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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, 1999 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, 1999
27,904,617
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AMERICAN HERITAGE LIFE INVESTMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
(Amounts in thousands, except share and per share amounts)
ASSETS
Investments:
Debt securities, available-for-sale, at fair value
(cost of $950,271 in 1999 and $945,675 in 1998) $ 969,584 984,333
Equity securities, available-for-sale, at fair value
(cost of $20,621 in 1999 and $21,473 in 1998) 33,568 35,795
Mortgage loans on real estate 88,159 88,922
Investment real estate, at cost 570 532
Policy loans 456,783 481,970
Short-term investments 6,743 6,420
----------- -----------
Total investments 1,555,407 1,597,972
----------- -----------
Cash 21,902 10,351
Agents' balances and prepaid commissions 33,303 33,337
Premiums receivable 43,246 44,091
Accrued investment income 38,175 33,889
Deferred acquisition costs and cost of business acquired 249,245 240,554
Property and equipment, at cost, less accumulated depreciation 38,302 36,345
Reinsurance receivables 9,179 11,210
Other assets 51,591 47,938
----------- -----------
Total assets $ 2,040,350 2,055,687
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities:
Future policy benefits $ 320,147 315,866
Policyholders' account balances 1,088,024 1,097,066
Unearned premiums 43,184 45,054
Policy and contract claims 63,613 65,057
----------- -----------
Total policy benefits 1,514,968 1,523,043
Notes payable to banks 53,621 63,571
Deferred income taxes 42,754 47,855
Other liabilities 49,049 39,660
----------- -----------
Total liabilities 1,660,392 1,674,129
----------- -----------
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 75,000,000
shares; Issued 28,178,287 in 1999 and 28,138,886 in 1998 28,178 28,139
Additional paid-in-capital 43,082 42,161
Retained earnings 202,004 194,854
Yield enhancement, contract and issuance costs of
mandatorily redeemable preferred securities (9,561) (9,561)
Net unrealized investment gains 16,795 26,514
----------- -----------
280,498 282,107
Less cost of 272,080 in 1999 and 272,715 in 1998 common
shares in treasury 4,040 4,049
----------- -----------
Total stockholders' equity 276,458 278,058
----------- -----------
Total liabilities and stockholders' equity $ 2,040,350 2,055,687
=========== ===========
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,
--------------------------------
1999 1998
---- ----
(Amounts in thousands, except share and per share amounts)
Income:
Insurance revenues $ 76,650 71,530
Net investment income 28,322 27,144
Other income 577 620
Realized investment gains, net 153 112
----------- -----------
Total income 105,702 99,406
----------- -----------
Benefits, claims and expenses:
Benefits and claims 48,422 44,057
Underwriting, acquisition and insurance expenses:
Taxes, commissions and general expenses 29,416 30,184
Amortization of deferred acquisition costs and
cost of business acquired 9,527 9,058
Other operating expenses 3,153 3,146
----------- -----------
Total benefits, claims and expenses 90,518 86,445
----------- -----------
Earnings before income taxes 15,184 12,961
Income tax expense 5,080 4,287
----------- -----------
Net earnings $ 10,104 8,674
=========== ===========
Net earnings per share of common stock - basic $ 0.37 0.32
=========== ===========
- diluted $ 0.35 0.31
=========== ===========
Dividends declared per share $ 0.105 0.105
=========== ===========
Average number of shares outstanding - basic 27,597,701 27,517,831
=========== ===========
- diluted 28,894,424 28,045,473
=========== ===========
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, 1999 and 1998
(Unaudited)
1999 1998
---- ----
(Amounts in thousands, except share and per share amounts)
Common stock:
Balance at beginning of period $ 28,139 14,021
Par value of shares issued pursuant to stock split - 14,056
Other shares issued, net 39 39
--------- ---------
Balance at end of period 28,178 28,116
--------- ---------
Additional paid-in-capital:
Balance at beginning of period 42,161 42,528
Excess over par value on shares issued 921 629
Additions(deductions) related to exercise of stock options - (603)
--------- ---------
Balance at end of period 43,082 42,554
--------- ---------
Retained earnings:
Balance at beginning of period 194,854 183,852
Add: net earnings 10,104 8,674
--------- ---------
204,958 192,526
Par value of shares issued pursuant to stock split - (14,056)
Deduct: cash dividends declared on common stock -
$.105 per share in 1999 and 1998 (2,954) (2,909)
--------- ---------
Balance at end of period 202,004 175,561
--------- ---------
Yield enhancement, contract and issuance costs of
mandatorily redeemable preferred securities at the
beginning and end of the period (9,561) (9,561)
--------- ---------
Accumulated other comprehensive income: Net unrealized investment gains
(losses):
Balance at beginning of period 26,514 25,612
Change during the period (9,719) 1,777
--------- ---------
Balance at end of period 16,795 27,389
--------- ---------
Treasury stock:
Balance at beginning of period 4,049 4,229
Add: treasury shares purchased (2,001 in 1998) - 36
Less: treasury shares issued/surrendered (15,668 shares
in 1999 and 15,270 shares in 1998) (9) (226)
--------- ---------
Balance at end of period 4,040 4,039
--------- ---------
Total stockholders' equity $ 276,458 260,020
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See accompanying notes to consolidated financial statements.
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AMERICAN HERITAGE LIFE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1999 1998
---- ----
(Amounts in thousands)
Operating activities:
Net earnings $ 10,104 8,674
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Change in agents' balance and prepaid commissions 34 3,101
Change in premiums receivable 844 (2,136)
Change in accrued investment income (4,286) (5,247)
Change in reinsurance receivables 2,031 (490)
Amortization of deferred acquisition costs and cost
of business acquired 9,527 9,058
Acquisition costs deferred (13,329) (11,981)
Change in future policy benefits 4,281 3,693
Change in policyholders' account balances (9,042) 9,499
Change in unearned premiums (1,870) (7,300)
Change in policy and contract claims (1,443) 1,412
Change in income taxes 4,202 3,044
Provision for depreciation and amortization 1,159 626
Change in unearned investment income (94) (111)
Other, net (8,622) (1,715)
-------- --------
Net cash provided (used) by operating activities (6,504) 10,127
-------- --------
Investing activities:
Sales of debt securities 8,356 351
Maturities of debt securities 31,061 19,905
Sales (purchases) of short-term investments, net (324) 25,200
Sales of equity securities 545 195
Maturities of mortgage loans on real estate 1,648 684
Policy loans paid 35,497 7,050
Purchases of debt securities (43,801) (44,039)
Origination of mortgage loans on real estate (882) (8,570)
Policy loans made (10,309) (10,026)
Purchases and additions of property and equipment and -- --
investment real estate (2,890) (1,020)
Other, net 11,027 (1,424)
-------- --------
Net cash provided (used) by investing activities 29,928 (11,694)
-------- --------
Financing activities:
Change in notes payable to banks, net (9,950) 5,220
Dividends to stockholders (2,955) (2,909)
Other, net 1,032 511
-------- --------
Net cash provided (used) by financing activities (11,873) 2,822
-------- --------
Increase (decrease) in cash 11,551 1,255
Cash, beginning of period 10,351 23,261
-------- --------
Cash, end of period $ 21,902 24,516
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AMERICAN HERITAGE LIFE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(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, 1998.
(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) Earnings per share of common stock were based on the weighted average
number of shares outstanding during each period, excluding treasury
shares.
(4) Current accrued income taxes were included in other liabilities in the
amount of $3,593,000 at March 31, 1999 and $400,000 at December 31,
1998, in the accompanying consolidated balance sheets.
(5) Segment information for the three months ended March 31, 1999
(amounts in thousands):
Total income Pre-tax Operating Earnings
------------ --------------------------
Ordinary $ 76,861 $ 13,053
Group 12,686 1,999
Credit 16,021 1,723
Other 424 (2,375)
Realized investment gains 153 -
Intercompany eliminations (443) 630
---------- --------
Total income $ 105,702 $ 15,030
---------- --------
Industry segment assets at March 31, 1999 and 1998 were consistent with
the amounts reported in the Industry Segment Information disclosure made
in the 1998 Annual Report to Shareholders.
(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
PERIOD ENDED MARCH 31, 1999 COMPARED TO
PERIODS ENDED MARCH 31, 1998
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.
Insurance revenues 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 three months ended March 31, 1999 were $76.7 million,
an increase of 7.2% from the $71.5 million for the same period in 1998. This
increase was due primarily to an increase in interest-sensitive policy charges,
cancer, individual accident and health and group insurance revenues, partially
offset by a decrease in credit insurance revenues.
Because increasing amounts of the ordinary life business are interest-sensitive,
the group business being sold predominately on a self-funded or split-funded
basis and the credit business being written on a reinsured or an 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 $88.8 million
and $72.8 million for the three months ended March 31, 1999 and 1998,
respectively, insurance revenues, including premium equivalents, were $165.5
million and $144.3 million, respectively, up 14.7% in 1999. Ordinary insurance
revenues including premium equivalents were up due in part to an increase in
individual accident and health, cancer, group revenues and annuity revenues and
premium equivalents. The increase was partially offset by a decrease in credit
insurance revenues and premium equivalents which were down due primarily to a
decrease in credit reinsurance and administrative services only business.
For the three months ended March 31, 1999, net investment income was $28.3
million, an increase of 4.3% over the $27.1 million reported for the same period
in 1998. This increase in net investment income for the three months ended March
31, 1999 compared to the same period in 1998 was due primarily to an increase in
invested assets. The increases were partially offset by a decrease in Management
Security Plan (MSP) policy loan interest due to a decrease in the average rate
charged (6.89% in 1999 versus 7.56% in 1998) 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, 1999
was 7.23% compared to 7.34% for the same period in 1998. Excluding MSP policy
loans, the effective yield was 7.34% for the three months ended March 31, 1999
and 7.27% for the same period in 1998.
Benefits and claims were $48.4 million for the three months ended March 31,
1999, up 9.9% from the $44.1 million for the same period in 1998. The increase
for the three months ended March 31, 1999 versus 1998 was due primarily to
growth in insurance business and slightly increased morbidity expenses.
Taxes, commissions, and general expenses aggregated $29.4 million for the first
three months of 1999 versus $30.2 million for the first three months of 1998, or
a decrease of 2.6%. The decrease was a result of a decrease in credit earned
commissions due to decreased insurance revenues, partially offset by increases
in general insurance expenses, due primarily to increases in expenses associated
with new production, regional expansion and technology.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PERIOD ENDED MARCH 31, 1999 COMPARED TO
PERIODS ENDED MARCH 31, 1998
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: (1) the
amortization of costs for policies which remain in force; (2) the write-off of
unamortized costs related to policies which are terminated; and (3) the
amortization of the cost of business acquired. For the three months ended March
31, 1999, the amortization of deferred acquisition costs was $9.5 million
compared to $9.1 million for the comparable period in 1998, or an increase of
5.2%. This increase in amortization expense was primarily due to increased
amortization from the growth of business in force.
For the three months ended March 31, 1999, other operating expenses were $3.2
million compared to $3.1 million for the same period in 1998, an increase of
.3%, primarily due to an increase in interest expense.
Income taxes increased 18.5% for the three months ended March 31, 1999 from the
same period in 1998, primarily as a result of an increase in net earnings and a
higher effective tax rate. For the three months ended March 31, 1999 and 1998,
the effective tax rate was 33.5% and 33.1%, 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 its 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, 1999, compared to the same period in 1998, was due primarily to
a decrease in policyholder account balances as a result of funding surrenders of
certain ordinary life policies in 1999.
The increase in net cash provided by investing activities for the three months
ended March 31, 1999 versus the same period in 1998 was due primarily to an
increase in policy loans paid as a result of surrenders of certain ordinary life
policies during the first quarter of 1999.
The increase in net cash used by financing activities for the three months ended
March 31, 1999, compared to the same period in 1998, was due to the net payoff
of $10.0 million of debt in the first quarter of 1999 versus a net increase in
debt of $5.2 million in the first quarter of 1998.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PERIOD ENDED MARCH 31, 1999 COMPARED TO
PERIOD ENDED MARCH 31, 1998
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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. Policy loans are generally
funded out of cash provided by operating activities and do not represent a
significant restriction on the Company's liquidity.
At March 31, 1999, the fair value of the Company's debt and equity security
portfolio aggregated $1,003.2 million compared with an amortized cost of $970.9
million, or an unrealized gain of $32.3 million. At December 31, 1998, the fair
value of the portfolio aggregated $1,020.1 million compared with an amortized
cost of $967.1 million, or an unrealized gain of $53.0 million. This change in
the unrealized gain was primarily due to changes in market conditions. With
respect to the Company's exposure to market risks, see management's comments in
the 1998 Form 10-K.
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,
1999 aggregated $51.6 million with a market value of $49.8 million. At market
value, these investments represented 2.4% of total assets, or 3.2% 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 March 31, 1999, compared to the amount at
December 31, 1998, reflected the payoff of debt in January, 1999. At March 31,
1999, the debt to total capital (excluding unrealized investment gains) ratio
was 12.9%.
Year 2000:
The Company has in place a Year 2000 compliance plan which includes updates and
revisions to existing software, as well as the installation of new or
replacement software. The Company's Year 2000 compliance plan began with a
detailed assessment of systems starting in the fall of 1996. It followed with a
disciplined plan of remediation, replacement and upgrading that will result in
Year 2000 compliant software being in place in substantially all areas of the
business enterprise by the end of the second quarter of 1999, and full Year 2000
compliance well before the end of the year. Included in the plan are several
system projects not specifically undertaken to remediate Year 2000 compliance
issues, but which, as a result, will ensure Year 2000 compliance in those areas.
As of the end of the first quarter of 1999, the Company has installed or
upgraded Year 2000 compliant systems supporting approximately 90% of the
Company's business.
The plan also called for a complete and ongoing assessment of the status and
progress of customers, vendors and corporate service partners in achieving Year
2000 compliance. For the most part, failure of any one or a group of customers
or vendors to be Year 2000 compliant will have little or no effect on the
ability of the Company to process business and serve its customers. In the
unlikely event the Company fails to complete those portions of its Year 2000
compliance plan not already substantially done, its ability to electronically
adjudicate claims would be negatively impacted. However, the Company has in
place a proven manual claims adjudication systems that would be utilized in such
an unlikely event, and the incremental cost incurred would not be material.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PERIOD ENDED MARCH 31, 1999 COMPARED TO
PERIODS ENDED MARCH 31, 1998
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The direct and indirect cost of achieving Year 2000 compliance, including all
remediation, replacement and upgrading of non-compliant systems over the three
years preceding the turn of the century is expected to be approximately $8.3
million. Most of such cost will be capitalized and amortized over the reasonable
useful lives of the new software systems put in place, as they relate primarily
to upgrading or replacing systems for business reasons other than Year 2000
remediation. Costs expensed in 1997, 1998 and 1999 are immaterial to the overall
financial statements of the Company.
The foregoing discussion contains forward-looking statements together with
related data and projections about the Company's projected financial results and
its future plans and strategies. However, actual results and needs of the
Company may vary materially from forward-looking statements and projections made
from time to time by the Company on the basis of management's then current
expectations. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Forward-Looking Information" in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
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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 May 13, 1999 /s/ Elizabeth A. Mahin
------------ ----------------------------------------------
Elizabeth A. Mahin
Senior Vice President and Chief
Accounting Officer
(Principal Accounting Officer)
Date May 13, 1999 /s/ John K. Anderson, Jr.
------------ ----------------------------------------------
John K. Anderson, Jr.
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
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