<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
Commission File Number: 1-11396
JOHN ALDEN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 59-2840712
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
7300 CORPORATE CENTER DRIVE, MIAMI, FLORIDA 33126-1208
(Address of principal executive offices) (Zip Code)
</TABLE>
(305) 715-3767
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. / X/ Yes / / No
As of August 8, 1996, 25,294,990 shares of Common Stock, par value $.01, were
outstanding.
<PAGE> 2
JOHN ALDEN FINANCIAL CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1996
Index
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<CAPTION>
Page
----
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements as of June 30, 1996
(unaudited) and December 31, 1995, and for the six and three months
ended June 30, 1996 (unaudited) and June 30, 1995 (unaudited) . . . . . . . . . . . . . . 1
Notes to Condensed Consolidated Financial Statements (unaudited) . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . 22
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
<PAGE> 3
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
JUNE 30,
1996 DECEMBER 31,
ASSETS (Unaudited) 1995
-------------- -------------
<S> <C> <C>
Debt securities:
Held-to-maturity securities, at amortized cost (market $656,015 and $609,599)........ $ 653,624 $ 584,330
Available-for-sale securities, at market (cost $3,639,843 and $3,652,408)............ 3,633,257 3,811,825
Trading account securities, at market (cost $5,442 and $5,450)....................... 5,494 5,703
Equity securities, at market (cost $70,734 and $72,919)................................ 77,337 82,639
Mortgage loans......................................................................... 1,505,890 1,506,874
Investment in real estate, at cost, less accumulated depreciation of $1,400
and $1,008.......................................................................... 37,615 20,998
Real estate owned...................................................................... 13,642 11,973
Policy loans and other notes receivable................................................ 90,215 84,079
Short-term investments................................................................. 14,497 6,349
-------------- -------------
Total invested assets.............................................................. 6,031,571 6,114,770
Cash and cash equivalents.............................................................. 46,954 99,606
Deferred policy acquisition costs...................................................... 269,157 197,667
Investment deposits recoverable........................................................ 789,924 806,333
Property and equipment, at cost, less accumulated
depreciation of $26,082 and $24,240................................................. 68,327 52,298
Other assets........................................................................... 435,372 425,356
-------------- -------------
Total assets....................................................................... $ 7,641,305 $ 7,696,030
============== =============
LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Contract holder liabilities.......................................................... $ 6,882,109 $ 6,867,803
Short-term debt...................................................................... 25,000 15,063
Long-term debt....................................................................... 76,500 92,000
Other liabilities.................................................................... 202,933 224,517
-------------- -------------
Total liabilities............................................................... 7,186,542 7,199,383
-------------- -------------
Redeemable securities:
Series A 9% cumulative preferred stock, $.01 par value;
150,000 shares authorized, issued and outstanding;
mandatory redemption value of $100 per share; including
accrued dividends of $286; $101.91 per share..................................... 15,286 15,286
Common stock, $.01 par value; 717,913 and 850,974 shares
authorized, issued and outstanding................................................ 4,152 4,130
-------------- -------------
Total redeemable securities..................................................... 19,438 19,416
-------------- -------------
Stockholders' equity:
Common stock, $.01 par value; 74,282,087 and 74,149,026 shares
authorized; 24,996,592 and 24,822,322 shares issued; 24,572,857
and 24,398,139 shares outstanding................................................ 250 248
Paid-in capital.................................................................... 181,636 181,154
Net unrealized gain (loss) on investments, net of income taxes..................... (5,015) 58,041
Retained earnings.................................................................. 271,155 250,167
Redemption value of common stock in excess of cost................................. (3,382) (3,050)
Treasury stock, at cost; 423,735 and 424,183 shares................................ (9,319) (9,329)
-------------- -------------
Total stockholders' equity...................................................... 435,325 477,231
-------------- -------------
Total liabilities, redeemable securities and stockholders' equity............... $ 7,641,305 $ 7,696,030
============== =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
1
<PAGE> 4
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
June 30, June 30,
-------------------------- -----------------------
1996 1995 1996 1995
---------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Gross insurance premiums and contract charges earned.................. $ 954,443 $ 961,092 $ 471,243 $ 484,589
Ceded insurance premiums and contract charges earned.................. (424,331) (440,710) (208,759) (220,863)
----------- ------------ ----------- -----------
Net insurance premiums and contract charges earned............... 530,112 520,382 262,484 263,726
Net investment income................................................. 22,568 26,485 10,766 13,626
Other income, including experience refunds and expense allowances
on reinsurance ceded............................................... 36,045 32,705 16,162 27,787
Net realized investment gains (losses)................................ 830 141 131 (1,398)
----------- ------------ ---------- -----------
Total revenues................................................... 589,555 579,713 289,543 303,741
----------- ------------ ----------- -----------
Benefits and expenses:
Gross claims incurred on insurance products........................... 697,383 696,557 350,364 346,968
Ceded claims incurred on insurance products........................... (323,749) (337,962) (161,299) (160,584)
----------- ------------ ----------- -----------
Net claims incurred on insurance products........................ 373,634 358,595 189,065 186,384
Universal life and investment-type contract benefits.................. 9,230 9,081 4,706 5,481
Increase (decrease) in life insurance reserves........................ 150 (187) 35 (392)
Commissions, net of commissions ceded................................. 40,877 38,010 19,572 17,408
General expenses, net of expenses ceded............................... 129,642 145,904 56,809 78,031
Amortization of purchased intangibles................................. 3,266 2,941 1,496 1,685
Amortization of deferred policy acquisition costs..................... 6,505 7,195 3,418 4,039
Interest expense...................................................... 3,360 4,214 1,654 2,135
Minority interest in joint venture's income........................... 775 -- 942 --
----------- ------------ ----------- -----------
Total benefits and expenses.................................... 567,439 565,753 277,697 294,771
----------- ------------ ----------- -----------
Income from continuing operations before provision for income taxes....... 22,116 13,960 11,846 8,970
Provision for income taxes................................................ 8,385 5,535 4,298 3,262
----------- ------------ ----------- -----------
Net income from continuing operations..................................... 13,731 8,425 7,548 5,708
Net income (loss) from discontinued operations:
Annuity Operations (net of income taxes of $8,983, $6,904, $4,534
and $3,004).......................................................... 14,781 12,366 7,330 5,275
Western Diversified Group (net of income taxes of ($528), $470,
($751) and $146)..................................................... (1,285) 1,137 (1,487) 283
----------- ------------ ----------- -----------
Net income................................................................ $ 27,227 $ 21,928 $ 13,391 $ 11,266
=========== ============ =========== ===========
Net income applicable to common stock..................................... $ 26,552 $ 21,253 $ 13,054 $ 10,929
=========== ============ =========== ===========
Net income per common and common equivalent share (see Note 3):
Net income from continuing operations............................... $ 0.51 $ 0.30 $ 0.28 $ 0.21
Net income from discontinued operations............................. 0.52 0.52 0.22 0.21
----------- ------------ ----------- -----------
Net income.......................................................... $ 1.03 $ 0.82 $ 0.50 $ 0.42
=========== ============ =========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE> 5
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
June 30, June 30,
-------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Number of shares outstanding............................................ 24,572,857 24,484,504 24,572,857 24,484,504
============ ============ ============ ============
Common stock, beginning of period....................................... $ 248 $ 245 $ 250 $ 247
Stock option exercises............................................... 1 1 -- --
Transfer from redeemable common stock................................ 1 1 -- --
------------ ------------ ------------ ------------
Common stock, end of period............................................. $ 250 $ 247 $ 250 247
============ ============ ============ ============
Paid-in capital, beginning of period.................................... $ 181,154 $ 180,401 $ 181,348 $ 180,793
Stock option exercises............................................... 173 281 62 --
Transfer from redeemable common stock................................ 309 116 226 5
------------ ------------ ------------ ------------
Paid-in capital, end of period.......................................... $ 181,636 $ 180,798 $ 181,636 $ 180,798
============ ============ ============ ============
Net unrealized gain (loss) on investments, net of income taxes,
beginning of period.................................................. $ 58,041 $ (20,348) $ 13,770 $ (3,482)
Change in net unrealized gain (loss) on investments,
net of income taxes ................................................. (63,056) 45,937 (18,785) 29,071
------------ ------------ ------------ ------------
Net unrealized gain (loss) on investments, net of income taxes,
end of period........................................................ $ (5,015) $ 25,589 $ (5,015) $ 25,589
============ ============ ============ ============
Retained earnings, beginning of period.................................. $ 250,167 $ 256,252 $ 260,884 $ 263,782
Net income........................................................... 27,227 21,928 13,391 11,266
Dividends on redeemable preferred stock ($4.50, $4.50, $2.25 and
$2.25 per share) ................................................ (675) (675) (337) (337)
Dividends on common stock ($0.22, $0.22, $0.11 and $0.11 per
share)........................................................... (5,564) (5,590) (2,783) (2,796)
------------ ------------ ------------ ------------
Retained earnings, end of period........................................ $ 271,155 $ 271,915 $ 271,155 $ 271,915
============ ============ ============ ============
Redemption value of common stock in excess of cost,
beginning of period.................................................. $ (3,050) $ (3,645) $ (2,581) $ (2,294)
Transfer from redeemable common stock................................ 4 124 4 124
Adjustment of put holder shares to market value...................... (24) (746) -- (746)
Change in redemption value of common stock in excess of cost........ (312) 1,505 (805) 154
------------ ------------ ------------ ------------
Redemption value of common stock in excess of cost, end of period....... $ (3,382) $ (2,762) $ (3,382) $ (2,762)
============ ============ ============ ============
Treasury stock, beginning of period..................................... $ (9,329) $ (6,181) $ (9,329) $ (6,181)
Stock option exercises .............................................. 10 -- 10 --
------------ ------------ ------------ ------------
Treasury stock, end of period........................................... $ (9,319) $ (6,181) $ (9,319) $ (6,181)
============ ============ ============ ============
Stockholders' equity, beginning of period............................... $ 477,231 $ 406,724 $ 444,342 $ 432,865
Net income........................................................... 27,227 21,928 13,391 11,266
Change in net unrealized gain (loss) on investments,
net of income taxes.............................................. (63,056) 45,937 (18,785) 29,071
Dividends on redeemable preferred stock ($4.50, $4.50, $2.25 and
$2.25 per share) ................................................ (675) (675) (337) (337)
Dividends on common stock ($0.22, $0.22, $0.11 and $0.11 per share).. (5,564) (5,590) (2,783) (2,796)
Change in redemption value of common stock in excess of cost......... (312) 1,505 (805) 154
Stock option exercises............................................... 184 282 72 --
Adjustment of put holder shares to market value...................... (24) (746) -- (746)
Transfer from redeemable common stock................................ 314 241 230 129
------------ ----------- ------------ ------------
Stockholders' equity, end of period..................................... $ 435,325 $ 469,606 $ 435,325 $ 469,606
============ ============ ============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 6
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------------
1996 1995
------------ -----------
<S> <C> <C>
Net cash provided by operating activities......................... $ 154,179 $ 172,303
------------ -----------
Cash flows from investing activities:
Proceeds from investments sold:
Available-for-sale........................................... 274,751 103,297
Equity securities............................................ 1,383 49,287
Real estate owned............................................ 5,697 3,495
Maturities, calls and scheduled loan payments:
Held-to-maturity............................................. 34,276 35,182
Available-for-sale........................................... 113,784 29,624
Mortgage loans and other notes receivable.................... 173,655 78,109
Investments purchased:
Held-to-maturity............................................. (102,472) (46,059)
Available-for-sale........................................... (370,441) (396,777)
Equity securities............................................ -- (27,179)
Mortgage loans and other notes receivable.................... (189,160) (103,324)
Investment in real estate.................................... (17,009) (454)
Inflows from net sales and purchases of short-term investments.. (8,392) 7,668
Acquisitions.................................................... -- (7,404)
Purchases of property and equipment............................ (18,011) (25,688)
---------- ----------
Net cash used in investing activities........................... (101,939) (300,223)
---------- ----------
Cash flows from financing activities:
Proceeds from borrowings of short-term and long-term debt....... 12,000 20,000
Repayments of borrowings of short-term and long-term debt....... (17,563) (16,576)
Receipts from universal life and investment-type contracts...... 282,709 530,112
Payments on universal life and investment-type contracts........ (375,958) (341,001)
Payment of dividends............................................ (6,264) (6,002)
Stock option exercises.......................................... 184 282
---------- ----------
Net cash (used in) provided by financing activities.............. (104,892) 186,815
---------- ----------
Net (decrease) increase in cash and cash equivalents............... (52,652) 58,895
Cash and cash equivalents, beginning of period..................... 99,606 58,474
---------- ----------
Cash and cash equivalents, end of period........................... $ 46,954 $ 117,369
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 7
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The condensed consolidated financial statements of John Alden
Financial Corporation and its subsidiaries (the "Company") have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The interim financial data is
unaudited; however, in the opinion of management, the interim data includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results of operations for the interim periods presented.
The results of operations for the six and three months ended June 30, 1996 are
not necessarily indicative of the results to be expected for the full year. As
described in Note 2, the Company is anticipating disposing of certain
operations. Certain reclassifications have been made to prior period condensed
consolidated financial statements to conform to current period presentation.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995, as
amended.
NOTE 2 -- DISCONTINUED OPERATIONS
On March 27, 1996, the Board of Directors of the Company authorized the
sale of its Annuity Operations and the Western Diversified Group. Annuity
Operations includes substantially all of the annuity business of John Alden
Life Insurance Company ("JALIC") and all of the business of John Alden Life
Insurance Company of New York ("JANY"). JANY primarily markets annuity
products in the State of New York, as well as certain individual life insurance
products. The Western Diversified Group markets credit life and disability and
retail service warranty coverage, primarily through automobile dealers. The
Company anticipates that the potential sales of these businesses will occur
within one year from the above date and will result in a net gain. Such sales
will be subject to applicable regulatory approvals. There can be no assurance
that such sales will occur.
It is anticipated that the sale of the JALIC annuity business will be
accomplished through an indemnity reinsurance transaction. As of June 30,
1996, total contract holder liabilities, net of reinsurance, related to such
annuities were $3,914.1 million. It is anticipated that the sales of JANY and
the Western Diversified Group will be accomplished through the sale of the
common stock of the respective subsidiaries. As of June 30, 1996, the net
assets of JANY and the Western Diversified Group aggregated approximately $76.7
million and $60.9 million, respectively. Total contract holder liabilities,
net of reinsurance, related to JANY annuities were $1,328.6 million as of June
30, 1996.
The results of operations relating to the Annuity Operations and the
Western Diversified Group are reflected as discontinued operations in the
accompanying condensed consolidated statements of income. Operating results
relating to continuing operations primarily relate to the Company's healthcare
business. As a result, beginning with the condensed consolidated financial
statements for the quarter ended March 31, 1996, the Company discontinued the
reporting of segment information.
5
<PAGE> 8
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED)
NOTE 3 -- EARNINGS PER SHARE
Net income per common and common equivalent share was determined by
dividing net income, as adjusted below, by applicable average shares
outstanding (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- -----------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . $27,227 $21,928 $13,391 $11,266
Dividends on redeemable preferred stock . . . . . (675) (675) (337) (337)
------- ------- ------- -------
Net income applicable to common stock . . . . . . $26,552 $21,253 $13,054 $10,929
======= ======= ======= =======
Average common and common equivalent shares
outstanding . . . . . . . . . . . . . . . . . . . 25,659 25,844 25,689 25,658
======= ======= ======= =======
</TABLE>
Average common and common equivalent shares outstanding include common
shares outstanding and common stock equivalents attributable to outstanding
stock options. All potentially dilutive securities are considered to be common
stock equivalents.
NOTE 4 -- ACCOUNTING CHANGES
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition
and Disclosures" effective January 1, 1995. SFAS No. 114 addresses the
accounting by creditors for the measurement and recognition of loan
impairments. SFAS No. 118 amends certain provisions of SFAS No. 114. There
was no effect on the Company's results of operations or financial position upon
adoption of these statements.
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" effective
January 1, 1996. This statement addresses the recognition and measurement of
impairments of long-lived assets, certain identifiable intangibles and goodwill
related to those assets to be held as well as to be disposed of. There was no
effect on the Company's results of operations or financial position upon
adoption of this statement.
6
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ACCOUNTING CHANGES
See Note 4 to the Condensed Consolidated Financial Statements for a
discussion of the impact of the adoption of new accounting pronouncements.
RESULTS OF OPERATIONS
KEY FINANCIAL DATA
CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
SIX MONTHS ENDED CHANGE THREE MONTHS ENDED CHANGE
JUNE 30, POSITIVE JUNE 30, POSITIVE
------------------- (NEGATIVE) ------------------- (NEGATIVE)
1996 1995 EFFECT 1996 1995 EFFECT
-------- -------- ---------- -------- -------- ----------
(In millions, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Gross insurance premiums and
contract charges earned . . . $954.4 $961.1 (0.7)% $471.2 $484.6 (2.8)%
Net realized investment
gains(losses) . . . . . . . . 0.8 0.1 700.0 0.1 (1.4) 107.1
Interest expense . . . . . . . 3.4 4.2 19.0 1.7 2.1 19.0
Pre-tax income from continuing
operations . . . . . . . . . . 22.1 14.0 57.9 11.8 9.0 31.1
Net income from continuing
operations . . . . . . . . . 13.7 8.4 63.1 7.5 5.7 31.6
Operating income (1):
Continuing operations . . . . 12.5 7.7 62.3 7.0 6.3 11.1
Discontinued operations . . . 15.8 15.9 (0.6) 7.5 7.0 7.1
Total . . . . . . . . . . . 28.3 23.6 19.9 14.5 13.3 9.0
Net income . . . . . . . . . . 27.2 21.9 24.2 13.4 11.3 18.6
Net income applicable to common
stock . . . . . . . . . . . . 26.6 21.2 25.5 13.1 10.9 20.2
Operating income per common
share(1):
Continuing operations . . . . 0.49 0.30 63.3 0.28 0.25 12.0
Discontinued operations . . . 0.61 0.61 -- 0.28 0.26 7.7
Total . . . . . . . . . . . 1.10 0.91 20.9 0.56 0.51 9.8
Net income per common share . . 1.03 0.82 25.6 0.50 0.42 19.0
Average common equivalent
shares outstanding (000's) . 25,659 25,844 (0.7) 25,689 25,658 0.1
</TABLE>
- ---------------------------
(1) Applicable to common stock, which excludes net realized investment
gains (losses) and is after preferred stock dividends.
Consolidated Results for the Six Months Ended June 30, 1996 and 1995
Operating income from continuing operations applicable to common stock
increased 62.3% to $12.5 million for the six months ended June 30, 1996 from
$7.7 million for the six months ended June 30, 1995. Operating income from
continuing operations for the six months ended June 30, 1996 was reduced by
$4.4 million for severance and other charges resulting from the Company's
comprehensive strategic evaluation of its non-core product lines and increased
focus on its core product lines. Operating income from continuing operations
for the six months ended June 30, 1995 was reduced by $6.5 million due to an
increase in the medical claim reserves relating to medical services provided
(claims incurred) in 1994. Excluding these adjustments in each of the
respective periods, operating income from continuing operations increased 19.0%
to $16.9 million for the six months ended June 30, 1996 from $14.2 million for
the six months ended June 30, 1995. This increase was primarily attributable
7
<PAGE> 10
to a decrease in the group gross combined ratio, partially offset by reduced
investment income resulting from lower yielding invested assets, as discussed
below. Operating income from discontinued operations was $15.8 million for the
six months ended June 30, 1996 as compared to $15.9 million for the six months
ended June 30, 1995.
Net realized investment gains increased to $0.8 million for the six
months ended June 30, 1996 from $0.1 million for the six months ended June 30,
1995. The net increase in operating income of 19.9%, coupled with the increase
in net realized investment gains, resulted in a 25.5% increase in net income
applicable to common stock to $26.6 million for the six months ended June 30,
1996 from $21.2 million for the six months ended June 30, 1995.
Operating income from continuing operations increased 63.3% to $0.49
per share for the six months ended June 30, 1996 from $0.30 per share for the
six months ended June 30, 1995. Operating income from discontinued operations
was $0.61 for both the six months ended June 30, 1996 and June 30, 1995. Net
income increased 25.6% to $1.03 per share for the six months ended June 30,
1996 from $0.82 per share for the six months ended June 30, 1995.
Consolidated Results for the Three Months Ended June 30, 1996 and 1995
Operating income from continuing operations applicable to common stock
increased 11.1% to $7.0 million for the three months ended June 30, 1996 from
$6.3 million for the three months ended June 30, 1995. This increase was due to
a decrease in corporate overhead and litigation related expenses as well as
reduced losses incurred relating to product lines no longer actively marketed.
Operating income from discontinued operations increased 7.1% to $7.5 million
for the three months ended June 30, 1996 from $7.0 million for the three months
ended June 30, 1995.
Net realized investment gains increased to $0.1 million for the three
months ended June 30, 1996 from net realized investment losses of $1.4 million
for the three months ended June 30, 1995. The increase in operating income of
9.0%, coupled with the increase in net realized investment gains, resulted in a
20.2% increase in net income applicable to common stock to $13.1 million for
the three months ended June 30, 1996 from $10.9 million for the three months
ended June 30, 1995.
Operating income from continuing operations increased 12.0% to $0.28
per share for the three months ended June 30, 1996 from $0.25 per share for the
three months ended June 30, 1995. Operating income from discontinued
operations increased 7.7% to $0.28 per share for the three months ended June
30, 1996 from $0.26 per share for the three months ended June 30, 1995. Net
income increased 19.0% to $0.50 per share for the three months ended June 30,
1996 from $0.42 per share for the three months ended June 30, 1995.
8
<PAGE> 11
CONTINUING OPERATIONS
HEALTHCARE OPERATIONS
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
SIX MONTHS ENDED CHANGE THREE MONTHS ENDED CHANGE
JUNE 30, POSITIVE JUNE 30, POSITIVE
---------------------- (NEGATIVE) ----------------------- (NEGATIVE)
1996 1995 EFFECT 1996 1995 EFFECT
--------- -------- ---------- ---------- --------- --------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Gross insurance premiums and
contract charges earned . . . . . . $ 946.5 $ 949.2 (0.3)% $ 467.3 $ 480.7 (2.8)%
Group insured data at end of period:
Employers (1) . . . . . . . . . . . 214,000 246,000 (13.0) 214,000 246,000 (13.0)
Employee lives . . . . . . . . . . 560,000 646,000 (13.3) 560,000 646,000 (13.3)
Group covered lives . . . . . . . . . 1,069,000 1,232,000 (13.2) 1,069,000 1,232,000 (13.2)
HMO covered lives . . . . . . . . . . 62,000 28,000 121.4 62,000 28,000 121.4
Total covered lives . . . . . . . . 1,131,000 1,260,000 (10.2) 1,131,000 1,260,000 (10.2)
Group pre-tax operating income . . . $ 33.7 $ 21.0 60.5 $ 17.6 $ 16.8 4.8
Group gross data:
Insurance premiums and contract
charges earned . . . . . . . . . . 799.5 844.9 (5.4) 392.6 422.3 (7.0)
Insurance premiums earned per group
employee life (in dollars) . . . . 1,355.1 1,295.9 4.6 677.0 648.3 4.4
Annualized persistency rates . . . 66.5% 71.8% (5.3) 64.2% 71.3% (7.1)
Medical loss ratio . . . . . . . . 73.0 73.4 0.4 73.5 71.8 (1.7)
Expense ratio . . . . . . . . . . . 23.6 24.9 1.3 22.7 25.0 2.3
Combined ratio . . . . . . . . . . 96.6 98.3 1.7 96.2 96.8 0.6
Pre-tax income . . . . . . . . . . . $ 34.3 $ 24.4 40.6 $ 17.1 $ 18.3 (6.6)
</TABLE>
- --------------------------
(1) Includes 35,000 and 42,000 groups, each group made up of one individual, as
of June 30, 1996 and 1995, respectively, marketed through an association
group trust.
Healthcare Operations Results for the Six Months Ended June 30, 1996 and 1995
Pre-tax income for healthcare operations increased 40.6% to $34.3
million for the six months ended June 30, 1996 from $24.4 million for the six
months ended June 30, 1995. Pre-tax income for the six months ended June 30,
1996 was reduced by $5.3 million for the healthcare operations' portion of the
charges discussed above. Pre-tax income for the six months ended June 30, 1995
was reduced by $10.0 million due to an increase in medical loss reserves
relating to claims incurred in 1994, as discussed below. Excluding these
adjustments in each of the respective periods, pre-tax income increased 15.1%
to $39.6 million for the six months ended June 30, 1996 from $34.4 million for
the six months ended June 30, 1995. The group gross medical loss ratio
increased to 73.0% for the six months ended June 30, 1996 from 72.2% for the
six months ended June 30, 1995, excluding the $10.0 million for claims incurred
in 1994. This increase was offset by a decrease in the group gross expense
ratio to 23.2% for the six months ended June 30, 1996 from 24.9% for the six
months ended June 30, 1995, excluding the adjustments referred to above.
In early 1995, the Company experienced an increase in the group gross
medical loss ratio over the already heightened 1994 levels resulting primarily
from increased utilization of medical services and lack of historical
experience in pricing in an environment of healthcare reform, primarily at the
state level, pertaining to small group and individual healthcare. The Company
believes it was among the first major participants in the small group market to
recognize the increasing medical cost trends. The Company identified the
increase during its periodic hindsight review of its estimates of unpaid claims
based on its actual claims experience. Upon such a review completed in late
March of 1995 utilizing the most recent available submitted claims data, the
Company discovered that claims submitted in 1995 relating to medical services
provided in 1994 were at higher levels than originally
9
<PAGE> 12
estimated. As a result of this review, the Company increased its claim
reserves as of December 31, 1994 by $15.0 million. Upon a hindsight review
performed in April 1995, based on claims received in April 1995 for medical
services provided in 1994, it became apparent that the claim reserves for 1994
would have to be further increased to reflect an even higher level of
utilization. Therefore, the Company recorded a pre-tax charge of $10.0 million
in the first quarter of 1995 for claims incurred in 1994. During the remainder
of 1995, the Company continued to experience loss ratio increases over the 1994
levels. The group gross medical loss ratio increased to 75.0% for the year
ended December 31, 1995 from 69.7% for the year ended December 31, 1994.
Premium rate increases are established approximately three months
prior to the quarter in which they become effective. Subsequent to
establishing the first quarter 1996 premium rate increases in October 1995, the
Company identified several factors, in addition to increased utilization, that
contributed to the relatively high medical loss ratio during 1995. These
factors were primarily a result of small group and individual healthcare reform
legislation, primarily at the state level. Such reform included guaranteed
issue, mandated benefits, premium rate limits (including community rating and
modified community rating), guaranteed renewability, minimum medical loss ratio
mandates, risk adjustment mechanisms which allocate losses of individual
carriers to group carriers and other reforms. The Company also increased its
ability to analyze claims experience by various specific characteristics.
These included, among other things, initial group size, current group size,
duration of policy, geographic location, level of deductibles and utilization
of particular benefits. As a result, the Company identified certain blocks of
business with profit margins lower than that which the Company deems
acceptable. These higher risk blocks of the business accounted for
approximately 30% of the total group gross insurance premiums and contract
charges earned in 1995, and incurred a 1995 "hindsighted" loss ratio of 82.4%.
Hindsighted loss ratios are calculated based on the ultimate claim payout over
time for a particular period. On the same basis, the remaining block of
business, representing approximately 70% of 1995 group gross insurance premiums
and contract charges earned, generated a hindsighted loss ratio for 1995 of
70.4%. As of June 30, 1996, the hindsighted loss ratio relating to gross
insurance premiums and contract charges earned in 1996 for the higher risk
block of business was less than ten percent above the hindsighted loss ratio
for the remaining block of business. However, the performance of these blocks
of business is best measured over at least a 12-month period.
As the first year and renewal premium rate increases that were
effective on January 1, 1996 were established in October 1995, they were
developed without benefit of this new information. The average rate increases
for the quarter beginning on January 1, 1996 were approximately 15%. Consistent
with the Company's objective of maintaining profit margins at the risk of
reducing market share, and utilizing the new information discussed above, the
Company significantly increased rates on its new business and increased rates
on its renewal business for the second, third and fourth quarters of 1996 by
approximately 22%, 23% and 23%, respectively. The Company has taken additional
actions that it believes will enable it to better control the future medical
loss ratios on its group business with a strong emphasis on the high risk
business. These actions include, where appropriate or available, improving
discounts from providers, redesigning benefits, improving underwriting
techniques, altering commission structures and discontinuing portions of such
business, if warranted. While all such actions are designed to improve
margins, they may have contributed to a decrease in group covered lives since
such rate increases may have resulted in prices above the competition. The
number of group covered lives decreased 13.2% to 1,069,000 at June 30, 1996
from 1,232,000 at June 30, 1995. Total group gross insurance premiums and
contract charges earned have decreased 5.4% to $799.5 million for the six
months ended June 30, 1996 from $844.9 million for the six months ended June
30, 1995 due to the decrease in covered lives, partially offset by the effect
of the premium rate increases described above. These actions may result in a
continued decrease in the total group gross insurance premiums and contract
charges earned over the next several quarters and possibly thereafter. There
can be no assurance that these actions will restore profit margins to
acceptable levels.
As noted above, the group gross medical loss ratio has increased to
73.0% for the six months ended June 30, 1996 as compared to 72.2% for the six
months ended June 30, 1995, excluding the increase in medical loss reserves
relating to claims incurred in 1994. The group gross medical loss ratio for
the first and second quarters of 1996 was 72.5% and 73.5%, respectively. This
increase is primarily attributable to the increased utilization of
10
<PAGE> 13
medical services which is generally being experienced throughout the industry.
The Company cannot predict whether the increase in utilization represents a
one-time event or more permanent trend.
The Company continues its strategy to strengthen its managed care
networks and products. This strategy is designed to reduce the risks created
in our marketplace by healthcare reforms and changing patterns of behavior by
providers while offering customers attractive, high quality, affordable
products. In this pursuit, the Company is designing benefit plans that are
more easily understood and administered by providers and which steer customers
into selected provider networks. In addition, the Company is enhancing
provider incentives and risk-sharing programs that encourage and reward
networks for effective medical cost management. It is anticipated that this
strategy may result in an increase in group operating expenses in the future.
During the six months ended June 30, 1996, the Company further
centralized processing functions by closing its Sacramento, California
processing office, resulting in a charge of approximately $1.0 million. During
this same period, the Company recorded a liability of approximately $1.9
million for the remaining lease obligation related to a computer software
system that will no longer be utilized due to the centralizing of various
functions and offices. The combined total for these severance and other
charges aggregates approximately $2.9 million, or 0.4% of the total group gross
insurance premiums and contract charges earned in this period.
The group gross expense ratio for the six months ended June 30, 1996,
excluding the 0.4% of severance and other charges discussed above, was 23.2%
compared to 24.9% for the six months ended June 30, 1995. This decrease was
primarily attributable to a reduction in the number of employees.
Additionally, reductions in renewal commissions were announced in late 1994 for
business sold subsequent to that announcement, which lowered commission expense
for the six months ended June 30, 1996 compared to the six months ended June
30, 1995.
Although the Company's medical loss ratio has generally been higher in
the fourth quarter than the other quarters of the year, the Company has
recently recognized an increase in this disparity. The Company cannot predict
the extent to which this disparity may increase or decrease in the future. As
discussed below, the Company is anticipating the sale of its Annuity
Operations. Such operations have generally resulted in fairly stable earnings
per share, which has had the effect of reducing the volatility in the Company's
earnings per share caused by fluctuations in the gross group medical loss
ratio. The Company believes, therefore, that the relative volatility of the
earnings per share may increase following the proposed sale of the Annuity
Operations.
Healthcare Operations Results for the Three Months Ended June 30, 1996 and 1995
Pre-tax income for healthcare operations decreased 6.6% to $17.1
million for the three months ended June 30, 1996 from $18.3 million for the
three months ended June 30, 1995. This decrease is generally due to an
increase in the loss ratio of the healthcare stop-loss reinsurance product
line, partially offset by a decrease in the group gross combined ratio to 96.2%
for the three months ended June 30, 1996 from 96.8% for the three months ended
June 30, 1995. Such decrease in the group gross combined ratio is generally
attributable to the decreased expense ratio offset by the increase in the
medical loss ratio, as discussed above. Total group covered lives decreased
13.2% to 1,069,000 at June 30, 1996 from 1,232,000 at June 30, 1995. Group
gross insurance premiums and contract charges earned decreased 7.0% to $392.6
million for the three months ended June 30, 1996 from $422.3 million for the
three months ended June 30, 1995 due to the decrease in covered lives,
partially offset by the premium rate increases which were put in effect in
1996, as discussed above.
11
<PAGE> 14
OTHER CONTINUING OPERATIONS
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
SIX MONTHS ENDED CHANGE THREE MONTHS ENDED CHANGE
JUNE 30, POSITIVE JUNE 30, POSITIVE
----------------- (NEGATIVE) ------------------ (NEGATIVE)
1996 1995 EFFECT 1996 1995 EFFECT
(In millions) ----- ------ ----------- ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gross premiums and fees . . . . $ 7.9 $11.9 (33.6) % $3.9 $ 3.9 -- %
Net investment income . . . . . 17.3 20.7 (16.4) 8.3 10.5 (21.0)
Pre-tax operating loss . . . . (13.0) (10.5) (23.8) (5.3) (7.8) 32.1
Net realized investment gains
(losses) . . . . . . . . . . 0.8 0.1 700.0 0.1 (1.4) 107.1
Pre-tax loss . . . . . . . . . (12.2) (10.4) (17.3) (5.2) (9.2) 43.5
</TABLE>
Other Continuing Operations Results for the Six Months Ended June 30, 1996 and
1995
Other continuing operations include JALIC's individual life business
and products no longer marketed by the Company. Also included are investment
income on equity, net corporate realized investment gains and losses and
corporate expenses for the Company and all of its subsidiaries, excluding John
Alden Life Insurance Company of New York ("JANY") and the Western Diversified
Group. Pre-tax loss from other continuing operations increased 17.3% to $12.2
million for the six months ended June 30, 1996 from $10.4 million for the six
months ended June 30, 1995. The 1996 amount includes the other continuing
operations' share of the severance and other charges, as discussed above, of
approximately $1.4 million. The 1995 amount includes $2.6 million of charges
incurred in relation to certain litigation related to the Company's operations.
Excluding these amounts, the pre-tax loss increased 38.5% to $10.8 million for
the six months ended June 30, 1996 from $7.8 million for the six months ended
June 30, 1995 primarily due to lower yielding invested assets which resulted in
reduced investment income for the 1996 period compared to the 1995 period. Net
realized investment gains increased to $0.8 million for the six months ended
June 30, 1996 from $0.1 million for the six months ended June 30, 1995. If the
Company completes the anticipated sales of the discontinued operations
discussed below, certain corporate expenses in other continuing operations may
be reduced. However, there can be no assurance as to when and to what extent
such expense reductions will occur.
Other Continuing Operations Results for the Three Months Ended June 30, 1996
and 1995
Pre-tax loss from other continuing operations decreased 43.5% to $5.2
million for the three months ended June 30, 1996 from $9.2 million for the
three months ended June 30, 1995. The 1995 amount includes $2.0 million of
charges incurred in relation to certain litigation related to the Company's
operations. Excluding these charges, the pre-tax loss decreased 27.8% during
these periods primarily due to a reduction in interest and overhead expenses,
as well as reduced losses incurred in the product lines no longer actively
marketed, partially offset by reduced investment income on equity. Net
realized investment gains increased 107.1% to $0.1 million for the three months
ended June 30, 1996 from net realized investment losses of $1.4 million for the
three months ended June 30, 1995.
DISCONTINUED OPERATIONS
On March 27, 1996, the Board of Directors of the Company authorized the
sale of its Annuity Operations and the Western Diversified Group. Annuity
Operations includes substantially all of the annuity business of John Alden
Life Insurance Company ("JALIC") and all of the business of JANY. JANY
primarily markets annuity products in the State of New York, as well as certain
individual life insurance products. The Western Diversified Group markets
credit life and disability and retail service warranty coverage, primarily
through automobile dealers. The Company anticipates that the potential sales
of these businesses will occur within one year from the above date and will
result in a net gain. Such sales will be subject to applicable regulatory
approvals. There can be no assurance that such sales will occur.
12
<PAGE> 15
ANNUITY OPERATIONS
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
SIX MONTHS ENDED CHANGE THREE MONTHS ENDED CHANGE
JUNE 30, POSITIVE JUNE 30, PERCENTAGE
------------------- (NEGATIVE) --------------------- (NEGATIVE)
1996 1995 EFFECT 1996 1995 EFFECT
-------- -------- ------- --------- ---------- -----------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Deposits received . . . . . . . . $ 270.7 $ 510.0 (46.9)% $ 104.5 $ 292.8 (64.3)%
Net investment income . . . . . . 201.9 198.6 1.7 101.1 101.0 0.1
Total revenues . . . . . . . . . 219.9 219.2 0.3 108.5 111.3 (2.5)
Benefit and surrender payments. . 364.2 333.0 (9.4) 173.4 201.4 13.9
Interest credited to
policyholders . . . . . . . . . 146.0 148.8 1.9 74.9 77.1 2.9
Average account balances, net of
reinsurance . . . . . . . . . . 5,183.8 5,223.6 (0.8) 5,207.7 5,302.4 (1.8)
Pre-tax operating income (net
spread earned) . . . . . . . . 27.4 23.0 19.1 14.3 10.4 37.5
Net realized investment losses . (3.7) (3.7) -- (2.5) (2.1) (19.0)
Pre-tax income . . . . . . . . . 23.7 19.3 22.8 11.8 8.3 42.2
</TABLE>
Annuity Operations Results for the Six Months Ended June 30, 1996 and 1995
The net spread earned increased 19.1% to $27.4 million for the six
months ended June 30, 1996 from $23.0 million for the six months ended June 30,
1995. Average account balances, net of reinsurance, decreased 0.8% to $5,183.8
million for the six months ended June 30, 1996 from $5,223.6 million for the
six months ended June 30, 1995. The increase in net spread is due to a slight
increase in gross margin due to changes in the mix of annuity contracts caused
by the ceding of a large block of contracts in the third quarter of 1995 which
carried high surrender penalties and changes in the earned rate of the
investment portfolio and the average credited rate on outstanding annuity
contracts. Also, investment income on JANY equity increased due to an increase
in retained earnings and a capital contribution made in late 1995. In
addition, the Company recognized $1.2 million of premium and intangible tax
refunds during the six months ended June 30, 1996. Deposits received decreased
46.9% to $270.7 million for the six months ended June 30, 1996 from $510.0
million for the six months ended June 30, 1995. This decrease is generally
attributable to the Company's announcement in March 1996 that it was selling
its Annuity Operations, as well as the lower ratings received by JALIC and JANY
from certain national rating agencies. See "Current Trends and Developments."
Annuity Operations Results for the Three Months Ended June 30, 1996 and 1995
The net spread earned increased 37.5% to $14.3 million for the three
months ended June 30, 1996 from $10.4 million for the three months ended June
30, 1995. Average account balances, net of reinsurance, decreased 1.8% to
$5,207.7 million for the three months ended June 30, 1996 from $5,302.4 million
for the three months ended June 30, 1995. The increase in net spread earned is
primarily attributable to the premium and intangible tax refunds recognized in
the second quarter and changes in gross margin and income earned on JANY
equity, as discussed above. Net realized investment losses increased 19.0% to
$2.5 million for the three months ended June 30, 1996 from $2.1 million for the
three months ended June 30, 1995. Pre-tax income increased 42.2% to $11.8
million for the three months ended June 30, 1996 from $8.3 million for the
three months ended June 30, 1995.
13
<PAGE> 16
WESTERN DIVERSIFIED GROUP
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
SIX MONTHS ENDED CHANGE THREE MONTHS ENDED CHANGE
JUNE 30, POSITIVE JUNE 30, PERCENTAGE
------------------- (NEGATIVE) --------------------- (NEGATIVE)
1996 1995 EFFECT 1996 1995 EFFECT
-------- -------- ------- --------- ---------- -----------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Written premiums . . . . . . . $ 45.1 $ 47.8 (5.6) % $ 25.1 $ 26.7 (6.0)%
Gross insurance premiums and
contract charges earned . . . 35.3 32.3 9.3 17.9 16.2 10.5
Pre-tax income (loss) . . . . (1.8) 1.6 (212.5) (2.2) 0.4 (650.0)
</TABLE>
Western Diversified Group Results for the Six Months Ended June 30, 1996 and
1995
Pre-tax income (loss) decreased 212.5% to a pre-tax loss of $1.8
million for the six months ended June 30, 1996 from pre-tax income of $1.6
million for the six months ended June 30, 1995. This decrease is primarily
attributable to a profit sharing liability recorded during the second quarter
of 1996 relating to amounts ceded to reinsurers in the credit product line and
an increase in the credit loss ratio.
Western Diversified Group Results for the Three Months Ended June 30, 1996 and
1995
Pre-tax income (loss) decreased to a pre-tax loss of $2.2 million for
the three months ended June 30, 1996 from pre-tax income of $0.4 million for
the three months ended June 30, 1995. This decrease is generally due to the
profit sharing liability recorded during the second quarter of 1996 and
increase in credit loss ratio, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
INDEBTEDNESS
In February 1993, the Company refinanced all remaining indebtedness
incurred in connection with the 1987 acquisition of JALIC and certain of its
affiliates pursuant to a credit agreement entered into with The Chase Manhattan
Bank on its own behalf and as administrative agent for certain commercial
lending institutions (the "Credit Agreement"). The Credit Agreement is
collateralized by the capital stock and the surplus debentures of Houston
National Life Insurance Company ("HNLIC"), as well as the stock of all of the
Company's other direct and indirect non-insurance subsidiaries, other than
those owned through an insurance subsidiary. The Credit Agreement contains
restrictive covenants which, among other things, limit additional indebtedness,
payments of dividends, sales of assets and reinsurance arrangements. It also
requires the Company to satisfy certain financial covenants. The Credit
Agreement's interest rate per annum is based on certain economic indices. The
Company made a scheduled principal payment of $15.0 million in April 1996 and
repaid $2.5 million under the Company's revolving credit facility in June 1996.
Also in April 1996, the Company borrowed $12.0 million pursuant to the
revolving credit facility. Future required principal payments are $25.0
million in 1997, $32.0 million in 1998 and $44.5 million in 1999.
The principal amounts of outstanding indebtedness of the Company at
June 30, 1996 and December 31, 1995 were $101.5 million and $107.1 million,
respectively. At June 30, 1996, the Company's ratio of debt and redeemable
securities to stockholders' equity was 0.28 to 1 compared to 0.27 to 1 at
December 31, 1995. The weighted average annualized interest rates on the
Company's indebtedness were approximately 6.6% and 6.8% for the six months
ended June 30, 1996 and 1995, respectively.
14
<PAGE> 17
DIVIDENDS
The Company paid preferred stock dividends of approximately $0.7
million in each of April 1995, October 1995 and April 1996. A summary of
common stock dividends declared or paid during 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
Amount of Dividend
-----------------------------------------
Aggregate
Month of Declaration Payment Month Per Share Dollars in Millions
- -------------------- ------------- --------- --------------------
<S> <C> <C> <C>
December 1994 January 1995 $ .10 $2.5
March 1995 April 1995 .11 2.8
June 1995 July 1995 .11 2.8
September 1995 October 1995 .11 2.8
December 1995 January 1996 .11 2.8
March 1996 April 1996 .11 2.8
June 1996 July 1996 .11 2.8
</TABLE>
CASH FLOWS
Net cash provided by operating activities decreased to $154.2 million
for the six months ended June 30, 1996 from $172.3 million for the six months
ended June 30, 1995. This decrease was generally attributable to the timing of
settlement of liabilities under reinsurance agreements and benefit reserves.
Net cash used in investing activities decreased to $101.9 million for
the six months ended June 30, 1996 from $300.2 million for the six months ended
June 30, 1995. This was primarily due to the decrease in net cash provided by
financing activities as explained below. The Company has increased its sales
of available-for-sale securities over the prior year in order to increase yield
earned during the period of an increasing interest rate environment. In May
1996 and April 1995, the Company exercised options to purchase office buildings
(one of which it had previously leased) located on land owned by the Company
adjacent to its headquarters building. The purchase prices of $33.5 million
and $21.8 million, respectively, were paid from internally generated funds.
Net cash used in financing activities aggregated $104.9 million for
the six months ended June 30, 1996 compared to net cash provided by financing
activities of $186.8 million for the six months ended June 30, 1995. This was
primarily due to a decrease in receipts from universal life and investment type
contracts to $282.7 million for the six months ended June 30, 1996 from $530.1
million for the six months ended June 30, 1995 and an increase in payments
relating to universal life and investments type contracts to $376.0 million for
the six months ended June 30, 1996 from $341.0 million for the six months ended
June 30, 1995. The decrease in net cash flows from universal life and
investment-type contracts may be due, in part, to the Company's announcement in
March 1996 that it was selling its Annuity Operations, as well as the Company's
recent downgrades in ratings, as discussed below.
Cash and cash equivalents decreased to $47.0 million at June 30, 1996
from $117.4 million at June 30, 1995. This decrease was due to the purchase of
the buildings discussed above and the purchase of additional investments.
The Company believes that operating cash flows, together with loan
repayments and investment maturities, are sufficient to meet anticipated
operating liquidity needs.
15
<PAGE> 18
REINSURANCE RECEIVABLES
Receivables from reinsurers and investment deposits recoverable,
consisting primarily of contract holder liabilities transferred to reinsurers,
aggregated $948.0 million. Of the total, $780.9 million, or 82.4%, has been
placed in trusts. These trust agreements generally require that assets be
maintained at least equal to 100% of the underlying regulatory liabilities and
that the assets in trust be left on deposit with an independent trustee. The
Company generally requires that its reinsurers be rated "A (Excellent)" or
better by A.M. Best and Company ("A.M. Best").
Significant reinsurance recoverables due to the Company and premiums
ceded as of and for the six months ended June 30, 1996 are as follows (dollars
in thousands):
<TABLE>
<CAPTION>
PREMIUMS CEDED
RECOVERABLES FOR THE SIX
A. M. BEST ---------------------------- MONTHS ENDED
RATING PAID LOSSES UNPAID LOSSES JUNE 30, 1996
--------------- ----------- ------------- ------------------
<S> <C> <C> <C> <C>
London Life Insurance Company . . . . . . . . A++ (Superior) $ -- $75,530 $231,637
Mercantile & General Life Reassurance
Company . . . . . . . . . . . . . . . . . . A+ (Superior) 3,648 15,131 21,623
Transamerica Occidental Life Insurance
Company . . . . . . . . . . . . . . . . . . A+ (Superior) -- 50,353 154,424
</TABLE>
16
<PAGE> 19
INVESTMENTS
The Company's investment portfolio is managed by its internal
investment professionals with the objectives of maintaining credit quality and
liquidity, maximizing current income within acceptable levels of risk,
minimizing interest rate exposure and matching the anticipated maturity of the
investments with the anticipated maturity of the liabilities they support. To
achieve a balancing of these objectives, the portfolio emphasizes investment
grade publicly traded debt securities and commercial and residential mortgages
meeting the Company's specific underwriting standards.
The Company's investment portfolio at June 30, 1996 is summarized in
the table below (dollars in thousands):
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
CARRYING VALUE CARRYING VALUE
-------------- --------------
<S> <C> <C>
Held-to-maturity securities (1):
U.S. government and agency debt securities (2) . . . . . . $ 146,046 2.4%
Municipal debt securities . . . . . . . . . . . . . . . . . 22,882 0.4
Investment grade corporate debt securities . . . . . . . . 210,329 3.5
Non-investment grade corporate debt securities . . . . . . 1,721 --
Mortgage-backed debt securities (3) . . . . . . . . . . . . 141,737 2.3
Asset-backed debt securities . . . . . . . . . . . . . . . 130,909 2.2
---------- ------
Total held-to-maturity securities . . . . . . . . . . . . 653,624 10.8
---------- ------
Available-for-sale securities (4):
U.S. government and agency debt securities (2) . . . . . . 987,700 16.4
Municipal debt securities . . . . . . . . . . . . . . . . . 2,844 --
Debt securities issued by foreign governments (5) . . . . . 15,963 0.3
Investment grade corporate debt securities . . . . . . . . 1,335,794 22.1
Non-investment grade corporate debt securities . . . . . . 3,028 0.1
Mortgage-backed debt securities (3) . . . . . . . . . . . . 993,361 16.4
Asset-backed debt securities . . . . . . . . . . . . . . . 294,567 4.9
---------- ------
Total available-for-sale securities . . . . . . . . . . . 3,633,257 60.2
---------- ------
Trading account securities (6) . . . . . . . . . . . . . . . 5,494 0.1
Equity securities (7) . . . . . . . . . . . . . . . . . . . . 77,337 1.3
Commercial mortgages (8) . . . . . . . . . . . . . . . . . . 1,094,677 18.1
Residential mortgages (8) . . . . . . . . . . . . . . . . . . 411,213 6.8
Investment in real estate (9) . . . . . . . . . . . . . . . . 37,615 0.7
Real estate owned (10) . . . . . . . . . . . . . . . . . . . 13,642 0.2
Policy loans and other notes receivable (11) . . . . . . . . 90,215 1.5
Short-term investments (12) . . . . . . . . . . . . . . . . . 14,497 0.3
---------- ------
Total investments (13) . . . . . . . . . . . . . . . . . . $6,031,571 100.0%
========== ======
</TABLE>
- -------------------------
(1) Carried at amortized cost, adjusted for impairments in value which are
considered other than temporary. Total market value was approximately
$656,015,000, representing net unrealized investment gains of approximately
$2,391,000.
(2) Includes $878,959,000 of agency collateralized mortgage obligations.
(3) Includes $1,097,402 of non-agency and private placement collateralized
mortgage obligations.
(4) Carried at market value. Total amortized cost was approximately
$3,639,843,000, representing net unrealized investment losses of
approximately $6,586,000.
(5) Consist principally of Canadian provincial government bonds.
17
<PAGE> 20
(6) Carried at market value. Total cost was approximately $5,442,000,
representing net unrealized investment gains of approximately $52,000.
(7) Carried at market value. Total cost was approximately $70,734,000,
representing net unrealized investment gains of approximately
$6,603,000.
(8) Carried at the unpaid principal balance less unamortized discounts, a
$7,334,000 valuation reserve and $8,367,000 in write-downs for
impairments in value, which are considered other than temporary.
(9) Real estate acquired as investment property is carried at cost less
accumulated depreciation of $1,400,000.
(10) Acquired in satisfaction of debt. Carried at cost less allowances for
impairments in value which are considered other than temporary.
(11) Consist of policy, collateral loans and provider notes receivable.
(12) Carried at amortized cost, which approximates market value.
(13) Includes Annuity Operations invested assets of approximately $5.2
billion. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Discontinued Operations" for a
discussion of the proposed sale of the Annuity Operations.
The following table sets forth the composition of the Company's debt
securities portfolio by rating at June 30, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
TRADING % OF TOTAL
HELD-TO-MATURITY AVAILABLE-FOR-SALE ACCOUNT TOTAL CARRYING
SECURITIES SECURITIES SECURITIES CARRYING VALUE VALUE
------------------ ---------------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Rating (1)
- ----------------
AAA(2) . . . . . . . . . . . . $ 343,647 $2,182,731 $ 5,494 $2,531,872 59.0%
AA . . . . . . . . . . . . . . 79,317 387,057 -- 466,374 10.9
A . . . . . . . . . . . . . . . 175,486 807,016 -- 982,502 22.9
BBB . . . . . . . . . . . . . . 53,453 253,425 -- 306,878 7.1
---------- ---------- ------- ---------- -----
Total investment grade . . . 651,903 3,630,229 5,494 4,287,626 99.9
---------- ---------- ------- ---------- -----
BB . . . . . . . . . . . . . . -- -- -- -- --
B . . . . . . . . . . . . . . . -- -- -- -- --
Other . . . . . . . . . . . . . 1,721 3,028 -- 4,749 0.1
--------- ---------- ------- ---------- -----
Total non-investment grade . 1,721 3,028 -- 4,749 0.1
--------- ---------- ------- ---------- -----
Total . . . . . . . . . . . $ 653,624 $3,633,257 $ 5,494 $4,292,375 100.0%
========= ========== ======= ========== =====
</TABLE>
- -----------------------
(1) Debt securities are classified according to the lowest rating by a
nationally recognized statistical rating organization. Debt securities not
rated by any such organization are classified according to the rating
assigned to them by the NAIC as follows: NAIC class 1 is considered
equivalent to an A or higher rating; class 2, BBB; class 3, BB; and classes
4-6, B and below.
(2) Includes approximately $1,139,240,000 of U.S. government and agency debt
securities.
Commercial and residential mortgages comprised 24.9% of the Company's
invested assets at June 30, 1996. Mortgage loans are diversified as to property
type, location and loan size, and are collateralized by the related properties.
At June 30, 1996, mortgages more than 30 days delinquent accounted for 1.1% of
the carrying value of the Company's mortgage portfolio of $1,505.9 million and,
together with real estate owned by the Company, accounted for 0.5% of the
carrying value of the Company's total investment portfolio.
18
<PAGE> 21
The following table sets forth information regarding the Company's
delinquent and other problem mortgage loans as of June 30, 1996 (dollars in
thousands):
<TABLE>
<CAPTION>
COMMERCIAL RESIDENTIAL TOTAL
----------- ----------- -------
<S> <C> <C> <C>
Delinquent 31 days or more:
In non-accrual status(1) . . . . . . . . . . . . . . . . . . $12,537 $1,345 $13,882
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,074 1,684 2,758
-------- ------ -------
Total delinquent . . . . . . . . . . . . . . . . . . . . . 13,611 3,029 16,640
Restructured on other than market terms(2) . . . . . . . . . . 36,638 -- 36,638
------- ------ -------
Delinquent and other problem loans . . . . . . . . . . . . . . $50,249 $3,029 $53,278
======= ====== =======
Delinquent and other problem loans as a percentage of
loans outstanding at June 30, 1996 . . . . . . . . . . . . . 4.6% 0.7% 3.5%
</TABLE>
- ----------------------------------
(1) The Company continues to accrue interest payments on mortgage loans which
are up to 90 days contractually past due as to principal or interest.
After such 90-day period, no additional interest is accrued. For mortgage
loans which are in process of foreclosure, all accrued interest is reduced
to zero.
(2) Excludes loans in this category included in delinquency totals.
CURRENT TRENDS AND DEVELOPMENTS
The Company continues its strategy to strengthen its managed care
networks and products. This strategy is designed to reduce the risks created
in our marketplace by healthcare reforms and changing patterns of behavior by
providers while offering customers attractive, high quality, affordable
products. In this pursuit, the Company is designing benefit plans that are
more easily understood and administered by providers and which steer customers
into selected provider networks. In addition, the Company is enhancing
provider incentives and risk-sharing programs that encourage and reward
networks for effective medical cost management. It is anticipated that this
strategy may result in an increase in group operating expenses in the future.
In April 1995, A.M. Best completed its annual review of JALIC and
assigned it a rating of "A (Excellent)". JALIC had previously been rated "A+
(Superior)". In October 1995, Standard & Poor's Rating Group ("S&P") assigned
JALIC a claims-paying ability rating of "A (Good)". JALIC had previously been
assigned a rating of "A+ (Good)". In November 1995, Moody's Investors Service
assigned JALIC and JANY initial insurance financial strength ratings of "A3".
On March 7, 1996, S&P lowered JALIC's "A (Good)" claims-paying ability rating
to "BBB+" and placed JANY's "A (Good)" claims-paying ability rating on "Credit
Watch with Developing Implications," meaning that JANY's rating could be raised
or lowered in connection with the potential sale of the Company's Annuity
Operations. S&P stated that if that sale does not occur, JANY's rating will be
downgraded to reflect JALIC's current rating. On March 11, 1996, A.M. Best
lowered JALIC's and JANY's "A (Excellent)" ratings to "A-(Excellent)" and has
placed such ratings under "Review with Developing Implications" pending further
discussions with the Company. The Company believes that these actions may
materially adversely affect future sales of the Company's products and
surrenders in the Company's Annuity Operations. Although the Company cannot
predict the ultimate effect of these actions, it is possible that they could
have a material adverse effect on the Company's financial position, results of
operations, cash flows and liquidity.
On March 27, 1996, the Board of Directors of the Company authorized the
sale of its Annuity Operations and the Western Diversified Group. The Annuity
Operations includes substantially all of the annuity business of JALIC and all
of the business of JANY. JANY primarily markets annuity products in the State
of New York, as well as certain individual life insurance products. The
Western Diversified Group markets credit life and disability and retail service
warranty
19
<PAGE> 22
coverage, primarily through automobile dealers. The Company anticipates that
the potential sales of these businesses will occur within one year from the
above date and will result in a net gain. Such sales will be subject to
applicable regulatory approvals. There can be no assurance that such sales
will occur.
Although the Company's medical loss ratio has generally been higher in
the fourth quarter than the other quarters of the year, the Company has
recently recognized an increase in this disparity. The Company cannot predict
the extent to which this disparity may increase or decrease in the future. As
discussed above, the Company is anticipating the sale of its Annuity
Operations. Such operations have generally resulted in fairly stable earnings
per share, which has had the effect of reducing the volatility in the Company's
earnings per share caused by fluctuations in the gross group medical loss
ratio. The Company believes, therefore, that the relative volatility of the
earnings per share may increase following the proposed sale of the Annuity
Operations.
20
<PAGE> 23
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings incidental to the
conduct of its business. While it is not possible to determine the ultimate
disposition of each of these proceedings, the Company believes that the
ultimate disposition of such proceedings, individually and in the aggregate
(including the lawsuit discussed below), will not have a material adverse
effect on the Company's financial position, results of operations or cash
flows.
During the period of April 1995 through May 1995, the Company and
certain of its officers and directors were named as defendants in a series of
putative class actions alleging violations of the federal securities laws. The
actions, all of which were filed in the United States District Court for the
Southern District of Florida (the "Court"), have been consolidated. In October
1995, the plaintiffs filed a Consolidated Amended Complaint purportedly on
behalf of a class of persons who purchased the Company's common stock, par
value $.01 per share (the "Common Stock") during the period of October 27, 1994
through May 3, 1995 seeking unspecified damages, fees, costs and interest. The
first of the original complaints was filed after the Company revised its
previously announced earnings for the fourth quarter of 1994 to reflect an
unanticipated increase in claims received in 1995 for medical services rendered
in 1994. The remainder of the original complaints were filed after the Company
increased reserves during the first quarter of 1995 to reflect a further
increase in such claims. The plaintiffs' motion for class certification, which
the defendants have opposed, is currently pending before the Court. The
defendants' motion to dismiss the Consolidated Amended Complaint, which the
plaintiffs have opposed, is also pending before the Court. While document
discovery is ongoing, defendants have filed a motion to stay deposition
discovery until these motions are decided. The Company and individual
defendants deny any wrongdoing, believe they have meritorious defenses against
the claims asserted, and intend to vigorously defend the lawsuits.
21
<PAGE> 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 19, 1996, the Company held its annual meeting of stockholders in
Miami, Florida. The stockholders voted on two matters.
The following votes were cast for the nominees for election of directors,
and all such nominees were elected.
<TABLE>
<CAPTION>
Votes For Votes Withheld
--------------- --------------
<S> <C> <C>
Glendon E. Johnson 22,171,026 218,003
Marvin H. Assofsky 22,229,425 159,604
Norman C. Crocker 21,978,430 410,599
David P. Gardner 22,231,583 157,446
Edwin J. Garn 22,230,275 158,754
Carl F. Geuther 22,234,617 154,412
Linda Jenckes 22,209,470 179,559
Lynn G. Merritt 22,225,924 163,105
James L. Moorefield 22,189,344 199,685
Scott L. Stanton 22,202,701 186,328
Lonnie R. Wright 22,236,713 152,316
</TABLE>
The votes cast on the ratification of the selection of Price Waterhouse LLP
as independent accountants for the Company and its subsidiaries for the year
1996 were as follows:
22,185,608 shares voted for the ratification
165,215 shares voted against the ratification
38,206 shares abstained from voting.
22
<PAGE> 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) The Company filed a report on Form 8-K on April 1, 1996, stating
that on March 27, 1996, the Board of Directors of the Company
authorized the sale of its Asset Accumulation Segment, which
includes the annuity business, and the Western Diversified Group,
the principal businesses included in the Credit and Other Segment
and which markets credit life and disability and retail service
warranty coverage. The Company anticipates a net gain from the
potential sales of these operations. In addition, certain of the
Company's other non-core product lines may be sold, discontinued or
their financial exposure significantly reduced in the future by
limiting capital outlays and amending or revising reinsurance
arrangements. However, there can be no assurances that such actions
will occur.
23
<PAGE> 26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
JOHN ALDEN FINANCIAL CORPORATION
Date: August 12, 1996 By: /s/ Scott L. Stanton
----------------------------------
Scott L. Stanton
Senior Vice President and
Chief Financial Officer
24
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
----------- ----------- --------
<S> <C> <C>
27 Financial Data Schedule 26
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 3,638,751
<DEBT-CARRYING-VALUE> 653,624
<DEBT-MARKET-VALUE> 656,015
<EQUITIES> 77,337
<MORTGAGE> 1,505,890
<REAL-ESTATE> 51,257
<TOTAL-INVEST> 6,031,571
<CASH> 46,954
<RECOVER-REINSURE> 947,980
<DEFERRED-ACQUISITION> 269,157
<TOTAL-ASSETS> 7,641,305
<POLICY-LOSSES> 6,346,185
<UNEARNED-PREMIUMS> 143,157
<POLICY-OTHER> 392,767
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 101,500
15,286
0
<COMMON> 182,656
<OTHER-SE> 256,821
<TOTAL-LIABILITY-AND-EQUITY> 7,641,305
530,112
<INVESTMENT-INCOME> 22,568
<INVESTMENT-GAINS> 830
<OTHER-INCOME> 36,045
<BENEFITS> 383,014
<UNDERWRITING-AMORTIZATION> 6,505
<UNDERWRITING-OTHER> 3,266
<INCOME-PRETAX> 22,116
<INCOME-TAX> 8,385
<INCOME-CONTINUING> 13,731
<DISCONTINUED> 13,496
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,227
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.03
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
