ITEM 1 - ------
BUSINESS --------
a. DEVELOPMENT OF BUSINESS
American Bankers Insurance Group, Inc. ("ABIG," "American Bankers" or the "Company") was incorporated in Florida on July 24, 1978. ABIG became the holding company of American Bankers Insurance Company of Florida ("ABIC") and American Bankers Life Assurance Company of Florida ("ABLAC") as a result of their merger with wholly-owned subsidiaries of ABIG after approval by their respective stockholders on October 31, 1980. In addition to ABIC and ABLAC, the Company's subsidiaries include American Bankers Seguros de Vida, S.A. ("ABSV"), Seguros la Hemisferica, S.A., Federal Warranty Service Corp. ("FWSC"), Sureway, Inc., Caribbean American Life Assurance Company ("CALAC"), Caribbean American Property Insurance Company ("CAPIC"), American Reliable Insurance Company ("ARIC"), Bankers American Life Assurance Company ("BALAC"), Bankers Insurance Group ("BIG"), Bankers Atlantic Reinsurance Company ("BARC"), IBIC Forsikringsmaeglere, La Suizo Compania Argentina de Seguros, S.A. (La Suizo), and five insurance companies referred to collectively as the Voyager Insurance Companies.
ABIC was incorporated in the state of Florida on October 29, 1947 and ABLAC, a legal reserve life insurance company, was incorporated in the state of Florida on February 6, 1952. ABSV, a wholly owned subsidiary in Argentina, began operations in 1996. Seguros la Hemisferica, S.A., a wholly owned subsidiary in the Dominican Republic, began operations in 1996. FWSC, a wholly owned subsidiary in California, was acquired in 1993. Sureway, Inc., a wholly owned subsidiary in Florida, began operations in 1973. CALAC and CAPIC, wholly owned subsidiaries in Puerto Rico, began operations in 1988 and 1992 respectively. ARIC, a wholly owned subsidiary in Arizona, was acquired by the Company in 1984. BALAC, a wholly owned subsidiary in New York, began operations in 1991. BIG, a wholly owned subsidiary in the United Kingdom, began operations in 1997. BIG acquired Bankers Insurance Company Limited (BICL), previously American Bankers' wholly owned subsidiary in the United Kingdom. BARC, a wholly owned subsidiary in the Turks & Caicos islands, began operations in 1995. IBIC, a wholly owned subsidiary in Denmark, was acquired by the Company in 1997. La Suizo, a wholly owned subsidiary in Argentina, was acquired by the Company in 1997. The Voyager Insurance Companies were acquired by the Company in 1993 and consist of five companies incorporated in Florida, Georgia and South Carolina.
The Company entered into an Agreement and Plan of Merger, dated as of March 23, 1998, by and among Cendant Corporation ("Cendant"), Season Acquisition Corporation ("Season") and the Company (the "Cendant Merger Agreement") pursuant to which (i) the previously announced tender offer by Season is being conducted (the "Offer") and (ii) upon consummation of the Offer, the merger of the Company with and into Season will be consummated (the "Merger"). The execution of the Cendant Merger Agreement followed the public announcement by Cendant on January 27, 1998 of its proposal to acquire the Company for $58 per share of Common Stock, to be paid in cash and common stock of Cendant and the subsequent announcement by Cendant on March 16, 1998, increasing the per share price for its proposal from $58 to $67.
Under the terms of the Cendant Merger Agreement, Season is offering to purchase 23,501,260 outstanding shares of Common Stock at a price of $67 per Common Share, net to the seller in cash, without interest thereon. Following the consummation of the Offer, the Company will be merged with and into Season with Season continuing as the surviving corporation. Season will succeed to the business of the Company and will assume the name American Bankers Insurance Group, Inc. As a result of the Merger, each Common Share then outstanding (other than Common Shares owned by Cendant, Season or any direct or indirect subsidiary of the company and in each case not held on behalf of third parties) will be converted into, and become exchangeable for, that number of shares of Cendant Common Stock having a value equal to the amount derived by dividing $67 by the average closing prices of the Cendant Common Stock as reported on the NYSE composite transactions reporting system (as reported by the New York City edition of the Wall Street Journal) for the ten trading days ending on the third trading day prior to the date the Merger is consummated. In addition, pursuant to the Merger, each of the then outstanding $3.125 Series B Cumulative Convertible Preferred Shares ("Preferred Shares") will be converted into one share of Cendant Preferred Stock having substantially similar terms to the Preferred Shares, except that such shares shall be convertible into shares of Cendant Common Stock in accordance with the terms of the Preferred Shares.
The consummation of the Merger is conditioned upon several requirements, including shareholder and regulatory approval.
Cendant's proposal to acquire the Company followed an announcement by the Company that it had entered into an agreement with American International Group, Inc. ("AIG") for the acquisition by AIG of 100 percent of the outstanding stock of the Company pursuant to the merger (the "AIG Merger") of the Company with and into AIGF, Inc., a Florida corporation and a newly formed wholly owned subsidiary of AIG, in accordance with the terms of the Agreement and Plan of Merger, dated as of December 21, 1997 among the Company, AIG and AIGF as amended and restated as of January 7, 1998, amended by Amendment No. 1 thereto dated as of January 28, 1998, and as further amended and restated as of February 28, 1998 (the "AIG Merger Agreement"). In connection with the AIG Merger Agreement, the Company had granted AIG an option to purchase a number of newly issued shares of Common Stock equal to approximately 19.9% of the outstanding number of shares of Common Stock pursuant to the Stock Option Agreement dated as of December 21, 1997, as amended and restated as of February 28, 1998 (the "Stock Option Agreement"). In addition, Messrs. Landon and Gaston who hold approximately 8.3% of the outstanding Common Stock had entered into a voting agreement (the "Voting Agreement") with AIG pursuant to which these stockholders agreed to vote their shares of Common Stock in favor of adoption of the AIG Merger Agreement and approval of the AIG Merger and to grant to AIG an irrevocable proxy with respect to such shares of Common Stock, subject to certain conditions.
The AIG Merger Agreement, Stock Option Agreement and Voting Agreement have been terminated. On March 18, 1998, the Company, AIG and Cendant entered into a settlement agreement (the "Settlement Agreement") pursuant to which AIG agreed to temporarily waive certain provisions of the AIG Merger Agreement, which waiver permitted the Company to terminate the AIG Merger Agreement and enter into the Cendant Merger Agreement. On March 23, 1998, in accordance with the terms of the Settlement Agreement, the Company paid to AIG a termination fee of $100 million and Cendant paid $5 million to AIG in respect of AIG's expenses, and the Company and AIG entered into a termination agreement which resulted in the
termination of the AIG Merger Agreement, the Stock Option Agreement and the Voting Agreement.
The Company's credit-related insurance products consist primarily of credit unemployment, accidental death and dismemberment ("AD&D"), disability, property, and life insurance issued in connection with the financing of consumer purchases. American Bankers also writes non credit-related insurance in markets where it believes it has less competition from other insurers. For example, the Company also sells extended service contracts in connection with consumer purchases.
For information on the growth of the Company's business for the years ended December 31, 1997, 1996, 1995, 1994 and 1993, see the Gross Collected Premium table set forth below in "Narrative Description of Business."
b. BUSINESS SEGMENT DATA
See Note 12 to the Consolidated Financial Statements on page 77 in Part II Item 8 of this report.
c. NARRATIVE DESCRIPTION OF BUSINESS
General
The Company is a specialty insurer providing primarily credit-related insurance products in the U.S. and Canada as well as in Latin America, the Caribbean and the United Kingdom. The majority of the Company's gross collected premiums are derived from credit-related insurance products sold through financial institutions and other entities which provide consumer financing as a regular part of their businesses.
The Company's credit-related insurance products consist primarily of credit unemployment, accidental death and dismemberment ("AD&D"), disability, property, and life insurance issued in connection with the financing of consumer purchases. Credit-related insurance products generally offer a consumer a convenient option to insure a credit card or loan balance so that the amount of coverage purchased equals the amount of outstanding debt. Coverage is generally available to all consumers with few of the underwriting conditions that apply to ordinary term insurance, such as medical examinations and medical history reports. The Company's life and AD&D insurance products generally provide payment in full of the outstanding debt balance in the event of the insured's death. The unemployment and disability products satisfy the minimum monthly loan payment for a specified duration in the event of unemployment or disability. The Company's property insurance products pay the loan balance or the cost of repairing or replacing the insured's merchandise in the event of a loss due to a covered event. The Company avoids lines of insurance characterized by long loss payout periods, such as workers' compensation and most general liability coverages.
The Company markets its products on a wholesale basis through a network of clients that consist primarily of major financial institutions, retailers and other entities which provide consumer financing as a regular part of their businesses. American Bankers enters into contracts, typically with terms of three to five years, with its corporate clients pursuant to which such clients market the Company's insurance products to their customers. In return, these clients receive expense reimbursements or commissions and are thus able to recover costs associated with the marketing of the insurance and generate incremental revenues. The Company's clients typically share in the profitability of business written through them.
American Bankers also writes non credit-related insurance in markets where it believes it has less competition from other insurers. For example, the Company's extended service contracts products pay the cost of repairing or replacing the insured's merchandise in the event of damages due to a covered event. In addition, the Company acts as an administrator for the National Flood Insurance Program, for which it earns a fee for collecting premiums and processing claims. The Company does not assume any underwriting risk with respect to this program.
The Company's business strategy is to continue developing distribution channels which provide access to large numbers of potential insureds in markets not traditionally served by other insurance companies. In addition, the Company emphasizes long-term relationships and the development of insurance programs designed to meet individual client needs. An essential part of the Company's strategy is to invest in technology which enables American Bankers to accommodate a large group of clients and their customers while simultaneously offering customized insurance programs.
American Bankers has been able to develop a diverse client base. In 1997, no single client accounted for more than 10% of the Company's gross collected premiums. The Company distributes its products through various markets or distribution channels involving over one thousand clients. Its business is generally not concentrated and the ten largest unrelated clients represent approximately 39% of the Company's gross collected premiums.
ABIC and ABLAC jointly market products and programs within each distribution channel, and the Company believes that such cross-marketing achieves economies of scale thus lowering administrative costs. By combining its service and marketing activities, the Company centralizes the processing of its products and avoids duplication of administrative functions.
The Company also provides management services and marketing support to its clients. Management services include administration of captive insurance companies and other participating programs for clients. American Bankers provides comprehensive administrative support in claims, accounting, tax, data processing and actuarial matters. The Company also packages credit-related insurance programs to meet a client's particular needs and provides the marketing assistance to implement these programs. Marketing support includes a full range of marketing materials, direct mail and telemarketing services and personnel training programs.
The majority of the Company's business utilizes contracts which afford the Company's clients the opportunity to participate in the underwriting results of policies they market to their customers. The "Retro Plan" contract links a client's overall commission to the claims experience on policies marketed to its customers, so that low loss ratios result in higher commissions for the client and high loss ratios result in lower commissions. Another form of participation is a profit sharing contract under which the client participates in up to 50% of the profits generated from its insurance business. The Company also cedes premiums generated by certain clients to the clients' own captive insurance companies or to reinsurance subsidiaries in which clients have an equity interest. For the Company's remaining business, the client's commission is not linked to its claims experience.
Business Segments
LIFE INSURANCE
(in thousands)
NET TOTAL PREMIUMS TOTAL OPERATING ASSETS EARNED REVENUES INCOME*
1997 $1,653,800 $405,800 $466,900 $67,200 1996 1,446,600 384,000 439,700 65,300 1995 1,339,200 377,100 419,000 45,900
*Operating income consists of earnings before interest expense and taxes.
Highlights
o Gross collected premiums increased 17% to $894.5 million in 1997 from $763.2 million in 1996. o Five products listed below contributed 88% of the segment's 1997 gross collected premiums.
Major Subsidiaries
o American Bankers Life Assurance Company of Florida (ABLAC) o American Bankers Seguros de Vida, S.A. (ABSV) o Bankers American Life Assurance Company (BALAC) o Bankers Atlantic Reinsurance Company (BARC) o Caribbean American Life Assurance Company (CALAC) o Voyager Life and Health Insurance Company (VLHIC) o Voyager Life Insurance Company (VLIC)
Major Products
o Credit Life o Credit Accident & Health o Mortgage Accident & Health o Group Life o Group Accident & Health
Distribution Channels
o Retailers o Financial Institutions Commercial Banks Consumer Finance Companies Mortgage Bankers Savings Institutions o Manufactured Housing, Travel Trailer and Equipment Manufacturers, Dealers and Lenders o Utilities o Independent Agents
PROPERTY AND CASUALTY INSURANCE
(in thousands)
Net Total Premiums Total Operating Assets Earned Revenues Income*
1997 $2,071,600 $1,048,000 $1,149,700 $113,300 1996 1,969,300 994,500 1,080,700 91,900 1995 1,602,500 863,600 934,200 87,400
*Operating income consists of earnings before interest expense and taxes.
HIGHLIGHTS
o Gross collected premiums increased 7% to $1.8 billion in 1997 from $1.7 billion in 1996. o Five products listed below contributed 73% of the segment's 1997 gross collected premiums. o Operating income increased 23% to $113.3 million in 1997 from $91.9 million in 1996.
MAJOR SUBSIDIARIES
o American Bankers Insurance Company of Florida (ABIC) o American Reliable Insurance Company (ARIC) o Bankers Atlantic Reinsurance Company (BARC) o Bankers Insurance Group (BIG) o Caribbean American Property Insurance Company (CAPIC) o Seguros La Hemisferica, S.A. o Voyager Indemnity Insurance Company (VIIC) o Voyager Property and Casualty Insurance Company (VPCIC)
MAJOR WARRANTY COMPANIES
o Federal Warranty Service Corporation (FWSC) o Sureway, Inc. o Voyager Service Warranties, Inc. (VSW) o Voyager Service Programs, Inc. (VSP)
MAJOR PRODUCTS
o Credit Unemployment o Credit Property o Extended Service Contracts o Mobilehome Physical Damage o Credit Accident & Health
DISTRIBUTION CHANNELS
o Retailers o Financial Institutions Commercial Banks Consumer Finance Companies Mortgage Bankers Savings Institutions o Manufactured Housing, Travel Trailer and Equipment Manufacturers, Dealers and Lenders o Utilities o Independent Agents
For additional Business Segment Information see page 32 in Part II Item 6 of this report.
Products --------
The following table sets forth the gross collected premiums of the Company's major insurance products:
Gross Collected Premiums Major Insurance Products
Years Ended December 31
(1) "All Other" represents a large number of products, approximately 50 to 60 each year. The most significant in 1997 and 1996 are the Livestock Mortality, Group Life and Group A&H.
The Company's business can be divided into two principal types of products: (1) Financial Market Products, consisting primarily of credit-related insurance, and (2) Personal Insurance lines, consisting of non credit-related products and services.
Financial Market Products
Property Insurance. The Company's property insurance is written primarily by ABIC, ARIC, CAPIC and certain of the Voyager Companies. Through these subsidiaries, the Company writes a variety of property insurance which includes homeowners' and coverages for comprehensive physical damage of mobilehomes, autos, furniture, fixtures and other consumer goods. In the event of a loss due to a covered event, the Company will either pay off the loan balance or replace or repair the merchandise.
The terms of the Company's property policies range from 30 days to multiple years. Multiple year policies generally coincide with the term of the financing for the insured property. For example, a consumer purchasing an automobile and financing the purchase over a three-year period can purchase a three-year physical damage policy at the inception of the loan for a single premium. An increasing proportion of gross collected premiums are monthly premiums received in connection with credit card purchases. Such premiums are based on the average outstanding credit card balance.
Life and Disability Insurance. Through ABLAC, BALAC, CALAC and certain of the Voyager Companies, the Company writes life, AD&D and disability insurance primarily on consumer loans, mortgages and credit card balances. This life insurance is a form of decreasing term life insurance written generally without medical examination of the borrower. Premiums are received either in a single payment at the time the policy is written or monthly along with the borrower's regular payment. It is normally written for the term of the installment debt and retires all or a portion of the indebtedness in the event of the insured's death. Disability insurance covers a borrower for payments coming due on an installment loan, mortgage loan or revolving charge account while the borrower is disabled.
Credit Unemployment Insurance. Through ABIC and CAPIC, the Company writes unemployment insurance on credit card balances in conjunction with life, disability and property coverages. This unemployment insurance provides for the payment of the minimum monthly loan payment for a specified duration while the insured is involuntarily out of work. Premiums for this coverage are based on the average outstanding credit card balance.
Extended Service Contracts. The Company's extended service contract (ESC) business, sold mainly through FWSC and Sureway, involves various arrangements including the administration for and the insuring of obligations for ESC's sold in conjunction with the sale of consumer products by retailers. The ESC's typically provide service guarantees through the retailers which go beyond any manufacturers' warranties underlying the products.
Of the Company's "Major Insurance Products", eight are associated with the Financial Market Products.
Personal Insurance Lines
The Company also derives revenues from non credit-related insurance products and services. These products and services principally consist of: (i) group life and group disability (ii) individual life and disability products sold through employer-sponsored payroll deduction programs, (iii) administration fees earned in connection with the National Flood Insurance Program, (iv) livestock mortality insurance, (v) individual life insurance and annuity products sold principally in Latin America and the Caribbean, and (vi) surety coverages.
Underwriting
The Company has over 40 years of experience in providing credit life and credit property insurance and therefore maintains an extensive actuarial database for its major lines of business. This database enables the Company to better identify and quantify the expected loss experience and is employed in the design of coverage and the establishment of premium rates. American Bankers uses this information in monitoring the loss experience of individual clients.
A distinct characteristic of the Company's credit-related insurance products is that the majority of these products represent relatively low policy values since policy size is equal to the size of the installment purchase or credit card balance. Thus, loss severity for most of the Company's business is low relative to other insurance companies writing more traditional lines of business. For those product lines where exposure to catastrophe loss is higher (Homeowners and Mobilehome Physical Damage) the Company closely monitors and manages its aggregate risk by geographic area and has entered into reinsurance treaties to control its exposure to catastrophe losses.
With respect to the Company's non credit-related insurance products, the Company utilizes traditional underwriting techniques. The Company seeks to ensure the quality of its business by maintaining strict underwriting standards. In underwriting individual life policies, the Company employs medical questionnaires, medical examinations, and current reports from the Medical Information Bureau. Group underwriting takes into account demographic factors such as age, gender and occupation of members of the groups. The Company also seeks to reduce its risk exposure by avoiding lines of insurance characterized by long loss payout periods, such as workers' compensation and most general liability coverages.
Marketing
American Bankers markets its credit-related insurance programs as a wholesale distributor through several defined distribution channels: Consumer Finance Companies, Mortgage Bankers, Electric, Gas, and Telephone Utilities, Savings Institutions, Commercial Banks, Manufactured Housing, Travel Trailer and Equipment Manufacturers, Dealers, Lenders, and Retailers. These distribution channels constitute the Company's Financial Market distribution channel. The distribution channel for the Company's Personal Insurance Lines is primarily Independent Agents.
At December 31, 1997, the Company had 93 salaried sales representatives and 16 sales managers located in 16 regional sales offices throughout the U.S., Canada, Puerto Rico, the United Kingdom, and Latin America. Employees in the regional sales offices solicit potential new clients and service existing clients. These sales personnel typically have work experience in the client's industry and have received extensive sales and product training from the Company. The Company's sales personnel provide ongoing service and advice to clients to assist them in marketing the Company's insurance products and attempt to gain new clients by illustrating how the client can provide a value-added service to its customers and at the same time enhance their profitability by marketing the Company's products. Specifically, the Company's sales personnel approach each potential client with a structured four-call process: (i) initial contact, (ii) gathering information and analyzing the prospect's needs, (iii) presenting a program tailored to those needs, and (iv) agreeing to and implementing a program that is satisfactory to both the client and the Company.
Products are individual programs underwritten by ABIC, ABLAC, or any of the insurance subsidiaries or "packages" which are a combination of products from various subsidiaries. These products can also be sold through more than one distribution channel. Product cross-over is commonplace within the Company's system, which facilitates streamlined administration and processing, as well as product development. For example, the Company's "Chargeguard" product is a combination of life, accident and disability, unemployment and property insurance coverage and is marketed through the Consumer Finance Companies, Mortgage Bankers and Savings Institutions, Commercial Banks and Retailers distribution channels.
Distribution Channels
The following is a discussion of the distribution channels for the Financial Market Products:
Consumer Finance Companies
The client base consists of consumer and commercial finance companies, leasing and second mortgage institutions, and mortgage brokers. Because many major consumer finance companies have their own captive insurance companies, approximately 65% of the premiums written historically have been ceded to these captive insurance companies. Therefore, a substantial portion of the income in this area is derived from the management fees paid by clients' captive companies for processing and servicing this insurance.
Mortgage Bankers and Savings Institutions
The client base consists of mortgage bankers, savings institutions and home builders. Through these clients, the Company markets life, AD&D, disability and property insurance products to residential and consumer borrowers as well as to depositors.
Commercial Banks
The Company markets its installment loan and credit card related insurance products through commercial banks, bank holding companies and their non-bank subsidiaries and other issuers of general purpose credit cards. Increases in gross collected premiums have resulted primarily from the marketing of insurance programs in connection with credit cards. American Bankers tries to expand the business written by its clients in this area by assisting them in implementing direct mail and telemarketing programs.
Manufactured Housing and Travel Trailer Manufacturers and Lenders
The Company provides property insurance and credit related products to purchasers of mobilehomes and travel trailers. Products are distributed primarily through manufactured housing, motor home and travel trailer manufacturers, dealers and lenders.
Retailers
The Company is a major provider of credit-related insurance and is a provider of extended service contract products to the retail industry. This client base includes department and specialty stores, home furnishings and home improvement stores, appliance and electronic stores, general merchandise and automotive chains, jewelry stores, catalogs and rental companies. To further enhance its market position in this area, the Company develops customized direct mail and telemarketing programs for these clients. Premiums are generated from mailings included in monthly credit card statements or are generated at the point of sale.
Equipment Manufacturers and Dealers
Dealers and Manufacturers revenues are derived from credit life, disability, physical damage and warranty insurance products sold through agricultural and other equipment manufacturers.
The following is a discussion of the distribution channels for the Personal Insurance Lines:
Independent Agents
The Company markets individual life insurance and annuity policies to the public through a network of independent agents. In the agency market, the Company competes with many large nationwide companies. As a result, the Company has made the decision to control the growth of this segment by de-emphasizing the U.S. market and focusing on the Caribbean and Latin American markets where loss experience has been favorable and the competition is less vigorous.
Other products sold through agents are livestock insurance, which primarily covers animal mortality, and surety coverages.
Agents also produce the flood premium that the Company administers on behalf of the National Flood Insurance Program. The Company acts as administrator and does not assume any underwriting risk with respect to this program.
Investments
The functions of the investment department are an integral part of any insurance company's operations. The Company's investment department is guided by strategic objectives established by the Finance Committee of the Board of Directors. The major investment objectives are:
o To ensure adequate safety of investments and to protect and enhance capital.
o To maximize risk-adjusted, after-tax return on investments.
o To make prudent investment decisions based on the current market environment.
o To provide sufficient liquidity to meet cash requirements with minimum sacrifice of investment returns.
In seeking to achieve these objectives, the Company invests predominantly in fixed income securities of the U.S. Government or its agencies, collateralized mortgage obligations ("CMOs") and investment grade corporate bonds. Protection against default risk is a primary consideration. The CMOs are tested for volatility prior to purchase.
Interest rate risk is controlled by matching the average duration of invested assets with the average duration of the policy liabilities. Investment department personnel work closely with the Company's actuaries to ensure that this balance is maintained.
Private investments are made selectively to support the insurance business. These investments comprise about 2% of the fixed maturities portfolio. While these Company underwritten investments are non-rated, a careful evaluation of creditworthiness is performed before an investment is made. This analysis helps to ensure that prudent investment standards are maintained, even in the non-rated portfolio holdings.
The Company's equity portfolio is managed by outside investment advisors who are monitored on a regular basis against established performance benchmarks.
Quality of Fixed Maturities Maturity of Fixed Maturities --------------------------- ------------------------------- AAA 55% 0-1 Years 10% AA 7% 1-5 Years 67% A 18% 5-10 Years 19% BBB 17% 10-20 Years 3% BB/NR 1% Over 20 Years 1% Private Placement 2% -------- ----------- 100% 100%
At December 31 (in thousands):
The amounts for 1994 and forward are reported in accordance with FASB Statement 115.
Net Investment Income (in millions of dollars)
1997 $134 1996 121 1995 99 1994 74 1993 70
Other information with respect to investments is included in Note 3 to the Consolidated Financial Statements on page 55 in Part II Item 8 of this report.
Reinsurance -----------
The Company's insurance subsidiaries reinsure that portion of risk in excess of $250,000 under a domestic ordinary life policy, $400,000 under an international life policy, and $300,000 under a property policy. In addition, coverage is obtained for the Company's property business as protection against catastrophic losses. This coverage is mainly related to the Company's homeowner, mobilehome physical damage and credit property products. The Company has excess of loss catastrophe reinsurance providing coverage per catastrophe on property losses of $30 million excess of a $15 million retention exclusive of any recoveries from the proportional reinsurance described above. Additional coverage is provided through aggregate stop loss coverage if the net loss ratio (after deducting all other reinsurance) exceeds 37.3%. The Company believes that its catastrophe reinsurance coverage continues to be adequate.
The Company's reinsurance receivable and prepaid reinsurance premiums at December 31, 1997 totaled $835.9 million. The Company's reinsurance was placed with numerous reinsurers including the following significant reinsurers: (i) Triton Insurance Company, (ii) Lincoln National Life Insurance Company, and (iii) Caterpillar Insurance Company, Limited. The Company historically has not experienced any material losses in collection of reinsurance receivables.
Certain Factors Common to the Operations of Insurance Companies ---------------------------------------------------------------
Government Regulation
The Company and its insurance subsidiaries are subject to regulation and supervision by the states in which the Company's insurance subsidiaries transact business. This regulation is designed primarily to ensure the financial stability of insurance companies and to protect policyholders, rather than stockholders or creditors. State insurance regulatory agencies have broad administrative powers to grant and revoke licenses to transact business, regulate trade practices, establish guaranty associations, license agents, require approval of policy forms and premium rates on certain business prior to use, establish reserve requirements, determine the form and content of required financial statements, determine reasonableness and adequacy of capital and surplus and prescribe the types of permitted investments and the maximum concentrations of certain classes of investments. These agencies also conduct periodic detailed examinations of the books, records, accounts and trade practices of insurance companies domiciled or admitted in their states. Applicable state insurance laws, rather than federal bankruptcy laws apply to the liquidation or the reorganization of insurance companies.
A substantial portion of the business written by the Company's insurance subsidiaries is credit-related insurance. Most states have enacted laws which regulate credit-related insurance to a greater extent than they regulate other forms of insurance including maximum premiums which may be charged and commissions which may be paid. In addition, certain states have enacted or are considering regulations which similarly attempt to limit profitability based upon underwriting experience. As in the case of other types of insurance, state regulators, directly and through the NAIC, have begun a greater focus on the regulatory, licensing and disclosure issues related to market conduct of credit insurers, including the Company.
The National Association of Insurance Commissioners (NAIC) develops and modifies model laws and regulations which may be modified and adopted by the various states to meet their perceived needs and concerns regarding business written in the state. While these model laws and regulations have no effect on the Company until adopted by the states, the activities of the NAIC provide useful insight into laws or regulations that might be adopted by the various states. In the area of credit insurance, the Creditor-Placed Insurance Model Act adopted in 1996 by the NAIC allows state regulators to take into account factors other than losses in determining the reasonableness of credit insurance rates. The NAIC also took action in 1995 on credit life insurance by adopting an alternative approach to strict loss ratio based rate making which allows state regulators to take into account factors other than losses in determining the reasonableness of credit insurance rates. Neither of these actions is expected to significantly affect the Company's operations. With respect to investment practices, in 1996 the NAIC adopted the Investments of Insurer's Model Act which provides a well-capitalized insurer more discretion and flexibility in its investing practices. The Board of Directors also reviews the investment policies of the Company's insurance subsidiaries.
Financial Regulation
Insurance companies are required to file detailed annual and quarterly statements with state insurance regulators in each of the states in which they do business. In addition, the Company's insurance subsidiaries are required to comply with a minimum risk-based capital (RBC Standards) developed by the NAIC. Under the RBC standards - risk specific for each company - areas such as asset risk, insurance risk, interest risk, and business risk are evaluated and compared to the Company's capital and surplus to determine relative solvency margins. Standards for the RBC formula were approved by regulators and effective for 1993 statutory financial statements for life companies and in 1994 for property and casualty companies. All of the Company's insurance subsidiaries meet the minimum risk-based capital requirements and require no action based on the criteria described above.
Dividend Regulation
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 are dividends and other payments from its insurance subsidiaries.
The Company's insurance subsidiaries are subject to various regulatory restrictions on the maximum amount of payments, including dividends, loans or cash advances that they may make to the Company without obtaining prior regulatory approval. As Florida domiciled insurance companies, ABIC and ABLAC are subject to Florida requirements that insurance
company dividends must receive prior regulatory approval unless, either (i) such dividends do not exceed the larger of: (a) the lesser of 10% of surplus or net gain from operations (ABLAC) or net income (ABIC), not including realized capital gains, plus a 2-year carryforward for ABIC, (b) 10% of surplus, with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains; or (c) the lesser of 10% of surplus or net investment income (net gain before capital gains for ABLAC) plus a 3-year carryforward (2-year carryforward for ABLAC) with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains; or (ii) the dividend is equal to or less than the greater of: (a) 10% of the insurer's surplus as to policyholders derived from realized net operating profits on its business and net realized capital gains; or the insurer's entire net operating profits and realized net capital gains derived during the immediately preceding calendar year; and (b) the insurer will have surplus as to policyholders equal to or exceeding 115% of the minimum required statutory surplus as to policyholders after the dividend is made. As an Arizona domiciled insurance company, ARIC must receive prior regulatory approval unless such dividends do not exceed the lesser of either 10% of surplus as regards policyholders or the net investment income. As Puerto Rico domiciled companies, CALAC and CAPIC may not pay any cash dividend to stockholders except out of that part of its unassigned surplus funds which is derived from any realized net profits on its business. As a New York domiciled company, BALAC must file notice of its intention to declare a dividend and the amount thereof with the superintendent of insurance who may disapprove such distribution if he finds that it is not warranted by the company's financial condition. The Voyager Insurance Companies are domiciled in Georgia and South Carolina. Georgia and South Carolina require prior regulatory approval for dividends in excess of the greater of (i) 10% of a company's surplus as regards policyholders or (ii) net gain from operations for life companies, or net income, not including realized (net realized for South Carolina) capital gains for non-life companies, as of the preceding year end.
If insurance regulators determine that payment of a dividend or any other payment to an affiliate (such as a payment under a tax allocation agreement or for employee or other services or pursuant to a surplus debenture) would, because of the financial condition of the paying insurance company or otherwise, be hazardous to such insurance company's policyholders or creditors, the regulators may prevent payment of such dividends or such other payment to the affiliates that would otherwise be permitted without prior approval.
See other information with respect to dividend regulation in Note 8 to the Consolidated Financial Statements on page 66 in Part II Item 8 of this report.
Change of Control Regulation
The states in which the Company's insurance subsidiaries are domiciled have enacted legislation or adopted administrative regulations affecting the acquisition of control of insurance companies as well as transactions between insurance companies and persons controlling them. Most states require administrative approval of the acquisition of control of an insurance company incorporated in the state or the acquisition of control of an insurance holding company whose insurance subsidiary is incorporated in the state. In Florida, the acquisition of 5% of such shares is generally deemed to be the acquisition of control for the purpose of the holding company statutes and requires not only the filing of detailed information concerning the acquiring parties and the plan of acquisition, but also administrative approval prior to the acquisition. In the other states in which the Company's insurance subsidiaries are domiciled, however, an acquisition of 10% of such shares is
generally deemed to be the acquisition of control. In many states, the insurance authority may find that control in fact does or does not exist in circumstances in which a person owns or controls either a lesser or a greater amount of securities.
Competition
The historical competitors of the Company consist of both stock and mutual insurance companies. Some competing companies, both stock and mutual, have been in business for a longer time, are more widely known by reason of such factors as age and size, and have greater financial resources than the Company. However, due to the specialized nature of the markets served and products offered, the Company's competitors differ among the different geographic locations and market segments in which the Company conducts business.
Banks have begun to market and underwrite insurance products which may lead to increased competition. However, because the Company's products do not include traditional life insurance products, the Company does not expect to be significantly impacted. In addition, lending institutions have begun to issue debt cancellation agreements, which are similar to the Company's credit life and disability products. The Company is unable to predict the market effect that this development may have.
The Company's strategy is to establish profitable insurance underwriting and to service business in distribution channels that are relatively free of competition. In keeping with this strategy, the Company markets non-traditional insurance products through non-traditional distribution channels.
Reserves --------
Life Companies
Life insurance companies are required to establish and maintain policy liabilities and claim liabilities to meet their future obligations under in-force policies. For ordinary life and guaranteed renewable health insurance the policy liabilities are amounts which will be sufficient to meet policy obligations at death, disability or maturity taking into consideration future premiums less expenses, interest, expected lapses and expected mortality. For the interest sensitive life policies, such as universal life, and for deferred annuities this amount is the account value of the policyholder. The claim reserves on these policies are the amounts of future unpaid benefits on all incurred claims, whether reported to the company or not.
For credit life, credit health insurance and non-guaranteed renewable health insurance, the policy liability is the unearned premium reserve. This is the amount of premiums received that have not been exposed to loss. It is equal to the premium the company would charge for the remaining benefits and the remaining period of coverage purchased. The claim reserves for these products are the amounts of future unpaid benefits on all incurred claims, whether reported to the company or not. For disability claims on which continuing payments are being made, the company records special claim reserves equal to the monthly benefits times the number of payments expected to be made in the future, discounted for interest.
Information on the Company's reserves appears in Note 4 to the Consolidated Financial Statements on page 58 in Part II Item 8 of this report.
Property and Casualty
The unearned premium reserve is the portion of the premium applicable to the unexpired period of the policy. The purpose of the unearned premium reserve is to determine the proper recognition of revenue, to refund the unearned premium to the policyholder if the policy is canceled, to provide a fund for the payment of future losses, and to maintain an amount available for the purchase of reinsurance.
The consolidated financial statements include estimated provisions for unpaid losses and loss adjustment expenses (LAE) applicable to the Company's property and casualty insurance subsidiaries. Currently, these subsidiaries write principally credit unemployment, credit property, extended service contracts, mobilehome physical damage, homeowners, and livestock lines of business throughout the United States, Canada, the Caribbean, and the United Kingdom. Such liabilities are established using a combination of case basis estimates and actuarial projections and include provisions for claims incurred but not yet reported as of the balance sheet date.
Overall claims experience is principally dependent on the frequency and severity of claims. With the exception of discontinued lines, the Company writes primarily property coverages which are characterized by relatively short settlement periods and quick development of ultimate losses. The discontinued reinsurance assumed pools involve liability coverages where development of the ultimate loss is more difficult to predict because of the settlement duration and the relative absence of homogeneity of claims as compared to the Company's property coverages. The Company's estimating and reserving practices are reviewed continuously. Subsequent adjustments to the original estimates are made when determinable and are reflected in current year operations.
The following table shows the development of the estimated liability for the ten years prior to 1997.
AMERICAN BANKERS INSURANCE GROUP, INC. DOMESTIC PROPERTY AND CASUALTY SUBSIDIARIES ANALYSIS OF REPORTED BALANCE SHEET LOSS AND LAE DEVELOPMENT GAAP BASIS (IN THOUSANDS)
*Indicates amounts are net of collected salvage and subrogation to conform with the presentation of Schedule P in the 1997 Statutory Reports filed with the state regulatory authorities. **Amounts do not include issued but unpresented claim drafts as of December 31; $1,546 (1992), $2,411 (1993), $1,322 (1994), $1,576 (1995), and $1,374 (1996).
The table in the preceding page presents the development of balance sheet liabilities for 1987 through 1997. The top line of the table shows the estimated liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and LAE for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the Company. The upper portion of the table shows the re-estimated amount of the previously recorded liability based on the experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims.
The lower section of the table shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year.
Note that each amount includes the effects of all changes in amounts for prior periods. Conditions and trends that have affected development of the liabilities in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table.
In the most recent years, actual loss development of the estimated liabilities for unpaid claims and LAE amounts demonstrated that the original estimates have generally been adequate except for those relating to the line "financial guarantees" (1985-1986), reinsurance pools, and for 1992 due to Hurricane Andrew.
The "cumulative (deficiency) redundancy" represents the aggregate change in the estimates over all prior years. Such amounts have been reflected in income over the years indicated.
The effect on income for the past three years of changes in estimates of the liabilities for losses and LAE is shown in Note 4 to the Consolidated Financial Statements on page 59 in Part II Item 8 of this report.
For the Company, the financial guarantee line is represented by its credit bond insurance where litigation and certain related legal issues have historically served to complicate the reserving process. Effective with 1995 settlements, credit bond insurance is not expected to produce any future impact.
The Company's loss reserve development reflects losses assumed from excess casualty reinsurance pools in which the Company discontinued participation effective on or prior to 1981. The business is long-tail in nature and losses continue to exceed both Company and industry expectations. Most of these losses result from asbestos-related and environmental pollution claims. The Company's exposure is primarily through participation in excess casualty pools. These pools typically involve high-layer coverages that are applicable only after primary insurance coverage and, in many cases, reinsurance coverages have been exhausted. The Company's experience can differ significantly from that of other insurers which wrote the primary coverages directly. The Company establishes loss reserves on known claims as recommended by the various pool managers, plus additional reserves to compensate for those claims that have not yet been reported.
At the current time, it is not possible to determine the future development of asbestos and environmental claims due to a general absence of reliable predictive data and of a generally accepted actuarial methodology for these exposures, significant unresolved legal issues including
coverage issues, policy definitions and evolving theories and arguments. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties is complex and uncertain. Our historical experience suggest, however, that although reinsurance pool losses will continue, they should not have a materially adverse effect on the Company's financial condition or cash flows. Losses from the Company's discontinued reinsurance pools were $6.6 and $8.3 million in 1997 and 1996, respectively. At December 31, 1997, the Company holds $34.8 million (gross) of reserves related to the reinsurance pools.
No specific formula adjustment is made to the reserves in connection with anticipated inflation; however, most coverages relate to property settlements which occur relatively quickly. The Company establishes full reserves on all lines (net of anticipated salvage and subrogation) and does not employ discounting in its reserving process.
The differences between the December 31, 1997 liability for losses and LAE reported in the accompanying consolidated financial statements in accordance with generally accepted accounting principles (GAAP) and that reported in the annual statement filed with state insurance departments in accordance with statutory accounting practices (SAP) are as follows:
Employees ---------
As of December 31, 1997, the Company employed 2,943 people.
d. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
For financial information about foreign and domestic operations see Note 12 to the Consolidated Financial Statements on page 77 in Part II Item 8 of this report.
ITEM 2
ITEM 2 - ------
PROPERTIES ----------
The headquarters building is located at 11222 Quail Roost Drive, Miami, Florida 33157, and is approximately 480,000 square feet in size. The building is used exclusively for general office use, except for a portion which functions as the Company's warehouse. Certain other properties are infrequently acquired through foreclosures of mortgage loans in which ABLAC has invested. ABLAC holds and operates such properties until sale can be effected.
ITEM 3
ITEM 3 - ------
LEGAL PROCEEDINGS -----------------
Except as discussed in the following paragraphs, there are no material legal proceedings, other than ordinary routine litigation incidental to the business, to which the Registrant or any of its subsidiaries is a party or of which any of their property is the subject.
LITIGATION ----------
Following is a description of material legal proceedings:
Alabama and other litigation ----------------------------
Certain of ABIG's subsidiaries, including the Company, are presently parties to a number of individual consumer and class action lawsuits pending in Alabama involving premium, rate, sales practices, marketing, disclosure and policy coverage issues. While a number of similar suits have been filed in other jurisdictions, the insurance and finance industries have been targeted in Alabama by plaintiffs' lawyers who enjoy a favorable judicial climate. The Company typically has been named as a co-defendant with one or several retailer or finance companies who have sold the Company's product to a consumer. Other insurers are also joined as co-defendants in some of the suits.
Although the Alabama lawsuits and similar suits pending in Mississippi and other jurisdictions generally involve relatively small amounts of actual or compensatory damages, they typically assert claims requesting substantial punitive awards or purport to represent a large class of policyholders. The Company denies any wrongdoing in any of these suits and believes that it has not engaged in any conduct that would warrant an award of punitive damages or that the class allegations have merit. The Company has been advised by legal counsel that it has meritorious defenses to all claims being asserted against it.
While no one case is necessarily significant in terms of financial risk to the Company, the judicial climate in Alabama is such that the outcome of these cases is extremely unpredictable. Moreover, class action lawsuits to which the Company is a party do not lend themselves to potential damage calculation. Without admitting any wrongdoing, the Company has settled a number of these suits, but there are still a significant number of cases pending, and it is expected that more suits alleging essentially the same causes of action are likely to continue to be filed during 1998. The Company intends to continue to defend itself vigorously against all such suits and believes, based on information currently available, that any liabilities that could result are not expected to have a material effect on the Company's financial position.
Merger-Related Litigation -------------------------
As described more fully in "Development of Business" on page 2 of this report, on December 22, 1997, the Company announced that it had entered into a merger agreement with AIG and on January 27, 1998, Cendant and Season commenced an unsolicited tender offer for 51% of the Company's shares. Six legal actions, have been brought against the Company and members of its board of directors growing out of the proposed merger with AIG and Cendant's tender offer.
The Company and members of its board of directors deny all allegations unlawful conduct asserted in any of these actions and have been advised by counsel that they have meritorious defenses to each of them. The Company intends to continue to defend itself vigorously against these actions and believes, based on currently available information, that any liabilities that could result are not expected to have a material effect on the Company's financial position.
CENDANT, ET AL. V. AMERICAN BANKERS, ET AL.
On January 27, 1998, Cendant and Season filed a complaint against the Company, members of the Company's Board, AIG and AIGF in the United States District Court for the Southern District of Florida. The complaint alleged that the directors of the Company breached their fiduciary duties by agreeing to the merger contemplated by the Original Merger Agreement, the Original Stock Option Agreement, the 120 day so-called "No-Shop" provision, the 180-day non-termination provision, the $66 million termination fee, the Voting Agreement, and by exempting the merger contemplated by the Original Merger Agreement from the provisions of the Rights Agreement. The complaint further alleges that AIG and AIGF conspired with the members of the Company's Board in the breach of their fiduciary duties, and that AIG violated Section 13(d) of the Exchange Act, by failing to disclose in the Schedule 13D that it filed with the Commission on January 16, 1998 that AIG's Chairman and Chief Executive Officer was a "controlling person" of AIG. The complaint sought, among other things, preliminary and permanent injunctive relief enjoining implementation or effectuation of the Original Merger Agreement unless and until the conduct alleged to constitute the breaches of fiduciary duties is remedied.
On March 23, 1998, Cendant and Season in connection with the Cendant Merger Agreement have agreed to dismiss with prejudice this action.
GOODMAN V. AMERICAN BANKERS INSURANCE GROUP, INC., ET AL.
On or about January 27, 1998, a putative class action complaint, on behalf of the Company' shareholders, was filed in the Circuit Court of the Eleventh Judicial District in and for Dade County Florida against the Company, the members of the Company's Board, and AIG (the
"Goodman State Court Action"). The complaint in the Goodman State Court Action alleges that the directors of the Company breached their fiduciary duties by agreeing to the merger contemplated by the Original Merger Agreement, the Original Stock Option Agreement, the 120 day so-called "No-Shop" provision, the $66 million termination fee, the Voting Agreement, and by failing to maximize shareholder value. The complaint further alleges that the Company and AIG aided and abetted the directors of the Company in the breach of their fiduciary duties. The complaint seeks declaratory and injunction relief, as well as unspecified damages and attorneys' fees.
On or about January 28, 1998, a putative class action complaint, on behalf of the Company shareholders, was filed in the United States District Court for the Southern District of Florida against the Company, the members of the Company's Board, and AIG (the "Goodman Federal Court Action"). The complaint in the Goodman Federal Court Action alleged that the directors of the Company breached their fiduciary duties by agreeing to the merger contemplated by the Original Merger Agreement, the Original Stock Option Agreement, the 120 day so-called "No-Shop" provision, the 180-day non-termination provision, the $66 million termination fee, and by exempting the merger contemplated by the Original Merger Agreement from the provisions of the Rights Agreement. The complaint further alleged that AIG aided and abetted the directors of the Company in the breach of their fiduciary duties, and that AIG violated Section 13(d) of the Exchange Act, by failing to disclose in the Schedule 13D that it filed with the Commission on January 16, 1998 that AIG's Chairman and Chief Executive Officer was a "controlling person" of AIG. The complaint sought declaratory and injunctive relief including an order requiring defendants to make corrective disclosure and enjoining the consummation of the merger, as well as unspecified damages and attorneys' fees.
On February 17, 1998, the plaintiff in the Goodman Federal Court Action filed an amended complaint asserting all of the claims in the original complaint and new claims that the Company and AIG violated Sections 14(a) and 14(e) of the Exchange Act by making materially false and misleading statements in the Original Proxy Statement/Prospectus. The amended complaint seeks substantially the same relief as the original complaint.
LOPATE V. LANDON, ET AL.
On or about January 28, 1998, a putative class action complaint, on behalf of the Company shareholders, was filed in the United States District Court for the Southern District of Florida against the Company, the members of the board of directors of the Company (except Jack Kemp), AIG and AIGF. The complaint alleged that the Company's Board (except Jack Kemp) breached their fiduciary duties by agreeing to the merger contemplated by the Original Merger Agreement, the Original Stock Option Agreement, the 120 day so-called "No-Shop" provision, the $66 million termination fee, the Voting Agreement, and by failing to maximize shareholder value. The complaint further alleged that AIG, AIGF and the Company aided and abetted the directors of the Company in the breach of their fiduciary duties, and that AIG violated Section 13(d) of the Exchange Act, by failing to disclose in the Schedule 13D that it filed with the Commission on January 16, 1998 that AIG's Chairman and Chief Executive Officer was a "controlling person" of AIG. The complaint sought declaratory and injunctive relief including an order requiring defendants to make corrective disclosure, enjoining the consummation of the merger contemplated by the Original Merger Agreement, and voiding the Original Merger Agreement, as well as unspecified damages and attorneys' fees.
On February 9, 1998, the plaintiffs filed an amended complaint asserting all of the claims in the original complaint and new claims that the Company and AIG violated Sections 14(a) and 14(e) of the Exchange Act by making materially false and misleading statements in the Original Proxy Statement/Prospectus. The amended complaint dropped the claim that AIG violated Section 13(d) of the Exchange Act. The amended complaint seeks substantially the same relief as the original complaint.
BILDSTEIN V. AMERICAN BANKERS INSURANCE GROUP, INC., ET AL.
On or about February 2, 1998, a putative class action complaint, on behalf of the Company shareholders, was filed in the United States District Court for the Southern District of Florida against the Company, the members of the Company's Board and AIG. The complaint alleged that the directors of the Company breached their fiduciary duties by agreeing to the merger contemplated by the Original Merger Agreement, the Original Stock Option Agreement, the 120 day so-called "No-Shop" provision, the 180-day non-termination provision, the $66 million termination fee, the Voting Agreement, and by exempting the merger contemplated by the original Merger Agreement from the provisions of the Rights Agreement. The complaint further alleges that AIG aided and abetted the directors of the Company in the breach of their fiduciary duties, and that AIG violated Section 13(d) of the Exchange Act, by failing to disclose in the Schedule 13D that it filed with the Commission on January 16, 1998 that AIG's Chairman and Chief Executive Officer was a "controlling person" of AIG. The complaint seeks declaratory and injunctive relief including an order requiring defendants to make corrective disclosure and enjoining the consummation of the merger contemplated by the Original Merger Agreement, as well as unspecified damages and attorneys' fees.
COFFEE V. AMERICAN BANKERS INSURANCE GROUP, INC., ET AL.
On or about February 9, 1998, a putative class action complaint, on behalf of the Company shareholders, was filed in the United States District Court for the Southern District of Florida against the Company, the members of the Company's Board and AIG. The complaint alleged that the directors of the Company breached their fiduciary duties by agreeing to the merger contemplated by the Original Merger Agreement, the Original Stock Option Agreement, the 120 day so-called "No-Shop" provision, the 180-day non-termination provision, the $66 million termination fee, the Voting Agreement, by exempting the merger contemplated by the Original Merger Agreement from the Rights Agreement, and by failing to maximize shareholder value. The complaint further alleges that AIG aided and abetted the directors of the Company in the breach of their fiduciary duties, and that AIG violated Section 13(d) of the Exchange Act, by failing to disclose in the Schedule 13D that it filed with the Commission on January 16, 1998 that AIG's Chairman and Chief Executive Officer was a "controlling person" of AIG. The complaint seeks declaratory and injunctive relief including an order requiring defendants to make corrective disclosure and enjoining the consummation of the merger contemplated by the Original Merger Agreement, as well as unspecified damages and attorneys' fees.
SPECTOR V. LANDON, ET AL.
On or about February 11, 1998, plaintiffs filed a complaint in the United States District Court for the Southern District of Florida against the Company, R. Kirk Landon, Gerald N. Gaston, AIG and AIGF. The complaint alleged that Mr. Landon and Mr. Gaston, aided and abetted by the Company, AIG and AIGF, breached their fiduciary duties by agreeing to the merger
contemplated by the Original Merger Agreement, the Original Stock Option Agreement, the 120 day so-called "No-Shop" provision, the $66 million termination fee, the Voting Agreement, by exempting the merger contemplated by the Original Merger Agreement from the Rights Agreement, and by failing to maximize shareholder value. The complaint further alleges that the Company and AIG violated Sections 14(a) and 14(e) of the Exchange Act by making materially false and misleading statements in the Original Proxy Statement/Prospectus. The complaint seeks declaratory and injunctive relief including an order requiring defendants to make corrective disclosure, enjoining the consummation of the merger contemplated by the Original Merger Agreement and voiding the Original Merger Agreement, as well as unspecified damages and attorneys' fees.
The Company is involved with a number of cases in the ordinary course of business relating to insurance matters or, more infrequently, certain corporate matters. Generally, the Company's liability is limited to specific amounts relating to insurance or policy coverage for which provision has been made in the financial statements. Other cases involve general corporate matters which generally do not represent significant contingencies for the Company.
ITEM 4
ITEM 4 - ------
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ---------------------------------------------------
There were no matters submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1997.
PART II - -------
ITEM 5
ITEM 5 - ------
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS --------------------------------------------------------------------
a. MARKET FOR COMMON STOCK -----------------------
Common Share Prices and Dividend Data
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- -------
- ---- High $29.63 $34.03 $38.31 $45.94 Low 24.38 25.19 32.19 36.69 Dividend 0.10 0.11 0.11 0.11
- ---- High $19.94 $22.13 $25.19 $26.19 Low 16.63 16.25 19.75 22.88 Dividend 0.10 0.10 0.10 0.10
Common share and dividend amounts for 1996 and the first and second quarters of 1997 have been restated to reflect the 2 for 1 stock split effective September 12, 1997.
The last sale price per share of the Company's common stock on the last trading day of 1997, as reported by the New York Stock Exchange, was $45.94.
Common Shares
American Bankers Insurance Group, Inc. is traded under the New York Stock Exchange symbol ABI. The stock appears in the NYSE stock table. The above table presents the high and low prices for the stock under the abbreviation AmBkrsIns.
The ending market price as of March 20, 1998 was $64.56.
b. APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS ---------------------------------------------
At December 31, 1997, there were 1,865 registered shareholders.
c. DIVIDENDS PER SHARE OF COMMON STOCK -----------------------------------
For information of the dividends paid per common share see the Table of data in Item 5 a. above.
Prior to the closing of the pending merger with Cendant Corporation, the Company expects to continue its policy of paying regular cash dividends; however, future dividends are dependent on future earnings, capital requirements and financial condition. For more information regarding liquidity and capital resources see page 38 in Part II Item 7 of this report.
ITEM 6
ITEM 6
SELECTED FINANCIAL DATA -----------------------
At December 31 (in thousands except book value per common share):
The book value per common share for years prior to 1997 has been restated to reflect the 2 for 1 stock split effective September 12, 1997.
For the Years ended December 31 (in thousands except per common share data):
The per common share data for years prior to 1997 has been restated to reflect the 2 for 1 stock split effective September 12, 1997.
For the Years ended December 31 (in thousands):
FIVE-YEAR SELECTED FINANCIAL DATA
*See Note 8 to Consolidated Financial Statements.
*Excludes net realized investment gains and losses.
Gross Life Insurance in Force Gross Collected Premiums (in millions of dollars) (in millions of dollars)
1997 $ 53,694 $ 2,740 1996 48,704 2,493 1995 42,708 2,287 1994 32,129 1,761 1993 30,848 1,427
ITEM 7
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Industry --------
Property and casualty insurers experienced higher earnings in 1997 due to the relative absence of major catastrophes. Standard & Poor has reported that increased capacity and increased competition are forcing property and casualty insurers to cut prices, particularly in the commercial sector.
The reinsurance market continued to experience significant consolidation in 1997. Despite the reduction in the number of large reinsurance companies, the cost of reinsurance coverage has been decreasing. This may be attributable in part to the relatively improved underwriting experience over the last two years, the expanded Bermuda market and the resurgence of Lloyd's of London.
Litigation continues to be a major industry concern. In Alabama, and increasingly in other states, the insurance and finance industries have been targeted in litigation. The legal environment in Alabama has received national news coverage and the Alabama legislature is considering tort reform. Future changes in the current environment, if any, cannot be predicted.
Recent Supreme Court and other regulatory rulings are expected to lead to increased marketing of insurance products by banks and other financial services firms. This may lead to increased competition; however, the Company does not expect to be significantly impacted since its major products do not include traditional life and property and casualty insurance products which banks may begin to market. Accordingly, this may result in additional products and services being sold through the Company's bank distribution channel. Congress has indicated that it may examine the issue of banking reform including state regulation of the insurance industry.
The Company has become aware that some financial institutions have, in connection with a loan, begun to issue debt cancellation agreements, which are similar to the Company's credit life and credit disability products. Various state insurance and financial institution regulators are examining these agreements to determine whether they should be regulated as insurance. It is premature to project the ultimate legal resolution and resulting market effects this development might have.
The federal government, commercial companies and the insurance industry continue to work together toward Superfund reform and dealing with the cleanup of pollution sites. Among issues pending are the determination of retroactive liability and a proposed insurer-specific tax. The most recent bill introduced in Congress reflects a scaled down Superfund reform plan that largely retains the retroactive liability system.
American Bankers ----------------
In 1997, net income increased 22% to $114.9 million from $94.5 million in 1996. Operating results benefited from continued strong growth in net investment income and in the Company's credit-related products. 1997 was impacted by the favorable results in the Company's property lines and a reduction of the operating losses in the United Kingdom insurance subsidiary. After-tax operating
income before realized gains generated by the property and casualty segment was adversely impacted in 1996 by losses from Hurricanes Bertha, Fran and Hortense of approximately $6.0 million, net of tax. The Company's United Kingdom insurance subsidiary incurred additional operating losses in 1996 principally due to canceled product lines. The 1995 results included, on an after-tax basis, $.5 million in net investment gains and a $3.8 million charge on the settlement of the final portion of the credit bond litigation.
Pre-tax operating income before realized gains by industry segment was as follows:
(IN THOUSANDS)
Life ---- 1997 $ 63,410 1996 $ 58,838 1995 $ 43,469
Property and Casualty --------------------- 1997 $ 101,772 1996 $ 86,028 1995 $ 83,971
These segment results exclude interest and other corporate activity.
REVENUES
Total revenues increased 6.0% in 1997 over the prior year, primarily due to increases in net premiums earned of $75.3 million and investment income of $12.9 million. Gross collected premiums increased more than $248 million or approximately 10%, from $2.5 billion in 1996 to $2.7 billion in 1997. In 1997, property and casualty segment revenues increased by $69.0 million while the life segment revenues increased $27.2 million. A significant portion of the revenue growth resulted from the increase in net earned premiums in extended service contract and homeowners products for the property and casualty segment and Credit Life and Credit A&H for the life segment.
The growth in gross collected premiums was primarily related to the following products:
The Company expects long-term premium growth to continue. Actual growth in any one year may vary depending on the acquisition or loss of significant clients, business acquisitions and international expansion or other factors as described in the Safe Harbor Cautionary Statement.
Gross collected premiums increased 9% in 1996 and 30% in 1995 (26% in 1995 excluding the $66 million block of business acquired). Net earned premiums increased 11% in 1996 and 13% in 1995.
Total net premiums earned by industry segment were as follows:
The cost of reinsurance to cover catastrophe losses decreased by $1.8 million to $7.5 million in 1997, from $9.3 million in 1996. The cost in 1995 was $9.5 million. The Company continually reviews its exposure to catastrophe losses.
Investment income increased by 11% to $134.1 million in 1997 from $121.2 million in 1996. The increase is mainly due to the overall increase in invested assets of $194.7 million. The investment income increase in 1996 from 1995 was 22%. The Company's average fixed income investment yield was 6.9% in 1997, 6.8% in 1996 and 7.0% in 1995.
CLAIMS AND COMMISSIONS
Through our extensive use of adjustable commission arrangements based on claims experience, we have been able to generate business with stable underwriting results. The overall loss ratio for the Company was 36.6% in 1997 compared with 37.9% and 37.3% in 1996 and 1995, respectively. The commission expense ratios for the same periods were 42.2% in 1997, 41.5% in 1996 and 42.4% in 1995.
The Company's experience in the property and casualty segment has been better than industry experience, as demonstrated by the following statutory combined ratios:
1997 1996 1995 ------ ------ ------ Property & Casualty Segment 96 97 94 Industry 102* 107 106.5
*Insurance Information Institute
In 1997, the Company did not experience significant catastrophic losses. In 1996, the Company incurred approximately $9.2 million in pre-tax losses related to Hurricanes Bertha, Fran and Hortense.
Credit bond pre-tax losses and expenses amounted to $11.5 million in 1995, including reserves and partial litigation settlements of $5.8 million. In 1997 and 1996, the Company did not incur any significant expenses or losses associated with the remaining credit bond policies in force.
The Company's 1997 reserve development, both foreign and domestic, was not significantly different from previously established reserves. The Company's loss reserve development includes losses assumed from excess casualty reinsurance pools in which the Company discontinued participation effective on or prior to 1981. The business is long-tail in nature and losses continue to exceed both Company and industry expectations. Most of these losses result from asbestos-related and environmental pollution claims. The Company's exposure is primarily through participation in excess casualty pools. These pools typically involve high-layer coverages that are applicable only after primary insurance coverage and, in many cases, reinsurance coverages have been exhausted. The Company's experience can differ significantly from that of other insurers which wrote the primary coverages directly. The Company establishes loss reserves on known claims as recommended by the various pool managers, plus additional reserves to compensate for those claims that have not yet been reported.
At the current time, it is not possible to determine the future development of asbestos and environmental claims due to a general absence of reliable predictive data and of a generally accepted actuarial methodology for these exposures, significant unresolved legal issues including coverage issues, policy definitions and evolving theories and arguments. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties is complex and uncertain. Our historical experience suggests, however, that although reinsurance pool losses will continue, they should not have a materially adverse effect on the Company's financial condition or cash flows. Losses from the Company's discontinued reinsurance pools were $6.6, $8.3 and $7.3 million in 1997, 1996 and 1995, respectively. Reserve additions in 1997 have increased the survival ratio to 22 years from 14 in 1996.
A few of the Company's products such as Mobilehome Physical Damage and Homeowners are affected by seasonal changes during the year, causing the profitability in those lines and for the Company to fluctuate throughout the year.
OPERATING AND INTEREST EXPENSES
Operating expenses (excluding interest expense) were $298.8 million in 1997, $280.8 million in 1996 and $251.5 million in 1995. The ratio of operating expenses to gross premiums earned in 1997 was 11.4%, showing continued improvement from 1996 of 11.8% and 1995 of 12.5%. The Company is in the process of replacing many of its legacy systems and is upgrading its systems to accommodate business for the year 2000. Costs relate to the new processing system being implemented for the property and casualty segment totaled $4.2 million in 1997, $6.3 million in 1996 and $4.9 million in 1995. Similar expense levels are expected to continue through 1998.
Interest expense was $16.2 million, $17.5 million and $15.6 million in 1997, 1996 and 1995, respectively. The decrease in interest expense in 1997 is primarily due to lower debt levels during the year. The increase in interest expense from 1995 to 1996 was due primarily to elevated debt levels.
TAXES
The effective tax rate decreased to 28% in 1997 from 30.5% in 1996. This decrease is due in part to the increase in low income housing investments and a reduction of losses in the United Kingdom subsidiary. The Company continues its strategy to increase its investments of tax-exempt and tax-credit investments to minimize its income tax expense.
FINANCIAL CONDITION
Total assets increased 9% to $3.8 billion at December 31, 1997, from $3.5 billion at December 31, 1996. The increase is attributable to strong cash flows. Total assets increased 16% at December 31, 1996, from $3.0 billion at December 31, 1995. This increase resulted from strong cash flows and the investment of proceeds from the issuance of Series B Convertible Preferred Stock. Invested assets at December 31, 1997, 1996 and 1995, were $2.2 billion, $2.0 billion and $1.7 billion respectively. At December 31, 1997, investments in fixed maturities represented 84% of the total investment portfolio while short-term and other investments (principally invested cash and short-term bonds) represented another 9%. The Company does not hold significant investments in equity securities, mortgage loans or real estate.
Liabilities were $3.0, $2.8 and $2.5 billion at December 31, 1997, 1996 and 1995, respectively. Liabilities associated with policies represent a major portion of total liabilities including $2.3 billion or 77.6% in 1997, $2.1 billion or 75.0% in 1996, and $1.9 billion or 75.1% in 1995.
Notes payable were $242.6 million at December 31, 1997, $222.5 million at December 31, 1996, and $236.0 million at December 31, 1995. The Company's debt to capitalization ratio of 23.0% at December 31, 1997 is down from 23.9% and 31.5% at December 31, 1996 and 1995 respectively.
During 1995 and 1994, the Company issued $50.0 million and $75.0 million of medium term notes respectively. The debt issuance proceeds were used to refinance outstanding debt and to support the Company's continued growth and expansion into new markets. In 1995, the Company replaced its short-term financing facility and borrowed $87 million, mainly used to pay off its former facility.
Stockholders' equity increased by $408.0 million to $813.9 million at December 31, 1997, from $405.9 million at January 1, 1995. In August 1997, the Company declared a two-for-one split, effected in the form of a stock dividend, on the Company's common stock. The result of the stock split was that all common shareholders received one additional share for each share they held. In July 1996, the Company issued 2.3 million shares of preferred stock with a stated value of $50 per share that contributed net proceeds of $111.8 million to equity. The other primary sources of growth in stockholders' equity from January 1, 1995, to December 31, 1997, are accumulated earnings of $281.6 million reduced by $57.4 million in dividends paid on the Company's common and preferred shares. Under FASB Statement 115 - Accounting for Certain Investments in Debt and Equity Securities - certain investments in debt and equity securities are carried in the balance sheet at fair value. The difference between amortized cost and fair value of securities available-for-sale (unrealized gain or loss, net of tax) is included as a component of equity. Unrealized gains, net of taxes on the Company's fixed maturity portfolio were $15.2 million at December 31, 1997.
In February 1996, the Board of Directors revoked the 1990 authority to repurchase Company stock and authorized a repurchase of up to one million shares of the Company's stock in the open market from time to time subject to certain conditions. At December 31, 1997, the Company held approximately 271,000 shares as treasury stock.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, $2.2 billion or 57% of the Company's total assets were comprised of securities, short-term investments and cash. Securities are principally readily marketable and none are part of highly leveraged transactions. In the bond portfolio, 77% of bonds have maturities of
under five years and 80% have a rating of "A" or better (80% and 83% respectively at December 31, 1996 and 1995). Unrealized gains on fixed maturity investments increased to $42.6 million at December 31, 1997, from $25.1 million at December 31, 1996.
The Company's investment portfolio has been structured to match cash requirements. Liabilities representing current cash requirements including claim liabilities, accrued commissions and other liabilities totaled $922.3, $906.3 and $748.0 million, at December 31, 1997, 1996 and 1995 respectively. Other significant cash commitments in 1998 include shareholder dividends of approximately $26.6 million under the current capital structure.
In connection with the execution of the Cendant Merger Agreement, the Company paid AIG a fee of $100 million for the termination of the AIG Merger Agreement and certain other related agreements. See Note 15 to the Consolidated Financial Statement on page 79 in Part II Item 8
ITEM 8 - ------
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -------------------------------------------
AMERICAN BANKERS INSURANCE GROUP, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page ---- Report of Independent Certified Public Accountants 45 Consolidated Balance Sheets at December 31, 1997 and 1996 46 Consolidated Statements of Income for the years ended December 31, 1997, 1996, and 1995 47 Consolidated Statements of Common Stock and Other Stockholders' Equity for the years ended December 31, 1997, 1996, and 1995 48 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995 49 Notes to Consolidated Financial Statements for the year ended December 31, 1997 50
SCHEDULES: * I Summary of Investments - Other Than Investments in Related Parties 81 II Condensed Financial Information of Registrant 82-85 III Supplementary Insurance Information 86 IV Reinsurance 87 VI Supplemental Information Concerning Property - Casualty Insurance Operations 88
* Note: All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Director and Stockholders of American Bankers Insurance Group, Inc.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of American Bankers Insurance Group, Inc. and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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 25, 1998
CONSOLIDATED BALANCE SHEETS - ---------------------------
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME ---------------------------------
FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS EXCEPT PER COMMON SHARE DATA):
Per share data has been restated due to stock split. See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY ----------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS EXCEPT PER COMMON SHARE DATA):
Per share data has been restated due to stock split. See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------
For the Years ended December 31 (in thousands):
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------
(1) DESCRIPTION OF BUSINESS
American Bankers Insurance Group, Inc. provides credit-related insurance programs in the United States, Canada and the Caribbean. The Company also conducts business in Latin America and the United Kingdom. ABIG, as an international wholesaler and marketer of insurance products, services and programs, concentrates on marketing through financial institutions, retailers and other entities which provide consumer financing as a regular part of their business.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in conformity with generally accepted accounting principles which vary in certain respects from reporting practices prescribed or permitted by state insurance departments and include the following significant accounting policies:
(a) Consolidation Policy
The accompanying consolidated financial statements include the accounts of American Bankers Insurance Group, Inc. (ABIG) and its subsidiaries (the Company):
* American Bankers Insurance Company of Florida (ABIC) * American Bankers Life Assurance Company of Florida (ABLAC) * American Reliable Insurance Company (ARIC) * Bankers American Life Assurance Company (BALAC) * Bankers Insurance Group (BIG) * Caribbean American Life Assurance Company (CALAC) * Caribbean American Property Insurance Company (CAPIC) * Federal Warranty Service Corporation (FWSC) * Voyager Insurance Companies
All significant intercompany transactions and accounts have been eliminated in consolidation.
(b) Investments
Under FASB Statement 115, investments in debt and equity securities are classified as either held-to-maturity, available-for-sale or trading. Investments in debt securities are classified as held-to-maturity and measured at amortized cost if the Company has the positive intent and ability to hold these securities to maturity. Investments in debt securities not classified as held-to-maturity and equity securities with readily determinable fair values are classified as either available-for-sale or trading securities and measured at fair value. Securities that are purchased and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value with subsequent changes in value reflected as unrealized investment gains and losses in the Consolidated Statements of Income. Investments not classified as either trading securities or held-to-maturity securities are classified as available-for-sale securities and reported at fair value with subsequent changes in value reflected as unrealized investment gains and losses in the Consolidated Statements of Common Stock and Other Stockholders' Equity.
Equity securities are carried at market value. Mortgage loans and policy loans are stated at the unpaid principal balance of such loans net of unamortized discount. Investments with impairment in value, which is other than temporary, are written down to estimated realizable value. The writedowns are included in realized investment gains in the Consolidated Statements of Income. Premiums and discounts on mortgage-backed securities are amortized using the simple interest method over the expected life of each security - generally 2 to 7 years. In addition, a pro rata portion of premiums and discounts is recognized when principal payments are received and is included in net investment income in the Consolidated Statements of Income. Unrealized gains and losses on equity securities are reflected in Stockholders' Equity. The cost of securities sold is based on the specific identification method.
(c) Premium Revenues
Life insurance and annuity premiums, including single premiums for accidental death and dismemberment policies, are reported as earned when due. Credit life insurance premiums and accident and health premiums are earned over the terms of the contracts in relation to anticipated benefits to the policyholders. Property insurance premiums are recognized as income principally on a pro rata basis over the life of the policies.
(d) Policy Acquisition Costs
For life business, the costs of acquiring new business (principally commissions and certain variable underwriting, agency and policy issue expenses) are deferred and amortized over the term of the contracts as follows:
* Acquisition costs relating to ordinary life contracts are amortized over the estimated term of the contracts in proportion to the ratio of the annual premium revenue to total premium revenue expected. Acquisition costs for universal life and annuities are amortized over the lives of the policies in relation to the present value of estimated gross profits from surrender charges and investment, mortality, and expense margins. The assumptions used for the estimates are consistent with those used in computing the policy liabilities.
* Acquisition costs relating to credit life and accident and health insurance are amortized over the term of the contracts in relation to premiums earned.
The method of computing the deferred policy acquisition costs for property business (commissions and other acquisition expenses) limits the amount deferred to the lower of (1) unearned premiums which remain after deducting the expected amount of losses, loss adjustment expenses, and servicing costs estimated to be incurred as the premiums are earned; or (2) the costs applicable to the unearned premiums.
Deferred acquisition costs are reviewed quarterly to assure their recoverability. The recoverability of the deferral is calculated without considering investment income.
(e) Policy Liabilities And Unearned Premiums
Policy liabilities on life and annuity business are computed principally by the net level premium method based upon assumptions as to future investment yield, mortality, morbidity, and withdrawals consistent with those used to develop the gross premiums on the policies in force. Universal life and annuity policyholders' liabilities are based on full account values. Unearned premiums for credit insurance and property business represent the unexpired portion of the premiums.
(f) Claim Liabilities
Claim liabilities net of salvage and subrogation are based primarily upon past experience and may be more or less than the amounts ultimately paid or recovered when the claims are settled. Changes in the estimated liability are charged or credited to operations as the estimates are revised.
(g) Income Taxes
Deferred taxes are provided for temporary differences in the bases of assets and liabilities for financial reporting and tax purposes.
(h) Property And Equipment
Depreciation of property and equipment is provided primarily on the accelerated method. Buildings are depreciated on the straight line method.
Depreciation expense for the years ended December 31, 1997, 1996 and 1995 was $10,091,000 $9,278,000 and $8,607,000, respectively and is a component of operating expenses. Estimated useful lives range from 10 to 40 years for buildings and 3 to 10 years for furniture and equipment.
(i) Earnings Per Common Share
In February 1997, the Financial Accounting Standards Board issued FASB Statement 128 Earnings per Share, which specifies the computation, presentation and disclosure requirements for earnings per share (EPS). It replaces the presentation of primary and fully diluted EPS with basic and diluted EPS. Basic EPS excludes all dilution. It is based on income available to common shareholders and the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. The Company adopted FASB Statement 128 as of the fourth quarter of 1997 and has restated all previously reported per share amounts to conform to the new presentation.
(j) Pension Plan
Pension costs are comprised of service costs applicable to benefits earned during the year, net interest cost or credit applicable to interest on plan liabilities and plan assets, and amortization of certain charges and credits including prior service costs.
(k) Translation Of Foreign Currencies
For those foreign affiliates where the foreign currency is the functional currency, unrealized foreign exchange gains (losses) net of taxes have been reflected in Common Stock and Other Stockholders' Equity under the caption "Net unrealized investment and foreign exchange gains (losses)."
(l) Fair Values Of Financial Instruments
The Company has used the following methods and assumptions in estimating its fair value disclosures:
* Investment securities: Fair values for fixed maturity securities are based on quoted market prices when available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or values obtained from independent pricing services. The fair values for equity securities are based on quoted market prices.
* Mortgage loans and policy loans: The fair values for mortgage loans are estimated using discounted cash-flow analysis, using interest rates currently being offered for loans with similar terms. The carrying amounts for policy loans approximate their fair values at the reporting date.
* Cash and short-term investments: The carrying amounts reported in the balance sheet for these instruments approximate their fair values.
* Trade receivables and payables: The carrying amounts reported in the balance sheet for these instruments approximate their fair values.
* Notes payable: The carrying amount of the Company's short-term financing program approximates its fair value. Fair values for the Company's medium-term notes are based on a discounted cash-flow calculation using the Company's current borrowing rate for similar debts.
(m) Reinsurance
The Company recognizes the income (ceding fees) on reinsurance contracts principally on a pro rata basis over the life of the policies covered under the reinsurance agreements.
(n) Segment Information
Operating results and other financial data for each segment are presented in Note 12. Industry segments are primarily composed of the Company's business in the life and property and casualty insurance industries. The geographic segments include the companies or branches located in the United States and its possessions as domestic and all other as foreign. Included in the domestic segments is one foreign insurance subsidiary which writes no direct business, reinsures only affiliated U.S. risks transacted in U.S. dollars and has elected to be taxed as a U.S. corporation.
(o) Reclassifications
Certain items in the 1996 and prior financial statements have been reclassified to conform with the 1997 presentation.
(p) Estimates
Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts. Certain significant estimates, including those used in determining property and casualty loss reserves, life insurance policy liabilities, deferred acquisition costs, valuation allowances for investment assets and unrecoverable reinsurance are discussed throughout the notes to consolidated financial statements.
(3) INVESTMENTS AND FAIR VALUES INVESTMENTS
Previously, the Company would periodically purchase securities for trading purposes generally not to exceed $20,000,000. The Company no longer engages in this activity, and there were no securities in the trading portfolio at December 31, 1997. At December 31, 1996, the Company held trading securities with a fair value of $9,038,000 (amortized cost $8,867,000) resulting in an unrealized gain of $171,000 which was included in operating results.
At December 31, 1997 and 1996, the fair value, amortized cost, and gross unrealized gains and losses of investments in held-to-maturity and available-for-sale securities consisted of the following:
At December 31, 1997 and 1996, fixed maturities with an amortized cost of $187,493,000 and $140,090,000 respectively were on deposit with insurance regulatory authorities to meet statutory requirements. In addition, fixed maturities with an amortized cost of $24,098,000 and $37,467,000 were being held in trust under reinsurance agreements at December 31, 1997 and 1996, respectively. The approximate market value and amortized cost of fixed maturity investments at December 31, 1997, are shown below by contractual or expected maturity periods. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Foreign exchange gains and losses due to the translation of foreign currency are combined with net unrealized investment gains and losses in the Stockholders' Equity section of the Balance Sheet. Following is a reconciliation of the "Net unrealized investment and foreign exchange gains (losses)" account:
Investments by the Company in investment grade corporate debt securities may be affected by a rating decline subsequent to acquisition. However, the percentage of the portfolio affected by such developments is generally not significant due to the diversification of the aggregate portfolio.
The Company has no significant investment concentration of credit risk by issuer, industry or geographic region.
An analysis of net realized gains and losses applicable to investments is as follows:
FAIR VALUES The fair value of the Company's financial instruments other than investments and those where fair values approximate carrying value (See Note 2(l)) are as follows:
(4) POLICY LIABILITIES, UNEARNED PREMIUMS AND LIABILITIES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The composition of the liability at December 31, 1997 and 1996, and related significant assumptions used are as follows:
(A) Life insurance in force and future policy benefits are stated individually net of reinsurance ceded to other companies. Reinsurance ceded to other companies has been added back to policy liabilities and unearned premiums for balance sheet presentation. (B) All withdrawal assumptions are based on the Company's experience.
PROPERTY AND CASUALTY LOSSES AND LOSS ADJUSTMENT EXPENSES
The consolidated financial statements include estimated provisions for unpaid losses and loss adjustment expenses (LAE) applicable to the Company's property and casualty insurance subsidiaries. These subsidiaries write principally credit property, unemployment, homeowners, mobilehome physical damage and livestock lines of business throughout the United States, Canada, the Caribbean and the United Kingdom. Such liabilities are established using a combination of case basis estimates and actuarial projections and include provisions for claims incurred but not yet reported as of the balance sheet date.
The Company's loss reserve development includes losses assumed from excess casualty reinsurance pools in which the Company discontinued participation effective on or prior to 1981. The business is long-tail in nature and losses continue to exceed both Company and industry expectations. Most of these losses result from asbestos-related and environmental pollution claims. The Company's exposure is primarily through participation in excess casualty pools. These pools typically involve high-layer coverages that are applicable only after primary insurance coverage and, in many cases, reinsurance coverages have been exhausted. The Company's experience can differ significantly from that of other insurers which wrote the primary coverages directly. The Company establishes loss reserves on known claims as recommended by the various pool managers, plus additional reserves to compensate for those claims that have not yet been reported.
At the current time, it is not possible to determine the future development of asbestos and environmental claims due to a general absence of reliable predictive data and of a generally accepted actuarial methodology for these exposures, significant unresolved legal issues including coverage issues, policy definitions and evolving theories and arguments. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties is complex and uncertain. Our historical experience suggests, however, that although reinsurance pool losses will continue, they should not have a materially adverse effect on the Company's financial condition or cash flows. Losses from the Company's discontinued reinsurance pools were $6.6, $8.3 and $7.3 million in 1997, 1996 and 1995 respectively.
Overall claims experience is principally dependent on the frequency and severity of claims as well as trends in litigation and loss cost inflation. With the exception of discontinued lines, the Company writes primarily property coverages which are characterized by relatively short settlement periods and quick development of ultimate losses. Reinsurance pool reserves represent approximately 10.2% of the gross liability for property and casualty losses and LAE at December 31, 1997. The Company's estimating and reserving practices are reviewed continually. Subsequent adjustments to the original estimates are made when determinable and are reflected in current year operations.
The accompanying tables present an analysis of losses and LAE for the Company's domestic property and casualty subsidiaries. The following table provides a reconciliation of beginning and ending liability balances for 1997, 1996 and 1995.
Accident and health net claim liabilities reported in the Company's life subsidiaries were $80,564,000, $80,026,000 and $57,049,000 at December 31, 1997, 1996 and 1995, respectively. There was no significant adverse development during the past three years.
(5) REINSURANCE
The Company's insurance subsidiaries follow the policy of reinsuring risk in excess of $250,000 under a domestic ordinary life policy, $400,000 under an international ordinary life policy and $300,000 under a property policy. In addition, aggregate excess of loss coverage is obtained for the Company's property and casualty business as protection against catastrophic losses. Ceded claim and policy liabilities are recorded as assets on the balance sheet under the caption "Reinsurance Receivable." The Company's insurance subsidiaries are liable for these amounts in the event reinsurers are unable to pay their portion of the claims. The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from similar geographic regions, activities or economic attributes of the reinsurers to lessen its exposure to significant losses from reinsurer insolvencies. Reinsurance ceded incurred losses for 1997 and 1996 were $416,333,000 and $315,096,000 respectively. Liabilities for ceded claim reserves and recoverables on paid losses at December 31, 1997 and 1996 are shown below.
(6) INCOME TAXES
Prior to 1984, ABLAC was taxed at regular corporate rates in accordance with the Life Insurance Company Income Tax Act of 1959, whereby a portion of its statutory income was not subject to current income taxation, but was accumulated in an account designated "policyholders' surplus." The aggregate balance in this account ($17,000,000 at December 31, 1997) would be taxed at applicable current rates only if distributed to stockholders or if the account exceeded a prescribed maximum. The Deficit Reduction Act of 1984 eliminated additions to the account for 1984 and thereafter. ABLAC does not anticipate any transactions that would cause any part of this amount to become taxable. Deferred taxes in the amount of $5,950,000 have not been provided since the Company does not anticipate any transactions that would cause any part of the account balance to become taxable. As of December 31, 1997, ABLAC has a shareholders' surplus account balance (on a tax basis) of approximately $158,100,000 from which it could pay dividends to stockholders without incurring any federal income tax liability, subject to regulatory requirements and the availability of funds. The other life insurance subsidiaries do not have policyholders' surplus account balances.
Under current Internal Revenue Code provisions, the life insurance subsidiaries are taxed under a single-phase structure incorporating tax rules comparable to other corporate taxpayers. The life insurance subsidiaries are included in the Company's consolidated tax return.
ABIG and all other subsidiaries are taxed at regular corporate rates applied to taxable income as determined in accordance with the Internal Revenue Code.
Pre-tax income from foreign sources excludes the results of Canadian branches of domestic companies.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred tax liabilities and assets are as follows:
Significant components of the provision for income taxes attributable to continuing operations are as follows:
The provision for foreign taxes includes amounts attributable to income from U.S. possessions which are considered foreign under U.S. tax laws.
Total income tax expense (benefit) varies from amounts computed by applying current federal income tax rates to income before income taxes. The reasons for these differences and the approximate tax effects thereon for each year ended December 31 are as follows:
Deferred income taxes of $13,066,000, $9,015,000, and $10,230,000 in 1997, 1996 and 1995 respectively have been provided on net unrealized investment gains.
The Company intends to indefinitely reinvest the undistributed earnings of its wholly owned foreign subsidiaries. The cumulative amount of undistributed earnings for which the Company has not provided deferred income taxes is approximately $77,300,000 as of December 31, 1997. Upon distribution of such earnings in a taxable transaction, the Company would incur additional U.S. income taxes in the amount of approximately $19,500,000 net of anticipated foreign tax credits.
Current tax benefits of approximately $4,339,000 related to the vesting of restricted stock were credited directly to additional paid-in capital in 1997.
At December 31, 1997, the Company's U.K. subsidiary had approximately $12,645,000 in net operating loss (NOL) carryforwards. A valuation allowance for the full amount of the related tax benefit has been established due to uncertainties associated with utilization of the NOL carryforwards.
The Company made federal income tax payments (net of refunds) of $24,075,000, $21,875,000, and $13,448,000 for the years 1997, 1996 and 1995 respectively.
(7) NOTES PAYABLE
Following is a summary of outstanding debt at December 31:
On December 1, 1995, the Company replaced its short-term credit agreement with a $250,000,000 five-year competitive advance and revolving credit agreement with a group of banks. The credit facility features a revolving line of credit, commercial paper and/or bid loan facilities. Interest rates vary according to the credit instrument exercised and the market rates then prevailing. Quarterly fees payable under this credit facility are: (a) fees payable to each lender, based upon the Company's Moody's and Standard & Poor's ratings at every quarter end; (b) utilization fees; and (c) administrative fee. The fees incurred in 1997 and 1996 were $237,000 and $316,000, respectively for these facilities. Fees for 1995 were $1,482,000 for the old credit agreement and credit facility. The credit agreement contains various covenants pertaining to minimum stockholders' equity, maximum funded debt ratio and insurance statutory surplus and other ratios. No dividend payments are permitted if there is a default under the credit facility. Consummation of the merger as contemplated by the Cendant Merger Agreement will, unless consents or waivers are obtained from the group of banks under the credit facility, constitute an event of default and result in the termination of the credit facility. This event may impact the Company's liquidity if it is required to repay all outstanding loans and advances pursuant to the credit facility and the unavailability of further loans and advances under the credit facility.
In 1994, the Company filed with the Securities and Exchange Commission a shelf registration statement for $200,000,000 medium-term notes which provides for maturities ranging from nine months to thirty years. Under this shelf registration, the Company issued a $75,000,000 fixed rate note in May 1994 at 7.6% that is due May 1999 and interest is payable semi-annually. In addition, the Company issued a five-year $50,000,000 floating rate note in April 1995. Interest is payable and the rate is established on a quarterly basis. At December 31, 1997, the interest rate was 6.4%.
Interest paid was $16,485,000 in 1997, $17,924,000 in 1996, and $14,328,000 in 1995.
The 10.2% promissory notes program was paid and terminated by the Company during 1997. The convertible debenture bonds were converted to shares of the Company's common stock during January 1998.
The following information is furnished with respect to the Company's short-term borrowings (commercial paper and revolving line of credit):
(8) STOCKHOLDERS' EQUITY
The Company has authorized 10,000,000 shares of no par preferred stock. On February 24, 1988, the Board of Directors adopted a "Rights Plan" (amended November 14, 1990, December 19, 1997, February 5, 1998, and February 19, 1998) creating certain rights which attach to and trade with each share of common stock outstanding on or after March 11, 1988. Upon the acquisition of, or the announcement of a tender offer for, specified amounts of the Company's common stock, the rights will separate from the common stock, at which time holders of the rights will be entitled to purchase units of the Company's Series A Participating Preferred Stock. Thereafter, under certain circumstances (including acquisitions of specified amounts of the Company's common stock, mergers involving the Company, and certain self-dealing transactions by an acquisitor), holders of the rights will be entitled to purchase common stock (or other property) of the Company (or of the acquiring entity) at prescribed levels. At December 31, 1997, there were 350,000 shares of Series A Preferred Stock reserved for issuance. The rights are redeemable at the Company's option and expire on March 10, 1998. The Board of Directors adopted a new "Rights Plan" on February 19, 1998 and designated and reserved for issuance 1,000,000 shares of Series C Participating Preferred Stock, which terms are substantially similar to the Series A Preferred Stock. Neither Rights Plans were or will be triggered by the proposed acquisition by Cendant Corporation.
In August 1997, the Company declared a two-for-one split, effected in the form of a stock dividend, on the Company's common stock.
At December 31, 1997, the Company had 2,300,000 shares of $3.125 Series B Cumulative Convertible Preferred Stock issued and outstanding. Holders of the Convertible Preferred Stock are entitled to a cumulative dividend, payable quarterly, at the annual rate of $3.125 per share. If six quarterly dividends are in arrears, the holders of the convertible preferred stock will be entitled to vote as a separate class to elect two directors of the Company. The Convertible Preferred Stock will not be redeemable prior to August 7, 2000. On and after such date, the Convertible Preferred Stock will be redeemable, in whole or in part, at the option of the Company, at $51.88 per share of Convertible Preferred Stock during the period from August 7, 2000 to August 6, 2001 and declining ratably annually to $50 per share of Convertible Preferred Stock on or after August 7, 2006, plus in each case accrued and unpaid dividends to the redemption date.
Each share of Preferred Stock has a liquidating preference of $50, plus accrued and unpaid dividends, and is convertible at any time at the option of the holders thereof into 1.9974 shares of Common Stock of the Company (equivalent to a conversion price of $25.0325 per Common Share), subject to adjustment under certain conditions.
Stock insurance companies are subject to various states' insurance laws and regulations whereby amounts available for dividends are restricted. Net consolidated assets restricted as to distribution to the Company are $672,500,000. The maximum statutory allowed dividends in 1998 are $141,300,000.
A summary of statutory financial information for the domestic insurance companies is presented below:
Statutory Permitted Practices
The Company's insurance subsidiaries prepare their statutory financial statements in accordance with accounting principles and practices prescribed or permitted by the insurance department of their state of domicile. Prescribed statutory accounting practices include state laws, regulations and general administrative rules as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). Permitted statutory accounting practices encompass all accounting practices that are not prescribed; such practices differ from state to state and may change in the future. The NAIC has a project to codify statutory accounting practices, the result of which is expected to constitute the only source of "prescribed" statutory accounting practices.
(9) COMPENSATION AND OTHER PLANS
Stock Option Plans
EQUITY INCENTIVE PLAN
At their Annual Meeting in 1997, the stockholders approved the Equity Incentive Plan (EIP). Under the EIP, selected officers and employees may be granted Options, Stock Appreciation Rights, Restricted Stock, Merit Awards, Performance Share Awards and Cash Awards. An aggregate of 4,000,000 (post-split) shares of common stock are reserved for issuance under the EIP. Awards were granted as follows:
Under the Incentive Stock Option award, 187,200 (post-split) options on shares of common stock were granted of which 122,800 (post-split) shares were issued upon exercise with an option price of $14.22. Certain key employees were granted options at fifty percent of the fair market value of the common stock on the grant date. Shares obtained by exercise are subject to restrictions. Non-vested shares are subject to forfeiture if employment is terminated except by death, disability or retirement. Vesting occurs ratably over a five-year period from the date exercised. The weighted-average fair value of options granted during the year was $14.31.
Under the Non-Qualified Stock Option award, 175,200 (post-split) options on shares of common stock were granted of which 162,600 (post-split) shares can be exercised starting May 1998 at a price of $28.44. Certain key employees were granted options at prices equivalent to the fair market value of the common stock on the grant date. Each option further entitles the employee to be awarded, for no additional consideration, two additional shares of restricted common stock. Restricted shares vest three years from date of exercise. Options are not exercisable before the first year anniversary nor after the third annual anniversary from the date of the grant. The weighted-average fair value of options granted during the year was $5.64.
Under the Non-Employee Directors Stock Option award, 26,000 (post-split) options on shares of common stock were granted all of which can be exercised starting May 1998 at a price of $28.44. Each non-employee director received 2,000 (post-split) options at prices equivalent to the fair market value of the common stock on the grant date. The weighted-average fair value of options granted during the year was $8.08.
SENIOR MANAGEMENT STOCK OPTION PLAN
Under the Senior Management Stock Option Plan (SMSOP), key management employees were granted a total of 460,200 (post-split) options on shares of the common stock during the years 1994 through 1996. Option prices were equivalent to the fair market value of common stock on the grant date with prices ranging from $11.07 to $23.75. The grantee received for no additional consideration two shares of common stock subject to certain transfer restrictions for every one primary share purchased upon the exercise of the option. During 1997, 144,400 (post-split) shares of common stock were issued upon exercise of options subject to the plan, with option prices ranging from $11.07 to $23.75. As the result of the adoption of the EIP, no new grants will be made under the SMSOP.
STOCK OPTION/RESTRICTED STOCK AWARD PLAN
Under the Stock Option/Restricted Stock Award Plan (SORSAP), key management employees were granted a total of 1,167,600 (post-split) options on shares of common stock during the years 1990 through 1994. Option prices were equivalent to the fair market value of common stock on the grant date with prices ranging from $4.13 to $13.25. The grantee received for no additional consideration three shares of common stock subject to certain transfer restrictions for every one primary share purchased upon the exercise of the option. As the result of the adoption in 1994 of the SMSOP, no new grants were made under the SORSAP.
STOCK INCENTIVE COMPENSATION PLAN
Under the Stock Incentive Compensation Plan (SICP), key management employees were granted a total of 672,100 (post-split) options on shares of common stock during the years 1991 through 1996. Option prices were equivalent to fifty percent of the fair market value of common stock on the grant date with prices ranging from $3.66 to $11.88. As the result of the adoption of the EIP, no new grants will be made under the SICP.
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
Under the Non-Employee Directors' Stock Option Plan (Directors' Plan), directors' received 2,000 (post-split) options annually at prices equivalent to the fair market value of common stock on the grant date. The stock options were granted during the years 1994 through 1996. As of December 31, 1997, 78,000 (post-split) shares of common stock were subject to options granted under the Directors' Plan with option prices ranging from $11.28 to $20.19. During 1997, 8,000 (post-split) shares of common stock were issued upon exercise of options subject to the stock option plan, with option prices ranging from $11.28 to $20.19. As the result of the adoption of the EIP, no new grants will be made under the Directors' Plan.
A summary of the status and activity for options and shares granted and exercised under the Plans at December 31, 1997, is as follows:
The following table summarizes information about stock options outstanding at December 31, 1997:
Shares issued under the plans are recorded at fair market value at the effective date of the grant. The unamortized difference ($6,252,000 as of December 31, 1997, and $4,382,000 as of December 31, 1996) between the fair market value and option price on shares which are restricted is reported as part of stockholders' equity. Amortization of the restricted stock is recorded as compensation expense ratably over the vesting period ($2,280,000 in 1997, $1,544,000 in 1996, and $1,407,000 in 1995). Furthermore, any difference between the fair market value at the grant date and the option price on the unrestricted shares in the SORSAP Plan and SMSOP Plan is recorded as compensation expense. Forfeitures are included as credits in the income statement during the period in which the forfeiting event occurs.
Fair Values of Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options as allowed pursuant to FASB Statement No. 123, "Accounting for Stock Based Compensation" (FASB Statement 123). FASB Statement 123 requires use of option valuation models that require the input of highly subjective assumptions, including expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards under those plans, consistent with FASB Statement No. 123, the reduction in the Company's 1997, 1996, and 1995 net income and net income per share would have been insignificant. The effect of applying the fair value method of accounting for stock options on reported net income and net income per share for 1997, 1996 and 1995 may not be representative of the effects for future years because outstanding options vest over a period of several years and additional awards are generally made each year.
The fair value of options granted was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1997, 1996 and 1995:
EXECUTIVE STOCK OPTION/DIVIDEND ACCRUAL PLAN
At their Annual Meeting in 1987, the stockholders approved the 1987 Executive Stock Option/Dividend Accrual Plan (ESODAP). As of December 31, 1997, options representing 1,420,828 shares (post-split) had been granted under the plan, of which 1,109,404 (post-split) had been exercised and 131,876 (post-split) had been terminated. A key feature of the plan is the Dividend Accrual Account which allows for the crediting of dividends in order to assist the executive in the exercise of the options. As the result of the adoption of the SORSAP and SICP, no new grants were made under the ESODAP.
Other Plans
KEDP
Under the 1994 Key Executive Debenture Plan (KEDP), the Board may select certain Company officers to be eligible to purchase convertible debentures. As of December 31, 1997, two debentures in the aggregate amount of $3.7 million had been issued which are convertible into all the 300,000 shares as currently reserved under the plan. All debentures were converted by the holders in January 1998.
LESOP
The Leveraged Employee Stock Ownership Plan (LESOP) through its trust was funded by a loan from a bank which was collateralized with newly issued shares of the Company's stock purchased by the LESOP at market price.
Although the debt is not a direct obligation of the Company, it is nevertheless reported as part of the Company's debt with an offsetting balance reflected as a reduction of stockholders' equity. As contributions to the LESOP are made by the Company, the debt is repaid to the bank by the LESOP and the balances on the Company's balance sheet are reduced accordingly. The Company has guaranteed the Trust's loan obligation. It intends to make contributions to the LESOP in amounts sufficient to enable the Trust to repay the loan on a quarterly basis over ten years, including interest equal to 6%. The shares held by the bank as collateral are released proportionately as loan repayments are made. Upon such release, the shares are available for allocation to employees based upon years of service. Employees are entitled to direct the vote of the shares allocated to them on voting instruction forms furnished to the trustee. Unallocated shares are voted by the LESOP's Trustee. At December 31, 1997 and 1996, the loan balance was $2.1 million and $4.3 million respectively. The interest portion of the LESOP pension expense was $.3 million in 1997 and $.4 million in 1996.
As a result of the promulgation of Statement of Position (SOP) 93-6 - "Employers' Accounting for Employee Stock Ownership Plans" - by the American Institute of Certified Public Accountants in late 1993, new reporting rules became effective in 1994. These changes are mandated for shares acquired in 1993 and later, and are optional for previously acquired shares. The Company has no shares subject to the mandated provisions and, as permitted by the SOP, is not electing to change its accounting for previously acquired shares. The following disclosures are made to supplement previously disclosed plan information:
* Dividends paid on all shares held by the LESOP are used to service the existing debt of the LESOP.
* Compensation expense for the years ended December 31, 1997, 1996 and 1995 was $976,000, $1,186,000 and $1,430,000 respectively. The compensation expense represents the Company's contributions to the LESOP necessary to meet its periodic debt service, after applying dividend payments received on the shares held by the LESOP. All dividends paid on such shares retain their character as distributions made from the Company's retained earnings.
* All shares held by the LESOP are treated as issued and outstanding and, accordingly, are included in the Company's earnings per share calculations.
* Shares held by the LESOP as of December 31, 1997 include the following:
Prior allocated 3,503,986 Allocated in 1997 343,432 Suspense shares 343,440 Distribution (684) --------- Total 4,190,174 =========
DIRECTORS' DEFERRED COMPENSATION PLAN
The 1994 Amended and Restated Directors' Deferred Compensation Plan (Deferred Plan) allows the directors to defer their fees in cash or in common stock equivalents. The fees that are deferred in common stock equivalents will accumulate and earn interest from the time the fees are deferred until the last day of each quarter when they are converted to common stock equivalents. Upon termination from the board, the director will receive, as elected, either cash or actual shares of the Company's common stock. The Deferred Plan provides for the issuance of up to 400,000 shares of the Company's common stock. At December 31, 1997 there were 123,273 shares allocated under this plan.
(10) PENSION PLAN
The Company has a non-contributory pension plan covering substantially all of its domestic employees. Benefits under the Plan are based on years of service and compensation levels near retirement. The Company's funding policy is to contribute amounts that meet minimum funding requirements but which do not exceed the maximum funding limits as currently determined under applicable tax regulations. The Plan previously reached the full funding limitation and, accordingly, no contributions were made in 1997, 1996 and 1995.
The pension plan expense included the following components for the years ended December 31:
The Board of Directors previously approved a non-qualified supplemental benefit plan. This unfunded deferred compensation plan is intended to provide pension benefits which would otherwise be provided under the benefit accrual formula applicable to all employees in the Company's qualified Plan, but which are in excess of an annual amount permitted under current tax regulations. Expense ($.5 million in 1997, $.1 million in 1996 and $.1 million in 1995) is being recognized over the remaining service period for the officers presently covered.
(11) COMMITMENTS AND CONTINGENCIES
A summary of the approximate future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year at December 31, 1997, is as follows:
Total rental expense for the years ended December 31, 1997, 1996 and 1995 was $10,962,000, $9,258,000 and $7,661,000 respectively.
Contingencies
During 1995, the Company completed a settlement with the Federal Deposit Insurance Corporation (FDIC) of the only remaining lawsuit against the Company relating to its relationship with a former credit bond client. This settlement included the entry of orders by the Court dismissing all claims between the Company and the FDIC with prejudice. The settlement, net of previously established reserves, resulted in a charge of $5.8 million. Effective with this settlement, the Company concluded all litigation ever initiated against it in connection with its discontinued credit bond insurance business.
Certain of ABIG's subsidiaries, including the Company, are presently parties to a number of individual consumer and class action lawsuits pending in Alabama involving premium, rate, sales practices, marketing, disclosure and policy coverage issues. While a number of similar suits have been filed in other jurisdictions, the insurance and finance industries have been targeted in Alabama by plaintiffs' lawyers who enjoy a favorable judicial climate. The Company typically has been named as a co-defendant with one or several retailer or finance companies who have sold the Company's product to a consumer. Other insurers are also joined as co-defendants in some of the suits.
Although the Alabama lawsuits and similar suits pending in Mississippi and other jurisdictions generally involve relatively small amounts of actual or compensatory damages, they typically assert claims requesting substantial punitive awards or purport to represent a large class of policyholders. The Company denies any wrongdoing in any of these suits and believes that it has not engaged in any conduct that would warrant an award of punitive damages or that the class allegations have merit. The Company has been advised by legal counsel that it has meritorious defenses to all claims being asserted against it.
While no one case is necessarily significant in terms of financial risk to the Company, the judicial climate in Alabama is such that the outcome of these cases is extremely unpredictable. Moreover, class action lawsuits to which the Company is a party do not lend themselves to potential damage calculation. Without admitting any wrongdoing, the Company has settled a number of these suits, but there are still a significant number of cases pending, and it is expected that more suits alleging essentially the same causes of action are likely to continue to be filed during 1998. The Company intends to continue to defend itself vigorously against all such suits and believes, based on information currently available, that
any liabilities that could result are not expected to have a material adverse effect on the Company's financial position.
As described more fully in Note 15 - "Change of Control of the Company" on page 79 of this report, on December 22, 1997, the Company announced that it had entered into a merger agreement with AIG and on January 27, 1998, Cendant Corporation ("Cendant") and Season Acquisition Corp. ("Season") commenced an unsolicited tender offer for 51% of the Company's shares. Six legal actions have been brought against the Company and members of its board of directors growing out of the proposed merger with AIG and Cendant's tender offer.
The Company and members of its board of directors deny all allegations of unlawful conduct asserted in any of these actions and have been advised by counsel that they have meritorious defenses to each of them. The Company intends to continue to defend itself vigorously against these actions and believes, based on currently available information, that any liabilities that could result are not expected to have a material effect on the Company's financial position.
The Company is involved with a number of cases in the ordinary course of business relating to insurance matters or, more infrequently, certain corporate matters. Generally, the Company's liability is limited to specific amounts relating to insurance or policy coverage for which provision has been made in the financial statements. Other cases involve general corporate matters which generally do not represent significant contingencies for the Company.
(12) SEGMENT INFORMATION FOR THE YEARS ENDED DECEMBER 31
- -------------------------------------------------------------------------------- Summarized data for the Company's foreign operations (principally in Canada and the United Kingdom) and domestic operations are as follows:
The Company distributes its products through eight markets or distribution channels involving over one thousand clients. Its business is generally not concentrated, and no single customer accounted for 10% or more of the Company's consolidated gross collected premiums in 1997.
(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 1997 and 1996, is presented below:
The sum of the quarterly earnings per share amounts may not equal the comparable amounts for the full year because the computations are done independently.
(14) EARNINGS PER SHARE
The Company adopted FASB Statement 128 "Earnings per Share" for the period ending December 31, 1997. This Statement replaces the presentation of primary and fully diluted EPS with a presentation of basic and diluted EPS. All prior year data has been restated to conform with the provisions of this Statement and to reflect the two-for-one stock split effective September 1997. The following is the required reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation
(15) CHANGE OF CONTROL OF THE COMPANY
The Company entered into an Agreement and Plan of Merger, dated as of March 23, 1998, by and among Cendant Corporation ("Cendant"), Season Acquisition Corporation ("Season") and the Company (the "Cendant Merger Agreement") pursuant to which (i) the previously announced tender offer by Season is being conducted (the "Offer") and (ii) upon consummation of the Offer, the merger of the Company with and into Season will be consummated (the "Merger"). The execution of the Cendant Merger Agreement followed the public announcement by Cendant on January 27, 1998 of its proposal to acquire the Company for $58 per share of Common Stock, to be paid in cash and common stock of Cendant and the subsequent announcement by Cendant on March 16, 1998, increasing the per share price for its proposal from $58 to $67.
Under the terms of the Cendant Merger Agreement, Season is offering to purchase 23,501,260 outstanding shares of Common Stock at a price of $67.00 per Common Share, net to the seller in cash, without interest thereon. Following the consummation of the Offer, the Company will be merged with and into Season with Season continuing as the surviving corporation. Season will succeed to the business of the Company and will assume the name American Bankers Insurance Group, Inc. As a result of the Merger, each Common Share then outstanding (other than Common Shares owned by Cendant, Season or any direct or indirect subsidiary of the company and in each case not held on behalf of third parties) will be converted into, and become exchangeable for, that number of shares of Cendant Common Stock having a value equal to the amount derived by dividing $67.00 by the average closing prices of the Cendant Common Stock as reported on the NYSE composite transactions reporting system (as reported by the New York City edition of the Wall Street Journal) for the ten trading days ending on the third trading day prior to the date the Merger is consummated). In addition, pursuant to the Merger, each of the then outstanding $3.125 Series B Cumulative Convertible Preferred Shares ("Preferred Shares") will be converted into one share of Cendant Preferred Stock having substantially similar terms to the Preferred Shares, except that such shares shall be convertible into shares of Cendant Common Stock in accordance with the terms of the Preferred Shares.
The consummation of the Merger is conditioned upon several requirements, including shareholder and regulatory approval. If the Company fails to consummate the Merger, under certain circumstances, the Company will be obligated to pay a termination fee to Cendant of $94.9 million plus expenses.
Cendant's proposal to acquire the Company followed an announcement by the Company that it had entered into an agreement with American International Group, Inc. ("AIG") for the acquisition by AIG of 100 percent of the outstanding stock of the Company pursuant to the merger (the "AIG Merger") of the Company with and into AIGF, Inc., a Florida corporation and a newly formed wholly-owned subsidiary of AIG, in accordance with the terms of the Agreement and Plan of Merger, dated as of December 21, 1997 among the Company, AIG and AIGF as amended and restated as of January 7, 1998, amended by Amendment No. 1 thereto dated as of January 28, 1998, and as further amended and restated as of February 28, 1998 (the "AIG Merger Agreement"). In connection with the AIG Merger Agreement, the Company had granted AIG an option to purchase a number of newly issued shares of Common Stock equal to approximately 19.9% of the outstanding number of shares of Common Stock pursuant to the Stock Option Agreement dated as of December 21, 1997, as amended and restated as of February 28, 1998 (the "Stock Option Agreement"). In addition, Messrs. Landon and Gaston who hold approximately 8.3% of the outstanding Common Stock had entered into a voting agreement (the "Voting Agreement") with AIG pursuant to which these stockholders agreed to vote their shares of Common Stock in favor of
adoption of the AIG Merger Agreement and approval of the AIG Merger and to grant to AIG an irrevocable proxy with respect to such shares of Common Stock, subject to certain conditions.
The AIG Merger Agreement, Stock Option Agreement and Voting Agreement have been terminated. On March 18, the Company, AIG and Cendant entered into a settlement agreement (the "Settlement Agreement") pursuant to which AIG agreed to temporarily waive certain provisions of the AIG Merger Agreement, which waiver permitted the Company to terminate the AIG Merger Agreement and enter into the Cendant Merger Agreement. On March 23, 1998, in accordance with the terms of the Settlement Agreement, the Company paid to AIG a termination fee of $100 million principally from funds provided by its short-term credit facility and Cendant paid $5 million, and agreed to pay an additional $5 million to AIG in respect of AIG's expenses, and the Company and AIG entered into a termination agreement which resulted in the termination of the AIG Merger Agreement, the Stock Option Agreement and the Voting Agreement.
The Merger is subject to approval by regulatory authorities and the Company's shareholders which are expected to be obtained by the end of the second quarter of 1998. In connection with the Merger, the Company will recognize certain expenses associated with the accelerated vesting of benefits under several compensation plans, including employee stock options and restricted stock. The Company estimates that the after-tax charge related to the acceleration of such benefits will be approximately $6 million.
Certain officers of the Company have severance agreements which entitle them to receive specified payments under certain circumstances following a change in control. The maximum amount that the Company could incur pursuant to such severance agreements is approximately $12.7 million, net of tax.
Schedule I
AMERICAN BANKERS INSURANCE GROUP, INC. SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1997 (IN THOUSANDS)
Information of Summary of Investments - Other Than Investments in Related Parties is included on page 11 in Part I Item 1 c. of this report, and in Note 3 on page 55 in Part II Item 8 of this report, with the exception of the Information on Equity Securities which is included below.
Schedule II
AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT) CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS AT DECEMBER 31, (IN THOUSANDS)
*Eliminated in consolidated financial statements. See accompanying notes to condensed financial statements.
Schedule II
AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS)
*Eliminated in consolidated financial statements. See accompanying notes to condensed financial statements.
Schedule II
AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS)
See accompanying notes to condensed financial statements
Schedule II
AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT) CONDENSED FINANCIAL INFORMATION OF REGISTRANT DECEMBER 31, 1997
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in conjunction with the Consolidated Financial Statements and notes thereto of American Bankers Insurance Group, Inc. and subsidiaries.
The Company is scheduled to repay the LESOP note at a yearly amount of $2,125,000 plus interest. For a description of short-term and long-term debt payable to others and related information see Note 7 to the Consolidated Financial Statements on page 64 in Part II Item 8 of this report. For a description of the Company's commitments and contingencies, see Note 11 to the Consolidated Financial Statements on page 75 in Part II Item 8 of this report.
Certain items in the 1996 financial statements have been reclassified to conform with the 1997 presentation.
Schedule III
AMERICAN BANKERS INSURANCE GROUP, INC. SUPPLEMENTARY INSURANCE INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS)
* Excluding net realized investment gains of $10,394, $7,812, and $721 for 1997, 1996 and 1995, respectively. **Excluding Life and Annuity premiums.
Schedule IV
AMERICAN BANKERS INSURANCE GROUP, INC. REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS)
*Includes premiums from both the life and property and casualty segments.
Schedule VI
AMERICAN BANKERS INSURANCE GROUP, INC. SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS)
Information otherwise required in the Schedule is provided in Schedule III.
*1995 amount has been restated to reflect the reclassification of credit bond losses in Schedule III, approximately $8,000.
ITEM 9
ITEM 9 - ------
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III - --------
ITEM 10
ITEM 10 - -------
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - --------------------------------------------------
a. Identification Of Directors And Executive Officers --------------------------------------------------
NAME AGE BUSINESS EXPERIENCE AND DIRECTORSHIPS - ---- --- -------------------------------------
R. Kirk Landon 68 Director (since 1980); Chairman of the Board (since 1980), Chief International Officer (since 1996) and Chief Executive Officer of the Company (1980-1995); Chief International Officer of ABIC and ABLAC (since 1996); Director (since 1982), President (1977-1988) and Chief Executive Officer (1979-1995) of ABIC; Director (since 1980), President (1979-1988) and Chief Executive Officer (1979-1995) of ABLAC; Director, CALAC (since 1988); Director, CAPIC (since 1992); Director, BICL (since 1990); Vice Chairman, Board of Trustees, Barry University (university), Miami Shores, FL (since 1983); Chairman and Director, Federal Reserve Bank of Atlanta (Miami Branch) Miami, FL (since 1991); Director, Mayor's Jewelers (jewelry retailers), Coral Gables, FL (since 1987).
Gerald N. Gaston 65 Director (since 1980); President and Chief Executive Officer (since 1996), President and Vice Chairman of the Board (since 1980), President and Chief Operating Officer of the Company (1980-1995); Chief Executive Officer (since 1996), Chief Operating Officer (1980-1995), Chairman of the Board (since 1993) and Vice Chairman of the Board (1979-1992) of ABIC and ABLAC (since 1993); Chairman of the Board, ARIC, VGI, VLIC, and VLHIC (since 1993); Director, BALAC (since 1991).
William H. Allen, Jr. 62 Director (since 1992); Vice Chairman, NationsBank, N.A. (South) (banking), Miami, FL (since 1996); Chairman of the Board and Chief Executive Officer, Intercontinental Bank, (commercial banking), Miami, FL (1987-1995); Director Winsloew Furniture Group (furniture manufacturer and distributor), Pompano Beach, FL (since 1993); Director, Decorator Industries (manufacturer of accessories for hospitality, recreation vehicle and manufactured housing industries), Ft. Lauderdale, FL (since 1995).
Nicholas A. Buoniconti 57 Director (since 1993); Vice Chairman, Chief Operating Officer and Director, Columbia Laboratories, Inc. (pharmaceutical distribution), Hollywood, FL (since 1992); Partner, Nicholas A. Buoniconti, P.A., (attorneys-at-law), Miami, FL (1990-1992); President and Chief Operating Officer, UST, (conglomerate), Greenwich, CT (1983-1989); Director, BALAC (since 1993); Director, Innkeepers USA (own and manage hotels), Palm Beach, FL (since 1995); Director, The Sports Authority (sporting goods), Ft. Lauderdale, FL (since 1996).
Armando M. Codina 51 Director (since 1987); Chairman of the Board of Codina Group Inc. (real estate development), Coral Gables, FL (since 1989); Director, Winn-Dixie Stores, Inc. (food stores), Jacksonville, FL (since 1987); Director, BellSouth Corporation (communications), Atlanta, GA (since 1992); Director, FPL Group, Inc. (electric utility), Juno Beach, FL (since 1995); Director, AMR, Inc. (airline), Dallas, TX (since 1995).
Peter J. Dolara 60 Director (since 1995); Officer/Senior Vice President, American Airlines (airline), Coral Gables, FL (since 1971); Director, SunTrust, Miami, FL (since 1997).
Daryl L. Jones 42 Director (since 1994); State of Florida Senator District 40 (since 1992); Major/Lt. Col. Pilot, U.S. Air Force Reserves (since 1989); Of Counsel/Attorney, Adorno & Zeder, P.A. (attorneys-at-law), Miami, FL (since 1996); Investment Banker (since 1997), Executive Vice President, Douglas James Securities, Inc. (investment banking) (1994-1996); Of Counsel/Attorney, Fowler, White, et al., P.A. (attorneys-at-law), Miami, FL (1992-1996).
James F. Jorden 56 Director (since 1982); Senior Managing Partner, Jorden Burt Boros Cicchetti Berenson & Johnson LLP (attorneys-at-law), Miami, FL (since 1988).
Jack F. Kemp 62 Director (since 1995, with break in service September 1996 through November 1996); Co-Director, Empower America (public policy/think tank), Washington, DC (since 1993); Secretary, U.S. Department of H.U.D., Washington, D.C. (1990-1993); Director, Landair Services (air transport service), Greenville, TN (since 1993); Director, Oracle
(database software provider), Redwood Shores, CA (since 1995); Director, Columbus Trust Realty (Real Estate Investment Trust), Dallas, TX (since 1993); Director, Cyrix (designer, developer and manufacturer of high performance processors for personal computers), Richardson, TX (since 1993); Director, World Corp. (air transportation services and transaction processing), Herndon, VA (since 1995).
Bernard P. Knoth, S.J. 49 Director (since 1997); President, Loyola University (university), New Orleans, LA (since 1995); Associate Dean of Georgetown University (university), Washington, D.C. (1993-1995).
Eugene M. Matalene, Jr. 50 Director (since 1990); President, Strada Capital (merchant banking), New York, NY (since 1997); Managing Director, Furman Selz (investment banking), New York, NY (1996-1997); Managing Director, PaineWebber Incorporated (investment banking), New York, NY (1987-1996).
Albert H. Nahmad 57 Director (since 1993); President, Chairman of the Board and Chief Executive Officer, Watsco, Inc. (distributor of residential central air conditioners), Miami, FL (since 1973); Director, Panama Canal Commission (since 1995); Board member, Florida Council of 100 (advisory board to the Governor of Florida) (since 1994); Chairman of the Board of Directors, Miami Children's Hospital Foundation, Miami, FL (since 1990); Director Mayor's Jewelers, Miami, FL (jewelry retailers) (since 1995); Director, Pediatrix Medical Group (physician management services) (since 1996).
Nicholas J. St. George 59 Director (since 1983); President, Chief Executive Officer (since 1979) and Director (since 1972) of Oakwood Homes Corporation (manufacturer, retailer and financier of mobile/manufactured homes), Greensboro, NC; Director, Legg Mason, Inc. (investment banking), Baltimore, MD (since 1983); Director, Carey International, Inc., (limousine services), Washington, D.C. (since 1997).
Robert C. Strauss 56 Director (since 1992); Director, President and CEO, Noven Pharmaceuticals (drug delivery company), Miami, FL (since 1997); President and Chief Operating Officer, Ivax (generic drug maker) (1997); President and Chief Executive Officer, Cordis, a Johnson & Johnson company (1996-1997), Miami, FL; Chairman, President, Chief Executive
Officer, Chief Financial Officer (1983-1995) and Director (since 1987), Cordis Corporation, (manufacturer of internal medical devices), Miami, FL; Director, Columbia Labs (pharmaceutical distribution), Miami, FL (since 1995); Director, Cardio Genesis Corp., (manufacturer of medical devices for the heart), Sunnyvale, CA (since 1996).
George E. Williamson, II 52 Director (since 1985); President, Williamson Cadillac Company, (automobile dealer), Miami, FL (since 1967); President, Williamson Saturn, Inc., d/b/a Saturn of Dadeland and Saturn of West Dade (automobile dealer), Miami, FL (since 1991 and 1995, respectively); Director, Northern Trust Bank of Florida, N.A. (banking), Miami, FL (since 1988).
Eugene E. Becker 48 Chief Marketing Officer of the Company (since 1996), Chief Executive Officer (since 1996) of ABIC and ABLAC; Executive Vice President (since 1991) of the Company; Chief Executive Officer of VGI, VLHIC, and VLIC (1996); Chief Marketing Officer of the Company (1991-1995); President of ABIC (1989-1996); Executive Vice President of ABLAC (1983-1989); Director, Financial Markets of ABIC and ABLAC (since 1983); Director (1989-1996), CEO (1996); President (1993-1996) of ARIC; Chairman of the Board (since 1991) of BALAC; Director of BARC (since 1995); President (1993-1996) and Chief Operating Officer (1993-1995) of VGI, VLHIC, and VLIC.
P. Bruce Camacho 40 Executive Vice President of Investor Relations and International Development of ABIC and ABLAC (since 1996); First Senior Vice President of ABIC and ABLAC (1995-1996); Vice President of Investor Relations, ABIC and ABLAC (1994-1995); Vice President Sales and Marketing Support (1993); Director of CALAC and CAPIC (since 1996); Director of BIG and ABSV (1997).
Floyd G. Denison 54 Executive Vice President - Finance of the Company, ABIC and ABLAC (since 1995); Executive Vice President and Director, Corporate Asset Management of the Company (1993-1995); Treasurer of the Company (1986-1991); Executive Vice President, Investments of ABIC and ABLAC (since 1996), Senior Vice President, Investments of ABIC and ABLAC (1983-1996); Vice President of BALAC (since 1991); Chairman of the Board of BARC (since 1996); Director of BICL (1995-1996); Director of
VIIC, VLIC, VLHIC (since 1996); Director of VPCIC (since 1993).
Jay R. Fuchs 42 President of ABLAC (since 1993); President of ABIC (since 1995); Executive Vice President of ABIC (1996); Director, ABIC and ABLAC (since 1991); Executive Vice President, Financial Markets of ABIC and ABLAC (1988-1991); Director (since 1991) and President (since 1996) of BALAC; Director of VLIC and VLHIC (since 1993); Director of VGI (1993-1995), VIIC, VPCIC (since 1993).
Leonardo F. Garcia 47 Vice President and Treasurer of the Company (since 1996); Secretary of the Company (1994-1996); Senior Vice President and Chief Investment Officer of ABIC and ABLAC (since 1996); Senior Vice President and Secretary, Corporate Planning and Acquisitions of ABIC and ABLAC (1994-1996); Vice President of Investments (1993-1995); Secretary of VGI (1994-1996); Assistant Secretary of ARIC (1995-1996) Director (since 1995) and Secretary (1994-1996) of BALAC; Secretary of CALAC and CAPIC (1994-1996); Director and Secretary of BARC (1995-1996); Secretary of VGI and VPCIC (1994-1996); Assistant Secretary of VIIC, VLIC and VLHIC (1994-1996).
Arthur W. Heggen 52 Secretary of the Company (since 1996); Vice President and Treasurer of the Company (1991-1996); Vice President and Principal Accounting Officer of the Company (1990-1991); Senior Vice President (since 1990), Secretary (since 1996) of ABIC and ABLAC; Vice President of BALAC (1995-1996); Secretary and Director of BALAC (since 1996); Secretary of VGI, VPCIC, CALAC, and CAPIC (since 1996); Assistant Secretary VIIC, VLIC, and VLHIC (since 1996).
Robert F. Hill 35 Chief Accounting Officer of the Company (since 1996); Senior Vice President and Chief Accounting Officer of ABIC and ABLAC (since 1996); Vice President of ARIC (1995-1996); Audit Manager, Price Waterhouse (accounting firm) (1993-1995).
Jason J. Israel 45 Executive Vice President, Administration (since 1996); Executive Vice President, Operations, of ABIC and ABLAC (1993-1995); Senior Vice President, Financial Operations, of ABIC and ABLAC (1992); Senior Vice
President, Profits, of ABIC and ABLAC (1990-1992); Vice President of BALAC (since 1995); Executive Vice President of CALAC and CAPIC (1995-1997).
Michael T. Ray 43 Executive Vice President, Information Services of ABIC and ABLAC (since 1996); First Senior Vice President, Personal and Financial Sales, of ABIC and ABLAC (1994-1995); First Senior Vice President, Marketing Director, of ABIC and ABLAC (1992-1994); Senior Vice President, Financial Insurance Processing, of ABIC and ABLAC (1990-1992).
Stephen T. Williams 45 Executive Vice President, Subsidiaries (since 1996) of the Company; Chief Executive Officer of VGI, VIIC, VLIC, VLHIC, VPCIC and ARIC (since 1996); Executive Vice President, Marketing Director, of ABIC and ABLAC (since 1996); First Senior Vice President, Marketing Director, of ABIC and ABLAC (1994-1995); Senior Vice President, Regional Sales, of ABIC and ABLAC (1988-1993); Director of BALAC (since 1991); President (1991-1995) and Executive Vice President of BALAC (since 1996).
b. Involvement in Certain Legal Proceedings ----------------------------------------
None of the Directors or Executive Officers named above are involved in legal proceedings required to be disclosed under Item 401(f) of Regulation S-K.
c. Compliance with Section 16 Reporting Requirements -------------------------------------------------
Under the U.S. federal securities laws, the Company's directors, certain officers, and any persons holding more than ten percent of the Company's Common Stock are required to report their ownership of the Company's Common Stock and $3.125 Series B Preferred Stock and any changes in that ownership to the Securities and Exchange Commission and the National Association of Securities Dealers, until June 1997 and the New York Stock Exchange. Specific due dates for these reports have been established and the Company is required to report any failure to file by these dates during 1997. All of these filing requirements were satisfied by these persons, with the exception of Messrs. Gaston, MacNeill, and Nahmad. Each of these individuals are directors of the Company and Mr. Gaston is also an executive officer of the Company. Mr. Gaston transferred, by gift, to his wife 22,000 shares of Common Stock on September 19, 1997 and failed to report the gift on his Form 5 filed on February 13, 1998. An amended Form 5 was filed on February 26, 1998. Mr. MacNeill failed to timely report 18,745 shares received in May 1997. A Form 4 was filed on July 9, 1997 to report this transaction. Mr. Nahmad failed to file on a timely basis 11,000 shares sold by Watsco, Inc. on October 31, 1997. A Form 4 was filed on January 9, 1998 to report this transaction. In making these statements, the Company has relied on the written representations of its incumbent directors, officers, and its ten percent holders and copies of the reports that they have filed with the Commission.
ITEM 11
ITEM 11 - -------
EXECUTIVE COMPENSATION ----------------------
a. SUMMARY COMPENSATION TABLE --------------------------
The Summary Compensation Table below indicates the cash compensation paid by the Company and its subsidiaries as well as certain other compensation paid or accrued for the Chief Executive Officer and the four other highest paid executive officers, for services rendered in all capacities during the fiscal years ended December 31, 1997, 1996 and 1995, respectively.
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(1) Estimated. Bonuses earned during a fiscal year are not paid until May of the following fiscal year.
(2) Officers also receive certain perquisites and personal benefits; however, such items do not exceed the lesser of $50,000 or 10% of such Officer's salary and bonus and, therefore, are not required to be reported. (3) Officers receive options with underlying Restricted Stock under the 1997 Equity Incentive Plan ("Incentive Plan"). The options are not exercisable until May 23, 1998. Under the Incentive Plan, the grantees were given options which upon the exercise the grantee will receive one "Primary Share" and two additional shares of "Restricted Shares" for each option. The Restricted Shares vest three years from the date of exercise of the related option. Holders of Restricted Shares are entitled to receive dividends equal to those granted to the holders of the Company's Common Stock and are entitled to vote such shares. The exercise price for the Primary Shares was $28.4375. The number of shares underlying the options granted and the exercise price have been adjusted for the two-for-one split declared on August 29, 1997. (4) At December 31, 1997, Restricted Shares of Common Stock held by the executive officers named in the table and the market value thereof were as follows: Mr. Landon, 81,000 shares acquired under the 1991 Stock Option/Restricted Stock Award Plan (the "1991 Plan"), $3,720,938; Mr. Becker 11,600 acquired under the Senior Management Stock Option Plan (the "Senior Plan"), $532,875; Mr. Fuchs, 13,200 under the Senior Plan, $606,375; and Mr. Denison 7,200 under the Senior Plan, $330,750. (5) For 1997, this amount represents the allocation of shares of the Company's Common Stock under the Company's Leveraged Employee Stock Ownership Plan. Mr. Landon, Mr. Gaston, Mr. Becker, Mr. Fuchs and Mr. Denison were allocated 817, 819, 819, 820 and 820 shares, respectively. The value is based on the market value at year-end of $45.9375 multiplied by the number of shares allocated to each named executive officer.
b. Option Grants In 1997 ---------------------
The following table sets forth information with regard to grants of stock options to each of the named executive officers during the year ended December 31, 1997. Grants were made under the 1997 Equity Incentive Plan (the "Incentive Plan"). No SARs have been granted.
(1) See footnote (3) under Summary Compensation Table of this 10-K for material terms of the options granted. (2) Adjusted for the two-for-one split declared on August 29, 1997. (3) As a percentage of options granted under the Incentive Plan. During 1997, options for 354,200 underlying shares were granted under the Incentive Plan which includes options for 23,400 underlying shares granted to the named executive officers. (4) Assumed annual rates of appreciation of 5% and 10% would result in the price of the Company's Common Stock increasing to $47.463 and $54.571, respectively.
c. Aggregated Option Exercises In 1997 And 1997 Year-end Option Values -------------------------------------------------------------------
The following table sets forth information with regard to stock option exercises during 1997 by each of the named executive officers and December 31, 1997 values of all unexercised options held by such individuals.
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(1) Market value of shares acquired at date of exercise minus exercise price for those shares. (2) All unexercised options include options that were granted under the 1987 Executive Stock Option/Dividend Accrual Plan; 160,000 shares for Mr. Landon and 140,000 shares for Mr. Gaston which are issuable upon conversion of the debentures granted under the 1994 ABIG Key Executive Debenture Plan; and options granted under the 1997 Equity Incentive Plan (the "Incentive Plan"). See note (3) for the Summary Compensation Table and the accompanying table disclosure for additional information regarding the options granted under the Incentive Plan. (3) Market value at year-end minus exercise price.
d. Retirement Plans ----------------
The Company has a non-contributory pension plan covering substantially all of its employees. The Company contributes such amounts as are necessary, on an actuarial basis, to provide the plan with assets sufficient to meet the benefits to be paid to plan members. Contributions under the plan are based on length of service and average annual compensation. Compensation includes normal salary and wages and does not include bonuses, overtime pay, reimbursements or special pay. Upon normal retirement, age 65, the participant's monthly benefit will be equal to 2% of the "average monthly earnings" multiplied by the number of years of service to the Company less 50% of the monthly primary social security benefits to which the individual is entitled. The participant's "average monthly earnings" equals the average monthly compensation for the highest 60 consecutive months of compensation within the last 120 months immediately preceding retirement. There was no actuarially-determined pension expense as a result of the plan reaching the full funding limitation.
On August 24, 1991, the Board of Directors approved the Non-qualified Supplemental Benefit Plan. The plan is a non-qualified, unfunded, deferred compensation arrangement designed solely to equalize the total benefits certain key executives would have received under the Company's Retirement Plan, but for the limitations on benefits imposed by Section 415 of the Internal Revenue Code (as reflected in Section 7.01 of the Retirement Plan). The plan is intended to benefit the Company and its affiliates by recognizing the value of the past and present services of the key executives covered by the plan and to encourage them to continue careers with the Company and its affiliates. The Compensation and Nominating Committee administers and interprets the provisions of the plan. Participants are those key executives designated from time to time by the Board of Directors.
Following are the estimated annual benefits under both Retirement Plans for various lengths of service and compensation levels based on the assumption that the retiree will choose a life-only benefit and is retiring at age 65 during the year 1997. Election of the other available payment options could change the benefit; however, all benefits are actuarially equivalent. For annual benefits in excess of $120,000 or salaries in excess of $150,000, assume the employee is a member of both retirement plans.
PENSION ACCRUAL BASED ON YEARS OF SERVICE
e. Compensation Of Directors -------------------------
ANNUAL AND MEETING FEES
Directors who are not officers or employees of the Company are paid a quarterly fee of $5,000 ($5,500, if chairman of a committee of the ABIG Board or chairman of the Boards of any subsidiary of the Company). Mr. Landon and Mr. Gaston, received no additional fees for their directorships. Directors who are not officers or employees of the Company are also paid a fee of $750 for each meeting of the Board of Directors or its committees which they attend and $375 for each meeting attended telephonically, but only one attendance fee is paid for attendance at meetings held on a single day. Directors who reside outside Miami are also reimbursed for transportation and other travel expenses. The Company's By-laws provide for indemnification of directors to the fullest extent permitted under Florida Statutes.
DIRECTORS' DEFERRED COMPENSATION PLAN
The Company's Directors' Deferred Compensation Plan (the "Deferred Plan") was adopted by the Board of Directors of the Company in October 1980 and amended and restated in February 1994, subject to shareholder approval which was obtained on May 25, 1994. Under the Deferred Plan, directors may elect to defer the receipt of their compensation in cash or in stock equivalents. Upon termination from
the Board of Directors, the Director will receive, as elected, either cash or actual shares of the Company's Common Stock for fees deferred as stock equivalents. Directors who elect to defer fees must make an election in writing prior to an annual meeting of the shareholders. All fees earned during each director's term shall be deferred until retirement, resignation or death. The deferral may be revoked with respect to future payments or the form of future payments to be deferred may be changed upon written notice delivered to the Company prior to an annual meeting of the shareholders. The revocation or change will be effective six months following receipt of the notice. For the year ended December 31, 1997, ten members of the Company's Board elected to defer their compensation under the plan. Under the Deferred Plan 200,000 shares of the Company's authorized but previously unissued Common Stock has been reserved.
NON-EMPLOYEE DIRECTORS' STOCK OPTIONS
On May 23, 1997, shareholders approved the adoption of the American Bankers Insurance Group, Inc. 1997 Equity Incentive Plan pursuant to which non-employee directors receive grants of options to purchase 2,000 shares of Common Stock at the annual Board of Directors meeting. The options are exercisable at prices equivalent to the fair market value of the Company's common stock on the grant date. Options granted are not exercisable before the one-year anniversary nor after the fifth year anniversary from the date of the grant.
f. Employment Contracts, Termination Of Employment And Change of Control Arrangements --------------------------------------------------------------
To help ensure that Senior Management will be prepared to function in the Company's best interests in the event of any possible change in control of the Company, whether by merger, sale or other comparable action, and to help ensure the continuing services of such officers, the Board of Directors (with only non-employee directors participating) authorized the Company originally to enter into certain contracts with selected executive officers. While there was no reason to believe that a merger or sale was imminent, the Board of Directors believed it in the best interest of the Company and its shareholders that it act at that time to avoid the need for hasty action in the future and to ensure continuity of highly qualified management.
Severance Agreements that were entered into prior to 1989 (the "Prior Severance Agreements") provide that an officer is entitled to receive payment of an amount (the "Designated Amount") equal to twice the officer's Current Annual Salary (as defined in the Severance Agreement) in the event that the Company is Merged or Sold (as defined in the Severance Agreement), regardless of whether the officer had terminated his employment. Under the terms of the Prior Severance Agreements, the Company would be treated as having been Merged or Sold as a result of the consummation of the Merger, and the officers would be entitled to payment of an amount equal to the Designated Amount.
Severance Agreements that were entered into after 1988 (the "Recent Severance Agreements") provide that if, within 24 months following a Change of Control (as defined in the Recent Severance Agreements) of the Company, an officer in good faith determines that there has been a significant adverse change in circumstances affecting such officer's position or status within the Company, such officer may terminate his employment and be entitled to receive payment of an amount (the "Maximum Amount") equal to the maximum amount that will not constitute a "parachute payment" as defined in Section 280G of the Code, as amended (or any successor provision or, if no such provision exists, as defined in such provision immediately prior to its repeal) and as calculated by the Company's independent auditors. The Recent Severance Agreements also provide that within fifteen (15) business
days following the occurrence of a Change in Control (as defined in the Recent Severance Agreements) of the Company, the Company is required to deposit with an escrow agent an amount equal to the Maximum Amount calculated as of the date of such Change in Control.
If, at December 31, 1997, a merger or sale had occurred as set forth above, the Company would have been obligated to make payments to Mr. Landon, Mr. Gaston, Mr. Becker, Mr. Fuchs and Mr. Denison in the amounts of $4,305,031, $4,794,732, $600,000, $460,940 and $1,507,384, respectively.
g. Compensation Committee Interlocks and Insiders Participation ------------------------------------------------------------
Present members of Compensation and Nominating Committee are Messrs. Robert C. Strauss (Chairman), Armando M. Codina, Nicholas A. Buoniconti, Peter J. Dolara and Bernard P. Knoth, S. J.
ITEM 12
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT --------------------------------------------------------------
a. Principal Shareholders ----------------------
The following persons were the only persons who on February 27, 1998, to the knowledge of the Company, owned beneficially more than 5% of the outstanding voting stock of the Company.
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(a) Includes 8,265,626 shares acquirable within 60 days pursuant to a Stock Option Agreement dated as of December 21, 1997 between the Company and American International Group, Inc. ("AIG") (the "Stock Option Agreement") which AIG exercised on January 27, 1998 pursuant to a notice to the Company. The consummation of the purchase of these shares was subject to applicable regulatory approvals. Also, includes 3,389,300 for which AIG had shared voting and dispositive power pursuant to a Voting Agreement, dated as of December 21, 1997, between AIG and the shareholders of the Company named therein (the "Voting Agreement"). Messrs. Landon and Gaston are parties to the Voting Agreement. The Stock Option Agreement and the Voting Agreement were executed in connection with the Agreement and Plan of Merger dated as of December 21, 1997, as amended and restated as of January 7, 1998, and as amended by Amendment No. 1 thereto dated as of January 28, 1998, as amended and restated as of February 28, 1998, among the Company, AIG and AIGF, Inc., a wholly-owned subsidiary of AIG (the "Merger Agreement").
The Stock Option Agreement, Voting Agreement and Merger Agreement were terminated as of March 23, 1998. Accordingly as of March 23, 1998 AIG no longer was the beneficial owner of any shares of Common Stock.
(b) Based upon information supplied to the Company, Morgan Stanley, Dean Witter, Discover & Co. ("Morgan Stanley") beneficially owns 2,203,761 shares and has shared dispositive power over these shares. Of these shares, Morgan Stanley has shared voting power with respect to 1,632,161 shares and no voting power with respect to the remaining shares.
(c) The American Bankers Insurance Group, Inc. Leveraged Employee Stock Ownership Trust is the beneficial owner of 3,509,652 shares. The Trustee, NationsBank, has sole voting power with respect to 435,060 shares and shared voting power with respect to 3,074,592 shares.
(d) Includes 1,024,342 shares owned by Mr. Landon directly; 81,000 Restricted Shares under the 1991 Stock Option/Restricted Stock Award Plan owned by Mr. Landon directly; 1,370,450 owned by the Landon Corporation, of which Mr. Landon is the controlling shareholder; 132,000 shares owned by R. Kirk/B. Landon Foundation, of which Mr. Landon is a director; 129,824 shares owned directly by the R. Kirk Landon Revocable Trust, for which Mr. Landon is the trustee; 14,919 shares allocated under the Company's Leveraged Employee Stock Ownership Plan; 52,380 options to purchase shares granted under the 1987 Executive Stock Option/Dividend Accrual Plan; 27,652 shares acquirable under the 1994 Amended and Restated Directors' Deferred Compensation Plan. Includes 40,000 shares subject to option exercise granted by Mr. Landon to Jack Kemp on May 24, 1995. The options are exercisable at $14.50 per share and expire on May 24, 2000. Includes 220,000 shares owned by Mr. Landon's wife for which Mr. Landon disclaims beneficial ownership.
As of February 27, 1998, Mr. Landon shared voting and dispositive power with AIG over the shares for which Mr. Landon is the beneficial owner pursuant to the Voting Agreement. The Voting Agreement was terminated on March 23, 1998. Accordingly, as of March 23, 1998, AIG no longer shared voting or dispositive power over the shares for which Mr. Landon is the beneficial owner.
SECURITY HOLDING OF MANAGEMENT
The following table sets forth the amount of Common Stock beneficially owned or acquirable within 60 days by each director, director emeritus, named executive officers, and directors and executive officers of the Company as a group as of February 27, 1998:
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(a) Includes 2,041 shares acquirable under the 1994 Amended and Restated Directors' Deferred Compensation Plan (the "Deferred Plan"), and 2,000 shares acquirable under the 1994 Non-Employee Directors' Stock Option Plan (the "Non-Employee Directors' Plan"). (b) Includes 7,150 shares acquirable under the Deferred Plan and 6,000 shares acquirable under the Non-Employee Directors' Plan. (c) Includes 23,290 shares acquirable under the Deferred Plan and 6,000 shares acquirable under the Non-Employee Directors' Plan.
(d) Includes 1,000 shares owned by Mr. Dolara's wife; 3,000 shares owned by his children; 2,945 shares acquirable under the Deferred Plan and 4,000 shares acquirable under the Non-Employee Directors' Plan. (e) Includes 600,436 shares owned by Mr. Gaston directly; 22,000 shares owned by Mr. Gaston's wife; 2,266 shares owned by Mr. Gaston's son; and 14,919 shares allocated under the Company's Leveraged Employee Stock Ownership Plan (the "LESOP"). As of February 27, 1998, Mr. Gaston shared voting and dispositive power with AIG over the shares for which Mr. Gaston is the beneficial owner pursuant to the Voting Agreement. The Voting Agreement was terminated on March 23, 1998. Accordingly, as of March 23, 1998, AIG no longer shared voting or dispositive power over the shares for which Mr. Gaston is the beneficial owner. (f) Includes 4,652 shares acquirable under the Deferred Plan. (g) Includes 440 shares held indirectly by an Individual Retirement Account Trust and 6,000 shares acquirable under the Non-Employee Directors' Plan. (h) Includes 40,000 shares acquirable by Mr. Kemp upon the exercise of options granted by Mr. Landon to Mr. Kemp. See footnote (d) under "Principal Shareholders" of this report. (i) See footnote (d) under "Principal Shareholders" of this report, which sets forth shares that may be deemed to be beneficially owned by Mr. Landon. (j) Includes 6,000 shares acquirable under the Non-Employee Directors' Plan. (k) Includes 2,000 shares owned by Watsco, Inc.; 20 shares owned by Mr. Nahmad's son; 7,335 shares acquirable under the Deferred Plan; and 6,000 shares acquirable under the Non-Employee Directors' Plan. (l) Includes 7,965 shares acquirable under the Deferred Plan and 6,000 shares acquirable under the Non-Employee Directors' Plan. (m) Includes 7,340 shares acquirable under the Deferred Plan and 6,000 shares acquirable under the Non-Employee Directors' Plan. (n) Includes 31,668 shares acquirable under the Deferred Plan and 6,000 shares acquirable under the Non-Employee Directors' Plan. (o) Includes 179,652 shares owned by Mr. Becker directly; and 11,600 Restricted Shares under the 1994 Senior Management Stock Option Plan (the "Senior Plan") owned by Mr. Becker directly; 9,798 shares owned by Mr. Becker's wife; and 12,575 shares allocated under the LESOP. (p) Includes 90,094 shares owned by Mr. Denison directly; 7,200 Restricted Shares under the Senior Plan owned by Mr. Denison directly; 20 shares owned by Mr. Denison's son' and 10,172 shares allocated under the LESOP. (q) Includes 60,600 shares owned by Mr. Fuchs directly; 13,200 Restricted Shares under the Senior Plan owned by Mr. Fuchs directly; and 9,990 shares allocated under the LESOP. (r) Includes shares owned by Mr. MacNeill's wife; shares owned by his daughter. (s) The 40,000 shares subject to an option granted by Mr. Landon to Mr. Kemp have only been counted once in determining the total number of amount of shares beneficially owned and percentage of ownership by the Directors and Executive Officers as a group. See footnote (h) above and footnote (d) under "Principal Shareholders" of this report. (t) Includes 10,200 owned by Mr. MacNeill's wife and 1,330 shares owned by his daughter.
* Denotes less than 1% ownership. ** Director Emeritus.
ITEM 13
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Jorden Burt Boros Cicchetti Berenson & Johnson LLP, of which Mr. Jorden is a Senior Managing Partner, serves as general counsel for the Company and its subsidiaries. In 1997, the firm received approximately $5,834,370 for legal services rendered and costs incurred in that capacity.
Mr. St. George is President, Chief Executive Officer and Director of Oakwood Homes Corporation. ABIC and ABLAC have reinsurance agreements with an affiliate of Oakwood Homes Corporation. In 1997, ABIC and ABLAC ceded premiums of approximately $ 44,614,000 to Blue Ridge Insurance Company, Limited under these reinsurance contracts.
Mr. Williamson is President of Williamson Cadillac Company, Williamson Saturn Inc. and WWW Enterprises (automobile dealerships). In 1997, Mr. Williamson's automobile dealerships sold ABLAC Credit Life, Health and Disability policies. Total net written premium by these dealerships was $137,070 in 1997.
The Company believes these transactions were made on terms no less favorable than that which could have been received by unaffiliated third parties.
PART IV - -------
ITEM 14
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K - --------------------------------------------------------------------------
(a)
(1) The responses to this portion of Item 14 is listed on page 30 of this report.
(2) The responses to this portion of Item 14 is listed on page 44 of this report.
(3) Exhibits
2.1(1) Agreement and Plan of Merger, dated as of December 21, 1997, as amended and restated as of January 7, 1998, and as amended by Amendment No. 1 thereto dated as of January 28, 1998, and as amended and restated as of February 28, 1998 among American Bankers Insurance Group, Inc., American International Group, Inc. and AIGF, Inc.
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(1) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9, Amendment No. 6, dated March 2, 1998.
2.2(2) Termination Agreement, dated as of March 23, 1998, among American International Group, Inc., AIGF, Inc. and American Bankers Insurance Group, Inc.
2.3(3) Agreement and Plan of Merger, dated March 23, 1998 among Cendant Corporation, Season Acquisition Corp. and American Bankers Insurance Group, Inc.
2.4(4) Settlement Agreement dated as of March 18, 1998 by and among American Bankers Insurance Group, Inc., American International Group, Inc. and Cendant Corporation.
3.1 Third Amended and Restated Articles of Incorporation, as amended on May 23, 1997, by First Amendment to Third Amended and Restated Articles of Incorporation, as further amended on February 19, 1998, by Second Amendment to Third Amended and Restated Articles of Incorporation.
3.2(5) Corporate By-Laws, as amended and restated on April 18, 1996.
4.1(6) Form of Rights Certificate to Purchase Series A Participating Preferred Stock.
4.2(7) Form of Rights Certificate to Purchase Series C Participating Preferred Stock.
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(2) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9, Amendment No. 11, dated March 24, 1998.
(3) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9, Amendment No. 11, dated March 24, 1998.
(4) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9, Amendment No. 10, dated March 19, 1998.
(5) Exhibit incorporated herein by reference from Registrant's Current Report on Form 10-Q for March 31, 1996.
(6) Exhibit incorporated herein by reference from Exhibit B of the Rights Agreement, dated as of February 24, 1988, between American Bankers Insurance Group, Inc. and Manufacturers Hanover Trust Company, a New York banking corporation, as Rights Agent, as amended and restated as of November 14, 1990, filed with Registrant's Current Report on Form 8-K, dated November 14, 1990.
(7) Exhibit incorporated herein by reference from Exhibit B of the Rights Agreement, dated as of February 19, 1998, between American Bankers Insurance Group, Inc. and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, filed with Registrant's Schedule 14D-9 Amendment No. 3, dated February 20, 1998.
10.1(8) Stock Option Agreement, dated as of December 21, 1997, as amended and restated as of February 28, 1998 between the American Bankers Insurance Group, Inc. and American International Group, Inc.
10.2(9) Voting Agreement, dated as of December 21, 1997, between AIG, and Gerald N. Gaston, R. Kirk Landon, R. Kirk/B. Landon Foundation, R. Kirk Landon Revocable Trust, and Landon Corporation.
10.3(10) 5 Year Competitive Advance and Revolving Credit Facility Agreement dated as of December 1, 1995 among the American Bankers Insurance Group, Inc., certain banks and Barclays Bank PLC.
10.4(11) Issuance and Paying Agent Agreement (For Commercial Paper) dated as of 21st day of November 1995 by and between the Company and Chemical Bank.
10.5(12) Trust Indenture and Selling Agency Agreement for shelf filing of $200,000,000 Medium-Term Notes.
10.6(13) $75,000,000, 7.60% Medium-Term Note dated May 2, 1994.
10.7(14) $50,000,000, Floating Rate, Medium-Term Note dated April 12, 1995.
10.8(15) Rights Agreement, dated as of February 24, 1988 between American Bankers Insurance Group, Inc. and Manufacturers Hanover Trust Company, a New York banking corporation, as Rights Agent, as amended and restated as of November 14, 1990.
10.9 Amendment No. 1, dated as of December 19, 1997 to Rights Agreement, dated as of February 24, 1998 between American Bankers Insurance Group, Inc. and Chase Mellon Shareholder Services, L.L.C., as successor Rights Agent, as amended and restated as of November 14, 1990.
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(8) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9, Amendment No. 6, dated March 2, 1998. (9) Exhibit incorporated herein by reference from Registrant's Current Report on Form 8-K dated January 13, 1998. (10) Exhibit incorporated herein by reference from Registrant's Current Report on Form 10-K for 1995. (11) Exhibit incorporated herein by reference from Registrant's Current Report on Form 10-K for 1995. (12) Exhibit incorporated herein by reference from Registrant's Current Report on Form 10-Q for March 31, 1994. (13) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1994. (14) Exhibit incorporated herein by reference from Registrant's Current Report on Form 10-Q for March 31, 1995. (15) Exhibit incorporated herein by reference from Registrant's Current Report on Form 8-K dated November 14, 1990.
10.10(16) Amendment No. 2, dated as of February 5, 1998, to the Rights Agreement, dated as of February 24, 1988, as amended and restated as of November 14, 1990 and as further amended on December 19, 1997, between the American Bankers Insurance Group, Inc. and Chase Mellon Shareholder Services, L.L.C. as successor Rights Agent.
10.11(17) Amendment No. 3, dated as of February 19, 1998, to the Rights Agreement, dated as of February 24, 1988, as amended and restated as of November 14, 1990 and as further amended on December 19, 1997 and February 5, 1998 between the American Bankers Insurance Group, Inc. and Chase Mellon Shareholder Services, L.L.C. as successor Rights Agent.
10.12(18) Rights Agreement, dated as of February 19, 1998, between American Bankers Insurance Group, Inc. and Chase Mellon Shareholder Services, L.L.C., as Rights Agent.
10.13(19) Amendment No. 1, dated as of March 20, 1998, to the Rights Agreement dated as of February 19, 1998 between American Bankers Insurance Group, Inc. and Chase Mellon Shareholder Services, L.L.C., as Rights Agent.
10.14(20) Master License Agreement between Policy Management Systems Corporation ("PMSC"), a South Carolina Corporation and American Bankers Insurance Group. Inc. ("customer").
10.15(21) Form of Executive Compensation Agreement.
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(16) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9, dated February 6, 1998. (17) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9, Amendment No. 3, dated February 20, 1998. (18) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9, Amendment No. 3, dated February 20, 1998. (19) Exhibit incorporated herein by reference from Registrant's Schedule 14D-9, Amendment No. 11, dated March 24, 1998. (20) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1993. (21) Exhibit incorporated herein by reference from Form S-3 Registration Statement Number 2-94359.
10.16(22) Form of Executive Severance Benefits Agreement.
10.17(23) Form of Executive Compensation Agreement.
10.18(24) 1987 Executive Stock Option/Dividend Accrual Plan.
10.19(25) Nonqualified Supplemental Benefit Plan.
10.20(26) 1991 Stock Incentive Compensation Plan, as amended February 18, 1994.
10.21(27) 1991 Stock Option/Restricted Stock Award Plan, as amended February 18, 1994.
10.22(28) Directors' Deferred Compensation Plan, amended and restated May 25, 1994.
10.23(29) Retirement Plan, as amended December 30, 1994.
10.24(30) Management Incentive Plan, as amended May 25, 1994.
10.25(31) 1994 Key Executive Convertible Subordinated Debenture Plan.
10.26(32) 1994 Non-Employee Director's Stock Option Plan.
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(22) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1990. (23) Exhibit incorporated herein by reference from Registrant's Current Report on Form 10-K for 1995. (24) Exhibit incorporated herein by reference from 1987 Annual Meeting Proxy Statement (Exhibit "A" pages 14 through 19). (25) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1991. (26) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1994. (27) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1994. (28) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1994. (29) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1994. (30) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1994. (31) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1994.
10.27(33) 1994 Senior Management Stock Option Plan.
10.28(34) Amendment to the 1991 Stock Option/Restricted Stock Award Plan.
10.29(35) 1997 Equity Incentive Plan, as amended on August 15, 1997.
11 Statement regarding computation of earnings per share.
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
27 Financial Data Schedule.
99 Additional Exhibits.
Documents relating to American Bankers Insurance Group, Inc. Leverage Employee Stock Ownership Plan (LESOP).
99.1(36) American Bankers Insurance Group, Inc. Leveraged Employee Stock Ownership Plan.
99.2(37) Agreement Among American Bankers Insurance Group, Inc. and Southeast Bank, N.A. establishing the American Bankers Insurance Group, Inc. Leveraged Employee Stock Ownership Trust.
99.3(38) Note.
99.4(39) Guaranty Agreement from American Bankers Insurance Group, Inc., American Bankers Insurance Company of Florida and American
- -------------------------------------------------------------------------------- (32) Exhibit incorporated herein by reference from Registrant's Annual Repot on form 10-K for 1994. (33) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1994. (34) Exhibit incorporated herein by reference from Registrant's Current Report on Form 10-K for 1995. (35) Exhibit incorporated herein by reference from Registrant's Current Report on Form 10-Q for September 30, 1997. (36) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1988. (37) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1988. (38) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1988.
Bankers Life Assurance Company of Florida in favor of Sun Bank/Miami, N.A.
99.5(40) First amendment to Credit Agreement among American Bankers Insurance Group, Inc. and Southeast Bank, N.A.
99.6(41) Modified ESOP Note.
99.7(42) Second Amendment to Trust Agreement among American Bankers Insurance Group and Barnett Banks Trust Company, N.A. (Successor to Southeast Bank, N.A., original trustee).
99.8(43) American Bankers Insurance Group, Inc. Leveraged Employee Stock Ownership Plan, as amended December 30, 1994.
99.9(44) Engagement Agreement, dated as of February 18, 1998, between U.S. Trust Company of California, N.A. and the Company.
(b.) REPORTS ON FORM 8-K
No report on Form 8-K was filed during the fourth quarter 1997.
(c.) EXHIBITS
The response to this portion of Item 14 is submitted as a separate section of this report.
(d.) FINANCIAL STATEMENT SCHEDULES
The response to this portion of Item 14 is submitted as part of Part II Item 8 of this report.
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(39) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1988. (40) Exhibit incorporated herein by reference from Registrant's Annual Reort on Form 10-K for 1990. (41) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1990. (42) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1991. (43) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1994. (44) Exhibit incorporated herein by reference from Registrant's Schedule 14 D-9, Amendment No. 3, dated February 20, 1998.
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.
American Bankers Insurance Group, Inc.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report signed below by the following persons on behalf of the Registrant and in the capacities and on March 30, 1998.
American Bankers Insurance Group, Inc.
ITEM 14(c) EXHIBIT INDEX
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Exhibit 11 - Statement regarding computation of earnings per share E-1
Exhibit 21 - Subsidiaries of the registrant E-2
Exhibit 23 - Consent of Independent Certified Public Accountants E-3
Exhibit 27 - Financial Data Schedule E-4
Other exhibits have been incorporated by reference. See Item 14, Part IV of this Annual Report on Form 10-K.