1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1997 Commission File Number 1-7255
AMERICAN HERITAGE LIFE INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
Florida 59-1219710
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1776 American Heritage Life Drive, Jacksonville, Florida 32224
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (904) 992-1776
Former name, former address and former fiscal year, if changed since last report
N/A
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 period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Number of registrant's shares of common stock outstanding at
July 31, 1997
13,844,950
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AMERICAN HERITAGE LIFE INVESTMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
(Amounts in thousands, except share and per share amounts)
ASSETS
Investments:
Debt securities, available-for-sale, at fair
value (cost of $824,176 in 1997 and
$512,900 in 1996) $ 830,533 521,916
Equity securities, available-for-sale, at
fair value (cost of $21,648 in 1997
and $21,465 in 1996) 39,986 34,520
Mortgage loans on real estate 65,922 53,736
Investment real estate, at cost 469 453
Policy loans 437,185 399,608
Short-term investments 4,623 1,216
---------- ---------
Total investments 1,378,718 1,011,449
---------- ---------
Cash 30,710 21,672
Agents' balances and prepaid commissions 34,417 35,730
Premiums receivable 46,069 40,989
Accrued investment income 33,820 24,958
Deferred acquisition costs 213,527 173,699
Property and equipment, at cost,
less accumulated depreciation 31,215 28,926
Reinsurance receivables 12,958 13,423
Other assets 32,189 19,271
---------- ---------
Total assets $1,813,623 1,370,117
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities:
Future policy benefits $ 277,675 203,396
Policyholders' account balances 983,368 681,098
Unearned premiums 52,062 52,279
Policy and contract claims 54,722 51,261
---------- ---------
Total policy liabilities 1,367,827 988,034
Notes payable to banks 22,234 85,459
Deferred income taxes 40,230 32,344
Other liabilities 47,815 35,337
---------- ---------
Total liabilities 1,478,106 1,141,174
---------- ---------
AHLIC-obligated mandatorily redeemable preferred
securities of subsidiaries holding solely subordinated
debentures of AHLIC 103,500 -
---------- ---------
Stockholders' equity:
Common stock of $1 par value. Authorized
35,000,000 in 1997 and 1996; issued
14,004,920 in 1997 and 13,967,253 in 1996 14,005 13,967
Additional paid-in capital 42,898 42,644
Retained earnings 173,619 163,460
Yield enhancement, contract and issuance costs
of mandatorily redeemable preferred securities (9,160) -
Net unrealized investment gains (losses) 14,446 12,158
---------- ---------
235,808 232,229
Less cost of 173,129 in 1997 and 153,728
in 1996 common shares in treasury 3,791 3,286
---------- ---------
Total stockholders' equity 232,017 228,943
---------- ---------
Total liabilities and shareholders' equity $1,813,623 1,370,117
========== =========
See accompanying notes to consolidated financial statements.
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AMERICAN HERITAGE LIFE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ --------------------------
1997 1996 1997 1996
---- ---- ---- ----
(Amounts in thousands, except share and per share amounts)
Income:
Insurance revenues $ 131,825 124,988 66,776 63,801
Net investment income 51,212 38,226 25,990 19,156
Realized investment gains, net 164 158 61 53
---------- ---------- ---------- ----------
Total income 183,201 163,372 92,827 83,010
---------- ---------- ---------- ----------
Benefits, claims and expenses:
Benefits and claims 82,856 71,346 41,239 35,417
Underwriting, acquisition and insurance expenses:
Taxes, commissions and general expenses 58,907 57,332 30,220 30,157
Amortization of deferred acquisition costs 14,454 12,931 7,516 6,528
Other operating expenses 3,778 1,934 2,195 979
---------- ---------- ---------- ----------
Total benefits, claims and expenses 159,995 143,543 81,170 73,081
---------- ---------- ---------- ----------
Earnings before income taxes 23,206 19,829 11,657 9,929
Income taxes 7,661 6,350 3,856 3,179
---------- ---------- ---------- ----------
Net earnings $ 15,545 13,479 7,801 6,750
========== ========== ========== ==========
Net earnings per share of common stock $ 1.13 .97 .56 .49
========== ========== ========== ==========
Dividends declared per share $ .39 .49 .20 .31
========== ========== ========== ==========
Average number of shares outstanding 13,814,245 13,836,211 13,818,302 13,839,065
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
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AMERICAN HERITAGE LIFE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
-------- -------
(Amounts in thousands, except share and per share amounts)
Common stock:
Balance at beginning of period $ 13,967 13,933
Other shares issued 38 34
-------- -------
Balance at end of period 14,005 13,967
-------- -------
Additional paid-in capital:
Balance at beginning of period 42,644 42,215
Excess over par value on shares issued 584 317
Net change on exercise of stock options (330) 112
-------- -------
Balance at end of period 42,898 42,644
-------- -------
Retained earnings:
Balance at beginning of period 163,460 148,454
Add net earnings 15,545 13,479
-------- -------
179,005 161,933
Deduct cash dividends declared on common stock - $.39
per share in 1997 and $.49 per share in 1996 (5,386) (6,778)
-------- -------
Balance at end of period 173,619 155,155
-------- -------
Yield enhancement, contract and issuance costs
of mandatorily redeemable preferred securities
at end of period (9,160) -
-------- -------
Net unrealized investment gains (losses):
Balance at beginning of period 12,158 16,772
Change during the period 2,288 (8,533)
-------- -------
Balance at end of period 14,446 8,239
-------- -------
Treasury stock:
Balance at beginning of period 3,287 2,045
Add treasury shares purchased (19,401 shares in 1997
and 33,451 shares in 1996) 504 760
-------- -------
Balance at end of period 3,791 2,805
-------- -------
Total stockholders' equity $232,017 217,200
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See accompanying notes to consolidated financial statements.
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AMERICAN HERITAGE LIFE INVESTMENT CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOW
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
-------- --------
(Amounts in thousands)
Operating activities:
Net earnings $15,545 13,479
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Change in agents' balances and prepaid commissions 1,313 1,080
Change in premiums receivable (4,836) (2,659)
Change in accrued investment income (3,417) (2,451)
Change in reinsurance receivables 2,412 (948)
Amortization of deferred acquisition costs 14,454 12,931
Acquisition costs deferred (20,548) (17,239)
Change in future policy benefits 2,769 (7,687)
Change in policyholders' account balances 46,372 26,149
Change in unearned premiums (532) (322)
Change in policy and contract claims 1,160 (2,165)
Change in income taxes 2,980 4,231
Provision for depreciation and amortization 1,030 1,366
Change in unearned investment income 327 (187)
Other, net (859) 2,496
------- -------
Net cash provided by operating activities 58,170 28,074
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Investing activities:
Sales of debt securities 26,833 4,652
Maturities of debt securities 31,950 17,493
Sales (purchases) of short-term investments, net 80 11,021
Sales of equity securities 2,033 658
Maturities of mortgage loans on real estate 1,683 1,671
Policy loans paid 15,577 17,108
Acquisitions, net of cash acquired (47,620) -
Purchases of debt securities (55,604) (40,306)
Purchases of equity securities - (2,648)
Origination of mortgage loans on real estate (11,525) (10,668)
Policy loans made (33,975) (24,111)
Purchases and additions of property and equipment
and investment real estate (2,688) (1,524)
Other, net (19) 125
------- -------
Net cash used by investing activities (73,275) (26,529)
------- -------
Financing activities:
Change in notes payable to banks, net (70,195) 4,080
Proceeds from securities offering, net 99,794 -
Dividends to stockholders (5,386) (6,778)
Other, net (70) 1,500
------- -------
Net cash provided (used) by financing activities 24,143 (1,198)
------- -------
Increase in cash 9,038 347
Cash, beginning of period 21,672 20,682
------- -------
Cash, end of period $30,710 21,029
======= =======
See accompanying notes to consolidated financial statements.
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AMERICAN HERITAGE LIFE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
(1) The accompanying consolidated financial statements, which are unaudited,
in the opinion of management, include all adjustments necessary to present
fairly the consolidated results of operations and financial position of
the Company for the periods indicated. However, certain information and
note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
omitted. It is suggested that these consolidated financial statements be
read in conjunction with the consolidated financial statements, schedules
and notes thereto included in the Company's Form 10-K for the year ended
December 31, 1996.
(2) The financial statements of the Company's life insurance operations,
primarily the operations of American Heritage Life Insurance Company (AHL)
and Columbia Universal Life Insurance Company (CUL), have been included in
the consolidated financial statements on the basis of generally accepted
accounting principles.
(3) On March 3, 1997, the Company closed on the acquisition of Columbia
Universal Corporation and its principal subsidiary, CUL, for $44.0 million
in cash. CUL markets individual life, annuity and supplemental health
products to selected markets. Amounts for CUL are reflected in the
Company's June 30, 1997 financial statements.
(4) On June 30, 1997, the Company closed on the acquisition of Concord
General Life Insurance Company (Concord General) for $7.5 million in cash.
Concord General primarily markets supplemental life and health insurance
products through worksite marketing. The acquisition was included in the
balance sheet at June 30, 1997, but will not be included in earnings until
the third quarter of 1997.
(5) During the second quarter of 1997, the Company completed an offering of
mandatorily redeemable preferred securities, raising $103.5 million, of
which the net proceeds were used to retire bank debt.
(6) Earnings per share of common stock were based on the weighted average
number of shares outstanding during each period, excluding treasury
shares. Options outstanding to purchase common stock had no significant
dilutive effect on earnings per share.
(7) Current accrued income taxes were included in other liabilities in the
amount of $557,533 at June 30, 1997 and $100,000 at December 31, 1996, in
the accompanying consolidated balance sheets.
(8) The Company's insurance subsidiaries, like other insurance companies, are
currently defendants in lawsuits that involve claims for punitive,
exemplary or other extracontractual damages, which are for amounts
substantially in excess of the actual damages sought. Management
considers such litigation regrettably to be of the type to which insurance
companies are usually and customarily subjected to in the ordinary course
of business and to date the settlements of such claims of this nature have
not been material to the financial position of the Company. In the
opinion of management, based on the currently ascertained facts of the
pending litigation, which the Company intends to vigorously defend, the
ultimate resolution of such litigation should not be material to the
financial position of the Company.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PERIODS ENDED JUNE 30, 1997 COMPARED TO
PERIODS ENDED JUNE 30, 1996
RESULTS OF OPERATIONS
American Heritage Life Investment Corporation (AHLIC) and subsidiaries (the
"Company") are engaged primarily in the life insurance business. The Company's
consolidated earnings are primarily attributable to its principal insurance
subsidiaries, American Heritage Life Insurance Company (AHL) and Columbia
Universal Life Insurance Company (CUL). Significant changes in the components
of the consolidated results of operations for the comparative periods are
presented below.
The Company acquired Columbia Universal for $44 million in cash. This
acquisition closed on March 3, 1997. Effective December 31, 1996, the Company
acquired a block of business from Kentucky Home Mutual Life Insurance Company
with approximately $1.8 million of premiums and premium equivalents and $3.3
million of assets. These acquisitions were reflected in the Company's
financial statements at June 30, 1997. On June 30, 1997, the Company closed on
the acquisition of Concord General Life Insurance Company (Concord General) for
a total consideration of $7.5 million. The balance sheet at June 30, 1997
reflected the consolidation of Concord General.
Insurance revenues for reporting purposes pursuant to generally accepted
accounting principles (GAAP) include only the mortality, expense, and surrender
charges for interest-sensitive products. Insurance revenues do not include
group and credit premium equivalents and cash deposits from interest-sensitive
products. Insurance revenues for the six months ended June 30, 1997 were $131.8
million, an increase of 5.5% from the $125.0 million for the same period in
1996. For the three months ended June 30, 1997, insurance revenues were $66.8
million versus $63.8 million for the same period in 1996, an increase of 4.7%.
These increases were due primarily to an increase in long-term care revenues and
the inclusion of CUL revenues of $6.9 million and $3.4 million for the six
months and three months ended June 30, 1997, respectively, with no comparable
amounts in 1996.
As a result of more of the ordinary life business being interest-sensitive, the
group business being on a self-funded or split-funded basis and the credit
business being written on a reinsurance/administrative services only basis, in
which only the fees charged are included in insurance revenues for GAAP
purposes, it is necessary to evaluate insurance revenues including premium
equivalents. Including premium equivalents of $184.3 million and $140.0 million
for the six months ended June 30, 1997 and 1996, respectively, insurance
revenues, including premium equivalents, were $316.2 million and $265.0 million,
up 19.3% in 1997. For the three months ended June 30, 1997 and 1996, insurance
revenues, including premium equivalents of $105.5 million and $79.2 million,
respectively, were $172.3 million and $143.0 million, respectively, up 20.5% in
1997. These increases in insurance revenues including premium equivalents were
due in part to an increase in long-term care revenues. Additionally, credit
insurance revenues and premium equivalents were up due to increased sales of
reinsurance, which generally provides less risk to the Company at an acceptable
profit margin and an increase in administrative services only business. Also,
CUL revenues and premium equiva-
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PERIODS ENDED JUNE 30, 1997 COMPARED TO
PERIODS ENDED JUNE 30, 1996
RESULTS OF OPERATIONS (CONTINUED)
lents were $19.4 million and $13.5 million for the six months and three months
ended June 30, 1997, respectively, with no comparable amounts in 1996.
For the six months ended June 30, 1997, net investment income was $51.2 million,
an increase of 34.0% over the $38.2 million reported for the same period in
1996. Net investment income for the three months ended June 30, 1997 was $26.0
million compared to $19.2 million for the three months ended June 30, 1996, or
an increase of 35.7%. These increases in net investment income for the six
months and three months ended June 30, 1997 compared to the same periods in 1996
were due primarily to an increase in invested assets, and $12.5 million and $6.4
million of investment income for CUL for the six months and three months ended
June 30, 1997, respectively, with no comparable amounts in 1996. These
increases were partially offset by a decrease in Management Security Plan (MSP)
policy loan interest due to a decrease in the average rate charged (7.92% in
1997 versus 9.30% in 1996) on increased policy loan balances (see page 9 for
discussion regarding MSP loans.) The effective yield on invested assets for the
six months ended June 30, 1997 was 7.57% compared to 7.81% for the same period
in 1996. Excluding MSP policy loans, the effective yield was 7.43% for the six
months ended June 30, 1997 and 6.98% for the same period in 1996.
Benefits and claims were $82.9 million for the six months ended June 30, 1997,
up 16.1% from the $71.3 million for the same period in 1996. For the three
months ended June 30, 1997, benefits and claims totaled $41.2 million compared
to $35.4 million for the same period in 1996, or an increase of 16.4%. These
increases for the six months and three months ended June 30, 1997 versus 1996
were due primarily to increased ordinary benefits, including increased dread
disease claims and an increase in reserves for long-term care business due to
its growth. Also, 1997 included benefits and claims for CUL of $12.8 million
and $6.1 million for the six months and three months ended June 30, with no
comparable amounts for 1996.
Taxes, commissions, and general expenses aggregated $58.9 million for the first
six months of 1997 versus $57.3 million for the first six months of 1996, or an
increase of 2.7%. For the three months ended June 30, 1997 and 1996, taxes,
commissions, and general expenses were $30.2 million for each period. The
increase for the six months was primarily due to CUL taxes, commissions, and
general expenses of $3.7 million for 1997 with no comparable amount for 1996,
partially offset by a decrease in credit business commissions and taxes as a
result of increased reinsured business.
Pursuant to GAAP, the initial costs directly associated with selling,
underwriting, and processing ordinary insurance are deferred and amortized over
the premium-paying period of the related policies for traditional products.
For interest-sensitive products, these costs 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. These costs
increase as the amount of sales and insurance in force increase. The charge to
earnings for acquisition costs of ordinary insurance is comprised of two
components: (1) the amortization of costs for policies which remain in force,
and (2) the write-off of unamortized costs related to policies which are
terminated. For the six months ended June 30, 1997, the amortization
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PERIODS ENDED JUNE 30, 1997 COMPARED TO
PERIODS ENDED JUNE 30, 1996
RESULTS OF OPERATIONS (CONTINUED)
of deferred acquisition costs was $14.5 million compared to $12.9 million for
the comparable period in 1996, or an increase of 11.8%. For the three months
ended June 30, 1997, the amortization of deferred acquisition costs were $7.5
million compared to $6.5 million for the comparable period in 1996, or an
increase of 15.1%. These increases in amortization expense were primarily due
to increased amortization from the growth of business in force and CUL
amortization of $1.8 million and $.9 million, respectively, for the six months
and three months ended June 30, 1997 with no comparable amounts for 1996.
For the six months ended June 30, 1997, other operating expenses were $3.8
million compared to $1.9 million for the same period in 1996, or an increase of
95.3%. For the three months ended June 30, 1997, other operating expenses were
$2.2 million compared to $1.0 million for the same period of 1996, or an
increase of 124.2%. These increases were due primarily to an increase in
interest expense as a result of an increase in the amount of average
outstanding bank debt including increased debt related to the acquisition of
CUL.
Income taxes increased 20.6% for the six months ended June 30, 1997 from the
same period in 1996, primarily as a result of an increase in net earnings and a
higher effective tax rate. For the six months ended June 30, 1997 and 1996,
the effective tax rate was 33.0% and 32.0%, respectively. The increase in the
effective tax rate was primarily due to CUL's earnings being taxed at a rate of
35% in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company is engaged primarily in the life insurance business. The principal
subsidiaries, AHL and CUL, generate major sources of cash flow from premiums
collected for traditional insurance products, deposits, and policy charges for
interest-sensitive products and investment income attributable to the life
insurance operations and associated investment portfolio. This results in a
significant portion of the Company's assets being liquid. Such assets are made
up of cash, short-term investments, and readily marketable securities.
As an insurer, the Company is required to maintain substantial liabilities for
future policy benefits and policyholders' account balances. Since premiums and
deposits received in anticipation of such benefits are investable funds, it is
expected that the Company will continue to increase its investment portfolio
using cash flow from operations.
The increase in net cash provided by operating activities for the six months
ended June 30, 1997, compared to the same period in 1996, was due primarily to
1996 including the funding of surrenders of certain ordinary life policies and
funding the return of certain group claim reserves with no such comparable
fundings for 1997.
The increase in net cash used by investing activities for the six months ended
June 30, 1997 versus the same period in 1996 was due primarily to the
acquisition of CUL and Concord General.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PERIODS ENDED JUNE 30, 1997 COMPARED TO
PERIODS ENDED JUNE 30, 1996
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The increase in net cash provided by financing activities for the six months
ended June 30, 1997, compared to the same period in 1996, was due primarily to
the proceeds from the "FELINE PRIDES" securities offering, which was partially
offset with the pay off of $70.2 million of debt.
The Company's policy loans are a higher percentage of invested and total assets
than industry norm as a result of a significant block of Management Security
Plan (MSP) business. The MSP product is an interest-sensitive, deferred
compensation/executive benefit-type product with the policy loan feature being
an integral part of the product. A market rate of interest is charged on the
policy loans, and a predetermined built-in spread is achieved between the
interest rate charged on the policy loans and the interest rate credited on the
loaned funds. Accordingly, all MSP policy loans are completely collateralized
by the underlying policyholders'
account balances. All policy loans are funded out of cash provided by
operating activities and do not represent a significant restriction on the
Company's liquidity.
At June 30, 1997, the fair value of the Company's debt and equity security
portfolio aggregated $870.5 million compared with an amortized cost of $845.8
million, or an unrealized gain of $24.7 million. At December 31, 1996, the
fair value of the portfolio aggregated $556.4 million compared with an
amortized cost of $534.4 million, or an unrealized gain of $22.0 million. This
change in the unrealized gain was primarily due to changes in market
conditions.
The Company's amortized cost of high-yield bonds (rated below BBB by Standard &
Poor's Corporation and excluding non-rated and private placements) at June 30,
1997 aggregated $29.0 million with a market value of $29.1 million. At market
value, these investments represented 1.6% of total assets, or 2.1% of total
invested assets. Such holdings were not material to invested assets nor is it
expected that any subsequent gains or losses on these securities would be
material to the operations of the Company.
AHLIC is a holding company, and its liquidity is largely dependent on the
ability of its subsidiaries, primarily AHL, to pay dividends and on external
financings. As a result, AHLIC borrows on an interim basis through lines of
credit with its major banks to cover any short-term cash requirements which may
occur. The decrease in bank debt at June 30,1997, compared to the amount at
December 31, 1996, reflected the paydown of bank debt with the proceeds of the
securities offering. At June 30, 1997, the debt to total capital (excluding
unrealized investment gains) ratio was 6.48%.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company's insurance subsidiaries, like other insurance companies,
are currently defendants in lawsuits that involve claims for punitive,
exemplary, or other extracontractual damages, which are for amounts
substantially in excess of the actual damages sought. Management
considers such litigation, regrettably, to be of the type to which
insurance companies are usually and customarily subjected to in the
ordinary course of business and, to date, the settlement of such claims
of this nature have not been material to the financial position of the
Company. In the opinion of management, based on the currently
ascertained facts of the pending litigation which the Company intends to
vigorously defend, the ultimate resolution of such litigation should not
be material to the financial position of the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Financial Data Schedule (for SEC purposes only)
(b) None
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PART II - OTHER INFORMATION
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
AMERICAN HERITAGE LIFE INVESTMENT CORPORATION
(REGISTRANT)
Date 08/8/97 /s/ Chris A. Verlander
-------------------- ----------------------------------------------
Chris A. Verlander, President and Chief
Operating Officer (Authorized Officer)
Date 08/8/97 /s/ C. Richard Morehead
-------------------- ----------------------------------------------
C. Richard Morehead, Executive Vice President
and Chief Financial Officer (Principal
Financial and Accounting Officer)
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