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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 March 31, 1998 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
April 30, 1998
27,853,418
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AMERICAN HERITAGE LIFE INVESTMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
(Amounts in thousands, except share and per share amounts)
ASSETS
Investments:
Debt securities, available-for-sale, at fair
value (cost of $913,613 in 1998 and
$889,811 in 1997) $ 945,635 923,287
Equity securities, available-for-sale, at
fair value (cost of $19,988 in 1998
and $20,329 in 1997) 39,749 36,817
Mortgage loans on real estate 78,588 70,697
Investment real estate, at cost 479 482
Policy loans 410,457 407,482
Short-term investments 7,434 32,635
----------- -----------
Total investments 1,482,342 1,471,400
----------- -----------
Cash 24,516 23,261
Agents' balances and prepaid commissions 32,167 35,268
Premiums receivable 45,332 43,196
Accrued investment income 35,766 30,519
Deferred acquisition costs and cost of business acquired 227,185 223,651
Property and equipment, at cost,
less accumulated depreciation 32,442 31,898
Reinsurance receivables 11,494 11,004
Other assets 46,068 45,062
----------- -----------
Total assets $ 1,937,312 1,915,259
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities:
Future policy benefits $ 293,458 289,765
Policyholders' account balances 1,023,101 1,013,602
Unearned premiums 45,366 52,666
Policy and contract claims 59,896 58,484
----------- -----------
Total policy liabilities 1,421,821 1,414,517
Notes payable to banks 44,412 39,192
Deferred income taxes 48,162 46,820
Other liabilities 59,397 59,007
----------- -----------
Total liabilities 1,573,792 1,559,536
----------- -----------
AHLIC-obligated mandatorily redeemable preferred securities
of subsidiaries holding solely subordinated debentures
of AHLIC 103,500 103,500
----------- -----------
Stockholders' equity:
Common stock of $1 par value. Authorized
35,000,000 in 1998 and 1997; issued
28,116,077 in 1998 and 14,020,861 in 1997 28,116 14,021
Additional paid-in capital 42,554 42,528
Retained earnings 175,561 183,852
Yield enhancement, contract and issuance costs of
mandatorily redeemable preferred securities (9,561) (9,561)
Net unrealized investment gains 27,389 25,612
----------- -----------
264,059 256,452
Less cost of 271,907 in 1998 and 142,589
in 1997 common shares in treasury 4,039 4,229
----------- -----------
Total stockholders' equity 260,020 252,223
----------- -----------
Total liabilities and shareholders' equity $ 1,937,312 1,915,259
=========== ===========
See accompanying notes to consolidated financial statements.
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AMERICAN HERITAGE LIFE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------------
1998 1997
----------- -----------
(Amounts in thousands, except share and per share amounts)
Income:
Insurance revenues $ 71,530 65,048
Net investment income 27,144 25,223
Other income 620 --
Realized investment gains, net 112 103
----------- -----------
Total income 99,406 90,374
----------- -----------
Benefits, claims and expenses:
Benefits and claims 44,057 41,618
Underwriting, acquisition and insurance expenses:
Taxes, commissions and general expenses 30,184 28,687
Amortization of deferred acquisition costs
and cost of business acquired 9,058 6,937
Other operating expenses 3,146 1,582
----------- -----------
Total benefits, claims and expenses 86,445 78,824
----------- -----------
Earnings before income taxes 12,961 11,550
Income taxes 4,287 3,805
----------- -----------
Net earnings $ 8,674 7,745
=========== ===========
Net earnings per share of common stock - basic .32 .28
=========== ===========
- diluted .31 .28
=========== ===========
Dividends declared per share .105 .095
=========== ===========
Average number of shares outstanding - basic 27,517,831 27,530,685
=========== ===========
- diluted 28,045,473 27,761,038
=========== ===========
See accompanying notes to consolidated financial statements.
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AMERICAN HERITAGE LIFE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1998 1997
--------- ---------
(Amounts in thousands, except share and per share amounts)
Common stock:
Balance at beginning of period $ 14,021 13,967
Par value of shares issued pursuant to stock split 14,056 --
Other shares issued (surrendered), net 39 23
--------- ---------
Balance at end of period 28,116 13,990
--------- ---------
Additional paid-in capital:
Balance at beginning of period 42,528 42,644
Excess over par value on shares issued 629 584
Addition (deduction) related to exercise of stock options (603) --
--------- ---------
Balance at end of period 42,554 43,228
--------- ---------
Retained earnings:
Balance at beginning of period 183,852 163,460
Add net earnings 8,674 7,745
--------- ---------
192,526 171,205
Par value of shares issued pursuant to stock split (14,056) --
Deduct cash dividends declared on common
stock - $.105 per share in 1998 and
$.095 per share in 1997 (2,909) (2,623)
--------- ---------
Balance at end of period 175,561 168,582
--------- ---------
Yield enhancement, contract and issuance costs of
mandatorily redeemable preferred securities
at beginning and end of period (9,561) --
--------- ---------
Accumulated other comprehensive income:
Net unrealized investment gains (losses):
Balance at beginning of period 25,613 12,158
Change during the period 1,776 (8,441)
--------- ---------
Balance at end of period 27,389 3,717
--------- ---------
Treasury stock:
Balance at beginning of period 4,229 3,287
Add treasury shares purchased
(2,001 shares in 1998
and 19,400 shares in 1997) 36 504
Less treasury shares surrendered
(15,270 shares in 1998) (226) --
--------- ---------
Balance at end of period 4,039 3,791
--------- ---------
Total stockholders' equity $ 260,020 225,726
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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
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1998 1997
-------- --------
(Amounts in thousands)
Operating activities:
Net earnings $ 8,674 7,745
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Change in agents' balances and prepaid commissions 3,101 1,369
Change in premiums receivable (2,136) (331)
Change in accrued investment income (5,247) (4,918)
Change in reinsurance receivables (490) 1,733
Amortization of deferred acquisition costs and
cost of business acquired 9,058 6,937
Acquisition costs deferred (11,981) (10,269)
Change in future policy benefits 3,693 (1,685)
Change in policyholders' account balances 9,499 21,075
Change in unearned premiums (7,300) (921)
Change in policy and contract claims 1,412 1,232
Change in income taxes 3,044 4,414
Provision for depreciation and amortization 626 710
Change in unearned investment income (111) (90)
Other, net (1,715) (2,112)
-------- --------
Net cash provided by operating activities 10,127 24,889
-------- --------
Investing activities:
Sales of debt securities 351 25,180
Maturities of debt securities 19,905 10,975
Sales (purchases) of short-term investments, net 25,200 1,545
Sales of equity securities 195 1,533
Maturities of mortgage loans on real estate 684 1,005
Policy loans paid 7,050 2,408
Acquisitions, net of cash acquired -- (45,266)
Purchases of debt securities (44,039) (33,144)
Origination of mortgage loans on real estate (8,570) (5,595)
Policy loans made (10,026) (7,544)
Purchases and additions of property and equipment
and investment real estate (1,020) (777)
Other, net (1,424) (36)
-------- --------
Net cash used by investing activities (11,694) (49,716)
-------- --------
Financing activities:
Change in notes payable to banks, net 5,220 23,590
Dividends to stockholders (2,909) (2,623)
Other, net 511 104
-------- --------
Net cash provided by financing activities 2,822 21,071
-------- --------
Increase (decrease) in cash 1,255 (3,756)
Cash, beginning of period 23,261 21,672
-------- --------
Cash, end of period $ 24,516 17,916
======== ========
See accompanying notes to consolidated financial statements.
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AMERICAN HERITAGE LIFE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
(1) In the opinion of management, the accompanying consolidated financial
statements, which are unaudited 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, 1997.
(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) During the second quarter of 1997, the Company completed an offering of
mandatorily redeemable preferred securities, raising $103.5 million, the
net proceeds of which were used to retire bank debt.
(4) Earnings per share of common stock were based on the weighted average
number of shares outstanding during each period, excluding treasury
shares.
(5) Current accrued income taxes were included in other liabilities in the
amount of $3,039,000 at March 31, 1998 and $683,000 at December 31, 1997,
in the accompanying consolidated balance sheets.
(6) 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 MARCH 31, 1998 COMPARED TO
PERIOS ENDED MARCH 1997
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.
Pursuant to generally accepted accounting principles (GAAP), insurance revenues
for reporting purposes 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 three months ended March 31, 1998 were
$71.5 million, an increase of 10.0% from the $65.0 million for the same period
in 1997. This increase was due primarily to an increase in interest-sensitive
policy charges, cancer and accident and health insurance revenues.
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 important to evaluate insurance revenues including premium
equivalents. Including premium equivalents of $72.8 million and $78.8 million
for the three months ended March 31, 1998 and 1997, respectively, insurance
revenues, including premium equivalents, were $144.3 million and $143.9 million,
up .3% in 1997. Ordinary insurance revenues including premium equivalents were
up due in part to an increase in long-term care revenues. Additionally, credit
insurance revenues and premium equivalents were down due primarily to a decrease
in administrative services only business.
For the three months ended March 31, 1998, net investment income was $27.1
million, an increase of 7.6% over the $25.2 million reported for the same period
in 1997. This increase in net investment income for the three months ended March
31, 1998 compared to the same periods in 1997 was due primarily to an increase
in invested assets. 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 (7.56% in 1998 versus 7.94% in 1997) on decreased policy
loan balances (see page 8 for discussion regarding MSP loans.) The effective
yield on invested assets for the three months ended March 31, 1998 was 7.34%
compared to 7.50% for the same period in 1997. Excluding MSP policy loans, the
effective yield was 7.27% for the three months ended March 31, 1998 and 6.92%
for the same period of 1997.
Benefits and claims were $44.1 million for the three months ended March 31,
1998, up 5.9% from the $41.6 million for the same period in 1997. The increase
for the three months ended March 31, 1998 versus 1997 was due primarily to
increased ordinary benefits, including increased death claims, dread disease and
individual accident and health claims.
Taxes, commissions, and general expenses aggregated $30.2 million for the first
three months of 1998 versus $28.7 million for the first three months of 1997, or
an increase of 5.2%. The increase for the three months was primarily due to
recent acquisitions having higher expense levels and additional expenses
associated with new production and technology.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PERIODS ENDED MARCH 31, 1998 COMPARED TO
PERIODS ENDED MARCH 31, 1997
RESULTS OF OPERATIONS (CONTINUED)
Pursuant to GAAP, the initial costs directly associated with selling,
underwriting, and processing traditional ordinary insurance products are
deferred and amortized over the premium-paying period of the related policies.
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 three months ended March 31, 1998, the amortization of
deferred acquisition costs was $9.1 million compared to $6.9 million for the
comparable period in 1997, or an increase of 30.6%. The increase in amortization
expense was primarily due to increased amortization from the growth of business
in force and the cost of business acquired.
For the three months ended March 31, 1998, other operating expenses were $3.1
million compared to $1.6 million for the same period in 1997, an increase of
98.8%. This increase was due primarily to an increase in interest expense as a
result of an increase in the amount of average outstanding bank debt and the
interest on the mandatorily redeemable preferred securities issued at the end of
the second quarter of 1997.
Income taxes increased 12.7% for the three months ended March 31, 1998 from the
same period in 1997, primarily as a result of an increase in net earnings and a
higher effective tax rate. For the three months ended March 31, 1998 and 1997,
the effective tax rate was 33.1% and 32.9%, respectively.
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 decrease in net cash provided by operating activities for the three months
ended March 31, 1998, compared to the same period in 1997, was due primarily to
a decrease in policyholder account balances as a result of certain surrenders in
the first quarter of 1998.
The decrease in net cash used by investing activities for the three months ended
March 31, 1998 versus the same period in 1997 was due primarily to the
acquisition of CUL in 1997.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PERIODS ENDED MARCH 31, 1998 COMPARED TO
PERIODS ENDED MARCH 31, 1997
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The decrease in net cash provided by financing activities for the three months
ended March 31, 1998, compared to the same period in 1997, was due primarily to
the increase in borrowing in 1997 to fund the acquisition of CUL.
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 March 31, 1998, the fair value of the Company's debt and equity security
portfolio aggregated $985.4 million compared with an amortized cost of $933.6
million, or an unrealized gain of $51.8 million. At December 31, 1997, the fair
value of the portfolio aggregated $960.1 million compared with an amortized cost
of $910.1 million, or an unrealized gain of $50.0 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 March 31,
1998 aggregated $48.3 million with a market value of $49.7 million. At market
value, these investments represented 2.6% of total assets, or 3.4% 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 increase in bank debt at March 31, 1998, compared to the amount at
December 31, 1997, reflected additional borrowings to fund shareholder dividends
and interest expense. At March 31, 1998, the debt to total capital (excluding
unrealized investment gains) ratio was 11.7%.
The year 2000 Issue is the result of computer programs written using two digits
rather than four to define the applicable year. Any of the Company's computer
programs or equipment that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations causing disruptions of operations, including
a temporary inability to process transactions or engage in normal business
activities.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PERIODS ENDED MARCH 31, 1998 COMPARED TO
PERIODS ENDED MARCH 31, 1997
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company has completed an assessment and has in place a Year 2000 compliance
plan which includes updates and revisions to existing software, and the
installation of replacement software. The Company's Year 2000 plan is to ensure
that there are no data-related failures associated with computer hardware,
computer software, business equipment, control systems or its relationships with
business partners. The Company has implemented a corporate project team and is
using internal and external resources for testing and acceptance of software and
hardware. The Company has been aggressively addressing Year 2000 compliance
since 1996 and is on schedule to have the conversion completed according to
plan.
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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)
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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 5/14/98 /s/ C. Richard Morehead
-------------------- --------------------------------------------------
C. Richard Morehead, President and Chief
Operating Officer (Authorized Officer)
Date 5/14/98 /s/ John K. Anderson, Jr.
-------------------- --------------------------------------------------
John K. Anderson, Jr., Executive Vice President and
Chief Financial Officer (Principal Financial and
Accounting Officer)
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