-----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, NLd2Ilh9sIyZGOtQk3ojjVW0alcc9UNM2QOLE3ePV79MQggEv9+81hyru4yvd9B5 mv7uMJqzf6n6LUgA3ZCTDw== 0000950144-99-003475.txt : 19990331 0000950144-99-003475.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950144-99-003475 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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-K SEC ACT: SEC FILE NUMBER: 001-13137 FILM NUMBER: 99577333 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-K 1 AMERICAN BANKERS INSURANCE GROUP INC 10-K 12/31/98 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 (NO FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 ( ) 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(b) OF THE ACT:
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED -------------- ----------------------------------------- COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE, INC. $3.125 SERIES B CUMULATIVE CONVERTIBLE NEW YORK STOCK EXCHANGE, INC. 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.[ ] THE AGGREGATE MARKET VALUE ON MARCH 19, 1999, OF THE VOTING COMMON STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT WAS APPROXIMATELY $2,100,000,000. 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 APPROXIMATELY 43,200,000 SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, $1 PAR VALUE, AS OF MARCH 19, 1999. DOCUMENTS INCORPORATED BY REFERENCE (1) PORTIONS OF REGISTRANT'S PROXY STATEMENT FOR THE ANNUAL SHAREHOLDERS MEETING TO BE HELD MAY 7, 1999 TO BE FILED WITHIN 120 DAYS OF REGISTRANT'S FISCAL YEAR END ARE INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K. (2) PORTIONS OF REGISTRANT'S SCHEDULE 14D-9 AND AMENDMENT NO. 3, AMENDMENT NO. 6, AMENDMENT NO. 10, AMENDMENT NO. 11, AND AMENDMENT NO. 22 THERETO; THE FORM S-3 REGISTRATION STATEMENT NUMBER 2-94359; THE REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE YEARS ENDING 1990, 1993, 1994, 1995, AND 1997; THE REGISTRANT'S CURRENT REPORT ON FORM 10-Q DATED MARCH 31, 1994; MARCH 31, 1995; SEPTEMBER 30, 1997; AND JUNE 30, 1998; THE 1987 ANNUAL MEETING PROXY STATEMENT; THE REGISTRANT'S CURRENT REPORT ON FORM 8-K DATED NOVEMBER 14, 1990, JANUARY 13, 1998, AND MARCH 10, 1999; REGISTRANT'S STATEMENTS ON FORM S-8 FILED ON FEBRUARY 19, 1999 NUMBER 333-72615 AND 333-72619 ARE INCORPORATED BY REFERENCE, IN PART IV OF THIS FORM 10-K. 2 AMERICAN BANKERS INSURANCE GROUP, INC. AND SUBSIDIARIES Table of Contents PART I
PAGE NUMBER ------ Item 1 Business.........................................................................3 Item 2 Properties......................................................................25 Item 3 Legal Proceedings...............................................................25 Item 4 Submission of Matters to a Vote of Security Holders.............................28 PART II Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters........32 Item 6 Selected Financial Data.........................................................33 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.........................................................37 Item 8 Financial Statements and Supplementary Data.....................................51 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures..........................................97 PART III Item 10 Directors and Executive Officers of the Registrant..............................98 Item 11 Executive Compensation..........................................................99 Item 12 Security Ownership of Certain Beneficial Owners and Management.................100 Item 13 Certain Relationships and Related Transactions.................................101 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K................102
2 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 Argentina Compania de Seguros, S.A. ("ABA"), American Bankers Dominicana, S.A. ("ABD"), Caribbean American de Panama Compania de Seguros, S.A. ("CAPSA"), Federal Warranty Service Corporation ("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 Group, Ltd. ("BIG"), Bankers Atlantic Reinsurance Company ("BARC"), IBIC Forsikringsmaeglere, five insurance companies referred to collectively as the Voyager Insurance Companies, and several insurance and non-insurance companies referred to collectively as MS Diversified Corporation ("MSD"). 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. ABA, formerly known as La Suizo, a wholly owned subsidiary in Argentina, was acquired by the Company in 1997. ABD, formerly known as Seguros la Hemisferica, S.A., a wholly owned subsidiary in the Dominican Republic, began operations in 1996. CAPSA, a wholly owned subsidiary in Panama, began operations in 1998. FWSC, a wholly owned subsidiary in California, was acquired in 1993. Sureway, Inc., a wholly owned subsidiary in Florida, 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. BIG, a wholly owned subsidiary in the United Kingdom, began operations in 1997. BIG acquired Bankers Insurance Company Limited (BICL), previously American Bankers' wholly owned subsidiary in the United Kingdom. BARC, a wholly owned subsidiary in the Turks & Caicos Islands, began operations in 1995. IBIC, a wholly owned subsidiary in Denmark, was acquired by the Company in 1997. The Voyager Insurance Companies were acquired by the Company in 1993 and consist of five companies incorporated in Florida, Georgia and South Carolina. MSD is a group of nineteen companies headquartered in Mississippi and was acquired by the Company in 1998. 3 4 On March 5, 1999, the Company entered into an agreement pursuant to which Fortis, Inc. ("Fortis") will acquire the Company through a merger. The Company, Fortis and Greenland Acquisition Corp., a wholly owned subsidiary of Fortis, entered into an Agreement and Plan of Merger (the "Fortis Merger Agreement") which provides that, subject to satisfaction of specified terms and conditions, including regulatory and common stockholder approval, Greenland will merge with and into the Company. The Company will be the surviving corporation in the Merger and will become a wholly owned subsidiary of Fortis. If the merger is consummated, holders of the Company's common stock will receive $55.00 in cash for each share of common stock. Holders of the Company's preferred stock will receive $109.857 in cash for each share of preferred stock unless the merger is not approved by the holders of at least 2/3 of the shares of preferred stock voting as a class or if Fortis reasonably determines that such a vote is not likely to be obtained. In such case, the preferred stock will continue to remain outstanding after the merger, pursuant to the terms and conditions as are in effect on March 5, 1999, except that the preferred stock will be convertible as provided in the Company's Articles of Incorporation. The Company also executed a Stock Option Agreement granting Fortis the right to purchase up to 8,406,559 shares of common stock upon the occurrence of certain events at $55 per share. If the merger is not consummated, the total amount that Fortis may receive under the Stock Option Agreement and the Fortis Merger Agreement is limited to $100 million plus expenses. In addition, certain stockholders have entered into a voting agreement with Fortis pursuant to which they have generally agreed to vote their shares in favor of the Fortis Merger Agreement and the merger. 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, 1998, 1997, 1996, 1995 and 1994, see the Gross Collected Premiums table following in "Narrative Description of Business." b. BUSINESS SEGMENT DATA In 1998, the Company adopted FASB 131, "Disclosures about Segments of an Enterprise and Related Information." FASB 131 supersedes FASB 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organizations that are used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. FASB 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of FASB 131 did not affect results of operations or financial position of the Company but did affect the disclosure of segment information. The Company has restated all previously reported segment information to conform to the new presentation. For Business Segment information see pages 7 and 8, and Note 14 to the Consolidated Financial Statements on page 85 in Part II Item 8 of this report. 4 5 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. 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 covered loss. 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 credit-related insurance 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 sell the Company's insurance products to their customers. In return, these clients receive expense reimbursements or commissions to recover costs associated with selling the insurance and to generate incremental revenues. The Company's clients typically share in the profitability of business sold by 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 loss. 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 with its clients 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. American Bankers has been able to develop a diverse client base. In 1998, 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 approximately 36% of the Company's gross collected premiums. 5 6 Several of the Company's subsidiaries jointly market products and programs within each distribution channel, and the Company believes that such cross-marketing achieves economies of scale that lower administrative costs. The Company centralizes the processing of its products and avoids duplication of administrative functions by combining its service and marketing activities. 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 Company uses contracts which allow the Company's clients 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 earns up to 50% of the profits generated from its insurance business. The Company also reinsures premiums generated by certain clients to the clients' own captive insurance companies or to reinsurance subsidiaries in which clients have an ownership interest. For the Company's remaining business, the client's commission is not linked to its claims experience. 6 7 Business Segments FINANCIAL MARKETS (in thousands) NET GROSS COLLECTED PREMIUMS OPERATING PREMIUMS EARNED INCOME* 1998 $2,345,400 $1,204,200 $127,300 1997 2,272,900 1,201,900 130,500 1996 2,070,400 1,139,400 114,700 *Operating income consists of earnings before interest expense and taxes. HIGHLIGHTS o Gross collected premiums increased 3.2% in 1998 from 1997. MAJOR PRODUCTS o Credit Unemployment o Credit A&H o Credit Life o Credit Property o Extended Service Contracts o Mobilehome Physical Damage 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 Utility Companies 7 8 PERSONAL LINES (in thousands) NET GROSS COLLECTED PREMIUMS OPERATING PREMIUMS EARNED INCOME* 1998 $351,900 $195,900 $14,100 1997 332,800 193,100 27,800 1996 319,500 199,900 28,900 *Operating income consists of earnings before interest expense and taxes. HIGHLIGHTS o Gross collected premiums increased 5.7% in 1998 from 1997. MAJOR PRODUCTS o Mobilehome Physical Damage o Flood o Homeowners o Ordinary o Agriculture DISTRIBUTION CHANNELS o Independent Agents For additional Business Segment Information see page 85 in Part II Item 8 of this report. 8 9 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 (in millions) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Credit Unemployment $ 531.8 $ 530.6 $ 489.4 $ 410.8 $ 269.8 Credit A&H 436.2 432.7 377.6 349.0 244.5 Credit Life 410.9 365.3 309.5 287.2 211.7 Credit Property 331.4 342.2 336.9 367.7 354.2 Extended Service Contracts 232.0 209.9 203.9 129.5 19.3 Mobilehome Physical Damage 182.1 138.4 132.2 137.3 121.4 Flood 85.6 77.1 56.0 44.5 35.8 Mortgage A&H 79.8 75.6 66.6 53.3 49.1 Homeowners 55.8 83.5 93.7 101.1 87.0 Ordinary 41.7 37.2 29.0 23.2 21.0 All Other(1) 411.7 447.9 398.0 383.0 347.3 ------------- -------------- ------------- -------------- ------------- Total $ 2,799.0 $ 2,740.4 $ 2,492.8 $ 2,286.6 $1,761.1 ============= ============== ============= ============== =============
(1) "All Other" represents a large number of products, approximately 50 to 60 each year. The most significant in 1998 and 1997 are the Group Life, Livestock Mortality and Group A&H. 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 Lines, consisting of non credit-related products and services. The Credit Unemployment, Credit A&H, Credit Life, Credit Property, Extended Service Contracts and Mortgage A&H products are all included in the Financial Market segment. The Flood and Ordinary products are included in the Personal Lines segment. The Mobilehome Physical Damage and Homeowners are written by both segments. 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. 9 10 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 balances. Life and A&H Insurance. Through ABLAC, ABA, ABD, BALAC, CALAC, CAPSA 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, ABA, BIG, CAPIC and certain of the Voyager companies, 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, sold mainly through FWSC, Sureway, certain of the Voyager companies and MSD, involves various arrangements including the administration for and the insuring of obligations for ESCs sold in conjunction with the sale of consumer products by retailers. The ESCs 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 Lines The Company also derives revenues from non credit-related insurance products and services. These products and services principally consist of: (1) mobilehome physical damage, (2) administration fees earned in connection with the National Flood Insurance Program, (3) individual life insurance sold principally in Latin America and the Caribbean, (4) livestock mortality insurance, (5) individual life and disability products sold through employer-sponsored payroll deduction programs, and (6) surety coverages. Certain products included in the Personal Lines segment, such as Mobilehome Physical Damage and Homeowners, are affected by seasonal changes during the year. This causes profitability in those lines and for the Company to fluctuate throughout the year. 10 11 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. 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 Lines is primarily Independent Agents. At December 31, 1998, the Company had 82 salaried sales representatives and 15 sales managers located in 15 regional sales offices throughout the U.S., Canada, Caribbean, 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: (1) initial contact, (2) gathering information and analyzing the prospect's needs, (3) presenting a program tailored to those needs, and (4) agreeing to and implementing a program that is satisfactory to both the client and the Company. 11 12 Products are individual programs underwritten by 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. 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 65% 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, travel trailer manufacturers, dealers and lenders. 12 13 Retailers The Company is a major provider of credit-related insurance and is a provider of extended service contract products to the retail industry. This client base includes department and specialty stores, home furnishings and home improvement stores, appliance and electronics stores, general merchandise and automotive chains, jewelry stores, catalog 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. The following is a discussion of the distribution channels for the Personal Lines: Independent Agents The Company markets individual life insurance 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 competition is less vigorous. Other Personal Lines products sold through agents are livestock insurance, which primarily covers animal mortality, surety coverages, and property insurance on antique automobiles and collectibles. Agents also produce the flood insurance business 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. 13 14 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. 14 15 Quality of Fixed Maturities Maturity of Fixed Maturities ================================= ====================================== AAA 53% 0-1 Year 17% AA 9% 1-5 Years 49% A 17% 5-10 Years 22% BBB 17% 10-20 Years 11% BB/NR 2% Over 20 Years 1% Private Placement 2% ----------- ----------- 100% 100% At December 31 (in thousands):
AT CARRYING VALUE: 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------- FIXED MATURITIES Corporate - Fixed Rate $ 859,100 $ 815,100 $ 679,800 $ 346,000 $ 229,900 Corporate - Adjustable Rate 68,000 65,200 19,900 15,000 14,400 Corporate - Convertible 10,800 7,000 5,400 6,000 State and Municipal 294,400 129,200 137,500 123,500 109,800 U.S. Government 717,000 738,800 741,600 817,900 631,400 Govt. & Foreign Jurisdictions 74,500 45,100 67,100 61,900 36,200 Installment Loans 6,400 10,000 14,000 17,300 22,200 - --------------------------------------------------------------------------------------------------------------------- 2,030,200 1,810,400 1,665,300 1,387,600 1,043,900 - --------------------------------------------------------------------------------------------------------------------- EQUITY SECURITIES Preferred - Fixed Rate 41,700 37,300 27,800 38,400 16,600 Preferred - Convertible 10,100 500 5,800 700 600 Common 78,600 103,500 79,300 73,900 48,200 - --------------------------------------------------------------------------------------------------------------------- 130,400 141,300 112,900 113,000 65,400 - --------------------------------------------------------------------------------------------------------------------- Mortgage Loans 7,000 9,300 10,200 11,800 13,800 Policy Loans 9,900 9,300 8,300 7,800 6,800 Real Estate 3,900 2,100 5,600 3,100 3,800 Short-Term & Other Investments (principally invested cash) 348,800 182,800 166,100 165,100 131,200 - --------------------------------------------------------------------------------------------------------------------- 369,600 203,500 190,200 187,800 155,600 ===================================================================================================================== TOTAL INVESTMENTS $2,530,200 $2,155,200 $1,968,400 $1,688,400 $1,264,900 =====================================================================================================================
15 16 NET INVESTMENT INCOME (in millions of dollars) 1998 $ 150 1997 134 1996 121 1995 99 1994 74 Other information with respect to investments is included in Note 4 to the Consolidated Financial Statements on page 63 in Part II Item 8 of this report. REINSURANCE A substantial portion of the Company's reinsurance activities are related to agreements to reinsure premiums generated by certain clients to the clients' own captive insurance companies, or to reinsurance subsidiaries in which the clients have an ownership interest. Therefore a substantial portion of income in this area is derived from fees paid by the captive insurance companies for processing and other services performed by the Company. Collateral is obtained in the amount equal to the outstanding reserves when these captive companies are not authorized to operate in the Company's insurance subsidiary's state of domicile as required by statutory accounting principles. The Company's reinsurance receivable and prepaid reinsurance premiums at December 31, 1998 and 1997 totaled $977.1 million and $835.9 million respectively. The Company's reinsurance was placed with numerous client reinsurers including the following significant reinsurers: (1) Montgomery Ward Insurance Company, (2) Great Lakes Insurance Company and (3) Viking Insurance Company, Ltd. The Company historically has not experienced any material losses in collection of reinsurance receivables. In addition, the Company's insurance subsidiaries reinsure that portion of risk in excess of $250,000 under a domestic ordinary life policy, $400,000 under an international 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 $25 million excess of a $20 million retention exclusive of any recoveries from the proportional reinsurance described above. Additional coverage is provided through aggregate stop loss coverage. The Company believes that its catastrophe reinsurance coverage continues to be adequate. 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 and jurisdictions in which the Company's insurance subsidiaries transact business. Within the United States, the regulation varies but generally has its source in statutes that delegate regulatory and supervisory authority to an insurance official. This regulation is designed primarily to ensure the financial stability of insurance companies and to protect policyholders, rather than stockholders or creditors. 16 17 The regulation and supervision relate primarily to approval of policy forms and rates, the standards of solvency that must be met and maintained, including risk based capital measurements, the licensing of insurers and their agents, the nature of and limitations on investments, restrictions on the size of risks which may be insured under a single policy, deposits of securities for the benefit of policyholders, methods of accounting, the form and content of reports of financial condition required to be filed, and reserves for unearned premiums, losses and other purposes. These insurance officials also conduct periodic detailed examinations of the books, records, accounts and trade practices of insurance companies domiciled or admitted in their states. Applicable state insurance laws, rather than federal bankruptcy laws, apply to the liquidation or the reorganization of insurance companies. Certain states also require registration and periodic reporting by insurance companies which are licensed in such states and are controlled by other corporations. Applicable legislation typically requires periodic disclosure concerning the corporation which controls the registered insurer and the other companies in the holding company system and prior approval of intercorporate transfers of assets (including in some instances payment of dividends by the insurance subsidiary) within the holding company system. The Company's subsidiaries are registered under such legislation in those states which have such requirements. A portion of the Company's insurance business is conducted in foreign countries. The degree of regulation and supervision in foreign jurisdictions varies from minimal in some to stringent in others. Generally, the Company's insurance subsidiaries operating in such jurisdictions, must satisfy local regulatory requirements. Licenses issued by foreign authorities to the Company's subsidiaries are subject to modification or revocation by such authorities. In addition to licensing requirements, the Company's foreign operations are also regulated in various jurisdictions with respect to currency, policy language and terms, amount and type of security deposits, amount and type of reserves and amount and type of local investment. A substantial portion of the business written by the Company's insurance subsidiaries is credit-related insurance. Most states and other jurisdictions in which the Company's insurance subsidiaries do business have enacted laws and regulations that apply specifically to credit-related insurance. The methods of regulation vary but generally relate to, among other things, the amount and term of coverage, the content of required disclosures to debtors, the filing and approval of policy forms and rates, and limitations on the amount of premiums that may be charged and on the amount of compensation that may be paid as a percentage of premium. In addition, some jurisdictions have enacted or are considering regulations which attempt to limit profitability arising from credit-related insurance based on underwriting experience. The National Association of Insurance Commissioners (NAIC), an organization of insurance regulators from all 50 states and other U.S. jurisdictions, provides a forum for the development of a uniform state insurance regulatory policy. As part of its mission, the NAIC develops model laws and regulations with the intention that the various states will, in turn, adopt them in whole or in substantial part to the extent such regulation may be deemed necessary. The NAIC's activities thus may provide useful insight into future state insurance regulatory initiatives. Individual states that adopt the NAIC model laws and regulations generally adapt the model to their perceived needs. 17 18 In 1996 the NAIC adopted the Investment of Insurers Model Act (Defined Limits Version) which allows well-capitalized insurers more discretion and flexibility in their investment practices. In 1998, the NAIC adopted the Investment of Insurers Model Act (Defined Standards Version) which offers a "prudent person" alternative to the Defined Limits Version and allows insurers even greater latitude in establishing investment policies. With respect to credit insurance, in 1996 the NAIC adopted the Creditor-Placed Insurance Model Act which allows state regulators to take into account factors other than losses in determining the reasonableness of credit-related insurance rates. Also, in 1995 the NAIC amended existing model regulations which adopted an alternative approach to strict loss ratio based rate making. Finally, the NAIC is anticipated to consider issues related to credit insurance due to concerns about excessive profits earned by credit insurers and market conduct practices. As in the case of other types of insurance, state regulators, directly and through the NAIC, have begun a greater focus on the regulatory, licensing and disclosure issues related to market conduct of credit insurers, including the Company. In May 1998, following market conduct examinations by several states, the Company received notice from the Kentucky Commissioner of Insurance that a larger group of states (the "participating states") intended to conduct a multi-state market conduct examination. The participating states also invited the Company to pursue a compromise resolution under which the Company would voluntarily address certain areas of concern through implementation of a Compliance Plan agreeable to the states. In light of the significant costs of a multi-state examination, as well as the potential exposure for monetary sanctions, the Company chose to voluntarily negotiate a Compliance Plan. On November 23, 1998, the Company entered into a Consent Order and comprehensive Compliance Plan with the participating states relating to compliance with the disparate state insurance laws, regulations and administrative interpretations relating to credit-related insurance products. (Thirty-nine states initially joined in the Consent Order, and since November 1998 four additional states have also executed Addenda to join in the Consent Order.) As a part of the adoption of the Compliance Plan, the Company agreed in a Consent Order to pay $12 million to the participating states, and through implementation of the Compliance Plan, to provide restitution to insureds, if instances of excess premiums or less than appropriate claims payments were discovered in that process. The Company also agreed to a multi-state market conduct examination commencing on or after November 23, 1999 for review of the Company's implementation of the Compliance Plan, and to a payment of $3 million to participating states if the Compliance Plan is not fully implemented by that time. The Company is taking steps to implement the Compliance Plan by November 23, 1999 (see Note 13); however, there can be no assurance that the Company will fully implement the Compliance Plan by that date. 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 Company's insurance subsidiaries are required to comply with a minimum risk-based capital (RBC) standards developed by the NAIC. All of the Company's insurance subsidiaries meet the minimum risk-based capital requirements and require no action. 18 19 In 1998, the NAIC adopted the Codification of Statutory Accounting Principles guidance, which will replace the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The NAIC is now considering amendments to the Codification guidance that would also be effective upon implementation. The NAIC has recommended an effective date of January 1, 2001. The Codification provides guidance for areas where statutory accounting has been silent and changes current accounting in some areas. It is not known whether the domiciliary states of ABIG's insurance subsidiaries will adopt the Codification and whether the Departments will make any changes to the guidance. ABIG has not estimated the potential effect of the Codification guidance if adopted by the Departments as the effect could differ as changes are made to the Codification guidance, prior to its recommended effective date of January 1, 2001. 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. The Company's 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 (1) 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 (2) the dividend is equal to or less than the greater of: (a) 10% of the insurer's surplus as to policyholders derived from realized net operating profits on its business and net realized capital gains; or the insurer's 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 may 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 company's financial condition. The Voyager Insurance Companies are domiciled in Georgia and South Carolina. Georgia and South Carolina require prior regulatory approval for dividends which combined with any distributions made within the preceding 12 months would be in excess of the greater of (1) 10% of a company's surplus as regards policyholders or (2) net gain from operations for life companies, or net income, not including realized (net realized for South Carolina) capital gains for non-life companies, as of the preceding year end. MSD has four insurance companies domiciled in Mississippi which are subject to Mississippi requirements that insurance company dividends must receive prior regulatory approval unless such dividends together with any other distributions made within the preceding 12 months do not 19 20 exceed the lesser of a) 10% of surplus as regards policyholders as of the prior year end; or b) the net gain from operations (life insurance companies) or the net income not including realized capital gains (property and casualty company) for the prior year; plus a two-year carry forward. If insurance regulators determine that payment of a dividend or any other payment to an affiliate (such as a payment under a tax allocation agreement or for employee or other services or pursuant to a surplus debenture) would, because of the financial condition of the paying insurance company or otherwise, be hazardous to such insurance company's policyholders or creditors, the regulators may prevent 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 10 to the Consolidated Financial Statements on page 74 in Part II Item 8 of this report. Change of Control Regulation The acquisition of control of an insurance company or its parent company may require approval of the insurance regulatory authorities. In general, the insurance laws and regulations of the states in which the Company's insurance subsidiaries are domiciled require this approval. In Florida, the acquisition of at least 5% of the outstanding shares of an insurance company or its parent company is generally deemed to be the acquisition of control. In the other states in which the Company's insurance subsidiaries are domiciled, however, an acquisition of 10% of such shares is generally deemed to be the acquisition of control. In seeking approval for the acquisition, the acquiring party must file detailed information concerning the acquiring parties and the plan of acquisition. The state insurance regulatory authorities may also require public hearings. The insurance laws and regulations of the states in which the Company's insurance subsidiaries conduct business may also require approval or notice of any acquisition of control. Approval or notice is required because a subsidiary may be considered to be "commercially domiciled" in the state or the market share of a subsidiary and that of the acquiror or its affiliates exceed specified limits. Competition The insurance industry is highly competitive. Some competing companies 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. Financial institutions have begun to market and underwrite insurance products which may lead to increased competition. To the extent that the products marketed and underwritten by these financial institutions are limited to traditional life insurance and annuity products, the Company does not expect to be significantly impacted. Some financial and lending institutions have begun to offer debt cancellation agreements. Under these agreements, the creditor agrees to forgive all or part of a debt upon death, disability or unemployment of the debtor. Thus, these agreements are similar to the Company's credit life and disability products. The state insurance and financial institution regulators are examining these agreements to determine whether they should be regulated as insurance. The Company is unable to predict the extent of any increased competition from financial or lending institution on its business. 20 21 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 Companies Life insurance companies are required to establish and maintain policy liabilities and claim liabilities to meet their future obligations under in-force policies. For ordinary life and guaranteed renewable health insurance, the policy liabilities are amounts which will be sufficient to meet policy obligations at death, disability or maturity taking into consideration future premiums less expenses, interest, expected lapses and expected mortality. For the interest sensitive life policies, such as universal life, and for deferred annuities, this amount is the account value of the policyholder. The claim reserves on these policies are the amounts of future unpaid benefits on all incurred claims, whether reported to the company or not. For credit life, credit health insurance and non-guaranteed renewable health insurance, the policy liability is the unearned premium reserve. This is the amount of premiums received that have not been exposed to loss. It is equal to the premium the company would charge for the remaining benefits and the remaining period of coverage purchased. The claim reserves for these products are the amounts of future unpaid benefits on all incurred claims, whether reported to the company or not. For disability claims on which continuing payments are being made, the company records special claim reserves equal to the monthly benefits times the number of payments expected to be made in the future, discounted for interest. Information on the Company's reserves appears in Note 5 to the Consolidated Financial Statements on page 66 in Part II Item 8 of this report. Property and Casualty Companies The unearned premium reserve is the portion of the premium applicable to the unexpired period of the policy. 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 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. 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. 21 22 The following table shows the development of the estimated liability for the ten years prior to 1998. AMERICAN BANKERS INSURANCE GROUP, INC. DOMESTIC PROPERTY AND CASUALTY SUBSIDIARIES ANALYSIS OF REPORTED BALANCE SHEET LOSS AND LAE DEVELOPMENT GAAP BASIS (in thousands)
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Liability for Unpaid Losses & LAE $ 83,873 $83,328 $87,262 $89,626 $94,531 $117,080 $137,936 $163,918 $187,212 $191,881 $191,606 LIABILITY RE-ESTIMATED AS OF: 1 year later $ 79,857 $ 88,054 $ 79,291 $ 83,107 $106,007 $119,810 $144,123 $168,188 $184,204 $184,934 2 years later 84,156 84,112 83,882 85,203 110,226 136,905 150,478 174,532 182,666 3 years later 83,415 88,843 86,954 89,697 122,481 148,475 157,289 176,297 4 years later 87,017 90,476 91,670 104,249 136,894 156,268 159,861 5 years later 89,180 96,419 106,458 119,228 143,703 159,098 6 years later 94,541 111,122 118,389 125,233 146,347 7 years later 109,473 119,976 124,357 127,347 8 years later 117,301 125,961 126,548 9 years later 123,248 128,152 10 years later 125,434 Cumulative (Deficiency) Redundancy (41,561) (44,824) (39,286) (37,721) (51,816) (42,018) (21,925) (12,379) 4,546 6,947 CUMULATIVE AMOUNT OF LIABILITY PAID THROUGH: 1 year later $45,460 $52,144 $49,983 $48,399 $63,922 $65,901 $71,654 $93,449 $104,001 $105,899 2 years later 59,865 64,778 61,736 60,540 85,500 92,249 96,417 120,580 132,482 3 years later 67,232 71,287 68,174 68,190 101,603 107,401 108,188 135,076 4 years later 71,444 74,210 73,273 80,932 112,557 113,745 115,825 5 years later 73,394 78,292 84,642 90,090 115,797 118,479 6 years later 76,938 89,410 90,447 92,212 119,490 7 years later 87,886 91,789 92,377 95,448 8 years later 89,234 93,620 95,582 9 years later 90,995 96,816 10 years later 94,178 Gross Liability - end of year $158,359 $187,999 $239,357 $267,944 $283,724 $310,696 Reinsurance Recoverable 41,279 50,063 75,439 80,732 91,843 119,090 ------ ------ ------ ------ ------ ------- Net Liability - end of year $117,080 $137,936 $163,918 $187,212 $191,881 $191,606 Gross Re-estimated Liability $205,215 $209,244 $252,483 $256,647 $261,260 Re-estimated Reinsurance Recoverable 46,117 49,383 76,186 73,981 76,326 ------ ------ ------ ------ ------ Net Re-estimated Liability $159,098 $159,861 $176,297 $182,666 $184,934 Gross Cumulative (Deficiency) Redundancy (46,856) (21,245) (13,126) 11,297 22,464
22 23 The table in the preceding page presents the development of balance sheet liabilities for 1988 through 1998. 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" not written since 1986, reinsurance pools not written since 1982, 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 the income statement over the years indicated. The effect on income for the past three years of changes in estimates of the liabilities for losses and LAE is shown in Note 5 to the Consolidated Financial Statements on page 66 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 loss reserve development reflects losses assumed from excess casualty reinsurance pools in which the Company discontinued participation effective prior to 1982. 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. 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. At the current time, it is not possible to determine the future development of asbestos and environmental claims due to a general absence of reliable predictive data and of a generally accepted actuarial methodology for these exposures, significant unresolved legal issues including 23 24 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 suggest, 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. Losses, net of reinsurance, from the Company's discontinued reinsurance pools were $1.8, $6.6 and $8.3 million in 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, the Company had $37.2 and $38.5 million of gross reserves related to the reinsurance pools. 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, 1998 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 statements filed with regulatory 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 $194,766,000 Deduct estimated salvage and subrogation recoveries recorded on a cash basis for SAP purposes and on an accrual basis for GAAP purposes (3,404,000) ----------- Liability reported on a GAAP basis for the domestic Property and Casualty subsidiaries before unpresented claim drafts and translation of foreign branch operations 191,362,000 Other 244,000 ----------- Liability reported on a GAAP basis - domestic Property and Casualty subsidiaries only 191,606,000 Add reserves of foreign subsidiaries not included in consolidated statutory liability 14,314,000 ----------- Liability reported on a GAAP basis (net) 205,920,000 Add Reinsurance Recoverable for ceded unpaid losses (domestic of $119,090,000 and foreign of $55,194,000) 174,284,000 ----------- Liability reported on a GAAP basis (gross) $380,204,000 ===========
EMPLOYEES As of December 31, 1998, the Company employed 3,265 people. 24 25 d. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS For financial information about foreign and domestic operations see Note 14 to the Consolidated Financial Statements on page 85 in Part II Item 8 of this report. ITEM 2 PROPERTIES The Company's headquarters building complex is located at 11222 Quail Roost Drive, Miami, Florida 33157, and is approximately 480,000 square feet in size. The building is used exclusively for general office use, except for a portion which functions as the Company's warehouse. ITEM 3 LEGAL PROCEEDINGS Except as discussed in the following paragraphs, there are no material legal proceedings, other than ordinary routine litigation incident to the business, to which the Registrant or any of its subsidiaries is a party or of which any of their property is subject. LITIGATION The following describes the material legal proceedings of the Company. ALABAMA AND OTHER LITIGATION Certain of ABIG's subsidiaries, including the Company, are presently parties to a number of individual consumer and class action lawsuits pending in Alabama involving premium, rate, marketing, sales practices, disclosure, 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. Other insurers are also joined as co-defendants in some of the suits. Although the Alabama lawsuits and similar suits pending in Mississippi and 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. On November 12, 1998, the Company and three of its clients entered into a settlement of all claims in class action litigation consolidated by the Panel on Multi-District Litigation in the United States District Court for the Middle District of Alabama, contingent upon approval of the fairness of the settlement by the District Court and other conditions. This series of class actions involved the largest collective class exposure to the Company. Under the terms of the settlement, without admitting any liability, the Company will contribute approximately $15 million in distributions to the classes and subclasses, and has agreed to be bound by an injunction limiting the percentage of authorized non-file insurance premium to be charged consumer finance and retailer accounts during 6 year and 18 month periods, respectively. The Company has accrued additional expenses associated with implementing the settlement. 25 26 While none of the Company's remaining cases are necessarily significant in terms of financial risk to the Company, the judicial climate in Alabama and Mississippi is such that the outcome of these cases is extremely unpredictable. Moreover, class action lawsuits to which the Company is a party do not lend themselves to potential damage calculation. There are still a 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 1999. 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. The Company 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 or results of operations. MERGER-RELATED LITIGATION In late January and early February 1998, Cendant Corporation ("Cendant") commenced litigation (the "Cendant Florida Litigation") in the United States District Court for the Southern District of Florida, Miami Division, against the Company, members of the Company's Board, American International Group, Inc. ("AIG") and a wholly owned subsidiary of AIG, challenging the validity of certain provisions in the merger agreement the Company originally entered into with AIG on December 21, 1997, which agreement was amended in January 1998 and again at the end of February 1998 ("AIG Merger Agreement"), with respect to acquisition proposals by third parties. Cendant's complaint in the Cendant Florida Litigation also challenged the terms of the stock option agreement between the Company and AIG. Pursuant to the terms of a settlement agreement providing for the termination of the AIG Merger Agreement and the payment to AIG by the Company of $100 million and by Cendant of $10 million (the "Settlement Agreement"), Cendant has taken the necessary actions to cause the dismissal of all claims asserted in the Cendant Florida Litigation against all defendants, including the Company and members of the Company's Board. Also pursuant to the terms of the Settlement Agreement, AIG has taken the necessary actions to cause the dismissal of claims against Cendant alleging violations of the federal securities laws in connection with Cendant's bid to acquire the Company. In late January and early February 1998, five putative class actions on behalf of American Bankers' shareholders were filed in United States District Court for the Southern District of Florida alleging causes of action arising out of the then proposed merger with AIG, including claims that certain members of the Company's Board breached their fiduciary duties and that the Company violated certain provisions of the federal securities laws in connection with the proposed merger with AIG making essentially comparable claims to those originally asserted by Cendant. The Company and its directors believe that the claims asserted in these actions are totally without merit and intend to continue to vigorously contest them. The District Court judge ordered that these cases be consolidated and that the plaintiffs file a consolidated complaint. That consolidated complaint was filed and the Company and directors filed an answer. The parties are presently engaged in various pretrial matters. 26 27 OTHER The Company, in the normal course, is subject to regulatory reviews and market conduct examinations from each of the states in which it conducts business. During 1998, a multi-state market conduct review was initiated under the auspices of the NAIC by several states. On November 23, 1998, the Company entered into a Consent Order and comprehensive Compliance Plan with 39 participating states relating to compliance with the disparate state insurance laws, regulations and administrative interpretations which have been difficult to apply to the marketing of the Company's credit related insurance products through financial institutions, retailers and other entities offering consumer financing as a regular part of their business. The Company and participating state regulators have pledged to cooperate in rationalizing existing insurance laws and regulations to the marketing and administration of credit-related insurance products on a more comprehensive and uniform basis. As a part of the adoption of the Compliance Plan, the Company agreed in a Consent Order to pay $12 million to the participating states, and through implementation of the Compliance Plan, to provide restitution to insureds, if instances of excess premiums or less than appropriate claims payments were discovered in that process. Since November 1998, four additional states have executed Addenda joining in the multi-state Consent Order. The Company also agreed to a multi-state market conduct examination commencing in November 1999 for review of the Company's implementation of the Compliance Plan, and to a payment of $3 million to participating states if the Compliance Plan is not fully implemented by that time. 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. 27 28 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, 1998. 28 29 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 69 Director (since 1980); Chairman of the Board (since 1980), Chief International Officer (1996 - January 1999 - Retired) and Chief Executive Officer of the Company (1980-1995); Chief International Officer of ABIC and ABLAC (1996 - January 1, 1999 - Retired); Director (since 1982), President (1977-1988) and Chief Executive Officer (1979-1995) of ABIC; Director (since 1980), President (1979-1988) and Chief Executive Officer (1979-1995) of ABLAC; Director, CALAC (since 1988); Director, CAPIC (since 1992); Director, BICL (since 1990); Vice Chairman, Board of Trustees, Barry University (university), Miami Shores, FL (since 1983); Chairman and Director, Federal Reserve Bank of Atlanta (Miami Branch) Miami, FL (1991 - 1998); Director, Mayor's Jewelers (jewelry retailers), Coral Gables, FL (1987 - 1998). Gerald N. Gaston 66 Director (since 1980); President and Chief Executive Officer (since 1996), President and Vice Chairman of the Board (since 1980), President and Chief Operating Officer of the Company (1980-1995); Chief Executive Officer (since 1996), Chief Operating Officer (1980-1995), Chairman of the Board (since 1993) and Vice Chairman of the Board (1979-1992) of ABIC and ABLAC (since 1993); Chairman of the Board, ARIC, VGI, VLIC, and VLHIC (since 1993); Director, BALAC (since 1991); Chairman of the Board, MSD (1998). Eugene E. Becker 49 Chief Marketing Officer of the Company (since 1996), Chief Executive Officer (since 1996) of ABIC and ABLAC; Executive Vice President (since 1991) of the Company; Chief Executive Officer of VGI, VLHIC, and VLIC (1996); 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 (since 1983); Director (1989-1996), CEO (1996); President (1993-1996) of ARIC; Chairman of the Board (since 1991) of BALAC; Director of BARC (since 1995); President (1993-1996) and Chief Operating Officer (1993-1995) of VGI, VLHIC, and VLIC.
29 30
P. Bruce Camacho 41 Executive Vice President of Investor Relations, Marketing Services, Legal and Government Affairs (1998); Executive Vice President of Investor Relations and International Development of ABIC and ABLAC (1996-1998); First Senior Vice President of ABIC and ABLAC (1995-1996); Vice President of Investor Relations, ABIC and ABLAC (1994-1995); Vice President Sales and Marketing Support (1993); Director of CALAC and CAPIC (since 1996); Director of BIG and ABSV (since 1997). Floyd G. Denison 55 Executive Vice President - Finance of the Company, ABIC and ABLAC (since 1995); Executive Vice President and Director, Corporate Asset Management of the Company (1993-1995); Treasurer of the Company (1986-1991); Executive Vice President, Investments of ABIC and ABLAC (since 1996), Senior Vice President, Investments of ABIC and ABLAC (1983-1996); Vice President of BALAC (since 1991); Chairman of the Board of BARC (since 1996); Director of BICL (1995-1996); Director of VIIC, VLIC, VLHIC (since 1996); Director of VPCIC (since 1993). Jay R. Fuchs 43 President of ABLAC (since 1993); President of ABIC (since 1995); Executive Vice President of ABIC (1996); Director, ABIC and ABLAC (since 1991); Executive Vice President, Financial Markets of ABIC and ABLAC (1988-1991); Director (since 1991) and President (since 1996) of BALAC; Director of VLIC and VLHIC (since 1993); Director of VGI (1993-1995), VIIC, VPCIC (since 1993). Leonardo F. Garcia 48 Vice President and Treasurer of the Company (since 1996); Secretary of the Company (1994-1996); Senior Vice President and Chief Investment Officer of ABIC and ABLAC (since 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 (since 1995) and Secretary (1994-1996) of BALAC; Secretary of CALAC and CAPIC (1994-1996); Director and Secretary of BARC (1995-1996); Secretary of VGI and VPCIC (1994-1996); Assistant Secretary of VIIC, VLIC and VLHIC (1994-1996). Arthur W. Heggen 53 Executive Vice President of the Company (since 1996); Secretary of the Company (since 1996); Vice President and Treasurer of the Company (1991-1996); Vice President and Principal Accounting Officer of the Company (1990-1991); Senior Vice President (since 1990), Secretary (since 1996) of ABIC and ABLAC; Vice President of BALAC (1995-1996); Secretary and Director of BALAC (since 1996); Secretary of VGI, VPCIC, CALAC, and CAPIC (since 1996); Assistant Secretary VIIC, VLIC, and VLHIC (since 1996); Secretary of ABD (since 1996); Secretary of FWS (since 1996).
30 31
Robert F. Hill 36 Chief Accounting Officer of the Company (since 1996); Senior Vice President and Chief Accounting Officer of ABIC and ABLAC (since 1996); Vice President of ARIC (1995-1996); Audit Manager, Price Waterhouse (accounting firm) (1993-1995). Jason J. Israel 46 Executive Vice President, Administration (since 1996); 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 (since 1995); Executive Vice President of CALAC and CAPIC (1995-1997). Manuel J. Millor 49 Executive Vice President, Marketing of ABIC and ABLAC (since 1998). Chairman of the Board, ION Information Technologies, Ltd. (since 1997); Director, Guaranteed Underwriting Agency, Ltd. (since 1998); President, SIMA Ventures Services, Inc. (since 1997); Chairman and CEO, Security Insurance Group, Ltd. (1992-1997) Michael T. Ray 44 Executive Vice President, Subsidiaries (1998); Executive Vice President, Information Services of ABIC and ABLAC (1996-1998); 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); Chief Executive Officer of ARIC (1998); Chairman of the Board of BIG, BICL, BLAC (1998); President of ABA (1998); President and Chief Executive Officer of FWS (1999); Chief Executive Officer of VGI (since 1998).
None of the Executive Officers named above are involved in legal proceeding as defined in Regulation S-K, Item 401(f). Information with respect to promoters and control persons is not applicable. 31 32 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 ------- ------- ------- ------- 1998 ---- High $65.75 $65.19 $61.25 $48.38 Low 45.63 57.75 41.75 31.31 Dividend .11 .11 .11 .12 1997 ---- High $29.63 $34.03 $38.31 $45.94 Low 24.38 25.19 32.19 36.69 Dividend 0.10 0.11 0.11 0.11
Common share and dividend amounts for the first and second quarters of 1997 have been restated to reflect the 2 for 1 stock split effective September 12, 1997. The last sale price per share of the Company's common stock on the last trading day of 1998, as reported by the New York Stock Exchange, was $48.38. Common Shares American Bankers Insurance Group, Inc. is traded under the New York Stock Exchange symbol ABI. The stock appears in the NYSE stock table. The above table presents the high and low prices for the stock . The ending market price as of March 19, 1999 was $51.94. b. APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS At December 31, 1998, there were 1,657 registered shareholders. c. DIVIDENDS PER SHARE OF COMMON STOCK For information regarding dividends paid per common share see the table of data in Item 5 a. above. Prior to the closing of the pending merger with Fortis, 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 43 in Part II Item 7 of this report. 32 33 ITEM 6 FIVE-YEAR SELECTED FINANCIAL DATA At December 31 (in thousands except book value per common share):
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Major Balance Sheet Items ASSETS Investments $2,530,200 $2,155,200 $1,968,400 $1,688,400 $1,264,900 Cash 12,800 23,300 30,400 23,300 89,500 Reinsurance receivable 315,500 270,700 202,600 168,100 130,900 Deferred policy acquisition costs 483,000 458,300 388,000 310,900 229,600 Prepaid reinsurance premiums 661,700 565,200 507,100 502,300 396,800 Other assets 365,300 309,800 373,000 294,700 320,800 ------------------------------------- -------------- ----------------- --------------- ---------------- --------------- Total assets 4,368,500 3,782,500 3,469,500 2,987,700 2,432,500 ------------------------------------- -------------- ----------------- --------------- ---------------- --------------- LIABILITIES Policy and claim liabilities 2,557,400 2,303,000 2,070,500 1,858,900 1,502,600 Notes payable 193,700 242,600 222,500 236,000 197,800 Deferred income taxes 32,800 51,700 40,800 29,500 Accrued expenses 140,100 150,100 156,900 136,200 98,800 Other liabilities 383,600 221,200 268,600 214,100 227,400 ------------------------------------- -------------- ----------------- --------------- ---------------- --------------- Total liabilities 3,307,600 2,968,600 2,759,300 2,474,700 2,026,600 ------------------------------------- -------------- ----------------- --------------- ---------------- --------------- STOCKHOLDERS' EQUITY Preferred stock 99,200 115,000 115,000 Common stock 43,100 41,800 20,500 20,400 20,200 Additional paid-in capital 245,400 212,000 217,900 215,100 212,100 Accumulated other comprehensive income (losses) 2,600 12,100 7,400 7,300 (38,500) Retained earnings 690,700 449,400 359,400 282,700 225,400 Treasury stock at cost (11,900) (8,100) (1,400) (2,500) (1,600) Unamortized restricted stock (8,200) (6,200) (4,400) (3,600) (3,200) Collateralization of loan to Leveraged Employee Stock Ownership Plan (2,100) (4,200) (6,400) (8,500) ------------------------------------- -------------- ----------------- --------------- ---------------- --------------- Total stockholders' equity 1,060,900 813,900 710,200 513,000 405,900 ------------------------------------- -------------- ----------------- --------------- ---------------- --------------- Total liabilities and stockholders' equity $4,368,500 $3,782,500 $3,469,500 $2,987,700 $2,432,500 ------------------------------------- -------------- ----------------- --------------- ---------------- --------------- Book value per common share $22.52 $16.83 $14.56 $12.67 $10.08 ===================================== ============== ================= =============== ================ ===============
The book value per common share for years prior to 1997 has been restated to reflect the 2 for 1 stock split effective September 12, 1997. 33 34 FIVE-YEAR SELECTED FINANCIAL DATA For the Years ended December 31 (in thousands except per common share data):
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Consolidated Statements of Income Revenues Net premiums earned $1,432,000 $1,453,800 $1,378,500 $1,240,700 $1,094,300 Net investment income 149,700 134,100 121,200 99,400 74,400 Realized investment gains 19,800 10,400 7,800 700 2,700 Merger termination fees, net (see Note 17) 300,000 Other income 28,700 23,100 21,500 20,100 15,400 ------------------------------------------------ ------------- --------------- ------------- -------------- --------------- Total revenues 1,930,200 1,621,400 1,529,000 1,360,900 1,186,800 ------------------------------------------------ ------------- --------------- ------------- -------------- --------------- Benefits and expenses Benefits, claims, losses, and settlement expenses 509,000 532,600 523,000 463,100 437,900 Commissions 625,300 614,200 571,800 526,500 437,700 Operating expenses 375,100 298,800 280,800 251,500 220,200 Interest expense 19,100 16,200 17,500 15,600 11,200 ------------------------------------------------ ------------- --------------- ------------- -------------- --------------- Total benefits and expenses 1,528,500 1,461,800 1,393,100 1,256,700 1,107,000 ------------------------------------------------ ------------- --------------- ------------- -------------- --------------- Income before income taxes 401,700 159,600 135,900 104,200 79,800 ------------------------------------------------ ------------- --------------- ------------- -------------- --------------- Income tax (expense) benefit Current (148,600) (37,300) (28,900) (25,200) (14,800) Deferred 13,900 (7,400) (12,500) (6,700) (8,500) ------------------------------------------------ ------------- --------------- ------------- -------------- --------------- Total tax expense (134,700) (44,700) (41,400) (31,900) (23,300) ------------------------------------------------ ------------- --------------- ------------- -------------- --------------- Net income $ 267,000 $ 114,900 $ 94,500 $ 72,300 $ 56,500 ------------------------------------------------ ------------- --------------- ------------- -------------- --------------- Per common share data Basic Net income $6.12 $2.60 $2.24 $1.78 $1.40 ------------------------------------------------ ------------- --------------- ------------- -------------- --------------- Weighted average number of shares outstanding 42,554 41,433 40,697 40,556 40,344 ------------------------------------------------ ------------- --------------- ------------- -------------- --------------- Diluted Net income $5.68 $2.45 $2.16 $1.74 $1.37 ------------------------------------------------ ------------- --------------- ------------- -------------- --------------- Weighted average number of shares outstanding 46,960 46,999 43,890 41,858 41,308 ================================================ ============= =============== ============= ============== =============== Dividends per common share $0.45 $0.43 $0.40 $0.38 $0.36 ================================================ ============= =============== ============= ============== ===============
The per common share data for years prior to 1997 has been restated to reflect the 2 for 1 stock split effective September 12, 1997. 34 35 PREMIUMS OF TOP TEN PRODUCTS For the Years ended December 31 (in thousands):
Gross Collected Gross Premiums Ceded Premiums Net Premiums Premiums Earned Earned Earned 1998 1997 1998 1997 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Credit Unemployment $531,800 $530,600 $576,600 $520,700 $354,700 $294,700 $221,900 $226,000 Credit A&H 436,200 432,700 419,500 402,300 223,200 193,800 196,300 208,500 Credit Life 410,900 365,300 346,600 324,700 192,700 151,500 153,900 173,200 Credit Property 331,400 342,200 355,800 360,900 229,400 161,800 126,400 199,100 Extended Service Contracts 232,000 209,900 242,800 156,900 15,700 6,700 227,100 150,200 Mobilehome Physical Damage 182,100 138,400 154,100 136,900 65,300 41,300 88,800 95,600 Flood 85,600 77,100 79,800 72,600 79,800 72,600 Mortgage A&H 79,800 75,600 81,100 74,200 18,700 14,000 62,400 60,200 Homeowners 55,800 83,500 70,800 93,800 10,500 1,500 60,300 92,300 Ordinary 41,700 37,200 41,500 35,200 9,400 7,900 32,100 27,300 - ---------------------------------------------------------------------------------------------------------------------------- Subtotal 2,387,300 2,292,500 2,368,600 2,178,200 1,199,400 945,800 1,169,200 1,232,400 - ---------------------------------------------------------------------------------------------------------------------------- All Other 411,700 447,900 323,900 432,000 61,100 210,600 262,800 221,400 ============================================================================================================================ Total $2,799,000 $2,740,400 $2,692,500 $2,610,200 $1,260,500 $1,156,400 $1,432,000 $1,453,800 ============================================================================================================================
FIVE-YEAR SELECTED FINANCIAL DATA At December 31:
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- LIFE INSURANCE SUBSIDIARIES Statutory capital and surplus (in thousands)* $297,300 $250,900 $234,700 $188,900 $174,100 Ratio of statutory capital and surplus to liabilities 37.6% 32.2% 33.2% 28.6% 32.2% PROPERTY AND CASUALTY SUBSIDIARIES Statutory capital and surplus (in thousands)* $476,400 $416,300 $374,500 $271,500 $224,900 Ratio of net premiums written to statutory capital and surplus 1.8x 2.1x 2.4x 3.1x 2.6x Ratio of loss and loss expense reserves to statutory capital and surplus 40.3% 45.5% 50.8% 65.5% 58.2% Combined loss and expense ratio (statutory basis) 96.0% 95.7% 96.8% 93.8% 96.0%
- ----------------------- *See Note 10 to consolidated financial statements. 35 36 FIVE-YEAR SELECTED FINANCIAL DATA For the Years ended December 31:
Operating Ratios 1998 1997 1996 1995 1994 - ---------------------------------------------------------- --------------- ---------------- --------------- --------------- As a percent of net premiums earned: Benefits, claims, losses, and settlement expenses 35.5% 36.6% 37.9% 37.3% 40.0% Commissions 43.7 42.2 41.5 42.4 40.0 Operating expenses as a percent of gross premiums earned 13.9 11.4 11.8 12.5 13.1 - -------------------------------------------- ------------- --------------- ---------------- --------------- --------------- Net operating income* as a percent of gross premiums earned 9.4 4.1 3.8 3.6 3.3 Net operating income* as a percent of total revenues 13.3 6.7 5.9 5.3 4.6 Net income as a percent of average assets (return on assets) 6.6 3.2 2.9 2.7 2.5 Net income as a percent of average common stockholders' equity (return on equity) 31.4 16.6 16.5 15.7 14.1 - -------------------------------------------- ------------- --------------- ---------------- --------------- --------------- At December 31: Debt as a percent of total capitalization 15.4 23.0 23.9 31.5 32.8 Price/Earnings Ratio (DILUTED) 8.5 18.8 11.9 11.2 8.8 Price/Book Value Ratio 2.1 2.7 1.8 1.5 1.2 - -------------------------------------------- ------------- --------------- ---------------- --------------- ---------------
*Excludes net realized investment gains and losses. Significant fluctuations in the 1998 ratios are discussed in Part II Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 37 through 50 of this report. Gross Life Insurance in Force Gross Collected Premiums (in millions of dollars) (in millions of dollars) 1998 $ 55,206 $ 2,799 1997 53,694 2,740 1996 48,704 2,493 1995 42,708 2,287 1994 32,129 1,761 36 37 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW INDUSTRY Property and casualty insurers experienced deteriorating underwriting results in 1998 as catastrophe losses returned to historical levels. A.M. Best expects underwriting results to continue to worsen through 2000. Slow premium growth continues in the property casualty industry and the expense ratio continues to increase. Declining interest rates are expected to impact the industry as investment yields are predicted to fall below 5% for the first time in 25 years. 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 and this legal environment has received national news coverage. The Alabama legislature enacted limited tort reform. Judicial elections for the Alabama Supreme Court also suggest a possible shift in the judicial philosophy of the court. Future changes in the current Alabama environment, however, cannot be predicted. Supreme Court and regulatory rulings are expected to lead to increased marketing of insurance products by financial institutions. Moreover, legislation has been introduced in Congress for reform of the regulation of financial institutions including state regulation of insurance products marketed and underwritten by financial institutions. Financial institutions have begun to market and underwrite insurance products which are generally limited to traditional life insurance and annuity products. The Company does not expect this activity by financial institutions to be of significance to its business. It is possible that the financial institutions may seek to market the products and services being sold through ABIG's bank distribution channel. Some financial and lending institutions have begun to offer debt cancellation agreements. Under these agreements, the creditor agrees to forgive all or part of a debt upon death, disability or unemployment of the debtor. Thus, these agreements are similar to the Company's credit life and disability products. The state insurance and financial institution regulators are examining these agreements to determine whether they should be regulated as insurance. The determination by the regulators may impact the marketability of these agreements. The Company is unable to predict the extent to which these agreements will impact its business. AMERICAN BANKERS On March 5, 1999, the Company entered into an agreement pursuant to which Fortis, Inc. ("Fortis") will acquire the Company through a merger. The Company, Fortis and Greenland Acquisition Corp, a wholly owned subsidiary of Fortis, entered into an Agreement and Plan of Merger (the "Fortis Merger Agreement") which provides that, subject to satisfaction of specified terms and conditions, including regulatory and common stockholder approval, Greenland will merge with and into the Company. The Company will be the surviving corporation in the Merger and will become a wholly owned subsidiary of Fortis. If the merger is consummated, holders of the Company's common stock will receive $55.00 in cash for each share of common stock. Holders of the Company's preferred stock will receive $109.857 in cash for each share of preferred stock unless the merger is not approved by the holders of at least 2/3 of the shares of preferred stock voting as a class or if Fortis reasonably determines that such a vote is not likely to be obtained. In such case, the preferred stock will continue to remain outstanding after the merger, pursuant to the terms and conditions as are in effect on March 5, 1999, except that the preferred stock will be convertible as provided in the Company's Articles of Incorporation. The 37 38 Company also executed a Stock Option Agreement granting Fortis the right to purchase up to 8,406,559 shares of common stock upon the occurrence of certain events at $55 per share. If the merger is not consummated, the total amount that Fortis may receive under the Stock Option Agreement and the Fortis Merger Agreement is limited to $100 million plus expenses. In addition, certain stockholders have entered into a voting agreement with Fortis pursuant to which they have generally agreed to vote their shares in favor of the Fortis Merger Agreement and the merger. In 1998, net income increased by 133% to $267.0 million from $114.9 million in 1997. Included in the results were several non-recurring revenues and expenses as described below. As discussed in the Terminated Acquisition Proposals section, the Company received a merger termination fee of $400 million from Cendant Corporation which was reflected in the Company's Consolidated Statements of Income net of a $100 million merger termination fee paid to AIG. The net fee is included in the other lines segment. Merger related expenses approximated $15.3 million pre-tax and are also included in the other lines segment. In November 1998, the Company reached an agreement, subject to court approval, to settle pending federal class action litigation associated with the Company's non-file insurance product. The Company's contribution to the settlement and related expenses approximated $17 million pre-tax and is included in the other lines segment. See discussion in Non-file Litigation. In November 1998, ABIG achieved agreement with 39 states resolving various market conduct issues. Incident to the adoption of the Comprehensive Compliance Plan, the Company agreed in a Consent Order, to pay up to $15 million pre-tax which will be allocated among the participating states. (Thirty-nine states joined initially in the multi-state Consent Order, and since November 1998, four additional states have also executed Addenda joining in the Consent Order.) This is included in the other lines segment. See discussion in Regulations. During the fourth quarter of 1998, the Company strengthened reserves by $9.8 million pre-tax and wrote off deferred acquisition costs of $3.1 million pre-tax primarily relating to lines of business no longer being written. Reserve strengthening of $4 million pre-tax is included in the Personal Lines segment with the rest of the items included in the other lines segment. In addition, the Company incurred charges totaling $6.4 million pre-tax from miscellaneous items including costs related to the relocation of a subsidiary. Excluding the impact on the 1998 operating results from the above items, pre-tax net income increased by $8.7 million from 1997. The increase was due to investment income and realized gains. The decrease in personal lines segment pre-tax operating income is primarily due to higher losses which includes the reserve strengthening described above. In 1997, operating results benefited from growth in net investment income and realized gains, while 1996 was adversely impacted by catastrophic losses of approximately $9.2 million, pre-tax, principally in the Financial Markets. 38 39 Pre-tax operating income by business segment was as follows: (IN MILLIONS) FINANCIAL MARKETS ------------------ 1998 $ 127.3 1997 $ 130.5 1996 $ 114.7 PERSONAL LINES -------------- 1998 $ 14.1 1997 $ 27.8 1996 $ 28.9 OTHER LINES ----------- 1998 $ 279.4 1997 $ 17.6 1996 $ 9.9 These segment results exclude interest expense. 39 40 REVENUES Gross collected premiums increased by $58.7 million or 2%, to $2.8 billion in 1998 from $2.7 billion in 1997. Premium production in 1998 did not meet our overall expectation and, in large part, this slowdown in sales momentum was attributed to the disruption which was caused by the proposed failed acquisitions. Gross collected premiums increased 10% in 1997 and 9% in 1996. Total revenues increased 1% (excluding the merger termination fees) in 1998 compared to 1997. An increase in investment income of $15.6 million and a $9.4 million increase in realized investment gains offset the $21.8 million decline in net earned premium revenue. The 1998 decrease in net premiums earned in the other lines business segment is principally due to the Company's decision to discontinue writing certain lines of business in the United Kingdom subsidiary. Net earned premiums increased 5% in 1997 and 11% in 1996. Total net premiums earned by business segment was as follows: (IN MILLIONS) FINANCIAL LINES ---------------- 1998 $ 1,204.2 1997 $ 1,201.9 1996 $ 1,139.4 PERSONAL LINES -------------- 1998 $ 195.9 1997 $ 193.1 1996 $ 199.9 OTHER LINES ----------- 1998 $ 31.9 1997 $ 58.8 1996 $ 39.2 Investment income increased by 12% to $149.7 million in 1998 from $134.1 million in 1997. The increase resulted from an overall increase in invested assets of $375.0 million. The increase in the invested assets includes approximately $148.0 million as a result of the acquisition of MSD, late in 1998. Investment income increased 11% in 1997 compared to 1996. AVERAGE FIXED INCOME INVESTMENT YIELD 1998 6.7% 1997 6.9% 1996 6.8% 40 41 CLAIMS AND COMMISSIONS Extensive use of commission arrangements that are adjustable based on claims experience allows ABIG to generate business with stable underwriting results as illustrated below.
OVERALL LOSS RATIO COMMISSION EXPENSE RATIO COMBINED RATIO ------------------ ------------------------ -------------- 1998 35.5% 43.7% 79.2% 1997 36.6% 42.2% 78.8% 1996 37.9% 41.5% 79.4%
The Company's property and casualty segment experience continues to perform better than the industry. STATUTORY COMBINED RATIOS 1998 1997 1996 ------------------------- ---- ---- ----- ABIG 96.0 95.7 96.8 Industry 105* 101.6 105.8 ----------------- * A.M. BEST ESTIMATE ABIG incurred pre-tax catastrophic losses of $3.7 million in 1998 and $9.2 million in 1996. Catastrophic losses were not significant in 1997. ABIG's 1998 reserve development was not significantly different from previously established reserves. The Company's loss reserve development includes losses assumed from excess casualty reinsurance pools. ABIG discontinued participation in these pools effective prior to 1982. The business is long-tail in nature and losses continue to exceed both Company and industry expectations. Most of the losses are asbestos-related or environmental pollution claims. The Company's exposure is primarily through participation in excess casualty pools. These pools typically involve high-layer coverages that apply only after primary insurance coverage and, in many cases, reinsurance coverages have been exhausted. ABIG'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. Currently, it is not possible to determine the future development of asbestos or environmental claims. The uncertainty is due to a general absence of reliable predictive data and of generally accepted actuarial methodology for these exposures. There are also significant unresolved legal issues including coverage issues, policy definitions and evolving theories and arguments. Additionally, determination of the ultimate damages and the final allocation to financially responsible parties is complex and uncertain. ABIG's historical experience however suggests that although reinsurance pool losses will continue, they should not have a materially adverse effect on the Company's financial condition or cash flows. Losses, net of reinsurance, from ABIG's discontinued reinsurance pools were $1.8, $6.6 and $8.3 million in 1998, 1997 and 1996, respectively. The survival rate for 1998 is 19.6 years which is an increase from 16.4 years in 1997. At December 31, 1998 and 1997, the Company had $37.2 million and $38.5 million, respectively, of gross reserves related to the reinsurance pools. The Company's U.K. subsidiary participated in certain personal accident reinsurance programs from other insurance companies during 1994 to 1997. The Company ceased writing this reinsurance in 1997; however, certain risk may continue beyond 1997 due to the nature of the reinsurance contracts written. The 41 42 Company has retroceded the majority of its personal accident liability to other insurance companies. On a gross basis, the personal accident loss ratios are substantially higher than that expected at the time the programs were written. However, due to the nature of the Company's retrocessional coverage, net losses on these programs have not been material to the Company's operating results. At December 31, 1998, the Company had gross payables of $14.1 million, ceded recoverables of $18.2 million, gross reserves of $45.8 million and ceded receivables of $37.8 million relating to the personal accident business. The Company is currently actively investigating the cause for the significant increase in the personal accident gross loss ratio. The outcome of that investigation is currently uncertain but may result in the Company taking legal or other action against its brokers, reinsurers or others. The Company is currently involved in arbitration overpayment of certain claims with one of the cedants, and several of the Company's retrocessioners have delayed payment pending further review. The December 31, 1998 loss reserves and reinsurance recoverables are based on various estimates that are subject to considerable uncertainty. However, it is management's opinion that due to the direct relationship of the business written to the Company's reinsurance coverage that future development on these programs will not have a material adverse effect on the Company's financial condition or results of operations. A few of ABIG's products such as Mobilehome Physical Damage and Homeowners are affected by seasonal changes during the year. This causes profitability in those lines and for the Company to fluctuate throughout the year. OPERATING AND INTEREST EXPENSES Operating expenses (excluding interest expense) were $375.1, $298.8 and $280.8 million in 1998, 1997 and 1996, respectively. Excluding the previously discussed items on page 38, the operating expenses in 1998 were $321.5 million or 11.9% of gross premiums earned. The operating expense to gross premiums earned ratio was 11.4% in 1997. The 1996 ratio was 11.8%. Interest expense was $19.1, $16.2 and $17.5 million in 1998, 1997 and 1996, respectively. The increase in interest expense in 1998 is due to elevated debt levels maintained mid-year. In early 1998, the Company was required to pay a fee to AIG to terminate their proposed merger and the Company borrowed additional funds to make the payment. A portion of the fee from Cendant was used to reduce the debt level at the end of 1998. The decrease in interest expense from 1996 to 1997 was primarily due to lower debt levels during the year. TAXES The 1998 effective tax rate increased to 33.5% from 28% in 1997. The increase is due to the net merger termination fee income of $300 million which was taxed at the full statutory rate. The effective tax rate decrease in 1997 from 30.5% in 1996 was due in part to an increase in low-income housing investments and a reduction of losses in the United Kingdom subsidiary. ABIG continues its strategy to increase its investment in tax-exempt and tax-credit investments to minimize its income tax expense. FINANCIAL CONDITION Total assets increased in 1998 by 15.5% to $4.4 billion from $3.8 billion at December 31, 1997. The increase is primarily attributable to merger termination fees and the acquisition of MSD with assets of $196.9 million and the change in prepaid reinsurance premiums of $96.5 million as a result of an increase in ceded business. The increase of 9% in total assets to $3.8 billion in 1997 from $3.5 billion in 1996 was primarily attributable to increases in invested assets of $194.7 million. 42 43 INVESTED ASSETS FIXED MATURITIES % SHORT-TERM & OTHER % --------------- ------------------ -------------------- 1998 $2.5 billion 80% 14% 1997 $2.2 billion 84% 9% 1996 $2.0 billion 85% 8% The increased percentage in the Short-term and Other investments is principally a result of the receipt of the $400 merger termination fee from Cendant in October 1998. ABIG does not hold significant investments in equity securities, mortgage loans or real estate. Liabilities were $3.3, $3.0 and $2.8 billion at December 31, 1998, 1997 and 1996, respectively. A major portion of the Company's liabilities in each of these years were reserves related to the insurance policies issued by the Company's subsidiaries. These reserves represented 77%, 78% and 75% of the total liabilities for the respective years 1998, 1997 and 1996. Notes payable were $193.8, $242.6 and $222.5 million at December 31, 1998, 1997 and 1996, respectively. ABIG's debt to capitalization (debt plus stockholders' equity) ratio has declined every year since 1994. The ratios for 1998, 1997 and 1996 were 15.4%, 23.0% and 23.9% . Stockholders' equity increased by $548 million to $1.1 billion at December 31, 1998, from $513 million at January 1, 1996. In August 1997, ABIG declared a two-for-one split, effected in the form of a stock dividend, on the Company's common stock. The stock split resulted in all common shareholders receiving one additional share for each share they held. In July 1996, ABIG issued 2.3 million shares of preferred stock with a stated value of $50 per share. The preferred stock issuance contributed net proceeds of $111.8 million to equity. The other primary source of growth in stockholders' equity from January 1, 1996 to December 31, 1998, was accumulated earnings of $476.3 million net of $68.2 million in dividends paid to ABIG's common and preferred shareholders. 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 the amortized cost and the fair value of the securities available-for-sale (unrealized gain or loss, net of tax) is included as a component of equity. Unrealized gains, net of taxes on ABIG's fixed maturity portfolio were $10.2 million at December 31, 1998. In February 1999, the Board of Directors revoked the 1996 authority to repurchase Company stock and authorized a repurchase of up to 1.5 million shares of the Company's stock in the open market from time to time subject to certain conditions. At December 31, 1998, ABIG held approximately 360,000 shares as treasury stock and acquired an additional 476,100 shares during the first quarter of 1999. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998, $2.5 billion or 58% of ABIG's total assets were comprised of securities, short-term investments and cash. The securities are principally readily marketable and none are part of highly leveraged transactions. In the bond portfolio, 66% have maturities of under five years and 79% have a rating of "A" or better (80% at December 31, 1997 and 1996). Unrealized gains in fixed maturity investments decreased to $36.6 million at December 31, 1998, from $42.6 million at December 31, 1997. ABIG's investment portfolio has been structured to match cash requirements. Liabilities representing current cash requirements including claim liabilities, accrued commissions and other liabilities 43 44 totaled $1.1 billion, $922.3 and $906.3 million, at December 31, 1998, 1997, and 1996, respectively. Other significant cash commitments in 1999 include shareholder dividends of approximately $26.6 million under the current capital structure. Cash flows from operations of $380.5 million in 1998, $194.4 million in 1997, and $202.7 million in 1996, contributed to meet operating requirements, as well as anticipated debt service. The 1998 cash flow from operations included the receipt of net merger termination fees of $300 million and other non-recurring charges. Cash provided by operating activities in excess of these needs is used in investing activities. During 1996, ABIG raised $115 million in a public offering of preferred stock. The net proceeds of $111.8 million were used primarily to support growth and reduce debt. Excluding any significant business acquisitions, ABIG expects to provide all its capital needs internally or through its short-term borrowing facility in 1999. Capital expenditures planned for 1999 are not expected to be significant compared to the Company's overall liquidity and cash flow. ABIG completed the expansion of its headquarters in 1997, associated costs incurred approximated $6.3 million in 1997 and $2.9 million in 1996. The 1.5 million share stock buyback program is not expected to significantly impact ABIG's liquidity or cash flow in any one financial reporting period. During 1998, ABIG acquired 88,900 of its shares at a cost of $3.8 million and an additional 476,100 at a cost of $22.7 million during the first quarter of 1999. While the impact, if any, from the resolution of pending litigation or any potential market conduct investigation cannot presently be identified, ABIG does not believe any unfavorable outcome will 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. 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. Under these arrangements, approximately $304 million is available for short-term liquidity needs as of year end. Consummation of the merger as contemplated by the Fortis Merger Agreement will, unless consents or waivers are obtained from the group of banks under the credit facility, constitute an event of default and result in the termination of the credit facility. This event may impact the Company's liquidity if it is required to repay all outstanding loans and advances pursuant to the credit facility and the unavailability of further loans and advances under the credit facility. The Fortis Merger Agreement requires the Company, under certain circumstances, to pay Fortis a fee of $100 million, if the Merger is not consummated. If such payments were required, the Company would obtain such funds from available credit facilities and/or operating cash flows. The interest rate on the floating rate note is determined quarterly. The interest rate under the short-term facility is determined at the time amounts are borrowed. Accordingly, interest rate changes may impact the Company's interest expense. The Company does not commit a significant portion of its investment portfolio to equity securities; consequently, liquidity is not significantly affected by changes in the equity securities markets. At December 31, 1998, equity securities represented 5.1% of ABIG's total invested assets. 44 45 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. Prior to the closing of the pending merger with Fortis, 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, financial condition and certain restrictions under its credit facility. Based on the current dividend paying abilities of the insurance subsidiaries, ABIG does not foresee any difficulty in servicing its outstanding indebtedness or its ability to pay dividends. Payment of dividends to ABIG by its insurance subsidiaries is dependent on regulations dictated by statutory authorities in the state in which they are domiciled. The National Association of Insurance Commissioners has introduced standards that 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 Item 1 on page 19 and Notes 9 and 10 to the Consolidated Financial Statements. EURO In Europe, effective in 1999, the European and Monetary Union has introduced the euro as a new currency. Eleven of the fifteen member countries of the European Union, participating countries, over the next three years will take the steps to convert to the new currency. Non-participating countries, include the United Kingdom and Denmark. ABIG's European subsidiaries, BIG and IBIC, are located in the United Kingdom and Denmark, respectively. Since our European subsidiaries are both located in and have as their principal marketplace non participating countries, the Company does not expect the introduction of the euro to materially impact their operations or increase their competition. YEAR 2000 The Year 2000 project at ABIG was developed in early 1997 to position the Company to complete the renovation and upgrades of all mission critical information systems by the end of 1998. The project involves the entire enterprise and its major accounts and vendors. It has four phases, Awareness, Assessment, Remediation, and Validation. At the end of 1998, Validation testing was essentially complete for all ABIG's core insurance processing and accounting systems. In early 1997, a Corporate project team was created and included Executive Management. At this point the Company began its Awareness phase. In the Assessment phase, ABIG inventoried all computer hardware and software. All specific systems that required modification or replacement were assessed to determine the steps necessary to remediate the Year 2000 issue. The Assessment phase was completed during the fourth quarter of 1997. The Remediation phase began in 1997. Remediation efforts on all core insurance and accounting information processing systems have been completed and the systems returned to production. In 1997, ABIG designed and configured isolated testing labs for both mainframe and network client server technologies. The technology infrastructure, such as operating systems, third party software, 45 46 wiring, and network hardware, were all upgraded to Year 2000 compliant releases before being used for lab testing. The labs provide the ability to perform validation testing for systems using various future Year 2000 date/time scenarios. The Validation testing phase started in 1998. Validation testing is a joint effort by the Information Systems Department and senior analysts from each business area. Testing procedures were documented using guidelines developed by the ABIG Internal Audit Group. These procedures are used throughout the testing by senior analysts and will continue until all systems are tested. The Validation testing phase is expected to be completed during the first half of 1999. The entire project reports to an Executive Steering Committee and is being monitored by the Internal Audit Group. The Internal Audit Group reports the progress of the Company's Year 2000 project to the Board of Directors. In 1999, the Year 2000 compliance effort at ABIG will be limited to the following: o Completion of all systems Validation testing in the Year 2000 labs during the first quarter. o Auditing and testing of our remote accounts. o PC/Server hardware and software upgrades and replacements. Non-information technology systems such as those pertaining to the operations of the building have been evaluated using the same four phases described above. Currently, the Company is in the Validation testing phase. The Company expects that all non-information systems should be compliant by the early part of 1999. In early 1997, ABIG completed an impact analysis of all major third party vendors to determine their Year 2000 compliance. Every software and hardware vendor was contacted and plans were executed to upgrade to the vendor's Year 2000 ready release. A few vendor software upgrades remain to be tested. During the first half of 1999, these products will be subject to the Validation testing described above. ABIG surveyed its network of corporate clients and other third parties regarding their Year 2000 readiness in our Assessment phase. The majority have responded to the surveys and have represented that they expect to be compliant by the Year 2000. Our Validation phase includes plans to audit the readiness of our major corporate clients and to test electronic interface data in 1999. The Company will continue to monitor their progress and work with them as required. While the Company is not presently aware of any significant exposure, there can be no guarantee that the systems of ABIG's corporate clients and other third parties will be converted in a timely manner, or that a failure to properly convert by another company would not have a material adverse effect on the Company. In the event the Company, clients or other third parties fail to be converted in a timely manner, the Company intends to implement the necessary portions of its disaster recovery plan. The Company as part of its overall business operation, has developed a disaster recovery plan which includes electronic as well as non-electronic processes. Additional internal resources will be focused to address each failure on a case-by-case basis. The recovery steps necessary will vary considerably depending on the nature of the Year 2000 issue being addressed. The worst case scenario would be where the Company's systems do not operate as expected and/or major clients and major service providers fail to achieve their Year 2000 compliance. Consequently, no assurance can be given that Year 2000 compliance can be achieved without costs that might affect 46 47 future financial results or cause reported financial information to not be necessarily indicative of future operating results or future financial condition. Through December 31, 1998, the Company has expensed approximately $7.6 million and estimates another $3.3 million to substantially complete the project. TERMINATED ACQUISITION PROPOSALS During 1998, the Company was a party to two agreements regarding the acquisition of the Company. Both agreements were terminated prior to consummation. The Company entered into an Agreement and Plan of Merger (the "Cendant Merger Agreement") with Cendant Corporation ("Cendant") under which Cendant would have acquired the Company by merger. The execution of the Cendant Merger Agreement followed the public announcement by Cendant of its tender offer at $58 per share for shares of the Company's of common stock, to be paid in cash and common stock of Cendant, which was subsequently raised to $67. The Cendant Merger Agreement and Cendant's tender offer were terminated in October 1998 and Cendant made a $400 million cash payment to the Company. Cendant's acquisition proposal followed an announcement by the Company that it had entered into an Agreement and Plan of Merger (the "AIG Merger Agreement") with American International Group, Inc. ("AIG"). In March 1998, the Company, AIG and Cendant entered into a settlement agreement (the "Settlement Agreement") pursuant to which AIG agreed to temporarily waive certain provisions of the AIG Merger Agreement, allowing the Company to terminate the AIG Merger Agreement and enter into the Cendant Merger Agreement. In connection with the termination of the AIG Merger Agreement and other related agreements, AIG received from the Company a termination fee of $100 million which the Company financed through its short-term credit facility. NON-FILE LITIGATION On November 12, 1998, the Company and three of its clients entered into a settlement of all claims in class action litigation consolidated by the Panel on Multi-District Litigation in the United States District Court for the Middle District of Alabama, contingent upon approval of the fairness of the settlement by the District Court and other conditions. This series of class actions involved the largest collective class exposure to the Company. Under the terms of the settlement, without admitting any liability, the Company will contribute approximately $15 million in distributions to the classes and subclasses, and has agreed to be bound by an injunction limiting the percentage of authorized non-filing insurance premium to be charged consumer finance and retailer accounts during 6 year and 18 month periods, respectively. The Company has accrued additional expenses associated with implementing the settlement. REGULATIONS ABIG's insurance subsidiaries, like other insurance companies, are subject to regulation and supervision in the jurisdictions 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. As in the case of other types of insurance, state regulators, directly and through the NAIC, have begun a greater focus on the regulatory, licensing and disclosure issues related to market conduct of 47 48 credit insurers, including the Company. In May 1998, following market conduct examinations by several states, the Company received notice from the Kentucky Commissioner of Insurance that a larger group of states (the "participating states") intended to conduct a multi-state market conduct examination. The participating states also invited the Company to pursue a compromise resolution under which the Company would voluntarily address certain areas of concern through implementation of a Compliance Plan agreeable to the states. In light of the significant costs of a multi-state examination, as well as the potential exposure for monetary sanctions, the Company chose to voluntarily negotiate a Compliance Plan. On November 23, 1998, the Company entered into a Consent Order and comprehensive Compliance Plan with 39 participating states relating to compliance with the disparate state insurance laws, regulations and administrative interpretations relating to credit-related insurance products. As a part of the adoption of the Compliance Plan, the Company agreed in a Consent Order to pay $12 million to those participating states, and through implementation of the Compliance Plan, to provide restitution to insureds, if instances of excess premiums or less than appropriate claims payments were discovered in that process. Since November 1998 four additional states have executed Addenda joining in the multi-state Consent Order. The Company also agreed to a multi-state market conduct examination commencing on or after November 23, 1999 for review of the Company's implementation of the Compliance Plan, and to a payment of $3 million to participating states if the Compliance Plan is not fully implemented by that time. The Company is taking steps to implement the Compliance Plan by November 23, 1999 (see Note 13), but there can be no assurance that the Company will fully implement the Compliance Plan by that date. In 1998, the NAIC adopted the Codification of Statutory Accounting Principles guidance, which will replace the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The NAIC is now considering amendments to the Codification guidance that would also be effective upon implementation. The NAIC has recommended an effective date of January 1, 2001. The Codification provides guidance for areas where statutory accounting has been silent and changes current accounting in some areas. It is not known whether the domiciliary states of ABIG's insurance subsidiaries will adopt the Codification and whether the Departments will make any changes to the guidance. ABIG has not estimated the potential effect of the Codification guidance if adopted by the Departments as the effect could differ as changes are made to the Codification guidance, prior to its recommended effective date of January 1, 2001. A substantial portion of the business written by the Company's insurance subsidiaries is credit-related insurance. Most states and other jurisdictions in which the Company's insurance subsidiaries do business have enacted laws and regulations that apply specifically to credit-related insurance. The methods of regulation vary but generally relate to, among other things, the amount and term of coverage, the content of required disclosures to debtors, the filing and approval of policy forms and rates, and limitations on the amount of premiums that may be charged and on the amount of compensation that may be paid as a percentage of premium. In addition, some jurisdictions have enacted or are considering regulations which attempt to limit profitability arising from credit-related insurance based on underwriting experience. As in the case of other types of insurance, state regulators, directly and through the NAIC, have begun a greater focus on the regulatory, licensing and disclosure issues related to market conduct of credit insurers, including the Company. 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. The NAIC is anticipated to consider in 1999 issues related to credit insurance due to concerns about excessive profits earned by credit insurers 48 49 and market conduct practices. It is impossible to predict whether any new regulations will be proposed. 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 that provides a well-capitalized insurer more discretion and flexibility in its investing practices. The NAIC has promulgated Risk-Based Capital (RBC) requirements. Under the RBC requirements, areas such a asset risk, insurance 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 continues to work 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. Certain factors included in the design of the reserve, such as reserve draw down trigger levels and an additional reserve cap based on an individual company's actual catastrophe exposure, are still under review. COMPETITION The insurance industry is highly competitive. Some competing companies 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. The Company may face increased competition from Financial institutions that have begun to market and underwrite insurance products. In addition, debt cancellation agreements offered by lending institutions may compete with the Company's credit life and disability products. The Company is unable to predict the extent of any increased competition from financial or lending institution on its business. RESERVES Life insurance companies are required to establish and maintain policy liabilities and claim liabilities to meet their future obligations on life policies. Policy liabilities are amounts which will be sufficient to meet policy obligations at death, disability or maturity taking into account future premiums less expenses, interest, expected lapses and expected mortality. Claim liabilities are amounts of future unpaid benefits on all incurred claims, whether reported to the Company or not. Liabilities for losses and loss adjustment expenses for property and casualty insurance represent estimates based on past actual experience of unpaid claims for known losses and for claims which have been incurred but not reported. The length of time for which claim costs must be estimated varies depending upon the coverage involved. The process used in computing reserves cannot be exact, particularly for liability coverages, since actual claim costs are dependent upon such complex factors as inflation, changes in doctrines of legal liability and damage awards. The majority of ABIG's property and casualty insurance business is property coverage where the ultimate loss experience develops relatively quicker than that for insurers concentrated more heavily in liability coverages. 49 50 In the ordinary course of business, ABIG reinsures risks with other insurance companies. ABIG remains contingently liable for the risks reinsured should the reinsuring companies fail to meet the obligations assumed in the reinsurance agreements. (See Note 7 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 (1) adverse catastrophe experience in certain of the Company's property and casualty products, (2) significant changes in interest rates, (3) increased competition causing reduction in product margin or loss of a significant client, (4) adverse loss development on property and casualty prior years' claims or the excess casualty reinsurance pools, (5) premium growth expectation not met because of the loss of any significant client, (6) outcome of litigation and other state and federal regulatory issues, (7) unresolved issues by the Company, its clients and third party vendors related to the Year 2000 compliance, and (8) 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. 50 51 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 52 Consolidated Balance Sheets at December 31, 1998 and 1997 53 Consolidated Statements of Income for the years ended December 31, 1998, 1997, and 1996 54 Consolidated Statements of Comprehensive Income for the years ended December 31, 1998, 1997, and 1996 55 Consolidated Statements of Common Stock and Other Stockholders' Equity for the years ended December 31, 1998, 1997, and 1996 56 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996 57 Notes to Consolidated Financial Statements for the year ended December 31, 1998 58 SCHEDULES:* I Summary of Investments - Other Than Investments in Related Parties 89 II Condensed Financial Information of Registrant 90 III Supplementary Insurance Information 94 IV Reinsurance 95 VI Supplemental Information Concerning Property Casualty Insurance Operations 96 * Note : All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 51 52 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, 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. PRICEWATERHOUSECOOPERS LLP Miami, Florida March 23, 1999 52 53 CONSOLIDATED BALANCE SHEETS AT DECEMBER 31 (IN THOUSANDS EXCEPT PAR VALUE OF STOCK):
- ------------------------------------------------------------------------------------------------------------------- 1998 1997 - ------------------------------------------------------------------------------------------------------------------- ASSETS Investments Held-to-maturity securities, at amortized cost (fair value: $796,118 in 1998 and $855,838 in 1997) $ 775,305 $ 836,608 Available-for-sale securities, at fair value (amortized cost: $1,239,039 in 1998 and $950,416 in 1997) 1,254,876 973,790 Equity securities, at approximate market value (cost: $120,320 in 1998 and $125,345 in 1997) 130,437 141,274 Mortgage loans on real estate 6,969 9,322 Policy loans 9,873 9,315 Short-term and other investments 352,764 184,923 - ------------------------------------------------------------------------------------------------------------------- Total investments 2,530,224 2,155,232 - ------------------------------------------------------------------------------------------------------------------- Cash 12,755 23,265 Accounts receivable, net of allowance for doubtful accounts of $7,516 in 1998 and $5,619 in 1997 136,049 144,330 Reinsurance receivable 315,477 270,692 Accrued investment income 30,586 25,228 Deferred policy acquisition costs 482,995 458,289 Prepaid reinsurance premiums 661,665 565,162 Other assets 198,756 140,253 - ------------------------------------------------------------------------------------------------------------------- Total assets $ 4,368,507 $ 3,782,451 - ------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Policy liabilities $ 336,982 $ 311,181 Unearned premiums 1,611,886 1,436,034 Claim liabilities 608,501 555,797 - ------------------------------------------------------------------------------------------------------------------- 2,557,369 2,303,012 - ------------------------------------------------------------------------------------------------------------------- Other policyholders' funds 5,976 4,786 Notes payable 193,753 242,592 Deferred income taxes 32,824 51,666 Accrued commissions and other expenses 140,055 150,147 Other liabilities 377,648 216,379 - ------------------------------------------------------------------------------------------------------------------- Total liabilities 3,307,625 2,968,582 - ------------------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 13) - ------------------------------------------------------------------------------------------------------------------- Stockholders' Equity Preferred stock: authorized 10,000 shares $3.125 Series B Cumulative Convertible Preferred Stock (stated at liquidation preference of $50 per share), issued and outstanding 1,983 shares in 1998 and 2,300 shares in 1997 99,160 115,000 Common stock of $1 par value. Authorized 100,000 shares; issued and outstanding 43,080 shares in 1998 and 41,806 shares in 1997 43,080 41,806 Additional paid-in capital 245,389 212,010 Accumulated other comprehensive income 2,593 12,096 Retained earnings 690,726 449,444 Treasury stock at cost - 360 shares in 1998 and 271 shares in 1997 (11,876) (8,110) Unamortized restricted stock (8,190) (6,252) Collateralization of loan to Leveraged Employee Stock Ownership Plan (2,125) - ------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 1,060,882 813,869 - ------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 4,368,507 $ 3,782,451 - -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 53 54 CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS EXCEPT PER COMMON SHARE DATA): - ------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- GROSS COLLECTED PREMIUMS $ 2,799,048 $ 2,740,363 $ 2,492,828 - ------------------------------------------------------------------------------------------------------------------- PREMIUMS AND OTHER REVENUES Net premiums earned $ 1,431,973 $ 1,453,783 $ 1,378,485 Net investment income 149,679 134,115 121,200 Realized investment gains 19,828 10,394 7,812 Merger termination fees, net (see Note 17) 300,000 Other income 28,699 23,090 21,538 - ------------------------------------------------------------------------------------------------------------------- Total revenues 1,930,179 1,621,382 1,529,035 - ------------------------------------------------------------------------------------------------------------------- BENEFITS AND EXPENSES Benefits, claims, losses, and settlement expenses 508,958 532,607 523,024 Commissions 625,331 614,117 571,768 Operating expenses 375,066 298,819 280,768 Interest expense 19,097 16,244 17,530 - ------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 1,528,452 1,461,787 1,393,090 - ------------------------------------------------------------------------------------------------------------------- Income before income taxes 401,727 159,595 135,945 - ------------------------------------------------------------------------------------------------------------------- Income tax (expense) benefit Current (148,649) (37,367) (28,921) Deferred 13,882 (7,365) (12,521) - ------------------------------------------------------------------------------------------------------------------- Total income tax expense (134,767) (44,732) (41,442) - ------------------------------------------------------------------------------------------------------------------- NET INCOME $ 266,960 $ 114,863 $ 94,503 - ------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE DATA Basic: NET INCOME $ 6.12 $ 2.60 $ 2.24 - ------------------------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding 42,554 41,433 40,697 - ------------------------------------------------------------------------------------------------------------------- Diluted: NET INCOME $ 5.68 $ 2.45 $ 2.16 - ------------------------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding 46,960 46,999 43,890 - -------------------------------------------------------------------------------------------------------------------
The per common share data for years prior to 1997 has been restated to reflect the 2 for 1 stock split effective September 12, 1997. See accompanying notes to consolidated financial statements. 54 55 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS) - ---------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Net Income $ 266,960 $ 114,863 $ 94,503 - ---------------------------------------------------------------------------------------------------------------------------- Other comprehensive income, net of tax: Foreign currency translation adjustments (198) (4,450) 2,980 - ---------------------------------------------------------------------------------------------------------------------------- Unrealized gains on securities: Unrealized holding gains (losses) arising during period 6,923 9,109 (2,798) Reclassification adjustment (16,228) - ---------------------------------------------------------------------------------------------------------------------------- Subtotal unrealized (losses) gains on securities (9,305) 9,109 (2,798) - ---------------------------------------------------------------------------------------------------------------------------- Other comprehensive (loss) income (9,503) 4,659 182 - ---------------------------------------------------------------------------------------------------------------------------- Comprehensive income $ 257,457 $ 119,522 $ 94,685 - ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 55 56 CONSOLIDATED STATEMENTS OF COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS EXCEPT PER COMMON SHARE DATA): - ------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- PREFERRED STOCK: Balance at beginning of year $ 115,000 $ 115,000 Conversion of preferred stock (15,840) Proceeds from sale of stock $ 115,000 Balance at end of year $ 99,160 $ 115,000 $ 115,000 - ------------------------------------------------------------------------------------------------------------------- COMMON STOCK: Balance at beginning of year $ 41,806 $ 20,530 $ 20,384 Exercise/forfeitures 341 495 146 Conversion of preferred stock 633 Stock split 20,781 Conversion of debentures 300 Balance at end of year $ 43,080 $ 41,806 $ 20,530 - ------------------------------------------------------------------------------------------------------------------- ADDITIONAL PAID-IN CAPITAL: Balance at beginning of year $ 212,010 $ 217,939 $ 215,121 Exercise/forfeitures and related tax expense 14,749 14,852 5,479 Conversion of preferred stock 15,207 Issuance of treasury stock 658 Conversion of debentures 3,423 Expenses related to issuance of stock (3,319) Stock split (20,781) Balance at end of year $ 245,389 $ 212,010 $ 217,939 - ------------------------------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE INCOME: Balance at beginning of year $ 12,096 $ 7,437 $ 7,255 Change in net unrealized investment gains/losses (13,748) 13,161 (4,013) Taxes on net unrealized investments gains/losses 4,443 (4,052) 1,215 Equity adjustment from foreign currency translation (198) (4,450) 2,980 Balance at end of year $ 2,593 $ 12,096 $ 7,437 - ------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS: Balance at beginning of year $ 449,444 $ 359,359 $ 282,748 Net income 266,960 114,863 94,503 Cash dividends ($.45, $.43 and $.40 per share), net of tax benefit on unallocated LESOP shares (25,678) (24,778) (17,892) Balance at end of year $ 690,726 $ 449,444 $ 359,359 - ------------------------------------------------------------------------------------------------------------------- TREASURY STOCK: Balance at beginning of year $ (8,110) $ (1,426) $ (2,516) Purchase of treasury stock (3,766) (6,684) (175) Issuance of treasury stock 1,265 Balance at end of year $ (11,876) $ (8,110) $ (1,426) - ------------------------------------------------------------------------------------------------------------------- UNAMORTIZED RESTRICTED STOCK: Balance at beginning of year $ (6,252) $ (4,382) $ (3,620) Exercise/forfeitures (5,456) (4,150) (2,306) Amortization expense 3,518 2,280 1,544 Balance at end of year $ (8,190) $ (6,252) $ (4,382) - ------------------------------------------------------------------------------------------------------------------- COLLATERALIZATION OF LOAN TO LESOP: Balance at beginning of year $ (2,125) $ (4,250) $ (6,375) Reduction of LESOP loan 2,125 2,125 2,125 Balance at end of year $ $ (2,125) $ (4,250) - -------------------------------------------------------------------------------------------------------------------
The per common share data for years prior to 1997 has been restated to reflect the 2 for 1 stock split effective September 12, 1997. See accompanying notes to consolidated financial statements. 56 57 CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years ended December 31 (in thousands): - ------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 266,960 $ 114,863 $ 94,503 Adjustments to reconcile net income to net cash provided by operating activities: Increase in policy liabilities, unearned premiums and claim liabilities (net of reinsurance) 27,633 132,285 172,195 Change in other assets and other liabilities 100,388 15,260 (15,174) Decrease (increase) in accounts receivable 14,195 (15,367) 2,007 Increase in accrued investment income (3,246) (932) (3,353) (Decrease) increase in accrued commission and expenses (17,133) (6,749) 20,722 Decrease in other policyholders' funds (6,213) (2,009) (318) Increase in policy loans (558) (1,025) (471) Amortization of deferred policy acquisition costs 528,414 590,117 497,855 Amortization of cost of insurance acquired 1,226 1,509 1,899 Policy acquisition costs deferred (521,061) (660,414) (574,969) Provision for amortization and depreciation 12,706 12,783 9,150 Deferred income taxes (13,882) 7,365 12,521 Net gain on sale of investments (19,827) (10,394) (7,812) Compensation and tax effect on stock option shares 10,859 8,479 2,837 Net cash flow from purchases and sales of trading securities 8,660 (8,852) - ------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 380,461 194,431 202,740 - ------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Purchase of investments Held-to-maturity securities (56,444) (92,703) (351,992) Available-for-sale securities (1,011,744) (1,287,688) (844,994) Proceeds from sale of investments Available-for-sale securities 684,633 1,038,856 223,292 Mortgage loans 2,711 870 1,200 Real estate 13 297 1,473 Proceeds from maturities of investments Held-to-maturity securities 115,667 106,247 95,100 Available-for-sale securities 163,046 79,494 608,029 Payment for purchase of subsidiaries, net of cash acquired (62,277) Increase in short-term investments (129,448) (26,791) (1,447) Transactions related to capital assets Capital expenditures (10,549) (14,902) (10,946) Sales of capital assets 103 290 509 - ------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (304,289) (196,030) (279,776) - ------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Proceeds from issuance of notes payable 150,138 31,427 138,147 Repayment of notes payable (209,502) (9,200) (149,513) Dividends paid to shareholders (25,666) (24,761) (17,951) Proceeds from sale of stock 2,294 4,004 113,679 Purchase of treasury stock (3,766) (6,684) (175) - ------------------------------------------------------------------------------------------------------------------- Net cash (used) provided by financing activities (86,502) (5,214) 84,187 - ------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash (180) (356) 26 - ------------------------------------------------------------------------------------------------------------------- Net change in cash (10,510) (7,169) 7,177 Cash at beginning of year 23,265 30,434 23,257 - ------------------------------------------------------------------------------------------------------------------- Cash at end of year $ 12,755 $ 23,265 $ 30,434 - -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 57 58 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) POTENTIAL CHANGE OF CONTROL OF THE COMPANY On March 5, 1999, the Company entered into an agreement pursuant to which Fortis, Inc. ("Fortis") will acquire the Company through a merger. The Company, Fortis and Greenland Acquisition Corp, a wholly owned subsidiary of Fortis, entered into an Agreement and Plan of Merger (the "Fortis Merger Agreement") which provides that, subject to satisfaction of specified terms and conditions, including regulatory and common stockholder approval, Greenland will merge with and into the Company. The Company will be the surviving corporation in the Merger and will become a wholly owned subsidiary of Fortis. If the merger is consummated, holders of the Company's common stock will receive $55.00 in cash for each share of common stock. Holders of the Company's preferred stock will receive $109.857 in cash for each share of preferred stock unless the merger not approved by the holders of at least 2/3 of the shares of preferred stock voting as a class or if Fortis reasonably determines that such a vote is not likely to be obtained. In such case, the preferred stock will continue to remain outstanding after the merger, pursuant to the terms and conditions as are in effect on March 5, 1999, except that the preferred stock will be convertible as provided in the Company's Articles of Incorporation. The Company also executed a Stock Option Agreement granting Fortis the right to purchase up to 8,406,559 shares of common stock upon the occurrence of certain events at $55 per share. If the merger is not consummated, the total amount that Fortis may receive under the Stock Option Agreement and the Fortis Merger Agreement is limited to $100 million plus expenses. In addition, certain stockholders have entered into a voting agreement with Fortis pursuant to which they have generally agreed to vote their shares in favor of the Fortis Merger Agreement and the merger. The merger is subject to approval by regulatory authorities and the Company's shareholders which are expected to be obtained by the end of the third quarter of 1999. Upon merger closing, the Company will recognize certain expenses associated with the accelerated vesting of benefits under several compensation plans, including employee stock options and restricted stock. The Company estimates that the pre-tax charge related to the acceleration of such benefits will be approximately $7.4 million. Certain officers of the Company have severance agreements which entitle them to receive specified payments under certain circumstances following a change in control. Upon merger closing, the maximum amount that the Company could incur pursuant to such severance agreements is approximately $23.6 million, pre-tax. (3) 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: 58 59 (A) CONSOLIDATION POLICY The accompanying consolidated financial statements include the accounts of American Bankers Insurance Group, Inc. (ABIG) and its subsidiaries (the Company): * American Bankers Insurance Company of Florida (ABIC) * American Bankers Life Assurance Company of Florida (ABLAC) * American Reliable Insurance Company (ARIC) * Bankers American Life Assurance Company (BALAC) * Bankers Insurance Group (BIG) * Caribbean American Life Assurance Company (CALAC) * Caribbean American Property Insurance Company (CAPIC) * Federal Warranty Service Corporation (FWSC) * MS Diversified Corporation and Subsidiaries * Voyager Insurance Companies All significant intercompany transactions and accounts have been eliminated in consolidation. (B) INVESTMENTS 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 carried 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 carried at fair value. Securities that are purchased and held principally for the purpose of selling them in the near term are 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. 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 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. 59 60 (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: * 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. * Acquisition costs relating to credit life and accident and health insurance are amortized over the term of the contracts in relation to premiums earned. 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. (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 buildings, furniture, and equipment are provided primarily on the accelerated method; software on the straight-line method; and autos on the 200% declining balance method. 60 61 Depreciation expense for the years ended December 31, 1998, 1997 and 1996 was $9,699,000, $10,091,000 and $9,278,000, respectively and is a component of operating expenses. Estimated useful lives range from 15 to 40 years for buildings; 3 to 15 years for software; and 5 to 7 years for furniture, equipment, and autos. (I) EARNINGS PER COMMON SHARE In February 1997, the Financial Accounting Standards Board issued FASB Statement 128, "Earnings per Share," which specifies the computation, presentation and disclosure requirements for earnings per share (EPS). It replaced the presentation of primary and fully diluted EPS with basic and diluted EPS. Basic EPS excludes all dilution. It is based on income available to common shareholders and the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. The Company adopted FASB Statement 128 in 1997 and has restated all previously reported per share amounts to conform to the new presentation. (J) PENSION PLAN In 1998, the Company adopted FASB Statement 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits," which revises disclosure requirements for pension and other postretirement benefits. This statement requires additional information on changes in the benefit obligations and fair values of plan assets. The prior years' information has been restated to conform with the disclosure requirements under FASB 132. 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 "Accumulated other comprehensive income." (L) FAIR VALUES OF FINANCIAL INSTRUMENTS The Company has used the following methods and assumptions in estimating its fair value disclosures: * 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. * 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. 61 62 * Cash and short-term investments: The carrying amounts reported in the balance sheet for these instruments approximate their fair values. * Trade receivables and payables: The carrying amounts reported in the balance sheet for these instruments approximate their fair values. * Notes payable: The carrying amount of the Company's short-term financing program approximates its fair value. Fair values for the Company's medium-term notes are based on a discounted cash-flow calculation using the Company's current borrowing rate for similar debts. (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 In 1998, the Company adopted FASB Statement 131, "Disclosures about Segments of an Enterprise and Related Information." FASB 131 supersedes FASB 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. FASB 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of FASB 131 did not affect results of operations or financial position of the Company but did affect the disclosure of segment information. The Company has restated all previously reported segment information to conform to the new presentation. Operating results and other financial data for each segment are presented in Note 14. Management segments are primarily composed of the Company's business in the Financial Markets and the Personal Lines. 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 and reinsures principally affiliated U.S. risks transacted in U.S. dollars. (O) RECLASSIFICATIONS Certain items in the 1997 and prior financial statements have been reclassified to conform with the 1998 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, deferred acquisition costs, valuation allowances for investment assets and unrecoverable reinsurance are discussed throughout the notes to consolidated financial statements. 62 63 (4) INVESTMENTS AND FAIR VALUES INVESTMENTS At December 31, 1998 and 1997, 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:
- ------------------------------------------------------------------------------------------------------------------- GROSS UNREALIZED DECEMBER 31, 1998 (IN THOUSANDS) FAIR AMORTIZED ------------------ HELD-TO-MATURITY VALUE COST GAINS LOSSES - ------------------------------------------------------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 112,870 $ 109,411 $ 3,542 $ (83) Obligations of states and political subdivisions 71,119 69,434 1,847 (162) Debt securities issued by foreign governments 37,726 37,691 88 (53) Corporate securities 554,272 538,638 16,490 (856) Other debt securities 20,131 20,131 - ------------------------------------------------------------------------------------------------------------------- TOTAL $ 796,118 $ 775,305 $ 21,967 $ (1,154) - ------------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 68,478 $ 68,653 $ 194 $ (369) Obligations of states and political subdivisions 224,948 222,110 3,176 (338) Debt securities issued by foreign governments 37,037 33,776 3,277 (16) Corporate securities 262,284 256,832 8,213 (2,761) Other debt securities 3,264 3,264 - ------------------------------------------------------------------------------------------------------------------- Subtotal 596,011 584,635 14,860 (3,484) Collateralized mortgage obligations 658,865 654,404 5,810 (1,349) - ------------------------------------------------------------------------------------------------------------------- Total $ 1,254,876 $ 1,239,039 $ 20,670 $ (4,833) - ------------------------------------------------------------------------------------------------------------------- GROSS UNREALIZED DECEMBER 31, 1997 (IN THOUSANDS) FAIR AMORTIZED ------------------ HELD-TO-MATURITY VALUE COST GAINS LOSSES - ------------------------------------------------------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 141,447 $ 139,181 $ 2,593 $ (327) Obligations of states and political subdivisions 100,748 98,636 2,204 (92) Debt securities issued by foreign governments 26,326 25,794 696 (164) Corporate securities 564,444 550,124 15,347 (1,027) Other debt securities 22,873 22,873 - ------------------------------------------------------------------------------------------------------------------- TOTAL $ 855,838 $ 836,608 $ 20,840 $ (1,610) - ------------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 26,143 $ 25,927 $ 246 $ (30) Obligations of states and political subdivisions 30,610 29,463 1,194 (47) Debt securities issued by foreign governments 19,292 17,176 2,197 (81) Corporate securities 232,307 226,757 6,545 (995) Other debt securities 886 882 4 - ------------------------------------------------------------------------------------------------------------------- Subtotal 309,238 300,205 10,186 (1,153) Collateralized mortgage obligations 664,552 650,211 14,545 (204) - ------------------------------------------------------------------------------------------------------------------- TOTAL $ 973,790 $ 950,416 $ 24,731 $ (1,357) - -------------------------------------------------------------------------------------------------------------------
63 64 At December 31, 1998 and 1997, fixed maturities with an amortized cost of $197,666,000 and $187,493,000 respectively were on deposit with insurance regulatory authorities to meet statutory requirements. In addition, fixed maturities with an amortized cost of $9,973,000 and $24,098,000 were being held in trust under reinsurance agreements at December 31, 1998 and 1997, respectively. The approximate market value and amortized cost of fixed maturity investments at December 31, 1998, 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.
- ------------------------------------------------------------------------------------------------------------------- HELD-TO-MATURITY AVAILABLE-FOR-SALE ----------------------- ---------------------- FAIR AMORTIZED FAIR AMORTIZED (IN THOUSANDS): VALUE COST VALUE COST - ------------------------------------------------------------------------------------------------------------------- Due in one year or less $ 188,701 $ 187,692 $ 45,975 $ 45,756 Due after one year through five years 521,569 505,745 191,328 188,855 Due after five years through ten years 66,368 63,937 158,039 154,506 Due after ten years 19,480 17,931 200,669 195,518 - ------------------------------------------------------------------------------------------------------------------- Subtotal 796,118 775,305 596,011 584,635 Collateralized mortgage obligations 658,865 654,404 - ------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $ 796,118 $ 775,305 $1,254,876 $ 1,239,039 - -------------------------------------------------------------------------------------------------------------------
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): 1998 FOR 1998 1997 FOR 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Fixed Maturities Available-for-Sale: Gross unrealized gains $ 20,670 $ (4,061) $ 24,731 $ 8,769 $ 15,962 Gross unrealized losses (4,833) (3,476) (1,357) 2,698 (4,055) Equity Securities: Gross unrealized gains 20,479 (1,028) 21,507 3,323 18,184 Gross unrealized losses (10,362) (4,784) (5,578) (1,627) (3,951) Other Invested Assets: Gross unrealized gains Gross unrealized losses (399) (399) - ------------------------------------------------------------------------------------------------------------------- Subtotal 25,555 (13,748) 39,303 13,163 26,140 Taxes (8,623) 4,443 (13,066) (4,051) (9,015) Foreign exchange translation (14,339) (198) (14,141) (4,453) (9,688) - ------------------------------------------------------------------------------------------------------------------- Total $ 2,593 $ (9,503) $ 12,096 $ 4,659 $ 7,437 - -------------------------------------------------------------------------------------------------------------------
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. 64 65 An analysis of net realized gains and losses applicable to investments is as follows:
- ------------------------------------------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS): 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Fixed Maturities Held-to-Maturity: Gross realized gains Gross realized losses $ (3,219) $ (118) Fixed Maturities Available-for-Sale: Gross realized gains 12,020 $ 6,776 2,240 Gross realized losses (2,606) (3,708) (1,652) Fixed Maturities Trading: Gross realized gains 241 Gross realized losses (622) Equity Securities: Gross realized gains 22,809 16,922 14,353 Gross realized losses (7,478) (8,016) (6,028) Other Invested Assets: Gross realized gains 3,004 1,122 1,160 Gross realized losses (4,702) (2,321) (2,143) - ------------------------------------------------------------------------------------------------------------------- TOTAL $ 19,828 $ 10,394 $ 7,812 - ------------------------------------------------------------------------------------------------------------------- The components of investment income are as follows: - ------------------------------------------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS): 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Interest on fixed maturities $ 128,773 $ 119,127 $ 103,539 Dividends on preferred stocks 2,887 2,774 3,100 Dividends on common stocks 2,414 2,475 5,720 Interest on mortgage loans 624 1,131 1,072 Interest on policy loans 621 571 499 Short-term and other investment income 19,912 13,270 12,180 - ------------------------------------------------------------------------------------------------------------------- Total 155,231 139,348 126,110 Less: Investment expenses (5,552) (5,233) (4,910) - ------------------------------------------------------------------------------------------------------------------- Net investment income $ 149,679 $ 134,115 $ 121,200 - -------------------------------------------------------------------------------------------------------------------
FAIR VALUES The fair value of the Company's financial instruments other than investments and those where fair values approximate carrying value (see Note 3(l)) are as follows:
- ------------------------------------------------------------------------------------------------------------------- 1998 1997 ---------------------- -------------------- AT DECEMBER 31 FAIR CARRYING FAIR CARRYING (IN THOUSANDS): VALUE AMOUNT VALUE AMOUNT - ------------------------------------------------------------------------------------------------------------------- Mortgage Loans $ 7,300 $ 6,969 $ 9,700 $ 9,322 Notes Payable $ 195,000 $ 193,753 $ 244,800 242,592 - -------------------------------------------------------------------------------------------------------------------
65 66 (5) POLICY LIABILITIES, UNEARNED PREMIUMS AND LIABILITIES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES The composition of the liability at December 31, 1998 and 1997, and related significant assumptions used are as follows:
- ------------------------------------------------------------------------------------------------------------------- LIFE AMOUNT OF INSURANCE FUTURE POLICY IN FORCE (A) BENEFITS (A) BASES OF ASSUMPTIONS (B) LINE OF BUSINESS (IN MILLIONS) (IN THOUSANDS) ----------------------------- -------------------- -------------------- INTEREST RATES 1998 1997 1998 1997 AND METHODS MORTALITY - ------------------------------------------------------------------------------------------------------------------- LIFE: Ordinary $ 359 $ 381 $ 29,822 $ 30,109 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 5,092 9,759 Same as above. Same as above. Flexible Premium 34,194 31,544 Full Account Value Single and Other Paid Up 20,493 17,132 Full Account Value Credit 23,596 23,540 170,269 152,021 Unearned premiums based principally on the "Rule of 78's" method. Group 5,554 5,190 1,007 1,172 7 1/2% Net Level 130% 60 CSG Universal Life 4,466 3,709 160,813 133,648 Full Account Value All Other 1,007 600 9.643 6,366 2.5%-6% Various Net Level ACCIDENT AND HEALTH: Group 8,442 14,292 Unearned premiums based on the pro rata method. Credit 154,330 115,336 Unearned premiums based on the average of the pro rata and "Rule of 78's" methods. Individual 46,551 47,392 3% 105% 1959 ADB Table PROPERTY: 610,205 585,636 Unearned Premiums based principally on the pro rata method. - ------------------------------------------------------------------------------------------------------------------- Totals - Net 34,982 33,420 1,250,861 1,144,407 Reinsurance Ceded 20,224 20,274 698,007 602,808 Totals - Gross $ 55,206 $ 53,694 $ 1,948,868 $1,747,215 - -------------------------------------------------------------------------------------------------------------------
(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. 66 67 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. The Company's loss reserve development includes losses assumed from excess casualty reinsurance pools in which the Company discontinued participation effective prior to 1982. 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. 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. At the current time, it is not possible to determine the future development of asbestos and environmental claims 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. Losses, net of reinsurance, from the Company's discontinued reinsurance pools were $1.8, $6.6 and $8.3 million in 1998, 1997 and 1996 respectively. At December 31, 1998 and 1997, the Company had $37.2 million and $38.5 million, respectively, of gross reserves related to the reinsurance pools. The Company's U.K. subsidiary participated in certain personal accident reinsurance programs from other insurance companies during 1994 to 1997. The Company ceased writing this reinsurance in 1997; however, certain risk may continue beyond 1997 due to the nature of the reinsurance contracts written. The Company has retroceded the majority of its personal accident liability to other insurance companies. On a gross basis, the personal accident loss ratios are substantially higher than that expected at the time the programs were written. However, due to the nature of the Company's retrocessional coverage, net losses on these programs have not been material to the Company's operating results. At December 31, 1998, the Company had gross payables of $14.1 million, ceded recoverables of $18.2 million, gross reserves of $45.8 million and ceded receivables of $37.8 million relating to the personal accident business. The Company is currently actively investigating the cause for the significant increase in the personal accident gross loss ratio. The outcome of that investigation is currently uncertain but may result in the Company taking legal or other action against its brokers, reinsurers or others. The Company is currently involved in arbitration overpayment of certain claims with one of the cedants, and several of the Company's retrocessioners have delayed payment pending further review. The December 31, 1998 loss reserves and reinsurance recoverables are based on various estimates that are subject to considerable uncertainty. However, it is management's opinion that due to the direct relationship of the business written to the Company's reinsurance coverage that future development on these programs will not have a material adverse effect on the Company's financial condition or results of operations. 67 68 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. Reinsurance pool reserves represent approximately 8.8% of the gross liability for property and casualty losses and LAE at December 31, 1998. 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 1998, 1997 and 1996.
- ------------------------------------------------------------------------------------------------------------------- Reconciliation of Liability for Losses and Loss Adjustment Expenses for Domestic Property and Casualty Subsidiaries - ------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS): 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Liability for losses and LAE at beginning of year (net) $ 191,881 $ 185,838 $ 162,342 Beginning liability of subsidiaries purchased during 1998 9,585 - ------------------------------------------------------------------------------------------------------------------- Losses and LAE incurred related to: Current year 335,408 329,151 313,469 Prior years (6,947) (3,008) 4,270 - ------------------------------------------------------------------------------------------------------------------- Total incurred 328,461 326,143 317,739 - ------------------------------------------------------------------------------------------------------------------- Losses and LAE paid related to: Current year (232,422) (216,099) (200,794) Prior years (105,899) (104,001) (93,449) - ------------------------------------------------------------------------------------------------------------------- Total paid (338,321) (320,100) (294,243) - ------------------------------------------------------------------------------------------------------------------- Liability for losses and LAE at end of year (net) 191,606 191,881 185,838 Reinsurance receivable for unpaid losses 119,090 91,843 80,732 Liability for losses and LAE at end of year (gross) $ 310,696 $ 283,724 $ 266,570 - -------------------------------------------------------------------------------------------------------------------
Accident and health net claim liabilities reported in the Company's life subsidiaries were $84,778,000, $80,564,000 and $80,026,000 at December 31, 1998, 1997 and 1996, respectively. There was no significant adverse development during the past three years. 68 69 (6) COMPREHENSIVE INCOME The Company adopted FASB Statement 130, "Reporting Comprehensive Income," effective January 1, 1998. Components of comprehensive income for the Company include items such as foreign currency translation and unrealized gains (losses) on available-for-sale securities. Related tax effects are allocated to each component of other comprehensive income as follows:
- ------------------------------------------------------------------------------------------------------------------------ FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS): 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ Foreign currency translation adjustments: Before tax amount $ (2,701) $ (4,780) $ 2,842 Tax benefit 2,503 330 138 - ------------------------------------------------------------------------------------------------------------------------ Net of tax amount (198) (4,450) 2,980 - ------------------------------------------------------------------------------------------------------------------------ Unrealized gains on securities: Unrealized holding gains arising during period Before tax amount 11,218 13,161 (4,013) Tax (expense) or benefit (4,295) (4,052) 1,215 - ------------------------------------------------------------------------------------------------------------------------ Net of tax amount 6,923 9,109 (2,798) - ------------------------------------------------------------------------------------------------------------------------ Reclassification adjustment Before tax amount (24,966) Tax expense 8,738 - ------------------------------------------------------------------------------------------------------------------------ Net of tax amount (16,228) - ------------------------------------------------------------------------------------------------------------------------ Net unrealized gains/losses Before tax amount (13,748) 13,161 (4,013) Tax benefit or (expense) 4,443 (4,052) 1,215 - ------------------------------------------------------------------------------------------------------------------------ Net of tax amount (9,305) 9,109 (2,798) - ------------------------------------------------------------------------------------------------------------------------ Other comprehensive (loss) income, net of tax $ (9,503) $ 4,659 $ 182 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ Accumulated Other Comprehensive Income Balances - ------------------------------------------------------------------------------------------------------------------------ ACCUMULATED FOREIGN UNREALIZED OTHER CURRENCY GAINS ON COMPREHENSIVE AT DECEMBER 31, 1998 ITEMS SECURITIES INCOME - ------------------------------------------------------------------------------------------------------------------------ Beginning balance $ (14,141) $ 26,237 $ 12,096 Current period change (198) (9,305) (9,503) - ------------------------------------------------------------------------------------------------------------------------ Ending balance $ (14,339) $ 16,932 $ 2,593 - ------------------------------------------------------------------------------------------------------------------------ ACCUMULATED FOREIGN UNREALIZED OTHER CURRENCY GAINS ON COMPREHENSIVE AT DECEMBER 31, 1997 ITEMS SECURITIES INCOME - ------------------------------------------------------------------------------------------------------------------------ Beginning balance $ (9,691) $ 17,128 $ 7,437 Current period change (4,450) 9,109 4,659 - ------------------------------------------------------------------------------------------------------------------------ Ending balance $ (14,141) $ 26,237 $ 12,096 - ------------------------------------------------------------------------------------------------------------------------
69 70 (7) REINSURANCE A substantial portion of the Company's reinsurance activities are related to agreements to reinsure premiums generated by certain clients to the clients' own captive insurance companies, or to reinsurance subsidiaries in which the clients have an ownership interest. Therefore a substantial portion of income in this area is derived from fees paid by the captive insurance companies for processing and other services performed by the Company. Collateral is obtained in the amount equal to the outstanding reserves when these captive companies are not authorized to operate in the Company's insurance subsidiary's state of domicile as required by statutory accounting principles. The Company's reinsurance receivable and prepaid reinsurance premiums at December 31, 1998 and 1997 totaled $977.1 million and $835.9 million respectively. The Company's reinsurance was placed with numerous client reinsurers including the following significant reinsurers: (1) Montgomery Ward Insurance Company, (2) Great Lakes Insurance Company and (3) Viking Insurance Company, Ltd. The Company historically has not experienced any material losses in collection of reinsurance receivables. The Company's insurance subsidiaries follow the policy of reinsuring risk in excess of $250,000 under a domestic ordinary life policy, $400,000 under an international 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 1998, 1997 and 1996 were $434,430,000, $416,333,000 and $315,096,000, respectively. Liabilities for ceded claim reserves and recoverables on paid losses at December 31, 1998 and 1997 are shown below.
- ------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31 (IN THOUSANDS): 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Ceded Claim Liabilities: Life and health business $ 101,364 $ 96,815 Property and casualty business $ 177,772 $ 136,228 - ------------------------------------------------------------------------------------------------------------------- Reinsurance Recoverable on Paid Losses: Life and health business $ 25,705 $ 23,307 Property and casualty business $ 52,911 $ 35,907 - ------------------------------------------------------------------------------------------------------------------- The effect of reinsurance on premiums written and earned for the years ended December 31 is as follows: - ------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 ---------------------- ---------------------- --------------------- (IN THOUSANDS): WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED - ------------------------------------------------------------------------------------------------------------------- Life and Health: Direct premiums $ 850,977 $ 779,315 $ 805,220 $ 718,748 $ 714,651 $ 677,758 Assumed premiums $ 85,608 $ 76,196 $ 89,031 $ 98,987 $ 48,563 $ 62,878 Ceded premiums $ 485,176 $ 426,093 $ 365,316 $ 411,995 $ 362,458 $ 356,671 - ------------------------------------------------------------------------------------------------------------------- Property and Casualty: Direct premiums $ 1,799,116 $ 1,780,414 $ 1,791,426 $ 1,726,658 $ 1,690,883 $ 1,561,533 Assumed premiums $ 63,347 $ 56,532 $ 54,687 $ 65,807 $ 38,731 $ 74,524 Ceded premiums $ 868,819 $ 834,391 $ 761,037 $ 744,424 $ 637,448 $ 641,537 - -------------------------------------------------------------------------------------------------------------------
70 71 (8) 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, 1998) 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, 1998, ABLAC has a shareholders' surplus account balance (on a tax basis) of approximately $190,200,000 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. All eligible life and property & casualty 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): 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Domestic (including U.S. possessions) $ 405,706 $ 160,040 $ 144,381 Foreign (3,979) (445) (8,436) - ------------------------------------------------------------------------------------------------------------------- Total $ 401,727 $ 159,595 $ 135,945 - -------------------------------------------------------------------------------------------------------------------
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): 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Deferred policy acquisition costs $ 123,866 $ 123,914 Net unrealized investment gains 8,623 13,066 Depreciation and amortization 6,345 5,602 Others - net 10,485 18,530 - ------------------------------------------------------------------------------------------------------------------- Total gross deferred tax liabilities 149,319 161,112 - ------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Insurance policy liabilities (74,955) (74,604) Difference between book and tax bases of investments (7,152) (3,343) Accrued expenses and other amounts not currently deductible for tax purposes (22,198) (19,496) Tax loss carryforward of U.K. subsidiary (4,602) (4,173) Others - net (12,190) (12,003) - ------------------------------------------------------------------------------------------------------------------- Total gross deferred tax assets (121,097) (113,619) Less valuation allowance 4,602 4,173 - ------------------------------------------------------------------------------------------------------------------- Net deferred tax assets (116,495) (109,446) - ------------------------------------------------------------------------------------------------------------------- Net deferred tax liability $ 32,824 $ 51,666 - -------------------------------------------------------------------------------------------------------------------
71 72 Significant components of the provision for income taxes are as follows:
- ------------------------------------------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS): 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Current: Federal $ 144,286 $ 31,862 $ 24,169 Foreign 4,363 5,505 4,752 - ------------------------------------------------------------------------------------------------------------------- Total current 148,649 37,367 28,921 - ------------------------------------------------------------------------------------------------------------------- Deferred: Federal (12,265) 9,025 11,032 Foreign (1,617) (1,660) 1,489 - ------------------------------------------------------------------------------------------------------------------- Total deferred (13,882) 7,365 12,521 - ------------------------------------------------------------------------------------------------------------------- Total provision for income taxes $ 134,767 $ 44,732 $ 41,442 - -------------------------------------------------------------------------------------------------------------------
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:
- ------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% Foreign operating loss carryforward .1 2.5 Rate differential - U.S. possessions (1.0) (3.3) (2.5) Tax exempt investment income and dividends (.6) (1.2) (1.7) Tax settlement, refunds and other taxes .2 .5 1.0 Tax credits, others - net (.2) (3.0) (3.8) - ------------------------------------------------------------------------------------------------------------------- Effective tax rate 33.5% 28.0% 30.5% - -------------------------------------------------------------------------------------------------------------------
Deferred income taxes of $8,623,000, $13,066,000, and $9,015,000 in 1998, 1997 and 1996, respectively have been provided on net unrealized investment gains. 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 $86,200,000 as of December 31, 1998. Upon distribution of such earnings in a taxable transaction, the Company would incur additional U.S. income taxes in the amount of approximately $22,800,000 net of anticipated foreign tax credits. Current tax benefits of approximately $6,800,000, $4,339,000 and $1,300,000 related to the vesting of restricted stock were credited directly to additional paid-in capital in 1998, 1997 and 1996, respectively. At December 31, 1998, the Company's U.K. subsidiary had approximately $14,840,000 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 $200,000, $24,075,000, and $21,875,000 for the years 1998, 1997 and 1996, respectively. 72 73 (9) NOTES PAYABLE Following is a summary of outstanding debt at December 31:
- ------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS): 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Short-term credit facility $ 21,000 $ 111,744 $200,000,000 medium-term note program 125,000 125,000 Note payable guaranteed by the Company for LESOP. (See Note 11.) 2,125 Convertible debenture bonds due to officers 3,723 Reverse repurchase agreements (Repaid January 1999) 30,253 Line of credit - MSD 17,500 - ------------------------------------------------------------------------------------------------------------------- Total $ 193,753 $ 242,592 - -------------------------------------------------------------------------------------------------------------------
The Company has a short-term credit agreement with a $250,000,000 five-year competitive advance and revolving credit agreement with a group of banks. The credit facility 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 fees. The fees incurred in 1998, 1997 and 1996 were $316,840, $237,000 and $316,000, respectively for these facilities. 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 facility. Consummation of the merger as contemplated by the Fortis Merger Agreement will, unless consents or waivers are obtained from the group of banks under the credit facility, constitute an event of default and result in the termination of the credit facility. 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, 1998, the interest rate was 6%. Interest paid was $18,399,000 in 1998, $16,485,000 in 1997 and $17,924,000 in 1996. The convertible debenture bonds were converted to shares of the Company's common stock in January 1998. The LESOP loan was paid off April 2, 1998. 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): 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Amount outstanding $ 21,000 $ 111,744 Weighted average interest rate on outstanding debt 5.69% 6.14% - ------------------------------------------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS): 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Average amount outstanding $ 166,086 $ 97,078 Maximum amount outstanding $ 241,209 $ 132,744 Average interest rate 5.83% 5.83%
73 74 (10) STOCKHOLDERS' EQUITY In 1997, the Company declared a two-for-one split, effected in the form of a stock dividend, on the Company's common stock. The Company has authorized 10,000,000 shares of preferred stock. At December 31, 1998, the Company had 2,300,000 authorized shares of $3.125 Series B Cumulative Convertible Preferred Stock issued and, at December 31, 1998, 1,983,205 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 1.9974 shares of Common Stock of the Company (equivalent to a conversion price of $25.0325 per Common Share), subject to adjustment under certain conditions. On February 19, 1998, the Board of Directors adopted a "Rights Plan" creating certain rights which attach to and trade with each share of common stock outstanding on or after March 10,1998. 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 C 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, 1998, there were 1,000,000 shares of Series C Preferred Stock reserved for issuance. The rights are redeemable at the Company's option and expire on March 10, 2008. The Rights Plan was amended so that the rights issuable pursuant to the Rights Plan will not separate solely as a result of the execution or delivery of the Fortis Merger Agreement and other related agreements or the consummation of the transactions contemplated thereby. The Company has also reserved for issuance 350,000 shares of Series A participating Preferred Stock in connection with the "Old Rights Plan" that had terminated in March 1998. 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 $884,700,000. The maximum statutory allowed dividends in 1999 are $176,200,000. 74 75 A summary of statutory financial information for the domestic insurance companies is presented below:
- ------------------------------------------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Statutory Net Income (including net realized capital gains/losses) Life insurance subsidiaries $ 35,800 $ 38,800 $ 54,100 Property and casualty insurance subsidiaries $ 84,400 $ 61,600 $ 52,200 - ------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31 (IN THOUSANDS) 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Statutory Capital and Surplus Life insurance subsidiaries $ 297,300 $ 250,900 Property and casualty insurance subsidiaries $ 476,400 $ 416,300
(11) COMPENSATION AND OTHER PLANS STOCK OPTION PLANS EQUITY INCENTIVE PLAN At their Annual Meeting in 1997, the stockholders approved the Equity Incentive Plan (EIP). Under the EIP, selected officers and employees may be granted Options, Stock Appreciation Rights, Restricted Stock, Merit Awards, Performance Share Awards and Cash Awards. An aggregate of 4,000,000 (post-split) shares of common stock are reserved for issuance under the EIP. Under the Restricted Stock Award, certain key employees may purchase common stock at fifty percent of the fair market value of the 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 exercised. No new grants were made during 1998. The weighted-average fair value of options granted during 1997 was $14.31. Under the Non-Qualified Stock Option, certain key employees were granted options to acquire common stock at prices equivalent to the fair market value of the common stock on the grant date. Each option further entitles the employee to be awarded, for no additional consideration, one or two additional shares of restricted common stock. The options which entitle the grantee one additional restricted share vests after five years from date of exercise. These options are not exercisable before the first year anniversary nor after the fifth annual anniversary from the date of the grant. The weighted-average fair value of these options granted during 1998 and 1997 was $14.59 and $7.79. The options which entitle the grantee two additional restricted shares vest after three years from date of exercise. These options are not exercisable before the first year anniversary nor after the third annual anniversary from date of grant. The weighted average fair value of these options granted during 1998 and 1997 was $10.56 and $5.36. Under the Non-Employee Directors' Stock Option, each non-employee director received options at prices equivalent to the fair market value of the common stock on the grant date. Options granted are not exercisable before the first year anniversary nor after the fifth anniversary from the date of the grant. No new grants were made during 1998. The weighted-average fair value of options granted during 1997 was $8.08. Under the Merit Award of Restricted Stock, awards were granted and issued to certain key employees for no consideration. The Restricted Stock issued upon exercise of the Merit Award is subject to certain restrictions. 75 76 SENIOR MANAGEMENT STOCK OPTION PLAN Under the Senior Management Stock Option Plan (SMSOP), key management employees were granted options on shares of the common stock during the years 1994 through 1996. Option prices were equivalent to the fair market value of common stock on the grant date. The grantee received for no additional consideration two shares of common stock subject to certain transfer restrictions for every one primary share purchased upon the exercise of the option. As the result of the adoption in 1997 of the EIP, no new grants were made under the SMSOP. STOCK OPTION/RESTRICTED STOCK AWARD PLAN Under the Stock Option/Restricted Stock Award Plan (SORSAP), key management employees were granted options on shares of common stock during the years 1990 through 1994. Option prices were equivalent to the fair market value of common stock on the grant date. The grantee received for no additional consideration three shares of common stock subject to certain transfer restrictions for every one primary share purchased upon the exercise of the option. As the result of the adoption in 1994 of the SMSOP, no new grants were made under the SORSAP. At December 31, 1998, there were no options outstanding, only restricted stock. STOCK INCENTIVE COMPENSATION PLAN Under the Stock Incentive Compensation Plan (SICP), key management employees were granted a total of 672,100 (post-split) options on shares of common stock. Option prices were equivalent to fifty percent of the fair market value of common stock on the grant date. As the result of the adoption in 1997 of the EIP, no new grants were made under the SICP. At December 31, 1998, there were no options outstanding, only restricted stock. NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN Under the Non-Employee Directors' Stock Option Plan (Directors' Plan), directors received 2,000 (post-split) options annually at prices equivalent to the fair market value of common stock on the grant date. The stock options were granted during the years 1994 through 1996. As the result of the adoption in 1997 of the EIP, no new grants were made under the Directors' Plan. 76 77 A summary of the status and activity for options and shares granted and exercised under the Plans at December 31, 1998, is as follows:
SICP/NON-EMPLOYEE SORSAP/SMSOP DIRECTORS EIP - --------------------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Granted Exercised Price Granted Exercised Price Granted Exercised Price - --------------------------------------------------------------------------------------------------------------------------------- AS OF DECEMBER 31, 1995 126,000 1,044,956 $13.60 48,000 290,030 $13.26 0 0 $0.00 - --------------------------------------------------------------------------------------------------------------------------------- 1996 Grants 188,400 $20.55 174,600 $11.76 Exercises (121,200) 121,200 $16.73 (102,000) 102,000 $10.58 Prices (SORSAP $13.25) (SMSOP $11.07 - $23.75) (SICP $10.25 - $11.88) (Non-Employee $11.28 - $14.94) Forfeitures/Re-acquisitions (29,076) $13.95 (13,140) Lapses (18,600) $13.95 (56,600) $10.28 - --------------------------------------------------------------------------------------------------------------------------------- Outstanding at End of Year (all exercisable) 174,600 1,137,080 $18.89 64,000 378,890 $16.04 0 0 $0.00 - --------------------------------------------------------------------------------------------------------------------------------- 1997 Grants 388,400 $21.58 Exercises (144,400) 144,400 $19.14 (8,000) 8,000 $16.65 (122,800) 122,800 $14.22 Prices (SMSOP $11.07 - $23.75) (Non-Employee $11.28 - $20.19) (EIP $14.22) Forfeitures/Re-acquisitions (19,404) $13.63 (8,666) $8.83 (1,000) $14.22 Lapses (9,800) $16.46 (77,000) $16.55 - --------------------------------------------------------------------------------------------------------------------------------- OUTSTANDING AT END OF YEAR 20,400 1,262,076 $18.29 56,000 378,224 $15.96 188,600 121,800 $28.44 - --------------------------------------------------------------------------------------------------------------------------------- 1998 Grants 207,000 $42.81 Exercises (16,200) 16,200 $18.31 (24,000) 24,000 $16.21 (152,800) 152,800 $25.16 Prices (SMSOP $11.07 - $23.75) (Non-Employee $11.28 - $20.19) (EIP $0 - $28.44) Forfeitures/Re-acquisitions (16,800) $16.21 (4,320) $4.26 (10,400) $24.06 Lapses (1,800) $15.13 - --------------------------------------------------------------------------------------------------------------------------------- OUTSTANDING AT END OF YEAR 2,400 $20.50 32,000 $15.76 242,800 $42.75 - --------------------------------------------------------------------------------------------------------------------------------- EXERCISED - NET 1,261,476 397,904 264,200 - ---------------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable - ------------------------------------------------------------------------------------------------------------------- Number Weighted-Average Number Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price - ------------------------------------------------------------------------------------------------------------------- $11.28 - $60.81 277,200 2.69 $39.44 88,200 $23.62
77 78 Shares issued under the plans are recorded at fair market value at the effective date of the grant. The unamortized difference ($8,190,000 as of December 31, 1998, and $6,252,000 as of December 31, 1997) 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 ($3,519,000 in 1998, $2,280,000 in 1997, and $1,544,000 in 1996). 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. 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 1998, 1997, and 1996 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 1998, 1997 and 1996 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 1998, 1997 and 1996: Risk-free interest rate 4.33% 5.78% 5.63% Expected life 1.02 1.25 1.33 Expected volatility 33.00% 29.00% 26.00% Expected dividend yield 1.01% 1.22% 1.99% EXECUTIVE STOCK OPTION/DIVIDEND ACCRUAL PLAN At their Annual Meeting in 1987, the stockholders approved the 1987 Executive Stock Option/Dividend Accrual Plan (ESODAP). As of December 31, 1998, options representing 1,420,828 shares (post-split) had been granted under the plan, of which 1,288,952 (post-split) had been exercised and 131,876 (post-split) 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. As the result of the adoption of the SORSAP and SICP, no new grants were made under the ESODAP. 78 79 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. Two debentures in the aggregate amount of $3.7 million had been issued which are convertible into all the 300,000 shares as currently reserved under the plan. All debentures were converted by the holders in January 1998. 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 was not a direct obligation of the Company, it was 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 were made by the Company, the debt was repaid to the bank by the LESOP and the balances on the Company's balance sheet were reduced accordingly. The Company guaranteed the Trust's loan obligation. It made 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 7.565%. The shares held by the bank as collateral were released proportionately as loan repayments were made. Upon such release, the shares were available for allocation to employees based upon years of service. Employees are entitled to direct the vote of the shares allocated to them on voting instruction forms furnished to the trustee. Unallocated shares were voted by the LESOP's Trustee. During 1998 the loan was paid off. The interest portion of the LESOP pension expense was $.04 million in 1998 and $.3 million in 1997. All shares allocated to domestic participants were transferred to the amended and restated American Bankers Insurance Group, Inc. 401(K) and Employee Stock Ownership Plan. The shares allocated to foreign participants remain in the LESOP. The following disclosures are made to supplement previously disclosed plan information: * Dividends paid on all shares held by the LESOP through March 1998 were used to service the debt of the LESOP. * Compensation expense for the years ended December 31, 1998, 1997 and 1996 was $1,727,000, $976,000 and $1,186,000 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. * All shares held by the LESOP are treated as issued and outstanding and, accordingly, are included in the Company's earnings per share calculations. 79 80 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 400,000 shares of the Company's common stock. At December 31, 1998, there were 130,080 shares allocated under this plan. (12) PENSION PLAN In 1998, the Company adopted FASB Statement 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits." The prior years' information has been restated to conform with the disclosure requirements under FASB 132. 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 in 1998, 1997 and 1996. 80 81 The pension plan expense included the following components for the years ended December 31:
- ------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Service cost $ 2,779 $ 2,398 $ 2,146 Interest cost 2,994 2,562 2,230 Expected return on plan assets (5,132) (3,781) (3,103) Net amortization and deferral (1,237) (379) (54) Pension plan (income)/expense $ (596) $ 800 $ 1,219 - -------------------------------------------------------------------------------------------------------------------
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) 1998 1997 - ------------------------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 38,846 $ 33,868 Service cost 2,779 2,398 Interest cost 2,994 2,562 Increase/(decrease) due to change in assumptions 4,493 Increase/(decrease) due to actuarial (gain)/loss 1,432 631 Benefits paid (646) (613) ----------- ----------- Benefit obligations at end of year $ 49,898 $ 38,846 ----------- ----------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $ 59,985 $ 44,897 Actual return on plan assets 9,683 15,701 Benefits paid (646) (613) ----------- ----------- Fair value of plan assets at end of year $ 69,022 $ 59,985 ----------- ----------- Funded status $ 19,124 $ 21,139 Unrecognized net (gain)/loss (16,818) (19,388) Unrecognized prior service cost (125) (166) - ------------------------------------------------------------------------------------------------------------------- Prepaid pension cost included in other assets $ 2,181 $ 1,585 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- ASSUMPTIONS USED WERE AS FOLLOWS: 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Plan discount rate for benefit obligation 7.0% 7.5% Rate of increase in compensation 5.0% 5.0% Expected long-term rate of return on assets 9.0% 9.0% - -------------------------------------------------------------------------------------------------------------------
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 ($1.1 million in 1998, $.5 million in 1997, and $.1 million in 1996) is being recognized over the remaining service period for the officers presently covered. 81 82 (13) 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, 1998, is as follows:
- ------------------------------------------------------------------------------------------------------------------- For the Years ending December 31 (in thousands): Real Property Equipment Total - ------------------------------------------------------------------------------------------------------------------- 1999 $ 4,305 $ 2,018 $ 6,323 2000 3,359 1,701 5,060 2001 2,048 989 3,037 2002 1,390 35 1,425 2003 779 4 783 - ------------------------------------------------------------------------------------------------------------------- $ 11,881 $ 4,747 $ 16,628 - -------------------------------------------------------------------------------------------------------------------
Total rental expense for the years ended December 31, 1998, 1997 and 1996 was $11,623,000, $10,962,000, and $9,258,000 respectively. Contingencies Certain of ABIG's subsidiaries, including the Company, are presently parties to a number of individual consumer and class action lawsuits pending in Alabama involving premium, rate, marketing, sales practices, disclosure 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. Other insurers are also joined as co-defendants in some of the suits. Although the Alabama lawsuits and similar suits pending in Mississippi and 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. On November 12, 1998, the Company and three of its clients entered into a settlement of all claims in class action litigation consolidated by the Panel on Multi-District Litigation in the United States District Court for the Middle District of Alabama, contingent upon approval of the fairness of the settlement by the District Court and other conditions. This series of class actions involved the largest collective class exposure to the Company. Under the terms of the settlement, without admitting any liability, the Company will contribute approximately $15 million in distributions to the classes and subclasses, and has agreed to be bound by an injunction limiting the percentage of authorized non-file insurance premium to be charged consumer finance and retailer accounts during 6 year and 18 month periods, respectively. The Company has accrued additional expenses associated with implementing the settlement. While none of the Company's remaining cases are necessarily significant in terms of financial risk to the Company, the judicial climate in Alabama and Mississippi is such that the outcome of these cases is extremely unpredictable. Moreover, class action lawsuits to which the Company is a party do not lend themselves to potential damage calculation. There are still a 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 1999. 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. The Company believes, based on 82 83 information currently available, that any liabilities that could result are not expected to have a material effect on the Company's financial position or results of operations. In late January and early February 1998, Cendant Corporation ("Cendant") commenced litigation (the "Cendant Florida Litigation") in the United States District Court for the Southern District of Florida, Miami, Division, against the Company, members of the Company's Board, American International Group, Inc. ("AIG") and a wholly owned subsidiary of AIG, challenging the validity of certain provisions in the merger agreement the Company originally entered into with AIG on December 21, 1997, which agreement was amended in January 1998 and again at the end of February 1998 ("AIG Merger Agreement"), with respect to acquisition proposals by third parties. Cendant's complaint in the Cendant Florida Litigation also challenged the terms of the stock option agreement between the Company and AIG. Pursuant to the terms of a settlement agreement providing for the termination of the AIG Merger Agreement and the payment to AIG by the Company of $100 million and by Cendant of $10 million (the "Settlement Agreement"), Cendant has taken the necessary actions to cause the dismissal of all claims asserted in the Cendant Florida Litigation against all defendants, including the Company and members of the Company's Board. Also pursuant to the terms of the Settlement Agreement, AIG has taken the necessary actions to cause the dismissal of claims against Cendant alleging violations of the federal securities laws in connection with Cendant's bid to acquire the Company. In late January and early February 1998, five putative class actions on behalf of American Bankers' shareholders were filed in United State District Court for the Southern District of Florida alleging causes of action arising out of the then proposed merger with AIG, including claims that certain members of the Company's Board breached their fiduciary duties and that the Company violated certain provisions of the federal securities laws in connection with the proposed merger with AIG making essentially comparable claims to those originally asserted by Cendant. The Company and its directors believe that the claims asserted in these actions are totally without merit and intend to continue to vigorously contest them. The District Court judge ordered that these cases be consolidated and that the plaintiffs file a consolidated complaint. That consolidated complaint was filed and the Company and directors filed an answer. The parties are presently engaged in various pretrial matters. The Company, in the normal course, is subject to regulatory reviews and market conduct examinations from each of the states in which it conducts business. During 1998, a multi-state market conduct review was initiated under the auspices of the NAIC by several states. On November 23, 1998 the Company entered into a Consent Order and comprehensive Compliance Plan with 39 participating states relating to compliance with the disparate state insurance laws, regulations and administrative interpretations which have been difficult to apply to the marketing of the Company's credit-related insurance products through financial institutions, retailers and other entities offering consumer financing as a regular part of their business. The Company and participating state regulators have pledged to cooperate in rationalizing existing insurance laws and regulations to the marketing and administration of credit-related insurance products on a more comprehensive and uniform basis. As a part of the adoption of the Compliance Plan, the Company agreed in a Consent Order to pay $12 million to the participating states, and through implementation of the Compliance Plan, to provide restitution to insureds, if instances of excess premiums or less than appropriate claims payments were discovered in that process. Since November 1998, four additional states have executed Addenda joining in the multi-state Consent Order. The Company also agreed to a multi-state market conduct examination commencing in November 1999 for review of the Company's implementation of the Compliance Plan, and to a payment of $3 million to participating states if the Compliance Plan is not fully implemented by that time. 83 84 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. 84 85 (14) SEGMENT INFORMATION In 1998, the Company adopted FASB 131, "Disclosures about Segments of an Enterprise and Related Information." The prior years' segment information has been restated to present the Company's reportable segments, Financial Markets, Personal Lines Markets and Other. The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies." Segment data includes allocated overhead costs to each of the operating segments. Asset information by reportable segment is not reported. The Company does not produce such information internally as it reviews its assets and liabilities at the individual affiliated company level. The Company is organized primarily on the basis of its distribution channels. There are ten separate markets, six of the markets are aggregated into the "Financial Markets." Two are combined to form the "Personal Lines." The Financial Markets' products, consisting primarily of credit-related insurance, are sold through retailers, financial institutions, manufactured housing, travel trailer and equipment manufacturers, dealers and lenders, and utility companies. The Personal Lines' business, consisting of non credit-related products and services, is sold primarily through independent agents. All other business has been included in "Other." The Company's business is generally not concentrated, and no single customer accounted for 10% or more of the Company's consolidated gross collected premiums in 1998. The table below presents information about reported segments for the years ended December 31:
- ------------------------------------------------------------------------------------------------------------------- INDUSTRY SEGMENTS (IN THOUSANDS): 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Gross collected premiums: Financial markets $ 2,345,399 $ 2,272,872 $ 2,070,374 Personal lines 351,924 332,802 319,538 Other 101,725 134,689 102,916 - ------------------------------------------------------------------------------------------------------------------- Total $ 2,799,048 $ 2,740,363 $ 2,492,828 - ------------------------------------------------------------------------------------------------------------------- Net premiums earned: Financial markets $ 1,204,213 $ 1,201,905 $ 1,139,420 Personal lines 195,886 193,060 199,885 Other 31,874 58,818 39,180 - ------------------------------------------------------------------------------------------------------------------- Total $ 1,431,973 $ 1,453,783 $ 1,378,485 - ------------------------------------------------------------------------------------------------------------------- Income before interest and income taxes: Financial markets $ 127,309 $ 130,493 $ 114,728 Personal lines 14,070 27,766 28,880 Other(A) 279,445 17,580 9,867 - ------------------------------------------------------------------------------------------------------------------- Subtotal 420,824 175,839 153,475 Interest expense (19,097) (16,244) (17,530) - ------------------------------------------------------------------------------------------------------------------- Total $ 401,727 $ 159,595 $ 135,945 - -------------------------------------------------------------------------------------------------------------------
Summarized data for the Company's foreign operations (principally in Canada and the United Kingdom) and domestic operations are as follows:
- ------------------------------------------------------------------------------------------------------------------- GEOGRAPHIC SEGMENTS (IN THOUSANDS): 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Net premiums earned: Domestic (including U.S. possessions) $ 1,395,291 $1,393,576 $ 1,315,822 Foreign 36,682 60,207 62,663 - ------------------------------------------------------------------------------------------------------------------- Total $ 1,431,973 $1,453,783 $ 1,378,485 - ------------------------------------------------------------------------------------------------------------------- Income before income taxes: Domestic (including U.S. possessions) $ 392,077 $ 153,803 $ 129,652 Foreign 9,650 5,792 6,293 - ------------------------------------------------------------------------------------------------------------------- Total $ 401,727 $ 159,595 $ 135,945 - ------------------------------------------------------------------------------------------------------------------- Identifiable assets: Domestic (including U.S. possessions) $ 4,041,902 $3,518,463 $ 3,294,847 Foreign 326,605 263,988 174,656 - ------------------------------------------------------------------------------------------------------------------- Total $ 4,368,507 $3,782,451 $ 3,469,503 - -------------------------------------------------------------------------------------------------------------------
(A) Includes the following in 1998: 1. $300 million in net termination fees income. See Note 17. 2. $17 million related to the settlement of litigation associated with the Company's non-file insurance product in the third quarter. See Note 13. 3. $15 million expense related to the Company's Consent Order with various states in the fourth quarter. See Note 13. 4. $15.3 million in merger-related expenses. 85 86 (15) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarterly financial information for the years ended December 31, 1998 and 1997, is presented below:
- ------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER COMMON SHARE DATA): First Second Third Fourth 1998 Quarter(2) Quarter(3) Quarter(4) Quarter(5) - ------------------------------------------------------------------------------------------------------------------- Total revenues $ 300,167 $ 414,013 $ 426,245 $ 789,753 Total benefits and expenses(1) $ 369,783 $ 373,304 $ 405,316 $ 380,049 Net (loss) income $ (42,679) $ 30,169 $ 16,286 $ 263,184 Net (loss) income per common share - basic $ (1.06) $ .67 $ .34 $ 6.11 - ------------------------------------------------------------------------------------------------------------------- First Second Third Fourth 1997 Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------- Total revenues $ 404,881 $ 406,040 $ 408,162 $ 402,299 Total benefits and expenses $ 367,567 $ 365,869 $ 366,527 $ 361,824 Net income $ 26,419 $ 28,618 $ 29,839 $ 29,987 Net income per common share - basic $ .60 $ .65 $ .67 $ .68 - -------------------------------------------------------------------------------------------------------------------
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. Includes the following in 1998: 1. $100 million termination fee paid to AIG was reported in "Total benefits and expenses" in the the first, second, and third quarters' Forms 10-Q. Such merger termination fee has been netted against the $400 million termination fee received from Cendant during the fourth quarter of 1998 (see Note 17) and was reclassified to "Merger termination fees, net" in the accompanying Consolidated Statements of Income. 2. $9.3 million in merger-related expenses. 3. $3.5 million in merger-related expenses. 4. $17 million related to the settlement of litigation associated with the Company's non-file insurance product (see Note 13) and $1.6 million in merger-related expenses.. 5. $400 million termination fee received from Cendant (see Note 17), $15 million in expenses related to the Company's Consent Order with various states (see Note 13) and $.9 million in merger-related expenses. 86 87 (16) EARNINGS PER SHARE The Company adopted FASB Statement 128 "Earnings per Share" beginning in the period ending December 31, 1997. This Statement replaces the presentation of primary and fully diluted EPS with a presentation of basic and diluted EPS. The following is the reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation
- -------------------------------------------------------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS): 1998 1997 1996 ------------------------------- -------------------------------- --------------------------------- Income Shares Per Share Income Shares Per Share Income Shares Per Share Numerator Denominator Amount Numerator Denominator Amount Numerator Denominator Amount - -------------------------------------------------------------------------------------------------------------------------------- Net income $ 266,960 $114,863 $ 94,503 less: Preferred stock dividends (6,450) (7,188) (3,115) - -------------------------------------------------------------------------------------------------------------------------------- BASIC EPS: - -------------------------------------------------------------------------------------------------------------------------------- Income available to common stockholders 260,510 42,554 $6.12 107,675 41,433 $2.60 91,388 40,697 $2.24 - -------------------------------------------------------------------------------------------------------------------------------- EFFECT OF DILUTIVE SECURITIES: - -------------------------------------------------------------------------------------------------------------------------------- Common stock options 444 672 930 Convertible preferred stock 6,450 3,962 7,188 4,594 3,115 1,963 Convertible debentures 15 232 300 228 300 - -------------------------------------------------------------------------------------------------------------------------------- DILUTED EPS: - -------------------------------------------------------------------------------------------------------------------------------- Income available to common stockholders plus assumed conversions $266,975 46,960 $5.68 $ 115,095 46,999 $2.45 $ 94,731 43,890 $2.16 - --------------------------------------------------------------------------------------------------------------------------------
87 88 (17) TERMINATED ACQUISITION PROPOSALS During 1998, the Company was a party to two agreements regarding the acquisition of the Company. Both agreements were terminated prior to consummation. The Company entered into an Agreement and Plan of Merger (the "Cendant Merger Agreement") with Cendant Corporation ("Cendant") under which Cendant would have acquired the Company by merger. The execution of the Cendant Merger Agreement followed the public announcement by Cendant of its tender offer at $58 per share for shares of the Company's of common stock, to be paid in cash and common stock of Cendant, which was subsequently raised to $67. The Cendant Merger Agreement and Cendant's tender offer were terminated in October 1998 and Cendant made a $400 million cash payment to the Company. Cendant's acquisition proposal followed an announcement by the Company that it had entered into an Agreement and Plan of Merger (the "AIG Merger Agreement") with American International Group, Inc. ("AIG"). In March 1998, the Company, AIG and Cendant entered into a settlement agreement (the "Settlement Agreement") pursuant to which AIG agreed to temporarily waive certain provisions of the AIG Merger Agreement, allowing the Company to terminate the AIG Merger Agreement and enter into the Cendant Merger Agreement. In connection with the termination of the AIG Merger Agreement and other related agreements, AIG received from the Company a termination fee of $100 million which the Company financed through its short-term credit facility. (18) ACQUISITIONS The Company acquired three companies during 1998 for $62 million. The acquisitions were accounted for as purchases and the results of these companies' operations are included in 1998 income from the date of acquisition to December 31, 1998. 88 89 Schedule I AMERICAN BANKERS INSURANCE GROUP, INC. Summary of Investments - Other Than Investments in Related Parties December 31, 1998 (in thousands) Information on Summary of Investments - Other Than Investments in Related Parties is included on page 13 in Part I Item 1 c. of this report, and in Note 4 on page 63 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 $ 545 $ 448 $ 448 Banks, Trust and Insurance Companies 6,774 7,650 7,650 Industrial, Miscellaneous and All Other 62,128 70,468 70,468 Non-Redeemable Preferred Stock 50,873 51,871 51,871 ------------ ---------- ----------- Total Equity Securities $ 120,320 $ 130,437 $ 130,437 ============ ========== ===========
89 90 Schedule II AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT) CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS AT DECEMBER 31, (IN THOUSANDS)
1998 1997 ----------- ----------- ASSETS - ------ Investments in subsidiaries* $ 1,185,697 $ 1,029,476 Investments in bonds 53,727 Investment in common stock 30 2,478 Amounts due from subsidiaries* 41,770 14,631 Short-term and other investments 83,623 859 Accounts receivable 8,173 8,417 Cash (43) 286 Other 22,783 13,182 ----------- ----------- Total Assets $ 1,395,760 $ 1,069,329 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Short-term debt $ 126,253 $ 113,869 Long-term debt 50,000 128,723 Accrued expenses and other liabilities 158,625 12,868 ----------- ----------- Total liabilities 334,878 255,460 ----------- ----------- STOCKHOLDERS' EQUITY - -------------------- Preferred stock 99,160 115,000 Common stock 43,080 41,806 Additional paid-in capital 245,389 212,010 Accumulated other comprehensive income 2,593 12,096 Retained earnings 690,726 449,444 Treasury stock, at cost (11,876) (8,110) Unamortized restricted stock (8,190) (6,252) Collateralization of loan to Leveraged Employee Stock Ownership Plan (2,125) ----------- ----------- Total stockholders' equity 1,060,882 813,869 ----------- ----------- Total liabilities and stockholders' equity $ 1,395,760 $ 1,069,329 =========== ===========
90 91 Schedule II AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS)
1998 1997 1996 ---- ---- ---- REVENUES: Net investment income $ 5,904 $ 4,102 $ 5,934 Net realized investment (losses) (488) (4,835) (4,379) Dividends from subsidiaries* 51,150 48,959 21,270 Merger termination fees, net (see Note 17) 300,000 --------- --------- --------- Total revenues 356,566 48,226 22,825 --------- --------- --------- EXPENSES Operating expenses 52,380 423 3,943 Interest 18,967 16,188 17,530 --------- --------- --------- Total expenses 71,347 16,611 21,473 --------- --------- --------- Income before income taxes and equity in undistributed income of subsidiaries 285,219 31,615 1,352 INCOME TAX EXPENSE (BENEFIT): Current 87,338 (3,774) (5,356) Deferred (807) 235 (1,313) --------- --------- --------- 86,531 (3,539) (6,669) --------- --------- --------- Income before equity in undistributed income of subsidiaries 198,688 35,154 8,021 Equity in undistributed income of subsidiaries* 68,272 79,709 86,482 --------- --------- --------- Net income $ 266,960 $ 114,863 $ 94,503 ========= ========= =========
- ------------- *Eliminated in consolidated financial statements. See accompanying notes to condensed financial statements. 91 92 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)
1998 1997 1996 --------- --------- --------- Operating Activities: Net income $ 266,960 $ 114,863 $ 94,503 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (68,272) (79,708) (73,427) (Increase) decrease in amounts due from subsidiaries (27,138) (23,641) 28,960 Decrease (increase) in accounts receivable 245 (5,742) (2,284) (Increase) decrease in other assets (10,381) 1,790 (7,373) Increase in accrued liabilities 147,747 2,031 399 Other 4,435 11,678 4,150 (Decrease) increase in deferred income taxes (807) 235 (1,313) --------- --------- --------- Net cash provided by operating activities 312,789 21,506 43,615 --------- --------- --------- Investing activities: Increase in investment in subsidiaries (26,577) (10,851) (82,789) Purchase of available for sale securities (94,544) (2,478) Sale of available-for-sale securities 39,224 (Increase) decrease in other investments (79,166) 236 1,636 Payment for purchase of subsidiaries (62,832) (3,279) (46,742) --------- --------- --------- Net cash used in investing activities (223,895) (16,372) (127,895) --------- --------- --------- Financing activities: Purchase of treasury stock (3,766) (6,684) (175) Proceeds from issuance of common stock 2,294 4,004 1,898 Proceeds from issuance of preferred stock 111,781 Proceeds from issuance of short-term debt - other 147,234 31,427 138,147 Repayment of long-term debt - other (1,594) (9,200) (4,683) Repayment of short-term debt - other (207,725) (144,830) Cash dividends paid to stockholders (25,666) (24,761) (17,951) --------- --------- --------- Net cash (used in) provided by financing activities (89,223) (5,214) 84,187 --------- --------- --------- Net decrease in cash (329) (80) (93) Cash at beginning of year 286 366 459 --------- --------- --------- Cash at end of year $ (43) $ 286 $ 366 ========= ========= =========
See accompanying notes to condensed financial statements. 92 93 Schedule II AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT) CONDENSED FINANCIAL INFORMATION OF REGISTRANT DECEMBER 31, 1998 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 paid off the LESOP note on April 2, 1998. For a description of short-term and long-term debt payable to others and related information see Note 9 to the Consolidated Financial Statements on page 73 in Part II Item 8 of this report. For a description of the Company's commitments and contingencies, see Note 13 to the Consolidated Financial Statements on page 82 in Part II Item 8 of this report. The Company received a fee of $400 million from Cendant Corporation which was netted against a $100 million fee paid to AIG. The net fee is reflected in the revenues as merger termination fees, net. Operating expenses also include $17 million pre-tax for the non-file litigation, $15 million pre-tax for the multi-state Consent Order and approximately $15 million in merger-related expenses. Certain items in the 1997 and prior financial statements have been reclassified to conform with the 1998 presentation. 93 94 Schedule III AMERICAN BANKERS INSURANCE GROUP, INC. SUPPLEMENTARY INSURANCE INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
------------------------------------------------------------------------------------------------ INDUSTRY SEGMENT 1998 1997 1996 ------------------------------------------------------------------------------------------------ Premium revenue Financial Markets 1,204,212 1,201,904 1,139,420 Personal Lines 195,886 193,060 199,885 Other 31,874 58,819 39,180 ------------------------------------------------------------------------------------------------ Total 1,431,972 1,453,783 1,378,485 ------------------------------------------------------------------------------------------------ Net investment income* Financial Markets 66,825 64,719 54,801 Personal Lines 22,685 21,102 19,990 Other 60,169 48,294 46,410 ------------------------------------------------------------------------------------------------ Total 149,679 134,115 121,201 ------------------------------------------------------------------------------------------------ Benefits, claims, and loss expenses Financial Markets 351,033 367,049 369,068 Personal Lines 111,744 97,642 99,095 Other 46,181 67,916 54,861 ------------------------------------------------------------------------------------------------ Total 508,958 532,607 523,024 ------------------------------------------------------------------------------------------------ Amortization of DAC Financial Markets 458,686 516,338 431,180 Personal Lines 56,301 53,164 53,683 Other 13,427 20,615 12,992 ------------------------------------------------------------------------------------------------ Total 528,414 590,117 497,855 ------------------------------------------------------------------------------------------------ Other operating expenses Financial Markets 342,537 258,869 286,719 Personal Lines 36,799 36,796 39,125 Other 92,647 27,154 28,837 ------------------------------------------------------------------------------------------------ Total 471,983 322,819 354,681 ------------------------------------------------------------------------------------------------ Net premiums written** Financial Markets 977,742 974,915 1,004,557 Personal Lines 162,628 169,791 186,333 Other 37,009 152,186 53,957 ------------------------------------------------------------------------------------------------ Total 1,177,379 1,296,892 1,244,847 ------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------ GEOGRAPHIC SEGMENT 1998 1997 1996 ------------------------------------------------------------------------------------------------ Deferred policy acquisition cost Domestic (including U.S. possessions) 453,120 439,255 375,797 Foreign 29,875 19,034 12,196 ------------------------------------------------------------------------------------------------ Total 482,995 458,289 387,993 ------------------------------------------------------------------------------------------------ Future policy benefits Domestic (including U.S. possessions) 335,243 309,525 291,693 Foreign 1,739 1,656 63 ------------------------------------------------------------------------------------------------ Total 336,982 311,181 291,756 ------------------------------------------------------------------------------------------------ Unearned premiums Domestic (including U.S. possessions) 1,518,617 1,353,397 1,250,027 Foreign 93,269 82,637 41,115 ------------------------------------------------------------------------------------------------ Total 1,611,886 1,436,034 1,291,142 ------------------------------------------------------------------------------------------------ Other policy claim benefits Domestic (including U.S. possessions) 519,104 481,437 449,399 Foreign 89,397 74,360 38,197 ------------------------------------------------------------------------------------------------ Total 608,501 555,797 487,596 ------------------------------------------------------------------------------------------------
- ------------- * Excluding net realized investment gains of $19,828, $10,394, and $7,812 for 1998, 1997 and 1996, respectively. ** Excluding Life and Annuity premiums. In 1998, the Company adopted FASB 131, "Disclosures about Segments of an Enterprise and Related Information." The Supplementary Insurance Information Schedule III has been changed to conform with FASB 131. For more information, see Note 14 "Segment Information." 94 95 Schedule IV AMERICAN BANKERS INSURANCE GROUP, INC. REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
Assumed Percentage of Gross Ceded to other from other amount assumed amount companies companies Net amount to net ----------- ------------- ----------- ----------- -------------- 1998 - ---- Life insurance in force $45,459,936 $20,224,353 $ 9,746,505 $34,982,088 27.9% =========== =========== =========== =========== ==== Premiums: Life insurance 411,114 228,227 55,529 238,416 23.3% Accident & Health insurance* 542,157 260,346 20,257 302,068 6.7% Property & Liability insurance 1,606,458 771,911 56,942 891,489 6.4% ----------- ----------- ----------- ----------- ---- Total premiums $ 2,559,729 $ 1,260,484 $ 132,728 $ 1,431,973 9.3% =========== =========== =========== =========== ==== 1997 $43,128,980 $20,274,140 $10,564,799 $33,419,639 31.6% - ---- =========== =========== =========== =========== ==== Life insurance in force Premiums: Life insurance 388,527 228,231 79,402 239,698 33.1% Accident & Health insurance* 496,862 218,945 17,473 295,390 5.9% Property & Liability insurance 1,560,018 709,243 67,920 918,695 7.4% ----------- ----------- ----------- ----------- ---- Total premiums $ 2,445,407 $ 1,156,419 $ 164,795 $ 1,453,783 11.3% =========== =========== =========== =========== ==== 1996 - ---- Life insurance in force Premiums: $37,851,887 $18,270,339 $10,852,864 $30,434,412 35.7% =========== =========== =========== =========== ==== 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 9.96% =========== =========== =========== =========== ====
- ------------- *Includes premiums from both the life and property and casualty segment 95 96 Schedule VI AMERICAN BANKERS INSURANCE GROUP, INC. SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
Claims and Claim Adjustment Expenses Incurred Related To Paid Claims and ---------------------------------------------- Claim Adjustment Current Year Prior Years Expenses ---------------------------------------------------------------------- 1998 - ---- Consolidated Property and Casualty Entities $340,858 ($3,960) $345,749 1997 - ---- Consolidated Property and Casualty Entities $350,650 ($2,046) $340,306 1996 - ---- Consolidated Property and Casualty Entities $345,857 $232 $313,299
Information otherwise required in the Schedule is provided in Schedule III. 96 97 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 97 98 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. 98 99 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. 99 100 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. 100 101 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. 101 102 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) The responses to this portion of Item 14 are listed on page 33 of this report. (2) The responses to this portion of Item 14 are listed on page 51 of this report. (3) Exhibits 2.1(1) Agreement and Plan of Merger, dated as of December 21, 1997, as amended and restated as of January 7, 1998, and as amended by Amendment No. 1 dated as of January 28, 1998, and as amended and restated as of February 28, 1998 among American Bankers Insurance Group, Inc., American International Group, Inc. and AIGF, Inc. 2.2(2) Stock Option Agreement, dated as of December 21, 1997, as amended and restated as of February 28, 1998 between the American Bankers Insurance Group, Inc. and American International Group, Inc. 2.3(3) Termination Agreement, dated as of March 23, 1998, among American International Group, Inc., AIGF, Inc. and American Bankers Insurance Group, Inc. 2.4(4) Settlement Agreement dated as of March 18, 1998 by and among American Bankers Insurance Group, Inc., American International Group, Inc. and Cendant Corporation. - --------------------------- (1) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9, Amendment No. 6, filed on March 2, 1998. (2) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9, Amendment No. 6, dated March 2, 1998. (3) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9, Amendment No. 11, dated March 24, 1998. (4) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9, Amendment No. 10, filed on March 19, 1998. 102 103 2.5(5) Agreement and Plan of Merger, dated March 23, 1998 among Cendant Corporation, Season Acquisition Corp. and American Bankers Insurance Group, Inc. 2.6(6) Settlement Agreement, dated as of October 13, 1998, by and among American Bankers Insurance Group, Inc., Cendant Corporation and Season Acquisition Corp. 2.7(7) Agreement and Plan of Merger dated as of March 5, 1999, among American Bankers Insurance Group, Inc., Fortis, Inc. and Greenland Acquisition Corp. 2.8(8) Stock Option Agreement, dated as of March 5, 1999, among American Bankers Insurance Group, Inc., Fortis, Inc. and Greenland Acquisition Corp. 3(i)(9) Third Amended and Restated Articles of Incorporation, as amended on May 23, 1997, by First Amendment to Third Amended and Restated Articles of Incorporation, as further amended on February 19, 1998, by Second Amendment to Third Amended and Restated Articles of Incorporation. 3(ii)(10) Corporate By-Laws, as amended and restated on May 14, 1998. 4(i).1(11) Form of Rights Certificate to Purchase Series A Participating Preferred Stock. - ------------------------ (5) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9, Amendment No. 10, filed on March 19, 1998. (6) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9, Amendment No. 22, filed on October 14, 1998. (7) Exhibit incorporated herein by reference from Registrant's Current Report on Form 8-K dated March 10, 1999. (8) Exhibit incorporated herein by reference from Registrant's Current Report on Form 8-K dated March 10, 1999 (9) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1997. (10) Exhibit incorporated herein by reference from Registrant's Current Report on Form 10-Q for June 30, 1998. (11) Exhibit incorporated herein by reference from Exhibit B of the Rights Agreement, dated as of February 24, 1988, between American Bankers Insurance Group, Inc. and Manufacturers Hanover Trust Company, a New York banking corporation, as Rights Agent, as amended and restated as of November 14, 1990, filed with Registrant's Current Report on Form 8-K, dated November 14, 1990. 103 104 4(i).2(12) Form of Rights Certificate to Purchase Series C Participating Preferred Stock. 4(i).3(13) $75,000,000, 7.60% Medium-Term Note dated May 2, 1994. 4(i).4(14) $50,000,000, Floating Rate, Medium-Term Note dated April 12, 1995. 4(i).5(15) Rights Agreement, dated as of February 24, 1988 between American Bankers Insurance Group, Inc. and Manufacturers Hanover Trust Company, a New York banking corporation, as Rights Agent, as amended and restated as of November 14, 1990. 4(i).6(16) Amendment No. 1, dated as of December 19, 1997 to Rights Agreement, dated as of February 24, 1998 between American Bankers Insurance Group, Inc. and ChaseMellon Shareholder Services, L.L.C., as successor Rights Agent, as amended and restated as of November 14, 1990. 4(i).7(17) Amendment No. 2, dated as of February 5, 1998, to the Rights Agreement, dated as of February 24, 1988, as amended and restated as of November 14, 1990 and as further amended on December 19, 1997, between the American Bankers Insurance Group, Inc. and ChaseMellon Shareholder Services, L.L.C. as successor Rights Agent. 4(i).8(18) Amendment No. 3, dated as of February 19, 1998, to the Rights Agreement, dated as of February 24, 1988, as amended and restated as of November 14, 1990 and as further amended on December 19, 1997 and February 5, 1998 between the American Bankers Insurance Group, Inc. and ChaseMellon Shareholder Services, L.L.C. as successor Rights Agent. - --------------------------- (12) Exhibit incorporated herein by reference from Exhibit B of the Rights Agreement, dated as of February 19, 1998, between American Bankers Insurance Group, Inc. and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, filed with Registrant's Schedule 14D-9 Amendment No. 3, dated February 20, 1998. (13) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1994. (14) Exhibit incorporated herein by reference from Registrant's Current Report on Form 10-Q for March 31, 1995. (15) Exhibit incorporated herein by reference from Registrant's Current Report on Form 8-K dated November 14, 1990. (16) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1997. (17) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9, dated February 6, 1998. (18) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9, Amendment No. 3, dated February 20, 1998. 104 105 4(i).9(19) Rights Agreement, dated as of February 19, 1998, between American Bankers Insurance Group, Inc. and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. 4(i).10(20) Amendment No. 1, dated as of March 20, 1998, to the Rights Agreement dated as of February 19, 1998 between American Bankers Insurance Group, Inc. and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. 4(i).11(21) Amendment Number Two to the Rights Agreement, dated as of March 4, 1999, between American Bankers Insurance Group, Inc. and ChaseMellon Shareholder Services, L.L.C. 4(iv).1(22) Trust Indenture for $200,000,000 Medium-Term Notes. 9.1(23) Voting Agreement, dated as of December 21, 1997, between AIG, and Gerald N. Gaston, R. Kirk Landon, R. Kirk/B. Landon Foundation, R. Kirk Landon Revocable Trust, and Landon Corporation. 9.2(24) Voting Agreement, dated as of March 5, 1999, between certain stockholders of American Bankers Insurance Group, Inc. and Fortis, Inc. 10(i).1(25) 5 Year Competitive Advance and Revolving Credit Facility Agreement dated as of December 1, 1995 among the American Bankers Insurance Group, Inc., certain banks and Barclays Bank PLC. 10(i).2(26) Issuance and Paying Agent Agreement (For Commercial Paper) dated as of 21st day of November 1995 by and between the Company and Chemical Bank. - ------------------------ (19) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9, Amendment No. 3, dated February 20, 1998. (20) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9, Amendment No. 11, dated March 24, 1998. (21) Exhibit incorporated herein by reference from Registrant's Current Report on Form 8-K dated March 10, 1999. (22) Exhibit incorporated herein by reference from Registrant's Current Report on Form 10-Q for March 31, 1994. (23) Exhibit incorporated herein by reference from Registrant's Current Report on Form 8-K dated January 13, 1998. (24) Exhibit incorporated herein by reference from Registrant's Current Report on Form 8-K dated March 10, 1999. (25) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1995. (26) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1995. 105 106 10(i).3(27) Selling Agency Agreement for $200,000,000 Medium-Term Notes. 10(ii).1(28) Master License Agreement between Policy Management Systems Corporation ("PMSC"), a South Carolina Corporation and American Bankers Insurance Group. Inc. ("customer"). 10(ii).2 Consulting and Non-Competition Agreement between R. Kirk Landon and American Bankers Insurance Group, Inc. 10(ii).3 Consulting Agreement between Gerald N. Gaston and American Bankers Insurance Group, Inc. 10(iii).1(29) Form of Executive Compensation Agreement. 10(iii).2(30) Form of Executive Compensation Agreement. 10(iii).3(31) Form of Executive Severance Benefits Agreement. 10(iii).4 Agreement to Terminate Severance Agreement between American Bankers Insurance Group, Inc. and Mr. R. Kirk Landon. 10(iii).5 Nonqualified Supplemental Benefit Plan, as amended and restated January 1, 1999. 10(iii).6(32) Retirement Plan, as amended December 30, 1994. 10(iii).7(33) American Bankers Insurance Group, Inc. Leveraged Employee Stock Ownership Plan, as amended December 30, 1994. 10(iii).8 Amendment of the American Bankers Insurance Group, Inc. Leveraged Employee Stock ownership Plan dated March 31, 1998. - -------------------------- (27) Exhibit incorporated herein by reference from Registrant's Current Report on Form 10-Q for March 31, 1994. (28) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1993. (29) Exhibit incorporated herein by reference from Form S-3 Registration Statement Number 2-94359. (30) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1995. (31) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1990. (32) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1994. (33) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1994. 106 107 10(iii).9(34) 1987 Executive Stock Option/Dividend Accrual Plan. 10(iii).10(35) 1991 Stock Incentive Compensation Plan, as amended February 18, 1994. 10(iii).11(36) 1991 Stock Option/Restricted Stock Award Plan, as amended February 18, 1994. 10(iii).12(37) 1995 Amendment to the 1991 Stock Option/Restricted Stock Award Plan. 10(iii).13(38) Management Incentive Plan, as amended May 25, 1994. 10(iii).14(39) Directors' Deferred Compensation Plan, amended and restated May 25, 1994. 10(iii).15 1994 Non-Employee Director's Stock Option Plan, as amended March 5, 1999. 10(iii).16(40) 1994 Senior Management Stock Option Plan. 10(iii).17(41) 1997 Equity Incentive Plan, as amended on August 15, 1997. 10(iii).18(42) American Bankers Insurance Group, Inc. 401(K) and Employee Stock Ownership Plan. 10(iii).19(43) 1999 Non-Employee Directors One-Time Award Plan - -------------------------- (34) Exhibit incorporated herein by reference from 1987 Annual Meeting Proxy Statement (Exhibit "A" pages 14 through 19). (35) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1994. (36) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1994. (37) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1995. (38) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1994. (39) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1994. (40) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1994. (41) Exhibit incorporated herein by reference from Registrant's Current Report on Form 10-Q for September 30, 1997. (42) Exhibit incorporated herein by reference from Registrant's Statement on Form S-8 filed on February 19, 1999, Registration Number 333-72619. (43) Exhibit incorporated herein by reference from Registrant's Statement on Form S-8 filed on February 19, 1999, Registration Number 333-72615. 107 108 21 Subsidiaries of the Registrant. 23 Consent of Independent Certified Public Accountants. 27 Financial Data Schedule. 108 109 (b.) REPORTS ON FORM 8-K Form 8-K, regarding termination of the Cendant Merger, filed on October 15, 1998. (c.) EXHIBIT INDEX Exhibit 10(ii).2 Consulting and Non-Competition Agreement between R. Kirk Landon and American Bankers Insurance Group, Inc. Exhibit 10(ii).3 Consulting Agreement between Gerald N. Gaston and American Bankers Insurance Group, Inc. Exhibit 10(iii).4 Agreement to Terminate Severance Agreement between American Bankers Insurance Group, Inc. and R. Kirk Landon Exhibit 10(iii).5 Nonqualified Supplemental Benefit Plan as amended and restated January 1, 1999. Exhibit 10(iii).8 Amendment of the American Bankers Insurance Group, Inc. Leveraged Employee Stock Ownership Plan, dated March 31, 1998. Exhibit 10(iii).15 1994 Non-Employee Director's Stock Option Plan, as amended March 5, 1999. Exhibit 21 Subsidiaries of the Registrant. Exhibit 23 Consent of Independent Certified Public Accountants. Exhibit 27 Financial Data Schedule. Other exhibits have been incorporated by reference. See Part IV, Item 14 of this Annual Report on Form 10-K. (d.) FINANCIAL STATEMENT SCHEDULES The response to this portion of Item 14 is submitted as part of Part II Item 8 of this report. 109 110 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.
By: /s/ Gerald N. Gaston Chief Executive Officer, President, March 26, 1999 ----------------------------------- and Vice Chairman of the Board Gerald N. Gaston By: /s/ Robert Hill Senior Vice President and March 26, 1999 ----------------------------------- Principal Accounting Officer Robert Hill
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 30, 1998. American Bankers Insurance Group, Inc.
/s/ R. Kirk Landon Chairman of the Board March 26, 1999 - ------------------------------------------------- and Director R. Kirk Landon /s/ Gerald N. Gaston Chief Executive Officer, March 26, 1999 - ------------------------------------------------- President, Vice Chairman of the Gerald N. Gaston Board and Director /s/ William H. Allen Jr. Director March 26, 1999 - ------------------------------------------------- William H. Allen Jr. Director March 26, 1999 - ------------------------------------------------- Nicholas A. Buoniconti /s/ Armando M. Codina Director March 26, 1999 - ------------------------------------------------- Armando M. Codina /s/ Peter J. Dolara Director March 26, 1999 - ------------------------------------------------- Peter J. Dolara
110 111
Director March 26, 1999 - ------------------------------------------------ Jack F. Kemp Director March 26, 1999 - ------------------------------------------------- Bernard P. Knoth, S.J. /s/ James F. Jorden Director March 26, 1999 - ------------------------------------------------- James F. Jorden Director March 26, 1999 - ------------------------------------------------- Daryl L. Jones /s/ Eugene M. Matalene Jr. Director March 26, 1999 - ------------------------------------------------- Eugene M. Matalene Jr. /s/ Albert H. Nahmad Director March 26, 1999 - ------------------------------------------------- Albert H. Nahmad /s/ Nicholas J. St. George Director March 26, 1999 - ------------------------------------------------- Nicholas J. St. George Director March 26, 1999 - ------------------------------------------------- Robert C. Strauss /s/ George E. Williamson II Director March 26, 1999 - ------------------------------------------------- George E. Williamson II
111 112 ITEM 14(c) EXHIBIT INDEX
Pages ----- Exhibit 10(ii).2 Consulting and Non-Competition Agreement between R. Kirk Landon and American Bankers Insurance Group, Inc. Exhibit 10(ii).3 Consulting Agreement between Gerald N. Gaston and American Bankers Insurance Group, Inc. Exhibit 10(iii).4 Agreement to Terminate Severance Agreement between American Bankers Insurance Group, Inc. and R. Kirk Landon Exhibit 10(iii).5 Nonqualified Supplemental Benefit Plan as amended and restated January 1, 1999. Exhibit 10(iii).8 Amendment of the American Bankers Insurance Group, Inc. Leveraged Employee Stock Ownership Plan, dated March 31, 1998. Exhibit 10(iii).15 1994 Non-Employee Director's Stock Option Plan, as amended March 5, 1999. Exhibit 21 - Subsidiaries of the registrant E-1 Exhibit 23 - Consent of Independent Certified Public Accountants E-2 Exhibit 27 - Financial Data Schedule E-3
Other exhibits have been incorporated by reference. See Part IV, Item 14 of this Annual Report on Form 10-K. 112 EX-10.(II).2 2 CONSULTING AND NON-COMPETITION AGREEMENT 1 EXHIBIT 10(ii).2 CONSULTING AND NONCOMPETITION AGREEMENT THIS AGREEMENT ("Agreement") is made by and between American Bankers Insurance Group, Inc., a Florida corporation (the "Company") and R. Kirk Landon (the "Consultant"); WHEREAS, the Company desires to engage the services of the Consultant, a director, stockholder and former officer of the Company, and to enter into an agreement embodying the terms of such engagement; and WHEREAS, the Consultant desires to accept such engagement and enter into such agreement; NOW, THEREFORE, in consideration of the promises and the mutual promises and covenants herein contained, the parties hereto mutually agree as follows: 1. CONSULTING ARRANGEMENT. The Company hereby engages the Consultant for the term and upon the terms and subject to the conditions hereinafter set forth. The Consultant hereby accepts such engagement. The parties acknowledge and agree that, for all purposes under and in connection with this Agreement, the Consultant shall be deemed an independent contractor and not an employee of the Company. 2. TERM. The Company shall retain the Consultant for the term of one (1) year from the date of the termination of his employment with the Company ("the "Minimum Term"). Following the expiration of the Minimum Term, the Consultant's retention by the Company shall continue only upon written agreement by both parties. 3. DUTIES. During the term of this Agreement, the Consultant shall be an independent contractor to the Company. The Consultant's duties include: (a) consulting with officers of the Company upon their request during regular business hours, and (b) promoting the goodwill of the Company by being available to attend and attending insurance-related conferences and functions as a representative of the Company. The Consultant shall devote only such time and attention to the business of the Company as may be reasonably necessary to perform the Consultant's duties under this Agreement, up to a maximum of 20 hours per month. 4. COMPENSATION. As compensation during the Minimum Term of this Agreement, the Company shall pay the Consultant, and the Consultant shall accept, the consulting fee of $1,035,000 to be paid in equal monthly installments on the fifteenth (15th) day of each month during the Minimum Term. 5. EXPENSES. The Consultant is authorized to incur reasonable business expenses in performing services under this Agreement. The Company shall promptly reimburse the Consultant for such expenses upon presentation of an itemized expense statement together with 1 2 supporting vouchers therefor and such other information as the Company may from time to time reasonably require. 6. PROPRIETARY PROPERTY; CONFIDENTIAL INFORMATION. (A) PROPRIETARY PROPERTY. The term "Proprietary Property" includes any and all ideas, creations, developments, improvements, inventions, trade secrets, patents, copyrights, trademarks, trade names, logos, processes, computer programs, databases, spread sheets, documentation, models, methodologies, strategies, material works of authorship, know-how and methods of applying and putting into practice any such items that are created, developed or discovered by or for the Company or are acquired or licensed on a proprietary basis by the Company from others. Proprietary Property does not include proprietary technical information generally known in the business in which the Company operates, even if disclosed to the Consultant or known or developed by the Consultant as a consequence of or through the Consultant's performance of services hereunder. (B) CONFIDENTIAL INFORMATION. The term "Confidential Information" includes any and all information which relates to the Company's products and services (including their development, marketing and sale), the financial, marketing and other aspects of the Company's operations, and the intellectual property and business and other rights which it owns, licenses or otherwise has the right to use, which is not generally known outside the Company (other than to the Company's customers or suppliers or other third parties in connection with their business with the Company) and which is disclosed or accessible to or known or developed by the Consultant as a consequence of or through the Consultant's performance of services hereunder or prior performance of services for the Company. It includes, but is not limited to, memoranda, files, books and records, financial and accounting methodologies, catalogs, lists of customers or prospects, price lists, advertising and promotional materials, packaging design, business plans, operating policies and manuals, internal controls, policies, procedures and guidelines, and other business information and records used in the conduct of business (whether in tangible - including written documents, magnetic tapes, disks or other media - or intangible form), agreements and understandings between the Company and third parties, and trade secrets, software and other licenses, source codes and object codes, designs, drawings, plans, and other such information and rights, intangible or otherwise, whether or not such information comes with the term "Proprietary Property." (C) RIGHTS TO PROPRIETARY PROPERTY. The Consultant agrees that, except as the Company may otherwise expressly agree in writing, (i) the Consultant shall have no rights and shall acquire no rights to any Proprietary Property that comes, or has come, within the Consultant's knowledge or possession through or as a consequence of the Consultant's performance of services hereunder or prior to the effective time of this Agreement, and (ii) any information or other property that is, or has been, invented, created, discovered, written, developed, furnished or produced by the Consultant, solely or jointly, wholly or partly, while performing services for the Company hereunder or prior to the effective time of this Agreement or with information proprietary to the Company (the "Developments"), shall be the exclusive property of the Company, and the Consultant shall have no right, title or interest of any kind in and to the Developments, including any results or proceeds therefrom. The Consultant hereby 2 3 sells, transfers and assigns to the Company all right, title and interest which the Consultant may be deemed to have in and to the Developments, including the right to patent, register copyrights for or obtain legal protection for the Developments, and agrees to communicate promptly and disclose to the Company, in such form as the Company requests, all information, details and data pertaining to any Developments. At any time during or subsequent to the term of this Agreement, upon the request and at the election and expense of the Company, the Consultant will patent, register copyrights for or obtain other legal protection for, or permit the Company to patent, register copyrights for or obtain other legal protection for, any Developments and execute any and all assignments, instruments of transfer, or other documents that the Company deems necessary or appropriate to transfer to the Company all rights in or to the Developments or to evidence the Company's ownership of such rights or any of them. (D) USE AND DISCLOSURE. Except as may be otherwise expressly authorized in writing by the Company, the Consultant shall not use any Proprietary Property or Confidential Information except for the benefit of the Company and shall not disclose any Confidential Information to any other person. As used in this Agreement, unless the context otherwise requires the term "person" includes, but is not limited to, any individual, partnership, association, firm, corporation, trust, unincorporated organization, joint venture or other entity. This restriction on use and disclosure applies without limitation as to time or place. (E) APPLICABILITY TO THE COMPANY AND ITS AFFILIATES. For purposes of this Section 6 and Sections 7, 8 and 9 of this Agreement, references to the Company shall be deemed to include the Company and any corporations or other business entities affiliated with it. 7. COMPANY PROPERTY. Following termination of this Agreement for any reason, the Consultant shall promptly return to the Company all property of the Company in the possession or control of the Consultant (and any and all copies thereof) including, without limitation, all Proprietary Property and Confidential Information. 8. NON-COMPETITION. During the period commencing on the date of this Agreement and ending five (5) years after the expiration of this Agreement (the "Restricted Period"), the Consultant shall not, either on the Consultant's own account or for any other person or entity, directly or indirectly, (a) engage in any activities or render any services which are similar or reasonably related to those performed for or rendered to or on behalf of the Company during the term of this Agreement or the two-year period preceding the date of this Agreement (together, the "Extended Term"), to any business which competes with the Company in any place where the Company is engaged or, to the knowledge of the Consultant, intends to engage in business or (b) own a greater than five percent equity interest in or be connected with the management, operation or control of any such business, but the foregoing shall not be deemed to exclude the Consultant from acting as a director, officer or employee of or a consultant to other businesses for the benefit of the Company with the consent of the Company's Board of Directors. 9. NON-SOLICITATION. During the Restricted Period, the Consultant shall not directly or indirectly: (a) attempt to induce, or assist others to attempt to induce, any person who was or was actively negotiating to become a customer of the Company at any time during the Extended Term, to reduce or terminate such customer's business with the Company or to direct any of its 3 4 business that is then being or may be done with the Company to any other person; (b) attempt to induce, or assist others to attempt to induce, any employee of the Company to terminate his or her employment with the Company; and (c) whether in an individual capacity or as the owner, partner, employee or agent of any entity, employ or offer employment to any person who is or was employed by the Company during the Extended Term unless such person shall cease to have been employed by the Company in any capacity for a period of at least one year. 10. NOTICES. All notices and other communications provided for in this Agreement shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, mailed by registered or certified mail (return receipt requested), or sent via facsimile transmission, all charges prepaid, to the intended at the address below (or such other address for a party as shall be specified by like notice): If to the Company: American Bankers Insurance Group, Inc. 11222 Quail Roost Drive Miami, FL 33157-6596 Attention: Chief Executive Officer If to the Consultant: R. Kirk Landon 10 Edgewater Drive, #16E Coral Gables, FL 33133 11. SURVIVAL. Sections 6, 7, 8, 9, 12 and 13 shall survive the termination of this Agreement, except as otherwise provided in such sections. In the event the Company is acquired or merges with another entity, this Agreement shall survive unless otherwise agreed in writing by both parties. 12. REMEDIES FOR BREACH OF AGREEMENT. If the Consultant commits a breach or threatens to commit a breach of any of the provisions of this Agreement, the Company shall have the right to have the provisions of this Agreement specifically enforced by any court having equity jurisdiction without having to prove the inadequacy of the available remedies at law or irreparable injury, it being acknowledged and agreed as between the parties hereto that any such breach or threatened breach will cause irreparable injury to the Company and that money damages may not provide an adequate remedy to the Company. In addition, the Company may take and pursue all such other actions and remedies as may be available to the Company at law or in equity and shall be entitled to such damages as the Company can show the Company has sustained by reason of such breach, together with court costs and attorneys' fees. 13. OTHER. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof, supersedes all prior agreements and understandings between the parties regarding that subject matter, may be executed in two or more counterparts which together shall constitute a single agreement, may be amended only by a written instrument executed by the parties hereto, may not be assigned by either party without the written consent of the other (except that it may be assigned by the Company to any affiliated company or to a successor in connection with a merger, consolidation or sale of all or substantially all of the assets of the Company or any such assignee), and shall inure to the benefit of and be binding 4 5 upon the parties and their respective successors. Forbearance by either party to require performance of any provision hereof shall not constitute or be deemed a waiver by such party of such provision or of the right thereafter to enforce the same, and no waiver by either party of any breach or default hereunder shall constitute or be deemed a waiver of any subsequent breach or default, whether of the same or similar nature or of any other nature, or a waiver of the provision or provisions breached or with respect to which such default occurred. In the event any of Sections 6, 7, 8 or 9 is held not to be enforceable in accordance with its terms, the Consultant and the Company hereby agree that such Section shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted by law. Unless the context otherwise requires, this Agreement shall be governed in all respects by the laws of the State of Florida, without reference to the principles of conflict or choice of law thereof, and both the Company and the Consultant hereby agree to submit to the exclusive jurisdiction of the federal and state courts within the State of Florida in any action or proceeding arising out of or relating to this Agreement, agree that process may be served upon them in any manner authorized for those courts and covenant not to assert or plead any objection which they might otherwise have to such jurisdiction and such process. IN WITNESS WHEREOF, the parties have duly executed this Agreement this 15th day of January, 1999. AMERICAN BANKERS INSURANCE CONSULTANT GROUP, INC. By: __________________________ By:________________________ Gerald Gaston R. Kirk Landon Chief Executive Officer EX-10.(II).3 3 CONSULTING AGREEMENT-GERALD GASTON 1 EXHIBIT 10(iii).3 CONSULTING AGREEMENT THIS CONSULTING AGREEMENT (this "Agreement") is made this 5th day of March, 1999, by and between American Bankers Insurance Group, Inc., a Florida corporation (the "Company"), and Gerald N. Gaston (the "Consultant"); WHEREAS, the Company has entered into that certain Agreement and Plan of Merger, dated as of the date hereof (the "Merger Agreement"), by and among the Company, Fortis, Inc. and Greenland Acquisition Corp., pursuant to which Fortis, Inc. will acquire all of the issued and outstanding common stock of the Company, by virtue of the merger of Greenland Acquisition Corp. with and into the Company (the "Merger"); and WHEREAS, as an inducement to Fortis, Inc. to enter into the Merger Agreement, Consultant has agreed to enter into this Agreement; and WHEREAS, the Board of Directors of the Company has determined that it is in the best interests of the Company to enter into this Agreement. NOW, THEREFORE, in consideration of the premises, $10.00 in hand paid and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. CONSULTING ARRANGEMENT. Subject to the consummation of the transactions contemplated by the Merger Agreement, the Company hereby engages the Consultant for the term and upon the terms and subject to the conditions hereinafter set forth. The Consultant hereby accepts such engagement. The parties acknowledge and agree that for all purposes under and in connection with this Agreement, the Consultant shall be deemed an independent contractor and not an employee of the Company. 2. TERM. The Company shall retain the Consultant for the term of twenty-four (24) months commencing at the Effective Time (as defined in the Merger Agreement) (the "Minimum Term"). Following the expiration of the Minimum Term, the Consultant's retention by the Company shall continue only upon written agreement by both parties. 3. DUTIES. The Consultant's duties shall include consulting with officers of the Company, from time to time, upon the Company's request during regular business hours, as mutually agreeable to the Company and Consultant. 4. EXPENSES. The Consultant is authorized to incur reasonable business expenses in performing services requested by the Company under this Agreement. The Company shall promptly reimburse the Consultant for such expenses upon presentation of an itemized expense statement together with supporting vouchers therefor and such other information as the Company may from time to time reasonably require. 2 5. OFFICE. The Company shall provide Consultant with reasonable office space in Coral Gables, Florida, in premises that are currently leased to the Company under a triple net lease, for the remainder of the initial five-year term of such lease, provided that the cost per year of such lease shall not exceed $175,000. 6. EXECUTIVE SEVERANCE CONTRACT PAYMENT. Consultant presently has an Executive Severance Contract with the Company, dated February 1, 1990 (the "Severance Agreement"). Immediately after the Effective Time, Consultant's employment with the Company shall terminate, this Agreement shall take effect, and the Company shall pay to the Consultant a lump sum of $8,045,000 as full payment of the Company's obligations under the Severance Agreement (subject to adjustment so that the amount received by the Consultant as a result of the Merger shall not exceed 2.99 times the Consultant's "base amount" as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended). 7. PROPRIETARY PROPERTY; CONFIDENTIAL INFORMATION. (a) PROPRIETARY PROPERTY. The term "Proprietary Property" includes any and all ideas, creations, developments, improvements, inventions, trade secrets, patents, copyrights, trademarks, trade names, logos, processes, computer programs, databases, spread sheets, documentation, models, methodologies, strategies, material works of authorship, know-how and methods of applying and putting into practice any such items that are created, developed or discovered by or for the Company or are acquired or licensed on a proprietary basis by the Company from others. Proprietary Property does not include proprietary technical information generally known in the business in which the Company operates, even if disclosed to the Consultant or known or developed by the Consultant as a consequence of or through the Consultant's performance of services hereunder. (b) CONFIDENTIAL INFORMATION. The term "Confidential Information" includes any and all information that relates to the Company's products and services (including their development, marketing and sale), the financial, marketing and other aspects of the Company's operations, and the intellectual property and business and other rights that it owns, licenses or otherwise has the right to use, that is not generally known outside the Company (other than to the Company's customers or suppliers or other third parties in connection with their business with the Company) and that is disclosed or accessible to or known or developed by the Consultant as a consequence of or through the Consultant's performance of services hereunder or prior performance of services for the Company. It includes, but is not limited to, memoranda, files, books and records, financial and accounting methodologies, catalogs, lists of customers or prospects, price lists, advertising and promotional materials, packaging design, business plans, operating policies and manuals, internal controls, policies, procedures and guidelines, and other business information and records used in the conduct of business (whether in tangible form--including written documents, magnetic tapes, disks or other media--or intangible -2- 3 form), agreements and understandings between the Company and third parties, and trade secrets, software and other licenses, source codes and object codes, designs, drawings, plans, and other such information and rights, intangible or otherwise, whether or not such information comes within the term "Proprietary Property." (c) RIGHTS TO PROPRIETARY PROPERTY. The Consultant agrees that, except as the Company may otherwise expressly agree in writing, (i) the Consultant shall have no rights and shall acquire no rights to any Proprietary Property that comes, or has come, within the Consultant's knowledge or possession through or as a consequence of the Consultant's performance of services hereunder or prior to the effective time of this Agreement, and (ii) any information or other property that is, or has been, invented, created, discovered, written, developed, furnished or produced by the Consultant, solely or jointly, wholly or partly, while performing services for the Company hereunder or prior to the effective time of this Agreement or with information proprietary to the Company (the "Developments"), shall be the exclusive property of the Company, and the Consultant shall have no right, title or interest of any kind in and to the Developments, including any results or proceeds therefrom. The Consultant hereby sells, transfers and assigns to the Company all right, title and interest which the Consultant may be deemed to have in and to the Developments, including the right to patent, register copyrights for, or obtain legal protection for the Developments, and agrees to communicate promptly and disclose to the Company, in such form as the Company requests, all information, details and data pertaining to any Developments. At any time during or subsequent to the term of this Agreement, upon the request and at the election and expense of the Company, the Consultant will patent, register copyrights for or obtain other legal protection for, or permit the Company to patent, register copyrights for, or obtain other legal protection for, any Developments and execute any and all assignments, instruments of transfer, or other documents that the Company deems necessary or appropriate to transfer to the Company all rights in or to the Developments or to evidence the Company's ownership of such rights in or to any of them. (d) USE AND DISCLOSURE. Except as may be otherwise expressly authorized in writing by the Company, the Consultant shall not use any Proprietary Property or Confidential Information, except for the benefit of the Company, and shall not disclose any Confidential Information to any other person. As used in this Agreement, unless the context otherwise requires the term "person" includes, but is not limited to, any individual, partnership, limited liability entity, association, firm, corporation, trust, unincorporated organization, joint venture or other entity. This restriction on use and disclosure applies without limitation as to time or place. (e) APPLICABILITY TO THE COMPANY AND ITS AFFILIATES. For purposes of this Section 5 and Sections 6, 7 and 8 of this Agreement, references to the Company shall be deemed to include the Company and any corporations or other business entities affiliated with it. -3- 4 8. COMPANY PROPERTY. Following termination of this Agreement for any reason, the Consultant shall promptly return to the Company all property of the Company in the possession or control of the Consultant (and any and all copies thereof) including, without limitation, all Proprietary Property and Confidential Information. 9. NON-COMPETITION. During the period commencing on the date of this Agreement and ending two (2) years after the expiration of this Agreement (the "Restricted Period"), the Consultant shall not, either on the Consultants own account or for any other person or entity, directly or indirectly, (a) engage in any activities or render any services which are similar or reasonably related to those performed for or rendered to or on behalf of the Company during the term of this Agreement or the two-year period preceding the date of this Agreement (together, the "Extended Term"), to any business which competes with the Company in any place where the Company is engaged or, to the knowledge of the Consultant, intends to engage in business or (b) own a greater than five percent equity interest in or be connected with the management, operation or control of any such business; provided however that the foregoing shall not be deemed to exclude the Consultant from acting as a director, officer or employee of or a consultant to other businesses for the benefit of the Company with the consent of the Company's Board of Directors. 10. NON-SOLICITATION. During the Restricted Period, the Consultant shall not directly or indirectly: (a) attempt to induce, or assist others to attempt to induce, any person who was or was actively negotiating to become a customer of the Company at any time during the Extended Term, to reduce or terminate such customer's business with the Company or to direct any of its business that is then being or may be done with the Company to any other person; (b) attempt to induce, or assist others to attempt to induce, any employee of the Company to terminate his or her employment with the Company; and (c) whether in an individual capacity or as the owner, partner, employee or agent of any entity, employ or offer employment to any person who is or was employed by the Company during the Extended Term unless such person shall cease to have been employed by the Company in any capacity for a period of at least one year. 11. NOTICES. All notices and other communications provided for in this Agreement shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, mailed by registered or certified mail (return receipt requested), or sent via facsimile transmission, all charges prepaid, to the intended at the address below (or such other address for a party as shall be specified by like notice): If to the Company: American Bankers Insurance Group, Inc. 11222 Quail Roost Drive Miami, FL 33157-6596 Attention: Chief Executive Officer If to the Consultant: Gerald N. Gaston -------------------------------- -------------------------------- -4- 5 12. SURVIVAL. Sections 5, 6, 7, 8, 11 and 12 shall survive the termination of this Agreement, except as otherwise provided in such sections. In the event the Company is acquired or merges with another entity, this Agreement shall survive unless otherwise agreed in writing by both parties. 13. REMEDIES FOR BREACH OF AGREEMENT. If the Consultant commits a breach or threatens to commit a breach of any of the provisions of this Agreement, the Company shall have the right to have the provisions of this Agreement specifically enforced by any court having equity jurisdiction without having to prove the inadequacy of the available remedies at law or irreparable injury, it being acknowledged and agreed as between the parties hereto that any such breach or threatened breach will cause irreparable injury to the Company and that money damages may not provide an adequate remedy to the Company. In addition, the Company may take and pursue all such other actions and remedies as may be available to the Company at law or in equity and shall be entitled to such damages as the Company can demonstrate that the Company has sustained by reason of such breach, together with court costs and attorneys' fees. 14. OTHER. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof, supersedes all prior agreements and understandings between the parties regarding such subject matter, may be executed in two or more counterparts which together shall constitute a single agreement, may be amended only by a written instrument executed by the parties hereto, may not be assigned by either party without the written consent of the other (except that it may be assigned by the Company to any affiliated company or to a successor in connection with a merger, consolidation or sale of all, or substantially all, of the assets of the Company or any such assignee), and shall inure to the benefit of and be binding upon the parties and their respective successors. Forbearance by either party to require performance of any provision hereof shall not constitute or be deemed a waiver by such party of such provision or of the right thereafter to enforce the same, and no waiver by either party of any breach or default hereunder shall constitute or be deemed a waiver of any subsequent breach or default, whether of the same or similar nature or of any other nature, or a waiver of the provision or provisions breached or with respect to which such default occurred. In the event any of Sections 5, 6, 7 or 8 is held not to be enforceable in accordance with its terms, the Consultant and the Company hereby agree that such Section shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted by law consistent with the provisions of such Sections 5, 6, 7 and 8. This Agreement shall be governed in all respects by the laws of the State of Florida, without reference to the principles of conflict or choice of law thereof. Both the Company and the Consultant hereby agree to submit to the exclusive jurisdiction of the federal and state courts within the State of Florida in any action or proceeding arising out of or relating to this Agreement, agree that process may be served upon them in any manner authorized for those courts, and covenant not to assert or plead any objection which they might otherwise have to such jurisdiction and such process. -5- 6 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date and year set forth above. AMERICAN BANKERS INSURANCE GROUP, INC. By: /s/ Floyd G. Dension ----------------------------------------- Name: Floyd G. Denison Title: Executive Vice President - Finance /s/ Gerald N. Gaston ----------------------------------------- Gerald N. Gaston -6- EX-10.(III).4 4 AGREEMENT TO TERMINATE SEVERANCE AGREEMENT 1 EXHIBIT 10(iii).4 AGREEMENT TO TERMINATE SEVERANCE AGREEMENT This AGREEMENT TO TERMINATE SEVERANCE AGREEMENT, dated as of January 15, 1999 (this "Agreement") is made between American Bankers Insurance Group, Inc., a Florida corporation (the "Company"), and Mr. R. Kirk Landon, an executive officer of the Company ("Landon"). WHEREAS, the Company and Landon have entered into a letter agreement dated February 1, 1990, under which Landon is entitled to severance benefits for disability, retirement, death and termination other than for cause (the "Severance Agreement"); WHEREAS, Landon desires to lessen his role with the Company and desires to resign as a member of the senior management of the Company; WHEREAS, the Company recognizes Landon's expertise and desires to retain Landon in some capacity; WHEREAS, the Company and Landon have entered into a Consulting and Noncompetition Agreement on even date herewith, under which Landon will offer consulting services to the Company ("Consulting Agreement"); WHEREAS, the Company and Landon have agreed to terminate the Severance Agreement. NOW, THEREFORE, in consideration of the foregoing premises and mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. The Severance Agreement shall terminate effective upon the later of the execution and delivery of the Consulting Agreement and the adoption of a resolution of the Board of Directors of the Company authorizing the Company to terminate the Severance Agreement. 2. Upon the termination of the Severance Agreement, the Company shall not be obligated to make any payments under the Severance Agreement to either Landon or any other third person. 3. This Agreement may be executed in counterparts. 4. This Agreement shall be construed in accordance with the laws of the State of Florida. (The Remainder of Page Intentionally Blank) 2 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the day and year first written above. AMERICAN BANKERS INSURANCE GROUP, INC. By: _____________________________________________ Name: Gerald N. Gaston Title: Chief Executive Officer ___________________________________________________ R. Kirk Landon EX-10.(III).5 5 NONQUALIFIED SUPPLEMENTAL BENEFIT PLAN 1 EXHIBIT 10(iii).5 AMERICAN BANKERS INSURANCE GROUP, INC. NONQUALIFIED SUPPLEMENTAL BENEFIT PLAN Amended and Restated as of January 1, 1999 ARTICLE I GENERAL PROVISIONS 1.1 PURPOSE. This Plan is a nonqualified, unfunded, deferred compensation arrangement designed solely to equalize the total benefits certain key executives would have received under the American Bankers Insurance Group, Inc. Retirement Plan (the "ABIG Retirement Plan"), but for the limitations on benefits imposed by Section 415 of the Internal Revenue Code (as reflected in Section 7.01 of the ABIG Pension Plan). The Plan is intended to benefit the Company and its Affiliates by recognizing the value of the past or present services of the key executives covered by the Plan and to encourage them to continue careers with the Company or its Affiliates. 1.2 CONSTRUCTION. The Compensation Committee shall have the power, authority, and discretion to construe and interpret the provisions of this Plan. This Plan is intended to constitute an unfunded "excess benefit plan" within the meaning of Section 3(36) of ERISA, and any construction of this Plan or its provisions shall be consistent with such intent. 1.3 NATURE OF THE PLAN. The adoption of this Plan and any setting aside of amounts by the Company with which to discharge its obligations hereunder shall not be deemed to create a trust. Legal and equitable title to any funds so set aside shall remain in the Company, and any recipient of benefits hereunder shall have no security or other interest in such funds. Any and all funds so set aside shall remain subject to the claims of the general creditors of the Company, present and future and the payment shall be made under this Plan unless the Company is then solvent. This provision shall not require the Company to set aside any funds, but the Company may set aside such funds if it so chooses. 1.4 EFFECTIVE DATE. This Plan shall be effective upon adoption by the Board. ARTICLE II DEFINITIONS 2.1 "ABIG Retirement Plan" shall mean the American Bankers Insurance Group, Inc. Retirement and all amendments thereto. The ABIG Retirement Plan is hereby incorporated by reference into and shall be a part of this Plan. The ABIG Retirement Plan, whenever referred to in the Plan, shall mean such ABIG Retirement Plan as it exists on the date any determination is made of benefits payable under this Plan. 2.2 "Affiliate" shall mean any corporation or other business entity which is included in a controlled group of corporations within which the Company is also included, as provided in Section 414(b) of the Internal Revenue Code, or which has a trade or business under common control with the Company, as provided in Section 414(c) of the Internal Revenue Code, or which has been so designated by the Company for one or more purposes under the ABIG Retirement Plan. 2.3 "Board" means the Board of Directors of the Company. 1 2 2.4 "Company" means American Bankers Insurance Group, Inc., a Florida corporation, and any successor corporation. 2.5 "Compensation Committee" means the Planning and Compensation Committee of the Board. Any function exercisable by by such Committee may also be exercised by the Board or its Executive Committee. 2.6 "Participant" means any executive officer of the Company or an Affiliate who is designated as a Participant by the Board as provided in Article III. 2.7 "Plan" means this American Bankers Insurance Group, Inc. Nonqualified Supplemental Plan and any amendments thereto. ARTICLE III DESIGNATION OF PARTICIPANTS AND ELIGIBILITY FOR BENEFITS 3.1 DESIGNATION OF PARTICIPANTS. The Participants shall be those key employees of the Company and its Affiliates designated in writing from time to time by resolution of the Board as Participants in the Plan. 3.2 ELIGIBILITY FOR BENEFITS. A Participant shall become eligible for benefits under this Plan if he is eligible for benefits under ABIG Retirement Plan and his benefits under the ABIG Retirement Plan are limited pursuant to Section 415 of the Internal Revenue Code. In no event shall a person who is not entitled to benefits under the ABIG Retirement Plan be eligible for a benefit under this Plan. ARTICLE IV RETIREMENT BENEFITS 4.1 AMOUNT OF BENEFIT UNDER THIS PLAN. The benefit payable to a Participant or his beneficiary under this Plan should be the actuarial equivalent of the excess, if any, of: (a) The benefit which would have been payable to such Participant, or on his behalf, to his beneficiary under the ABIG Retirement Plan, if the provisions of the ABIG Retirement Plan were administered without regard to the annual retirement income limitations as set forth in Section 415 of the Internal Revenue Code and expressed in Section 7.01 of the ABIG Retirement Plan, except without limitation for years of credited service. (b) The benefit which is in fact payable to such Participant, or on his behalf, to his beneficiary or beneficiaries under the ABIG Retirement Plan. Benefits payable under this Plan to any recipient shall be computed in accordance with the foregoing and with the objective that such recipient should receive under the Plan and the ABIG Retirement Plan the total amount which would otherwise have been payable to that recipient solely under the ABIG Retirement Plan had not the provisions of Section 415 of the Code and Section 7.01 of the ABIG Retirement Plan been applicable thereto. 2 3 4.2 FORM OF BENEFITS. Except as provided in Section 4.2(a), the benefits under this Plan shall be paid in the same form as, and coincident with, the payment of pension benefits from the ABIG Retirement Plan. Designations of beneficiaries and elections relating to optional forms of payment, made by the employee for purposes of the ABIG Retirement Plan, shall be equally applicable to this Plan. Benefits payable to recipients under this Plan shall cease to be payable at the same time as benefits payable from the ABIG Retirement Plan to such recipient shall cease, or at such earlier time as the limitations under Section 415 of the Code are no longer applicable. 4.2(a) An eligible Participant, who previously was elected otherwise upon attaining Normal Retirement Age, may opt to have his or her benefit under the Plan provided in the form of (1) an immediate single life annuity (or an equivalent joint and survivor annuity) purchased from a domestic life insurer with an AM Best Rating of A- or higher, or (2) a single cash payment which is the actuarial equivalent of a single life immediate annuity which would pay the benefits otherwise provided to the Participant under the Plan. 4.3 SOURCE OF BENEFITS. Except as provided in Section 4.3(a), benefits under this Plan shall not be prefunded, but shall be payable by the Company as and when they become due as provided herein, and the Participant's interest in his benefits under this Plan (and the interest of any beneficiary) shall not be greater than that of an unsecured creditor of the Company from its own funds, and such payments shall not (i) impose any obligation upon the trust fund under the ABIG Retirement Plan; or (ii) be paid from the trust fund under the ABIG Retirement Plan; or (iii) have any effect whatsoever upon the ABIG Retirement Plan the payment of benefits from the trust fund under the ABIG Retirement Plan. No employee or his beneficiary or beneficiaries shall have title to or beneficial ownership in any assests which the Company may earmark to pay benefits hereunder. 4.3(a) An eligible Participant, upon attaining Normal Retirement Age, who previously has elected otherwise, may opt to have his or her benefit under the Plan provided in the form of (1) an immediate single life annuity (or an equivalent joint and survivor annuity) purchased from a domestic life insurer with an AM Best Rating of A- or higher, or (2) a single cash payment which is the actuarial equivalent of a single life immediate annuity which would pay the benefits otherwise provided to the Participant under the Plan. ARTICLE V AMENDMENT AND TERMINATION 5.1 AMENDMENT AND TERMINATION. The Board may at any time, or from time to time, amend this Plan in any respect or terminate this Plan without restriction and without consent of any Participant or beneficiary; provided that any such amendment or termination shall not affect or impair any benefits then being paid to Participants under the Plan as determined prior to such amendment or termination. In the event of a termination, the Company shall remain obligated to pay benefits to those Participants in the Plan on the date of such termination, to the extent such benefits would be otherwise payable, determined on the basis that each participating employee's presumed retirement date was as of the date the Plan was terminated. 3 4 ARTICLE VI MISCELLANEOUS PROVISIONS 6.1 PLAN ADMINISTRATION. The general administration of this Plan shall be the responsibility of the Compensation Committee which is hereby authorized, in its discretion, to delegate said responsibilities to an administrator or administrative committee. The Compensation Committee shall have all such powers as may be necessary to discharge their duties relative to the administration of the Plan, including but not limited to the power to interpret and construe the Plan, to decide any dispute arising hereunder, and to determine the right of any employee with respect to benefits payable under the Plan. No member of the Compensation Committee shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of the Plan unless attributable to willful misconduct or lack of good faith. Members of the Compensation Committee shall not participate in any action or determination regarding their own benefits payable hereunder. Decisions of such Committee made in good faith shall be final, conclusive, and binding upon all parties. 6.2 NO GUARANTEE OF EMPLOYMENT. Nothing contained herein shall be construed as a contract of employment or deemed to give any Participant the right to be retained in the employ of the Company or any Affiliate, or to interfere with the rights of any such employer to discharge any individual at any time, with, or without cause, except as may be otherwise agreed in writing or provided by applicable law. 6.3 NON-ALIENATION OF BENEFITS. No interest of a Participant in this Plan and no benefit payable hereunder may be sold, transferred, assigned, pledged, mortgaged, hypothecated, or encumbered in any manner, and any attempt to sell, transfer, assign, pledge, mortgage, hypothecate, or encumber the same shall be null, void and of no force or effect. Except to the extent required by applicable law, no benefit hereunder shall be subject to legal process or attachment for the payment of any claims of a creditor of a Participant or beneficiary. Neither shall the benefits hereunder be liable for or subject to the debts, contracts, liabilities, engagements or torts of any person to whom such benefits or funds are payable, nor shall they be subject to garnishment, attachment, or other legal or equitable process nor shall they be an asset in bankruptcy, except that no amount shall be payable hereunder until and unless any and all amounts representing debts or other obligations owed to the Company or any Affiliate by Participant with respect to whom such amount would otherwise be payable shall have been fully paid and satisfied. 6.4 GOVERNING LAW. The Provisions of this Plan shall be construed according to the laws of the State of Florida. 6.5 GENDER AND NUMBER. The masculine pronoun wherever used shall include the feminine. Wherever any words are used herein in the singular, they shall be construed as though they were also used in the plural in all cases where they shall so apply. 6.6 TITLES AND HEADINGS. The titles to articles and headings of sections of this Plan are for convenience of reference and in case of any conflict the text of the Plan, rather than such titles and headings, shall control. 6.7 SUCCESSORS. This Plan shall be binding upon and inure to the benefit of the Company, its successors and assigns and the Participant and his heirs, executors, administrators and legal representatives. 6.8 CALCULATIONS. Calculations of lump sum benefits under Section 4.2(a) under this Plan shall be made by utilizing the GATT Basis - 1983 GAM mortality table with a 5.99% discount rate. 4 EX-10.(III).8 6 AMENDMENT OF THE AMERICAN BANKERS INSURANCE GROUP 1 EXHIBIT 10(iii).8 AMENDMENT OF THE AMERICAN BANKERS INSURANCE GROUP, INC. LEVERAGED EMPLOYEE STOCK OWNERSHIP PLAN WHEREAS, American Bankers Insurance Group, Inc. (the "Company") maintains the American Bankers Insurance Group, Inc. Leveraged Employee Stock Ownership Plan (the "Plan"); and WHEREAS, the Plan has previously been amended and further amendment is desirable thereof; NOW, THEREFORE, IT IS RESOLVED that, pursuant to the power reserved to the Company under Subsection 12.1 of the Plan, the Plan, as previously amended, be and is hereby further amended, effective March 31, 1998, in the following particulars: 1. SECTION 3.2 IS AMENDED TO READ AS FOLLOWS: 3.2 COMMENCEMENT OF PARTICIPATION. An Employee who has, on January 1, 1988, completed an Eligibility Period shall be enrolled as a Participant as of January 1, 1988. Each other Employee shall become a Participant on the January 1 or July 1 coinciding with or next following the date on which he shall have completed an Eligibility Period and attained his 18th birthday. NOTWITHSTANDING THE FOREGOING, ANY EMPLOYEE AS OF MARCH 31, 1998 WHO HAS COMPLETED 9 MONTHS OF SERVICE AND ATTAINED AGE 18 AS OF MARCH 31, 1998 SHALL BECOME A PARTICIPANT AS OF MARCH 31, 1998. 2. A NEW SECTION 5.1(E) IS ADDED TO READ AS FOLLOWS: (E) NOTWITHSTANDING THE FOREGOING, EFFECTIVE MARCH 31, 1998, THE ACCOUNT MAINTAINED FOR EACH PARTICIPANT WILL BE CREDITED AS OF MARCH 31, 1998 WITH HIS ALLOCABLE SHARE OF (1) STOCK PURCHASED BY THE TRUST FUND USING CASH CONTRIBUTED BY THE EMPLOYER, IF ANY, (2) CASH CONTRIBUTIONS BY THE EMPLOYER, AND (3) STOCK RELEASED FROM THE SUSPENSE SUBFUND PURSUANT TO PARAGRAPH 5.3. THE ALLOCATION OF CONTRIBUTIONS SHALL BE MADE ONLY TO THE ACCOUNTS OF THOSE PARTICIPANTS WHO WERE IN EMPLOYMENT ON MARCH 31, 1998 OR WHO TERMINATED EMPLOYMENT, DURING THE PERIOD JANUARY 1, 1998 TO MARCH 31, 1998, ON OR AFTER HIS RETIREMENT DATE, BECAUSE OF DEATH OR BY REASON OF TOTAL AND PERMANENT DISABILITY (AS DEFINED IN ARTICLE VI HEREOF) OR RETIREMENT. 2 3. SECTION 5.4 IS AMENDED TO READ AS FOLLOWS: 5.4 ALLOCATIONS OF CONTRIBUTIONS AND SHARES. Shares of Stock released from the Suspense Subfund for a Calendar Year in accordance with Paragraph 5.3 hereof and all contributions under Paragraph 5.1 shall be held in the Fund on an unallocated basis until allocated by the Committee as of the last day of such Calendar Year. Except to the extent provided in Section 5.1(b) or (d) and this section, the allocation of such shares and funds among the Accounts of Participants shall be made among the Accounts of those Participants who were in Employment on the last day of such Calendar Year. If cash dividends (declared on Stock that had been acquired with an Exempt Loan and that are allocated to a Participant's Account) are used to make payments on such Exempt Loan, then Stock with a fair market value at least equal to the amount of such dividends released from the Suspense Subfund shall be allocated to such Participant's Account. The remaining number of shares and funds allocable to a Participant's Account after application of the preceding sentence shall be the number of such shares and funds which bears the same ratio to the total of such remaining shares released (and any other Employer contribution) for such Calendar Year and allocable to the contribution made by the Employer as the Earnings for the Calendar Year of such Participant while in Employment bears to the total Earnings for the Calendar Year of all Participants entitled to an allocation under this Paragraph 5.4 for that Calendar Year. All Stock in the Fund, other than Stock held in the Suspense Subfund as of the last day of a Calendar Year, must be allocated to Accounts as of such last day. Notwithstanding the foregoing, a Participant shall be entitled to an allocation for the Calendar Year in which the Participant terminates employment due to Retirement, death, or disability (defined as being eligible to receive benefits under Paragraph 6.1) regardless of whether the Participant was in Employment on the last business day of such Calendar Year. NOTWITHSTANDING THE FOREGOING, EFFECTIVE MARCH 31, 1998, SHARES OF STOCK RELEASED FROM THE SUSPENSE SUBFUND FOR THE PERIOD JANUARY 1, 1998 THROUGH MARCH 31, 1998 IN ACCORDANCE WITH PARAGRAPH 5.3 HEREOF AND ALL CONTRIBUTIONS UNDER PARAGRAPH 5.1 SHALL BE HELD IN THE FUND ON AN UNALLOCATED BASIS UNTIL ALLOCATED BY THE COMMITTEE AS OF MARCH 31, 1998. EXCEPT TO THE EXTENT PROVIDED IN SECTION 5.1(E) AND THIS PARAGRAPH, THE ALLOCATION OF SUCH SHARES AND FUNDS AMONG THE ACCOUNTS OF PARTICIPANTS SHALL BE MADE AMONG THE ACCOUNTS OF THOSE PARTICIPANTS WHO WERE IN EMPLOYMENT ON MARCH 31, 1998. IF CASH DIVIDENDS (DECLARED ON STOCK THAT HAD BEEN ACQUIRED WITH AN EXEMPT LOAN AND THAT ARE ALLOCATED TO A PARTICIPANT'S ACCOUNT) ARE USED TO MAKE PAYMENTS ON SUCH EXEMPT LOAN, THEN STOCK WITH A FAIR MARKET VALUED AT LEAST EQUAL TO THE AMOUNT OF SUCH DIVIDENDS RELEASED FROM THE SUSPENSE SUBFUND SHALL BE ALLOCATED TO SUCH PARTICIPANT'S ACCOUNT. THE REMAINING NUMBER OF SHARES AND FUNDS ALLOCABLE TO A PARTICIPANT'S ACCOUNT AFTER APPLICATION OF THE PRECEDING SENTENCE SHALL BE THE NUMBER OF SUCH SHARES AND FUNDS WHICH BEARS THE SAME RATIO TO THE TOTAL OF SUCH REMAINING SHARES RELEASED (AND ANY OTHER EMPLOYER CONTRIBUTION) FOR THE PERIOD JANUARY 1, 1998 THROUGH MARCH 31, 1998 AND ALLOCABLE TO THE CONTRIBUTION MADE BY THE EMPLOYER AS THE EARNINGS FOR THE PERIOD JANUARY 1, 1998 THROUGH MARCH 31, 1998 OF SUCH PARTICIPANT WHILE IN EMPLOYMENT BEARS TO THE 2 3 TOTAL EARNINGS FOR THE PERIOD JANUARY 1, 1998 THROUGH MARCH 31, 1998 OF ALL PARTICIPANTS ENTITLED TO AN ALLOCATION UNDER THIS PARAGRAPH FOR THE PERIOD JANUARY 1, 1998 THROUGH MARCH 31, 1998. TO THE EXTENT SUCH ALLOCATION IS FOUND TO BE DISCRIMINATORY UPON TESTING BASED ON THE TOTAL EARNINGS FOR THE CALENDAR YEAR, AN ADDITIONAL CONTRIBUTION WILL BE MADE TO THE ACCOUNTS OF PARTICIPANTS WHO ARE NOT HIGHLY COMPENSATED EMPLOYEES. NOTWITHSTANDING THE FOREGOING, A PARTICIPANT SHALL BE ENTITLED TO AN ALLOCATION FOR THE PERIOD JANUARY 1, 1998 THROUGH MARCH 31, 1998 IF THE PARTICIPANT TERMINATES EMPLOYMENT DUE TO RETIREMENT, DEATH, OR DISABILITY (DEFINED AS BEING ELIGIBLE TO RECEIVE BENEFITS UNDER PARAGRAPH 6.1) DURING THE PERIOD JANUARY 1, 1998 THROUGH MARCH 1998 REGARDLESS OF WHETHER THE PARTICIPANT WAS IN EMPLOYMENT ON MARCH 31, 1998. 3 EX-10.(III).15 7 1994 NON-EMPLOYEE DIRECTOR'S STOCK OPTION PLAN 1 EXHIBIT 10(iii).15 AMERICAN BANKERS INSURANCE GROUP, INC. 1994 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN 1. PURPOSE OF THE PLAN. The purpose of this Non-Employee Directors' Stock Option Plan is to promote the success of American Bankers Insurance Group, Inc. (the "Company") by attracting and retaining non-employee directors. The Plan supplements the non-employee directors' cash compensation and provides a means for them to increase their holdings of common stock of the Company, thereby fostering an increased personal interest in the Company's continued success and progress, to the mutual benefit of directors, employees and Shareholders of the Company. It is intended that this Plan qualify under Rule 16b-3 ("Rule 16b-3") promulgated under Section 16 of the Securities Exchange Act of 1934, as amended ("Section 16"). 2. DEFINITIONS. As used herein, the following definitions shall apply: 2.1 The "Company" means American Bankers Insurance Group, Inc., a Florida corporation. 2.2 "Board" means the Board of Directors of the Company. 2.3 "Business Day" means a day on which the New York Stock Exchange is open for trading business. 2.4 "Committee" means the Planning and Compensation Committee of the Board, which is the designated administrator of the Plan. 2.5 "Common Stock" means the Common Stock, par value $1.00 per share of the Company. 2.6 "Code" means the Internal Revenue Code of 1986, as amended. 2.7 "Director" means a member of the Board. 2.8 "Eligible Director" means any Director who is not an employee, full time or part time, of the Company or any Subsidiary. 2.9 "Fair Market Value" when used in connection with Common Stock on a certain date means the last reported sale price as reported by the NASDAQ System on the relevant date, or if no quotation shall have been 2 made on that date, on the next preceding day on which there was a quotation. 2.10 "Grant Date" means the date of each Annual Meeting of the Board subsequent to the approval of the Plan by the Shareholders. 2.11 "Long-Term Disability" means a disability within the meaning of Section 22(e)(3) of the Code. 2.12 "Option" means a stock option granted pursuant to this Plan. 2.13 "Option Agreement" means the agreement between the Company and an Optionee respecting the grant of an Option. 2.14 "Option Stock" means stock subject to an Option granted pursuant to this Plan. 2.15 "Optionee" means a person who receives an Option. 2.16 "Plan" means the Company's 1994 Non-Employee Directors' Stock Option Plan. 2.17 "Shares" means the shares of Common Stock. 2.18 "Shareholders" means the holders of Shares. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 10 of this Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan, excluding those Shares constituting the unexercised portion of any cancelled, terminated or expired Options, is 50,000 Shares, subject to adjustment in accordance with Section 9 of this Plan. These Shares may be authorized but unissued or reacquired Shares. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for the grant of other Options under the Plan. 4. ADMINISTRATION OF THE PLAN. This Plan shall be administered by the Committee. The Committee shall have authority to adopt such rules and regulations, and to make such determinations as are not inconsistent with the 2 3 Plan and are necessary or desirable for its implementation and administration. All determinations and decisions made by the Committee pursuant to the Plan shall be final, conclusive and binding on all persons, including the Company, its Shareholders, Eligible Directors and their estates and beneficiaries. 5. GRANTS OF OPTIONS. 5.1 Nondiscretionary Annual Grants. Each Eligible Director shall receive an annual grant of an Option to purchase 1,000 Shares. 5.2 Adjustment. The number of Shares subject to an Option shall be subject to adjustment from time to time in accordance with Section 9 hereof. 6. TERM OF PLAN. Subject to approval of Shareholders as contemplated by Section 10.1, this Plan shall become effective upon its adoption by the Board, and shall continue in effect until all Options granted hereunder have expired or been exercised, unless sooner terminated under the provisions relating thereto. No Option shall be granted after 10 years from the earlier of the date of adoption of this Plan by the Board or its approval by the Shareholders as contemplated by Section 10.1. 7. TERMS OF OPTION AGREEMENT. Upon the grant of each Option, the Company and the Optionee shall enter into an Option Agreement which shall specify the Grant Date and the purchase price, and shall include or incorporate by reference the substance of the following provisions and, as the Committee may determine, such other provisions consistent with this Plan. 7.1 Term. The term of the Option shall be five years from its Grant Date unless otherwise extended by the Board, subject to earlier termination in accordance with Sections 7.6, 7.7 or 7.8 hereof. 7.2 Exercise. The Option shall be exercisable immediately upon the expiration of a six (6) month waiting period which begins on the Grant Date. During the Optionee's lifetime, an Option shall be exercisable only by the Optionee, except in the event of the Long-Term Disability of an Optionee, an Option may be exercised by the Optionee's legal representative in accordance with Section 7.8 hereof. 3 4 7.3 Purchase Price. The purchase price of a particular Share shall be equal to the Fair Market Value of a Share on the Grant Date of the corresponding Option. 7.4 Payment of Purchase Price. The purchase price of Shares acquired pursuant to an Option shall be paid at the time the Option is exercised. Payment of the purchase price shall be made in cash or Shares valued at the Fair Market Value on the date of exercise of the Option, provided such shares have been held for at least six (6) months. 7.5 Transferability. An Option shall not be transferable other than by will or the laws of descent and distribution. 7.6 Termination of Membership on the Board. If an Optionee's membership on the Board terminates for any reason other than death or Long-Term Disability, an Option held at the date of termination shall expire on termination, and may not be exercised following such time. 7.7 Termination by Death. In the case of an Optionee's death, an Option held at such time (but only to the extent exercisable on the date of death in accordance with Section 7.2) may be exercised in whole or in part at any time within 6 months after the date of death (but in no event after the term of the Option expires) and shall thereafter automatically terminate. Such Options may be exercised by the person or persons (including his estate) to whom the Optionee's rights under such Option shall have passed by will or by laws of descent and distribution. Any Options which may not be exercised as of the date of death shall expire immediately and may not be exercised. 7.8 Termination Due to Long-Term Disability. In the case of the Long-Term Disability of an Optionee causing Optionee's termination as a Director, an Option held at such time (but only to the extent exercisable on the date the Optionee ceases to become a Director in accordance with Section 7.2) may be exercised in whole or in part at any time within 6 months after the date on which the Optionee ceased to be a Director (but in no event after the term of the Option expires) and shall thereafter automatically terminate. Such Options may be exercised by the Optionee or the legal representative of the Optionee. Any Options which may not be exercised as of the date the Optionee ceases to be a Director shall expire immediately and may not be exercised. 4 5 7.9 Non-Qualified Plan. An Option under this Plan shall not be treated as an "incentive stock option" as such term is defined in Section 422(b) of the Code. 8. EXERCISE OF OPTIONS. Any Option granted hereunder shall be exercisable as specified in Section 7.2 hereof, under such conditions as the Committee shall designate under the terms of the Plan and of the Option Agreement. An Option shall be exercisable in whole or in part, at any time after becoming exercisable, but not later than the date the Option expires as specified in Section 7.1. Fractional shares may not be issued when an Option is exercised. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option Agreement by the person entitled to exercise the Option and full payment for the Shares in respect of which the Option is exercised has been received by the Company. Until the issuance of the stock certificates (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to Option Stock notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other rights for which the record date is prior to the date the stock certificates are issued except as provided in Section 10 of the Plan. 9. ADJUSTMENT UPON CHANGES IN CAPITALIZATION. The number of Shares which may be issued under the Plan, as stated in Section 3 hereof, the number of Shares issuable with respect to any subsequent grants of Options under Section 5 hereof, and the number of Shares issuable upon exercise of outstanding Options under the Plan (as well as the exercise price per share under such outstanding Options), shall, in accordance with the provisions of Section 424(a) of the Code, be adjusted by the Committee to reflect any stock dividend, stock split, share combination, or similar change in the capitalization of the Company. In the event any such change in capitalization cannot be reflected in a straight mathematical adjustment of the number of shares issuable upon the exercise of outstanding Options (and a straight mathematical adjustment to the exercise price thereof), the Committee shall make such adjustments as are appropriate to reflect most nearly such straight mathematical adjustments. In the event of a proposed dissolution, liquidation, or sale of a substantial portion of the assets of the Company, or of a merger or consolidation in which Shareholders are to receive cash, securities or other property, and provision is not made for the continuance and assumption of Options under the Plan, or the 5 6 substitution for such options of new options to acquire securities or other property to be delivered in connection with the transaction, the Committee shall terminate all outstanding Options upon at least seven days' prior notice to each Optionee and cause the Company to pay to each Optionee an amount in cash with respect to each Share to which a terminated Option pertains equal to the difference between the purchase price of each such Share and the consideration per Share to be received by the Shareholders in connection with such transaction. 10. APPROVAL, AMENDMENT AND TERMINATION OF THE PLAN. 10.1 Approval. This Plan shall be adopted by the Board, and shall be presented to the Shareholders of the Company for their approval by vote of a majority of such Shareholders present, or represented at a meeting duly held, such approval to be given within twelve (12) months before or after the date of adoption hereof. 10.2 Amendment. The Committee may amend this Plan at any time and from time to time in such respects as the Committee may deem advisable, subject to any regulatory or Shareholder approval required by law or required for transactions under this Plan to maintain exempt status under Rule 16b-3 of the Securities Exchange Act of 1934; provided that in no event shall the Plan be amended more than once every six months other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, or the rules thereunder. In addition, the Plan shall not be amended to increase materially the benefits accruing to participants under the Plan without Shareholder approval. 10.3 Termination and Suspension. At any time with the approval of the Board, the Committee may terminate or suspend this Plan without further approval of the Shareholders. Any such termination or suspension of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been terminated or suspended. No Option may be granted while the Plan is suspended or after it is terminated. 4 7 11. REQUIREMENTS OF LAW. 11.1 Requirements of Law. The granting of Options and the issuance of Shares under the Plan shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 11.2 Governing Law. To the extent not preempted by Federal law, the Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Florida. 12. GENERAL PROVISIONS. 12.1 No Right to Continue. Nothing in the Plan or any instrument executed pursuant to the Plan will confer upon any Eligible Director any right to continue to be a Director or affect the right of the Shareholders to terminate the directorship of any Eligible Director. 12.2 Expenses. All costs and expenses incurred in connection with the administration of the Plan including any excise tax imposed upon the transfer of Shares pursuant to the exercise of an Option shall be borne by the Company. 12.3 Notices. Notices and other communications required or permitted to be made under the Plan shall be in writing and shall be deemed to have been duly given if personally delivered or sent by first class mail addressed (a) if to an Eligible Director, at the Director's address set forth in the corporate records of the Company or (b) if to the Company, to its Secretary at its principal executive offices. 7 EX-21 8 SUBSIDIARIES OF THE REGISTRANT 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 Florida 100% Bankers American Reinsurance Company Turks & Caicos Islands 100% Caribbean American Life Assurance Company Puerto Rico 100% Voyager Group, Inc. Florida 100%
E-1 EX-23 9 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT 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, No. 33-82342, No. 333-28557, No. 333-72615 and No. 333-72619) of American Bankers Insurance Group, Inc. of our report dated March 23, 1999 appearing on page 52 of this Form 10-K. PRICEWATERHOUSECOOPERS LLP Miami, Florida March 23, 1999 E-2 EX-27 10 FINANCIAL DATA SCHEDULE
7 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1,254,876 775,305 796,118 130,437 6,969 0 2,530,224 12,755 0 482,995 4,368,507 336,982 1,611,886 608,501 5,976 193,753 0 99,160 43,080 918,642 4,368,507 1,431,973 149,679 19,828 328,699 508,958 0 0 401,727 134,767 266,960 0 0 0 266,960 6.12 5.68 201,466 335,408 (6,947) 232,422 105,899 191,606 6,947
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