UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT under Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required]
For the fiscal year ended: December 31, 1995
[ ] TRANSITION REPORT under Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the transition period from ____________ to ____________
Commission file number 0-14451
Acap Corporation
(Name of small business issuer in its charter)
State of Incorporation: IRS Employer Id.:
Delaware 25-1489730
Address of Principal Executive Office:
10555 Richmond Avenue, Houston, Texas 77042
Issuer's telephone number, including area code: (713) 974-2242
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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. [x] Yes [ ] No.
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [x]
Revenues for the issuer for its most recent fiscal year were $5,308,709.
As of March 22, 1996, 8,516 shares of the registrant's Common Stock,
excluding shares held in treasury, were issued and outstanding, and the
aggregate market value of such shares held by non-affiliates of the
registrant on such date, based on the average of the closing bid and asked
prices for such shares on such date, was $959,450.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part II, Items 5 - 7 of Form 10-KSB is
incorporated by reference from the registrant's 1995 Annual Report to
Stockholders. The information required by Part III, Items 9 - 12 of Form 10-
KSB is incorporated by reference from the registrant's definitive information
statement to be furnished in connection with the Annual Meeting of
Stockholders to be held on or about May 6, 1996.
The Exhibit Index, Part IV, Item 13, is located on page 7 of this Form 10-
KSB. This Form 10-KSB contains a total of 47 pages including any exhibits.
Transitional Small Business Disclosure Format (check one):
[ ] Yes [ x ] No
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Acap Corporation was incorporated under the laws of the State of Delaware on
March 18, 1985 by the management of American Capitol Insurance Company
("American Capitol") to become the parent or "holding company" of American
Capitol. Acap Corporation began operating in that capacity on
October 31, 1985. American Capitol is a Texas life insurance company
licensed in 33 states and the District of Columbia. American Capitol began
operations as a life insurance company on June 1, 1954.
Unless the context otherwise requires, the term "Acap" refers to the
consolidated group of Acap Corporation and its wholly-owned subsidiaries.
Acap primarily engages in the acquisition and servicing of existing blocks of
life insurance policies. Since September 1994, the Company has marketed a
small volume of final expense insurance and prearranged funeral service
contracts. Through its life insurance subsidiaries, Acap maintains a broad
portfolio of individual life insurance policies and annuity contracts. Life
insurance is the only industry segment material to the operations of Acap.
Fortune National Corporation ("Fortune Corp"), a Pennsylvania corporation,
acquired a majority interest in American Capitol in 1984. In the 1985
reorganization that resulted in American Capitol becoming a wholly-owned
subsidiary of Acap, Fortune Corp's majority interest in American Capitol was
exchanged for an equivalent interest in Acap. Fortune Corp currently owns
approximately 63.7% of the outstanding common stock of Acap.
Acquisition Strategy
- --------------------
Acap's strategy for achieving growth and profits is based upon the
acquisition of blocks of existing life insurance policies through the direct
purchase of such blocks or indirectly through the acquisition of life
insurance companies. By acquiring blocks of life insurance directly or
through the purchase of other life insurance companies, Acap hopes to add
"new" life policies to its books more economically than through marketing.
Generally, insurance companies can acquire policies in two ways; either by
"purchasing" them policy by policy through marketing, or by buying an
existing block of policies. Purchasing an existing block of business has the
advantage that the policies have an established "history." That is, an
existing block will have an established pattern of mortality and lapse
experience. Also, the company selling the block of existing life policies
has already absorbed the risks involved in marketing the life insurance
products. In purchasing an existing block of policies, Acap's strategy is to
set the purchase price at the sum of the expected future profits of the block
of policies discounted at a rate of return in excess of Acap's cost of funds.
Acap then attempts to improve upon the rate of return by maintaining the
acquired policies at a lower per policy cost than was used in the pricing
assumptions and by realizing a higher investment yield on the acquired assets
than was used in the pricing assumptions.
It also should be noted that the acquisition strategy has certain risks and
disadvantages. Since the marketing of life insurance products generally
involves greater risks than acquiring existing blocks of life insurance, the
profit margins available through marketing may be greater than the margins
available with respect to an acquired block of life insurance. Also, there
are relatively few companies or blocks of business meeting Acap's acquisition
criteria that become available for purchase each year. Acap's acquisition
strategy requires Acap to maintain the personnel, computer systems and
physical properties necessary to accommodate large growth phases without the
guarantee that such growth will occur.
Acquisitions to Date
- --------------------
Acap (i.e., its predecessor, American Capitol) switched from a traditional
marketing strategy to the current acquisition strategy in 1984 in connection
with the change in control and associated change in management resulting from
Fortune Corp's purchase of a majority of the outstanding common stock.
Acquisitions made through December 31, 1995 include:
Fortune National Life Insurance Company, acquired November 29, 1985,
which added approximately 12,447 life policies and annuity contracts to
Acap's operations.
Associated Companies, Inc., acquired January 13, 1989, which
approximately doubled the existing insurance operations of Acap.
Trans-Western Life Insurance Company, acquired February 25, 1994, which
added approximately 4,235 life policies and annuity contracts to Acap's
operations.
Family Life Insurance Company of Texas, acquired August 31, 1994, which
added approximately 46,500 life policies and annuity contracts to Acap's
operations.
Texas Imperial Life Insurance Company, acquired September 29, 1994,
which added approximately 9,750 life policies and annuity contracts to
Acap's operations.
Oakley-Metcalf Insurance Company, acquired February 2, 1995, which added
approximately 3,000 life policies to Acap's operations.
Products and Markets
- --------------------
The policies serviced by Acap are primarily traditional whole life policies,
interest-sensitive whole life policies, term life policies, stipulated
premium whole life policies and flexible premium annuity contracts.
Traditional whole life policies are generally characterized by a uniform
death benefit and a level periodic premium throughout the insured's lifetime.
These policies combine a savings element with insurance protection. The
savings element, called the cash value, builds at a fixed rate of interest
and may be borrowed against by the policyholder and, if the policy terminates
other than through the death of the insured, may be paid to the policyholder.
Acap's interest-sensitive whole life policies also generally have a uniform
death benefit and a level periodic premium. However, with these policies,
the interest rate credited to the savings element of the policy may be varied
at Acap's option above a guaranteed minimum rate. The interest-sensitive
policies also provide for a surrender charge in the event that the
policyholder surrenders the policy during the first ten years following the
issue date of the policy. Further, Acap may vary below a guaranteed maximum
the amount charged against the policy for expenses and mortality costs.
Term life policies generally offer pure insurance protection (i.e., no
savings element) for a specified period. Such policies typically offer a
conversion privilege, a renewal privilege, or both. Premiums typically are
adjusted upon the exercise of either privilege.
Stipulated premium whole life policies are characterized by a uniform death
benefit and a level periodic premium throughout the insured's lifetime,
however, unlike traditional whole life policies, stipulated premium whole
life policies have no cash value.
Flexible premium annuity contracts permit the annuitant to make deposits as
he sees fit, and allow the annuitant to make withdrawals at his option,
subject to deduction of applicable surrender charges. The annuity balance
earns interest on a tax deferred basis at a rate that Acap may change
annually.
From mid-1985 until September 1994, the Company relied exclusively on its
acquisition strategy and did not actively market new business. Since
September 1994, the Company has marketed a small volume of final expense
insurance and prearranged funeral service contracts. These policies are
primarily written through independent funeral homes. The Company currently
receives new business from approximately thirty funeral homes.
The following table sets forth information with respect to gross insurance in
force and net premium income of Acap during the past three years:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994 1993
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Life insurance in force $286,803 321,859 267,722
Premium income:
Life $1,828 1,350 848
Annuity 547 223 166
-------- -------- -------
Total premiums $ 2,375 1,573 1,014
======== ======== =======
</TABLE>
The table below presents the direct collected premiums by major geographic
area for the last three years:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994 1993
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Texas $ 4,573 2,414 1,225
Ohio 550 614 682
Indiana 457 503 551
Pennsylvania 399 440 536
Michigan 352 396 448
Other U.S. 2,122 2,298 2,513
------ ------ ------
Total $ 8,453 6,665 5,955
======= ======= ======
</TABLE>
The preceding tables include certain premium amounts which under Statement of
Financial Accounting Standards No. 97 ("FAS 97") are credited to liability
accounts and are not considered revenues, and exclude surrender charges that
under FAS 97 are considered revenue. The premiums of Acap affected by FAS 97
are the premiums on interest-sensitive whole life policies and annuity
contracts.
Competition
- -----------
The life insurance industry is highly competitive. There are approximately
1,770 legal reserve life insurance companies in the United States. Although
Acap's acquisition strategy is not the standard strategy employed in the
industry, Acap must compete with a significant number of companies, both
inside and outside the life insurance industry, when looking for an
acquisition. Many of these companies have substantially greater financial
resources and larger staffs than Acap.
Acap also must compete with a significant number of other life insurance
companies to retain Acap's existing block of policies. Many of these
companies have broader and more diverse product lines together with active
agency forces, and therefore, certain of Acap's policyholders may be induced
to replace their existing policies with those provided by Acap's competitors.
Regulation
- ----------
The insurance subsidiaries of the Company are subject to regulation by the
supervisory insurance agency of each state or other jurisdiction in which the
insurance subsidiaries are licensed to do business. These supervisory
agencies have broad administrative powers relating to the granting and
revocation of licenses to transact business, the approval of policy forms,
the form and content of mandatory financial statements, capital, surplus,
reserve requirements and the types of investments that may be made. The
insurance subsidiaries are required to file detailed reports with each
supervisory agency, and its books and records are subject to examination by
each. In accordance with the insurance laws of the State of Texas (the
insurance subsidiaries' state of domicile) and the rules and practices of the
National Association of Insurance Commissioners (the "NAIC"), the insurance
subsidiaries are examined periodically by examiners from Texas.
Most states have enacted legislation or adopted administrative regulations
covering such matters as the acquisition of control of insurance companies
and transactions between insurance companies and the persons controlling
them. The NAIC has recommended model legislation on these subjects that has
been adopted, with variations, by many states. The nature and extent of the
legislation and administrative regulations now in effect vary from state to
state, and in most states prior administrative approval of the acquisition of
control of an insurance company incorporated in the state, whether by tender
offer, exchange of securities, merger or otherwise, is required, which
process involves the filing of detailed information regarding the acquiring
parties and the plan of acquisition.
The insurance subsidiaries are members of an "insurance holding company
system" and are required to register as such with the State of Texas and file
periodic reports concerning their relationships with the insurance holding
company and other affiliates of the holding company. Material transactions
between members of the holding company system are required to be "fair and
reasonable" and in some cases are subject to administrative approval, and the
books, accounts and records of each party are required to be so maintained as
to clearly and accurately disclose the precise nature and details of the
transactions. Notice to or approval by the State of Texas is required for
dividends paid by the insurance subsidiaries.
Employees
- ---------
At December 31, 1995, Acap had a total of 29 employees. None of these
employees is covered by a collective bargaining agreement. Acap believes
that it has excellent relations with its employees.
ITEM 2. DESCRIPTION OF PROPERTIES.
The principal offices of the Company are located at 10555 Richmond Avenue,
Houston, Texas 77042. The Company holds unencumbered title to a building
containing approximately 50,000 square feet and approximately 6.6 acres of
land at that location. The Company occupies approximately 20,000 square feet.
Approximately 5,300 square feet of additional space is leased by unaffiliated
tenants. The Company's offices are suitable for the conduct of its business
and provide room for future growth. Management believes that the property is
adequately covered by insurance.
The Company's investment policy prohibits making new investments in real
estate without the prior approval of the Board of Directors. There are no
plans to make any real estate investments in the foreseeable future. If the
Company were interested in making a real estate investment, regulatory
restrictions applicable to Texas life insurance companies would prohibit the
life insurance subsidiaries from investing in real estate outside of the
United States, in residential real estate, or in any property, other than
home office property, that exceeds 5% of the insurer's statutory assets.
The Company owns and services first mortgage loans with aggregate principal
balances at December 31, 1995 of $1,265,499. The Company's investment policy
prohibits making new investments in mortgage loans without the prior approval
of the Board of Directors. There are no plans to make any mortgage loan
investments in the foreseeable future. If the Company were interested in
making a mortgage loan investment, regulatory restrictions applicable to
Texas life insurance companies would prohibit the life insurance subsidiaries
from investing in mortgage loans on real estate outside of the United States,
in other than first liens, or in any loan that exceeds 25% of the insurer's
statutory capital and surplus.
ITEM 3. LEGAL PROCEEDINGS.
Acap and its subsidiary are involved in various lawsuits and legal actions
arising in the ordinary course of operations. Management is of the opinion
that the ultimate disposition of these matters will not have a material
adverse effect on Acap's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the quarter
ended December 31, 1995.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The required information regarding the market for the common equity of the
Company and related stockholder matters is incorporated herein by reference
from "Stockholder Information" on page 32 of Acap's 1995 Annual Report to
Stockholders.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Management's Discussion and Analysis of Financial Condition and Results of
Operations is incorporated herein by reference from "Management's Financial
Analysis" on pages 4 - 9 of Acap's 1995 Annual Report to Stockholders.
ITEM 7. FINANCIAL STATEMENTS.
Financial statements and supplementary data are incorporated herein by
reference from pages 11 - 30 of Acap's 1995 Annual Report to Stockholders.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
PART III
The information required by Items 9-12 is incorporated by reference from
Acap's definitive information statement, which is to be filed pursuant to
Regulation 14C.<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibits Location or
Description Incorporation by Reference
3(a)(1)
Certificate of Incorporation of *Form 10 effective June 22,
Registration dated March 12, 1985 1986, pages 58-61
3(a)(2)
Certificate of Amendment to the Certificate *Form 10 effective June
of Incorporation of the Registrant dated 22, 1986, pages 62-65
October 25, 1985
3(a)(3)
Certificate of Amendment to the Certificate *Form 10K dated December 31,
of Incorporation of the Registrant dated 1988, pages 51-53
August 22, 1986
3(a)(4)
Certificate of Amendment to the Certificate *Form S4, Registration
of Incorporation of the Registrant dated No. 33-27874
March 20, 1989
3(a)(5)
Certificate of Amendment to the Certificate *Form 10KSB dated
of Incorporation of the Registrant dated December 31,1994,
May 9, 1994 pages 273-276
3(b)(1)
Bylaws of the Registrant, as amended *Form 10K dated December 31,
1988, pages 54-68
3(b)(2)
Amendment to the Bylaws of the Registrant *Form 10Q dated March 31, 1990
page 11
4
Certificate of Designations of the *Form 8K dated December 31,
Preferred Stock of the Registrant 1986, pages 23-31
10(a)(1)
1988 American Capitol Insurance Company *Form 10K dated December 31,
Key Employee Stock Option Plan 1988, pages 37-44
10(a)(2)
Form of Grant of Stock Option used in 1988 *Form 10K dated December 31, 1988,
American Capitol Insurance Company Key pages 45-50
Employee Stock Option Plan
10(b)(1)
Agreement dated December 18, 1986 between *Form S4, Amendment No.2,
Acap Corporation and Fortune National Registration No. 33-27874
Corporation
<PAGE>
Exhibits Location or
Description Incorporation by Reference
10(b)(2)
Amendment dated June 13, 1989 to Agreement *Form S4, Amendment No. 2,
dated December 18, 1986 between Registration No. 33-27874
Acap Corporation and Fortune
National Corporation
10(c)(1)
Employment Contract between American *Form 10KSB dated December 31,
Capitol Insurance Company and John D. 1994, pages 278-290
Cornett
10(c)(2)
Stock Purchase Agreement between American *Form 10KSB dated December 31,
Capitol Insurance Company and John D. 1994, pages 291-300
Cornett
10(d)
Supplemental Disability Income Agreement *Form 10Q dated September 30,
between American Capitol Insurance Company 1990, pages 12-18
and William F. Guest
10(e)
Reinsurance Agreement between American *Form 10KSB dated December 31,
Capitol Insurance Company and Crown Life 1993, pages 10-66
Insurance Company effective December 31,
1992, as amended
10(f)
Stock Purchase Agreement for Family Life *Form 8K dated August 31,1994,
Insurance Company of Texas dated pages 5-71
August 12, 1994
10(g)
$5,000,000 Surplus Debenture issued by *Form 8K dated August 31, 1994,
American Capitol Insurance Company to pages 72-74
John C. Bowden
10(h)
Guaranty Agreement and Collateral Pledge *Form 8K dated August 31, 1994,
Agreement dated August 31, 1994 between pages 75-93
Acap Corporation and John C. Bowden
10(i)
Reinsurance Agreement between Family Life *Form 8K dated August 31, 1994,
Insurance Company of Texas and Alabama pages 94-158
Reassurance Company effective
September 1, 1994
10(j)
Stock Purchase Agreement for Texas Imperial *Form 8K dated September 28,
Life Insurance Company dated August 2, 1994 1994, pages 5-72
10(k)
Stock Purchase Agreement for Imperial Plan, *Form 8K dated September 28,
Inc. dated August 2, 1994 1994, pages 73-81
<PAGE>
Exhibits Location or
Description Incorporation by Reference
10(l)
Employment Agreement between Texas Imperial *Form 8K dated September 28,
Life Insurance Company and Richard M. Ridley 1994, pages 82-110
10(m)
Stock Purchase Agreement for Trans-Western *Form 10KSB dated December 31,
Life Insurance Company 1994, pages 43-110
10(n)
Reinsurance Agreement effective March 1, *Form 10KSB dated December 31,
1994 between Trans-Western Life Insurance 1994, pages 111-161
Company and Alabama Reassurance Company
10(o)
Stock Purchase Agreement for Oakley-Metcalf *Form 10KSB dated December 31,
Insurance Company 1994, pages 162-212
10(p)
Reinsurance Agreement effective *Form 10KSB dated December 31,
February 2, 1995 between Oakley-Metcalf 1994, pages 213-260
Insurance Company and Alabama Reassurance
Company
10(q)
Loan Agreement and related documents *Form 10KSB dated December 31,
between Acap Corporation and Central 1994, pages 261-272
National Bank
11
Statement re computation of per share *1995 Annual Report to
earnings Stockholders, page 18
13
1995 Annual Report to Stockholders Pages 12-47
22
Subsidiaries of the Registrant Page 11
_______________________________________________________
* Exhibit is incorporated by reference to the listed document.
(b) Reports on Form 8-K:
None.<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Acap Corporation
Date: March 25, 1996
By:
/s/ William F. Guest
--------------------------------------------------
William F. Guest
Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the date indicated.
Date: March 25, 1996
By:
/s/ William F. Guest /s/John D. Cornett
- ------------------------------- --------------------------------------
William F. Guest John D. Cornett
Chairman of the Board, Executive Vice President and Treasurer
President and Director (Principal Financial and Accounting
(Principal Executive Officer) Officer)
/s/ R. Wellington Daniels
- ----------------------------------
R. Wellington Daniels
Director
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF ACAP CORPORATION
Wholly-owned subsidiary of Acap Corporation:
- --------------------------------------------
American Capitol Insurance Company (Texas)
Wholly-owned subsidiaries of American Capitol Insurance Company:
- ----------------------------------------------------------------
Family Life Insurance Company of Texas (Texas)
Imperial Plan, Inc. (Texas)
Texas Imperial Life Insurance Company (Texas)
Wholly-owned subsidiary of Texas Imperial Life Insurance Company:
- -----------------------------------------------------------------
Oakley-Metcalf Insurance Company (Texas)
<PAGE>
ACAP CORPORATION
Contents
President's Report 1
Management's Financial Analysis 4
Consolidated Balance Sheet 11
Consolidated Statements of Operations 12
Consolidated Statements of Stockholders' Equity 13
Consolidated Statements of Cash Flows 14
Notes to Consolidated Financial Statements 15
Independent Auditors' Report 31
Stockholder Information 32
Directors and Officers 33
<PAGE>
CORPORATE PROFILE
Acap Corporation is a life insurance holding company that focuses on the
acquisition of existing life insurance policies, either through direct purchase
or the acquisition of life insurance companies. Adjuncts to the acquisition-
oriented growth strategy include using financial leverage and reinsurance to
make more acquisitions and to maximize the return to stockholders,
consolidating and streamlining the operations of acquired businesses,
concentrating on a limited number of lines of business and providing superior
customer service to improve policy retention.
Acap was formed in 1985. Acap's life insurance operations are conducted
through its wholly-owned life insurance subsidiaries. All operations are
conducted from the corporate headquarters in Houston, Texas. Acap's common
stock is quoted on the NASD Electronic Bulletin Board under the symbol AKAP.<PAGE>
PRESIDENT'S REPORT
HIGHLIGHTS
During 1995:
The Company completed the acquisition of Oakley-Metcalf Insurance Company.
The Company consolidated the business of the four recently acquired life
insurance subsidiaries into one of those subsidiaries. One of the three
resulting "shell" companies was sold and the Company hopes to sell the two
remaining "shell" companies during 1996.
The Company increased the reinsurance on the policies from a 1994 acquisition,
resulting in a deferred gain on reinsurance of $1,350,036.
The Company reduced notes payable from $8.3 million at December 31, 1994 to
$1.3 million at December 31, 1995.
The Company had earnings of $277,033, or $9.04 per common share.
Corporate Developments
On February 2, 1995, the Company acquired Oakley-Metcalf Insurance Company
("Oakley"), a Texas life insurance company, in a $2,559,516 cash transaction.
At the date of acquisition, Oakley had assets totalling approximately $4.4
million and had approximately 3,000 life insurance policies in force.
During 1995, the Company consolidated the policies in force of Oakley and two
life insurance subsidiaries acquired in 1994, Family Life Insurance Company of
Texas ("Family") and Trans-Western Life Insurance Company ("Trans-Western"),
into another subsidiary acquired during 1994, Texas Imperial Life Insurance
Company ("Texas Imperial"). The Company expects to realize operational
efficiencies as a result of the consolidation, beginning in 1996. Also, by
moving the policies out of Oakley, Family and Trans-Western and leaving those
companies with minimal assets, it positioned the Company to realize the value
of the charters of those companies through the sale of such companies. Trans-
Western was sold to an unaffiliated third party on September 30, 1995. The
Company realized a pre-tax investment gain of $50,000 on the sale of the Trans-
Western stock. The Company hopes to sell Oakley and Family during 1996.
Immediately following the acquisition of Family on August 31, 1994, the Company
reinsured with an unaffiliated life insurance company 20% of each of the life
insurance policies in force of Family. On January 4, 1995, the Company
increased the reinsurance on each of those policies from 20% to 100%. The
Company recorded a deferred gain on reinsurance of $1,350,036 and an increase
in the reinsurance receivable of $2,809,418 as a result of the increase in the
reinsurance percentage. The Company continues to administer the policies, for
which it receives compensation from the reinsuring life insurance company.
The Company reduced notes payable from $8,300,000 at December 31, 1994 to
$1,312,500 at December 31, 1995. The two notes outstanding at December 31,
1994 were repaid January 31, 1995. The sources of repayment were $6.8 million
in working capital of the Company and a new $1.5 million bank loan.
The Company is exploring the potential of the marketing operation of Texas
Imperial. Texas Imperial markets final expense life insurance and insurance-
funded prepaid funeral services contracts in the State of Texas. While the
marketing results during 1995 were below expectations, the Company did receive
approximately $500,000 in single premiums related to the conversion of three
trust-funded prepaid funeral service plans to insurance-funded plans.
RESULTS OF OPERATIONS
The Company's net income for 1995 of $277,033, or $9.04 per common share,
compares to net income for 1994 of $1,718,374, or $183.04 per common share.
The 1994 net income included $1,361,310 in realized investment gains, whereas
the 1995 net income included $170,003 in realized investment gains. Excluding
realized investment gains, pre-tax operating income for the year 1995 was
$330,359, compared to pre-tax operating income in 1994 of $817,409. As
explained in detail in the Management's Financial Analysis section of this
Annual Report, the decrease in operating income is primarily the result of
unusual mortality experience and a decrease in investment income on a
significant asset of the Company.
Largely as a result of unrealized investment gains, book value per common share
increased 105% to $518.01 at December 31, 1995 compared to $252.23 at
December 31, 1994. Under an accounting standard adopted in 1993, the Company
records its fixed maturity and equity securities at fair value, with unrealized
gains and losses, net of taxes, reported in stockholders' equity. With the
Company's sizeable investments in fixed maturity securities, changes in market
interest rates can result in significant swings in the fair value of the fixed
maturity securities. The accounting standard does not permit the Company to
make an offsetting restatement of its liabilities for changes in interest
rates. Excluding all unrealized investment gains and losses, book value per
common share increased 2% to $387.47 at December 31, 1995 compared to $378.43
at December 31, 1994.
A more complete analysis of the results of operations is included in the
Management's Financial Analysis section of this Annual Report. Stockholders
are urged to read the entire Annual Report to gain a better understanding of
the Company, its recent financial performance and its prospects.
LIQUIDATION OF FORTUNE
Fortune National Corporation ("Fortune"), the Owner of 63.7% of the Company's
outstanding common stock, expects to adopt a plan of dissolution and
liquidation at its annual stockholder meeting on May 6, 1996. Except for a
small amount of cash, Fortune's assets consist solely of 5,421 shares of the
Company's common stock. Upon liquidation, Fortune's stockholders are entitled
to receive their pro rata portion of the 5,421 shares of the Company's common
stock owned by Fortune.
Under the plan, no fractional shares of the Company's common stock will be
issued. Fortune's stockholders have the option of selling their "odd lot"
shares of Fortune common stock to the Company or buying from the Company enough
Fortune common stock to round up their holdings.
The Company has entered into an agreement with Fortune to pay for Fortune's
operating expenses through the expiration of the plan of dissolution and
liquidation of Fortune (estimated to be $19,350). In exchange for its
services, the Company will receive 55,323 shares of Fortune common stock
prior to the liquidation. The Company will account for its own common stock
received as a part of the liquidating distribution as treasury shares. The
estimated result of this accounting treatment will be a decrease in the
Company's stockholders' equity of approximately $144,784 and a decrease in
the number of shares of Company common stock outstanding from 8,516 to
approximately 7,570. Due to a higher proportional decrease in common shares
outstanding as compared to stockholders' equity, the Company's book value per
common share is estimated to increase from $518.01 to $563.62 (based on
December 31, 1995 amounts). The foregoing figures assume that no Fortune
stockholders elect to round up odd lot shares and the Company is required to
purchase all of the odd lot shares.
Fortune's liquidation will not result in a change in the management, directors,
or the ultimate control of the Company.
OUTLOOK
The Company is continually searching for, evaluating and negotiating for new
acquisitions. While the acquisition strategy is inherently characterized by
punctuated growth, the Company hopes to continue the increased pace of
acquisitions which began in 1994.
William F. Guest
President
April 15, 1996
<PAGE>
ACAP CORPORATION
MANAGEMENT'S FINANCIAL ANALYSIS
SIGNIFICANT TRANSACTIONS
During 1994, the Company, through its wholly-owned subsidiary, American Capitol
Insurance Company ("American Capitol"), acquired three life insurance
companies: Trans-Western Life Insurance Company ("Trans-Western") on February
25, 1994, Family Life Insurance Company of Texas ("Family") on August 31, 1994,
and Texas Imperial Life Insurance Company ("Texas Imperial") on September 29,
1994. The Family acquisition met the accounting definition of a "material"
transaction.
On February 2, 1995, the Company, through Texas Imperial, acquired Oakley-
Metcalf Insurance Company ("Oakley"), a Texas life insurance company, in a
$2,559,516 cash transaction. At the date of acquisition, Oakley had assets
totalling approximately $4.4 million and approximately 3,000 life policies in
force.
All of the acquisitions noted above were accounted for using the purchase
method of accounting. Accordingly, the Company's results of operations only
reflect the results of the acquired companies from their respective dates of
acquisition.
On January 4, 1995, the Company increased the reinsurance on each of the life
policies in force of Family from 20% to 100%. The Company recorded a deferred
gain on reinsurance of $1,350,036 and an increase in the reinsurance receivable
of $2,809,418 on the transaction. Whereas 1994's results of operations
included 80% of the premiums, policy benefits, etc. of Family's policies from
September 1, 1994 through December 31, 1994, 1995's results of operations do
not include those income and expense elements.
During 1995, the Company consolidated the policies in force of Family, Oakley
and Trans-Western into Texas Imperial. The Company expects to realize
operational efficiencies as a result of the consolidation, beginning in 1996.
RESULTS OF OPERATIONS
Revenue from premiums and other considerations increased 43% during 1995 in
comparison to premiums and other considerations for 1994. As a result of the
inclusion of premiums for Texas Imperial for all of 1995, premiums increased
approximately $900,000 in 1995 in comparison to 1994. During 1994, Texas
Imperial's premiums were only included from the date Texas Imperial was
acquired, September 29, 1994. Texas Imperial's 1995 premiums included
approximately $500,000 in single premiums related to the conversion of three
trust-funded prepaid funeral service plans to insurance-funded plans.
Partially offsetting the increase in premiums resulting from the inclusion of
Texas Imperial for a full year was a decrease in the premiums of American
Capitol, Family and Trans-Western. American Capitol's premiums were
approximately $20,000 lower in 1995 in comparison to 1994 as a result of normal
policy attrition. Family's premiums were approximately $300,000 lower in 1995
in comparison to 1994. This decrease is attributable to the difference in the
reinsurance percentages on the Family policies noted above. Whereas 1994's
premiums included 80% of Family's premiums from the date Family was acquired
(August 31, 1994), 1995's premiums included none of Family's premiums since the
policies were 100% reinsured. Finally, premiums related to Trans-Western's
policies were approximately $100,000 lower in 1995 in comparison to 1994 due to
the termination at the beginning of 1995 of a reinsurance treaty whereby Trans-
Western was the assuming reinsurer.
Net investment income decreased 23% during 1995 in comparison to 1994. The
decrease in net investment income is attributable to several factors. One such
factor is the difference in the reinsurance percentages on the Family policies
noted above. Whereas 1994's net investment income included 80% of the net
investment income on Family's reserve assets from the date Family was acquired
(August 31, 1994), 1995's net investment income included none of the net
investment income on Family's reserve assets since the policies were 100%
reinsured (January 4, 1995). A second factor in the decrease was the repayment
of a $2.3 million mortgage loan on September 28, 1994. The mortgage loan in
question was issued in 1983 in connection with the sale of American Capitol's
home office building. The loan was repaid in full by (1) selling the home
office building to American Capitol for $1.1 million, (2) making a cash payment
of $600,000 and (3) issuing a note to American Capitol that was then paid off
in December, 1994 for cash of $600,000. Whereas the mortgage loan earned 10%,
the cash the Company received was reinvested at a rate lower than 10%. Also,
to date the building has not yielded a 10% return. The decreases in net
investment income for 1995 noted above were somewhat offset by the inclusion of
a full year's net investment income on Texas Imperial during 1995, whereas
1994's net investment income only included the income of Texas Imperial from
the date of its acquisition, September 29, 1994.
The Company recorded realized investment gains of $170,003 for the year 1995 in
comparison to realized investment gains of $1,361,310 for the year 1994.
Realized investment gains for 1995 include a gain on the sale of the stock of
Trans-Western. During the third quarter of 1995, Trans-Western transferred
most of its business to Texas Imperial. The Trans-Western "shell" was then
sold to an unaffiliated third party. The Company realized a pre-tax investment
gain of $50,000 on the sale of the Trans-Western stock. The balance of 1995's
realized investment gains were primarily the result of a restructuring of Texas
Imperial's investment portfolio. Realized investment gains for 1994 include a
$1,450,000 gain related to the mortgage loan on the Company's home office
property, discussed above. Prior to the repayment of the loan, the Company
held a valuation allowance related to the mortgage loan. The 1994 gain of
$1,450,000 was the release of the total valuation allowance. During 1995, the
Company entered into an earnest money contract to sell the home office
property. However, the sale was not completed and the earnest money contract
expired.
The reinsurance expense allowance increased 17% during 1995 in comparison to
1994. Whereas during 1994 the Company only received the reinsurance expense
allowance related to the companies acquired during 1994 from their respective
dates of acquisition and reinsurance, the Company received such expense
allowance for the full year during 1995. Also, the Company only received an
expense allowance on 20% of Family's policies during 1994, while the previously
noted change in the reinsurance percentage resulted in the Company receiving an
expense allowance on 100% of Family's policies during 1995.
The amortization of the deferred gain on reinsurance increased 116% during 1995
in comparison to 1994. Whereas during 1994 the Company only received the
amortization of the deferred gain on reinsurance related to the companies
acquired during 1994 from their respective dates of acquisition and
reinsurance, the Company received such amortization for the full year during
1995. Also, the change in the reinsurance percentage on Family's policies
during 1995 increased the deferred gain on reinsurance and the related
amortization of such deferred gain into income.
Policy benefits (death and other benefits) were 36% of total revenue excluding
realized investment gains during 1995 compared to 29% of total revenue
excluding realized investment gains during 1994. The higher ratio of total
policy benefits to total revenue during 1995 is attributable in part to the
composition of the business of Texas Imperial. Texas Imperial is in the
insurance-funded prepaid funeral services business. Higher reserve
requirements due to higher average attained ages in this type of business
result in a higher benefit to revenue ratio. It should also be noted that
American Capitol's death claims were $346,844 in 1995 compared to $182,854 in
1994 (and $185,264 in 1993). Management is unaware of any factor that would
indicate the higher level of claims in 1995 represents a trend as opposed to an
aberration.
Total expenses (commissions, general expenses, interest expense, and the
amortization of deferred acquisitions costs and goodwill) were 58% of total
revenue excluding realized investment gains during 1995 compared to 53% of
total revenue excluding realized investment gains during 1994. General
expenses in both years include the costs associated with administering
reinsured policies. Given the significance of the Company's reinsurance, this
results in an expense to revenue ratio that is higher than typical for the life
insurance industry. However, the Company receives an expense allowance on
reinsurance ceded that management believes adequately compensates the Company
for the administration of the reinsured policies. The higher percentage of
total expenses to total revenue in 1995 is in part due to the change in the
reinsurance percentage on Family's policies. As noted above, the expense to
revenue ratio is higher for the Company's fully reinsured business than for
business that is not fully reinsured. Since the Family policies were fully
reinsured during 1995 but only 20% reinsured during 1994, the expense to
revenue ratio related to these policies is not comparable.
Excluding net realized investment gains, pre-tax operating income for the year
1995 was $330,359 compared to pre-tax operating income for the year 1994 of
$817,409. The decrease in operating income is primarily the result of the
adverse mortality experience in American Capitol and the decrease in investment
income resulting from the repayment of the $2.3 million mortgage loan.
The Company's current federal income tax expense for the year 1995 was
$1,004,727 compared to a current federal income tax expense for the year 1994
of $320,522. The Family reinsurance transactions, the 20% reinsurance in 1994
and the increase to 100% reinsurance in 1995, resulted in significant taxable
income, the taxes on which are the primary component of the current federal
income tax expense for 1994 and 1995, respectively.
The current federal income tax effect of the Family reinsurance transactions
was partially offset by a related deferred federal income tax benefit. The
deferred federal income tax benefit from the 1994 Family reinsurance
transaction was less than the deferred federal income tax expense in 1994
related to the repayment of the home office mortgage loan.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY OF INSURANCE SUBSIDIARIES
Acap's insurance subsidiaries have a significant portion of their assets
invested in debt instruments, short-term investments, or other marketable
securities. Although there is no present need or intent to dispose of such
investments, the insurance subsidiaries could liquidate portions of the
investments should the need arise. These assets should be sufficient to meet
the insurance subsidiaries' anticipated long-term and short-term liquidity
needs.
As of December 31, 1995, 100% of the insurance subsidiaries' portfolios of
publicly-traded bonds are invested in securities that are rated investment
grade (i.e., rated BBB-/Baa3 or higher by Standard & Poor or Moody). The
Company's investment policy prohibits making any new investment in below
investment grade securities without the advance approval of the applicable
insurance subsidiary's Board of Directors. All of the Company's bonds are
classified as available for sale and are, accordingly, reflected in the
financial statements at fair value. The insurance subsidiaries' liabilities
are primarily long term in nature. Therefore, long-term assets can be
purchased with the general intent to hold such assets to maturity. It has not
been the Company's investment practice in the past to be an active trader with
its bond portfolios. It is not expected that the insurance subsidiaries'
investment practices will change in the future.
A significant portion (35%) of the Company's bond portfolio is invested in
mortgage-backed securities, with 94% of such mortgage-backed securities
classified as collateralized mortgage obligations and 6% classified as pass-
through securities. Mortgage-backed securities are purchased to diversify the
portfolio from credit risk associated with corporate bonds. The majority of
mortgage-backed securities in the Company's investment portfolio have minimal
credit risk because the underlying collateral is guaranteed by specified
government agencies (e.g., GNMA, FNMA, FHLMC).
The principal risks inherent in holding mortgage-backed securities are
prepayment and extension risks that arise from changes in the general level of
interest rates. As interest rates decline and homeowners refinance their
mortgages, mortgage-backed securities prepay more rapidly than anticipated.
Conversely, as interest rates increase, underlying mortgages prepay more
slowly, causing mortgage-backed securities principal repayment to be extended.
In general, mortgage-backed securities provide for higher yields than corporate
debt securities of similar credit quality and expected maturity to compensate
for this greater amount of cash flow risk. Due to the underlying structure of
the individual securities, the majority of mortgage-backed securities in the
Company's investment portfolio have relatively low cash flow variability.
The Company's investments in collateralized mortgage obligations are primarily
of the planned amortization class (56%), Z (23%) and sequential (19%) types. A
planned amortization class tranche is structured to provide more certain cash
flows and is therefore subject to less prepayment and extension risk than other
forms of mortgage-backed securities. Planned amortization class securities
derive their stability at the expense of cash flow risk for other tranches in a
deal, as early repayments are applied first to other tranches, and cash flows
originally applicable to other tranches are first applied to the planned
amortization class tranche if that tranche's originally scheduled cash flows
are received later than expected. The Z tranche defers all interest to other
tranches until those tranches are paid down, at which time accumulated interest
and principal are paid to this class. The cash flows associated with
sequential tranches can vary as interest rates fluctuate, since these tranches
are not supported by other tranches.
Under an accounting standard adopted in 1993, the Company records its fixed
maturity and equity securities at fair value with unrealized gains and losses,
net of taxes, reported as a separate component of stockholders' equity.
Primarily as a result of declining interest rates during the year, the fair
value of the Company's fixed maturity and equity securities increased
$2,186,436 during 1995, following a $1,101,395 decrease during 1994. The new
accounting standard does not permit the Company to restate its liabilities for
changes in interest rates.
As of December 31, 1995, American Capitol held 16 mortgage loans as
investments. American Capitol's investment policy generally prohibits making
new investments in mortgage loans, except in connection with the sale of
Company owned real estate. The average principal balance of the remaining
mortgage loans at December 31, 1995 was $79,094 and the weighted average
maturity was 3 years. Mortgage loans on Texas properties represent 86% of the
mortgage loan balances at December 31, 1995 with Louisiana properties
representing 14% of the balances. Commercial mortgages represent 86% of the
mortgage loan balances at December 31, 1995 with residential mortgages
constituting the balance. In general, the performance of commercial mortgages
is more subject to changing U.S. and regional economic conditions than
residential mortgages. Mortgage loans are far less liquid an investment than
publicly-traded securities.
At December 31, 1995, the only real estate owned by American Capitol is the
home office property, with a book value of $1,505,325.
At December 31, 1994, Family had a $3.3 million note payable outstanding.
Family repaid the note on January 31, 1995, out of working capital.
At December 31, 1994, American Capitol had a $5 million surplus debenture
outstanding that had been issued in connection with the acquisition of Family.
The note was repaid on January 31, 1995. Of the total $5 million payment, $3.5
million was paid from working capital of the Company and $1.5 million was
provided by a surplus debenture issued by American Capitol to Acap. As
described below, Acap's source of funds was a $1.5 million bank loan.
LIQUIDITY OF THE PARENT COMPANY
On January 31, 1995, as a source of funds to repay the $5 million surplus
debenture issued in connection with the Company's acquisition of Family, Acap
borrowed $1.5 million from Central National Bank of Waco, Texas. The note is
renewable each April 30 until fully repaid. The note bears interest at a rate
equal to the base rate of a bank plus 1%. Principal payments on the note are
due quarterly. The note is secured by a pledge of all the outstanding shares
of American Capitol. The loan agreement contains certain restrictions and
financial covenants. Without the written consent of the bank, Acap may not
incur any debt, pay common stock dividends or sell any substantial amounts of
assets. Also, American Capitol is subject to minimum statutory earnings and
capital and surplus requirements during the loan term. The Company is in
compliance with all of the terms of the loan. The principal payments on the
bank loan are matched by the principal payments on a surplus debenture issued
by American Capitol to Acap.
Going forward, the primary sources of funds for Acap are payments on the
surplus debenture from American Capitol and dividends from American Capitol.
American Capitol may pay dividends in any one year without the prior approval
of regulatory authorities as long as such dividends do not exceed certain
statutory limitations. As of December 31, 1995, the amount of dividends
available to the parent company from American Capitol not limited by such
restrictions is approximately $260,000. Payments on the surplus debenture may
only be made to the extent statutory capital and surplus exceeds $2 million.
At December 31, 1995, American Capitol's statutory capital and surplus was
$2,716,261.
The determination of statutory surplus is governed by accounting practices
prescribed or permitted by the State of Texas. Statutory surplus therefore
bears no direct relationship to surplus as would be determined under generally
accepted accounting principles.
REINSURANCE
Reinsurance plays a significant role in the Company's operations. In
accounting for reinsurance, amounts paid or deemed to have been paid for
reinsurance contracts are recorded as reinsurance receivables. The cost of
reinsurance related to long-duration contracts is accounted for over the life
of the underlying reinsured policies using assumptions consistent with those
used to account for the underlying policies. At December 31, 1995, reinsurance
receivables with a carrying value of $29.8 million were associated with a
single reinsurer, Crown Life Insurance Company ("Crown"). At December 31,
1994, Crown had assets in excess of $7 billion and shareholders' equity of
approximately $0.4 billion. Crown is rated "Excellent" by A.M. Best Company,
an insurance company rating organization. At December 31, 1995, reinsurance
receivables with a carrying value of $4.2 million were associated with Alabama
Reassurance Company ("Alabama Re"). The Alabama Re reinsurance receivables are
secured by trust accounts containing letters of credit totalling $6.6 million
granted in favor of the applicable insurance subsidiary of the Company.
With regard to the policies not 100% reinsured with Crown or Alabama Re, the
Company seeks to limit its exposure to loss on any single insured by reinsuring
the portion of risks in excess of $50,000 on the life of any individual through
various reinsurance contracts, primarily of the coinsurance and yearly
renewable term type.
The Company is contingently liable for amounts ceded to reinsurers in the event
the reinsurers are unable to meet their obligations assumed under the
reinsurance agreements. Acap evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk to minimize its exposure
to significant losses from reinsurer insolvencies.
ACCOUNTING STANDARDS
In December 1991, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
About Fair Value of Financial Instruments." SFAS No. 107 extends existing fair
value disclosure practices for some instruments by requiring all entities to
disclose the fair value of financial instruments, both assets and liabilities
recognized and not recognized in the statement of financial position, for which
it is practicable to estimate fair value. If estimating fair value is not
practicable, SFAS No. 107 requires disclosures of descriptive information
pertinent to estimating the value of a financial instrument. SFAS No. 107 was
amended by SFAS No. 119, "Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments." Among other things, SFAS No. 119
requires additional disclosures about derivative financial instruments. For
companies the size of Acap, SFAS No. 107 and SFAS No. 119 are effective for
financial statements issued for fiscal years ending after December 15, 1995.
Accordingly, the Company incorporated the disclosures required by these
standards in the December 31, 1995, financial statements.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114 requires a creditor to measure impairment
of a loan based on the fair value of the collateral when the creditor
determines that foreclosure is probable. A creditor is required to recognize
impairment by creating a valuation allowance. If there is a significant change
(increase or decrease) in the fair value of the collateral, the creditor is
required to recalculate impairment and adjust the valuation allowance. In
1994, the FASB amended SFAS No. 114 through SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures," to
allow a creditor to use existing methods for recognizing income on impaired
loans. The Company adopted these standards in 1995 without impact to the
financial statements.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121,
which must be adopted by fiscal years beginning after December 15, 1995,
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to (1) those assets to
be held and used in the business, and (2) for assets to be disposed of. The
Company does not anticipate a material effect of the financial statements from
this new accounting standard.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 provides a choice for accounting for employee
stock compensation plans. A company can elect to use the new fair-value-based
method of accounting for employee stock compensation plans, under which
compensation cost is measured and recognized in results of operations, or
continue to account for these plans under the current accounting standards.
Entities electing to remain with the present accounting method must make
disclosures of what net income and earnings per share would have been if the
fair-value-based method of accounting had been applied. SFAS No. 123 must be
adopted in 1996. The Company has not yet selected which accounting option it
will adopt, however, the Company currently has only immaterial stock options
outstanding and therefore does not expect the adoption of SFAS No. 123 to have
material effect on the financial statements.
SUBSEQUENT EVENT
Fortune National Corporation ("Fortune"), the owner of 63.7% of the Company's
outstanding common stock, expects to adopt a plan of dissolution and
liquidation at its annual stockholder meeting on May 6, 1996. Except for a
small amount of cash, Fortune's assets consist solely of 5,421 shares of Acap's
common stock. Upon liquidation, Fortune's stockholders are entitled to receive
their pro rata portion of the 5,421 shares of Acap's common stock owned by
Fortune.
Under the plan, no fractional shares of Acap's common stock will be issued.
Fortune's stockholders have the option of selling their "odd lot" shares of
Fortune common stock to Acap or buying from Acap enough Fortune common stock to
round up their holdings.
Acap has entered into an agreement with Fortune to pay for Fortune's operating
expenses through the expiration of the plan of dissolution and liquidation of
Fortune (estimated to be $19,350). In exchange for its services, Acap will
receive 55,323 shares of Fortune common stock prior to the liquidation. The
Company will account for its own common stock received as a part of the
liquidating distribution as treasury shares. The estimated result of this
accounting treatment will be a decrease in the Company's stockholders' equity
of approximately $144,784 and a decrease in the number of shares of Company
common stock outstanding from 8,516 to approximately 7,570. Due to a higher
proportional decrease in common shares outstanding as compared to stockholders'
equity, the Company's book value per common share is estimated to increase from
$518.01 to $563.62 (based on December 31, 1995 amounts). The foregoing
figures assume that no Fortune stockholders elect to round up odd lot shares
and the Company is required to purchase all of the odd lot shares.
Fortune's liquidation will not result in a change in the management, directors,
or the ultimate control of Acap.
<PAGE>
ACAP CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1995
<S> <C>
ASSETS
Investments:
Fixed maturities available for sale
(amortized cost $28,019,620) $29,815,078
Equity securities (cost $247,856) 59,679
Mortgage loans 1,265,499
Real estate 1,505,325
Policy loans 6,634,446
Short-term investments 1,710,747
----------
Total investments 40,990,774
Cash 123,613
Accrued investment income 552,961
Reinsurance receivables 36,735,253
Accounts receivable (less allowance for uncollectible accounts
of $82,797) 119,553
Deferred acquisition costs 1,779,055
Property and equipment (less accumulated depreciation of $541,398) 64,291
Costs in excess of net assets of acquired business
(less accumulated amortization of $472,802) 2,200,972
Other assets 314,982
----------
$82,881,454
===========
LIABILITIES
Policy liabilities:
Future policy benefits $67,662,600
Contract claims 778,380
----------
Total policy liabilities 68,440,980
Other policyholders' funds 1,733,485
Other liabilities 677,510
Deferred tax liability 2,040,354
Note payable 1,312,500
Deferred gain on reinsurance 2,415,222
----------
Total liabilities 76,660,051
----------
STOCKHOLDERS' EQUITY
Series A preferred stock, par value $.10 per share, authorized,
issued and outstanding 74,000 shares (involuntary liquidation
value $2,035,000) 1,850,000
Common stock, par value $.10 per share,
authorized 10,000 shares, issued 8,757 shares 876
Additional paid-in capital 6,259,069
Accumulated deficit (2,854,416)
Treasury stock, at cost, 241 common shares (105,853)
Net unrealized investment gains, net of taxes of $505,497 1,111,727
-----------
TOTAL STOCKHOLDERS' EQUITY 6,261,403
-----------
$82,881,454
===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ACAP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
<S> <C> <C>
REVENUES
Premiums and other considerations $1,581,864 1,105,202
Net investment income 1,297,361 1,686,519
Net realized investment gains 170,003 1,361,310
Reinsurance expense allowance 1,897,257 1,623,438
Amortization of deferred gain on reinsurance 278,306 128,747
Other income 83,918 26,249
---------------------
Total revenues 5,308,709 5,931,465
---------------------
BENEFITS AND EXPENSES
Death benefits 612,125 518,029
Other benefits 1,234,174 807,357
Commissions and general expenses 2,576,224 2,049,103
Interest expense 165,929 192,608
Amortization of costs in excess of net acquired business 104,095 73,994
Amortization of deferred acquisition costs 115,800 111,655
--------------------
Total benefits and expenses 4,808,347 3,752,746
--------------------
EARNINGS
Income before federal income tax expense (benefit) 500,362 2,178,719
Federal income tax expense (benefit):
Current 1,004,727 320,522
Deferred (781,398) 139,823
------------------------
Net income $ 277,033 1,718,374
------------------------
EARNINGS PER SHARE
Net income per common share $ 9.04 183.04
=======================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ACAP CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
<S>
<C> <C>
PREFERRED STOCK (Including Additional Paid-in Capital) $1,850,000 1,850,000
COMMON STOCK 876 876
ADDITIONAL PAID-IN CAPITAL 6,259,069 6,259,069
ACCUMULATED DEFICIT
Balance, beginning of year (2,931,417)(4,490,225)
Net income 277,033 1,718,374
Preferred stock cash dividends (200,032) (159,566)
----------------------
Balance, end of year (2,854,416)(2,931,417)
---------------------
TREASURY STOCK (105,853) (105,853)
NET UNREALIZED INVESTMENT GAINS (LOSSES)
Balance, beginning of year (1,074,709) 26,686
Change during year 2,186,436 (1,101,395)
---------------------
Balance, end of year 1,111,727 (1,074,709)
----------------------
TOTAL STOCKHOLDERS' EQUITY $ 6,261,403 3,997,966
========================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ACAP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $277,033 1,718,374
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 190,600 124,200
Amortization of deferred acquisition costs 115,800 111,655
Premium and discount amortization (33,640) 15,177
Realized gains on investments (170,003) (1,361,310)
Deferred federal income tax expense (benefit) (781,398) 139,823
Decrease in reinsurance receivables 1,411,458 95,014
Decrease (increase) in accrued investment income 36,488 (35,669)
Decrease (increase) in accounts receivable (97,448) 7,672
Decrease (increase) in other assets 652,387 (312,971)
Increase (decrease) in future policy benefit liability(472,836) 475,905
Increase (decrease) in contract claim liability 96,793 (141,283)
Increase (decrease) in other policyholders' funds
liability 50,484 (18,832)
Increase (decrease) in other liabilities (219,436) 153,075
Amortization of deferred gain on reinsurance (278,306) (128,747)
-----------------------------------
Net cash provided by operating activities 777,976 842,083
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investments available for sale
and principal repayments on mortgage loans 5,231,345 4,884,802
Purchases of investments available for sale (8,011,380)(11,191,659)
Net decrease in policy loans 318,167 285,897
Net decrease in short-term investments 11,422,323 5,795,927
Purchase of subsidiaries, net of cash provided by
(used in) acquisitions (1,952,300) 564,355
Purchases of property and equipment (24,746) (14,271)
----------------------------------
Net cash provided by investing activities 6,983,409 325,051
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of note payable 1,500,000 --
Principal payments on notes payable (8,487,500) --
Deposits on policy contracts 1,316,280 1,042,461
Withdrawals from policy contracts (2,151,240) (1,727,307)
Preferred dividends paid (200,032) (159,566)
-----------------------------------
Net cash used in financing activities (8,022,492) (844,412)
---------------------------------
Net increase (decrease) in cash (261,107) 322,722
Cash at beginning of year 384,720 61,998
Cash at end of year $ 123,613 384,720
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
The consolidated financial statements of Acap Corporation ("Acap" or "the
Company"), a majority-owned subsidiary of Fortune National Corporation
("Fortune"), include its wholly-owned subsidiaries, American Capitol Insurance
Company ("American Capitol"), Family Life Insurance Company of Texas
("Family"), Imperial Plan, Inc. ("Imperial Plan"), Texas Imperial Life
Insurance Company ("Texas Imperial"), through September 30, 1995, Trans-Western
Life Insurance Company ("Trans-Western") and, since February 2, 1995, Oakley-
Metcalf Insurance Company ("Oakley"). All significant intercompany
transactions and accounts have been eliminated in consolidation.
Acap is a life insurance holding company that focuses on the acquisition of
existing life insurance policies, either through direct purchase or the
acquisition of insurance companies. Acap's life insurance operations are
conducted through its wholly-owned life insurance subsidiaries. Operations are
conducted from the corporate headquarters in Houston, Texas. Approximately
half of the Company's direct collected premium comes from residents of the
State of Texas, with no other state generating as much as 10% of the Company's
direct collected premium.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. Such accounting principles differ
from prescribed statutory reporting practices used by the insurance
subsidiaries in reporting to state regulatory authorities. The more
significant differences from statutory accounting principles are:
(a) acquisition costs related to acquiring new business are deferred and
amortized over the expected lives of the policies rather than being charged to
operations as incurred; (b) future policy benefits are based on estimates of
mortality, interest and withdrawals generally representing the Company's
experience, which may differ from those based on statutory mortality and
interest requirements without consideration of withdrawals; (c) deferred
federal income taxes are provided for temporary differences between assets and
liabilities reported for financial reporting purposes and reported for federal
income tax purposes; (d) certain assets (principally furniture and equipment,
agents' debit balances and certain other receivables) are reported as assets
rather than being charged to retained earnings; (e) investments in fixed
maturities available for sale are recorded at fair value rather than at
amortized cost; and (f) for acquisitions accounted for as a purchase, the
identified net assets of the acquired company are valued at their fair values
and the excess of the value of the consideration over the net assets assumed is
amortized over a period not to exceed forty years; whereas, for statutory
purposes, acquisitions are accounted for as equity investments.
Generally, the net assets of the Company's insurance subsidiaries available for
transfer to the parent company are limited to the amounts that the insurance
subsidiaries' statutory net assets exceed minimum statutory capital
requirements; however, payment of the amounts as dividends may be subject to
approval by regulatory authorities. As of December 31, 1995, the amount of
dividends available to the parent company from subsidiaries not limited by such
restrictions is approximately $260,000. The combined net income of the
Company's insurance subsidiaries (where applicable, from the date such
subsidiary was acquired), as determined using statutory accounting practices,
was $7,454,344 and $2,871,495 for the years ended December 31, 1995 and 1994,
respectively. The consolidated statutory stockholders' equity of the Company's
insurance subsidiaries amounted to $2,716,261 and $2,704,711 at December 31,
1995 and 1994, respectively. The total adjusted statutory stockholders' equity
of the Company's insurance subsidiaries exceeds the applicable Risk-Based
Capital requirements.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
INVESTMENTS
Investments are reported on the following bases:
All of the Company's debt and equity securities are accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115 and are
classified as available-for-sale securities. Accordingly, such securities are
reported at fair value, with unrealized gains and losses, net of taxes,
excluded from earnings and reported in a separate component of stockholders'
equity.
Mortgage loans on real estate are carried at unpaid principal balances.
Policy loans are carried at their unpaid principal balances. Policy loans
consist primarily of automatic borrowings against a policy's cash surrender
value to pay policy premiums. Interest accrues at rates ranging from 5% to
10%.
Real estate consists of the home office property. The home office building is
carried at cost less accumulated depreciation. Depreciation is computed using
the straight line method over twenty years. Accumulated depreciation at
December 31, 1995 was $51,250. Tenant improvements are amortized over the term
of the lease. Land is carried at the lower of cost or fair value. Foreclosed
real estate is carried at the lower of cost or fair value determined at the
date of foreclosure.
Short-term investments, consisting primarily of commercial paper, are carried
at cost.
Write-downs and other realized gains and losses, determined on the specific
identification method, are accounted for in the consolidated statements of
operations in net realized investment gains or losses.
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEFERRED ACQUISITION COSTS
Costs which vary with and are primarily related to the production of new
business have been deferred to the extent that such costs are deemed
recoverable through future revenues. These costs principally include
commissions and certain costs of policy issuance and underwriting. For
universal life-type contracts, deferred costs are amortized in relation to the
present value of expected future gross profits from the contracts. For
traditional contracts, deferred costs are amortized in relation to future
anticipated premiums. The deferred costs are reviewed to determine that the
unamortized portion of such costs does not exceed recoverable amounts.
Management believes such amounts are recoverable.
The cost of policies acquired through the purchase of insurance companies,
representing the actuarially determined present value of projected future
profits from policies in force at the purchase date, is deferred and amortized
with interest of 7% to 9% over the policies' estimated lives.
The deferred acquisition costs for the year ended December 31, 1995 are
summarized as follows:
<TABLE>
<S> <C>
Balance at December 31, 1994 $ 3,354,237
Amortized during the year (115,800)
Insurance in force acquired 564,272
Insurance in force ceded (2,023,654)
------------
Balance at December 31, 1995 $ 1,779,055
============
</TABLE>
On January 4, 1995, the Company increased the reinsurance on the Family life
policies from 20% to 100% which resulted in a $1,459,382 decrease in deferred
acquisition costs.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using the
straight-line method over the estimated useful lives, which range from five to
ten years. Depreciation expense was $44,907 and $50,206 for the years ended
December 31, 1995 and 1994, respectively. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts, and any resulting gains or losses are recognized in income for the
period. The cost of maintenance and repairs is charged to income as incurred;
significant renewals and betterments are capitalized.
COSTS IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESS
The costs in excess of net assets of acquired business are amortized on a
straight-line basis over seven year and forty year periods.
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECOGNITION OF PREMIUM REVENUE AND RELATED EXPENSES, LIABILITY FOR FUTURE
POLICY BENEFITS AND CONTRACT CLAIMS
For traditional insurance contracts, premiums are recognized as revenue when
due. Benefits and expenses are associated with earned premiums so as to result
in their recognition over the premium paying period of the contracts. Such
recognition is accomplished by means of the provision for future policy
benefits and the amortization of deferred policy acquisition costs.
For contracts with mortality risk that permit the Company to make changes in
the contract terms (such as interest-sensitive whole life policies), premium
collections and benefit payments are accounted for as increases or decreases to
a liability account rather than as revenue and expense. In addition, decreases
to the liability account for the costs of insurance and policy administration
and for surrender penalties are recorded as revenues. Interest credited to the
liability account and benefit payments made in excess of a contract liability
account balance are charged to expense.
For investment contracts without mortality risk (such as deferred annuities),
net premium collections and benefit payments are recorded as increases or
decreases to a liability account rather than as revenue and expense. Surrender
penalties are recorded as revenues. Interest credited to the liability account
is charged to expense.
Reserves for traditional contracts are calculated using the net level premium
method and assumptions as to investment yields, mortality, withdrawals and
dividends. The assumptions are based on past and expected experience and
include provisions for possible unfavorable deviation. These assumptions are
made at the time the contract is issued or, for contracts acquired by purchase,
at the purchase date. Interest assumptions used to compute reserves ranged
from 4% to 9% at December 31, 1995.
Reserves for universal life-type and investment contracts are based on the
contract account balance if future benefit payments in excess of the account
balance are not guaranteed, or the present value of future benefit payments
when such payments are guaranteed.
The liability for contract claims represents the liability for life insurance
claims reported in excess of the related policy benefit reserve plus an
estimate of claims incurred but not reported.
EARNINGS PER COMMON SHARE
Earnings per common share were computed as follows:
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
<S> <C> <C>
Net income $ 277,033 1,718,374
Preferred dividends (200,032) (159,566)
--------------------------
77,001 1,558,808
Divided by weighted average common shares
outstanding 8,516 8,516
-------------------------
Net income per share $ 9.04 183.04
=========================
</TABLE>
PARTICIPATING POLICIES
Acap maintains both participating and non-participating life insurance
policies. Participating business represented approximately 11% and 10% of the
life insurance in force, and 8% of life insurance premium income at December
31, 1995 and 1994, respectively. Dividends to participating policyholders are
determined annually and are payable only upon declaration of the Boards of
Directors of the insurance subsidiaries.
FEDERAL INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109. SFAS
No. 109 requires that a deferred tax liability be recognized for all taxable
temporary differences and a deferred tax asset be recognized for an
enterprise's deductible temporary differences and operating loss and tax credit
carryforwards. A deferred tax asset or liability is measured using the
marginal tax rate that is expected to apply to the last dollars of taxable
income in future years. The effects of enacted changes in tax laws or rates
are recognized in the period that includes the enactment date.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash includes cash on hand, in demand
accounts, in money market accounts and in savings accounts.
ACCOUNTING STANDARDS
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114 requires a creditor to measure impairment
of a loan based on the fair value of the collateral when the creditor
determines that foreclosure is probable. A creditor is required to recognize
impairment by creating a valuation allowance. If there is a significant change
(increase or decrease) in the fair value of the collateral, the creditor is
required to recalculate impairment and adjust the valuation allowance. In
1994, the FASB amended SFAS No. 114 through SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures," to
allow a creditor to use existing methods for recognizing income on impaired
loans. The Company adopted these standards in 1995 without impact to the
financial statements.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121,
which must be adopted for fiscal years beginning after December 15, 1995,
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to (1) those assets to
be held and used in the business, and (2) for assets to be disposed of. The
Company does not anticipate a material effect of the financial statements from
this new accounting standard.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 provides a choice for accounting for employee
stock compensation plans. A company can elect to use the new fair-value-based
method of accounting for employee stock compensation plans, under which
compensation cost is measured and recognized in results of operations, or
continue to account for these plans under the current accounting standards.
Entities electing to remain with the present accounting method must make
disclosures of what net income and earnings per share would have been if the
fair-value-based method of accounting had been applied. SFAS No. 123 must be
adopted in 1996. The Company has not yet selected which accounting option it
will adopt, however, the Company currently has only immaterial stock options
outstanding and would therefore have no material effect on the financial
statements even if the new method of accounting was elected.
2. ACQUISITIONS
On August 31, 1994, the Company, through American Capitol, acquired Family for
$6,665,886. Funding for the acquisition was provided by the working capital of
American Capitol and a $5 million surplus debenture issued to the seller. The
acquisition has been accounted for using the purchase method of accounting;
accordingly, the identified assets acquired and liabilities assumed were valued
at their fair values and the excess of the amount paid over the net assets
acquired is being amortized over seven years. The results of operations of
Family are included with the Company's from the date of purchase.
Unaudited pro forma results of operations of the Company for 1994 as if the
acquisition of Family had occurred at the beginning of the year are as follows:
<TABLE>
<CAPTION>
1994
----
<S> <C>
Total revenue $ 6,087,673
Net income 2,208,810
Net income per common share 240.69
</TABLE>
Also during 1994, the Company, through American Capitol, acquired two other
life insurance companies, Trans-Western and Texas Imperial. In 1995, the
Company, through Texas Imperial, acquired one other life insurance company,
Oakley. On September 30, 1995, the Company transferred Trans-Western's
policies in force to Texas Imperial and sold Trans-Western to an unrelated
third party. All of these transactions were immaterial to the Company's
consolidated financial statements.
3. INVESTMENTS
FIXED MATURITY AND EQUITY SECURITIES
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1995, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Maturing in one year or less $ 373,953 375,754
Maturing after one year through five years 7,292,141 7,384,679
Maturing after five years through ten years 6,906,084 7,275,456
Maturing after ten years 3,941,018 4,360,018
---------------------------
18,513,196 19,395,907
Mortgage-backed securities 9,506,424 10,419,171
---------------------------
$28,019,620 29,815,078
============================
</TABLE>
A summary of mortgage-backed securities by type as of December 31, 1995
follows:
<TABLE>
<S> <C>
Collateralized mortgage obligations:
Planned amortization class $ 5,492,382
Z 2,249,531
Sequential 1,890,614
Other 160,689
------------
9,793,216
Pass-through securities 625,955
------------
$10,419,171
============
</TABLE>
With a planned amortization class security, early repayments are applied first
to other tranches, and cash flows originally applicable to other tranches are
first applied to the planned amortization class tranche if that tranche's
originally scheduled cash flows are received later than expected. The Z
tranche defers all interest to other tranches until those tranches are paid
down, at which time accumulated interest and principal are paid to this class.
Sequential tranches are not supported by other tranches.
The amortized cost and fair values of investments in fixed maturity and equity
securities as of December 31, 1995 are as follows:
<PAGE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ ------
<S> <C> <C> <C> <C>
Fixed maturity securities:
Government securities $ 3,346,148 93,202 (235) 3,439,115
Corporate securities 11,414,545 664,832 (23,233) 12,056,144
Asset-backed securities 3,752,505 148,954 (811) 3,900,648
Mortgage-backed securities 9,506,422 943,258 (30,509) 10,419,171
28,019,620 1,850,246 (54,788) 29,815,078
-------------------------------------------
Equity securities $ 247,856 -- (188,177) 59,679
-------------------------------------------
$28,267,476 1,850,246 (242,965) 29,874,757
</TABLE>
A summary of proceeds from the sales of investments in fixed maturity
securities, exclusive of proceeds from maturities, and the gross gains and
losses realized on those sales follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Proceeds on sales $3,297,458 1,785,507
==========================
Gross realized gains on sales $ 149,889 19,044
Gross realized losses on sales (43,226) (27,796)
--------------------------
Net realized gains (losses) on sales 106,663 (8,752)
Realized gains on transactions other than sales 3,475 62
--------------------------
Net realized gains (losses) $ 110,138 (8,690)
==========================
</TABLE>
As of December 31, 1995, 100% of the Company's fixed maturity securities were
rated investment grade (i.e., rated BBB-/Baa3 or higher by Standard & Poor or
Moody).
<PAGE>
MORTGAGE LOANS
The weighted average interest rate of mortgage loans held as of December 31,
1995 and 1994 was 9.8% and 9.7%, respectively.
The distribution of principal balances on mortgage loans held as of December
31, 1995 by contractual maturity follows. Actual maturities may differ from
contractual maturities because borrowers may have the right to prepay
obligations with or without penalties.
<TABLE>
<CAPTION>
PRINCIPAL
BALANCE
---------
<S> <C>
Maturing in one year or less $ 175,610
Maturing after one year through five years 918,448
Maturing after five years through ten years 171,441
----------
$1,265,499
==========
</TABLE>
The distribution of mortgage loans by class of loan and geographic distribution
follows:
<TABLE>
<CAPTION>
PRINCIPAL
BALANCE
----------
<S> <C>
Commercial loans:
Texas $ 958,706
Louisiana 131,556
----------
$1,090,262
==========
Residential loans:
Texas $ 133,147
Louisiana 42,090
----------
$ 175,237
==========
</TABLE>
<PAGE>
INVESTMENT INCOME
A summary of net investment income follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Interest on fixed maturities $1,249,118 1,133,913
Interest on mortgage loans 89,397 312,219
Interest on policy loans 44,721 37,574
Interest on cash and short-term investments 114,375 221,800
Real estate income 40,600 7,554
Dividends on equity securities 5,632 4,462
Miscellaneous investment income 42,943 83,192
-------------------------
1,586,786 1,800,714
Investment expense (289,425) (114,195)
-------------------------
$1,297,361 1,686,519
=========================
</TABLE>
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNREALIZED INVESTMENT GAINS (LOSSES)
The change between cost and fair value for fixed maturity and equity
securities, net of taxes, follows:
<TABLE>
<CAPTION>
FIXED EQUITY
MATURITIES SECURITIES TOTAL
---------- ---------- -----
<S> <C> <C> <C>
Balance, January 1, 1994 $ 211,267 (184,581) 26,686
Change during the year (1,080,197) (21,198) (1,101,395)
-----------------------------------
Balance, December 31, 1994 (868,930) (205,779) (1,074,709)
Change during the year 2,158,157 28,279 2,186,436
-----------------------------------
Balance, December 31, 1995 $ 1,289,227 (177,500) 1,111,727
===================================
</TABLE>
<PAGE>
NET REALIZED INVESTMENT GAINS
A summary of net realized investment gains follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Fixed maturities $110,138 (8,690)
Equity securities (including investment
in subsidiaries) 59,865 --
Mortgage loans -- 1,450,000
Real estate -- (80,000)
----------------------
$170,003 1,361,310
======================
</TABLE>
OTHER INVESTMENT DISCLOSURES
At December 31, 1995, bonds with a fair value of $5,386,146 and a $25,000
certificate of deposit were on deposit with various regulatory authorities.
Investments, other than investments issued or guaranteed by the United States
Government or a United States Government agency or authority, in excess of 10%
of stockholders' equity at December 31, 1995 were as follows:
<PAGE>
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
BALANCE
SHEET AMOUNT CATEGORY
------------ --------
<S> <C> <C>
Home office building and property $1,505,325 Real estate
EQCC Home Equity 1,429,025 Fixed maturity
Standard Credit Card 1,165,686 Fixed maturity
BankAmerica Corporation 982,435 Fixed maturity
Ford Motor Credit Corporation 891,905 Fixed maturity
Goldman Sachs 831,280 Fixed maturity
Commercial Credit Corporation 670,747 Fixed maturity
</TABLE>
4. FAIR VALUES
The carrying values and estimated fair values of the Company's financial
instruments as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Carrying Amount Fair Value
--------------- ----------
<S> <C> <C>
Assets:
Fixed maturities $29,815,078 29,815,078
Equity securities 59,678 59,678
Mortgage loans 1,265,499 1,235,658
Policy loans 6,634,336 6,634,336
Short-term investments 1,710,747 1,710,747
Liabilities:
Note payable 1,312,500 1,312,500
</TABLE>
<PAGE>
Estimated market values of publicly-traded fixed maturity and equity securities
are as reported by an independent pricing service. Estimated market values of
fixed maturity securities not actively traded in a liquid market are estimated
using a third party pricing system, which uses a matrix calculation assuming a
spread over U.S. Treasury bonds.
Fair values of mortgage loans are estimated by discounting expected cash flows,
using market interest rates currently being offered for similar loans.
Policy loans have no stated maturity dates and are a part of the related
insurance contracts. Accordingly, it is not practicable for the Company to
estimate a fair value for them.
For short-term investments, the carrying amount is a reasonable estimate of
fair value.
In that the note payable is a floating rate instrument, the principal balance
is a reasonable estimate of the note's fair value.
5. NOTES PAYABLE
In connection with American Capitol's purchase of Family, American Capitol
issued a $5,000,000 surplus debenture. The debenture was a balloon note
maturing on January 4, 1995, bearing interest at the rate of 7.5%. The
debenture was payable only out of the statutory equity of American Capitol in
excess of $2,000,000. Acap guaranteed American Capitol's performance under the
debenture by pledging the common stock of American Capitol owned by Acap as
security. The debenture was repaid in full on January 31, 1995.
At December 31, 1994, Family had a $3.3 million balloon note payable bearing 6%
interest maturing January 4, 1995. The note was repaid in full on January 31,
1995.
As a source of funds to repay the $5 million surplus debenture issued in
connection with the acquisition of Family, on January 31, 1995 the Company
borrowed $1.5 million from Central National Bank of Waco, Texas. The note is
renewable by the bank each April 30 until fully repaid. The note bears
interest at a rate equal to the base rate of a bank plus 1%. Principal
payments on the note of $62,500 (a six year amortization) are due quarterly
beginning April 30, 1995. The note is secured by the Company's pledge of all
the outstanding shares of Acap's subsidiary, American Capitol. The loan
agreement contains certain restrictions and financial covenants. Without the
written consent of the bank, Acap may not incur any debt, pay common stock
dividends or sell any substantial amounts of assets. Also, American Capitol is
subject to minimum statutory earnings and capital and surplus requirements
during the loan term. The Company is in compliance with all of the terms of
the loan.
6. COMMITMENTS AND CONTINGENCIES
LEASES
The Company acquired its home office building on September 28, 1994, and has
had no material leases since that date. Rent expense was $10,020 for 1995 and
$85,578 for 1994.
REINSURANCE
The Company accounts for reinsurance in accordance with Statement of Financial
Accounting Standards No. 113. In accounting for reinsurance, amounts paid or
deemed to have been paid for reinsurance contracts are recorded as reinsurance
receivables. The cost of reinsurance related to long-duration contracts is
accounted for over the life of the underlying reinsured policies using
assumptions consistent with those used to account for the underlying policies.
At December 31, 1995, reinsurance receivables with a carrying value of $29.8
million were associated with a single reinsurer, Crown Life Insurance Company
("Crown"). At December 31, 1994, Crown had assets in excess of $7 billion and
stockholders' equity of approximately $0.4 billion. Crown is rated "Excellent"
by A.M. Best Company, an insurance company rating organization. At December
31, 1995, reinsurance receivables with a carrying value of $4.2 million were
associated with Alabama Reassurance Company ("Alabama Re"). The Alabama Re
reinsurance receivables are secured by trust accounts containing letters of
credit totalling $6.6 million granted in favor of the applicable insurance
subsidiary of the Company.
The Crown and Alabama Re reinsurance treaties are representative of a key use
of reinsurance by the Company. Immediately following the purchase of a block
of life insurance policies through the Company's acquisition program, the
Company may reinsure all or a portion of the acquired policies. By doing so,
the Company seeks to recover all or a portion of the purchase price of the
acquired policies and transfer the risks associated with the policies to the
reinsurer. The Company retains the administration of the reinsured policies
and seeks to profit from the compensation the Company receives from the
reinsurer for such policy administration. The Company is entitled, but not
obligated, to recapture the policies at a price determined by a formula in the
reinsurance treaty.
With regard to the policies not 100% reinsured with Crown or Alabama Re, the
purpose of reinsurance is to limit the Company's exposure to loss on any single
insured. The Company reinsures the portion of risks in excess of a maximum of
$50,000 on the life of any individual through various reinsurance contracts,
primarily of the coinsurance and yearly renewable term type.
The Company is contingently liable for amounts ceded to reinsurers in the event
the reinsurers are unable to meet their obligations assumed under the
reinsurance agreements. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk to minimize its exposure
to significant losses from reinsurer insolvencies. Other than its exposure to
Crown and Alabama Re as discussed above, management does not believe the
Company has significant concentrations of credit risk related to reinsurance,
or otherwise.
The effect of reinsurance on premiums and benefits follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
--------------------------
<S> <C> <C>
Direct premiums $ 7,884,105 6,197,219
Reinsurance assumed 3,655 132,883
Reinsurance ceded (6,305,896) (5,224,900)
--------------------------
Net premiums $ 1,581,864 1,105,202
===========================
Direct policy benefits $ 5,059,540 7,026,411
Reinsurance assumed (26) 16,328
Reinsurance ceded (3,213,215) (5,717,353)
----------------------------
Net policy benefits $ 1,846,299 1,325,386
=============================
</TABLE>
LITIGATION
Acap and its subsidiaries are involved in various lawsuits and legal actions
arising in the ordinary course of operations. Management is of the opinion
that the ultimate disposition of the matters will not have a material adverse
effect on Acap's financial position.
7. SUPPLEMENTAL INFORMATION REGARDING CASH FLOWS
Cash payments for interest expense for the years ended December 31, 1995 and
1994 were $418,876 and $0, respectively. Cash payments of $1,017,013 and
$744,291 for federal income taxes were made during the years ended December 31,
1995 and 1994, respectively.
The reinsurance agreement entered into by the Company in 1994 with an
unaffiliated reinsurer covering 20% of each of Family's life policies was a
non-cash transaction. Family transferred assets of $379,069 and liabilities of
$1,012,390 and recognized a deferred gain on reinsurance of $633,321 to be
amortized over the life of the policies. On January 4, 1995, Family increased
the amount of reinsurance on each of its life policies from 20% to 100%. The
increase in the reinsurance percentage on the Family policies and a reinsurance
agreement entered into by the Company with an unaffiliated reinsurer covering
100% of each of the life policies acquired with Oakley were non-cash
transactions. In connection with those transactions, the Company transferred
assets of $2,020,065 and liabilities of $3,259,418 and recognized a deferred
gain on reinsurance of $1,239,353 to be amortized over the life of the
policies.
In connection with the acquisition of Family in 1994, a $5,000,000 surplus
debenture was issued to the seller, which was a non-cash transaction.
In 1994, the Company reacquired its home office property in partial
satisfaction of the mortgage loan outstanding on the property, which was a non-
cash transaction.
The following reflects assets acquired and liabilities assumed relative to the
acquisitions by the Company of three life insurance companies in 1994 and one
life insurance company in 1995, and the consideration given and the net cash
flow relative to such acquisitions.
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Assets of acquired subsidiaries $ 4,393,403 28,504,392
Liabilities of acquired subsidiaries (1,833,887) (20,763,913)
Excess of cost over net assets acquired -- 316,074
---------------------------
Cost of acquisition $ 2,559,516 8,056,553
Cash paid for acquisitions $ 2,559,516 3,056,553
Surplus debenture issued -- 5,000,000
Cost of acquisition $ 2,559,516 8,056,553
===========================
Net cash from acquisitions:
Cash of acquired companies $ 607,216 3,620,908
Cash paid for acquisitions (2,559,516) (3,056,553)
---------------------------
Net cash provided from (used by) acquisitions $(1,952,300) 564,355
===========================
</TABLE>
8. FEDERAL INCOME TAXES
Acap and American Capitol file a consolidated federal income tax return.
The other subsidiaries of the Company file separate federal income tax returns.
At December 31, 1995, Acap has a remaining tax net operating loss carryover of
approximately $1,100,000 that will expire during the years 2001 through 2008 if
not previously utilized. At December 31, 1995, the Company had alternative
minimum tax carryforwards of approximately $349,000 that are available for an
indefinite period to reduce future regular federal income taxes and tax capital
loss carryforwards of approximately $139,000 that will expire in the year 2000
if not previously utilized.
A portion of life insurance taxable income generated prior to 1984 is not
taxable unless it exceeds certain statutory limitations or is distributed to
stockholders, in which case it becomes taxable at ordinary corporate rates.
Such income is accumulated in a Policyholders' Surplus account that, at
December 31, 1995, had a balance of approximately $4,600,000. No provision has
been made for income taxes related to this accumulation.
A reconciliation of income tax expense for the years 1995 and 1994 computed at
the applicable federal tax rate of 34% to the amount recorded in the
consolidated financial statements is as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Federal income tax expense at statutory rate $ 170,123 740,764
Small life insurance company special deduction (596,918) (336,989)
Change in valuation allowance 616,489) (73,043)
Tax underpayment (refund) 15,084 (57,519)
Other, net 18,551 187,132
-------------------------
Total federal income tax expense $ 223,329 460,345
=========================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1995
are as follows:
<TABLE>
<S> <C>
Deferred Tax Assets:
Allowance for investment losses $137,525
Deferred gain on reinsurance 809,928
Net operating loss carryforwards 387,512
Alternative minimum tax credit carryforwards 118,753
Other 112,319
---------
Total gross deferred tax assets 1,566,037
Less: Valuation allowance (1,549,232)
----------
Deferred tax assets 16,805
----------
Deferred Tax Liabilities:
Net unrealized gains on available-for-sale securities 505,497
Deferred policy acquisition costs 460,396
Policy reserves and policy funds 1,078,584
Other 12,682
-----------
Deferred tax liabilities 2,057,159
-----------
Net deferred tax liability ($2,040,354)
===========
</TABLE>
A valuation allowance of $1,549,232 was established at December 31, 1995 against
the deferred tax asset. The net change in the total valuation allowance for
the years ended December 31, 1995 and 1994 was an increase of $429,666 and a
decrease of $73,043, respectively. Management believes that it is more
likely than not that the net deferred tax asset is recoverable.
9. AMERICAN CAPITOL KEY EMPLOYEE STOCK OPTION PLAN
On July 18, 1988, the Board of Directors of American Capitol approved a Key
Employee Stock Option Plan ("the Plan"). Under the terms of the non-qualified
Plan, the Compensation Committee of the Board of Directors of American Capitol
is authorized to grant stock options to any employee the Compensation Committee
determines is a key employee. The stock options may only be granted on shares
of common stock of Acap or Fortune owned by American Capitol. The options
enable the grantee to purchase the common stock to which the options relate at
the fair market value of the common stock on the date the options were granted.
The options generally expire 20% annually over a five year period and are
exercisable immediately upon grant.
Stock options granted for Acap Corporation common stock are summarized as
follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
OPTION PRICE 1995 1994
------------ ---- ----
<S> <C> <C> <C>
Outstanding at January 1 $131 1/4 - $187 1/2 102 102
Cancelled during the year $131 1/4 (34) --
-------------------
Outstanding at December 31 $187 1/2 68 102
===================
Available for future grant 173 139
===================
</TABLE>
Stock options granted for Fortune common stock are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
OPTION PRICE 1995 1994
------------ ---- ----
<S> <C> <C> <C>
Outstanding at January 1 $11/32 - $3/8 35,000 35,000
Cancelled during the year $3/8 (10,000) --
-----------------------
Outstanding at December 31 $11/32 25,000 35,000
=======================
Available for future grant 46,571 36,571
=======================
</TABLE>
10. CAPITAL STOCK
Acap has two classes of capital stock: preferred stock ($.10 par value,
authorized 80,000 shares), which may be issued in series with such dividend,
liquidation, redemption, conversion, voting, and other rights as the Board of
Directors may determine, and common stock ($.10 par value, authorized 10,000
shares), the "Common Stock." The only series of preferred stock outstanding is
the Cumulative Exchangeable Preferred Stock, Series A, $2.50 (Adjustable), the
"Series A Preferred Stock."
SERIES A PREFERRED STOCK
There are 74,000 shares of Series A Preferred Stock authorized, issued and
outstanding. Acap pays dividends quarterly on the Series A Preferred Stock
(when and as declared by the Board of Directors). The amount of the dividend
is based on the prime rate of a Pittsburgh bank plus 2%. Acap has the right,
if elected by the Board of Directors, to redeem the Series A Preferred Stock at
the fixed redemption price of $27.50 per share. The holders of Series A
Preferred Stock are entitled to liquidating distributions of $27.50 per share.
The cumulative dividends and liquidating distributions of the Series A
Preferred Stock are payable in preference to the Common Stock. The Series A
Preferred Stock is non-voting, except as required by law and except that, if
six quarterly dividends are unpaid and past due, the holders of the Series A
Preferred Stock may elect two directors to Acap's Board of Directors. The
shares of Series A Preferred Stock, valued for such purposes at $27.50 per
share, are exchangeable at the option of the holders into shares of common
stock of Fortune at the price of $2.50 per share of Fortune common stock.
Under an exchange agreement between Acap and Fortune, Fortune is obligated to
provide Acap with such shares of Fortune common stock as are necessary for Acap
to meet its obligation under the Series A Preferred Stock. In addition, the
exchange agreement provides for payment by Acap to Fortune for the Fortune
common stock to consist of shares of the Common Stock of equal value to the
Fortune common stock received. Therefore, exercise of the exchange right under
the Series A Preferred Stock will have the same effect upon the stockholders'
equity of Acap as a direct conversion of Series A Preferred Stock into Common
Stock. There was no activity related to the Series A Preferred Stock for the
two years ended December 31, 1995 other than payments of dividends.
COMMON STOCK
On March 21, 1994, the Company decreased the number of authorized shares of the
Common Stock from 3,300,000 shares to 10,000 shares. There was no other
activity related to the Common Stock for the two years ended December 31, 1995.
11. SUBSEQUENT EVENTS
Fortune expects to adopt a plan of dissolution and liquidation at its annual
stockholder meeting on May 6, 1996. Except for a small amount of cash,
Fortune's assets consist solely of 5,421 shares of Acap's common stock. Upon
liquidation, Fortune's stockholders are entitled to receive their pro rata
portion of the 5,421 shares of Acap's common stock owned by Fortune.
Under the plan, no fractional shares of Acap's common stock will be issued.
Fortune's stockholders have the option of selling their "odd lot" shares of
Fortune common stock to Acap or buying from Acap enough Fortune common stock to
round up their holdings.
Acap has entered into an agreement with Fortune to pay for Fortune's operating
expenses through the expiration of the plan of dissolution and liquidation of
Fortune (estimated to be $19,350). In exchange for its services, Acap will
receive 55,323 shares of Fortune common stock. The Company will account for
its own common stock received as a part of the liquidating distribution as
treasury shares. The estimated result of this accounting treatment will be a
decrease in the Company's stockholders' equity of approximately $144,784 and
a decrease in the number of shares of Company common stock outstanding from
8,516 to approximately 7,570. Due to a higher proportional decrease in
common shares outstanding as compared to stockholders' equity, the Company's
book value per common share is estimated to increase from $518.01 to $563.62
(based on December 31, 1995 amounts). The foregoing figures assume that no
Fortune stockholders elect to round up odd lot shares and Acap is required to
purchase all of the odd lot shares.
Fortune's liquidation will not result in a change in the management, directors,
or the ultimate control of Acap.
<PAGE>
ACAP CORPORATION
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Acap Corporation
We have audited the accompanying consolidated balance sheet of Acap Corporation
and subsidiaries as of December 31, 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1995 and 1994. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Acap Corporation
and subsidiaries as of December 31, 1995, and the results of their operations
and their cash flows for the years ended December 31, 1995 and 1994 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standard No. 114, "Accounting by Creditors for the
Impairment of a Loan," as amended by Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for the Impairment of a Loan:
Income Recognition and Disclosures," in 1994.
KPMG Peat Marwick LLP
Houston, Texas
March 25, 1996<PAGE>
ACAP CORPORATION
STOCKHOLDER INFORMATION
MARKET INFORMATION
The common stock of Acap is traded over-the-counter with activity in the stock
reflected nationally on the OTC Bulletin Board electronic quotation system of
the National Association of Securities Dealers. The Company's stock symbol is
AKAP.
The table below presents the range of closing bid quotations for Acap's common
stock during the two most recent fiscal years.
<TABLE>
<CAPTION>
1995 1994
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First quarter $125 100 205 135
Second quarter 135 100 125 100
Third quarter 135 135 225 100
Fourth quarter 180 135 125 100
</TABLE>
The prices presented are bid prices, which reflect inter-dealer transactions
and do not include retail mark-ups and mark-downs or any commission to the
parties involved. As such, the prices may not reflect prices in actual
transactions.
HOLDERS
The approximate number of holders of record of Acap's common stock as of
March 22, 1996 was 610.
DIVIDENDS
Acap declared no common stock dividends in 1995 or 1994. At present,
management anticipates that no dividends will be declared or paid with respect
to Acap's common stock during 1996.
FORM 10-KSB
Stockholders may receive without charge a copy of the Company's Annual Report
on Form 10-KSB filed with the Securities and Exchange Commission by writing to
Lana S. Vaughn, Stockholder Services, Acap Corporation, 10555 Richmond Avenue,
Houston, TX 77042.
TRANSFER AGENT
The registrar and transfer agent for the Company's common stock is Continental
Stock Transfer and Trust Company, 2 Broadway, New York, NY 10004. For a change
of name or address, or to replace lost stock certificates, write to Continental
at the address above or call (212) 509-4000.
ACAP CORPORATION
STOCKHOLDER INFORMATION
INVESTOR RELATIONS
Requests for information should be directed by mail to Lana S. Vaughn,
Stockholder Services, Acap Corporation, 10555 Richmond Avenue, Houston, TX
77042 or by calling (713) 974-2242.
INDEPENDENT AUDITORS
The Company's financial statements for the year 1995 were audited by the
independent accounting firm of KPMG Peat Marwick LLP, 700 Louisiana, Houston,
TX 77002.
ANNUAL MEETING
Stockholders are invited to attend the Annual Meeting of Stockholders which
will be held on Monday, May 6, 1996 at 8:00 a.m. at the Company's office at
10555 Richmond Avenue, Houston, Texas, on the second floor.
<PAGE>
ACAP CORPORATION
DIRECTORS AND OFFICERS
Board of Directors of Acap
R. Wellington Daniels
Investor; Retired Director of National Accounts, American Cyanamid
William F. Guest
Chairman of the Board and President, Acap Corporation
C. Stratton Hill, Jr., M.D.
Physician
OFFICERS OF ACAP
William F. Guest
Chairman of the Board and President
John D. Cornett
Executive Vice President and Treasurer
Paul L. Clancy
Secretary
H. Kathleen Musselwhite
Assistant Treasurer
OFFICERS OF AMERICAN CAPITOL
William F. Guest
Chairman of the Board
John D. Cornett
President
Paul L. Clancy
Executive Vice President and Secretary
H. Kathleen Musselwhite
Treasurer and Controller
Carolyn M. Rawlins
Assistant Secretary
Linda G. Stark
Assistant Vice President
C. Stratton Hill, Jr., M.D.
Medical Director
<PAGE>
ACAP CORPORATION
10555 Richmond Avenue Houston, Texas 77042
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1995 CORPORATION AND IS QUALIFED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 29,815,078
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 59,679
<MORTGAGE> 1,264,499
<REAL-ESTATE> 1,505,325
<TOTAL-INVEST> 40,990,774
<CASH> 123,613
<RECOVER-REINSURE> 36,735,253
<DEFERRED-ACQUISITION> 1,779,055
<TOTAL-ASSETS> 82,881,454
<POLICY-LOSSES> 68,440,980
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 1,733,485
<NOTES-PAYABLE> 1,312,500
0
1,850,000
<COMMON> 876
<OTHER-SE> 4,410,527
<TOTAL-LIABILITY-AND-EQUITY> 82,881,454
1,581,864
<INVESTMENT-INCOME> 1,297,361
<INVESTMENT-GAINS> 170,003
<OTHER-INCOME> 83,918
<BENEFITS> 1,846,299
<UNDERWRITING-AMORTIZATION> 115,800
<UNDERWRITING-OTHER> 2,576,224
<INCOME-PRETAX> 500,362
<INCOME-TAX> 223,329
<INCOME-CONTINUING> 277,033
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 277,033
<EPS-PRIMARY> 9.04
<EPS-DILUTED> 0
<RESERVE-OPEN> 672,987
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 612,125
<PAYMENTS-PRIOR> 518,029
<RESERVE-CLOSE> 778,380
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
