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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER : 1-11396
JOHN ALDEN FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 59-2840712
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
7300 CORPORATE CENTER DRIVE, MIAMI, FLORIDA 33126-1223
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 715-3767
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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COMMON STOCK, PAR VALUE $.01 NEW YORK STOCK EXCHANGE
PREFERRED SHARE PURCHASE RIGHT NEW YORK STOCK EXCHANGE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT 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-K OR ANY
AMENDMENT TO THIS FORM 10-K [X].
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT AS OF MARCH 11, 1997 WAS APPROXIMATELY $483,805,898.
AS OF MARCH 11, 1997, 25,335,538 SHARES OF THE REGISTRANT'S COMMON STOCK
WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE. THE INFORMATION CALLED FOR BY PART
III IS INCORPORATED BY REFERENCE TO THE DEFINITIVE PROXY STATEMENT FOR THE 1997
ANNUAL MEETING OF STOCKHOLDERS OF THE COMPANY, WHICH WILL BE FILED ON OR BEFORE
APRIL 30, 1997.
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TABLE OF CONTENTS
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PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Historical Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Business Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . 11
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Principal Markets and Sales Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . 28
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
PART III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
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The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This Form 10-K, the Company's Annual Report to
Stockholders, any Form 10-Q and any Form 8-K of the Company and any other
written or oral statements made by or on behalf of the Company may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are subject to certain uncertainties and other factors that could
cause actual results to differ
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materially from such statements. These uncertainties and other factors (which
are described in more detail elsewhere in this Form 10-K) include, but are not
limited to, uncertainties relating to general economic conditions and cyclical
industry conditions, uncertainties relating to federal and state government and
regulatory policies, volatile and unpredictable developments (including
utilization of medical services), the uncertainties of the reserving process,
the competitive environment in which the Company operates, the uncertainties
inherent in the development and introduction into the marketplace of the
Company's new small group health insurance product, the ability of the Company
to obtain desired contracts and pricing with providers, the consummation of the
sale of the Company's Annuity Operations and Western Diversified Group and the
ability to obtain dividend approval from state regulators. The words "believe",
"expect", "anticipate", "project" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of their dates. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
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PART I
ITEM 1. BUSINESS
HISTORICAL PERSPECTIVE
John Alden Financial Corporation (the "Company") is an insurance
holding company that, through its subsidiaries, is principally engaged in
providing group health insurance to small businesses. For more than 25 years,
the Company has provided comprehensive group health benefit packages to
employers through its small group health insurance products. The Company is
one of the largest insurance company providers in the group market, selling
primarily to groups with fewer than 50 employees, while concentrating on groups
with fewer than 25 employees. The Company offers traditional group indemnity
products and "managed indemnity" products, which have provider network,
utilization review and case management features to contain costs. The Company
has offered these products in 47 states.
In addition to the small group health insurance products, the
Company's HealthCare Segment historically included two other related product
lines. Through Alden Risk Management Services ("ARMS"), the Company provides
healthcare stop-loss reinsurance products to a number of organizations that
bear a significant portion of their own risk, including employer groups whose
benefit programs are self-funded and health maintenance organizations
("HMO's"). Through a joint venture corporation, the Company also offers HMO
products in the South Florida market.
During recent years, the healthcare industry has undergone a
substantial transformation, primarily caused by healthcare legislation,
originally at the state level and, more recently, also at the federal level
(the "reforms") and the growth of managed care organizations. The reforms
include, among other things, guaranteed issue, mandated benefits, premium rate
limits (including "community rating" and "modified community rating"),
guaranteed renewability, minimum loss ratio mandates and risk adjustment
mechanisms which allocate losses of individual carriers to group carriers.
Among other things, such legislation places certain limits on the Company's
ability to reprice its products to reflect increasing medical costs. By 1996,
a large number of the states in which the Company sells health insurance had
adopted some form of healthcare reform legislation and approximately two thirds
of the states had enacted reforms limiting the use of individual underwriting.
Additionally, the healthcare industry saw rapid growth of HMO's and other
managed care organizations. Finally, the healthcare providers are organizing
themselves in new ways such as Physician Hospital Organizations ("PHO's").
In response to these varied changes in the environment in which the
Company operates, the Company is undergoing its own transformation. Beginning
in late 1994 and throughout 1995, the Company conducted a strategic evaluation
of its operations. As a result of this evaluation, the Company determined that
it needed to focus all of its energies and resources on its healthcare
operations and, accordingly, discontinued the marketing of certain product
lines that were no longer considered viable. In addition, on March 27, 1996,
the Board of Directors of the Company authorized the sale of its Asset
Accumulation Segment, which includes substantially all of the annuity business
(the "Annuity Operations"), and the Western Diversified Group, the principal
businesses which market credit life and disability and retail service warranty
coverage (see "Discontinued Operations").
BUSINESS STRATEGY
Small Group Health Insurance Products
The Company has continued its strategy to strengthen its products and
negotiate new and better contracts with its providers. This strategy is
designed to reduce the risks created in its marketplace by healthcare reforms
and changing patterns of behavior by providers while offering customers
attractive, high quality, affordable products. In this pursuit, during early
1996, the Company began a major project to design benefit plans that are more
easily understood and administered by providers and which steer customers into
selected provider networks. The strategy
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has resulted in the development of a new product which is anticipated
to be introduced into 17 states in the second quarter of 1997 and should be
available in most of the states in which the Company expects to continue its
marketing efforts by the end of the third quarter of 1997. It is designed to
offer customers the high quality, affordable features they demand, reward
policyholders for using the Company's selected local provider system, generate
stronger relationships with providers and reduce the risks healthcare reforms
have created in the marketplace. The features of the new product, while not
unique, were designed to be similar to, and competitive with, the key features
of products offered by the Company's competitors. In response to increasing
restrictions on the Company's ability to use individual underwriting and in
order to better spread medical risks, the Company will increase its marketing
efforts to groups having five to fifteen employees, which are slightly larger
groups than those to which the Company has made most of its sales in the past
(see "Healthcare Marketing"). Although there can be no assurance as to the
success of this new product in the competitive healthcare industry, it has been
designed to be more attractive to providers and customers thereby increasing
demand in the marketplace and sales. It is anticipated that the cost of
implementing this strategy will result in an increase in the group gross
expense ratio over the next several quarters and possibly thereafter.
The new product will employ greater differentials between in-network
and out-of-network benefits to increase steerage to contracted providers.
Out-of-network benefits will be subject to certain higher coinsurance
percentages, reimbursements based upon in-network negotiated levels or Medicare
allowable levels, separate and higher deductibles and out-of-pocket limits.
Certain medical services, such as preventive benefits, will only be available
in-network. The new product will include limits on transplants and outpatient
therapies. Changes in both the type of benefit and the amount covered have
been made, especially in the types of benefits that are particularly prone to
over utilization. Additionally, certain markets will have "value plans"
available that will appeal to a healthier segment of the market and compete in
low-cost areas of the market. The new product is designed to be "provider
network friendly". Plan designs can be customized for the local marketplace
and medical delivery system. The number of plan designs offered in each market
will be reduced to make administration by the provider easier than the existing
product. Additionally, the new product will employ greater use of co-pays, as
provider networks generally prefer co-pays over deductibles since they are more
understandable and easier to administer.
In addition to the development of the new product, as part of the
Company's business strategy, during 1996 the Company began exiting certain
markets and/or states in which it determined that it could not operate on a
profitable basis. This included ceasing to offer coverage through certain
purchasing alliances and the exiting of the State of Kentucky. In January
1997, the Company announced that it would be focusing its marketing efforts and
resources in those markets and states in which it believes it can best increase
profitability and market share. In these markets, provider relationships are
continuing to be strengthened and the new product discussed above will be
introduced. Conversely, the Company intends to reduce its marketing efforts
and significantly reduce its financial exposure and may, in some cases,
withdraw from business in those states where legislative reform and intense
competition have significantly increased the risk profile of writing small
employer health coverage. Approximately 25% of 1996 group health
premiums were generated in these states. In line with this strategy, the
Company has decided to stop selling small group insurance plans in California,
Maryland and New Jersey, and to terminate existing small group insurance plans
in these states.
In conjunction with the Company's strategic decision to sell its
Annuity Operations and the Western Diversified Group, as well as reducing
marketing efforts in certain states, the Company plans to closely manage its
expense structure, including among other things, achieving a workforce
proportionate to its business.
Another changing part of the healthcare mix is the providers
themselves. Providers are now organizing in a manner that allows them to
contract directly with a selected number of payors rather than through an
intermediary organization such as a Preferred Provider Organization ("PPO").
PPO's act as intermediaries between the insured and the payor and rent access
to medical services to the managed care payor at lower contracted rates than
otherwise available. Characteristics of a PHO as compared to characteristics
of a PPO include smaller, higher-quality groups, greater discounts, stronger
medical management and the ability to risk-share with a payor partner where
allowed by law. Risk-sharing will align the goals of the Company and the
provider to provide high quality services at the lowest possible medical costs.
As of December 31, 1996, the Company's small group indemnity and
managed indemnity products covered approximately 474,000 employees and
approximately 901,000 total insureds, including dependents.
In the third quarter of 1994, the Company entered into an HMO joint
venture, NHP Holding Company, Inc. ("NHP"), with Dimension Physician-Hospital
Organization, Inc. ("Dimension"), to serve the South Florida area. Dimension
included five leading hospitals and approximately 1,600 physicians and, through
its existing HMO, provided medical coverage to approximately 11,000 people. By
December 31, 1996, NHP's South Florida
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HMO network included 22 hospitals and approximately 3,500 physicians, and NHP
was providing medical coverage to approximately 81,000 people throughout South
Florida, including approximately 5,700 Medicare customers and approximately
10,200 Medicaid customers. Through its small group business, the Company may
also pursue opportunities to market HMO-like insurance products in other areas.
Healthcare Stop-loss Reinsurance Products
ARMS's business consists primarily of providing healthcare stop-loss
reinsurance coverage and related insurance products to employers that elect to
self-insure a portion of their employee medical benefit programs. These
products cover the employers' risk of catastrophic claims in excess of
deductible amounts on both specific and aggregate bases. In addition, ARMS
offers such products to managed care organizations and HMO's. The healthcare
stop-loss insurance coverage offered to HMO's, hospitals and other medical
providers allows them to transfer the risk of catastrophic individual claims to
the Company, which, in turn, reinsures a portion of such risk. At December 31,
1996, the Company's healthcare stop-loss reinsurance products covered
approximately 947,000 lives.
Healthcare Marketing
Sales of the Company's small group health insurance products are
diversified geographically. Following the withdrawal from certain states as
discussed above, business will be offered in 41 states and the District of
Columbia. The small group health insurance products are marketed primarily
through the Company's captive marketing organization, North Star Marketing
Corporation, which markets products through approximately 74,000 independent
insurance agents. Group insurance generally is a small part of the business of
the independent insurance agents contacted by the marketing organization. No
single agent accounts for a significant portion of the group product sales.
The ability of the Company to provide a detailed explanation of the Company's
products, competitive information that will assist the agent to make the sale,
and service support to the insured group, enables the Company to meet the
agents' need for timely information and other service support. This, in turn,
enhances the ability of the Company to compete on a basis other than price or
agent compensation alone. The sales representatives' compensation is based on
both the amount of insurance sold and the first year loss ratios on their
sales.
In the past, the Company's use of individual medical underwriting and
its policy features and pricing were better suited to the small group
marketplace of businesses having fewer than five employees. As of December 31,
1996, approximately 11% of all groups insured by the Company consisted of
groups having five or more employees, which groups accounted for approximately
46% of the annualized gross premiums in force at such date. In response to
increasing restrictions on the Company's ability to use individual medical
underwriting and in order to better spread medical risks, the Company will
increase its marketing efforts to business groups with five to fifteen
employees. This segment of the small group market may have characteristics
that differ from those of slightly smaller group sizes, and may be more
sensitive to the identity of provider systems, pricing, product characteristics
and other competitive factors. There can be no assurance that the Company will
be able to successfully market the new product.
To reach self-insured employer groups, ARMS uses 20 regional marketing
employees to market to unaffiliated third party administrators ("TPAs"). These
TPAs are generally small, independent businesses specializing in benefits
administration services. ARMS has sold employer excess-loss insurance through
approximately 250 TPAs nationwide, representing approximately 1,100
self-insured employers. ARMS distributes reinsurance for HMO's through several
channels, including specialized independent sales organizations and direct
marketing by ARMS sales representatives.
DISCONTINUED OPERATIONS
As discussed above, the Board of Directors of the Company authorized
the sale of its Annuity Operations and the Western Diversified Group on March
27, 1996 as part of its plan to focus on its healthcare operations.
Annuity Operations
The sale of the Company's Annuity Operations to SunAmerica Life
Insurance Company ("SunAmerica") is scheduled to close by March 31, 1997. The
transaction includes the sale of all of the common stock of the Company's
subsidiary, John Alden Life Insurance Company of New York ("JANY") and the
coinsurance of substantially all of the annuity business of another subsidiary,
John Alden Life Insurance Company ("JALIC"). This coinsurance will initially
be on an indemnity basis and, pursuant to the agreement, will transition to an
assumption basis as soon as practical. In certain states, the transition to an
assumption basis is subject to policyholder approval. To the extent that such
transition does not take place with respect to any particular policy, such
policy will remain indemnity reinsured. A substantial portion of the
transition to an assumption basis is
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expected to be completed within two years. The transaction is contingent upon
customary terms and conditions, including required regulatory approvals.
The total purchase price is approximately $240 million. This
represents approximately $165 million premium paid to acquire the business and
approximately $75 million of adjusted capital and surplus in JANY. It does not
include any capital and surplus used to support the annuity business in JALIC,
which will remain in JALIC. The Company's available capital will be enhanced
by both the after-tax gain generated from the transaction and by the release of
the capital previously allocated to support the annuity business. The Company
intends to use a portion of this available capital to strengthen its
healthcare operations, after which it estimates there will be approximately
$175 million to $200 million of capital available for other uses. Subject to
applicable regulatory approvals, this additional capital may be used to
repurchase common stock, pay dividends, pay down debt and, to a lesser extent,
for general corporate purposes.
Western Diversified Group
The Company is pursuing the execution of a definitive agreement for
the sale of the Western Diversified Group and expects to enter into a
non-binding letter of intent in the second quarter of 1997. The Western
Diversified Group includes the Company's principal businesses which market
credit life and disability and retail service warranty coverages. Such sale
may be in the form of a sale of all of the common stock of the subsidiaries
which comprise the Western Diversified Group or the reinsurance of the
applicable business and would be subject to applicable regulatory approvals.
There can be no assurance that such sale will be consummated. As of December
31, 1996, the net assets of the Western Diversified Group aggregated
approximately $62.4 million.
Effect of the Discontinued Operations
As a result of the sale of its Annuity Operations and the Company's
previously announced intention to sell the Western Diversified Group, the
Company expects to record a net deferred gain of approximately $45 million.
This amount is net of transaction expenses, taxes, goodwill and other
adjustments relating to these transactions including an adjustment to reduce
the carrying value of the Western Diversified Group to its estimated net
realizable value. The net deferred gain will be recognized as income as
SunAmerica completes the assumption of policyholder liabilities. The Company
expects to begin recognizing the net deferred gain in 1997 and to earn the
majority of the gain by December 31, 1998. See "Investments" and "Reinsurance"
for further discussion regarding the effect of the sale of the Annuity
Operations on the Company's invested assets and reinsurance recoverables. See
additional discussion at "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- General Overview -- Sale of Annuity
Operations and Western Diversified Group", "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Cash Flows" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Current Trends and
Developments".
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INVESTMENTS
The Company's investment portfolio at December 31, 1996 aggregated
approximately $6.0 billion. Pro forma for the disposition of discontinued
operations, the Company's investment portfolio at December 31, 1996 aggregated
approximately $1.1 billion as follows (dollars in thousands):
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HISTORIC PRO FORMA
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Debt securities:
Held-to-maturity securities.......................................... $ 45,357 $ 45,357
Available-for-sale securities........................................ 4,248,774 806,458
Trading account securities........................................... 4,518 3,519
Equity securities....................................................... 82,098 39
Mortgage loans.......................................................... 1,449,242 149,735
Investment in real estate, at cost, less accumulated depreciation....... 39,903 39,903
Real estate owned....................................................... 11,483 11,483
Policy loans and other notes receivable................................. 75,186 35,054
Short-term investments.................................................. 6,371 4,243
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Total invested assets................................................ $ 5,962,932 $ 1,095,791
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The composition of the Company's debt securities as of December 31,
1996 on a historic and pro forma basis after giving effect to the disposition
of discontinued operations is as follows (dollars in thousands):
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HISTORIC PRO FORMA
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AMOUNT % AMOUNT %
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RATING (1):
AAA (2)................................. $ 2,561,349 59.7% $ 354,945 41.5%
AA...................................... 460,777 10.7 113,441 13.3
A....................................... 951,385 22.1 290,278 33.9
BBB..................................... 315,825 7.3 96,670 11.3
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Total investment grade................ 4,289,336 99.8 855,334 100.0
Below investment grade.................. 9,313 0.2 -- --
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Total................................ $ 4,298,649 100.0% $ 855,334 100.0%
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(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 $1,052,206,000 and $68,525,000, respectively, of
U.S. government and agency debt securities.
See Note 5 to the Company's consolidated financial statements for
further discussion regarding invested assets.
REINSURANCE
The Company has entered into a variety of reinsurance arrangements
under which it cedes business to other insurance companies to mitigate risk
exposure and to permit premium and asset growth while maintaining acceptable
risk-based capital ratios. The different types of reinsurance arrangements
used by the Company are described below.
The Company uses stop-loss reinsurance to mitigate its risk exposure.
The Company chooses retention limits for such reinsurance based upon the risk
distributions of each product line rather than the broader risk
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distribution of the Company as a whole. The Company believes that the small
group health risk distribution is sufficiently large, and thus it does not
purchase excess reinsurance on that line.
The Company uses reinsurance to manage its aggregate retained risk
exposures in order to maintain risk-based capital ratios (see "-- Government
Regulation -- Risk-Based Capital and Investment Reserve Requirements") while
sustaining growth and making debt service payments. Rather than depending
solely on limiting business written, at the cost of both foregone profits and
reductions in general expense economies of scale, the Company has instead made
coinsurance its primary means of controlling growth in risk exposure. Since
the business coinsured has been the Company's more mature product lines, for
which the reinsurers have considerable historical data from which to derive
pricing comfort, the Company seeks to limit reinsurance costs by participating
in the ongoing profits on such coinsured business under contractual formulas.
In addition, such profit sharing provisions compensate the Company for its
marketing efforts, since the reinsurers are generally unable to generate
sufficient business through their own distribution networks. Substantially all
of the Company's group accident and health insurance business has been
coinsured under a Group Reinsurance Agreement with London Life Insurance
Company and Transamerica Occidental Life Insurance Company (the "Group
Reinsurance Agreement"), which became effective October 1, 1991 for small
groups under 25 employee lives. The Group Reinsurance Agreement was amended
effective January 1, 1994 to include all fully-insured groups, regardless of
size. See further discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Reinsurance".
Effective October 1, 1995, the Company entered into a reinsurance
treaty with Lincoln National Reinsurance Company Limited to cede 90% of certain
annuity contract deposits aggregating approximately $403.5 million. Amounts
paid to Lincoln to fund the ceding of such liabilities have been placed in
trust. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations -- Discontinued Operations --
Annuity Operations".
For excess stop-loss and catastrophe reinsurance, where reinsurance
cash flows are small and disproportionate to risk, the Company generally
restricts reinsurance arrangements to established professional reinsurers with
an A.M. Best and Company ("A.M. Best") rating of "A+ (Superior)" or other
rating agency equivalent designations. For health coinsurance, where reinsurer
cash buildups are minimal, the Company applies the same reinsurer minimum
standards. For annuity coinsurance, the Company generally requires that each
reinsurer maintain assets in trust with a market value always in excess of
reinsured regulatory reserves, in addition to generally requiring an "A
(Excellent)" or better A.M. Best rating at agreement inception.
The reinsurance of risk does not relieve the Company of its original
liability to policyholders. The ceded business is included in contract holder
liabilities and is reflected as reinsurance receivables or investment deposits
recoverable on the Company's Consolidated Balance Sheet. Receivables from
reinsurers and investment deposits recoverable, aggregating $970.7 million and
$969.8 million at December 31, 1996 and December 31, 1995, respectively, are
comprised primarily of contract holder liabilities transferred to reinsurers.
Of the total receivables from reinsurers and investment deposits recoverable,
$768.1 million, or 79.1%, of the December 31, 1996 amount was placed in trusts.
6
<PAGE> 10
Significant reinsurance recoverables due to the Company and premiums
ceded as of and for the year ended December 31, 1996 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
RECOVERABLES
----------------------------
PAID UNPAID PREMIUMS
A.M. BEST RATING LOSSES LOSSES CEDED
------------------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
London Life Insurance Company . . . A++ (Superior) $ -- $75,284 $439,248
Mercantile & General Life
Reinsurance Company . . . . . . A+ (Superior) 10,532 16,260 39,029
Transamerica Occidental
Life Insurance Company . . . . . A+ (Superior) -- 50,190 292,832
</TABLE>
Upon the coinsurance of the JALIC Annuity Operations discussed
above, the amount of investment deposits recoverable will increase by
approximately $3.8 billion. Assets equal to this amount will be placed in
trust for the benefit of JALIC. SunAmerica is rated "A+ (Superior)" by A.M.
Best. In addition, substantially all of the Company's existing coinsurance of
JALIC's Annuity Operations will be assigned to SunAmerica.
COMPETITION
The Company operates in a highly competitive environment. There are
numerous insurance companies and other entities that compete with the Company,
many of which have greater resources than the Company. The Company believes
that the principal competitive factors in the sale of insurance are product
features, price, commission structure, perceived stability of the insurer,
service, name recognition and managed care capability. Many other insurance
companies are capable of competing for sales in the Company's markets. The
Company's ability to compete is affected in part by its ability to recruit,
train and retain quality marketing and sales representatives, which is based
upon compensation structure and support services.
The Company competes in the healthcare industry primarily with the
other large health insurers and with Blue Cross and Blue Shield associations.
Major national and regional health carriers are competitors to the extent they
offer group health insurance, but the degree of this competition varies by
state and locality. Another important group of competitors includes managed
care providers, the most significant of which is HMO's.
Recent state and federal legislative reforms, the rapid growth of HMO's
and managed care organizations and new forms of healthcare provider
organizations have negatively impacted the Company's ability to compete. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Statement of Income Data -- Continuing
Operations" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Business Development".
GOVERNMENT REGULATION
General Regulation
As an insurance holding company, the Company is subject to regulation
by the states in which its insurance subsidiaries are domiciled or transact
business. Most states have enacted legislation that requires each insurance
company in a holding company system to register with the insurance regulatory
authority of its state of domicile and furnish to it financial and other
information concerning the operations of companies within the holding company
system that may materially affect the operations, management or financial
condition of the insurers within the system. All transactions within a holding
company system affecting insurers must be fair and equitable, and each
insurer's policyholder surplus following any transaction must be both
reasonable in relation to its outstanding liabilities and adequate for its
needs. State laws also require prior notice or regulatory agency approval of
changes in control of an insurer or its holding company; certain inter-company
transfers of assets within the holding company structure may also require
notice to or approval from the regulatory agency.
In addition, the laws of various states establish regulatory agencies
with broad administrative powers to grant and revoke licenses to transact
business, regulate trade practices, license agents, require statutory financial
statements and prescribe the type and amount of investments permitted.
7
<PAGE> 11
The insurance subsidiaries of the Company may be required by the
applicable insurance codes of the states in which they operate to file rates
and policy forms in connection with certain insurance products. In most cases,
such rates and/or policy forms must be approved by the relevant insurance
department prior to use. Many states require the inclusion of specified
provisions in insurance policies issued or delivered in the state. The
foregoing state regulation and supervision are designed primarily to ensure the
financial stability of insurance companies and to protect policyholders, rather
than stockholders or creditors.
Insurance companies are required to file detailed statutory annual
statements with the state insurance regulators in each of the states in which
they transact business, and their business and accounts are subject to
examination at any time. In addition, insurance regulators periodically
examine the insurer's financial condition, adherence to statutory accounting
practices, and compliance with insurance department rules and regulations.
Applicable state insurance laws, rather than federal bankruptcy laws, apply to
the liquidation or the reorganization of insurance companies.
The NAIC has adopted a small group model law to limit the
differentials in rates carriers can charge between new business and renewal
business and with respect to similar demographic groups. The NAIC also has
adopted a model law to assure access to health insurance by all small employer
groups. This model law would make health insurance available to all small
groups by requiring coverage of all employees and their dependents in a group,
by limiting the applicability of pre-existing condition exclusions, by
requiring carriers to offer a basic plan exempt from certain mandated benefits
as well as a standard plan, and by establishing mechanisms to spread the risk
of high risk employees to small group carriers. NAIC model laws are binding
upon the Company only to the extent that they are adopted by states in which
the Company's insurance subsidiaries are domiciled or conduct business. States
may enact NAIC model laws as proposed or with variations from the proposed
text, or laws which have the same effect as the NAIC model laws.
Regulatory Changes
The NAIC and insurance regulators periodically re-examine existing
laws and regulations and their application to insurance companies. The NAIC
has formed committees and appointed advisory groups to study and formulate
regulatory proposals or model acts concerning such diverse issues as the use of
surplus debentures, accounting for reinsurance transactions, creation of a
model investment law, refinement of risk-based capital rules including creating
such rules for HMO's, asset valuation reserve requirements and the NAIC
accounting standards. Recently, this re-examination has focused on insurance
company investment and solvency issues and, in some instances, has resulted in
new interpretations of existing law, development of new laws and the
implementation of non-statutory guidelines.
Many states have enacted small group reforms that either go further
than or are unique in their approach compared to the NAIC model law. By 1996,
a large number of the states in which the Company sells health insurance have
adopted some form of healthcare reform legislation and approximately two-thirds
of the states have enacted reforms limiting the use of individual underwriting.
Such reform legislation included the NAIC small group model law reforms
discussed above, as well as guaranteed renewal and mandated loss ratios.
Insurance reform will likely continue at the state level. These state reforms
have restricted the Company's ability to adjust pricing based on underwriting
and to maintain targeted profit margins for its products. In certain states,
such reforms could preclude the Company from competing profitably, causing the
Company to withdraw from doing business in such state. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations -- Statement of Income Data -- Continuing Operations" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Business Development".
In 1996, Congress enacted the Health Insurance Portability and
Accountability Act ("HIPAA"). HIPAA provides minimum standards for the
availability of employer group and individual health coverage which could
impact the Company's products. However, state legislation which does not
conform with at least the minimum federal standards is preempted by the federal
law. Since forthcoming federal regulations and state legislation pertaining to
the subjects governed by HIPAA will affect the actual regulation of the
Company's products, HIPAA's overall impact cannot be predicted.
HIPAA federal standards for group and small employer health coverage
are similar in most respects to state health insurance reforms already
governing the Company's group business in most states. HIPAA imposes
8
<PAGE> 12
minimum standards limiting preexisting condition exclusions which may be
imposed by group health plans and requiring employer group health plans to
provide "credit" against preexisting condition exclusionary periods for persons
changing jobs, when the person has maintained health coverage under a
qualifying plan. HIPAA prohibits the exclusion of individuals from coverage
under employer group health plans due to health problems. HIPAA requires
insurance companies to guarantee the issuance of coverage to small employers
with 2 to 50 employees regardless of group members' health conditions.
HIPAA also establishes new requirements for the availability of
individual health coverage to individuals who have previously maintained group
coverage for a minimum of 18 months and who are ineligible for group coverage.
In lieu of federal enforcement of the minimum standards, states may choose from
a variety of mechanisms permissible under HIPAA which meet or exceed the
minimum standards for the availability of individual health coverage. Some
individual market alternatives which would be allowed under HIPAA could affect
underwriting, rating or benefit design of products the Company sells to
individuals. Since neither state legislation nor federal regulations which
will determine actual requirements are in place as yet, the nature and extent
of any effects on the Company's business cannot be predicted.
Other HIPAA provisions include: increased tax deductions for health
insurance premiums by the self-employed; establishment of tax deductions for
long term care coverage premiums; and authorization of tax deductions for
contributions to medical savings account health plans.
Regulation of Dividends and Other Payments from Insurance Subsidiaries
The Company is a legal entity separate and distinct from its
subsidiaries. As a holding company with no other business operations, its
primary sources of cash needed to meet its obligations, including principal and
interest payments under its credit agreement, are dividends and other payments
from its insurance and non-insurance subsidiaries. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources -- Cash Flows".
As discussed above, the sale of the Annuity Operations will enhance
the Company's available capital by both the after-tax gain generated from the
transaction and by the release of the capital previously allocated to support
the annuity business. The Company intends to use a portion of this available
capital to strengthen its healthcare operations, after which it estimates there
will be approximately $175 million to $200 million of capital available for
other uses. Subject to applicable regulatory approvals, such uses may include
repurchasing stock, paying dividends, the repayment of debt or, to a lesser
extent, general corporate purposes. In order to have this capital available at
the parent company, the Company's insurance subsidiaries must pay dividends to
the parent.
The Company's insurance subsidiaries are subject to various regulatory
restrictions on the maximum amount of payments including loans, cash advances,
contracts for services or other related company transactions that they may
enter into with the Company or any of its subsidiaries or affiliates without
obtaining prior regulatory approval. As a Minnesota-domiciled insurance
company, JALIC is subject to Minnesota requirements that life insurance company
dividends must receive prior regulatory approval if their fair market value,
together with that of other dividends or distributions made within the
preceding 12 months, exceeds the greater of: (i) 10% of the insurer's surplus
as regards policyholders as of the 31st day of December next preceding; or (ii)
the net gain from operations of the insurer, not including realized investment
gains, for the 12-month period ending the 31st day of December next preceding.
The Minnesota dividend statute requires notice to the Minnesota Commissioner of
Commerce for dividend payments made by an insurance carrier within five days
after declaration and at least ten days prior to payment. The Minnesota
statute also limits payment of dividends to a carrier's unassigned surplus less
25% of unassigned surplus attributable to unrealized capital gains. During
1997, $44.9 million is available for payment of dividends by JALIC to Houston
National Life Insurance Company ("HNLIC"), JALIC's parent company, without
regulatory approval. As a Texas-domiciled insurance company, HNLIC is subject
to Texas requirements that life insurance company dividends must receive prior
regulatory approval if their fair market value, together with that of other
dividends or distributions made within the preceding 12 months, exceeds the
greater of: (i) 10% of the insurer's surplus as regards policyholders as of the
preceding December 31st; or (ii) the
9
<PAGE> 13
statutory net gain from operations of the insurer for the 12-month period
ending the preceding December 31st. During 1997, $34.4 million is available
for payment of dividends by HNLIC to the Company without regulatory approval.
Risk-Based Capital and Investment Reserve Requirements
The Risk-Based Capital for Life and/or Health Insurers Model Act (the
"Model Act") is used by insurance regulators to monitor the solvency of
insurers. It provides for four different levels of regulatory action, each of
which may be triggered if an insurer's Total Adjusted Capital (as defined in
the Model Act) is less than a corresponding "level" of risk-based capital. The
Model Act establishes capital requirements for four categories of risk: asset
risk, insurance risk, interest rate risk and business risk. For each category,
the capital requirement is determined by applying factors to various asset,
premium and reserve items, with the factor being higher for those items with
greater underlying risk and lower for less risky items.
Applying the NAIC formula as of December 31, 1996, the Total Adjusted
Capital of the Company's principal life insurance subsidiary, JALIC, was
substantially above the level necessary to trigger any action under the Model
Act.
Assessments Against Insurers
Under insolvency or guaranty laws in most states in which the Company
operates, insurers can be assessed for policyholder losses incurred by
insolvent insurance companies. The timing of any future assessments on the
Company under these laws cannot be reasonably estimated and is beyond the
control of the Company. Most of these laws do provide, however, that an
assessment may be excused or deferred if it would threaten an insurer's
financial strength, and some assessments paid by the Company pursuant to these
laws may be used as credits for a portion of the Company's premium taxes. The
Company has recorded a future assessment liability of $8.4 million at December
31, 1996.
EMPLOYEES
The Company had approximately 2,800 employees as of March 1, 1997, and
considers its employee relations to be good. The Company's employees are not
represented by labor unions. As a result of the Company's decision to focus on
healthcare and the sale of the Annuity Operations and Western Diversified Group
as discussed above, the Company will be reviewing its workforce and the
structure of its operations, including overhead functions. It is anticipated
that functions will be reduced or eliminated and that the size of the Company's
workforce will be decreased.
RATINGS
JALIC is currently rated "A- (Excellent)" by A.M. Best, "BBB+
(Adequate)" by Standard & Poor's Rating Group for claim-paying ability and "A3"
by Moody's Investors Service ("Moody's") for income financial strength. The
current rating of Moody's is under review for possible downgrade.
ITEM 2. PROPERTIES
The Company's headquarters are located in Miami, Florida, where it
owns approximately 55 acres of an office park with the following improvements:
(i) a seven-story office building containing approximately 231,000 rentable
square feet of office space, (ii) three six-story office buildings containing
approximately 130,000 rentable square feet per building and (iii) five
single-story buildings and two mid-rise buildings containing, in the aggregate,
approximately 384,000 rentable square feet of office and warehouse space. The
Company occupies the entire seven-story building and one of the six-story
buildings, a portion of the space in a second six-story building, and a
majority of the space in two of the single-story buildings.
10
<PAGE> 14
The Company owns an office building in Boise, Idaho which contains
50,000 rentable square feet of office space. The Western Diversified Group's
operations are located in Deerfield, Illinois, where it leases 34,600 square
feet of office space under a lease expiring in March 2003. The Company also
leases sales offices and six service centers throughout the United States.
The Company believes that its present facilities are adequate for
its current needs.
ITEM 3. 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, Christopher W. Aronson, et. al. v. John Alden Financial Corporation,
et. al.; In Re: John Alden Financial Corporation Securities Litigation, 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. On September 30, 1996, the Court denied the defendants' motion to
dismiss the Consolidated Amended Complaint and the Court certified a class of
those persons who purchased the Company's Common Stock during the period
between October 27, 1994 through May 3, 1995. Discovery in this lawsuit is
ongoing. The Company and individual defendants deny any wrongdoing, believe
they have meritorious defenses against the claims asserted, and intend to
vigorously defend the lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
PRINCIPAL MARKETS AND SALES PRICES
The Company's Common Stock is listed and principally traded on the New
York Stock Exchange ("NYSE") under the ticker symbol "JA". The Company's
Common Stock is also traded on the following regional exchanges: the Boston
Stock Exchange, the Philadelphia Stock Exchange, the Midwest Stock Exchange and
the Pacific Stock Exchange.
11
<PAGE> 15
The following table sets forth the price range of the Company's Common
Stock and the cash dividends per share of Common Stock declared for the periods
shown. The Common Stock prices are the closing sale price as reported on the
NYSE.
<TABLE>
<CAPTION>
PRICE RANGE
-------------------------------- DIVIDENDS
HIGH LOW DECLARED
------------- --------------- ---------------
<S> <C> <C> <C>
1995
----
First Quarter....................... $31-1/4 $18-3/8 $0.11
Second Quarter...................... 19 15-1/8 0.11
Third Quarter....................... 23-1/2 16-1/8 0.11
Fourth Quarter...................... 21-7/8 19-3/8 0.11
1996
----
First Quarter....................... 21-5/8 17-5/8 0.11
Second Quarter...................... 24-1/8 18-3/8 0.11
Third Quarter....................... 22-1/8 18-1/4 0.12
Fourth Quarter...................... 20-1/2 16-5/8 0.12
</TABLE>
HOLDERS
As of March 11, 1997, the approximate number of record holders of the
Company's Common Stock was 750 and the approximate number of beneficial owners
was 10,500.
DIVIDENDS
On March 6, 1997, the Board of Directors of the Company declared a
dividend of $0.12 per share of Common Stock payable on April 21, 1997 to
holders of record on March 31, 1997, aggregating approximately $3.0 million.
The Company's 9% cumulative preferred stock ranks prior to the Common
Stock as to payment of dividends and, therefore, no payment of dividends can be
made to the holders of the Common Stock unless all accrued dividends have been
paid to the holders of the 9% cumulative preferred stock. As an insurance
holding company, the Company depends on dividends and other permitted payments
from its insurance subsidiaries to pay cash dividends to stockholders. The
payment of dividends and such other payments by the insurance subsidiaries are
restricted by the laws of each insurance subsidiary's state of domicile and
each state where the subsidiary conducts business. State insurance regulators
have authority in certain circumstances to block payments of dividends and
other amounts by the insurance subsidiaries that would otherwise be permitted
without regulatory approval. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Business -- Government Regulation". In addition, the Company's
credit agreement prohibits it from declaring cash dividends on its Common Stock
in an annual aggregate amount in excess of certain specified limits.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following historical financial data for the nine years ended
December 31, 1996 have been derived from the Consolidated Financial Statements
of the Company audited by Price Waterhouse LLP, independent accountants. The
following selected financial data of the Company should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Company's audited Consolidated Financial Statements
appearing elsewhere herein.
On March 27, 1996, the Board of Directors of the Company authorized
the sale of its Annuity Operations and the Western Diversified Group. As a
result of this action, beginning in 1996, the Company has reported the results
of operations of the Annuity Operations and Western Diversified Group as
discontinued operations. The
12
<PAGE> 16
Consolidated Statements of Income for the years ended December 31, 1995 and
1994 have been restated to reflect the results of these operations as
discontinued operations. Accordingly, the Statement of Income Data for the
years ended December 31, 1995 and 1994 has also been restated.
13
<PAGE> 17
SELECTED FINANCIAL DATA
John Alden Financial Corporation and Subsidiaries
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------- ----------- -------
(In thousands, except per share Actual Pro Forma Actual
and ratio data) ---------------------------------------------- ---------- -------
1996 1995 1994 1993 1992 (1) 1992
- ----------------------------------------------------------------------------------------------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Gross insurance premiums and
contract charges earned $1,838,254 $1,936,262 $1,792,087 $1,661,229 $1,380,634 $1,380,634
Net insurance premiums and
contract charges earned 1,024,574 1,053,035 939,913 930,588 753,744 753,744
Net investment income 45,460 50,388 38,145 353,869 329,494 329,494
Total revenues 1,114,682 1,156,464 1,071,198 1,406,784 1,185,063 1,185,063
Gross claims incurred on insurance
products 1,396,695 1,458,365 1,226,531 1,039,693 872,269 872,269
Net claims incurred on insurance
products 749,051 763,099 609,767 555,517 456,688 456,688
Interest expense 6,615 8,413 6,067 6,096 6,886 15,226
Total benefits and expenses 1,116,353 1,186,984 1,000,971 1,279,204 1,082,850 1,092,230
Net income (loss) before cumulative effect
of change in accounting principle:
Continuing operations (1,711) (18,900) 48,625 -- -- --
Discontinued operations 32,647 25,308 27,690 -- -- --
Total 30,936 6,408 76,315 80,044 64,523 57,856
Net income (loss) 30,936 6,408 75,774 83,126 64,523 57,856
Net income (loss) applicable to
common stock 29,586 5,058 74,424 81,776 63,176 54,829
Per common share:
Net income (loss) before cumulative
effect of change in accounting
principle:
Continuing operations (0.12) (0.78) 1.86 -- -- --
Discontinued operations 1.27 0.98 1.09 -- -- --
Total 1.15 0.20 2.95 3.29 2.71 3.08
Net income (loss) 1.15 0.20 2.93 3.42 2.71 3.08
Average common equivalent
shares outstanding 25,651 25,721 25,388 23,911 23,308 17,786
Cash dividends declared per
common and common
equivalent share $ 0.46 $ 0.44 $ 0.40 $ 0.27 N/A $0.06
BALANCE SHEET DATA:
Total invested assets $5,962,932 $6,114,770 $5,675,743 $4,988,946 $4,366,105 $4,359,992
Total assets 7,671,249 7,696,030 6,962,133 6,131,288 5,553,481 5,543,489
Short-term debt 25,000 15,063 22,679 30,875 19,676 21,154
Long-term debt 76,500 92,000 102,399 92,754 105,966 94,496
Redeemable securities 18,687 19,416 20,181 23,776 51,114 51,114
Stockholders' equity 465,211 477,231 406,724 344,197 198,561 198,561
OTHER DATA:
Operating income (loss) applicable to
common stock $ 32,832 $ 4,100 $ 83,278 $ 82,767 $ 71,214 $ 62,870
Operating income (loss) per common
and common equivalent share 1.28 0.16 3.28 3.46 3.05 3.53
Operating income before interest,
taxes and preferred stock dividends 59,295 19,159 133,631 139,949 121,303 120,263
Group gross medical loss ratio 76.3% 75.0% 69.7% 64.9% 65.0% 65.0%
Group gross combined ratio 100.0% 100.2% 94.8% 90.6% 90.1% 90.1%
</TABLE>
(1) The pro forma statement of income data and other related data for the year
ended December 31, 1992 were prepared assuming the Company's initial
public offering of its common stock (the "IPO") occurred on January 1, 1992.
The pro forma balance sheet data as of December 31, 1992 and related other
data were prepared assuming the IPO occurred on December 31, 1992.
14
<PAGE> 18
SELECTED FINANCIAL DATA
John Alden Financial Corporation and Subsidiaries
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
(In thousands, except per share ACTUAL
and ratio data) --------------------------------------------
1991 1990 1989 1988
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Gross insurance premiums and
contract charges earned $1,205,796 $ 982,464 $ 734,630 $ 567,827
Net insurance premiums and
contract charges earned 931,900 897,786 666,197 490,611
Net investment income 332,294 332,015 301,790 282,473
Total revenues 1,338,916 1,228,949 969,124 778,895
Gross claims incurred on insurance
products 788,975 651,906 467,089 357,501
Net claims incurred on insurance
products 579,172 590,145 426,068 324,342
Interest expense 24,316 32,093 35,637 30,411
Total benefits and expenses 1,260,578 1,202,616 949,479 779,351
Net income (loss) before cumulative effect
of change in accounting principle:
Continuing operations -- -- -- --
Discontinued operations -- -- -- --
Total 49,134 12,073 11,186 (2,181)
Net income (loss) 55,904 12,073 11,186 (2,181)
Net income (loss) applicable to
common stock 51,772 9,814 9,012 (4,341)
Per common share:
Net income (loss) before cumulative
effect of change in accounting
principle:
Continuing operations -- -- -- --
Discontinued operations -- -- -- --
Total 2.83 0.62 0.57 (0.27)
Net income (loss) 3.25 0.62 0.57 (0.27)
Average common equivalent
shares outstanding 15,930 15,930 15,930 15,930
Cash dividends declared per
common and common
equivalent share -- -- -- --
BALANCE SHEET DATA:
Total invested assets $4,003,019 $3,171,096 $3,165,005 $2,662,832
Total assets 5,208,575 4,502,069 4,075,482 3,429,552
Short-term debt 97,089 18,891 18,609 8,592
Long-term debt 115,586 214,213 259,986 247,653
Redeemable securities 64,834 58,585 50,890 48,420
Stockholders' equity 73,227 14,694 10,321 1,592
OTHER DATA:
Operating income (loss) applicable to
common stock $ 20,728 $ 16,144 $ 13,306 $ (2,260)
Operating income (loss) per common
and common equivalent share 1.32 1.01 0.83 (0.14)
Operating income before interest,
taxes and preferred stock dividends 65,792 68,035 61,800 33,105
Group gross medical loss ratio 67.8% 67.0% 68.5% 72.4%
Group gross combined ratio 92.9% 93.3% 94.9% 98.8%
</TABLE>
15
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL OVERVIEW
BUSINESS SEGMENTS
The Company has historically operated in three segments: HealthCare,
Asset Accumulation, and Credit and Other. In addition, a Corporate Segment
included certain activities that were not directly related to any operating
division. Beginning in 1994 and throughout 1995, the Company conducted a
strategic evaluation of its operations. The purpose of this evaluation was to
maximize stockholder value and to increase the Company's focus on the major
product lines within each segment that it believed had long-term financial
viability and provided a significant contribution to the Company's operating
results. On March 27, 1996, the Board of Directors of the Company authorized
the sale of its Asset Accumulation Segment, which includes the annuity
business, (the "Annuity Operations"), and the Western Diversified Group, the
principal businesses which market credit life and disability and retail service
warranty coverage (see "Sale of Annuity Operations and the Western Diversified
Group" below). As a result of this action, the Company has reported the
results of operations of the Annuity Operations and Western Diversified Group
as discontinued operations and has reclassified prior period results of
operations in the accompanying Consolidated Statements of Income. In addition,
the Company has discontinued the reporting of segment information as management
is now managing the Company as a single line company operating in the
healthcare market. The current healthcare operations primarily include
indemnity and managed indemnity products, healthcare stop-loss reinsurance
products and health maintenance organization ("HMO") and HMO-like products.
The Company also has certain product lines which are no longer being actively
marketed (run-off operations). All references to the Company herein include
the subsidiaries and predecessors of John Alden Financial Corporation, unless
the context otherwise indicates.
SALE OF ANNUITY OPERATIONS AND WESTERN DIVERSIFIED GROUP
On December 2, 1996, the Company announced that it had entered into a
definitive agreement to sell the Annuity Operations to SunAmerica Life
Insurance Company ("SunAmerica"). The transaction includes the sale of all of
the common stock of John Alden Life Insurance Company of New York ("JANY") and
the coinsurance of substantially all of the annuity block of John Alden Life
Insurance Company ("JALIC"). This coinsurance will initially be on an
indemnity basis and, pursuant to the agreement, will transition to an
assumption basis as soon as practical. In certain states, the transition to an
assumption basis is subject to policyholder approval. To the extent that such
transition does not take place with respect to any particular policy, such
policy will remain indemnity reinsured. A substantial portion of the
transition to an assumption basis is expected to be completed within two years.
The transaction is contingent upon customary terms and conditions, including
required regulatory approvals and is scheduled to close by the end of the
first quarter of 1997.
The total purchase price is approximately $240 million. This
represents approximately $165 million premium paid to acquire the business and
$75 million of adjusted capital and surplus of JANY. It does not include any
capital and surplus used to support the annuity business in JALIC, which will
remain in JALIC. The Company's available capital will be enhanced by both the
after-tax gain generated from the transaction and by the release of the net
capital previously allocated to support the annuity business. The Company
intends to use a portion of this available capital to strengthen its healthcare
operations, after which it estimates there will be approximately $175 million
to $200 million of capital available for other uses. Subject to applicable
regulatory approvals, this additional capital may be used to repurchase common
stock, pay dividends, pay down debt and, to a lesser extent, for general
corporate purposes.
The Company is pursuing the execution of a definitive agreement for
the sale of the Western Diversified Group and expects to enter into a
non-binding letter of intent in the second quarter of 1997. Such sale may be
in the form of a sale of all of the common stock of the subsidiaries which
comprise the Western Diversified Group or the reinsurance of the applicable
business and would be subject to applicable regulatory approvals. There can be
no assurance that such sale will be consummated.
16
<PAGE> 20
As a result of these sales, the Company expects to record a net
deferred gain of approximately $45 million. This amount is net of transaction
expenses, taxes, goodwill and other adjustments relating to these transactions
including an adjustment to reduce the carrying value of the Western Diversified
Group to its estimated net realizable value. The net deferred gain will be
recognized as income as SunAmerica completes the assumption of policyholder
liabilities. The Company expects to begin recognizing the net deferred gain in
1997 and to earn the majority of the gain by December 31, 1998.
ACCOUNTING CHANGES
See Note 2 to the consolidated financial statements for a discussion
of the impact of the adoption of new accounting pronouncements.
RESULTS OF OPERATIONS
RESULTS SUMMARY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
----------- ----------- ------------
(In millions, except per share data)
<S> <C> <C> <C>
Operating income (loss) (1):
Continuing operations . . . . . . . . . . . . . . . $(5.0) $(18.7) $49.1
Discontinued operations . . . . . . . . . . . . . . 37.8 22.8 34.2
Total . . . . . . . . . . . . . . . . . . . . . . 32.8 4.1 83.3
Net income (loss) (2):
Continuing operations . . . . . . . . . . . . . . . (1.7) (18.9) 48.6
Discontinued operations . . . . . . . . . . . . . . 32.6 25.3 27.7
Total . . . . . . . . . . . . . . . . . . . . . . 30.9 6.4 76.3
Net income applicable to common stock . . . . . . . . 29.6 5.1 74.4
Operating income (loss) per common share (1):
Continuing operations . . . . . . . . . . . . . . . (0.20) (0.73) 1.93
Discontinued operations . . . . . . . . . . . . . . 1.48 0.89 1.35
Total . . . . . . . . . . . . . . . . . . . . . . 1.28 0.16 3.28
Net income per common share . . . . . . . . . . . . . 1.15 0.20 2.93
Average common equivalent shares outstanding . . . . 25,651 25,721 25,388
</TABLE>
- -----------------------------
(1) Applicable to common stock excluding net realized investment gains
(losses) and cumulative effect of change in accounting principle and is
after preferred stock dividends.
(2) Income (loss) before cumulative effect of change in accounting principle.
STATEMENT OF INCOME DATA
As discussed above, the Company reports the results of operations of
the Annuity Operations and the Western Diversified Group as discontinued
operations. The Company's continuing operations primarily consist of its group
health business, its joint venture HMO and its stop-loss reinsurance business.
17
<PAGE> 21
CONTINUING OPERATIONS
The following tables recast the accompanying Consolidated Statements
of Income for continuing operations for the years ended December 31, 1996, 1995
and 1994 as a percent of net insurance premiums and contract charges earned and
provide other relevant information:
<TABLE>
<CAPTION>
POINT CHANGE
------------------------
POSITIVE (NEGATIVE)
YEAR ENDED DECEMBER 31, EFFECT
-------------------------------- ------------------------
1996 1995 1994 1996 1995
--------- --------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Gross insurance premiums and contract charges earned . . . . . . . 179.4% 183.9% 190.7% (4.5)% (6.8)%
Ceded insurance premiums and contract charges earned . . . . . . . (79.4) (83.9) (90.7) 4.5 6.8
------- ------- ------- -------- --------
Net insurance premiums and contract charges earned . . . . . . 100.0 100.0 100.0 -- --
Net investment income . . . . . . . . . . . . . . . . . . . . . . 4.4 4.8 4.1 (0.4) 0.7
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 5.3 10.2 (1.2) (4.9)
Net realized investment gains (losses) . . . . . . . . . . . . . . 0.3 (0.2) (0.3) 0.5 0.1
------- ------- ------- -------- -------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . 108.8 109.9 114.0 (1.1) (4.1)
------- ------- ------- -------- -------
Benefits and expenses:
Gross claims incurred on insurance products . . . . . . . . . . . 136.3 138.5 130.5 2.2 (8.0)
Ceded claims incurred on insurance products . . . . . . . . . . . (63.2) (66.0) (65.6) (2.8) 0.4
------- ------- ------- -------- -------
Net claims incurred on insurance products . . . . . . . . . . . 73.1 72.5 64.9 (0.6) (7.6)
------- ------- ------- -------- -------
Universal life and investment-type contract benefits:
Interest credited to account balances . . . . . . . . . . . . . 1.3 1.2 1.2 (0.1) --
Benefit claims incurred in excess of account balances . . . . . 0.5 0.4 0.4 (0.1) --
Increase (decrease) in life insurance reserves . . . . . . . . . . -- (0.2) -- (0.2) 0.2
------- ------- ------- -------- -------
Total benefits . . . . . . . . . . . . . . . . . . . . . . . . 74.9 73.9 66.5 (1.0) (7.4)
------- ------- ------- -------- -------
Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5 7.9 9.4 0.4 1.5
General expenses . . . . . . . . . . . . . . . . . . . . . . . . . 24.0 28.4 28.4 4.4 --
Amortization of purchased intangibles . . . . . . . . . . . . . . 0.5 0.5 0.7 -- 0.2
Amortization of deferred policy acquisition costs . . . . . . . . 1.4 1.3 0.8 (0.1) (0.5)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . 0.6 0.8 0.6 0.2 (0.2)
------- ------- -------- -------- -------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . 34.0 38.9 39.9 4.9 1.0
------- ------- -------- -------- -------
Total benefits and expenses . . . . . . . . . . . . . . . . . . 108.9 112.8 106.4 3.9 (6.4)
------- ------- -------- -------- -------
(Loss) income from continuing operations before
(benefit) provision for income taxes and minority
interest joint venture's (income) loss . . . . . . . . . . . . . . (0.1) (2.9) 7.6 2.8 (10.5)
(Benefit) provision for income taxes . . . . . . . . . . . . . . . . (0.2) (0.9) 2.3 (0.7) 3.2
Minority interest in joint venture's (income) loss . . . . . . . . . (0.2) 0.2 -- (0.4) 0.2
------- ------- ------- -------- -------
Net (loss) income from continuing operations . . . . . . . . . . . . (0.1)% (1.8)% 5.3% 1.7% (7.1)%
======= ======= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
---------------------------
YEAR ENDED DECEMBER 31, POSITIVE (NEGATIVE) EFFECT
------------------------------------------- ---------------------------
1996 1995 1994 1996 1995
----------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Other relevant information:
Group insured data:
Employers(1) . . . . . . . . . . 183,000 235,000 243,000 (22.1)% (3.3)%
Employee lives . . . . . . . . . 474,000 620,000 658,000 (23.5) (5.8)
Group covered lives . . . . . . . 901,000 1,190,000 1,274,000 (24.3) (6.6)
HMO covered lives . . . . . . . . 81,000 43,000 16,000 88.4 168.8
Total covered lives . . . . . 982,000 1,233,000 1,290,000 (20.4) (4.4)
Group gross medical loss ratio . . . 76.3% 75.0% 69.7% (1.3) (5.3)
</TABLE>
- -------------------
(1) Includes 32,000, 40,000 and 24,000 groups, each group made up of one
individual, as of December 31, 1996, 1995 and 1994, respectively, marketed
through an association trust.
During the three years ended December 31, 1996, the Company's
continuing operations' profitability was primarily a result of the amount of
business sold, the claims incurred and the control of sales and general
expenses.
18
<PAGE> 22
Gross insurance premiums and contract charges earned ("gross
premiums") increased 8.0% to $1,936.3 million for the year ended December 31,
1995 from $1,792.1 million for the year ended December 31, 1994. Consistent
with the Company's objective of maintaining profit margins at the risk of
reducing market share, the Company began to significantly increase rates on its
new and renewal business effective January 1, 1995, with larger increases
targeted to the higher risk business. The Company raised its 1995 premium
rates higher than the majority of the competition as it believes it was among
the first major participants in the small group market to recognize the
increased level of utilization and the rising medical cost trends. The Company
also began to take additional actions that were designed to 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 included, where appropriate
or available, improving discounts from providers, redesigning benefits,
improving underwriting techniques, implementing a lower commission structure
and discontinuing portions of such business, if warranted. While these actions
resulted in a decline in group covered lives of 6.6% to 1,190,000 at December
31, 1995 from 1,274,000 at December 31, 1994, the rate increases resulted in
the net increase in gross insurance premiums and contract charges earned in
1995.
During 1996, the Company continued to experience increased utilization
of medical services. The group gross medical loss ratio increased to 76.3% for
the year ended December 31, 1996 from 75.0% for the year ended December 31,
1995. 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 the increased utilization, that were
contributing to the relatively high medical loss ratios. These factors
resulted primarily from small group and individual healthcare reform
legislation. The Company also enhanced its ability to analyze claims
experience by various specific characteristics including, among other things,
initial and current group size, duration of policy, geographic location, level
of deductibles and utilization of particular benefits. Consistent with the
objective of maintaining profit margins at the risk of reducing market share,
the Company continued to significantly increase premium rates throughout 1996,
specifically targeting those blocks of business with profit margins lower than
that which the Company deems acceptable. While the number of group covered
lives decreased 24.3% to 901,000 at December 31, 1996 from 1,190,000 at
December 31, 1995, the rate increases offset, in part, the decline in covered
lives. Additionally, gross premiums from the Company's HMO joint venture
discussed below increased 191.8% in 1996 to $107.4 million from $36.8 million
in 1995. Total gross premiums decreased 5.1% to $1,838.3 million for the year
ended December 31, 1996 from $1,936.3 million for the year ended December 31,
1995.
Ceded premiums as a percentage of gross premiums decreased from 47.6%
in 1994 to 45.6% in 1995 to 44.3% in 1996. This is due to growth in other
non-reinsured products, such as the Company's HMO joint venture formed in the
third quarter of 1994, NHP Holding Company, Inc. ("NHP"), with a physician
hospital organization ("PHO"). At that time, the PHO included five leading
hospitals and approximately 1,600 physicians in the South Florida geographic
area and, through its existing HMO, provided medical coverage to approximately
11,000 people. By December 31, 1996, the network included 22 hospitals and
approximately 3,500 physicians and the HMO covered approximately 81,000 covered
lives. The Company's 50% share of the operating loss from start-up operations
of NHP was $2.0 million and $0.8 million in 1995 and 1994, respectively. In
1996, the Company's 50% share of the operating profit of NHP was $2.1 million.
Other income consists primarily of profit sharing provisions in
accordance with a Group Reinsurance Agreement with London Life Insurance
Company and Transamerica Occidental Life Insurance Company (the "Group
Reinsurance Agreement"), which became effective October 1, 1991 for small
groups under 25 employee lives. The Group Reinsurance Agreement was amended
effective January 1, 1994 to include all fully-insured groups, regardless of
size. See further discussion in "Liquidity and Capital Resources --
Reinsurance". The amount of these profit sharing provisions has declined in
1995 and 1996 due to the decline in the gross profitability.
Total benefits as a percent of net insurance premiums and contract
charges earned ("net premiums") increased from 66.5% in 1994 to 73.9% in 1995.
In early 1995, the Company began to experience an increase in the group gross
medical loss ratio over the 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
19
<PAGE> 23
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 claim data, the
Company discovered that claims submitted in 1995 relating to medical services
provided in 1994 were at higher levels than originally 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 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% in 1995 from 69.7% in 1994.
During 1995, the Company recorded additional medical benefits in its
provider excess stop-loss reinsurance product line. The Company began selling
this product in late 1993. Since this was a relatively new product throughout
the industry, the Company entered into a 50% reinsurance arrangement with a
pool of reinsurers. During the third and fourth quarters of 1995, the Company
received sufficient information to enable it to conclude that the initial
premium rates were insufficient to pay the anticipated claims on pre-1995
business. Accordingly, the Company recorded charges of $5.8 million relating to
its 50% exposure in this business. In 1996, the Company increased premium
rates, revised benefits and coverage allowances, raised the amount of business
ceded to 100% and ultimately reached a decision to discontinue this product
line. Estimated losses during the run-off period have been accrued in 1996.
Commissions, as a percent of net premiums, declined from 9.4% in 1994
to 7.9% in 1995. This decline was primarily the result of a reduction of
commission rates effective in late 1994. In addition, during the third quarter
of 1994, the Company began to defer acquisition costs related to a product
within the small group health insurance product line as it achieved sufficient
size to warrant recoverability against future profits.
General expenses, as a percent of net premiums, were 28.4% in 1994 and
1995, but decreased to 24.0% in 1996. Included in general expenses are direct
costs to support the group, HMO and stop-loss reinsurance product lines, as
well as the Company's overhead costs. Also included in general expenses are
charges recorded in connection with the Company's strategic evaluation of its
operations, excluding the Annuity Operations and the Western Diversified Group.
During 1994, the Company recorded a $0.9 million charge for the discontinuance
of the Emperion Corporation joint venture. During 1995, the Company recorded
$20.8 million of intangible asset write-offs, severance and other charges
related to the strategic evaluation. The severance charges were related to an
approximate 400 position elimination, which approximated 10% of the work force
that then existed. An additional $6.7 million of severance and related charges
were recorded in 1996 for further actions related to the strategic evaluation.
The amortization of deferred policy acquisition costs, as a percent of
net premiums, increased from 0.8% in 1994 to 1.3% in 1995 and 1.4% in 1996. As
discussed above, the Company began to defer acquisition costs related to a
small group product in the third quarter of 1994.
The Company's income from continuing operations was 7.6% of net
premiums in 1994. Due primarily to the increase in the group gross medical
loss ratio and the $20.8 million of charges related to the strategic
evaluation, the Company recorded a loss from continuing operations in 1995,
which equated to 2.9% of net premiums. The loss from continuing operations was
reduced in 1996, primarily as a result of the expense reductions discussed
above, to 0.1% of net premiums.
The Company's income tax provisions differ from the amounts determined
by multiplying total income before income taxes by the statutory federal income
tax rate of 35% primarily due to permanent differences including goodwill
amortization, non-taxable investment income, non-deductible expenses, changes
in tax valuation allowances and other items. During 1994, the Company also
recognized a $3.3 million tax benefit from the dissolution of the Emperion
joint venture. During 1995, the Company increased its valuation allowance for
20
<PAGE> 24
the tax losses from NHP by $1.5 million, bringing the total for such valuation
allowance to $3.7 million at December 31, 1995. During 1996, the Company
determined that the valuation allowance was no longer necessary and it was
released.
DISCONTINUED OPERATIONS
On March 27, 1996, the Board of Directors of the Company authorized
the sale of the Annuity Operations and the Western Diversified Group. On
December 2, 1996, the Company announced that it had entered into a definitive
agreement to sell the Annuity Operations to SunAmerica. The transaction
includes the sale of all of the common stock of JANY and the coinsurance of
substantially all of the annuity block of JALIC. This coinsurance will
initially be on an indemnity basis and, pursuant to the agreement, will
transition to an assumption basis as soon as practical. In certain states, the
transition to an assumption basis is subject to policyholder approval. To the
extent that such transition does not take place with respect to any particular
policy, such policy will remain indemnity reinsured. A substantial portion of
the transition to an assumption basis is expected to be completed within two
years. The transaction is contingent upon customary terms and conditions,
including required regulatory approvals and is scheduled to close by the end
of the first quarter of 1997.
ANNUITY OPERATIONS
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
-----------------
YEAR ENDED DECEMBER 31, POSITIVE (NEGATIVE) EFFECT
------------------------------ --------------------------
1996 1995 1994 1996 1995
-------- ------- ------ ---------- -----------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Total revenues . . . . . . . . . . . . . $ 432.6 $ 459.9 $ 383.7 (5.9)% 19.9%
Pre-tax operating income (net spread
earned) . . . . . . . . . . . . . . . . 60.1 33.8 52.9 77.8 (36.1)
Net realized investment (losses) gains. . (8.0) 3.8 (9.9) (310.5) 138.4
Pre-tax income . . . . . . . . . . . . . 52.1 37.6 43.0 38.6 (12.6)
</TABLE>
The net spread earned in 1995 decreased 36.1% to $33.8 million from
$52.9 million in 1994. The decrease in net spread earned in 1995 as compared
to the high spreads earned in 1994 was primarily due to the tightening of
spreads during the period of declining interest rates in 1995. The net spread
earned in 1995 was also reduced by $8.2 million in charges from two significant
adjustments. In January 1996, the National Organization of Life and Health
Guaranty Associations revised its prior estimates of certain insolvencies and,
accordingly, the Company increased its existing 1995 liability for guaranty
fund assessments by $3.8 million. In addition, during 1995, the Company
entered into a reinsurance agreement to cede 90% of certain annuity contracts.
The Company liquidated available-for-sale securities to fund the ceding of the
annuity contracts, resulting in $13.8 million of net realized investment gains.
As a result of the agreement, the Company recognized $4.4 million of
accelerated amortization of deferred policy acquisition costs. Therefore, 1995
pre-tax income increased $9.4 million from this agreement. The assets
transferred to the reinsurer were placed in trust for the Company's
protection.
Net spread earned increased 77.8% to $60.1 million for the year ended
December 31, 1996 from $33.8 million for the year ended December 31, 1995. The
increase in net spread is 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 average credited rate on
outstanding annuity contracts during 1996 as compared to the tightening of
spreads during the period of declining interest rates in 1995 as well as a
reduction in marketing and administration expenses incurred in 1996 due to the
anticipated sale. Also, investment income on JANY equity increased due to an
increase in capital, including a contribution made in late 1995. In addition,
the Company recognized $2.6 million of premium and intangible tax refunds and
guaranty fund liability reductions during 1996.
21
<PAGE> 25
WESTERN DIVERSIFIED GROUP
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
-----------------
YEAR ENDED DECEMBER 31, POSITIVE (NEGATIVE) EFFECT
------------------------------ --------------------------
1996 1995 1994 1996 1995
-------- ------- ------ ---------- -----------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Written premiums . . . . . . . . . . . . $91.7 $80.4 $79.0 14.1% 1.8%
Gross insurance premiums and contract
charges earned . . . . . . . . . . . . 74.6 67.1 61.8 11.2 8.6
Pre-tax (loss) income . . . . . . . . . . (0.6) 3.2 1.6 (118.8) 100.0
</TABLE>
Pre-tax income increased 100.0% to $3.2 million for the year ended
December 31, 1995 from $1.6 million for the year ended December 31, 1994.
Pre-tax income decreased 118.8% to a pre-tax loss of $0.6 million for the year
ended December 31, 1996 from pre-tax income of $3.2 million for the year ended
December 31, 1995. This decrease is primarily attributable to additional
profit sharing liabilities recorded during 1996 relating to amounts ceded to
reinsurers in the credit and extended service product lines.
BUSINESS DEVELOPMENT
Group insurance business historically has been subject to pricing and
profitability cycles that are driven by competitive price pressures within the
industry. These pressures and other factors make it difficult to predict with
certainty the effect pricing changes will have on the Company's combined
ratios. Traditionally, the cycle has been characterized by a period of lower
combined ratios, which has fostered intense price competition and aggressive
marketing by new entrants as well as existing companies striving to increase
market share, resulting in higher combined ratios and lower profitability. The
higher combined ratios typically resulted in a withdrawal of competitors and a
firming of prices, resulting once again in lower combined ratios and increased
profitability and, thus, a renewal of the cycle. There are factors in the
current cycle that were not present in previous cycles. The first significant
factor is small group and individual healthcare reform and its effect on
medical underwriting and pricing. Small group and individual healthcare
reforms, primarily at the state level and increasingly at the federal level,
include legislation on matters such as guaranteed issue, mandated benefits,
premium rate limits (including community rating and modified community rating),
guaranteed renewability, minimum loss ratio mandates, risk adjustment
mechanisms which allocate losses of individual carriers to group carriers, and
other reforms. Secondly, HMO's now represent a more significant source of
competition than in previous cycles.
Historically, the Company has generally experienced a relatively high
gross loss ratio in the fourth quarter of the year. The Company believes that
these higher loss ratios are primarily due to the increased incidence of claims
associated with the colder, winter climate and the fact that insureds generally
exceed the deductible and out-of-pocket expense limits of their policies by
that time of year. The Company cannot predict the extent to which this
disparity may continue, increase or decrease in the future.
The Company has continued its strategy to strengthen its products and
negotiate new and better contracts with its providers. This strategy is
designed to reduce the risks created in its marketplace by healthcare reforms
and changing patterns of behavior by providers while offering customers
attractive, high quality, affordable products. In this pursuit, during early
1996, the Company began a major project to design benefit plans that are more
easily understood and administered by providers and which steer customers into
selected provider networks. The strategy has resulted in the development of a
new product which is anticipated to be introduced in 17 states in the second
quarter of 1997 and should be available in most of the states in which the
Company expects to continue its marketing efforts by the end of the third
quarter of 1997. It is designed to offer customers the high quality,
affordable features they demand, reward policyholders for using the Company's
selected local provider system, generate stronger relationships with providers
and reduce the risks healthcare reforms have created in the marketplace. The
new product will employ greater use of co-pays, increase steerage to contracted
providers and has been designed to minimize exposure to anti-selection.
Although there can be no assurance as to the success of this new product in the
competitive healthcare industry, it has been designed to be more attractive to
providers and customers thereby increasing demand in the marketplace and
sales. In addition, the Company will be enhancing provider incentives and
risk-sharing programs that encourage and reward networks for effective
medical cost management. It is anticipated that the cost of implementing
this strategy will result in an increase in the group gross expense ratio
over the next several quarters and possibly thereafter.
In January 1997, the Company announced that it would be focusing its
marketing efforts and resources in those markets and states in which it
believes it can best increase profitability and market share. In these
markets,
22
<PAGE> 26
provider relationships are continuing to be strengthened and the new product
discussed above will be introduced. Conversely, the Company intends to reduce
its marketing efforts and significantly reduce its financial exposure and may,
in some cases, withdraw from business in those states where legislative reform
and intense competition have significantly increased the risk profile of
writing small employer health coverage. Approximately 25% of 1996 group
health premiums were generated in these states. In line with this strategy, the
Company has decided to stop selling small group insurance plans in California,
Maryland and New Jersey, and to terminate existing small group insurance plans
in these states. In addition, the Company continues to closely manage its
expense structure, including maintaining its workforce proportionate to its
business.
The actions described above are designed to make the Company's
products more competitive and to ultimately increase the total group gross
insurance premiums and contract charges earned, as well as to restore profit
margins to an acceptable level. During the short-term, these actions may
result in a decrease in group gross insurance premiums and contract charges
earned. There can be no assurance that these actions will restore profit
margins to acceptable levels.
LIQUIDITY AND CAPITAL RESOURCES
INDEBTEDNESS
The Company maintains a Credit Agreement with The Chase Manhattan Bank
which was amended in July 1994 to increase the commitment amount of the term
loan to $110.0 million and to establish a revolving credit loan with a
commitment amount of $40.0 million and an expiration of July 1998 (the "Credit
Agreement"). As of December 31, 1996, the Company has $23.5 million available
under the revolving credit loan. 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, sale 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 and ranged from
5.6% to 9.0% during 1996, 1995 and 1994. Future required principal payments
are $25.0 million in 1997, $41.5 million in 1998, and $35.0 million in 1999.
In December 1993, the Company entered into a revolving credit
agreement with three banks, allowing the Company to borrow up to $35.0 million
to finance purchases of fixed assets and capitalized software. In December
1995, the remaining principal balance of $20.4 million was repaid in full
utilizing the net proceeds of a sale and leaseback of certain fixed assets and
capitalized software. Fixed assets with a net book value of $13.4 million and
unamortized capitalized software with a net book value of $13.9 million were
sold to a bank for book value and leased back to the Company. The lease is for
a five-year term and is accounted for as an operating lease.
The principal amounts of outstanding indebtedness of the Company at
December 31, 1996, 1995 and 1994 were $101.5 million, $107.1 million and $125.1
million, respectively. At December 31, 1996, the Company's ratio of debt and
redeemable securities to stockholders' equity was 0.26 to 1 compared to 0.27 to
1 at December 31, 1995, and 0.36 to 1 at December 31, 1994. The weighted
average interest rates on the Company's indebtedness were approximately 6.3%,
6.9% and 4.9% for 1996, 1995 and 1994, respectively.
DIVIDENDS
The Credit Agreement restricts dividends and other distributions
payable by the Company. In any period of 12 consecutive months, the Company
may pay cash dividends on, or repurchase for cash, capital stock in an amount
not to exceed 15% of net worth (representing stockholders' equity excluding net
unrealized gains (losses) on investments plus redeemable securities) as of the
end of the fiscal quarter ending on or most recently prior to the last day of
such 12 month period ($65.8 million for the 12 months ended December 31, 1996).
23
<PAGE> 27
The Company paid preferred stock dividends of approximately $0.7
million in each April and October of 1995 and 1996. On March 6, 1997, the
Company declared a preferred stock dividend in the amount of approximately $0.7
million and a common stock dividend of approximately $3.0 million which are
both to be paid in April 1997. A summary of common stock dividends declared or
paid during 1995, 1996 and 1997 is as follows (dollars in millions, except per
share amounts):
<TABLE>
<CAPTION>
AMOUNT OF DIVIDEND
-------------------------------------
MONTH OF DECLARATION PAYMENT MONTH PER SHARE AGGREGATE
- --------------------------------- ------------------------- ----------------- ----------------
<S> <C> <C> <C>
December 1994 January 1995 $0.10 $2.5
March 1995 April 1995 0.11 2.8
June 1995 July 1995 0.11 2.8
September 1995 October 1995 0.11 2.8
December 1995 January 1996 0.11 2.8
March 1996 April 1996 0.11 2.8
June 1996 July 1996 0.11 2.8
September 1996 October 1996 0.12 3.0
December 1996 January 1997 0.12 3.0
March 1997 April 1997 0.12 3.0
</TABLE>
CASH FLOWS
The Company's sources of cash are payments of principal and interest
on the Surplus Debentures of, and dividends from, its direct life insurance
subsidiary, HNLIC, and dividends, management fees and tax allocation payments
from the Company's principal non-insurance subsidiary, JA Services, Inc.
("JASI") and JASI's subsidiaries. HNLIC's primary sources of cash are
dividends from its subsidiary, JALIC, and tax allocation payments from JALIC
and its subsidiaries. The Surplus Debentures require HNLIC to make principal
payments to the Company of $33.6 million in 1997 and $43.0 million in 1998.
JALIC paid cash dividends to HNLIC of $12.0 million in 1996, $30.0 million in
1995 and $29.0 million in 1994.
Principal sources of funds at the insurance company level are
insurance premiums, contract charges earned, annuity considerations collected,
net investment income received and proceeds from investments that have been
sold, called or matured, or from loans that have been repaid. The principal
uses of these funds are the payment of operating expenses, the payment of
claims and benefits on insurance policies, the purchase of investments and the
payment of indebtedness. Net cash provided by operating activities (reflecting
principally (i) premiums and contract charges collected less claims and
benefits on insurance products plus (ii) interest collected on invested assets
less (iii) commissions and other general expenses paid, together with (iv) the
inflows or outflows from the purchases or sales of trading account securities)
was $301.7 million, $383.0 million and $524.5 million in 1996, 1995 and 1994,
respectively. The net decrease in cash flows from operating activities from
1995 to 1996 was generally due to a reduction in the volume of business,
partially offset by decreased operating expenses. Net inflows from trading
account securities were $1.0 million and $6.6 million in 1996 and 1995,
respectively, compared to $153.2 million in 1994. The Company reduced the size
of the trading account in 1994 so as to limit volatility in net income. In
addition to the reduction in inflows from trading account securities, cash
provided by operations was also reduced in 1996 and 1995 by the reduction in
net income to $30.9 million and $6.4 million in 1996 and 1995, respectively,
from $75.8 million in 1994.
Net cash provided by (used in) investing activities (reflecting
principally investments purchased and loans made, less investments sold or
matured, and loans repaid) was $36.6 million, $(186.5) million and $(968.8)
million in 1996, 1995 and 1994, respectively. In conjunction with the
Company's announcement in March 1996 that it was selling its Annuity
Operations, the Company slowed production of new mortgages in 1996 while
experiencing increased repayments. In anticipation of cash needs relating to
the sale of the Annuity Operations as discussed below, the Company has kept the
additional cash generated from the mortgage repayments in cash equivalents, as
opposed to reinvesting these funds. This resulted in the increase in cash
provided by investing activities in 1996. The principal reasons for the
decrease in cash used in 1995 as compared to 1994 were the sale of $342.0
million of securities to
24
<PAGE> 28
fund the annuity reinsurance transaction (as described above) coupled with the
decreases in cash provided by operating and financing activities.
Cash flow from financing activities consists of net proceeds from
public stock offerings and debt refinancing, payments on redemption of
redeemable common and preferred stock, dividend payments on preferred and
common stock, additions to and repayments of indebtedness, as well as receipts
and payments on the Company's annuity and universal life products. Net cash
(used in) provided by financing activities was $(270.4) million, $(155.4)
million and $480.2 million in 1996, 1995 and 1994, respectively. In 1996, the
Company borrowed $26.0 million and repaid $31.5 million under the amended
Credit Agreement and related revolving credit facility. In 1995, the Company
borrowed $27.0 million and repaid $15.0 million under the amended Credit
Agreement and related revolving credit facility. Additionally, in 1995, the
Company paid in full a $29.8 million loan for fixed assets and capitalized
software. The Company made principal payments under the Credit Agreement of
$19.7 million in 1994 and borrowed additional funds of $13.5 million. Deposits
received from universal life and investment-type contracts were $453.2 million,
$886.3 million and $859.4 million in 1996, 1995 and 1994, respectively.
Payments to contract holders of these products consist of surrenders, partial
withdrawals, death claims and annuitized benefits. Such payments for these
same periods aggregated $705.6 million, $666.7 million and $401.2 million,
respectively. During 1995, the Company paid $342.0 million for the reinsurance
treaty discussed above. The amount of cash and cash equivalents at December
31, 1996, 1995 and 1994 was $167.5 million, $99.6 million and $58.5 million,
respectively.
On December 2, 1996, the Company announced that it had entered into a
definitive agreement to sell the Annuity Operations to SunAmerica for a total
purchase price of $240 million. The transaction includes the sale of all of
the common stock of JANY and the coinsurance of substantially all of the
annuity block of JALIC. This coinsurance will initially be on an indemnity
basis and, pursuant to the agreement, will transition to an assumption basis as
soon as practical. In certain states, the transition to an assumption basis is
subject to policyholder approval. To the extent that such transition does not
take place with respect to any particular policy, such policy will remain
indemnity reinsured. A substantial portion of the transition to an assumption
basis is expected to be completed within two years. The transaction is
contingent upon customary terms and conditions, including required regulatory
approvals and is scheduled to close by the end of the first quarter of 1997.
The Company is pursuing the execution of a definitive agreement for the sale of
the Western Diversified Group and expects to enter into a non-binding letter of
intent in the second quarter of 1997. Such sale may be in the form of a sale of
all of the common stock of the subsidiaries which comprise the Western
Diversified Group or the reinsurance of the applicable business and would be
subject to applicable regulatory approvals. There can be no assurance that
such sales will be consummated. For further discussion, see "General Overview
- -- Sale of Annuity Operations and Western Diversified Group".
In accordance with the terms of the definitive agreement to sell the
Annuity Operations, the Company will be required to remit cash or cash
equivalents to SunAmerica. In anticipation of this obligation, the cash and
cash equivalents of the Company have increased from $99.6 million at December
31, 1995 to $167.5 million at December 31, 1996. The total purchase price of
the Annuity Operations is approximately $240 million. The Company's available
capital will be enhanced by both the after-tax gain generated from the
transaction and by the release of the capital previously allocated to support
the annuity business. The Company intends to use a portion of this available
capital to strengthen its healthcare operations, after which it estimates there
will be approximately $175 million to $200 million of capital available for
other uses. Subject to applicable regulatory approvals, this additional
capital may be used to repurchase common stock, pay dividends, pay down debt
and, to a lesser extent, for general corporate purposes.
The Annuity Operations have historically represented a significant
source of cash flows to the Company. As a result of the sale, it is expected
that liquidity and cash flows from operating, investing and financing
activities will be decreased. In addition, as discussed above, the Company has
recently developed a new small group health insurance product which will be
introduced into the marketplace beginning in the second quarter of 1997. The
Company will also be enhancing its management of provider relationships and
risk-sharing programs. In conjunction with these actions, the Company will be
reviewing its current and future information systems needs. As a result, the
Company may need to make additional investments in its information systems in
the future to support the operations of the business and as the Company
prepares for the transitioning of operations into the year 2000. However, the
Company believes that sufficient sources of cash flow exist which will be
available in
25
<PAGE> 29
the foreseeable future to allow the Company to service its debt, redeem
preferred stock and meet anticipated dividend requirements.
See Notes 5, 11, 12 and 14 to the Consolidated Financial Statements
for a discussion of liquidity, quality, composition and fair values of the
Company's invested asset portfolio.
REINSURANCE
Substantially all of the group accident and health insurance business
has been reinsured under the Group Reinsurance Agreement which provides for the
Company and the reinsurers to share on a 50-50 basis all premiums and claims
expense. Annually, the Company receives profit sharing payments from the
reinsurers equal to the excess of reinsurers' profits over contractual floor
amounts. For years where such profits fall short of floor amounts, the
shortfalls are carried forward with interest to be applied as reductions
against future profit sharing payments. In addition, under the Group
Reinsurance Agreement, to the extent the combined ratio of the group accident
and health insurance business for a rolling 12-month period exceeds contractual
amounts, the Company receives a reduced profit sharing payment. As originally
contracted, the Company's 1996 profit sharing payment would have been reduced
as its combined ratio exceeded the contractual amount. However, in December
1996, the reinsurers agreed to amend the agreement. Under the terms of the
amended agreement, the Company and the reinsurers agreed to suspend the
contractual combined ratio requirement for 1996. Accordingly, the Company is
not obligated to return any portion of the 1996 profit sharing payments to the
reinsurers. In addition, the contractual amount was increased by one
percentage point for 1997. The contractual amount is then reduced by one
percentage point for 1998 and subsequent years. To the extent the combined
ratio for 1997 exceeds contractual amounts, the Company's profit sharing
amounts will be reduced by 25%. To the extent the combined ratio in years
subsequent to 1997 exceeds the contractual amounts, the Company's profit
sharing amounts will be reduced by 50%. Further, to the extent the reinsurers
incur a loss in relation to the agreement in 1997, the Company has agreed to
reimburse the first $5.0 million of net losses incurred by the reinsurers.
Receivables from reinsurers and investment deposits recoverable,
consisting primarily of contract holder liabilities transferred to reinsurers,
increased $0.9 million to $970.7 million at December 31, 1996 from $969.8
million at December 31, 1995. Of the total receivables from reinsurers and
investment deposits recoverable as of December 31, 1996, $768.1 million, or
79.1%, 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. Upon the coinsurance of the JALIC Annuity
Operations, the amount of investment deposits recoverable will increase by
approximately $3.8 billion. Assets equal to this amount will be placed in
trust for the benefit of JALIC. SunAmerica is rated "A+ (Superior)" by A.M.
Best. In addition, substantially all of the Company's existing coinsurance of
JALIC's Annuity Operations will be assigned to SunAmerica.
CURRENT TRENDS AND DEVELOPMENTS
On December 2, 1996, the Company announced that it had entered into a
definitive agreement to sell the Annuity Operations to SunAmerica for a total
purchase price of $240 million. The transaction includes the sale of all of
the common stock of JANY and the coinsurance of substantially all of the
annuity block of JALIC. This coinsurance will initially be on an indemnity
basis and, pursuant to the agreement, will transition to an assumption basis as
soon as practical. In certain states, the transition to an assumption basis is
subject to policyholder approval. To the extent that such transition does not
take place with respect to any particular policy, such policy will remain
indemnity reinsured. A substantial portion of the transition to an assumption
basis is expected to be completed within two years. The transaction is
contingent upon customary terms and conditions, including required regulatory
approvals and is scheduled to close by the end of the first quarter of
1997. The Annuity 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. In addition, cash flow and liquidity will be reduced. See
"Liquidity and Capital Resources -- Cash Flows". During 1997, the Company
will assist SunAmerica in the
26
<PAGE> 30
transition of the Annuity Operations. The Company is pursuing the execution of
a definitive agreement for the sale of the Western Diversified Group and
expects to enter into a non-binding letter of intent in the second quarter of
1997. Such sale may be in the form of a sale of all of the common stock of the
subsidiaries which comprise the Western Diversified Group or the reinsurance of
the applicable business and would be subject to applicable regulatory
approvals. There can be no assurance that such sales will be consummated. For
further discussion, see "General Overview -- Sale of Annuity Operations and
Western Diversified Group".
The Company has continued its strategy to strengthen its products and
negotiate new and better contracts with its providers. This strategy is
designed to reduce the risks created in its marketplace by healthcare reforms
and changing patterns of behavior by providers while offering customers
attractive, high quality, affordable products. In this pursuit, during early
1996, the Company began a major project to design benefit plans that are more
easily understood and administered by providers and which steer customers into
selected provider networks. The strategy has resulted in the development of a
new product which is anticipated to be introduced in 17 states in the second
quarter of 1997 and should be available in most of the states in which the
Company expects to continue its marketing efforts by the end of the third
quarter of 1997. It is designed to offer customers the high quality,
affordable features they demand, reward policyholders for using the Company's
selected local provider system, generate stronger relationships with providers
and reduce the risks healthcare reforms have created in the marketplace. The
new product will employ greater use of co-pays, increase steerage to contracted
providers and has been designed to minimize exposure to anti-selection.
Although there can be no assurance as to the success of this new product in the
competitive healthcare industry, it has been designed to be more attractive to
providers and customers thereby increasing demand in the marketplace and sales.
In addition, the Company will be enhancing provider incentives and risk-sharing
programs that encourage and reward networks for effective medical cost
management. It is anticipated that the cost of implementing this strategy will
result in an increase in the group gross expense ratio over the next several
quarters and possibly thereafter.
In January 1997, the Company announced that it would be focusing its
marketing efforts and resources in those markets and states in which it
believes it can best increase profitability and market share. In these
markets, provider relationships are continuing to be strengthened and the new
product discussed above will be introduced. Conversely, the Company intends to
reduce its marketing efforts and significantly reduce its financial exposure
and may, in some cases, withdraw from business in those states where
legislative reform and intense competition have significantly increased the
risk profile of writing small employer health coverage. Approximately 25% of
1996 group health premiums were generated in these states. In line with this
strategy, the Company has decided to stop selling small group insurance plans
in California, Maryland and New Jersey, and to terminate existing small group
insurance plans in these states. In addition, the Company continues to closely
manage its expense structure, including maintaining its workforce proportionate
to its business.
In 1996, Congress enacted HR 3103 ("Health Insurance Portability and
Accountability Act", or "HIPAA"), also commonly referred to as the
Kassenbaum-Kennedy Bill. HIPAA provisions applicable to both insured and
self-funded employer group coverage include minimum standards for pre-existing
condition exclusions, waiver of pre-existing condition exclusions for
individuals meeting minimum prior coverage requirements and prohibition of
health related exclusion of individuals from employer group coverage. HIPAA
also provides guaranteed acceptance of small employers with 2 to 50 employees
for insured coverage. In other respects, HIPAA's group and small group
provisions are largely in line with state small group reform laws already
enacted by the large majority of states. However, most of these states are
expected to amend their laws to alleviate any inconsistencies. States which
have not already enacted all of the HIPAA group and small group standards may
enact state reforms consistent with HIPAA. The final outcome of state
amendments or new legislation, as well as federal regulations addressing these
provisions, cannot be predicted.
As discussed above, the Company has recently developed a new small
group health insurance product which will be introduced into the marketplace
beginning in the second quarter of 1997. In addition, the Company will be
enhancing its management of provider relationships and risk-sharing programs.
In conjunction with these actions, the Company will be reviewing its current
and future information systems needs. As a result, the Company may need to
make additional investments in its information systems in the future to support
the operations of the business and as the Company prepares for the
transitioning of operations into the year 2000.
27
<PAGE> 31
The Company has recently announced that it would be focusing its small
group health insurance marketing efforts and resources in those markets and
states in which it believes it can best increase profitability and market
share. The Company intends to reduce its marketing efforts and significantly
reduce its financial exposure and may, in some cases, withdraw from business.
As a result of these changes and the sale of the Annuity Operations and Western
Diversified Group as discussed above, the Company will be reviewing its
workforce and the structure of its operations, including overhead functions.
It is anticipated that functions will be reduced or eliminated and that the
size of the Company's workforce will be decreased. As a result, the Company
anticipates that additional costs including severance and other charges will be
incurred in the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements, together with the
report thereon of Price Waterhouse LLP dated March 10, 1997, are filed as part
of this Report, beginning on page F-1. Unaudited quarterly financial
information is filed as a part of this Report on page F-31.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Glendon E. Johnson 73 President, Chairman of the Board
and Chief Executive Officer
Marvin H. Assofsky 51 Director, Senior Vice President
and Chief Investment Officer
Gary F. Kadlec 49 Senior Vice President -- Sales and
Marketing
Mark A. Schoder 44 Senior Vice President -- Business
Development and Communications
Scott L. Stanton 41 Director, Senior Vice President
and Chief Financial Officer
Lonnie R. Wright 54 Director, Executive Vice President and
Chief Operating Officer
</TABLE>
Glendon E. Johnson has served as Chairman of the Board and Chief
Executive Officer of the Company since 1987 and of JALIC since 1984. He also
served as President of the Company from 1987 to March 1993 and since May 1995
and of JALIC from 1984 to March 1993. Mr. Johnson is also a director of each
of the 13 investment companies comprising the United Group of Mutual Funds, as
well as the following investment companies: United Funds, Inc., TMK/United
Funds, Inc., and Waddell & Reed Funds, Inc., all of which are based in Overland
Park, Kansas. Mr. Johnson has been a Director of the Company since 1987.
Marvin H. Assofsky has served as the Senior Vice President and Chief
Investment Officer and as a Director of the Company since 1987. He has been
Senior Vice President and Chief Investment Officer of JALIC since 1981.
28
<PAGE> 32
Gary F. Kadlec has served as Senior Vice President of Sales and
Marketing of the Company since June 1995. He has been a Vice President of the
Company since 1973 and has been President of North Star Marketing Corporation
since 1984.
Mark A. Schoder has served as Senior Vice President of Business
Development and Communications of the Company since September 1995. Prior to
joining the Company, he was an analyst with Alex. Brown & Sons, where he
followed the Company, as well as other life and health insurance companies.
Scott L. Stanton has served as Senior Vice President and Chief
Financial Officer of the Company since 1994. He has been a Director of the
Company since 1994, a Vice President of the Company since 1987 and has been
with JALIC since 1984.
Lonnie R. Wright has served as Executive Vice President and Chief
Operating Officer of the Company since January 1997. He was Senior Vice
President of the Asset Accumulation Division of the Company from 1987 to
January 1997 and has been a Director of the Company since June 1995. He was
Senior Vice President of the Asset Accumulation Division of JALIC from 1984 to
January 1997.
All executive officers hold office until their respective successors
are elected and qualified, or until their earlier resignation or removal. The
Company's executive officers devote substantially all of their business efforts
to the affairs of the Company.
29
<PAGE> 33
PART III
The Proxy Statement for the 1997 Annual Meeting of Stockholders (other
than the portions thereof not deemed to be "filed" for the purposes of Section
18 of the Securities Exchange Act of 1934), which, when filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934, will be incorporated
by reference in this Annual Report on Form 10-K pursuant to General Instruction
G(3) of Form 10-K, will provide the information required under Part III (Items
10, 11, 12 and 13), except for the information regarding the executive officers
of the Company, which is included in Part II of this Annual Report on Form 10-K
beginning on page 28.
30
<PAGE> 34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following report and consolidated financial statements are
filed as part of this Report beginning on Page F-1:
<TABLE>
<CAPTION>
Page
No.
---
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of
December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Income for the Years
Ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
(a)(2) The following is a list of financial statement schedules filed
as part of this Report beginning on page S-2:
<TABLE>
<CAPTION>
Schedule Number Description
--------------- -----------
<S> <C>
Schedule I Summary of Investments Other than Investments in Related Parties
Schedule II Condensed Financial Information (Parent Company Only)
Schedule III Supplementary Insurance Information
Schedule IV Reinsurance
Schedule V Valuation and Qualifying Accounts
</TABLE>
Schedules other than those listed above have been omitted since they
are either not required, are not applicable, or the required
information is shown in the financial statements or related notes.
(a)(3) See accompanying Index to Exhibits at 14(c) below.
(b) Reports on Form 8-K.
Form 8-K filed on December 13, 1996 relating to the adoption of a
shareholder rights plan.
(c) The following is a list of all Exhibits filed as part of this Report:
31
<PAGE> 35
Exhibit
Number Exhibit
3.1 Amended and Restated By-laws of the Registrant dated as of
May 17, 1995. Filed as Exhibit 3.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1995 (Commission File No. 1-11396) and
incorporated herein by reference.
3.2 Amended and Restated Certificate of Incorporation of the
Registrant as filed with the Secretary of State of
Delaware on September 23, 1992. Filed as Exhibit 3.4 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (Commission File No. 1-11396)
and incorporated herein by reference.
3.3 Certificate of Amendment to Amended and Restated
Certificate of Incorporation of Registrant as filed with
the Secretary of State of Delaware on October 2, 1992.
Filed as Exhibit 3.5 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992
(Commission File No. 1-11396) and incorporated herein by
reference.
3.4 Amended and Restated By-laws of the Registrant dated as of
September 12, 1996, filed as Exhibit 3 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1996 (Commission File No. 1-11396) and
incorporated herein by reference.
4.1 Amended and Restated Certificate of Designation of 150,000
shares of 9% Cumulative Preferred Stock. Filed as Exhibit
4.3 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 (Commission File No.
1-11396) and incorporated herein by reference.
4.2 Credit Agreement among the Registrant, Certain Commercial
Lending Institutions (named therein) and The Chase
Manhattan Bank (National Association) dated February 17,
1993. Filed as Exhibit 4.8 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1992 (Commission File No. 1-11396) and incorporated herein
by reference.
4.3 Pledge Agreement among the Registrant, John Alden Systems
Company, JA Services, Inc. and The Chase Manhattan Bank
(National Association) dated February 17, 1993. Filed as
Exhibit 4.9 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992 (Commission
File No. 1-11396) and incorporated herein by reference.
4.4 Sister Company Guarantee among John Alden Systems Company,
JAFCO, Western Diversified Services, Inc., JA Services,
Inc., John Alden Asset Management Company, Anchor Benefit
Consulting, Inc., LensCard Systems Corporation and The
Chase Manhattan Bank (National Association) dated February
17, 1993. Filed as Exhibit 4.10 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1992 (Commission File No. 1-11396) and
incorporated herein by reference.
10.1 Compensation Letter Agreement between the Registrant and
the Management Stockholders dated October 30, 1987. Filed
as Exhibit 10.5 to the Registrant's Registration Statement
(No. 33-47644) on Form S-1 and incorporated herein by
reference.
10.2 Loan Agreement between the Registrant and General Electric
Capital Corporation dated October 30, 1987. Filed as
Exhibit 10.7 to the Registrant's Registration Statement
(No. 33-47644) on Form S-1 and incorporated herein by
reference.
10.3 Term Note dated October 30, 1987 in the principal amount
of $87,000,000. Filed as Exhibit 10.8 to the Registrant's
Registration Statement (No. 33-47644) on Form S-1 and
incorporated herein by reference.
32
<PAGE> 36
Exhibit
Number Exhibit
10.4 Intermediate Term Note dated October 30, 1987 in the
principal amount of $76,350,000. Filed as Exhibit 10.9 to
the Registrant's Registration Statement (No. 33-47644) on
Form S-1 and incorporated herein by reference.
10.5 Bridge Note dated October 30, 1987 in the principal amount
of $75,000,000. Filed as Exhibit 10.10 to the
Registrant's Registration Statement (No. 33-47644) on Form
S-1 and incorporated herein by reference.
10.6 Revolving Credit Note dated October 30, 1987 in the
principal amount of $15,000,000. Filed as Exhibit 10.11
to the Registrant's Registration Statement (No. 33-47644)
on Form S-1 and incorporated herein by reference.
10.7 Surplus Debenture dated October 30, 1987 in the principal
amount of $155,000,000. Filed as Exhibit 10.12 to the
Registrant's Registration Statement (No. 33-47644) on Form
S-1 and incorporated herein by reference.
10.8 Subordinated Surplus Debenture dated October 30, 1987 in
the principal amount of $72,000,000. Filed as Exhibit
10.13 to the Registrant's Registration Statement (No.
33-47644) on Form S-1 and incorporated herein by
reference.
10.9 Pledge and Security Agreement dated October 30, 1987, made
by the Registrant to General Electric Capital Corporation.
Filed as Exhibit 10.14 to the Registrant's Registration
Statement (No. 33-47644) on Form S-1 and incorporated
herein by reference.
10.10 Employment Agreement dated December 13, 1988, between the
Registrant and Lloyd E. Gearhart. Filed as Exhibit 10.20
to the Registrant's Registration Statement (No. 33-47644)
on Form S-1 and incorporated herein by reference.
10.11 John Alden Retirement Plan as Amended and Restated
effective January 1, 1989. Filed as Exhibit 10.21 to the
Registrant's Registration Statement (No. 33-47644) on Form
S-1 and incorporated herein by reference.
10.12 John Alden Senior Executive Supplemental Retirement Plan
effective January 1, 1990. Filed as Exhibit 10.22 to the
Registrant's Registration Statement (No. 33-47644) on Form
S-1 and incorporated herein by reference.
10.13 Supplemental Executive Retirement Plan effective December
1, 1984. Filed as Exhibit 10.22 to the Registrant's
Registration Statement (No. 33-47644) on Form S-1 and
incorporated herein by reference.
10.14 Indemnity Coinsurance Agreement between JALIC and Oxford
Life Insurance Company, dated January 1, 1989. Filed as
Exhibit 10.24 to the Registrant's Registration Statement
(No. 33-47644) on Form S-1 and incorporated herein by
reference.
10.15 Indemnity Coinsurance Agreement between JALIC and Reliance
Standard Life Insurance Company dated June 30, 1990.
Filed as Exhibit 10.25 to the Registrant's Registration
Statement (No. 33-47644) on Form S-1 and incorporated
herein by reference.
10.16 Indemnity Coinsurance Agreement between JALIC and Reliance
Standard Life Insurance Company dated October 31, 1990.
Filed as Exhibit 10.26 to the Registrant's Registration
Statement (No. 33-47644) on Form S-1 and incorporated
herein by reference.
10.17 Indemnity Coinsurance Agreement between JANY and The
Franklin Life Insurance Company dated March 31, 1991.
Filed as Exhibit 10.27 to the Registrant's Registration
Statement (No. 33-47644) on Form S-1 and incorporated
herein by reference.
33
<PAGE> 37
Exhibit
Number Exhibit
10.18 Reinsurance Agreement among JALIC, London Life Insurance
Company and Transamerica Occidental Life Insurance Company
dated October 1, 1991. Filed as Exhibit 10.28 to the
Registrant's Registration Statement (No. 33-47644) on Form
S-1 and incorporated herein by reference.
10.19 Reinsurance Agreement between Western Diversified Life
Insurance Company and ITT Lyndon Property Insurance
Company dated December 1, 1991. Filed as Exhibit 10.29 to
the Registrant's Registration Statement (No. 33-47644) on
Form S-1 and incorporated herein by reference.
10.20 Reinsurance Agreement between JALIC and Lincoln National
Reassurance Company dated December 31, 1991. Filed as
Exhibit 10.30 to the Registrant's Registration Statement
(No. 33-47644) on Form S-1 and incorporated herein by
reference.
10.21 Letter Agreement among Merrill Lynch Capital Partners,
Inc., GE Capital, ERC, the Management Stockholders and the
Registrant dated August 26, 1992. Filed as Exhibit 10.31
to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 (Commission File No.
1-11396) and incorporated herein by reference.
10.22 Employment Agreement between the Registrant and Glendon E.
Johnson dated October 2, 1992. Filed as Exhibit 10.32 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (Commission File No. 1-11396)
and incorporated herein by reference.
10.23 John Alden Financial Corporation Employee Stock Purchase
Plan. Filed as Exhibit 4.3 to the Registrant's
Registration Statement (No. 33-55230) on Form S-8 and
incorporated herein by reference.
10.24 John Alden Financial Corporation Long-Term Incentive Plan.
Filed as Exhibit 4.5 to the Registrant's Registration
Statement (No. 33-56656) on Form S-8 and incorporated
herein by reference.
10.25 Amended and Restated Registration Rights Agreement between
the Registrant and General Electric Capital Corporation
dated as of October 2, 1992. Filed as Exhibit 10.35 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (Commission File No. 1-11396)
and incorporated herein by reference.
10.26 Amended and Restated Registration Rights Agreement between
the Registrant and Merrill Lynch Capital Partners, Inc.
dated as of October 2, 1992. Filed as Exhibit 10.36 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (Commission File No. 1-11396)
and incorporated herein by reference.
10.27 Amended and Restated Registration Rights Agreement among
the Registrant and Management Stockholders dated as of
October 2, 1992. Filed as Exhibit 10.37 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (Commission File No. 1-11396)
and incorporated herein by reference.
10.28 Consent and Amendment to Loan Agreement between the
Registrant and General Electric Capital Corporation dated
September 22, 1992. Filed as Exhibit 10.38 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (Commission File No. 1-11396)
and incorporated herein by reference.
34
<PAGE> 38
Exhibit
Number Exhibit
10.29 Agreement to Amend Warrant between the Registrant and
General Electric Capital Corporation dated September 22,
1992. Filed as Exhibit 10.39 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1992 (Commission File No. 1-11396) and incorporated herein
by reference.
10.30 Agreement to Amend Warrant between the Registrant and
Employers Reinsurance Corporation dated September 22,
1992. Filed as Exhibit 10.40 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1992 (Commission File No. 1-11396) and incorporated herein
by reference.
10.31 Amended and Restated Management Stockholders Agreement
among the Management Stockholders and the Registrant dated
February 17, 1993. Filed as Exhibit 10.42 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (Commission File No. 1-11396)
and incorporated herein by reference.
10.32 North Star Marketing Organization Long-Term Incentive
Plan. Filed as Exhibit 4.3 to the Registrant's
Registration Statement (No. 33-56544) on Form S-8 and
incorporated herein by reference.
10.33 John Alden Financial Corporation Employee Savings
Incentive Plan, as amended, together with Amendments 1
through 5 thereto. Filed as Exhibit 4.3 to the
Registrant's Registration Statement (No. 33-56656) on Form
S-8 and incorporated herein by reference.
10.34 Letter agreement among the Registrant and the Management
Stockholders dated October 2, 1992. Filed as Exhibit
10.50 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992 (Commission File
No. 1-11396) and incorporated herein by reference.
10.35 Stock and Warrant Purchase Agreement among Emperion
Corporation, Electronic Data Systems Corporation and JA
Services, Inc. dated December 17, 1991. Filed as Exhibit
10.51 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992 (Commission File
No. 1-11396) and incorporated herein by reference.
10.36 Amendment to Stock and Warrant Purchase Agreement dated
December 30, 1992. Filed as Exhibit 10.52 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (Commission File No. 1-11396)
and incorporated herein by reference.
10.37 Revolving Credit Agreement among John Alden Systems
Company and The Chase Manhattan Bank (National
Association), Barnett Bank of South Florida, N.A. and
Shawmut Bank Connecticut, N.A. dated December 31, 1993.
Filed as Exhibit 10.53 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993
(Commission File No. 1-11396) and incorporated herein by
reference.
10.38 Amended and Restated Credit Agreement among the
Registrant, Certain Commercial Lending Institutions (named
therein) and the Chase Manhattan Bank (National
Association) dated as of July 27, 1994. Filed as Exhibit
10.42 to the Registrant's Registration Statement (No.
33-78662) on Form S-3 and incorporated herein by
reference.
10.39 Agreement dated July 27, 1994 to Amended and Restated
Management Stockholders Agreement among the Management
Stockholders and the Registrant dated February 17, 1993.
Filed as Exhibit 10.54 to the Registrant's Registration
Statement (No. 33-78662) on Form S-3 and incorporated
herein by reference.
35
<PAGE> 39
Exhibit
Number Exhibit
10.40 Plan of Complete Liquidation and Dissolution of Emperion
Corporation. Filed as Exhibit 10.56 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (Commission File No. 1-11396) and
incorporated herein by reference.
10.41 Articles of Dissolution of Emperion Corporation dated
December 29, 1994. Filed as Exhibit 10.57 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (Commission File No. 1-11396)
and incorporated herein by reference.
10.42 Reinsurance Agreement between JALIC and Lincoln National
Reinsurance Company Limited dated as of September 30,
1995. Filed as Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1995 (Commission File No. 1-11396) and
incorporated herein by reference.
10.43 Trust Agreement among JALIC, Lincoln National Reinsurance
Company Limited and The Chase Manhattan Bank, N.A. dated
as of October 9, 1995. Filed as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995 (Commission File
No. 1-11396) and incorporated herein by reference.
10.44 Amendment dated March 8, 1996 to Amended and Restated
Credit Agreement among the Registrant, Certain Commercial
Lending Institutions (named therein) and the Chase
Manhattan Bank (National Association) dated as of July 27,
1994. Filed as Exhibit 10.44 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995
(Commission File No. 1-11396) and incorporated herein by
reference.
10.45 Rights Agreement, dated as of December 13, 1996, between
John Alden Financial Corporation and Chase Mellon
Shareholder Services, L.L.C. Filed as Exhibit 2 to the
Registrant's Form 8-K dated December 13, 1996 (Commission
File No. 1-11396) and incorporated herein by reference.
*10.46 Amendment dated November 1, 1996 to reinsurance agreement
among JALIC, London Life Insurance Company and
TransAmerica Occidental Life Insurance Company dated
October 1, 1991.
*10.47 Amendment dated February 28, 1997 to Employment Agreement
between the Registrant and Glendon E. Johnson dated
October 2, 1992.
21.1 Subsidiaries of the Registrant.
*23.1 Consent of Independent Accountants.
*27.1 Financial Data Schedule.
99.1 Financial Statements of the John Alden Financial
Corporation Employee Stock Purchase Plan for the year
ended December 31, 1996 (to be filed by amendment).
- -----------------------
* Filed herewith.
36
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Miami,
State of Florida, on the 20th day of March 1997.
JOHN ALDEN FINANCIAL CORPORATION
By: /s/ Scott L. Stanton
-----------------------------------------
Scott L. Stanton
Senior Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities
indicated on March 20, 1997.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Glendon E. Johnson President, Chairman of the Board and Chief Executive Officer
- -------------------------- (Principal Executive Officer)
Glendon E. Johnson
/s/ Marvin H. Assofsky Director, Senior Vice President and Chief Investment
- -------------------------- Officer
Marvin H. Assofsky
/s/ Scott L. Stanton Director, Senior Vice President and Chief Financial Officer
- -------------------------- (Principal Financial Officer and Principal Accounting Officer)
Scott L. Stanton
/s/ Lonnie R. Wright Director, Executive Vice President and Chief Operating
- -------------------------- Officer
Lonnie R. Wright
/s/ Norman E. Crocker Director
- --------------------------
Norman E. Crocker
/s/ David P. Gardner Director
- --------------------------
David P. Gardner
/s/ Edwin J. Garn Director
- --------------------------
Edwin J. Garn
/s/ Carl F. Geuther Director
- --------------------------
Carl F. Geuther
</TABLE>
37
<PAGE> 41
<TABLE>
<S> <C>
/s/ Linda Jenckes Director
- --------------------------
Linda Jenckes
/s/ Lynn G. Merritt Director
- --------------------------
Lynn G. Merritt
/s/ James L. Moorefield Director
- --------------------------
James L. Moorefield
</TABLE>
38
<PAGE> 42
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
---------
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Changes in Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
F-1
<PAGE> 43
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
John Alden Financial Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 31 present fairly, in all
material respects, the financial position of John Alden Financial Corporation
and its subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PRICE WATERHOUSE LLP
- ------------------------
PRICE WATERHOUSE LLP
Miami, Florida
March 10, 1997
F-2
<PAGE> 44
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------
ASSETS 1996 1995
--------- ---------
<S> <C> <C>
Debt securities:
Held-to-maturity securities, at amortized cost (market $46,884 and $609,599).......... $45,357 $584,330
Available-for-sale securities, at market (cost $4,185,263 and $3,652,408)............. 4,248,774 3,811,825
Trading account securities, at market (cost $4,435 and $5,450)........................ 4,518 5,703
Equity securities, at market (cost $73,692 and $72,919).................................. 82,098 82,639
Mortgage loans........................................................................... 1,449,242 1,506,874
Investment in real estate, at cost, less accumulated depreciation of $2,008 and $1,008... 39,903 20,998
Real estate owned........................................................................ 11,483 11,973
Policy loans and other notes receivable.................................................. 75,186 84,079
Short-term investments................................................................... 6,371 6,349
---------- ----------
Total invested assets............................................................... 5,962,932 6,114,770
Cash and cash equivalents................................................................ 167,511 99,606
Accrued investment income................................................................ 65,727 64,443
Deferred policy acquisition costs........................................................ 239,622 197,667
Property and equipment, at cost, less accumulated depreciation of $23,976 and $24,240.... 69,856 52,298
Reinsurance receivables.................................................................. 204,379 163,430
Investment deposits recoverable.......................................................... 766,286 806,333
Other assets............................................................................. 194,936 197,483
---------- ----------
Total assets...................................................................... $7,671,249 $7,696,030
========== ==========
LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Contract holder liabilities:
Contract holder deposit funds...................................................... $6,271,779 $6,265,442
Other benefit and claim reserves................................................... 458,929 466,407
Unearned premium reserves.......................................................... 156,924 135,954
Short-term debt........................................................................ 25,000 15,063
Accounts payable and other liabilities................................................. 120,888 121,493
Funds payable under reinsurance treaties............................................... 77,331 103,024
Long-term debt......................................................................... 76,500 92,000
---------- ----------
Total liabilities................................................................ 7,187,351 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; 667,430 and 850,974 shares
authorized, issued and outstanding ................................................. 3,401 4,130
---------- ----------
Total redeemable securities...................................................... 18,687 19,416
---------- ----------
Stockholders' equity:
Common stock, $.01 par value; 74,332,570 and 74,149,026 shares
authorized; 25,055,843 and 24,822,322 shares issued; 24,668,108
and 24,398,139 shares outstanding.................................................. 250 248
Paid-in capital...................................................................... 181,863 181,154
Net unrealized gain on investments, net of income taxes.............................. 26,977 58,041
Retained earnings.................................................................... 268,109 250,167
Redemption value of common stock in excess of cost................................... (2,669) (3,050)
Unearned compensation................................................................ (643) --
Treasury stock, at cost; 387,735 and 424,183 shares.................................. (8,676) (9,329)
---------- ----------
Total stockholders' equity...................................................... 465,211 477,231
---------- ----------
Total liabilities, redeemable securities and stockholders' equity............... $7,671,249 $7,696,030
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 45
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1996 1995 1994
------------ ----------- ---------
<S> <C> <C> <C>
Revenues:
Gross insurance premiums and contract charges earned...................... $1,838,254 $1,936,262 $1,792,087
Ceded insurance premiums and contract charges earned...................... (813,680) (883,227) (852,174)
---------- ---------- ----------
Net insurance premiums and contract charges earned................... 1,024,574 1,053,035 939,913
Net investment income..................................................... 45,460 50,388 38,145
Other income, including experience refunds and expense allowances
on reinsurance ceded of $32,172, $46,204 and $88,162.................. 41,596 55,434 95,993
Net realized investment gains (losses).................................... 3,052 (2,393) (2,853)
---------- ---------- ----------
Total revenues................................................ 1,114,682 1,156,464 1,071,198
---------- ---------- ----------
Benefits and expenses:
Gross claims incurred on insurance products.............................. 1,396,695 1,458,365 1,226,531
Ceded claims incurred on insurance products.............................. (647,644) (695,266) (616,764)
---------- ---------- ----------
Net claims incurred on insurance products............................ 749,051 763,099 609,767
Universal life and investment-type contract benefits:
Interest credited to account balances................................ 13,562 12,959 11,694
Benefit claims incurred in excess of account balances................ 4,895 3,962 4,171
Increase (decrease) in life insurance reserves........................... 132 (1,717) 283
---------- ---------- ----------
Total benefits............................................... 767,640 778,303 625,915
---------- ---------- ----------
Commissions, net of commissions ceded of $73,537, $75,643 and $72,895.... 77,318 83,362 88,502
General expenses, net of expenses ceded of $78,927, $78,518 and $73,543.. 246,140 298,618 266,908
Amortization of purchased intangibles.................................... 4,786 4,833 6,479
Amortization of deferred policy acquisition costs........................ 13,854 13,455 7,100
Interest expense......................................................... 6,615 8,413 6,067
---------- ---------- ----------
Total expenses............................................... 348,713 408,681 375,056
---------- ---------- ----------
Total benefits and expenses.................................. 1,116,353 1,186,984 1,000,971
---------- ---------- ----------
(Loss) income from continuing operations before (benefit) provision for income
taxes and minority interest in joint venture's (income) loss............. (1,671) (30,520) 70,227
(Benefit) provision for income taxes......................................... (2,096) (9,637) 21,602
Minority interest in joint venture's (income) loss........................... (2,136) 1,983 --
---------- ---------- ----------
Net (loss) income from continuing operations................................. (1,711) (18,900) 48,625
Net income (loss) from discontinued operations:
Annuity Operations (net of income taxes of $18,819, $14,172 and $16,008).. 33,297 23,402 26,972
Western Diversified Group (net of income taxes of $21, $1,279 and $835)... (650) 1,906 718
---------- ---------- ----------
Net income before cumulative effect of change in accounting principle........ 30,936 6,408 76,315
Cumulative effect of change in accounting principle.......................... -- -- (541)
---------- ---------- ----------
Net income................................................................... $ 30,936 $ 6,408 $ 75,774
========== ========== ==========
Net income applicable to common stock........................................ $ 29,586 $ 5,058 $ 74,424
========== ========== ==========
Net income per common and common equivalent share (see Note 2):
Net (loss) income from continuing operations........................... $ (0.12) $ (0.78) $ 1.86
Net income from discontinued operations................................ 1.27 0.98 1.09
Cumulative effect of change in accounting principle.................... -- -- (0.02)
---------- ---------- ----------
Net income $ 1.15 $ 0.20 $ 2.93
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 46
JOHN ALDEN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Value of
Net Common
Number of Unrealized Stock in
Shares Common Paid-in Gain (Loss)on Retained Excess of
Outstanding Stock Capital Investments Earnings Cost
----------- ------ -------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993......................... 22,438,776 $227 $139,511 $24,607 $191,741 ($6,714)
Net income......................................... 75,774
Change in net unrealized gain (loss)............... (44,955)
Redeemable preferred stock
dividends ($9.00 per share)..................... (1,350)
Change in redemption value of
common stock.................................... 1,109
Common stock dividends ($0.40 per share)........... (9,913)
Issuance of common stock........................... 1,000,000 10 29,972
Exercise of stock options.......................... 135,227 1 1,854
Treasury stock acquired............................ (31,282)
Treasury stock sale................................ 4,089
Stock option compensation expense.................. 7,672
Tax benefit from stock option exercise............. 872
Transfer from redeemable common stock.............. 699,351 7 520 1,960
------------- ------- -------- --------- -------- ---------
Balance, December 31, 1994......................... 24,246,161 245 180,401 (20,348) 256,252 (3,645)
Net income......................................... 6,408
Change in net unrealized gain (loss)............... 78,389
Redeemable preferred stock
dividends ($9.00 per share)..................... (1,350)
Change in redemption value of
common stock.................................... 922
Common stock dividends ($0.44 per share)........... (11,143)
Exercise of stock options.......................... 91,340 1 329
Treasury stock acquired............................ (165,000)
Stock option compensation expense.................. 256
Adjustment of put holder shares to market value.... (1,489)
Transfer from redeemable common stock.............. 225,638 2 168 1,162
------------- ------- -------- --------- -------- ---------
Balance, December 31, 1995......................... 24,398,139 248 181,154 58,041 250,167 (3,050)
Net income......................................... 30,936
Change in net unrealized gain (loss)............... (31,064)
Redeemable preferred stock
dividends ($9.00 per share)..................... (1,350)
Change in redemption value of
common stock.................................... 401
Common stock dividends ($0.46 per share)........... (11,644)
Exercise of stock options.......................... 50,425 1 268
Unearned compensation - treasury stock grant....... 36,000 95
Compensation expense recognized....................
Adjustment of put holder shares to market value.... (24)
Transfer from redeemable common stock.............. 183,544 1 346 4
------------- ------- -------- --------- -------- ---------
Balance, December 31, 1996......................... 24,668,108 $250 $181,863 $26,977 $268,109 ($2,669)
============= ======= ======== ========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
Unearned Treasury Stockholders'
Compensation Stock Equity
--------------- --------- -----------
<S> <C> <C> <C>
Balance, December 31, 1993......................... $ -- $(5,175) $344,197
Net income......................................... 75,774
Change in net unrealized gain (loss)............... (44,955)
Redeemable preferred stock
dividends ($9.00 per share)..................... (1,350)
Change in redemption value of
common stock.................................... 1,109
Common stock dividends ($0.40 per share)........... (9,913)
Issuance of common stock........................... 29,982
Exercise of stock options.......................... 1,855
Treasury stock acquired............................ (1,102) (1,102)
Treasury stock sale................................ 96 96
Stock option compensation expense.................. 7,672
Tax benefit from stock option exercise............. 872
Transfer from redeemable common stock.............. 2,487
----------- -------- --------
Balance, December 31, 1994......................... -- (6,181) 406,724
Net income......................................... 6,408
Change in net unrealized gain (loss)............... 78,389
Redeemable preferred stock
dividends ($9.00 per share)..................... (1,350)
Change in redemption value of
common stock.................................... 922
Common stock dividends ($0.44 per share)........... (11,143)
Exercise of stock options.......................... 55 385
Treasury stock acquired............................ (3,203) (3,203)
Stock option compensation expense.................. 256
Adjustment of put holder shares to market value.... (1,489)
Transfer from redeemable common stock.............. 1,332
----------- -------- --------
Balance, December 31, 1995......................... -- (9,329) 477,231
Net income......................................... 30,936
Change in net unrealized gain (loss)............... (31,064)
Redeemable preferred stock --
dividends ($9.00 per share)..................... (1,350)
Change in redemption value of --
common stock.................................... 401
Common stock dividends ($0.46 per share)........... (11,644)
Exercise of stock options.......................... 10 279
Unearned compensation - treasury stock grant....... (738) 643 --
Compensation expense recognized.................... 95 95
Adjustment of put holder shares to market value.... (24)
Transfer from redeemable common stock.............. 351
----------- -------- --------
Balance, December 31, 1996......................... $ (643) $ (8,676) $465,211
=========== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 47
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
---------- ------------ ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................................. $ 30,936 $ 6,408 $ 75,774
Adjustments to reconcile net income to net cash provided by
operating activities:
Net realized investment losses (gains)............................... 5,000 (1,476) 12,804
Net loss on unconsolidated subsidiaries.............................. -- -- 7,301
Depreciation and amortization........................................ (7,123) 7,455 5,747
Policy acquisition costs deferred, net of amortization............... 7,789 (30,975) (45,688)
Amortization of purchased intangibles................................ 12,451 17,380 15,142
Cumulative effect of a change in accounting principle................ -- -- 541
Inflows from net sales, maturities, calls and purchases of trading
account securities................................................. 1,000 6,570 153,249
Interest credited on universal life and investment type contracts.... 302,756 324,071 269,709
Surrender and other contract charges................................. (28,548) (27,563) (24,665)
Increase in contract holder liabilities.............................. 904 119,106 63,211
Increase in accrued investment income................................ (1,284) (4,175) (3,075)
(Increase) decrease in reinsurance receivables and investment
deposits recoverable............................................... (18,163) (39,935) 31,845
Increase in other assets............................................. (1,253) (10,402) (45,587)
Minority interest in joint venture's income (loss)................... 2,136 (1,983) --
Increase in accounts payable and other liabilities................... 6,825 10,126 15,690
(Decrease) increase in funds payable under reinsurance treaties...... (11,693) 8,430 (7,485)
--------- -------- ---------
Net cash provided by operating activities............................... 301,733 383,037 524,513
--------- -------- ---------
Cash flows from investing activities:
Proceeds from investments sold:
Available-for-sale............................................. 527,346 512,997 282,250
Equity securities.............................................. 1,383 72,883 3,963
Real estate owned.............................................. 11,327 10,514 20,584
Maturities, calls and scheduled loan payments:
Held-to-maturity............................................... 88,693 74,515 101,130
Available-for-sale............................................. 159,574 105,458 35,358
Mortgage loans and other notes receivable...................... 365,869 189,036 190,410
Investments purchased:
Held-to-maturity............................................... (121,418) (128,138) (663,137)
Available-for-sale............................................. (634,821) (576,858) (385,740)
Equity securities.............................................. (346) (27,179) (91,720)
Mortgage loans and other notes receivable...................... (319,155) (420,355) (421,110)
Investment in real estate...................................... (19,904) (1,117) (17,267)
(Outflows) inflows from net sales and purchases of short-term
investments......................................................... (266) 9,134 4,584
Sales of property, equipment and capitalized software projects........ -- 28,429 4,535
Purchases of property, equipment and other............................ (21,701) (35,794) (32,627)
--------- -------- ---------
Net cash provided by (used in) investing activities..................... 36,581 (186,475) (968,787)
--------- -------- ---------
Cash flows from financing activities:
Proceeds from borrowings of short-term and long-term debt............. 26,000 27,000 32,328
Repayments of borrowings of short-term and long-term debt............. (31,563) (45,015) (30,879)
Receipts from universal life and investment-type contracts............ 453,185 886,270 859,445
Payments on universal life and investment-type contracts.............. (705,579) (666,663) (401,155)
Proceeds from sale of stock........................................... -- -- 29,982
(Purchase) sale of treasury stock, net............................... -- (3,203) 13
Payment of dividends.................................................. (12,731) (12,248) (10,668)
Exercises of stock options............................................ 279 385 1,138
Payments made under reinsurance agreement............................. -- (341,956) --
--------- -------- ----------
Net cash (used in) provided by financing activities..................... (270,409) (155,430) 480,204
--------- -------- ----------
Net increase in cash and cash equivalents.................................. 67,905 41,132 35,930
Cash and cash equivalents, beginning of period............................. 99,606 58,474 22,544
--------- -------- ----------
Cash and cash equivalents, end of period................................... $ 167,511 $ 99,606 $ 58,474
========= ======== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 48
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS AND HISTORY OF THE COMPANY
The consolidated financial statements include the accounts of John
Alden Financial Corporation ("JAFCO"), a holding company established in 1987
for the purpose of acquiring John Alden Life Insurance Company ("JALIC") and
certain of its affiliates and its consolidated subsidiaries (collectively "John
Alden" or the "Company"). Prior to 1996, John Alden operated in three
segments: Healthcare, Asset Accumulation and Credit and Other. In addition, a
Corporate Segment included certain activities that were not directly related to
any operating division. On March 27, 1996, the Board of Directors of the
Company authorized the sale of its Asset Accumulation Segment, which includes
the annuity business, (the "Annuity Operations"), and the Western Diversified
Group, the principal businesses included in the Credit and Other Segment and
which market credit life and disability and retail service warranty coverage
(see Note 4). As a result of this action, beginning in 1996, the Company has
reported the results of operations of the Annuity Operations and Western
Diversified Group as discontinued operations. In addition, the Company has
discontinued the reporting of segment information of its remaining continuing
operations which are primarily related to healthcare product lines and other
continuing operations. The current healthcare operations primarily include
indemnity and managed indemnity products, Health Maintenance Organization
("HMO") and HMO-like products and healthcare stop-loss reinsurance products.
The Company also has certain product lines which are no longer being actively
marketed (run-off operations).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles ("GAAP") and
include management estimates and assumptions that affect the recorded amounts.
All significant intercompany balances and transactions have been eliminated.
The following accounting policies describe the accounting principles used in
the preparation of the consolidated financial statements:
Investments
Investments in debt securities are classified into one of three
categories: held-to-maturity, available-for-sale or trading. Investments in
debt securities which the Company has the positive intent and ability to hold
to maturity are classified as held-to-maturity and carried at amortized cost,
with premiums amortized to call dates and discounts amortized to maturity
dates. In certain limited circumstances, such as individual issuer credit
deterioration or requirements of insurance regulators, the Company may dispose
of such investments prior to their scheduled maturities. Investments in debt
securities which are held principally for the purpose of resale in the near
term are classified as trading securities and carried at market value with
unrealized gains and losses included in earnings. Investments in debt
securities not classified as held-to-maturity or trading are classified as
available-for-sale and carried at market value, with resulting unrealized gains
and losses, net of applicable income taxes and deferred policy acquisition
costs, credited or charged to stockholders' equity.
Equity securities are reported at market value, with the resulting
unrealized gains and losses, net of applicable income taxes and deferred policy
acquisition costs, credited or charged to stockholders' equity. Investments in
common stocks of entities in which the Company maintains control are
consolidated. Gain or loss on the sale of securities is computed on the
specific identification method. Policy loans are carried at the unpaid
principal balance. Mortgage loans are carried at the unpaid principal balance
less unamortized discounts, write-downs and a valuation reserve. The valuation
reserve is determined by both a historical analysis and specific loan analysis.
Mortgage loan origination incremental costs and fees are deferred and amortized
over the life of the loan using the interest method. Mortgage discounts are
deferred and amortized to call dates. The Company's policy of placing mortgage
loans on non-accrual status (i.e., no longer accruing investment income) is at
the earlier of 90 days past due or at the commencement of foreclosure.
Investment in real estate represents land and buildings and is carried at cost,
less accumulated depreciation. Real estate owned represents foreclosed
mortgage loan collateral and
F-7
<PAGE> 49
is held for sale and carried at cost less allowances for selling costs and
impairments in value. Short-term investments are carried at amortized cost,
which approximates market value. The investment portfolio is continuously
reviewed for investments that may have experienced a decline in value
considered to be other than temporary. Provisions for impairments that are
considered other than temporary are included in net realized investment gains
(losses).
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
Premium and Other Contract-Related Revenues, Contract Holder Liabilities and
Deferred Policy Acquisition Costs
Single Payment Deferred Annuities and Flexible Payment Annuities.
Contract charges earned for investment-type contracts consist of service
charges and surrender charges assessed against account balances. Expenses
related to these products include interest credited to account balances.
Contract holder liabilities are recorded at accumulated value without reduction
for surrender charges. Policy acquisition costs (principally excess first year
commissions) are deferred and amortized over an initial policy period,
generally ten years, in relation to expected profits. This amortization is
reviewed annually and adjusted retrospectively when the Company revises its
estimate of current or future gross profits to be realized from a group of
products, including realized and unrealized gains and losses from investments.
Universal Life Insurance. Contract charges earned consist of cost of
insurance assessments, service charges and surrender charges assessed against
account balances. Expenses consist of interest credited to account balances
and benefit claims incurred in excess of policyholder account balances.
Contract holder liabilities are recorded at accumulated value without reduction
for surrender charges. Policy acquisition costs (principally excess first year
commissions) are deferred and amortized over a period of 20 or 25 years in
proportion to an expected profit stream emerging from the assumed margins
implicit in the product. This amortization is reviewed annually and adjusted
retrospectively when the Company revises its estimate of current or future
gross profits to be realized from a group of products, including realized and
unrealized gains and losses from investments.
Group Life and Health. Premiums are recorded as revenue when due.
Unearned premiums are earned pro rata over the applicable premium period.
Policy acquisition costs are generally expensed as incurred. Policy
acquisition costs (excess first year commissions and other incremental issue
costs) on certain group products are deferred and generally amortized over five
years relative to the expected revenue stream. Aggregate deferred policy
acquisition costs of the group life and health business are monitored for
purposes of assessing recoverability. The liability for policy claims
represents management's estimate of the ultimate liability associated with
reported claims. Liabilities for incurred-but-not-reported claims are estimated
based on Company experience. Changes in the estimated cost to settle unpaid
claims are charged or credited to operations periodically as the estimates are
revised.
Reinsurance and Risk Management Services. Premiums are earned pro rata
over the term of the policy. Reinsurance fees and third-party administration
fees are recorded as revenue when due. The liability for policy claims
represents management's estimate of the ultimate liability associated with
reported claims. Liabilities for incurred-but-not-reported claims are
estimated based on Company experience. Changes in the estimated cost to settle
unpaid claims are charged or credited to operations periodically as the
estimates are revised.
Credit Life, Credit Accident and Health and Extended Service Contracts.
Insurance premiums on credit life policies are deferred and amortized to income
over the term of the policy (on the pro rata method for level coverage and
principally on the Rule of 78's method for decreasing coverage). Accident and
health insurance premiums are deferred and amortized to income principally on
the mean of the pro rata and Rule of 78's methods. Premiums on extended
service contracts are deferred and amortized into income in relation to
historical claims experience. Policy acquisition costs (principally
commissions) are deferred and amortized over the term of the contracts in
relation to premiums earned.
F-8
<PAGE> 50
Other Annuities and Ordinary Life Insurance. Premiums are recorded as
revenue when due. Policy and contract benefit reserves generally are
calculated using the same assumptions as to interest, mortality, lapses and
expenses used in pricing, plus additional margins for adverse deviation.
Policy acquisition costs (principally excess first year commissions) are
deferred and amortized over the premium-paying period using the same
assumptions as to interest, mortality and lapses used in calculating benefit
reserves.
Property and Equipment
Property and equipment consists primarily of the headquarters
buildings, land, office furniture and equipment, leasehold improvements,
microcomputers and other data processing equipment and is stated at cost, less
accumulated depreciation. Expenditures for new property are capitalized, while
maintenance and repairs are charged to income as incurred. Depreciation is
computed on the straight-line method over the estimated useful lives of the
depreciable assets ranging from four to 39 years.
Other Assets
The excess of cost over the fair values of net assets of companies
acquired is amortized on a straight-line basis over lives ranging from 15 to 25
years. At December 31, 1996 and 1995, the balances of such net goodwill and
accumulated amortization were approximately $86.3 million and $48.1 million and
$93.2 million and $42.6 million, respectively. The Company periodically reviews
the recoverability of goodwill from future cash flows, and adjusts the carrying
value as required. At December 31, 1996 and 1995, the Company determined that
goodwill, net of accumulated amortization, was not impaired. At December 31,
1996 and 1995, value of insurance in force was approximately $9.2 million and
$14.5 million, respectively.
The Company capitalizes certain software development costs related to
major systems conversions and enhancements. The unamortized amounts of
capitalized software costs were approximately $7.5 million and $2.0 million as
of December 31, 1996 and 1995, respectively. Such costs are being amortized on
the straight-line method over a three-to-five-year period.
Stock-based Compensation Plans
The Company periodically grants stock options and restricted stock
awards as compensation to certain key executives and employees. Under the
provisions of Accounting Principles Board Opinion No. 25 ("APB 25"), the
Company determines stock-based compensation expense by the intrinsic value
method.
Income Taxes
Tax expense is the amount of income taxes expected to be payable for
the current year plus (or minus) the change from the beginning of the year in
deferred tax liabilities or assets. Deferred income taxes are provided in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". The tax effect of future taxable temporary
differences (liabilities) and future deductible temporary differences (assets)
are separately calculated and recorded. A valuation allowance reducing the
asset recognized must be recorded if it is determined that it is more likely
than not that the asset will not be realized.
The Company has elected to file a Life/Non-Life consolidated federal
income tax return which includes all subsidiaries. Income tax expense is
generally calculated on a consolidated basis, although there are limitations on
the utilization of losses of one group against the other group's income.
Changes in Accounting Principles
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. SFAS No. 121 addresses the recognition and measurement of
impairments of long-lived assets, certain identifiable intangible assets and
goodwill related to those
F-9
<PAGE> 51
assets to be held as well as impairments of long-lived assets and certain
identifiable intangibles to be disposed of. There was no effect on the
Company's results of operations or financial position upon adoption of this
statement.
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", for the year ended December 31, 1996. SFAS No. 123 establishes
a fair value based accounting method of accounting for stock-based compensation
plans. As permitted under the statement, the Company has elected to continue
to apply the provisions of Accounting Principles Board Opinion No. 25 ("APB
25") and to comply with the disclosure requirements of SFAS No. 123. There was
no effect on the Company's results of operations or financial position upon
adoption of the statement. SFAS No. 123 disclosures of the pro forma effects
of stock options and awards granted in 1995 and 1996 are provided in Note 16.
The Company adopted 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. It is the Company's
policy to discontinue accrual of interest income on loans at the earlier of 90
days past due or at the commencement of foreclosure. Cash receipts on such
loans are recognized as interest income, including recognition of amounts
previously not accrued. Receipts in excess of all past due interest are
recognized as reductions of principal. Loan impairments are generally
considered to be other than temporary declines in value and therefore are
reported as realized investment losses. As of December 31, 1996, investments
in impaired mortgage loans totaled $24.5 million, and impairment reserves due
to other than temporary declines in value of $17.7 million have been recognized
as realized investment losses in relation to such loans.
The Company adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits", effective January 1, 1994. SFAS No. 112 requires
the accrual method of accounting for postemployment benefits. Prior to 1994,
postemployment benefits were expensed as paid. The net effect of adopting SFAS
No. 112 was to decrease 1994 net income by $0.5 million resulting from the
cumulative effect of a change in accounting principle.
Net Income Per Common and Common Equivalent Share
Net income per common and common equivalent share is determined by
dividing net income, as adjusted below, by applicable average common and common
equivalent shares outstanding (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . . . $ 30,936 $ 6,408 $75,774
Preferred stock dividends . . . . . . . . . . . . . . . (1,350) (1,350) (1,350)
-------- ------- -------
Net income applicable to common stock . . . . . . . . . $ 29,586 $ 5,058 $74,424
======== ======= =======
Average common and common equivalent shares
outstanding . . . . . . . . . . . . . . . . . . . . 25,651 25,721 25,388
======== ======= =======
</TABLE>
Average common and common equivalent shares include common shares
outstanding and common stock equivalents attributable to outstanding stock
options and warrants. All potentially dilutive securities are considered to be
common stock equivalents.
Reclassifications
Certain reclassifications have been made to the prior year
consolidated financial statements to conform with the current year
presentation.
F-10
<PAGE> 52
NOTE 3 -- EFFECTS OF ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED IN THE FUTURE
In June 1996, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement addresses the accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on a financial-components approach.
Adoption is generally required for transactions occurring after December 31,
1996, while the effective date for certain portions of the statement has been
deferred one year. The Company does not anticipate a material impact on its
financial position or results of operations upon adoption.
NOTE 4 -- DISCONTINUED OPERATIONS
On March 27, 1996, the Board of Directors of the Company authorized
the sale of the Annuity Operations and the Western Diversified Group. On
December 2, 1996, the Company announced that it had entered into a definitive
agreement to sell the Annuity Operations to SunAmerica Life Insurance Company
("SunAmerica"). The transaction includes the sale of all of the common stock
of John Alden Life Insurance Company of New York ("JANY") and the coinsurance
of substantially all of the annuity block of JALIC. This coinsurance will
initially be on an indemnity basis and, pursuant to the agreement, will
transition to an assumption basis as soon as practical. In certain states, the
transition to an assumption basis is subject to policyholder approval. To the
extent that such transition does not take place with respect to any particular
policy, such policy will remain indemnity reinsured. A substantial portion of
the transition to an assumption basis is expected to be completed within two
years. The transaction is contingent upon customary terms and conditions,
including required regulatory approvals and is scheduled to close by the end
of the first quarter of 1997.
The total purchase price is approximately $240 million. This
represents approximately $165 million premium paid to acquire the business and
approximately $75 million of adjusted statutory capital and surplus of JANY.
The Company intends to use a portion of the capital made available from the
sale to strengthen its healthcare operations, after which it estimates there
will be approximately $175 million to $200 million of capital available for
other uses. Subject to applicable regulatory approvals, this additional
capital may be used to repurchase common stock, pay dividends, pay down debt
and, to a lesser extent, for general corporate purposes.
The Company is pursuing the execution of a definitive agreement for
the sale of the Western Diversified Group and expects to enter into a
non-binding letter of intent in the second quarter of 1997. Such sale may be
in the form of a sale of all of the common stock of the subsidiaries which
comprise the Western Diversified Group or the reinsurance of the applicable
business and would be subject to applicable regulatory approvals. There can be
no assurance that such sale will be consummated.
As a result of these sales, the Company expects to record a net
deferred gain of approximately $45 million. This amount is net of transaction
expenses, taxes, goodwill and other adjustments relating to these transactions
including an adjustment to reduce the carrying value of the Western Diversified
Group to its estimated net realizable value. The net deferred gain will be
recognized as income as SunAmerica completes the assumption of policyholder
liabilities. The Company expects to begin recognizing the net deferred gain in
1997 and to earn the majority of the gain by December 31, 1998.
Total revenues for the discontinued operations for the years ended
December 31, 1996, 1995 and 1994 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Annuity Operations . . . . . . . . . . . . . . . $432,615 $459,894 $383,665
Western Diversified Group . . . . . . . . . . . . 62,240 54,595 50,833
</TABLE>
F-11
<PAGE> 53
During the period from the measurement date of the disposal (March 27,
1996) through December 31, 1996, the Annuity Operations and Western Diversified
Group have generated after-tax income from operations of $25.8 million and
$(0.9) million, respectively.
The following represent the assets and liabilities to be disposed of
in connection with the sale of the discontinued operations (dollars in
thousands):
<TABLE>
<S> <C>
Invested assets . . . . . . . . . . . . . . . . . . $ 4,867,142
Other assets . . . . . . . . . . . . . . . . . . . 1,492,761
-------------
Total assets . . . . . . . . . . . . . . . . . . 6,359,903
-------------
Contract holder liabilities. . . . . . . . . . . . . 6,096,929
Other liabilities. . . . . . . . . . . . . . . . . . 76,339
-------------
Total liabilities . . . . . . . . . . . . . . . . 6,173,268
-------------
Net assets held for disposition . . . . . . . . . $ 186,635
=============
</TABLE>
Approximately 70% and 75% of these invested assets and contract holder
liabilities, respectively, will be subject to the Annuity Operations
coinsurance agreement discussed above.
As of December 31, 1996, the Western Diversified Group had total
assets of $278.9 million comprised primarily of invested assets and reinsurance
recoverables and total liabilities of $216.5 million comprised primarily of
unearned premium reserves and funds payable under reinsurance treaties.
NOTE 5 -- INVESTMENTS
As discussed in Note 4, the Company has entered into a definitive
agreement to sell the Annuity Operations. Accordingly, the Company reclassified
held-to-maturity debt securities with an amortized cost and market value of
$572.8 million and $582.7 million, respectively, to the available-for-sale
portfolio. As a result, the Company recorded a net unrealized gain in
stockholders' equity, net of deferred policy acquisition costs and deferred
income taxes, of approximately $2.6 million.
In November 1995, the FASB issued "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities". This guidance permitted enterprises a one-time opportunity to
reassess the appropriateness of the classifications of all securities and to
reclassify held-to-maturity securities to the available-for-sale category
without calling into question their intent to hold other debt securities to
maturity. On December 18, 1995, the Company transferred securities from the
held-to-maturity portfolio with an aggregate amortized cost of approximately
$2,534.3 million to the available-for-sale portfolio at a market value of
$2,593.6 million. As a result, the Company recorded a net unrealized gain in
stockholders' equity, net of deferred policy acquisition costs (see Note 7) and
deferred income taxes, of approximately $18.3 million.
F-12
<PAGE> 54
The amortized cost and estimated market value of investments in
held-to-maturity and available-for-sale securities as of December 31, 1996 and
1995 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
HELD-TO-MATURITY
----------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government corporations and agencies $ 5,090 $ 63 $ -- $ 5,153
Corporate securities . . . . . . . . . . . . . 21,049 1,026 -- 22,075
Mortgage-backed securities . . . . . . . . . . 19,218 547 (109) 19,656
-------- ------- ------- --------
Total . . . . . . . . . . . . . . . . . . $ 45,357 $ 1,636 $ (109) $ 46,884
======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
HELD-TO-MATURITY
----------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government corporations and agencies. $158,544 $ 6,143 $ (8) $164,679
Obligations of state and local governments . . 22,872 2,259 -- 25,131
Corporate securities . . . . . . . . . . . . . 167,114 8,947 (353) 175,708
Mortgage-backed securities . . . . . . . . . . 126,395 4,556 (177) 130,774
Asset-backed securities . . . . . . . . . . . . 109,405 4,032 (130) 113,307
-------- ------- ----- --------
Total . . . . . . . . . . . . . . . . . . $584,330 $25,937 $(668) $609,599
======== ======= ===== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
AVAILABLE-FOR-SALE
------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government corporations and agencies $1,037,987 $ 16,703 $(11,806) $1,042,884
Obligations of state and local governments . . 25,854 1,705 (63) 27,496
Debt securities issued by foreign governments . 15,625 663 (22) 16,266
Corporate securities . . . . . . . . . . . . . 1,443,202 49,490 (4,541) 1,488,151
Mortgage-backed securities . . . . . . . . . . 1,207,351 19,879 (13,058) 1,214,172
Asset-backed securities . . . . . . . . . . . . 455,244 6,765 (2,204) 459,805
---------- -------- -------- ----------
Total . . . . . . . . . . . . . . . . . . $4,185,263 $ 95,205 $(31,694) $4,248,774
========== ======== ======== ==========
</TABLE>
F-13
<PAGE> 55
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ --------------
AVAILABLE-FOR-SALE
------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government corporations and agencies $1,243,175 $ 44,384 $ (1,180) $1,286,379
Obligations of state and local governments . . 2,966 39 (16) 2,989
Debt securities issued by foreign governments . 15,825 1,246 (27) 17,044
Corporate securities . . . . . . . . . . . . . 1,266,808 84,151 (5,457) 1,345,502
Mortgage-backed securities . . . . . . . . . 921,267 32,437 (3,476) 950,228
Asset-backed securities . . . . . . . . . . . . 202,367 7,336 (20) 209,683
---------- -------- -------- ----------
Total . . . . . . . . . . . . . . . . . . $3,652,408 $169,593 $(10,176) $3,811,825
========== ======== ======== ==========
</TABLE>
The amortized cost and estimated market value of investments in
held-to-maturity and available-for-sale securities at December 31, 1996, by
contractual maturity, are shown below (dollars in thousands). 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. Securities which will be collected over multiple periods have been
allocated based upon the ultimate maturities of the securities.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------
HELD-TO-MATURITY AVAILABLE-FOR-SALE
---------------------------------------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Due in one year or less . . . . . . . . . . . . $ -- $ -- $ 115,339 $ 117,378
Due after one year through five years . . . . . 14,067 14,455 557,515 572,315
Due after five years through ten years . . . . 10,072 10,618 1,529,258 1,573,954
Due after ten years . . . . . . . . . . . . . . 21,218 21,811 1,983,151 1,985,127
-------- ---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . $ 45,357 $ 46,884 $4,185,263 $4,248,774
======== ========== ========== ==========
</TABLE>
At December 31, 1996, the Company held unrated or less than investment
grade (i.e., with a Standard & Poor's Corporation rating below BBB) debt
securities with an aggregate carrying value of $9.3 million, representing less
than 0.2% of the Company's total invested assets.
F-14
<PAGE> 56
The Company's mortgage loan investments are diversified by property
type, location and loan size. Generally, loans do not exceed 75% of the
property's value at the time the loan is made. At December 31, 1996, mortgage
loan investments were concentrated in the following property types (dollars in
thousands):
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
PROPERTY TYPE: CARRYING VALUE MORTGAGES
-------------- -------------
<S> <C> <C>
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . $ 384,364 26.5%
Commercial:
Retail space . . . . . . . . . . . . . . . . . . . . . . . . 518,309 35.8
Office buildings . . . . . . . . . . . . . . . . . . . . . . 275,928 19.0
Multi-family apartments . . . . . . . . . . . . . . . . . . 136,329 9.4
Warehouses . . . . . . . . . . . . . . . . . . . . . . . . . 122,403 8.5
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,909 0.8
---------- -----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $1,449,242 100.0%
========== =====
</TABLE>
At December 31, 1996, contractual commitments to extend credit under
mortgage loan agreements amounted to approximately $5.6 million. These
commitments generally expire within one year and are diversified by property
type and geographic region.
The following is a summary of activity relating to the mortgage loan
impairment reserves as of and for the years ended December 31, 1996, 1995 and
1994 (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Impairment reserves balance, beginning of year . . . . . . . . . $14,274 $ 13,161 $ 12,104
Additions to impairment reserves . . . . . . . . . . . . . . . . 9,681 15,046 14,431
Amounts charged off or transferred to real estate owned . . . . . (6,273) (13,933) (13,374)
------- -------- --------
Impairment reserves balance, end of year . . . . . . . . . . . . $17,682 $ 14,274 $ 13,161
======= ======== ========
</TABLE>
As of December 31, 1996 and 1995, the Company held no investments in
debt securities or preferred stock which were non-income producing for the
previous twelve months. Non-income producing mortgage loans aggregating
approximately $3.2 million and $3.1 million were held as of December 31, 1996
and 1995, respectively. The Company held no investments in a single entity
(other than United States government agencies and authorities) which exceeded
10% of stockholders' equity as of December 31, 1996.
At December 31, 1996, the Company held assets in trust for the benefit
of reinsurers aggregating $132.9 million. At December 31, 1996, securities
with a carrying value of approximately $16.7 million were on deposit with
governmental agencies, as required by law in various states in which the
insurance subsidiaries of JAFCO conduct business. These amounts are included
in total invested assets in the Company's consolidated balance sheets.
See Note 14 for fair value of investment disclosures.
F-15
<PAGE> 57
NOTE 6 -- NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS (LOSSES)
Major categories of investment income for the years ended December 31,
1996, 1995 and 1994 are summarized below (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Debt securities and short-term investments . . . . . . . . . . . $ 49,487 $ 51,756 $ 40,523
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . -- 1,915 168
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . 5,536 6,950 3,959
Trading account securities . . . . . . . . . . . . . . . . . . . 257 714 1,621
Investment income ceded to reinsurers . . . . . . . . . . . . . . (12,141) (12,098) (10,489)
Policy loans, other notes receivable and other invested assets . 4,876 2,804 3,292
--------- --------- ---------
Total gross investment income . . . . . . . . . . . . . . . . 48,015 52,041 39,074
Less investment expenses . . . . . . . . . . . . . . . . . . . . (2,555) (1,653) (929)
--------- --------- ---------
Net investment income . . . . . . . . . . . . . . . . . . . . $ 45,460 $ 50,388 $ 38,145
========= ========= =========
</TABLE>
Net investment income from discontinued operations was $412.4 million,
$410.5 million and $357.3 million for the years ended December 31, 1996, 1995
and 1994, respectively.
Proceeds from sales and calls of investments in debt securities for
the years ended December 31, 1996, 1995 and 1994 were $568.5 million, $604.0
million and $536.0 million, respectively. Proceeds from sales and calls of
available-for-sale securities for the years ended December 31, 1996, 1995 and
1994 were $567.3 million, $583.4 million and $284.4 million, respectively.
Gross unrealized investment gains (losses) related to available-for-sale
securities (decreased) increased stockholders' equity by $(95.9) million,
$198.7 million and $(89.3) million for the years ended December 31, 1996, 1995
and 1994, respectively.
The components of net realized investment gains (losses) for the years
ended December 31, 1996, 1995 and 1994 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
Realized gains (losses) from sales, calls and prepayments:
Gross realized investment gains from sales and calls . . . . . $ 5,113 $ 6,815 $ 2,795
Gross realized investment losses from sales and calls . . . . . (1,433) (5,806) (1,568)
Prepayments of mortgage loans and other . . . . . . . . . . . . 502 (19) (24)
------- -------- --------
Realized gains (losses) from sales, calls and prepayments . 4,182 990 1,203
Impairments in value . . . . . . . . . . . . . . . . . . . . . . (910) (3,627) (3,939)
Change in net unrealized gains and losses on trading account
securities . . . . . . . . . . . . . . . . . . . . . . . . . . (220) 244 (117)
------- --------- --------
Net realized investment gains (losses) . . . . . . . . . . . . $ 3,052 $ (2,393) $ (2,853)
======= ======== ========
</TABLE>
Net realized investment (losses) gains from discontinued operations
were $(8.1) million, $3.9 million and $(9.9) million for the years ended
December 31, 1996, 1995 and 1994, respectively.
F-16
<PAGE> 58
NOTE 7 -- DEFERRED POLICY ACQUISITION COSTS
The balances of and changes in deferred policy acquisition costs as of
and for the years ended December 31, 1996, 1995 and 1994 are summarized as
follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year . . . . . . . . . . . . . . . . . . $197,667 $295,716 $226,998
Capitalization of commissions, sales and issue expenses . . . . 56,003 83,961 78,929
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . (63,419) (52,986) (33,241)
Commission allowance on reinsurance ceded (see Note 10) . . . . -- (40,188) --
Effect of change in unrealized gains (losses) on
available-for-sale securities . . . . . . . . . . . . . . . . 49,371 (57,787) 23,030
Effect of implementation of subsequent SFAS No. 115
guidance (see Note 5) . . . . . . . . . . . . . . . . . . . . -- (31,049) --
-------- -------- --------
Balance, end of year . . . . . . . . . . . . . . . . . . . . . $239,622 $197,667 $295,716
======== ======== ========
</TABLE>
NOTE 8 -- CONTRACT HOLDER LIABILITIES
The composition of contract holder liabilities at December 31, 1996
and 1995 and the more significant assumptions as to future investment yield,
mortality and withdrawals, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
BASIS OF ASSUMPTION
DECEMBER 31, -------------------------------
---------------------- INTEREST MORTALITY/
1996 1995 RATES MORBIDITY
----------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Contract holder deposit funds:
Deferred and immediate annuities
and guaranteed investment contracts . . $6,025,769 $6,019,662 3.5- 10.0% 1971 IAM and 1983 IAM
Universal life insurance . . . . . . . . 246,010 245,780 4.5- 7.0% 1980 CSO Table
Other benefit reserves, including
individual life insurance and credit
insurance . . . . . . . . . . . . . . . 58,239 38,065 3.5-6.0% 1946-1949 and 1955-1960
Select and Ultimate
Tables and 1958 and 1980
CSO Tables
Claim reserves . . . . . . . . . . . . . . 400,690 428,342
Unearned premium reserves . . . . . . . . . 156,924 135,954
---------- ----------
Total contract holder liabilities. . . . . $6,887,632 $6,867,803
========== ==========
</TABLE>
Contract holder deposit funds for deferred annuities and universal
life contracts are recorded at their accumulated values using the retrospective
deposit approach. The average accumulated values per annuity contract were
approximately $25,200 and $23,900 as of December 31, 1996 and 1995,
respectively. Interest rates shown for these contracts are current credited
rates. Mortality rates are contractual guarantees for monthly term charges
(universal life insurance) or settlement rates (deferred annuities).
F-17
<PAGE> 59
NOTE 9 -- LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSES
The following table provides a reconciliation of the beginning and
ending reserve balances for unpaid claims and claims adjustment expenses, on a
gross-of-reinsurance basis for the years ended December 31, 1996, 1995 and 1994
(dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Balance at January 1 before acquisition of insurance subsidiary . . . $428,342 $332,741 $286,569
Balance at January 1 of acquired insurance subsidiary . . . . . . -- 1,453 --
Less reinsurance recoverables . . . . . . . . . . . . . . . . . . 214,998 154,811 124,277
-------- -------- --------
Net balance at January 1 . . . . . . . . . . . . . . . . . . . . . . 213,344 179,383 162,292
-------- -------- --------
Incurred claims related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . 816,630 776,054 675,946
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,353) 8,594 (19,277)
-------- -------- --------
Total incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . 799,277 784,648 656,669
-------- -------- --------
Paid claims related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . 608,150 570,213 503,681
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . 197,044 180,474 137,350
-------- -------- --------
Total paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 805,194 750,687 641,031
-------- -------- --------
Net balance at December 31 . . . . . . . . . . . . . . . . . . . . . 207,427 213,344 177,930
Plus reinsurance recoverables . . . . . . . . . . . . . . . . . . 193,263 214,998 154,811
-------- -------- --------
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . $400,690 $428,342 $332,741
======== ======== ========
</TABLE>
The total incurred claims above include claims adjustment expenses net
of reinsurance, which are included in general expenses in the accompanying
consolidated statements of income for the years ended December 31, 1996, 1995
and 1994. In addition, 1994 incurred claims related to prior years reflect
ceded claim reserves of $17.0 million resulting from the January 1, 1994
amendment to the Group Reinsurance Agreement (see Note 10). Reinsurance
recoverables above include ceded claims relating to this agreement. Under the
terms of this agreement, the Company withheld the assets in a separate trust
account to pay claims on behalf of the reinsurers. These assets are included
in total invested assets in the Company's consolidated balance sheets.
NOTE 10 -- REINSURANCE
In the ordinary course of business, the Company assumes and cedes
business with other insurance companies. Ceding reinsurance is used by the
Company to limit its risk on new and unproven products, to meet certain
regulatory, rating agency or debt covenant leverage ratios or to limit its risk
up to its retention limits. The Company is not relieved of its primary
obligation to the policyholder as a result of these reinsurance transactions.
The maximum amount of life insurance retained on any one life is generally
$150,000 or $500,000, depending upon the plan of insurance. At December 31,
1996, life insurance in force aggregated approximately $12.7 billion, after a
reduction of approximately $3.0 billion for reinsurance ceded.
Substantially all of the group accident and health insurance business
has been reinsured under a Group Reinsurance Agreement with London Life
Insurance Company and Transamerica Occidental Life Insurance Company which
became effective October 1, 1991 (the "Group Reinsurance Agreement").
Effective January 1, 1994, this agreement was amended to include all
fully-insured groups regardless of size. The Group Reinsurance Agreement
provides for the Company and the reinsurers to share on a 50-50 basis all
premiums and claims expense. Annually, the Company receives profit sharing
payments from the reinsurers equal to the excess of reinsurers' profits over
contractual floor amounts. For years where such profits fall short of floor
amounts, the shortfalls are carried forward with interest to be applied as
reductions against future profit sharing payments. In addition, under the
Group
F-18
<PAGE> 60
Reinsurance Agreement, to the extent the combined ratio of the group accident
and health insurance business for a rolling 12-month period exceeds contractual
amounts, the Company receives a reduced profit sharing payment. As originally
contracted, the Company's 1996 profit sharing payment would have been reduced
as its combined ratio exceeded the contractual amount. However, in December
1996, the reinsurers agreed to amend the agreement. Under the terms of the
amended agreement, the Company and the reinsurers agreed to suspend the
contractual combined ratio requirement for 1996. Accordingly, the Company is
not obligated to return any portion of the 1996 profit sharing payments to the
reinsurers. In addition, the contractual amount was increased by one
percentage point for 1997. The contractual amount is then reduced by one
percentage point for 1998 and subsequent years. To the extent the combined
ratio for 1997 exceeds contractual amounts, the Company's profit sharing
amounts will be reduced by 25%. To the extent the combined ratio in years
subsequent to 1997 exceeds the contractual amounts, the Company's profit
sharing amounts will be reduced by 50%. Further, to the extent the reinsurers
incur a loss in relation to the agreement in 1997, the Company has agreed to
reimburse the first $5.0 million of net losses incurred by the reinsurers.
The effects of reinsurance on short duration contracts for insurance
premiums and for long duration contracts for insurance premiums and contract
charges earned, the majority of which relates to continuing operations, are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1996 1995 1994
Premiums from short -------------------------- ------------------------- -------------------------
duration contracts WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
- ---------------------- ----------- ----------- ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Direct business . . . . . $1,847,828 $1,834,634 $1,882,188 $1,916,807 $1,795,741 $1,767,989
Reinsurance assumed . . . 50,451 45,726 67,280 65,505 42,805 47,110
Reinsurance ceded . . . . (862,456) (831,451) (892,436) (911,312) (888,513) (875,485)
---------- ---------- ---------- ---------- ---------- ----------
Net . . . . . . . . . $1,035,823 $1,048,909 $1,057,032 $1,071,000 $ 950,033 $ 939,614
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Insurance premiums and
contract charges earned YEAR ENDED DECEMBER 31,
from long duration ----------------------------------------
contracts 1996 1995 1994
- ---------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
Direct business . . . . . $55,393 $55,168 $64,830
Reinsurance assumed . . . 11,995 12,383 1,280
Reinsurance ceded . . . . (11,804) -- --
------- ------- -------
Net . . . . . . . . . $55,584 $67,551 $66,110
======= ======= =======
</TABLE>
The Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk arising from similar geographic regions
or economic characteristics of the reinsurers. The Company generally requires
that its reinsurers be rated "A (Excellent)" or better by A.M. Best and
Company. At December 31, 1996, significant reinsurance recoverables on paid
and unpaid losses are as follows (dollars in thousands):
<TABLE>
<CAPTION>
PAID UNPAID
LOSSES LOSSES
------ ------
<S> <C> <C>
London Life Insurance Company . . . . . . . . . . . . . . . . . $ -- $ 75,284
Mercantile & General Life Reinsurance Company . . . . . . . . . 10,532 16,260
Transamerica Occidental Life Insurance Company . . . . . . . . -- 50,190
-------- --------
$ 10,532 $141,734
======== ========
</TABLE>
Effective October 1, 1995, the Company entered into a reinsurance
agreement with Lincoln National Reinsurance Company Limited ("Lincoln") to cede
90% of certain annuity contracts. Under the agreement, the Company ceded
approximately $403.5 million of annuity contracts. Associated with the ceded
policies was
F-19
<PAGE> 61
unamortized deferred policy acquisition costs and value of insurance in force
aggregating approximately $43.0 million. The Company received approximately
$40.2 million for these assets and, accordingly, recorded accelerated
amortization of $2.8 million. Under the terms of the agreement, the policy
loans outstanding on the ceded annuity contracts were retained by the Company.
Accordingly, a funds payable under reinsurance treaties liability of
approximately $21.3 million was established. The Company liquidated
available-for-sale securities to fund the $342.0 million payment made to
Lincoln. This liquidation generated $13.8 million of net realized investment
gains in 1995, which resulted in $1.6 million of additional accelerated
amortization of deferred policy acquisition costs.
As of December 31, 1996, receivables from reinsurers and investment
deposits recoverable, consisting primarily of contract holder liabilities
transferred to reinsurers, were approximately $970.7 million. Of this total,
approximately $768.1 million or 79.1% has been placed in trust under agreements
which generally require that amounts in trust be equal to at least 100% of the
regulatory contract holder liability balances at all times.
NOTE 11 -- INDEBTEDNESS
Indebtedness of the Company as of December 31, 1996 and 1995 is as
follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
---------- -----------
<S> <C> <C>
Credit Agreement . . . . . . . . . . . . . . . . . . . . . . . . . $101,500 $107,000
Notes payable to banks and other . . . . . . . . . . . . . . . . . -- 63
--------- ---------
Total indebtedness . . . . . . . . . . . . . . . . . . . . . . . 101,500 107,063
Less current maturities . . . . . . . . . . . . . . . . . . . . . . (25,000) (15,063)
-------- --------
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . $ 76,500 $ 92,000
======== ========
</TABLE>
In July 1994, the Company amended its credit agreement (the "Credit
Agreement") to increase the commitment amount of the term loan to $110.0
million and to establish a revolving credit loan with a commitment amount of
$40.0 million and an expiration of July 1998. As of December 31, 1996, the
Company has $23.5 million available under the revolving credit loan. 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, payment of dividends, sale of assets and
reinsurance arrangements. It also requires the Company to satisfy certain
financial covenants. In March 1997, the Company received approval from its
lenders for the sale of the Annuity Operations. The Credit Agreement's
interest rate per annum, at the Company's option, is based on certain economic
indices and ranged from 5.6% to 9.0% during 1996, 1995 and 1994. Future
required principal payments are $25.0 million in 1997, $41.5 million in 1998
and $35.0 million in 1999.
The Company historically entered into loan agreements to finance the
purchase of fixed assets and capitalized software costs which typically
required quarterly principal installments. Interest rates, based on LIBOR
90-day rates, for the years ended December 31, 1995 and 1994 ranged from 5.6%
to 9.0%. In December 1995, the Company retired the outstanding principal
balance and interest accrued thereon, aggregating approximately $20.4 million
utilizing the net proceeds of a sale and leaseback of certain fixed assets and
capitalized software.
Interest payments for the years ended December 31, 1996, 1995 and 1994
on the total indebtedness aggregated approximately $6.1 million, $9.3 million
and $5.2 million, respectively.
NOTE 12 -- STOCKHOLDER SECURITIES
The holders of Cumulative Preferred Stock are entitled to receive
cumulative accrued dividends, payable semi-annually on April 15th and October
15th. The Cumulative Preferred Stock ranks prior to the common stock upon
liquidation, dissolution or winding up of the Company and is not convertible.
The Cumulative Preferred Stock
F-20
<PAGE> 62
is required to be redeemed for $100 per share plus accrued and unpaid dividends
in three equal annual installments in each of 2000, 2001 and 2002. The
Company, at its option, may elect to redeem the Cumulative Preferred Stock at
any time.
Pursuant to the terms of a stockholder agreement, which expires on
October 30, 1997, the Company has an option to purchase and/or each of the
management stockholders has an option to sell his or her common stock subject
to this agreement to the Company in certain circumstances (death, complete
disability, termination of employment without cause or retirement at or beyond
the early retirement date). Shares held by management stockholders which are
estimated to be exercisable by the expiration date are carried at the closing
fair market value of the Company's common stock as of December 31 of the
respective years. Shares held by other management stockholders are carried at
cost. As of December 31, 1996 and 1995, the redeemable common stock carrying
values were $3.4 million and $4.1 million, respectively.
During the fourth quarter of 1996, the Company adopted a shareholder
rights plan (the "Shareholder Rights Plan"). Under the Shareholder Rights
Plan, each shareholder received a dividend distribution of one preferred share
purchase right for each outstanding share of common stock. The purchase rights
distributed to the shareholders entitled them to buy one one-hundredth of a
share of a new series of junior participating preferred stock at an exercise
price of $75. The rights are exercisable only if a person or group acquires
10% or more of the Company's common stock or announces a tender offer, the
consummation of which would result in ownership of 10% or more of the Company's
common stock. If the Company is acquired in a merger or other business
combination or after a person has acquired 10% or more of the Company's common
stock, each right will entitle the holder to purchase a number of the acquiring
company's common shares or the Company's common shares having a market value of
twice the purchase price.
NOTE 13 -- INCOME TAXES
The components of the (benefit) provision for income taxes for the
years ended December 31, 1996, 1995 and 1994 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . $ 13,708 $ (1,270) $ 40,776
Deferred tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . 3,036 7,084 (2,331)
-------- -------- --------
Total provision for income taxes . . . . . . . . . . . . . . . . . . 16,744 5,814 38,445
Less provision for income taxes from discontinued operations . . . . . . . 18,840 15,451 16,843
-------- -------- --------
(Benefit) provision for income taxes from continuing operations . . . . . . $ (2,096) $ (9,637) $ 21,602
======== ======== ========
</TABLE>
A reclassification of approximately $6.5 million was made during 1995,
reducing current tax expense and increasing deferred tax expense, to reflect
the actual 1994 tax liability. Current tax expense was reduced by $3.7 million
and $1.5 million from the utilization of net operating loss carryovers in 1996
and 1994, respectively. Current tax benefits of $0.9 million relating to the
exercise of nonqualifying stock options were credited to paid-in capital during
1994. A deferred tax benefit of $0.3 million was charged to the cumulative
effect of changes in accounting principles in 1994 (see Note 2).
During 1994, the Company terminated a joint venture which was formed
in 1992 and had operating losses in all years. A tax benefit on these losses
had not been recognized in 1992 or 1993 as the venture could not be included in
the Company's consolidated return. Upon dissolution of the venture in December
1994, the Company recognized a capital loss for tax purposes and, accordingly,
recorded a tax benefit of $5.6 million, inclusive of the prior years' impact of
$3.3 million.
F-21
<PAGE> 63
The income tax provisions differ from the amounts determined by
multiplying total income before income taxes by the statutory federal income
tax rate of 35%. Reconciliations between the actual tax provisions and
expected tax provisions for the years ended December 31, 1996, 1995 and 1994
are as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
Income taxes at statutory rate . . . . . . . . . . . . . . . . . . . . . . $ 17,437 $ 3,583 $40,166
Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . . 1,945 1,877 1,893
Recognized loss of joint venture . . . . . . . . . . . . . . . . . . . . -- -- (3,345)
Non-deductible travel and entertainment . . . . . . . . . . . . . . . . 564 607 325
Non-taxable dividends and interest . . . . . . . . . . . . . . . . . . . (129) (563) (86)
Net (decrease) increase in valuation allowance . . . . . . . . . . . . . (3,359) 1,492 --
Decrease in tax reserves . . . . . . . . . . . . . . . . . . . . . . . . (600) (1,164) (998)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 886 (18) 490
-------- ------- -------
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . $ 16,744 $ 5,814 $38,445
======== ======= =======
</TABLE>
The income tax provisions from discontinued operations for the years
ended December 31, 1996, 1995 and 1994 differ from the amounts determined by
multiplying total income before income taxes by the statutory rate primarily
due to non-deductibility of goodwill amortization and other expenses and the
reduction in the valuation allowance, as discussed below.
The significant temporary differences included in the net deferred
income tax asset as of December 31, 1996 and 1995 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Deferred income tax assets:
Policy reserves and other insurance items . . . . . . . . . . . . $ 108,680 $116,257
Bad debt reserves and non-deductible liabilities . . . . . . . . 10,222 7,263
Unearned income . . . . . . . . . . . . . . . . . . . . . . . . . 1,567 1,191
Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . 2,884 4,827
Net operating loss carryforward . . . . . . . . . . . . . . . . . 4,756 8,126
Tax deductible intangible assets . . . . . . . . . . . . . . . . 959 732
Other deductible temporary differences . . . . . . . . . . . . . 3,080 2,862
--------- --------
Deferred income tax assets . . . . . . . . . . . . . . . . . . 132,148 141,258
--------- --------
Deferred income tax liabilities:
Deferred policy acquisition costs and value of insurance in force (85,269) (89,936)
Net unrealized gain on trading account securities . . . . . . . . (29) (89)
Market discount on bonds and other investment items . . . . . . . (9,450) (7,686)
Other taxable temporary differences . . . . . . . . . . . . . . . (397) (149)
-------- --------
Deferred income tax liabilities . . . . . . . . . . . . . . . (95,145) (97,860)
-------- --------
Net unrealized gains and related deferred acquisition
costs allocated to equity . . . . . . . . . . . . . . . . . . . . (14,576) (31,360)
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . (1,092) (5,313)
-------- --------
Net deferred income tax asset . . . . . . . . . . . . . . . . . . $ 21,335 $ 6,725
======== ========
</TABLE>
These amounts are included in other assets in the accompanying
consolidated balance sheets.
Approximately $13.5 million of net operating loss carryforwards
("NOL's") remain as of December 31, 1996 which expire through the year 2010.
Of this amount, the utilization of $0.2 million of NOL's is limited to the
F-22
<PAGE> 64
taxable earnings of the non-life insurance group and the utilization of $4.9
million is limited to the taxable earnings of NHP Holding Company, Inc.
("NHP"), a 50% owned joint venture. In addition, $1.3 million of these NOL's,
which were generated by the non-life insurance group, are available, with
certain statutory limitations, to offset the taxable earnings of the life
insurance group. The utilization of the remaining NOL's of $7.1 million, which
were acquired in connection with the purchase of a life insurance company
domiciled in New York, is limited to the taxable earnings of JANY and is
further subject to an annual limitation of $0.6 million.
Management believes, based on the Company's earnings history and its
future expectations, that the Company will have sufficient taxable income in
future years to realize the net deferred income tax asset. In evaluating the
expectation of sufficient future taxable income, management considered the
future reversal of temporary differences and available tax planning strategies
that could be implemented, if required. Except as noted below, a valuation
allowance was not required as of December 31, 1996 and 1995 as it was
management's assessment that, based on available information, it is not more
likely than not that any or all of the deferred tax asset will not be realized.
A valuation allowance will be established if there is a change in management's
assessment of the amount of the net deferred income tax asset that is expected
to be realized. However, a valuation allowance of $1.6 million was established
in 1995 in order to reflect uncertainties associated with the utilization of
certain tax benefits acquired in connection with the purchase of the life
insurance company discussed above. During 1996, the valuation allowance was
reduced by $0.5 million as a result of management's reevaluation of the
uncertainties associated with the utilization of certain tax benefits acquired
in connection with the purchase of the life insurance company. The reduction
in the valuation allowance for this item was applied to reduce the provision
for income taxes from discontinued operations.
In addition, a valuation allowance of $3.7 million was established in
1995 for that portion of the net deferred tax asset which is attributed to the
operations of NHP. During 1996, the valuation allowance was reduced by $1.0
million for temporary differences that reversed during the year. In addition,
the valuation allowance at December 31, 1996 was reduced by $2.7 million to
reflect management's reevaluation of its ability to realize the portion of the
deferred tax asset which is attributed to NHP. Of this amount, $0.9 million
was applied to reduce goodwill and $1.8 million was applied to reduce the
provision for income taxes from continuing operations.
Prior to 1984, two of the Company's life insurance subsidiaries were
permitted to exclude from taxable income those amounts determined under a
formula established by provisions of the Internal Revenue Code of 1954, as
amended. At December 31, 1996, these life insurance subsidiaries had
accumulated untaxed income of approximately $56.9 million (tax effect of $20.0
million). Although such amounts are taxable under certain circumstances,
management does not intend to take, or fail to take, any action that would
cause all or part of these amounts to be included in taxable income;
accordingly, deferred income taxes have not been provided on these amounts. At
December 31, 1996, the two life insurance subsidiaries had approximately $334.3
million in their "shareholder's surplus" tax accounts from which dividend
distributions can be made without incurring federal income taxes.
The Company made federal income tax payments of approximately $7.9
million, $4.5 million and $55.1 million for the years ended December 31, 1996,
1995 and 1994, respectively.
F-23
<PAGE> 65
NOTE 14 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of the Company's financial
assets and financial liabilities at December 31, 1996 and 1995 are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------- ------------------------
CARRYING FAIR CARRYING FAIR VALUATION
VALUE VALUE VALUE VALUE METHOD
--------- --------- --------- ---------- ------
<S> <C> <C> <C> <C> <C>
Financial assets:
Held-to-maturity securities:
Publicly traded . . . . . . . . . . . . . . $ 29,908 $ 30,744 $ 373,634 $ 389,724 (1)
Private placements . . . . . . . . . . . . 15,449 16,140 208,975 218,154 (2)
Non-investment grade . . . . . . . . . . . -- -- 1,721 1,721 (2)
Available-for-sale securities:
Publicly traded . . . . . . . . . . . . . . 3,913,833 3,913,833 3,743,698 3,743,698 (1)
Private placements . . . . . . . . . . . . 325,628 325,628 68,127 68,127 (2)
Non-investment grade . . . . . . . . . . . 9,313 9,313 -- -- (2)
Trading account securities . . . . . . . . . . 4,518 4,518 5,703 5,703 (1)
Equity securities . . . . . . . . . . . . . . 82,098 82,098 82,639 82,639 (1)
Mortgage loans:
Performing . . . . . . . . . . . . . . . . 1,409,252 1,482,976 1,457,831 1,551,240 (3)
Non-performing . . . . . . . . . . . . . . 8,366 8,366 12,823 12,823 (4)
Restructured on other than market terms . . 31,624 31,624 36,220 36,220 (4)
Policy loans and other notes receivable . . . . 75,186 75,186 84,079 84,079 (5)
Short-term investments. . . . . . . . . . . . . 6,371 6,371 6,349 6,349 (5)
Cash and cash equivalents . . . . . . . . . . . 167,511 167,511 99,606 99,606 (5)
Accrued investment income . . . . . . . . . . . 65,727 65,727 64,443 64,443 (5)
Financial liabilities:
Investment contracts with defined maturities. . 294,605 294,762 299,607 301,140 (6)
Investment contracts with no defined maturities 5,606,694 5,285,370 5,604,265 5,263,746 (7)
Short-term debt . . . . . . . . . . . . . . . 25,000 25,000 15,063 15,063 (5)
Long-term debt . . . . . . . . . . . . . . . . 76,500 76,500 92,000 92,000 (5)
</TABLE>
- -----------------
(1) Fair value is based on publicly quoted market prices.
(2) Fair value is estimated using publicly quoted market prices
for similar securities and adjusting by a spread which is
reevaluated monthly, and approximates the spread on similar
securities which the Company has purchased.
(3) Fair value is estimated using the discounted cash flow method,
using interest rates currently offered for similar loans to
borrowers with similar credit ratings.
(4) Fair value is based on external and internal appraisals less
an allowance for estimated sales costs.
(5) Carrying value approximates fair value.
(6) Fair value is estimated based upon the discounted cash flow
method, using interest rates currently offered for similar
contracts.
(7) Fair value is defined as the amount payable on demand.
F-24
<PAGE> 66
NOTE 15 -- STOCKHOLDERS' EQUITY
Each of the life insurance companies is limited by various state
insurance department regulations as to the amount of dividends and other
payments that may be paid to its parent or affiliates. Dividends in excess of
prescribed amounts require regulatory approval. Loans and advances are limited
to certain prescribed maximums in various jurisdictions and, in any event,
require "arms-length" terms. Dividends may generally be paid without prior
regulatory approval if their fair market value, together with that of other
dividends or distributions made within the preceding 12 months, does not exceed
the greater of: (i) 10% of the insurer's surplus as regards policyholders as of
the 31st day of December next preceding; or (ii) the net gain from operations
of the insurer, not including realized investment gains, for the 12-month
period ending the 31st day of December next preceding. In addition, payments
of dividends are limited to statutory unassigned surplus less 25% of unassigned
surplus attributable to unrealized capital gains as determined in accordance
with accounting practices prescribed or permitted by state insurance regulatory
authorities. During 1997, $44.9 million is available for payment of dividends
by JALIC to HNLIC without regulatory approval. Also, during 1997, $34.4
million is available for payment of dividends by HNLIC to the Company without
regulatory approval.
Accounting practices used to prepare statutory financial statements
for regulatory filings of stock life insurance companies differ from GAAP.
Material differences in these accounting practices include: value of insurance
in force, deferred policy acquisition costs, goodwill, statutory non-admitted
assets and deferred federal income taxes are recognized under GAAP accounting,
while asset valuation and interest maintenance reserves are not; surplus
debentures are reported as surplus up to statutory limits for statutory
purposes and as debt under GAAP; certain reinsurance agreements are accounted
for as reinsurance for statutory purposes and as financing transactions under
GAAP; premiums for universal life and investment-type products are recognized
as revenues for statutory purposes and as deposits to policyholders' accounts
under GAAP; investments in the Company's trading and available-for-sale
accounts are carried at market value under GAAP and amortized cost under
statutory reporting; and different assumptions are used in calculating future
policyholders' benefits for statutory and GAAP purposes.
The following reconciles capital and surplus and net income determined
in accordance with accounting practices prescribed or permitted by the state
insurance departments (statutory accounting practices) with stockholders'
equity and net income on a GAAP basis (dollars in thousands). Included in the
amounts stated in accordance with statutory accounting practices are amounts
recorded in accordance with GAAP for the non-insurance subsidiaries.
Stockholders' Equity
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995
-------- ----------
<S> <C> <C>
Capital and surplus, on basis of statutory accounting practices,
as filed with insurance regulatory authorities . . . . . . . . . . . . $339,040 $346,898
Value of insurance in force . . . . . . . . . . . . . . . . . . . . . . 9,230 14,515
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . 269,988 277,404
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,379 82,619
Net unrealized gain on investments . . . . . . . . . . . . . . . . . . 26,542 57,600
Adjustment in policy and claim liabilities . . . . . . . . . . . . . . (257,149) (284,350)
Net deferred income tax assets . . . . . . . . . . . . . . . . . . . . 28,185 32,973
Statutory investment reserves . . . . . . . . . . . . . . . . . . . . . 50,797 51,175
Surplus debentures . . . . . . . . . . . . . . . . . . . . . . . . . . (78,071) (98,479)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,730) (3,124)
-------- ---------
Stockholders' equity, on basis of generally accepted
accounting principles . . . . . . . . . . . . . . . . . . . . . . . . . $465,211 $ 477,231
======== =========
</TABLE>
F-25
<PAGE> 67
Net Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
Net income (loss), on basis of statutory accounting practices,
as filed with insurance regulatory authorities. . . . . . . . . . . . . $36,579 $(5,796) $ 72,190
Change in unrealized gain (loss) on trading portfolio . . . . . . . . . (110) 456 (4,464)
Amortization of purchased intangibles . . . . . . . . . . . . . . . . . (10,137) (15,829) (12,024)
Capitalization and amortization of deferred policy acquisition
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,416) (9,213) 45,688
Adjustment of policy and claim liabilities. . . . . . . . . . . . . . . 29,198 32,170 (17,358)
Effect of statutory investment reserves . . . . . . . . . . . . . . . . (8,175) 5,367 (2,681)
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . (3,392) (379) (2,211)
Cumulative effect of change in accounting principle . . . . . . . . . . -- -- (541)
Change in mortgage delinquency reserves . . . . . . . . . . . . . . . . (2,657) 702 1,560
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,954) (1,070) (4,385)
------- ------- ---------
Net income, on basis of generally accepted accounting principles . . . . $30,936 $ 6,408 $ 75,774
======= ======= =========
</TABLE>
Treasury Stock
The Company has acquired treasury shares of stock as a result of the
exercise of put or call options on the redeemable common stock (see Note 12).
The Company has also acquired treasury stock in consideration for the cost of
stock option exercises. During 1995, the Company also acquired treasury shares
pursuant to a common stock repurchase program. During 1996, restricted
treasury shares were granted to an employee (see Note 16). The following is a
summary of treasury stock activity, accounted for under the cost method, for
the years ended December 31, 1996 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995
------------------------ ---------------------
SHARES COST SHARES COST
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Balance, beginning of year . . . . . . . . . . . 424,183 $9,329 261,652 $6,181
Stock repurchase program . . . . . . . . . . . -- -- 165,000 3,203
Treasury stock option exercises (see Note 16) . (448) (10) (2,469) (55)
Restricted stock granted . . . . . . . . . . . (36,000) (643) -- --
------- ------ ------- ------
Balance, end of year . . . . . . . . . . . . . . 387,735 $8,676 424,183 $9,329
======= ====== ======= ======
</TABLE>
NOTE 16 -- STOCK PLANS
The Company maintains various stock-based compensation plans, which
are described below, and applies APB 25 and related interpretations in
accounting for such plans. As permitted under SFAS No. 123, no compensation
cost has been recognized for these plans. Had compensation expense been
determined using the alternative principles provided under SFAS No. 123, the
Company's net income and net income per common and common equivalent share
would have been reduced to the pro forma amounts indicated below (dollars in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995
----------- ----------
<S> <C> <C>
Net income:
As reported . . . . . . . . . . . . . . . . . . . . . $ 30,936 $ 6,408
Pro forma . . . . . . . . . . . . . . . . . . . . . . 28,720 5,635
Net income per common and common equivalent share:
As reported . . . . . . . . . . . . . . . . . . . . . 1.15 0.20
Pro forma . . . . . . . . . . . . . . . . . . . . . . 1.07 0.17
</TABLE>
F-26
<PAGE> 68
Long-Term Incentive Plan
The Company has reserved a maximum of 2,618,428 shares of common stock
to be available for options or grants during the term of the John Alden
Financial Corporation Long-Term Incentive Plan. The exercise price of options
granted under this plan equals the market value of the Company's common stock
at the date of grant. Such options generally vest ratably over a three-year
period and have a maximum term of ten years.
North Star Incentive Plan
The Company maintains a compensation plan for certain employees of its
captive marketing organization, North Star Marketing Corporation. A portion of
the shares granted under this plan were issued with an option price of $1.00
and vest ratably over three years. The remaining shares were issued with an
option price equal to the market value of the Company's common stock at the
date of grant and were fully vested on that date. The shares granted under
this plan have a maximum term of ten years.
Treasury Stock Options
The common stock acquired by the Company pursuant to a stockholder
agreement (see Note 15) is to be reserved for sale or transfer to certain
designated full-time employees of the Company or to management stockholders at
a price not less than the price paid by the Company to acquire the shares. The
exercise price of options granted under this plan equals the market value of
the Company's common stock at the date of grant. Such options are fully vested
at the date of grant and have a maximum term of ten years.
Other Stock Plans
On January 1, 1996 and January 1, 1995, the Company granted 61,390 and
46,400 restricted shares of common stock to certain management employees.
These shares vest over a three-year period from the date of grant. As of
December 31, 1996, 93,920 restricted shares were outstanding.
During 1996, the Company granted an employee 36,000 shares of its
common stock held in treasury subject to certain restrictions, principally
stating that the individual remain employed by the Company. These shares vest
in three equal installments in April 1997, 1998 and 1999. Unearned
compensation of $0.7 million was recognized as a separate component of
stockholders' equity at the date of grant. The unearned compensation is being
amortized over the three-year vesting period.
The Company has established an Employee Stock Purchase Plan and
Employee Savings Incentive Plan ("ESIP") for employees who have met certain
eligibility requirements. Employees may designate a portion of their
contributions to the ESIP to be invested in the common stock of the Company.
The fair value of each option and stock grant during 1996 and 1995 is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions used for grants in 1996 and
1995, respectively: dividend yield of 2.1% and 2.0%, expected volatility of
45.8% and 49.0%, risk-free interest rates of 6.6% and 6.2%, and expected lives
of six years.
F-27
<PAGE> 69
A summary of the Company's option plans as of and for the years ended
December 31, 1996 and 1995 are as follows (shares in thousands):
<TABLE>
<CAPTION>
1996 1995
----------------------------- ------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- ----------------- -------- -------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year . . . . 2,305 $19.36 1,739 $17.87
Granted . . . . . . . . . . . . . . 390 20.50 725 21.50
Exercised . . . . . . . . . . . . . (50) 5.51 (91) 4.21
Forfeited . . . . . . . . . . . . . (63) 22.91 (68) 24.57
----- -----
Outstanding at end of year . . . . . . . 2,582 19.71 2,305 19.36
===== =====
Options exercisable at year-end. . . . . 1,652 1,370
Weighted-average fair value of options
granted during the year . . . . . . $9.05 $9.38
Weighted-average fair value of restricted
stock granted during the year. . . . 18.20 23.34
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1996 (options in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ----------------------------
WEIGHTED-AVG.
RANGE OF EXERCISE CONTRACTUAL WEIGHTED-AVG. WEIGHTED-AVG.
PRICES NUMBER REMAINING LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
--------------- ------ -------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$1 - $20 1,052 6.1 years $15.35 986 $15.07
20 - 22 957 9.1 years 21.23 202 21.71
22 - 36 573 7.7 years 25.19 464 24.92
----- -----
1 - 36 2,582 7.6 years 19.71 1,652 18.65
===== =====
</TABLE>
NOTE 17 -- LEASES
The Company leases office space, principally for regional
administration and sales, office equipment and computer equipment under various
operating leases with terms ranging up to 20 years. The Company has no
material capital leases. Under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year, approximate aggregate annual
minimum rentals are as follows (dollars in thousands):
<TABLE>
<CAPTION>
GROSS
RENTALS
-------
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . . . . $25,526
1998 . . . . . . . . . . . . . . . . . . . . . . . . . 14,109
1999 . . . . . . . . . . . . . . . . . . . . . . . . . 10,265
2000 . . . . . . . . . . . . . . . . . . . . . . . . . 6,059
2001 . . . . . . . . . . . . . . . . . . . . . . . . . 2,881
Later years . . . . . . . . . . . . . . . . . . . . . . 11,629
-------
Total minimum future rentals . . . . . . . . . . . $70,469
=======
</TABLE>
As discussed in Note 11, in December 1995, the Company entered into an
agreement relating to the sale and leaseback of certain fixed assets and
capitalized software. Rental expense, which includes operating expenses
associated with leased office space, for the years ended December 31, 1996,
1995, and 1994 is summarized as follows (dollars in thousands):
F-28
<PAGE> 70
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
-------- ---------- ----------
<S> <C> <C> <C>
Office space . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,438 $11,903 $10,176
Computer and related items . . . . . . . . . . . . . . . . . . . . . 11,871 19,909 15,821
Other (principally office equipment) . . . . . . . . . . . . . . . . 16,382 4,883 8,138
-------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $38,691 $36,695 $34,135
======= ======= =======
</TABLE>
NOTE 18 -- BENEFIT PLANS
Pension Plan
The Company has a defined benefit pension plan (the "Plan") covering
substantially all of its employees. The benefits are based on years of service
and compensation levels near retirement. The Company's policy is to fund the
Plan's current statutory requirements. Net pension cost for the years ended
December 31, 1996, 1995 and 1994 was $3.0 million, $2.7 million and $3.0
million, respectively.
The following sets forth the funded status of the Plan at January 1,
1996 and 1995 and the amount of prepaid pension cost included in the Company's
consolidated balance sheets at December 31, 1996 and 1995 (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
---------- ------------
<S> <C> <C>
Actuarial present value of benefit obligations:
A. Vested benefit obligation . . . . . . . . . . . . . . . . . . . . . . $ 22,880 $ 15,829
======== ========
B. Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . $ 24,984 $ 17,721
======== ========
C. Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . $ 30,692 $ 23,300
Plan assets at fair value, primarily listed stocks and bonds . . . . . . . . 30,892 25,754
-------- --------
Plan assets greater than projected benefit obligation . . . . . . . . . . . 200 2,454
Unrecognized prior service costs . . . . . . . . . . . . . . . . . . . . . . (794) (874)
Unrecognized net loss from past experience different from that assumed . . . 5,082 2,215
Unrecognized net asset at January 1, 1987 being recognized over 15 years . . (384) (461)
--------- ---------
Prepaid pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,104 $ 3,334
======== ========
Assumptions used were:
Discount rate for actuarial present value of benefit obligations . . . . 7.5% 8.5%
Rate of increase in compensation . . . . . . . . . . . . . . . . . . . . 4%-8% 4%-8%
Expected long-term rate of return on assets . . . . . . . . . . . . . . . 8% 8%
</TABLE>
Other Benefit Plans
The Company maintains an unfunded benefit plan to provide life
insurance and medical postretirement benefits to certain of its retired
employees. The unfunded accumulated postretirement benefit obligation was $6.6
million and $8.0 million at December 31, 1996 and 1995, respectively. The
Company also maintains certain unfunded defined benefit supplemental retirement
plans. The accrued unfunded projected benefit obligations for the supplemental
plans as of December 31, 1996 and 1995 aggregated approximately $6.2 million
and $5.1 million, respectively.
The Company provides certain benefits for former or inactive employees
and their dependents during the time period following employment but before
retirement. As of December 31, 1996, the Company has accrued $2.2 million of
benefits owed under this plan.
F-29
<PAGE> 71
NOTE 19 -- COMMITMENTS AND CONTINGENCIES
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.
While it is not possible to determine the ultimate disposition of this
proceeding, the Company believes that the ultimate disposition will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
The Company is routinely involved in litigation incidental to its
businesses. It is management's opinion that the aggregate liability arising
from the disposition of all such pending litigation will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
NOTE 20 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended December 31, 1996 and
1995 are as follows (in thousands, except for per share amounts):
<TABLE>
<CAPTION>
1996 QUARTER
---- ------------------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Net insurance premiums and
contract charges earned . . . . . . . . . . . $267,628 $262,484 $249,227 $245,235
Revenues . . . . . . . . . . . . . . . . . . . . 300,012 289,543 272,304 252,823
Benefits and expenses . . . . . . . . . . . . . 289,909 276,755 274,822 274,867
(Loss) income from continuing operations
before (benefit) provision for income taxes
and cumulative effect of change in accounting
principle. . . . . . . . . . . . . . . . . . . 10,270 11,846 (2,574) (23,349)
Operating income (loss) . . . . . . . . . . . . 13,808 14,503 7,817 (3,296)
Net income (loss) from continuing operations . . 6,183 7,548 (2,498) (12,944)
Net income from discontinued operations . . . . 7,653 5,843 8,236 10,915
Net income (loss) . . . . . . . . . . . . . . . 13,836 13,391 5,738 (2,029)
Per common and common equivalent share:
Net income (loss) from continuing operations 0.23 0.28 (0.11) (0.52)
Net income from discontinued operations . . . 0.30 0.22 0.33 0.42
Net income (loss) . . . . . . . . . . . . . . 0.53 0.50 0.22 (0.10)
Average shares outstanding . . . . . . . . . . . 25,627 25,689 25,664 25,620
<CAPTION>
1995 QUARTER
---- ------------------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Net insurance premiums and
contract charges earned . . . . . . . . . . . $256,656 $263,726 $267,352 $265,301
Revenues . . . . . . . . . . . . . . . . . . . . 275,972 303,741 296,256 280,495
Benefits and expenses . . . . . . . . . . . . . 270,982 294,771 299,631 321,600
(Loss) income from continuing operations
before (benefit) provision for income taxes
and cumulative effect of change in accounting
principle . . . . . . . . . . . . . . . . . . 4,990 8,970 (1,682) (40,815)
Operating income (loss) . . . . . . . . . . . . 10,381 13,193 5,061 (24,535)
Net income (loss) from continuing operations . . 2,717 5,708 (1,036) (26,289)
Net income from discontinued operations . . . . 7,945 5,558 4,011 7,794
Net income (loss) . . . . . . . . . . . . . . . 10,662 11,266 2,975 (18,495)
Per common and common equivalent share:
Net income (loss) from continuing operations 0.09 0.21 (0.05) (1.03)
Net income from discontinued operations . . . 0.31 0.21 0.15 0.31
Net income (loss) . . . . . . . . . . . . . . 0.40 0.42 0.10 (0.72)
Average shares outstanding . . . . . . . . . . . 26,029 25,658 25,624 25,866
</TABLE>
F-30
<PAGE> 72
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page No.
---------
<S> <C>
Report of Independent Accountants on Financial Statement Schedules . . . . . . . . . . . . . . . . . F-2
Schedule I - Summary of Investments Other than Investments in Related Parties . . . . . . . . . . . . S-2
Schedule II - Condensed Financial Information (Parent Company Only) . . . . . . . . . . . . . . . . . S-3
Schedule III - Supplementary Insurance Information . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Schedule IV - Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Schedule V - Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-9
</TABLE>
S-1
<PAGE> 73
SCHEDULE I
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
AMOUNT AT
WHICH CARRIED
TYPE OF INVESTMENT MARKET ON BALANCE
COST VALUE SHEET
--------- ------- ---------------
<S> <C> <C> <C>
Held-to-maturity securities:
U.S. Government and government agencies and
authorities..................................... $ 5,090 $ 5,152 $ 5,090
Public utilities................................... 3,500 3,671 3,500
All other corporate bonds.......................... 36,767 38,061 36,767
---------- ---------- ----------
Total held-to-maturity securities............... 45,357 46,884 45,357
---------- ---------- ----------
Available-for-sale securities:
U.S. Government and government agencies and
authorities..................................... 1,037,987 1,042,885 1,042,885
State, municipalities and political subdivisions... 25,854 27,496 27,496
Foreign governments................................ 15,625 16,266 16,266
Public utilities................................... 253,501 258,290 258,290
All other corporate bonds.......................... 2,852,296 2,903,837 2,903,837
---------- ---------- ----------
Total available-for-sale securities............. 4,185,263 4,248,774 4,248,774
---------- ---------- ----------
Trading account securities........................... 4,435 4,518 4,518
Equity securities.................................... 73,692 82,098 82,098
Mortgage loans....................................... 1,449,242 1,522,966 1,449,242
Real estate owned.................................... 11,483 11,483 11,483
Investment in real estate............................ 39,903 39,903 39,903
Policy loans and other notes receivable.............. 75,186 75,186 75,186
Short-term investments............................... 6,371 6,371 6,371
---------- ---------- ----------
Total investments............................... $5,890,932 $6,038,183 $5,962,932
========== ========== ==========
</TABLE>
S-2
<PAGE> 74
SCHEDULE II
JOHN ALDEN FINANCIAL CORPORATION
(Parent Company Only)
CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31,
----------------------
1996 1995
--------- ----------
<S> <C> <C>
Cash and cash equivalents.................................................. $ 554 $ 1,851
Investments in subsidiaries................................................ 511,583 488,104
Surplus debentures receivable from subsidiary.............................. 76,600 103,480
Accrued investment income.................................................. 2,472 3,223
Other assets............................................................... 4,497 5,869
---------- ---------
Total assets............................................................ $ 595,706 $ 602,527
========== =========
LIABILITIES, REDEEMABLE SECURITIES
AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and other liabilities................................. $ 5,192 $ 4,187
Amounts payable to (receivable from) subsidiaries...................... 5,116 (5,307)
Short-term debt........................................................ 25,000 15,000
Long-term debt......................................................... 76,500 92,000
---------- ---------
Total liabilities.................................................. 111,808 105,880
---------- ---------
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; 667,430 and 850,974
shares authorized, issued and outstanding.............................. 3,401 4,130
---------- ---------
Total redeemable securities........................................ 18,687 19,416
---------- ---------
Stockholders' equity:
Common stock, $.01 par value; 74,332,570 and 74,149,026 shares
authorized; 25,055,843 and 24,822,322 shares issued;
24,668,108 and 24,398,139 shares outstanding......................... 250 248
Paid-in capital......................................................... 181,863 181,154
Net unrealized gain on investments, net of income taxes ................ 26,977 58,041
Retained earnings....................................................... 268,109 250,167
Redemption value of common stock in excess of cost...................... (2,669) (3,050)
Unearned compensation................................................... (643) --
Treasury stock, at cost; 387,735 and 424,183 shares..................... (8,676) (9,329)
---------- ---------
Total stockholders' equity....................................... 465,211 477,231
---------- ---------
Total liabilities, redeemable securities and stockholders' equity $ 595,706 $ 602,527
========== =========
</TABLE>
See accompanying Note to Condensed Financial Information.
S-3
<PAGE> 75
SCHEDULE II
JOHN ALDEN FINANCIAL CORPORATION
(Parent Company Only)
CONDENSED FINANCIAL INFORMATION
STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- -------- ------
<S> <C> <C> <C>
Revenues:
Net investment income................................... $12,097 $16,335 $14,972
Net realized investment gains........................... -- 1,945 --
-------- ------- -------
Total revenues...................................... 12,097 18,280 14,972
-------- ------- -------
Expenses:
Interest expense....................................... 6,615 6,614 5,131
Other.................................................. 7,622 8,527 5,216
-------- ------- -------
Total expenses....................................... 14,237 15,141 10,347
-------- ------- -------
(Loss) income before income taxes and equity in net
earnings of subsidiaries............................... (2,140) 3,139 4,625
(Benefit) provision for income taxes...................... (734) 587 1,604
-------- ------- -------
(Loss) income before equity in net earnings of
subsidiaries........................................... (1,406) 2,552 3,021
Equity in net earnings of subsidiaries.................... 32,342 3,856 72,753
-------- ------- -------
Net income................................................ $30,936 $6,408 $75,774
======== ======= =======
</TABLE>
See accompanying Note to Condensed Financial Information.
S-4
<PAGE> 76
SCHEDULE II
JOHN ALDEN FINANCIAL CORPORATION
(Parent Company Only)
CONDENSED FINANCIAL INFORMATION
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- ------- -----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................ $ 30,936 $ 6,408 $75,774
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net earnings of subsidiaries......................... (32,342) (3,856) (72,753)
Net realized investment gains.................................. -- (1,945) --
Amortization of purchased intangibles.......................... 1,320 959 2,502
Decrease (increase) in accrued investment income............... 751 506 (1,860)
(Decrease) increase in amounts payable to subsidiaries ....... (1,032) 612 258
Increase in other assets....................................... (280) (202) (1,158)
Stock option compensation expense.............................. -- 256 3,381
Receipt of dividend from subsidiaries.......................... -- -- 5,000
Increase (decrease) in accounts payable and other liabilities.. 1,167 3,401 (2,628)
-------- ------- -------
Net cash provided by operating activities................. 520 6,139 8,516
-------- ------- -------
Cash flows from investing activities:
Collections of surplus debentures receivable
from subsidiary............................................. 26,880 22,080 16,760
Capital contributions to subsidiaries........................... (22,200) (46,302) (27,540)
Sales of equity securities...................................... -- 37,012 --
Purchase of equity securities................................... -- -- (35,067)
-------- ------- -------
Net cash provided by (used in) investing activities......... 4,680 12,790 (45,847)
-------- ------- -------
Cash flows from financing activities:
Proceeds from borrowings of short-term and long-term debt....... 26,000 27,000 13,464
Repayments of borrowings of short-term and long-term debt....... (31,500) (15,000) (19,664)
Receipts (payments) of borrowings from (to) subsidiaries........ 11,455 (16,966) 14,382
Sale of stock................................................... -- -- 29,982
Sale (purchase) of treasury stock............................... -- (3,203) 13
Exercises of stock options ..................................... 279 385 1,138
Payment of dividends............................................ (12,731) (12,248) (10,668)
-------- ------- -------
Net cash (used in) provided by financing activities......... (6,497) (20,032) 28,647
-------- ------- -------
Net decrease in cash and cash equivalents........................... (1,297) (1,103) (8,684)
Cash and cash equivalents, beginning of year........................ 1,851 2,954 11,638
-------- ------- -------
Cash and cash equivalents, end of year.............................. $ 554 $ 1,851 $ 2,954
======== ======= =======
</TABLE>
See accompanying Note to Condensed Financial Information.
S-5
<PAGE> 77
SCHEDULE II
JOHN ALDEN FINANCIAL CORPORATION
(Parent Company Only)
CONDENSED FINANCIAL INFORMATION
NOTE TO CONDENSED FINANCIAL INFORMATION
The accompanying condensed financial statements should be read in
conjunction with the Consolidated Financial Statements and the accompanying
notes thereto in this Form 10-K.
S-6
<PAGE> 78
SCHEDULE III
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(Dollars in thousands)
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Deferred policy acquisition costs............................... $ 239,622 $ 197,667 $ 295,716
Future policy benefits, losses, claims and loss expenses........ 6,730,708 6,731,849 6,111,511
Unearned premiums............................................... 156,924 135,954 128,489
Net premium revenues and contract charges earned................ 1,024,574 1,053,035 939,913
Net investment income........................................... 45,460 50,388 38,145
Benefits, claims, losses and expenses........................... 767,640 778,303 625,915
Amortization of deferred policy acquisition costs............... 13,854 13,455 7,100
Other operating expenses........................................ 334,859 395,226 367,956
Net premiums written............................................ 855,707 942,829 874,589
</TABLE>
S-7
<PAGE> 79
SCHEDULE IV
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
REINSURANCE
(Dollars in thousands)
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
DIRECT OTHER FROM OTHER NET ASSUMED
BUSINESS COMPANIES COMPANIES AMOUNT TO NET
----------- ----------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996
- ----------------------------
Life insurance in force..... $15,055,957 $2,967,777 $653,840 $12,742,020 5.1%
Premiums.................... 1,893,176 843,513 62,293 1,111,956 5.6%
Year Ended December 31, 1995
- ----------------------------
Life insurance in force..... $16,837,893 $3,158,977 $720,168 $14,399,084 5.0%
Premiums.................... 1,980,949 911,564 77,888 1,147,273 6.8%
Year Ended December 31, 1994
- ----------------------------
Life insurance in force..... $16,441,691 $2,516,454 $75,041 $14,000,278 0.5%
Premiums.................... 1,843,837 877,477 48,390 1,014,750 4.8%
</TABLE>
S-8
<PAGE> 80
SCHEDULE V
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1996
- ----------------------------
Reserve for impairment of mortgage loans............ $14,274 $9,681 $6,273 $17,682
Write-down for impairment of real estate............ -- 829 829 --
Allowance for agents balances....................... 1,248 118 -- 1,366
Valuation allowance on deferred tax asset........... 5,313 -- 4,221 1,092
------- ------- ------- -------
Total...................................... $20,835 $10,628 $11,323 $20,140
======= ======= ======= =======
Year ended December 31, 1995
- ----------------------------
Reserve for impairment of mortgage loans............ $13,161 $15,046 $13,933 $14,274
Write-down for impairment of real estate............ -- 3,157 3,157 --
Allowance for agents balances....................... 2,505 -- 1,257 1,248
Valuation allowance on deferred tax asset (1)....... -- 5,313 -- 5,313
------- ------- ------- -------
Total...................................... $15,666 $23,516 $18,347 $20,835
======= ======= ======= =======
Year ended December 31, 1994
- ----------------------------
Reserve for impairment of mortgage loans............ $12,104 $14,431 $13,374 $13,161
Write-down for impairment of real estate............ -- 4,205 4,205 --
Allowance for agents balances....................... 1,676 829 -- 2,505
------- ------- ------- -------
Total...................................... $13,780 $19,465 $17,579 $15,666
======= ======= ======= =======
</TABLE>
(1) Includes approximately $3.7 million which was established upon the
consolidation of a joint venture previously accounted for under the equity
method.
S-9
<PAGE> 81
Exhibit Index
-------------
Exhibit
Number Exhibit
3.1 Amended and Restated By-laws of the Registrant dated as of
May 17, 1995. Filed as Exhibit 3.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1995 (Commission File No. 1-11396) and
incorporated herein by reference.
3.2 Amended and Restated Certificate of Incorporation of the
Registrant as filed with the Secretary of State of
Delaware on September 23, 1992. Filed as Exhibit 3.4 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (Commission File No. 1-11396)
and incorporated herein by reference.
3.3 Certificate of Amendment to Amended and Restated
Certificate of Incorporation of Registrant as filed with
the Secretary of State of Delaware on October 2, 1992.
Filed as Exhibit 3.5 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992
(Commission File No. 1-11396) and incorporated herein by
reference.
3.4 Amended and Restated By-laws of the Registrant dated as of
September 12, 1996, filed as Exhibit 3 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1996 (Commission File No. 1-11396) and
incorporated herein by reference.
4.1 Amended and Restated Certificate of Designation of 150,000
shares of 9% Cumulative Preferred Stock. Filed as Exhibit
4.3 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 (Commission File No.
1-11396) and incorporated herein by reference.
4.2 Credit Agreement among the Registrant, Certain Commercial
Lending Institutions (named therein) and The Chase
Manhattan Bank (National Association) dated February 17,
1993. Filed as Exhibit 4.8 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1992 (Commission File No. 1-11396) and incorporated herein
by reference.
4.3 Pledge Agreement among the Registrant, John Alden Systems
Company, JA Services, Inc. and The Chase Manhattan Bank
(National Association) dated February 17, 1993. Filed as
Exhibit 4.9 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992 (Commission
File No. 1-11396) and incorporated herein by reference.
4.4 Sister Company Guarantee among John Alden Systems Company,
JAFCO, Western Diversified Services, Inc., JA Services,
Inc., John Alden Asset Management Company, Anchor Benefit
Consulting, Inc., LensCard Systems Corporation and The
Chase Manhattan Bank (National Association) dated February
17, 1993. Filed as Exhibit 4.10 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1992 (Commission File No. 1-11396) and
incorporated herein by reference.
10.1 Compensation Letter Agreement between the Registrant and
the Management Stockholders dated October 30, 1987. Filed
as Exhibit 10.5 to the Registrant's Registration Statement
(No. 33-47644) on Form S-1 and incorporated herein by
reference.
10.2 Loan Agreement between the Registrant and General Electric
Capital Corporation dated October 30, 1987. Filed as
Exhibit 10.7 to the Registrant's Registration Statement
(No. 33-47644) on Form S-1 and incorporated herein by
reference.
10.3 Term Note dated October 30, 1987 in the principal amount
of $87,000,000. Filed as Exhibit 10.8 to the Registrant's
Registration Statement (No. 33-47644) on Form S-1 and
incorporated herein by reference.
<PAGE> 82
Exhibit
Number Exhibit
10.4 Intermediate Term Note dated October 30, 1987 in the
principal amount of $76,350,000. Filed as Exhibit 10.9 to
the Registrant's Registration Statement (No. 33-47644) on
Form S-1 and incorporated herein by reference.
10.5 Bridge Note dated October 30, 1987 in the principal amount
of $75,000,000. Filed as Exhibit 10.10 to the
Registrant's Registration Statement (No. 33-47644) on Form
S-1 and incorporated herein by reference.
10.6 Revolving Credit Note dated October 30, 1987 in the
principal amount of $15,000,000. Filed as Exhibit 10.11
to the Registrant's Registration Statement (No. 33-47644)
on Form S-1 and incorporated herein by reference.
10.7 Surplus Debenture dated October 30, 1987 in the principal
amount of $155,000,000. Filed as Exhibit 10.12 to the
Registrant's Registration Statement (No. 33-47644) on Form
S-1 and incorporated herein by reference.
10.8 Subordinated Surplus Debenture dated October 30, 1987 in
the principal amount of $72,000,000. Filed as Exhibit
10.13 to the Registrant's Registration Statement (No.
33-47644) on Form S-1 and incorporated herein by
reference.
10.9 Pledge and Security Agreement dated October 30, 1987, made
by the Registrant to General Electric Capital Corporation.
Filed as Exhibit 10.14 to the Registrant's Registration
Statement (No. 33-47644) on Form S-1 and incorporated
herein by reference.
10.10 Employment Agreement dated December 13, 1988, between the
Registrant and Lloyd E. Gearhart. Filed as Exhibit 10.20
to the Registrant's Registration Statement (No. 33-47644)
on Form S-1 and incorporated herein by reference.
10.11 John Alden Retirement Plan as Amended and Restated
effective January 1, 1989. Filed as Exhibit 10.21 to the
Registrant's Registration Statement (No. 33-47644) on Form
S-1 and incorporated herein by reference.
10.12 John Alden Senior Executive Supplemental Retirement Plan
effective January 1, 1990. Filed as Exhibit 10.22 to the
Registrant's Registration Statement (No. 33-47644) on Form
S-1 and incorporated herein by reference.
10.13 Supplemental Executive Retirement Plan effective December
1, 1984. Filed as Exhibit 10.22 to the Registrant's
Registration Statement (No. 33-47644) on Form S-1 and
incorporated herein by reference.
10.14 Indemnity Coinsurance Agreement between JALIC and Oxford
Life Insurance Company, dated January 1, 1989. Filed as
Exhibit 10.24 to the Registrant's Registration Statement
(No. 33-47644) on Form S-1 and incorporated herein by
reference.
10.15 Indemnity Coinsurance Agreement between JALIC and Reliance
Standard Life Insurance Company dated June 30, 1990.
Filed as Exhibit 10.25 to the Registrant's Registration
Statement (No. 33-47644) on Form S-1 and incorporated
herein by reference.
10.16 Indemnity Coinsurance Agreement between JALIC and Reliance
Standard Life Insurance Company dated October 31, 1990.
Filed as Exhibit 10.26 to the Registrant's Registration
Statement (No. 33-47644) on Form S-1 and incorporated
herein by reference.
<PAGE> 83
Exhibit
Number Exhibit
10.17 Indemnity Coinsurance Agreement between JANY and The
Franklin Life Insurance Company dated March 31, 1991.
Filed as Exhibit 10.27 to the Registrant's Registration
Statement (No. 33-47644) on Form S-1 and incorporated
herein by reference.
10.18 Reinsurance Agreement among JALIC, London Life Insurance
Company and Transamerica Occidental Life Insurance Company
dated October 1, 1991. Filed as Exhibit 10.28 to the
Registrant's Registration Statement (No. 33-47644) on Form
S-1 and incorporated herein by reference.
10.19 Reinsurance Agreement between Western Diversified Life
Insurance Company and ITT Lyndon Property Insurance
Company dated December 1, 1991. Filed as Exhibit 10.29 to
the Registrant's Registration Statement (No. 33-47644) on
Form S-1 and incorporated herein by reference.
10.20 Reinsurance Agreement between JALIC and Lincoln National
Reassurance Company dated December 31, 1991. Filed as
Exhibit 10.30 to the Registrant's Registration Statement
(No. 33-47644) on Form S-1 and incorporated herein by
reference.
10.21 Letter Agreement among Merrill Lynch Capital Partners,
Inc., GE Capital, ERC, the Management Stockholders and the
Registrant dated August 26, 1992. Filed as Exhibit 10.31
to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 (Commission File No.
1-11396) and incorporated herein by reference.
10.22 Employment Agreement between the Registrant and Glendon E.
Johnson dated October 2, 1992. Filed as Exhibit 10.32 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (Commission File No. 1-11396)
and incorporated herein by reference.
10.23 John Alden Financial Corporation Employee Stock Purchase
Plan. Filed as Exhibit 4.3 to the Registrant's
Registration Statement (No. 33-55230) on Form S-8 and
incorporated herein by reference.
10.24 John Alden Financial Corporation Long-Term Incentive Plan.
Filed as Exhibit 4.5 to the Registrant's Registration
Statement (No. 33-56656) on Form S-8 and incorporated
herein by reference.
10.25 Amended and Restated Registration Rights Agreement between
the Registrant and General Electric Capital Corporation
dated as of October 2, 1992. Filed as Exhibit 10.35 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (Commission File No. 1-11396)
and incorporated herein by reference.
10.26 Amended and Restated Registration Rights Agreement between
the Registrant and Merrill Lynch Capital Partners, Inc.
dated as of October 2, 1992. Filed as Exhibit 10.36 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (Commission File No. 1-11396)
and incorporated herein by reference.
10.27 Amended and Restated Registration Rights Agreement among
the Registrant and Management Stockholders dated as of
October 2, 1992. Filed as Exhibit 10.37 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (Commission File No. 1-11396)
and incorporated herein by reference.
<PAGE> 84
Exhibit
Number Exhibit
10.28 Consent and Amendment to Loan Agreement between the
Registrant and General Electric Capital Corporation dated
September 22, 1992. Filed as Exhibit 10.38 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (Commission File No. 1-11396)
and incorporated herein by reference.
10.29 Agreement to Amend Warrant between the Registrant and
General Electric Capital Corporation dated September 22,
1992. Filed as Exhibit 10.39 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1992 (Commission File No. 1-11396) and incorporated herein
by reference.
10.30 Agreement to Amend Warrant between the Registrant and
Employers Reinsurance Corporation dated September 22,
1992. Filed as Exhibit 10.40 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1992 (Commission File No. 1-11396) and incorporated herein
by reference.
10.31 Amended and Restated Management Stockholders Agreement
among the Management Stockholders and the Registrant dated
February 17, 1993. Filed as Exhibit 10.42 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (Commission File No. 1-11396)
and incorporated herein by reference.
10.32 North Star Marketing Organization Long-Term Incentive
Plan. Filed as Exhibit 4.3 to the Registrant's
Registration Statement (No. 33-56544) on Form S-8 and
incorporated herein by reference.
10.33 John Alden Financial Corporation Employee Savings
Incentive Plan, as amended, together with Amendments 1
through 5 thereto. Filed as Exhibit 4.3 to the
Registrant's Registration Statement (No. 33-56656) on Form
S-8 and incorporated herein by reference.
10.34 Letter agreement among the Registrant and the Management
Stockholders dated October 2, 1992. Filed as Exhibit
10.50 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992 (Commission File
No. 1-11396) and incorporated herein by reference.
10.35 Stock and Warrant Purchase Agreement among Emperion
Corporation, Electronic Data Systems Corporation and JA
Services, Inc. dated December 17, 1991. Filed as Exhibit
10.51 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992 (Commission File
No. 1-11396) and incorporated herein by reference.
10.36 Amendment to Stock and Warrant Purchase Agreement dated
December 30, 1992. Filed as Exhibit 10.52 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (Commission File No. 1-11396)
and incorporated herein by reference.
10.37 Revolving Credit Agreement among John Alden Systems
Company and The Chase Manhattan Bank (National
Association), Barnett Bank of South Florida, N.A. and
Shawmut Bank Connecticut, N.A. dated December 31, 1993.
Filed as Exhibit 10.53 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993
(Commission File No. 1-11396) and incorporated herein by
reference.
10.38 Amended and Restated Credit Agreement among the
Registrant, Certain Commercial Lending Institutions (named
therein) and the Chase Manhattan Bank (National
Association) dated as of July 27, 1994. Filed as Exhibit
10.42 to the Registrant's Registration Statement (No.
33-78662) on Form S-3 and incorporated herein by
reference.
<PAGE> 85
Exhibit
Number Exhibit
10.39 Agreement dated July 27, 1994 to Amended and Restated
Management Stockholders Agreement among the Management
Stockholders and the Registrant dated February 17, 1993.
Filed as Exhibit 10.54 to the Registrant's Registration
Statement (No. 33-78662) on Form S-3 and incorporated
herein by reference.
10.40 Plan of Complete Liquidation and Dissolution of Emperion
Corporation. Filed as Exhibit 10.56 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (Commission File No. 1-11396) and
incorporated herein by reference.
10.41 Articles of Dissolution of Emperion Corporation dated
December 29, 1994. Filed as Exhibit 10.57 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (Commission File No. 1-11396)
and incorporated herein by reference.
10.42 Reinsurance Agreement between JALIC and Lincoln National
Reinsurance Company Limited dated as of September 30,
1995. Filed as Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1995 (Commission File No. 1-11396) and
incorporated herein by reference.
10.43 Trust Agreement among JALIC, Lincoln National Reinsurance
Company Limited and The Chase Manhattan Bank, N.A. dated
as of October 9, 1995. Filed as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995 (Commission File
No. 1-11396) and incorporated herein by reference.
10.44 Amendment dated March 8, 1996 to Amended and Restated
Credit Agreement among the Registrant, Certain Commercial
Lending Institutions (named therein) and the Chase
Manhattan Bank (National Association) dated as of July 27,
1994. Filed as Exhibit 10.44 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995
(Commission File No. 1-11396) and incorporated herein by
reference.
10.45 Rights Agreement, dated as of December 13, 1996, between
John Alden Financial Corporation and Chase Mellon
Shareholder Services, L.L.C. Filed as Exhibit 2 to the
Registrant's Form 8-K dated December 13, 1996 (Commission
File No. 1-11396) and incorporated herein by reference.
*10.46 Amendment dated November 1, 1996 to reinsurance agreement
among JALIC, London Life Insurance Company and
TransAmerica Occidental Life Insurance Company dated
October 1, 1991.
*10.47 Amendment dated February 28, 1997 to Employment Agreement
between the Registrant and Glendon E. Johnson dated
October 2, 1992.
21.1 Subsidiaries of the Registrant.
*23.1 Consent of Independent Accountants.
*27.1 Financial Data Schedule.
99.1 Financial Statements of the John Alden Financial
Corporation Employee Stock Purchase Plan for the year
ended December 31, 1996 (to be filed by amendment).
- -----------------------
* Filed herewith.
<PAGE> 1
Exhibit 10.46
AMENDMENT NO. 5
TO
COINSURANCE AGREEMENT 1991-MG
BETWEEN
JOHN ALDEN LIFE INSURANCE COMPANY
(HEREINAFTER REFERRED TO AS THE "COMPANY")
AND
POOL REINSURANCE MEMBERS
(HEREINAFTER REFERRED TO AS THE "REINSURER")
IN CONSIDERATION of the mutual covenants and for other good and valuable
consideration, the COMPANY and the REINSURER agree to amend this Agreement with
an effective date of November 1, 1996:
1. SECTION A, (DEFINITIONS), the term "Expense and Profit Charge" shall be
amended to read:
The "Expense and Profit Charge" for each Accounting Period shall be an
amount equal to the applicable percentage below times the net of (a) minus
(b) where (a) is the Monthly Reinsurance Premium and (b) is the Stop Loss
Premium. The applicable percentage is as follows unless modified according
to Schedule VI, Part C:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
ACCOUNTING PERIODS PERCENTAGE
-------------------------------------------------------------------
<S> <C>
during 1991 0.10%
-------------------------------------------------------------------
1992 through 1996 0.80%
-------------------------------------------------------------------
1997 0.85%
-------------------------------------------------------------------
1998 AND SUBSEQUENT 0.80%
-------------------------------------------------------------------
</TABLE>
<PAGE> 2
2. SECTION E (PAYMENTS BY REINSURER) shall be amended to read:
Unless specified otherwise, the REINSURER shall pay the COMPANY all
Benefits, Expense Allowance, unusual expenses, Stop Loss Premium and
Experience Refund due under this Agreement provided however, in
consideration of the Stop Loss Premium, if the resulting Combined Ratio
would exceed 110% for any Accounting Period, the amount of Benefits
reimbursed for such Accounting Period shall be reduced to the extent
necessary to produce a Combined Ratio equal to 110%.
Should the REINSURER incur a loss in 1997, the REINSURER shall pay the
COMPANY an amount equal to the maximum of (a) and (b) where:
a) is the loss incurred by the REINSURER in 1997 less $5,000,000.
b) is zero (0)
For the purpose of this section, a loss is defined as the absolute value of the
result of the experience refund calculation under this Agreement if it is
negative. If the result of the experience refund calculation is positive, the
loss shall be equal to 0.
3. Schedule VI, Paragraph B, Item 2 shall be amended to read:
From the effective date of this Agreement through December 31, 1995 the
Experience Refund percentage shall be 100%, unless the Combined Ratio
equals or exceeds 98.0% for any 12 consecutive Accounting Periods. In the
latter event, the Experience Refund, if positive, will be reduced by 50%.
The Combined Ratio test for 12 consecutive Accounting Periods shall be
suspended for the period January 1, 1996 through December 31, 1997. If, as
at December 31, 1997 the Combined Ratio equals or exceeds 99% for the
preceding 12 Accounting Periods, the Experience Refund percentage shall be
reduced by 25%.
Effective January 1, 1998 the Experience Refund percentage shall be 100%,
unless the Combined Ratio equals or exceeds 98.0% for any 12 consecutive
Accounting Periods. In the latter event, the Experience Refund, if
positive, will be reduced by 50%.
<PAGE> 3
IN WITNESS WHEREOF, the COMPANY and the REINSURER have by their respective
officers executed this Amendment in triplicate on the dates shown below with an
effective date of November 1, 1996.
<TABLE>
<S> <C>
JOHN ALDEN LIFE INSURANCE COMPANY (COMPANY)
By /s/ ROBERT Li
-----------------------------------------
Title V.P. Corporate Actuary Witness By /s/ MEL MIDDELSTAEDT
----------------------------------------- ---------------------------------------------------------------
Date January 7, 1997 Date January 7, 1997
----------------------------------------- ---------------------------------------------------------------------
LONDON LIFE INSURANCE COMPANY (REINSURER)
By /s/ GREGORY MORRISON
-----------------------------------------
Title SVP Reinsurance Witness By /s/ MARY ANN MCLAUGHLIN
----------------------------------------- ---------------------------------------------------------------
Date December 24, 1996 Date December 24, 1996
----------------------------------------- ---------------------------------------------------------------------
<CAPTION>
TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY (REINSURER)
<S> <C>
By /s/ DAVID FAIRHALL
-----------------------------------------
Title 2nd Vice President Witness By /s/ PHILLIP MCHALE
----------------------------------------- ---------------------------------------------------------------
Date January 6, 1997 Date January 6, 1997
----------------------------------------- ---------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 10.47
[JOHN ALDEN FINANCIAL CORPORATION LETTERHEAD]
February 28, 1997
Glendon E. Johnson
John Alden Financial Corporation
7300 Corporate Center Drive
Miami, Florida 33126
RE: AMENDMENT OF EMPLOYMENT AGREEMENT
Dear Mr. Johnson:
The undersigned hereby agree that the term of the Employment Agreement
dated as of October 2, 1992 between John Alden Financial Corporation and you,
is hereby extended until December 31, 1997, by amending, effective as of
December 30, 1996, the reference in such paragraph 4 to "December 31, 1996" to
read "December 31, 1997".
If you are in agreement with this amendment, please execute and return
a copy of this letter agreement, whereupon the Employment Agreement will be
amended, effective as of December 30, 1996.
EMPLOYER:
---------
JOHN ALDEN FINANCIAL CORPORATION
/s/ SCOTT L. STANTON
---------------------------------
EXECUTIVE:
- ----------
GLENDON E. JOHNSON
/s/ GLENDON E. JOHNSON
- -----------------------
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-56656, No. 33-56544, No. 33-55230, No.
33-84506, No. 33-84508 and No. 33-95598) of John Alden Financial Corporation of
our report dated March 10, 1997 appearing on page F-2 of the Annual Report on
Form 10-K for the year ended December 31, 1996.
/s/ PRICE WATERHOUSE LLP
- -------------------------
PRICE WATERHOUSE LLP
Miami, Florida
March 20, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 4,253,292
<DEBT-CARRYING-VALUE> 45,357
<DEBT-MARKET-VALUE> 46,884
<EQUITIES> 82,098
<MORTGAGE> 1,449,242
<REAL-ESTATE> 51,386
<TOTAL-INVEST> 5,962,932
<CASH> 167,511
<RECOVER-REINSURE> 970,665
<DEFERRED-ACQUISITION> 239,622
<TOTAL-ASSETS> 7,671,249
<POLICY-LOSSES> 6,330,018
<UNEARNED-PREMIUMS> 156,924
<POLICY-OTHER> 400,690
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 101,500
15,286
0
<COMMON> 182,845
<OTHER-SE> 285,767
<TOTAL-LIABILITY-AND-EQUITY> 7,671,249
1,024,574
<INVESTMENT-INCOME> 45,460
<INVESTMENT-GAINS> 3,052
<OTHER-INCOME> 41,596
<BENEFITS> 767,640
<UNDERWRITING-AMORTIZATION> 13,854
<UNDERWRITING-OTHER> 4,786
<INCOME-PRETAX> (1,671)
<INCOME-TAX> (2,096)
<INCOME-CONTINUING> (1,711)
<DISCONTINUED> 32,647
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,936
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.15
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
