12/31/96 FORM 10-K/A
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition
The Corporation is primarily engaged in the life insurance business which
historically has provided a positive cash flow. By statute, the Life Company
is required to invest in high quality securities which provide ample
protection for its policyholders. Policy liabilities of the Life Company are
predominately long-term in nature and are supported by long and
intermediate-term fixed maturity investments and mortgage loans on real
estate.
In May 1993 the Financial Accounting Standards Boards (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," effective for fiscal years
beginning after December 15, 1993. Under the new rules, debt securities that
the Corporation has both the positive intent and ability to hold-to-maturity
are carried at amortized cost. Debt securities that the Corporation does not
have the positive intent or ability to hold-to-maturity and all marketable
equity securities are classified as available-for-sale or trading and carried
at fair value. Unrealized holding gains and losses on securities classified
as available-for-sale are carried as a separate component of stockholders'
equity. Unrealized holding gains and losses on securities classified as
trading are reported in earnings. The Corporation adopted the provisions of
SFAS No. 115 as of January 1, 1994 and placed its entire fixed maturity and
equity securities portfolio in the available-for-sale classification. The
Corporation believes it has the ability to hold all fixed income investments
until maturity; however, securities may be sold to take advantage of
investment opportunities generated by changing interest rates, prepayments or
income tax considerations, as a part of the Corporation's asset/liability
strategy, or for similar factors. Due to increasing interest rates during
1996, a $15.1 million net unrealized loss (net of deferred income tax benefit)
on fixed maturities was charged against stockholders' equity at December 31,
1996. Declining interest rates during 1995 produced a $50.7 million net
unrealized gain (net of deferred income taxes) which was credited to
stockholders' equity at December 31, 1995.
In May 1993, the FASB issued SFAS No. 114, "Accounting for Creditors for
Impairment of a Loan". SFAS No. 114 requires that impaired loans be valued at
the present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's observable
market price, or the fair market value of the collateral if the loan is
collateral dependent. The Corporation adopted the provisions of SFAS No. 114
as of January 1, 1995. Adoption of this Standard does not have any effect on
the financial condition or results of operations of the Corporation.
Assets totaled $1.4 billion at December 31, 1996 with investment assets
totaling $1.3 billion or 90% of total assets. Growth in investment assets for
1996 was affected by reduced market value adjustments to fixed maturities as a
result of increasing interest rates during 1996 and the use of internal funds
to repurchase $9.3 million of the Corporation's common stock.
The capital resources of the Corporation are dependent upon the ability of its
subsidiaries to pay dividends to the Corporation. As disclosed in Note 7 of
Notes to the Consolidated Financial Statements, $157 million of consolidated
stockholders' equity represents net assets of the Life Company that cannot be
transferred in the form of dividends, loans or advances to the Corporation.
These restrictions on the Life Company have not affected the ability of the
Corporation to meet its financial obligations in the past, nor does management
expect them to in the future. For the year ended December 31, 1996, the Life
Company could pay the Corporation dividends in the amount of $29 million
without prior approval by state regulators.
The Life Company continually matches the investment portfolio to the cash flow
demands of the types of insurance being written and maintains adequate cash
and short-term investments to meet current cash requirements for policy loans,
mortgage loan investment commitments, and voluntary policy terminations. Cash
and invested assets exceeded total liabilities by 47% at December 31, 1996 and
1995.
To properly match assets and liabilities, the Life Company primarily invests
in intermediate term fixed maturity securities and structures certain mortgage
loans to include call provisions. Collectively, these assets accounted for
90% of the Corporation's invested assets for both 1996 and 1995. At December
31, 1996 and 1995, respectively, 92% and 93% of the Life Company's fixed
maturity securities had maturities of ten years or less. For these same
periods, more than 98% of the Life Company's fixed maturity security portfolio
was rated "1", the highest quality category by the National Association of
Insurance Commissions. These investment grade securities are deemed to be
associated with superior debt paying ability. At December 31, 1996 and 1995,
there were no principal and interest payments past due on fixed maturities.
The Life Company's average length to maturity for residential loans and
commercial and other loans is 20 years and 13 years, respectively. To provide
for its cash flow needs, the Life Company structures substantially all of its
commercial mortgage loans with a maturity or a call provision of 10 years and
all residential mortgage loans with amortization schedules in excess of 15
years with 10 year call provisions. At December 31, 1996 and 1995 over 99% of
the Corporation's mortgage loans were current as to principal and interest.
No mortgage loans were restructured during the year. The Corporation has no
debt or material long-term lease commitments. Mortgage loan commitments at
December 31, 1996 were approximately $14 million.
Cash flow from operations continues to provide the principal source of the
Corporation's liquidity. For each of the three years ended December 31, 1996,
1995 and 1994, cash provided by operating activities has exceeded $45
million. The Corporation has no plans which would significantly affect these
trends and thus believes that it can meet both its short- and long-term
capital needs.
Effective December 31, 1993 the National Association of Insurance
Commissioners adopted Risk-Based Capital (RBC) requirements for life/health
insurance companies to evaluate the adequacy of statutory capital and surplus
in relation to investment and insurance risks such as asset quality, mortality
and morbidity, asset and liability matching, and other business factors. The
RBC formula will be used by states as an early warning tool to identify
companies that potentially are inadequately capitalized for the purpose of
initiating regulatory action. The Life Company's statutory adjusted capital
substantially exceeds the authorized control level of the RBC requirement.
On December 22, 1996 the Corporation's Board of Directors approved the merger
of the Corporation with and into a wholly owned subsidiary of American General
Corporation. Subject to shareholder approval and regulatory consents, the
transaction is expected to close during April of 1997.
Results of Operations
Premiums
1996 1995 1994
Individual premiums $ 88.4 $ 86.1 $ 87.4
Group premiums 29.2 27.9 28.7
Total premiums $117.6 $114.0 $116.1
Premium revenues increased $3.6 million or 3% in 1996 over 1995. In 1995,
premium revenues decreased $2.1 million or 2% compared to 1994. Individual
premiums increased $2.3 million or 2.6% in 1996 over 1995 reflecting increased
sales in the second half of 1995 and in 1996. The decrease in 1995 individual
premiums compared to 1994 is primarily due to the fact that while 1995 sales
were up over 1994, such sales were heavily weighted toward the second half of
the year. Group premiums were up $1.3 million in 1996 compared to 1995 which
was down $0.8 million compared to 1994. The increase in 1996 is due primarily
to increased participation and growth in a large group life insurance program
in which the Life Company participates as a reinsurer. Premiums related to
the Life Company's participation in this program increased from $18.1 million
in 1995 to $23.0 million in 1996. This increase offset a decrease in group
accident and health premiums, which were down approximately $5 million for
1996 compared to 1995 and 1994. The decrease for 1996 resulted from the
Corporation not recognizing accident and health premiums from its employee
medical plan for 1996. This medical plan is a trusteed plan with an
independent claims administrator and all payments are charged directly to
operating expenses with employee contributions credited against the expense.
Non-recognition of these premiums has no effect on net income since accident
and health benefits paid were decreased by the same amount. Total accident
and health premiums, including group and individual premiums, have
historically accounted for less than 10% of premium revenues. The decrease in
group premiums for 1995 was primarily due to a decline in life premiums
recognized from participation in a large group reinsurance contract.
Other
Net investment income, excluding realized investment gains, amounted to $89.4
million for 1996 compared to $88.1 million and $84.8 million for 1995 and
1994, respectively. The improvement for both 1996 and 1995 resulted from
growth in investment assets. Net investment income for 1994 was affected by a
downward trend experienced in portfolio interest rates during 1993. Also,
during the period April, 1991 through July, 1994, the Corporation used $34
million of internally generated funds to repurchase 1.5 million shares of its
common stock. During 1996, the Corporation used $9.3 million of internally
generated funds to repurchase 0.4 million shares of its common stock.
Realized investment gains and losses for 1995 and 1994 were insignificant.
Realized investment gains of $6.9 million were recognized for 1996 and
resulted primarily from the sale of equities.
Amortization of deferred policy acquisition costs increased $4.8 million for
1996. By comparison, 1995 declined $0.9 million from 1994 results. Increased
individual policy terminations along with increased deferred costs on
increased production produced the increase for 1996. Terminations of current
year issues, prior year issues and second preceding year issues for 1996
measured on the basis of present value of future premiums in force were 21.1%,
30.4%, and 16.7% in 1996 compared to 18.2%, 27.4%, and 14.3% in 1995. While
persistency rates are influenced by many factors, management does not expect
individual policy terminations to continue at the 1996 level.
Several factors contributed to the decrease in commission and related sales
expenses in 1996 compared to 1995 and 1994. A new rate book went into effect
on January 1, 1996 which along with market factors contributed to a
significantly higher percentage (28.4% in 1996 compared to 16.1% and 14.4% for
1995 and 1994) of premiums on 1996 issues being direct bill premiums versus
agency serviced business. This resulted in an increased proportion of
incurred commissions and related sales expenses that were deferred as compared
to prior years. Costs deferred meet the test of being related directly to and
varying with the production of new business and are recoverable from
anticipated future premiums.
General expenses for 1996 increased $2.4 million or 9% when compared to 1995,
returning to the 1994 level. The $2.5 million decrease in 1995 resulted
primarily from favorable claims experience in the retired employee health
plan. Although retiree health plan expense increased to approximately its
1994 level for 1996, management expects the increased use of managed care
techniques and other factors to have a favorable impact on retiree health plan
costs in the future.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934 the Registrant has duly caused this Annual Report Amendment to be
signed on its behalf by the undersigned, thereunto duly authorized:
HOME BENEFICIAL CORPORATION
Registrant
By: H. D. Garnett
H. D. Garnett, Vice President and Controller