UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-1283
American Life Group, Inc.
Delaware No. 42-0951848
State of Incorporation IRS Employer Identification No.
1100 Des Moines Building
Des Moines, Iowa 50309 (515) 284-7500
Address of principal executive offices Telephone
The Statesman Group, Inc.
Former name of Registrant
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [x] No [ ]
Shares of common stock outstanding as of November 1, 1995: 11,299,218
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
ASSETS
September 30, December 31,
1995 1994
---- ----
(unaudited) (audited)
Investments:
Actively managed fixed maturities at fair value (amortized cost:
1995 - $4,505.9; 1994 - $4,144.0).................................................. $4,877.3 $4,100.1
Equity securities at fair value (cost: 1995 - $18.8; 1994 - $19.7)................... 20.9 18.9
Credit tenant loans.................................................................. 6.0 -
Mortgage loans....................................................................... 64.4 64.7
Policy loans......................................................................... 61.9 59.7
Short-term investments............................................................... 48.7 53.6
Other invested assets................................................................ 15.3 22.7
-------- --------
Total investments............................................................... 5,094.5 4,319.7
Accrued investment income .............................................................. 86.8 71.3
Cost of policies purchased.............................................................. 287.8 447.8
Cost of policies produced............................................................... 71.3 25.0
Income tax assets....................................................................... - 130.4
Property and equipment (net of accumulated depreciation: 1995 - $.9; 1994 - $.3)........ 11.0 11.7
Cash segregated for the conversion of the Convertible Debentures........................ 15.0 24.2
Securities segregated for the future redemption of redeemable preferred
stock of a subsidiary................................................................ 38.4 36.2
Goodwill (net of accumulated amortization: 1995 - $9.0; 1994 - $2.2).................... 351.2 353.2
Other assets............................................................................ 28.1 30.2
-------- --------
Total assets.................................................................... $5,984.1 $5,449.7
======== ========
(Continued on next page)
<FN>
The accompanying notes are an integral
part of the consolidated financial
statements.
</FN>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
(Dollars in millions, except per share amounts)
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
1995 1994
---- ----
(unaudited) (audited)
Liabilities:
Insurance liabilities............................................................... $5,095.2 $4,843.8
Income tax liabilities.............................................................. 5.0 -
Investment borrowings............................................................... 60.8 -
Contingent consideration payable upon
determination of the Savings Bank Litigation...................................... 30.1 30.1
Other liabilities................................................................... 66.4 65.0
Accounts payable to affiliates...................................................... 1.1 2.1
Notes payable....................................................................... 307.5 330.0
-------- --------
Total liabilities.............................................................. 5,566.1 5,271.0
Minority interest, primarily redeemable preferred
stock of a subsidiary............................................................... 99.6 99.6
Shareholders' equity:
Preferred stock..................................................................... 64.5 58.9
Common stock, $1 par value, and additional paid-in capital; 35,000,000
shares authorized; 11,299,218 shares issued and outstanding....................... 45.9 45.9
Unrealized appreciation (depreciation) of securities (net of applicable deferred
income taxes: 1995 - $88.6; 1994 - $(15.7))....................................... 164.7 (29.0)
Retained earnings................................................................... 43.3 3.3
-------- --------
Total shareholders' equity..................................................... 318.4 79.1
-------- --------
Total liabilities and shareholders' equity..................................... $5,984.1 $5,449.7
======== ========
<FN>
The accompanying notes are an integral
part of the consolidated financial
statements.
</FN>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions, except per share amounts)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
1995 1994 1995 1994
---- ---- ---- ----
(predecessor (predecessor
basis) basis)
Revenues:
Insurance policy income.......................... $ 13.8 $ 13.9 $ 43.6 $ 40.2
Net investment income............................ 105.4 86.7 312.9 250.8
Net trading income............................... .3 - 1.1 -
Net realized gains (losses)...................... 11.1 (.1) 63.2 (16.8)
Other income..................................... 1.5 1.6 4.9 4.3
------ ------ ------ -------
Total revenues.............................. 132.1 102.1 425.7 278.5
------ ------ ------ ------
Benefits and expenses:
Insurance policy benefits........................ 7.0 6.6 22.0 16.7
Change in future policy benefits................. 1.5 2.6 2.5 9.4
Interest expense on annuities and financial
products....................................... 64.9 56.6 194.3 158.8
Interest expense on notes payable................ 8.3 2.6 25.7 6.7
Interest expense on investment borrowings........ 2.3 - 6.7 2.8
Amortization of cost of policies purchased
and cost of policies produced:
Related to operations....................... 9.3 10.2 26.4 29.7
Related to realized gains................... 4.4 - 33.6 2.8
Amortization of goodwill......................... 2.3 - 6.8 -
Acquisition and merger expenses.................. - 7.2 - 7.2
Other operating costs and expenses............... 7.7 8.4 23.8 25.8
------ ------ ------ ------
Total benefits and expenses................. 107.7 94.2 341.8 259.9
------ ------ ------ ------
Income before income taxes and
minority interest......................... 24.4 7.9 83.9 18.6
Income tax expense................................... 9.4 3.9 31.7 6.7
------ ------ ------ ------
Income before minority interest............. 15.0 4.0 52.2 11.9
Minority interest - primarily dividends on redeemable
preferred stock of subsidiary.................... 2.2 2.2 6.6 6.7
------ ------ ------ ------
Net income.................................. 12.8 1.8 45.6 5.2
Less preferred stock dividends....................... 1.9 .3 5.6 1.1
------ ------ ------ ------
Net income applicable to
common stock.............................. $ 10.9 $ 1.5 $ 40.0 $ 4.1
====== ====== ====== ======
Net income per common share and common equivalent share:
Primary:
Weighted average shares outstanding......... 11,299,000 7,195,000 11,299,000 7,100,000
========== ========= ========== =========
Net income.................................. $.96 $.21 $3.54 $.58
==== ==== ===== ====
Fully diluted:
Weighted average shares outstanding......... 11,299,000 7,195,000 11,299,000 7,100,000
========== ========= ========== =========
Net income.................................. $.96 $.21 $3.54 $.58
==== ==== ===== ====
<FN>
The accompanying notes are an integral
part of the consolidated financial
statements.
</FN>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in millions, except per share amounts)
(unaudited)
Nine months ended
September 30,
----------------------
1995 1994
---- ----
(predecessor
basis)
Series Preferred Stock $1 Par:
Balance, beginning of period.................................. $ 58.9 $ .3
Redemption of 1976 Series Preferred Stock pursuant to
Acquisition.............................................. - (.2)
Elimination of amounts related to 1988 Series Preferred
Stock considered in establishment of liabilities
at Acquisition date...................................... - (.1)
1994 Series Preferred Stock issued.......................... - 45.7
Allocation to 1994 Series Preferred Stock from additional
paid-in capital.......................................... - 11.3
Accrued dividends on 1994 Series Preferred Stock............ 5.6 -
------ ------
Balance, end of period........................................ $ 64.5 $ 57.0
====== ======
Common stock and additional paid-in capital:
Balance, beginning of period.................................. $ 45.9 $ 65.9
Cost of shares acquired..................................... - (.6)
Amounts related to stock option plans and employee
benefit plans............................................ - (3.4)
Tax benefit related to issuance of shares under stock
option plans............................................. - 3.2
Conversion of Convertible Debentures........................ - 2.5
Retirement of common and preferred stock pursuant to
Acquisition.............................................. - (67.6)
Issuance of common stock to Partnership II pursuant to
Acquisition.............................................. - 45.9
Issuance of common stock to holders of the 1994 Series
Preferred Stock.......................................... - 11.3
Allocation of additional paid-in capital to 1994 Series
Preferred Stock.......................................... - (11.3)
------ ------
Balance, end of period........................................ $ 45.9 $ 45.9
====== ======
Unrealized appreciation (depreciation) of securities:
Balance, beginning of period.................................. $(29.0) $ (.3)
Adoption of new accounting standard......................... - 38.2
Change in unrealized appreciation (depreciation)............ 193.7 (190.2)
Elimination of balance pursuant to Acquisition.............. - 152.3
------- -------
Balance, end of period........................................ $164.7 $ -
====== ======
(continued on next page)
<FN>
The accompanying notes are an integral
part of the consolidated financial
statements.
</FN>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY, Continued
(Dollars in millions, except per share amounts)
(unaudited)
Nine months ended
September 30,
----------------------
1995 1994
---- ----
(predecessor
basis)
Retained earnings:
Balance, beginning of period.................................. $ 3.3 $ 79.4
Net income.................................................. 45.6 5.2
Dividends:
Common stock............................................. - (1.3)
Preferred stock.......................................... - (1.4)
Preferred stock (payable in additional shares)........... (5.6) -
Tax benefit on 1987 Series II Preferred Stock dividends.. - .1
Elimination of balance pursuant to Acquisition........... - (82.0)
------ ------
Balance, end of period........................................ $ 43.3 $ -
====== ======
Total shareholders' equity.................................. $318.4 $102.9
====== ======
<FN>
The accompanying notes are an integral
part of the consolidated financial
statements.
</FN>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(unaudited)
Nine months ended
September 30,
----------------------
1995 1994
---- ----
(predecessor
basis)
Cash flows from operating activities:
Net income.................................................................. $ 45.6 $ 5.2
Adjustments to reconcile net income to net cash provided by operating
activities:
Changes in:
Insurance liabilities.................................................. 3.9 (13.3)
Interest credited to insurance liabilities............................. 194.3 158.8
Other liabilities...................................................... (11.7) 13.1
Accrued investment income.............................................. (15.5) (10.3)
Income tax liabilities................................................. 32.8 (1.1)
Cost of policies purchased............................................. 55.1 -
Cost of policies produced ............................................. (53.1) (52.7)
Amortization of discounts and premiums on investments, net................ (36.5) (29.5)
Depreciation and amortization............................................. 7.6 1.8
Realized (gains) losses and trading (income) on investments............... (64.3) 16.8
Other..................................................................... (3.7) (3.5)
-------- --------
Net cash provided by operating activities.............................. 154.5 85.3
-------- --------
Cash flows from investing activities:
Purchases of investments.................................................... (1,987.9) (1,324.6)
Sales of investments........................................................ 1,691.5 629.9
Maturities and redemptions.................................................. 46.5 241.8
-------- --------
Net cash used by investing activities.................................. (249.9) (452.9)
-------- --------
Cash flows from financing activities:
Issuance of notes payable................................................... - 336.8
Payments on notes payable................................................... (15.0) (79.3)
Cash segregated for conversion of Convertible Debentures.................... - (66.5)
Capital contribution from Partnership II.................................... - 45.9
Payments to former stockholders pursuant to the Acquisition................. - (244.4)
Issuance of preferred stock including redeemable preferred stock
of a subsidiary........................................................... - 57.0
Payments to repurchase equity securities.................................... - (.6)
Investment borrowings, net.................................................. 60.8 -
Deposits to insurance liabilities........................................... 625.2 824.1
Withdrawals from insurance liabilities...................................... (580.5) (389.4)
Dividends paid.............................................................. - (1.7)
Other....................................................................... - -
-------- --------
Net cash provided by financing activities.............................. 90.5 481.9
-------- --------
Net increase (decrease) in short-term investments...................... (4.9) 114.3
Short-term investments, beginning of period..................................... 53.6 23.9
-------- --------
Short-term investments, end of period........................................... $ 48.7 $ 138.2
======== ========
<FN>
The accompanying notes are an integral
part of the consolidated financial
statements.
</FN>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
American Life Group, Inc. and subsidiaries (the "Company") changed its name
from The Statesman Group, Inc. in August 1995. The following notes should be
read in conjunction with the notes to the consolidated financial statements
included in the Company's 1994 Form 10-K.
SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements as of and for the periods
ended September 30, 1995 and 1994, reflect all adjustments, consisting only of
normal recurring items, which are necessary to present fairly the Company's
financial position and results of operations on a basis consistent with that of
prior audited financial statements. Certain amounts previously reported in the
Form 10-Q for the period ended September 30, 1994, have been reclassified to
conform with the current presentation.
On September 29, 1994, Conseco Capital Partners II, L.P. ("Partnership II")
completed the acquisition (the "Acquisition") of the Company. The Acquisition
was accounted for using the purchase method of accounting. Under purchase
accounting, the total purchase cost of the Company was allocated to the assets
and liabilities acquired based on their fair values, with the excess of the
total purchase cost over the fair value of the net assets acquired recorded as
goodwill. The consolidated balance sheet as of September 30, 1995, and December
31, 1994, and the consolidated statements of operations, shareholders' equity
and cash flows for the 1995 periods are reported based on such purchase values.
The consolidated statements of operations, shareholders' equity and cash flows
for the 1994 periods are presented based on the historical predecessor basis
applicable to periods prior to the Acquisition.
The consolidated financial statements include the accounts of American Life
and Casualty Insurance Company ("American Life and Casualty") and Vulcan Life
Insurance Company ("Vulcan Life"). The Company, through its wholly owned
subsidiary, American Life Holding Company ("American Life Holding"), owns 100
percent of American Life and Casualty, which owns 98 percent of Vulcan Life.
On August 8, 1995, the Company completed a one-for-two reverse stock split.
All applicable share and per share data have been adjusted for the stock split.
Net income and fully diluted earnings per share, as previously reported in
the Form 10-Q for the nine months ended September 30, 1994, have been reduced by
$13.8 million (net of income taxes of $7.5 million) and $1.32 per fully diluted
share, respectively, for the net realized loss incurred on interest rate swaps
as discussed in note 12 to the consolidated financial statements included in the
Company's 1994 Form 10-K.
ADJUSTMENT TO ACTIVELY MANAGED FIXED MATURITIES
The Company classifies fixed maturity investments into three categories:
"actively managed" (which are carried at estimated fair value), "trading
account" (which are carried at estimated fair value) and "held to maturity"
(which are carried at amortized cost). The Company has not held any securities
in the "held to maturity" classification since the Acquisition and did not
classify any fixed maturity investments in the "trading account" category at
September 30, 1995. The adjustment to carry actively managed fixed maturity
investments at fair value (as described in note 1 to the consolidated financial
statements included in the Company's 1994 Form 10-K) resulted in the following
cumulative effects on balance sheet accounts as of September 30, 1995:
Effect of fair value
Balance adjustment to
before actively managed Reported
adjustment fixed maturities amount
---------- ---------------- ------
(Dollars in millions)
Actively managed fixed maturities........................................ $4,505.9 $ 371.4 $4,877.3
Cost of policies purchased............................................... 392.7 (104.9) 287.8
Cost of policies produced................................................ 86.6 (15.3) 71.3
Income tax liabilities .................................................. (82.9) 87.9 5.0
Unrealized appreciation of securities.................................... 1.4 163.3 164.7
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
PRO FORMA DATA
The following unaudited pro forma results of operations of the Company are
presented as if the Acquisition and related transactions had occurred as of
January 1, 1994, based on the interest rate environment in effect at the
Acquisition date. No pro forma adjustment has been made for the net realized
losses (after income taxes) recognized on interest rate swap contracts during
the nine months ended September 30, 1994 (which aggregated $13.8 million or
$1.22 per share). The Company's current investment strategy does not include
investments in such contracts. If the Acquisition had occurred on January 1,
1994, these contracts would have been terminated at or about that date and the
loss on such termination would have been insignificant.
Nine months ended
September 30, 1994
(Dollars in millions,
except per share data)
----------------------
Revenues..................................................................................... $291.5
Net loss applicable to common stock.......................................................... 3.2
Net loss per common share.................................................................... $ .28
CHANGES IN INVESTMENT BORROWINGS
As part of its investment strategy, the Company enters into reverse
repurchase agreements and dollar-roll transactions to increase its return on
investments and improve its liquidity. These transactions are accounted for as
short-term collateralized borrowings. Such borrowings averaged approximately
$156.3 million and $105.0 million during the nine months ended September 30,
1995 and 1994, respectively, and were collateralized by investment securities
with fair values approximately equal to the loan value. The weighted average
interest rate on short-term collateralized borrowings was 5.7 percent and 3.6
percent for the nine months ended September 30, 1995 and 1994, respectively.
CHANGES IN NOTES PAYABLE
On March 30, 1995, the Company made the 1995 scheduled $15.0 million
principal payment on the senior term loan.
At September 30, 1995, $115.0 million and $40.0 million principal amounts
were outstanding under Tranche A and Tranche B of the senior term loan,
respectively. An additional $30.0 million of Tranche A borrowings remains
available to fund contingent payments payable upon the settlement of litigation
concerning the Company's former savings bank subsidiary (see "Contingent
Consideration Payable upon Determination of Savings Bank Litigation"). Tranche A
and Tranche B bear interest at either: (i) the Alternative Reference Rate of the
agent bank in the syndication plus an applicable margin payable monthly or (ii)
the Interbank Offered Rate ("IBOR") plus an applicable margin for periods of
one, two, three or six months as selected by the Company from time to time. The
interest rates on this loan at September 30, 1995, were 8.13 percent for Tranche
A borrowings and 8.63 percent for Tranche B borrowings.
In connection with the Acquisition, cash was segregated for the
conversion of the 6-1/4% Convertible Debentures due 2003 (the "Convertible
Debentures"). The senior term loan requires such funds to be held in escrow
until the debentures are converted, redeemed or mature. During the nine months
ended September 30, 1995, an additional $9.2 million principal amount of the
Convertible Debentures was converted, leaving $15.0 million outstanding at
September 30, 1995.
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
PREFERRED STOCK
In connection with the Acquisition, the Company issued 57,000 shares
($57.0 million) of 1994 Series Preferred Stock in a private placement
transaction. Dividends are cumulative and accrue annually at 13 percent in
additional shares of 1994 Series Preferred Stock through 2005. Thereafter,
dividends are payable quarterly at 15 percent per annum in cash. At September
30, 1995, the carrying value of the 1994 Series Preferred Stock was $64.5
million, including $7.5 million of dividends accrued but undistributed through
September 30, 1995.
CONTINGENT CONSIDERATION PAYABLE UPON DETERMINATION OF SAVINGS BANK
LITIGATION
In conjunction with the Acquisition, each common or equivalent share of the
Company outstanding immediately before the Acquisition received a contingent
payment right, designed to provide holders with certain financial benefits that
the Company may receive from a favorable determination of the litigation against
the United States of America described in the notes to the consolidated
financial statements included in the 1994 Form 10-K (the "Savings Bank
Litigation"). A liability of $30.1 million was established at the Acquisition
date representing the consideration that would be payable either to the holder
of the Company's 1988 Series I and Series II Preferred Stock (the "1988 Series
Preferred Stock"), or to the Company's other former shareholders, depending upon
the outcome of the Savings Bank Litigation. The senior term loan commitment
includes $30.0 million available to be borrowed at a later date when needed for
such payment. Since the timing of a final determination of the Savings Bank
Litigation is uncertain, the Company is unable to predict when such $30.1
million amount will become payable.
On August 30, 1995, the United States Court of Appeals for the Federal
Circuit affirmed the summary judgement of the Court of Federal Claims, which had
granted the Company's motion for summary judgement as to the defendant's
liability for breach of contract in the Savings Bank Litigation. The United
States of America has not indicated whether it intends to petition for
certiorari to the United States Supreme Court. In the event the case is not
taken to the Supreme Court, a trial will be held in the Court of Federal Claims
to determine damages related to breach of contract by the United States.
Prior to the Acquisition, the 1988 Series Preferred Stock was presented
as issued and outstanding non-redeemable preferred stock and was considered in
the computation of primary and fully diluted earnings per share. Cumulative
dividends in arrears on the 1988 Series Preferred Stock through September 30,
1995, were $6.7 million, of which $5.5 million have been accrued.
SUBSEQUENT EVENT
On October 19, 1995, the Company announced that, due to unfavorable
market conditions, it had withdrawn the previously announced initial public
offering of 15,000,000 shares of its common stock.
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion addresses the principal factors affecting earnings
and financial condition including liquidity and capital resources. This
discussion should be read in conjunction with the consolidated financial
statements and notes thereto included in the 1994 Form 10-K.
RESULTS OF OPERATIONS
The following table presents reported and pro forma results of operations
for the periods indicated. The pro forma results are presented as if the
Acquisition and related transactions had occurred on January 1, 1994, and as if
the interest rate environment in effect at September 30, 1994 (the actual
Acquisition date) had been in effect during the nine months ended September 30,
1994.
Pro forma
Nine for the Nine
months ended nine months ended months ended
September 30, September 30, September 30,
1995 1994 1994
---- ---- ----
(predecessor
basis)
(Dollars in millions)
Revenues:
Insurance policy income.......................... $ 43.6 $ 39.9 $ 40.2
Net investment income ........................... 312.9 264.1 250.8
Net trading income............................... 1.1 - -
Net realized gains (losses)...................... 63.2 (16.8) (16.8)
Other income..................................... 4.9 4.3 4.3
------- ------ -------
Total revenues............................... 425.7 291.5 278.5
------- ------ -------
Benefits and expenses:
Insurance policy benefits and change in future
policy benefits ............................... 24.5 26.1 26.1
Interest expense on annuities and financial
products....................................... 194.3 164.8 158.8
Interest expense on notes payable................ 25.7 24.3 6.7
Interest expense on investment borrowings........ 6.7 2.8 2.8
Amortization of cost of policies purchased
and cost of policies produced:
Related to operations........................ 26.4 22.9 29.7
Related to realized gains.................... 33.6 2.8 2.8
Amortization of goodwill......................... 6.8 6.9 -
Acquisition and merger expenses.................. - - 7.2
Other operating costs and expenses .............. 23.8 25.8 25.8
------- ------ -------
Total benefits and expenses.................. 341.8 276.4 259.9
------- ------ -------
Income before income taxes and
minority interest.......................... 83.9 15.1 18.6
Income tax expense................................... 31.7 6.3 6.7
------- ------ -------
Income before minority interest.............. 52.2 8.8 11.9
Minority interest.................................... 6.6 6.5 6.7
------- ------ -------
Net income................................... 45.6 2.3 5.2
Less preferred stock dividends....................... 5.6 5.5 1.1
------- ------ -------
Net income (loss) applicable
to common stock............................ $ 40.0 $ (3.2) $ 4.1
======= ====== =======
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
On a line-by-line basis, comparison of current period results with
historical results of prior periods is affected by the Acquisition of the
Company as described in the 1994 Form 10-K.
Pro Forma Nine Months Ended September 30, 1994 Data
Significant items affecting the pro forma results of operations compared to
historical amounts include: (i) an increase in net investment income; (ii) an
increase in interest expense; (iii) an increase in amortization of goodwill; and
(iv) the elimination of Acquisition and merger expenses. Pro forma net
investment income is adjusted to include the effect of the restatement of
invested assets to estimated fair value as of January 1, 1994, reflecting the
interest rate environment which existed at September 30, 1994. No pro forma
adjustment has been made for the net realized losses (after income taxes)
recognized on interest rate swap contracts during the nine months ended
September 30, 1994 (which aggregated $13.8 million or $1.22 per share). The
Company's current investment strategy does not include investments in such
contracts. If the Acquisition had occurred on January 1, 1994, these contracts
would have been terminated at or about that date and the loss on such
termination would have been insignificant. Pro forma interest expense increased
due to the additional interest expense on debt incurred to finance the
Acquisition. The pro forma amortization of goodwill increased due to the
goodwill established as a result of the Acquisition. The pro forma data are not
necessarily indicative of the results of operations of the Company that would
have been reported if the Acquisition and related transactions had occurred on
January 1, 1994.
Nine Months Ended September 30, 1995 Compared to Nine Months Ended
September 30, 1994 (As Reported)
Insurance policy income, which consists of premiums received on traditional
life insurance products and policy fund and surrender charges assessed against
investment type products, increased 8 percent to $43.6 million in the first nine
months of 1995 from $40.2 million in the first nine months of 1994, primarily
because increased annuity policy withdrawals resulted in higher surrender
charges. Surrender charges assessed against annuity withdrawals for the first
nine months of 1995 were $11.3 million compared to $7.6 million for the first
nine months of 1994 while annuity policy withdrawals were $566.8 million and
$384.6 million for the same periods, respectively. The Company has experienced
increases in withdrawals during 1995 due to: (i) the increased size of the
Company's annuity portfolio; and (ii) the increase in interest rates in the
second half of 1994 and the first quarter of 1995, which caused some
policyholders to surrender policies and incur a surrender charge to invest funds
in higher yielding alternative investments.
Net investment income increased 25 percent to $312.9 million in the first
nine months of 1995 from $250.8 million in the first nine months of 1994 on a 7
percent increase in average invested assets (amortized cost basis) to $4.7
billion in 1995 compared to $4.4 billion in 1994. The percentage increase in net
investment income was greater than the percentage increase in average invested
assets because the yield earned on average invested assets increased 124 basis
points to 8.91 percent in the first nine months of 1995 from 7.67 percent in the
first nine months of 1994. The increase in yield primarily resulted from the
application of purchase accounting on the Acquisition date as discussed above.
Additional investment income resulting from the redemption of fixed maturity
investments prior to their regularly scheduled maturity dates is not significant
in either nine month period.
Net realized gains (losses) and net trading income often fluctuate from
period to period. The Company sold approximately $1.7 billion of investments
(principally fixed maturities) in the first nine months of 1995 compared to $.6
billion in the first nine months of 1994 which sales resulted in net realized
gains of $69.2 million and trading income of $1.1 million in the first nine
months of 1995 compared to net realized gains of $5.7 million in the first nine
months of 1994. Net realized gains from sales of investments in 1994 were offset
by a loss on certain interest rate swap contracts that no longer effectively
hedged interest rate risks in the second quarter of 1994 and were therefore
recorded at fair value, resulting in a net realized loss of $21.3 million.
Substantially all of the Company's interest rate swap contracts were terminated
subsequent to the Acquisition with no additional loss. In addition, during the
first nine months of 1995 and 1994, the Company recorded realized losses on the
writedown of investments totaling $6.0 million and $1.2 million, respectively,
as a result of changes in conditions which caused the Company to conclude that a
decline in fair value of the investments was other than temporary.
The increased level of investment activity in 1995 is the result of more
active investment portfolio management by the Company's investment adviser since
the Acquisition and planned changes in the fixed maturity investment portfolio
to reduce the portfolio's duration and exposure to more volatile CMO
investments. The declining interest rate environment since the Acquisition date,
which increased the market value of fixed maturity investments, contributed to
the Company's ability to realize gains on investment sales in 1995.
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Selling securities at a gain and reinvesting the proceeds at lower yields
may, absent other management action, tend to decrease future investment yields.
The Company believes, however, that certain factors would mitigate the adverse
effect of such decreases as follows: (i) additional amortization of the cost of
policies purchased and the cost of policies produced is recognized in the same
period as the gain in order to reflect reduced future yields thereby reducing
such amortization in future periods (see amortization related to realized gains
below); (ii) interest rates credited to some products can be reduced thereby
diminishing the effect of the yield decrease on the investment spread; and (iii)
the investment portfolio grows as a result of reinvesting the realized gains.
Interest expense on annuities and financial products increased 22 percent
to $194.3 million in the first nine months of 1995 from $158.8 million in the
first nine months of 1994 primarily due to: (i) a larger block of annuity
business in force in 1995; (ii) higher crediting rates; and (iii) the expensing
of the first year interest rate bonuses of approximately $5.9 million in 1995 on
policies issued prior to the Acquisition date as a result of the application of
purchase accounting on the Acquisition date. Prior to the Acquisition date, such
first year interest rate bonuses (related to policies issued prior to the
Acquisition date) were capitalized as a cost of policies produced. At September
30, 1995, the weighted average crediting rate for the Company's annuity
liabilities excluding interest rate bonuses guaranteed for the first year of the
annuity contract was 5.4 percent compared to 5.3 percent at September 30, 1994.
Interest expense on notes payable increased to $25.7 million in the first
nine months of 1995 from $6.7 million in the first nine months of 1994 as a
result of additional interest on debt incurred to finance the Acquisition,
partially offset by reductions in interest expense resulting from: (i) the
conversion and retirement of $54.0 million principal amount of the Convertible
Debentures; and (ii) the repayment of subsidiary bank debt that had been
outstanding prior to the Acquisition.
Interest expense on investment borrowings increased to $6.7 million in the
first nine months of 1995 from $2.8 million in the first nine months of 1994 as
a result of higher balances of funds borrowed and a higher cost of funds in
1995.
Amortization related to operations decreased 11 percent to $26.4 million in
the first nine months of 1995 from $29.7 million in the first nine months of
1994. Amortization related to operations in 1994 is comprised solely of
amortization of cost of policies produced. Amortization related to operations in
1995 is comprised of amortization of: (i) the cost of policies purchased for
business in force at the Acquisition date; and (ii) the cost of policies
produced for business written subsequent to the Acquisition date.
Cost of policies produced represents the cost of producing new business
(primarily commissions, bonus interest and certain costs of policy issuance and
underwriting) which varies with and is primarily related to the production of
new business. Costs deferred may represent amounts paid in the period the new
business is written (such as underwriting costs and first year commissions) or
in periods after the business is written (such as commissions paid in subsequent
years in excess of ultimate commissions paid and bonus interest credited through
the first policy anniversary date).
Cost of policies purchased represents the portion of the cost to acquire
the Company that is attributable to the right to receive cash flows from
insurance contracts written at the Acquisition date. Some costs incurred
subsequent to the Acquisition date on policies issued prior to such date, which
otherwise would have been deferred had it not been for the Acquisition (because
they vary with and are primarily related to the production of the acquired
policies), are expensed. Examples include commissions paid in excess of ultimate
commissions and bonus interest. However, such amounts were considered in
determining the cost of policies purchased and its amortization. The amount of
amortization related to operations in the 1995 period is less than the 1994
period primarily due to costs related to purchased policies that would have been
deferred as the cost of policies produced but instead are expensed as either (i)
other operating costs or (ii) interest on annuities and financial products.
Amortization related to realized gains increased to $33.6 million in the
first nine months of 1995 from $2.8 million in the first nine months of 1994
primarily as a result of the increase in realized gains discussed above.
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Amortization of goodwill of $6.8 million in 1995 reflects amortization of
the goodwill recorded at the Acquisition date. Goodwill amortization prior to
the Acquisition was insignificant.
Acquisition and merger expenses reported in 1994 represent costs incurred
by the Company related to the Acquisition. These expenses include legal,
investment banking, accounting and actuarial fees and certain compensation
expense. The aforementioned compensation expense represents amounts incurred
when certain unexercised stock options and stock appreciation rights were
redeemed in conjunction with the Acquisition.
Income tax expense increased to $31.7 million in the first nine months of
1995 from $6.7 million in the first nine months of 1994. This increase is
primarily due to the increase in pretax income to $83.9 million in the first
nine months of 1995 from $18.6 million in the first nine months of 1994. The
effective tax rate for 1995 of 38 percent exceeds the statutory corporate
federal income tax rate (35 percent) because goodwill amortization is not
deductible for federal income tax purposes. The effective tax rate for 1994 of
36 percent exceeded the statutory corporate tax rate because certain acquisition
and merger expenses were not deductible for federal income tax purposes,
partially offset by a reduction in the valuation allowance for net operating
loss carryforwards.
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Dividends on preferred stock increased to $5.6 million in the first nine
months of 1995 from $1.1 million in the first nine months of 1994 primarily due
to the dividends on the 1994 Series Preferred Stock issued in connection with
the Acquisition. This increase was partially offset by the elimination of the
dividends on the other issues of preferred stock retired at the Acquisition
date.
Third Quarter of 1995 Compared to Third Quarter of 1994 (As Reported)
Insurance policy income decreased 1 percent to $13.8 million in the third
quarter of 1995 from $13.9 million in the third quarter of 1994 as a result of a
decrease in premiums (to $6.5 million in 1995 from $7.3 million in 1994)
partially offset by an increase in policy fund charges and surrender charges
earned on policy withdrawals (to $7.3 million in 1995 from $6.6 million in 1994)
consistent with the explanation above for the nine month periods.
Net investment income increased 22 percent to $105.4 million in the third
quarter of 1995 from $86.7 million in the third quarter of 1994 on a 4 percent
increase in average invested assets (amortized cost basis) to $4.8 billion in
the third quarter of 1995 compared to $4.6 billion in the third quarter of 1994.
The percentage increase in net investment income was greater than the percentage
increase in average invested assets as a result of the factors discussed above
for the nine month periods. Additional investment income resulting from the
redemption of fixed maturity investments prior to their regularly scheduled
maturity dates is not significant in either three month period.
Net realized gains (losses) and net trading income often fluctuate from
period to period. The Company sold approximately $.4 billion of investments
(principally fixed maturities) in the third quarter of 1995 compared to $.1
billion in the third quarter of 1994 which sales resulted in net realized gains
of $15.6 million and trading income of $.3 million in the third quarter of 1995
compared to net realized losses of $.1 million in the third quarter of 1994.
During the third quarter of 1995, the Company recorded a realized loss on the
writedown of a fixed maturity security of $4.5 million as a result of changes in
conditions which caused the Company to conclude that the security's decline in
fair value was other than temporary.
The increased level of investment activity in 1995 is consistent with the
explanation above for the nine month periods.
Interest expense on annuities and financial products increased 15 percent
to $64.9 million in the third quarter of 1995 from $56.6 million in the third
quarter of 1994 due to the factors described above for the nine month periods.
First year interest rate bonuses on policies issued prior to the Acquisition
date of approximately $1.9 million were expensed in the 1995 period.
Interest expense on notes payable increased to $8.3 million in the third
quarter of 1995 from $2.6 million in the third quarter of 1994 as a result of
the factors discussed above for the nine month periods.
Interest expense on investment borrowings was $2.3 million in the third
quarter of 1995. There were no investment borrowings in the third quarter of
1994.
Amortization related to operations decreased 9 percent to $9.3 million in
the third quarter of 1995 from $10.2 million in the third quarter of 1994
consistent with the explanation above for the nine month periods.
Amortization related to realized gains totaled $4.4 million in the third
quarter of 1995 as a result of the increase in realized gains discussed above.
There was no amortization related to realized gains in the third quarter of
1994.
Amortization of goodwill of $2.3 million in 1995 reflects amortization of
the goodwill recorded at the Acquisition date. Goodwill amortization prior to
the Acquisition was insignificant.
Acquisition and merger expenses reported in 1994 represent costs incurred
by the Company related to the Acquisition. These expenses include legal,
investment banking, accounting and actuarial fees and certain compensation
expense. The aforementioned compensation expense represents amounts incurred
when certain unexercised stock options and stock appreciation rights were
redeemed in conjunction with the Acquisition.
Income tax expense increased to $9.4 million in the third quarter of 1995
from $3.9 million in the third quarter of 1994. This increase is primarily due
to the increase in pretax income to $24.4 million in the third quarter of 1995
from $7.9 million in the third quarter of 1994. The effective tax rate for the
third quarter of 1995 of 39 percent exceeded the statutory corporate federal
income tax rate (35 percent) because goodwill amortization is not deductible for
federal income tax purposes. The effective tax rate for the third quarter of
1994 of 49 percent exceeded the statutory corporate tax rate because certain
acquisition and merger expenses were not deductible for federal income tax
purposes, partially offset by a reduction in the valuation allowance for net
operating loss carryforwards.
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Dividends on preferred stock increased to $1.9 million in the third quarter
of 1995 from $.3 million in the third quarter of 1994 primarily due to the
dividends on the 1994 Series Preferred Stock issued in connection with the
Acquisition. This increase was partially offset by the elimination of the
dividends on the other issues of preferred stock retired at the Acquisition
date.
SALES
In accordance with generally accepted accounting principles, insurance
policy income shown on the Company's consolidated statement of operations
consists of premiums received for policies which have life contingencies or
morbidity features. For annuity and universal life contracts without such
features, premiums collected are not reported as revenues, but rather are
reported as deposits to insurance liabilities. Revenues for these products are
recognized in the form of investment income and surrender or other charges.
Net premiums collected in the nine months ended September 30, 1995, were
$647.0 million, of which $625.2 million were recorded as deposits to policy
liability accounts. This compared to $846.0 million collected and $824.1 million
recorded as deposits to policy liability accounts in the nine months ended
September 30, 1994. Net premiums collected declined in the first nine months of
1995 compared to the first nine months of 1994 as a result of several factors.
New annuity sales (which account for approximately 92 percent of premiums
collected) have been negatively impacted by a reduction of American Life and
Casualty's ratings to "A-" by two nationally recognized insurance company rating
organizations as a result of the Acquisition and related financing transactions.
These rating declines have directly affected American Life and Casualty's
competitive position in the financial institution marketplace where many
financial institutions require an insurer's ratings to be at least "A" resulting
in a loss of certain former customers and foregone opportunities for new sales.
In addition, American Life and Casualty has generally maintained a less
competitive crediting rate position on new business since the Acquisition in
order to manage its asset growth relative to its capital position.
LIQUIDITY AND CAPITAL RESOURCES
Insurance Operations
The Company's annuity and life insurance business generally provides the
insurance subsidiaries with positive cash flows from premium collections and
investment income. Cash flows from insurance subsidiary financing activities
principally result from the excess of premium collections from annuities and
interest-sensitive insurance contracts over related benefit payments, including
withdrawal and surrender payments.
The increases in policy withdrawals and surrender payments generally
correspond to the aging and growth of the Company's annuity business in force,
and to a certain extent, during the first nine months of 1995, the reduction of
American Life and Casualty's claims - paying ability ratings to "A-" by two
nationally recognized insurance company rating organizations as a result of the
Acquisition and related financing transactions. In addition, the Company has
experienced increases in policyholder utilization of the systematic withdrawal
features in several of its annuity policies and an increase in surrenders and
withdrawals as a result of interest rates increasing during 1994 and the first
quarter of 1995 which has increased the yields on alternative investments.
Total withdrawals and surrenders by policyholders were 14.4 percent
(annualized) and 11.2 percent of the average cash values outstanding during the
nine months ended September 30, 1995, and the year ended December 31, 1994,
respectively. Withdrawals and surrender payments accelerated in 1994 and 1995
primarily due to a certain policy form principally issued during 1988 through
1990 whose surrender charge declined from 4 percent at the fifth policy
anniversary date to zero percent at the sixth policy anniversary date. As these
policies reached their sixth anniversary, surrenders occurred. The Company
expects the trend of accelerated withdrawals and surrenders of this product to
subside over the next 9 months since sales of this product peaked in the second
quarter of 1989 and were effectively discontinued after June 30, 1990.
The following table summarizes the Company's deferred annuity liabilities
at September 30, 1995 and December 31, 1994, and sales for the nine months and
year then ended, respectively, by surrender charge category (dollars in
millions):
September 30, 1995 December 31, 1994
--------------------------------------- -------------------------------------
Annuity Annuity
Surrender charge percent deposits Percent Liabilities Percent deposits Percent Liabilities Percent
- - ------------------------ -------- ------- ----------- ------- -------- ------- ----------- -------
No surrender charge................... $ .1 - % $ 983.7 21% $ 2.1 - % $ 827.0 19%
1 to 3.9 percent...................... - - 320.7 7 - - 450.2 10
4 to 6.9 percent...................... 5.5 1 550.0 12 9.2 1 588.3 13
7 to 9.9 percent...................... 54.9 10 640.7 14 145.1 14 610.7 14
10 to 11.9 percent.................... 299.4 52 996.2 21 551.0 53 907.1 20
12 percent and greater................ 212.5 37 1,180.0 25 327.4 32 1,061.5 24
------ --- -------- --- -------- -- -------- --
$572.4 100% $4,671.3 100% $1,034.8 100% $4,444.8 100%
====== === ======== === ======== === ======== ===
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
The increase in deferred annuity liabilities that can be surrendered
without penalty is principally attributable to the policy form discussed above
where the surrender charge declines from 4 percent to zero percent on the sixth
policy anniversary.
Most of the Company's assets are invested in bonds and other securities,
substantially all of which are readily marketable. Although there is no present
need or intent to dispose of such investments, the Company could liquidate
portions of its investments or use them to facilitate borrowings under reverse
repurchase agreements if such a need arose. At September 30, 1995, the Company's
portfolio of bonds, notes and redeemable preferred stocks had an aggregate net
unrealized gain of $371.4 million.
Parent Holding Companies
The comparison of September 30, 1995, balances to December 31, 1994,
balances in the consolidated balance sheet reflects the following: (i) the
increase in the fair value of actively managed fixed maturity investments and
its effects on the consolidated balance sheet accounts; (ii) investment
borrowings of $60.8 million; (iii) a principal payment on notes payable of $15.0
million; and (iv) growth in invested assets, insurance liabilities and retained
earnings attributable to the Company's operations.
The ratio of debt to total capital decreased to .42 to 1 at September 30,
1995, from .65 to 1 at December 31, 1994, as a result of the repayment of debt
and the effect of the change in the fair value of actively managed fixed
maturity investments. The ratio of debt to total capital excluding the effect of
reporting fixed maturities at fair value decreased to .55 to 1 at September 30,
1995, from .61 to 1 at December 31, 1994.
The Company is expected to incur pre-tax expenses totaling $10.5 million in
the fourth quarter of 1995 related to the following: (i) expenses incurred in
connection with the terminated initial public offering; (ii) amounts due to the
former Chief Executive Officer (who resigned in October 1995) pursuant to
employment agreements; and (iii) an extraordinary loss related to the early
extinguishment of the senior term loan (in conjunction with the financing
transactions described below).
The Company anticipates the completion of the following financing
transactions in the fourth quarter of 1995: (i) the sale of $30 million of
equity to Partnership II, partners of Partnership II individually, or other
investors pursuant to a private placement; (ii) a capital contribution of $30
million to American Life Holding from the Company using the proceeds from such
offering; (iii) a $30 million unscheduled principal payment on the senior term
loan by American Life Holding; (iv) the completion of a new credit facility to
provide for aggregate borrowings of up to $225 million (the "New Senior Loan");
and (v) the simultaneous borrowing of $125 million under the New Senior Loan and
repayment in full of the remaining principal balance under the existing senior
term loan using the proceeds from the New Senior Loan.
The New Senior Loan is expected to provide for $225 million of senior
secured credit facilities comprised of: (i) a Term Loan A Facility (the "Term
Loan A") in the amount of $105 million; (ii) a Term Loan B Facility (the "Term
Loan B") in the amount of $20 million; and (iii) a Revolving Credit Facility
(the "Revolver") in an amount of up to $100 million. Management believes the New
Senior Loan will provide greater flexibility to American Life Holding than the
existing senior term loan because the New Senior Loan: (i) will provide
additional available working capital by increasing the aggregate maximum
borrowings to $225 million; (ii) will provide for a revolving credit facility;
(iii) will provide for more favorable interest rates; (iv) will have less
restrictive convenants; and (v) will have a more favorable repayment schedule.
Unless otherwise extended, the Revolver will mature, and all principal and
interest thereunder will become due and payable, in September 1998. The Term
Loan A facility will mature in April 2002, and the Term Loan B facility will
mature in April 2003.
Term Loan A and Term Loan B are to be amortized as follows (dollars in
millions):
Term Loan A Term Loan B
Payment Date payment amount payment amount
------------ -------------- --------------
April 1996.................................................................. $ - $ -
April 1997.................................................................. - .25
April 1998.................................................................. 15.0 .25
April 1999.................................................................. 20.0 .25
April 2000.................................................................. 20.0 .25
April 2001.................................................................. 25.0 .25
April 2002.................................................................. 25.0 .25
April 2003.................................................................. - 18.50
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
American Life Holding will have the option to prepay the New Senior Loan
at any time in full or, subject to certain minimum amounts to be mutually agreed
upon, in part. Mandatory prepayments will be required: (i) from 50 percent of
Excess Cash Flow (as defined); (ii) upon the sale or disposition of any
significant assets other than in the ordinary course of business; and (iii) upon
the sale or issuance of debt or equity securities of the Company, American Life
Holding or any of its subsidiaries.
The New Senior Loan will bear interest at the following per annum rates,
as selected by American Life Holding from time to time plus the applicable
margins: (i) the Bank's Base Rate which is the higher of (a) the rate as
publicly announced from time to time by the Bank as its reference rate or (b)
the federal funds rate plus one-half of one percent per annum payable quarterly;
or (ii) Interbank Offered Rate ("IBOR") (as adjusted for reserves if incurred)
for periods of one, two or three or, if available, six months, payable at the
end of the applicable interest period (payable quarterly in arrears in the case
of the six month IBOR option). The applicable margins for a Base Rate loan will
vary from zero to 1.75 percent (depending on the long-term senior debt ratings
of American Life Holding), and the applicable margins for an IBOR Rate loan will
vary from 1.25 percent to 3.0 percent (depending on such ratings). A per annum
non-use fee of .2 percent to .5 percent on the unused portion of the Revolver
commitment (except the fee shall be .25 percent on $30 million of the Revolver
which may be used to fund the contingent consideration payable upon
determination of the Saving Bank Litigation), payable in arrears from the date
of execution of the New Senior Loan Agreement. As of September 30, 1995, the
interest rate on $115 million principal amount of the existing senior term loan
was 8.75 percent. If the New Senior Loan had been in place as of September 30,
1995, the interest rate applicable to Term Loan A and Term Loan B under the New
Senior Loan would have been 7.4 percent and 7.9 percent, respectively .
INVESTMENTS
The amortized cost and estimated fair value of fixed maturities (all of
which were actively managed) were as follows at September 30, 1995:
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(Dollars in millions)
United States Treasury securities...................................... $ 124.3 $ 7.4 $ - $ 131.7
Obligations of states and political subdivisions and foreign
government obligations............................................ 52.0 2.0 1.4 52.6
Public utility securities.............................................. 853.3 84.1 .1 937.3
Other corporate securities............................................. 2,097.0 150.5 3.5 2,244.0
Mortgage-backed securities............................................. 1,379.3 133.8 1.4 1,511.7
-------- ------ ----- --------
Total fixed maturities .......................................... $4,505.9 $377.8 $ 6.4 $4,877.3
======== ====== ===== ========
The following table sets forth fixed maturity investments at September 30,
1995, classified by rating categories (designated categories include securities
with "+" or "-" rating modifiers). The category assigned is the highest rating
by Standard & Poors or Moody's Investor Service or, as to $55.7 million fair
value of fixed maturities not rated by such firms, the rating assigned by the
National Association of Insurance Commissioners ("NAIC"). For the purposes of
this table, NAIC Class 1 is included in the "A" rating; Class 2, "BBB"; Class 3,
"BB" and Classes 4 to 6, "B and below."
Percent of
---------------------------------------
Investment rating Fixed maturities Total investments
----------------- ---------------- -----------------
AAA................................... 33% 31%
AA.................................... 10 10
A..................................... 30 29
BBB................................... 24 23
--- ---
Investment grade............... 97 93
--- ---
BB.................................... 2 2
B and below........................... 1 1
--- ---
Below investment grade......... 3 3
--- ---
Total fixed maturities......... 100% 96%
=== ===
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
At September 30, 1995, the Company's below investment grade fixed
maturities had an amortized cost of $157.8 million and an estimated fair value
of $164.9 million.
During the first nine months of 1995 and 1994, the Company recorded
realized losses for investment writedowns of $6.0 million and $1.2 million,
respectively, as a result of changes in the financial condition of an issuer and
changes in the value of underlying collateral, which caused the Company to
conclude that a decline in fair value of such investments was other than
temporary. The Company's investment portfolio is subject to the risk of further
declines in realizable value; however, the Company attempts to mitigate this
risk through the diversification and active management of its portfolio. As of
September 30, 1995, there were no other fixed maturity investments about which
the Company has serious doubts as to the ability of the issuer to comply with
the contractual terms of their obligations on a timely basis.
Proceeds from the sales of invested assets were $1.7 billion for the nine
months ended September 30, 1995. Such sales resulted in net realized gains of
$69.2 million and trading income of $1.1 million. These sales were the result of
a more active portfolio management after the Acquisition and the implementation
of strategies to: (i) reduce the Company's overall exposure to interest rate
risk by, in part, increasing holdings of corporate securities and reducing
holdings of mortgage-backed securities; and (ii) enhance liquidity to meet cash
flow requirements by reducing the duration of the portfolio to more closely
match the estimated average duration of insurance liabilities.
Proceeds from sales of fixed maturity securities during the first nine
months of 1994 were $604 million, of which $596 million were from sales of
securities classified as actively managed and $8 million were from the sale of
securities classified as held-to- maturity as of January 1, 1994. These sales
resulted in net realized gains of $5.8 million. The securities classified as
held-to-maturity were sold subsequent to a debtor being placed on credit watch
by a nationally recognized rating agency. A loss of $1.6 million was recognized
on such sale. The issuer's credit ratings were subsequently downgraded.
At September 30, 1995, fixed maturity investments included $1.5 billion (31
percent of the fixed maturity investment portfolio) of mortgage-backed
securities of which $1.2 billion were collateralized mortgage obligations
("CMOs") and $276.0 million were pass-through securities. CMOs are securities
backed by pools of pass-through securities and/or mortgages that are segregated
into sections or "tranches" which provide for sequential retirement of principal
rather than the pro rata share of principal return which occurs through regular
monthly principal payments on pass-through securities.
The yield characteristics of mortgage-backed securities differ from those
of traditional fixed income securities. Interest and principal payments occur
more frequently, often monthly, and mortgage-backed securities are subject to
risks associated with variable prepayments. Prepayment rates are influenced by a
number of factors which cannot be predicted with certainty, including the
relative sensitivity of the underlying mortgages backing the assets to changes
in interest rates, a variety of economic, geographic and other factors and the
repayment priority of the securities in the overall securitization structures.
In general, prepayments on the underlying mortgage loans, and the
securities backed by these loans, increase when the level of prevailing interest
rates declines significantly below the interest rates on such loans.
Mortgage-backed securities purchased at a discount to par will experience an
increase in yield when the underlying mortgages prepay faster than expected.
Those securities purchased at a premium that prepay faster than expected will
incur a reduction in yield. When declines in interest rates occur, the proceeds
from the prepayment of mortgage-backed securities are likely to be reinvested at
lower rates than the Company was earning on the prepaid securities. As the level
of prevailing interest rates increases, prepayments on mortgage-backed
securities decrease as fewer underlying mortgages are refinanced. When this
occurs, the average maturity and duration of the mortgage-backed securities
increase, which decreases the yield on mortgage-backed securities purchased at a
discount because the discount is realized as income at a slower rate and
increases the yield on those purchased at a premium as a result of a decrease in
annual amortization of the premium.
The following table sets forth the par value, amortized cost and estimated
fair value of mortgage-backed securities including CMOs, summarized by interest
rates on the underlying collateral at September 30, 1995:
Par Amortized Estimated
value cost fair value
----- ---- ---------
(Dollars in millions)
Below 7 percent .................................................................. $ 316.9 $ 264.4 $ 294.8
7 percent - 8 percent............................................................... 989.8 855.8 938.1
8 percent - 9 percent............................................................... 227.3 207.4 224.6
9 percent and above................................................................. 57.6 51.7 54.2
-------- -------- --------
Total mortgage-backed securities......................................... $1,591.6 $1,379.3 $1,511.7
======== ======== ========
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
The amortized cost and estimated fair value of mortgage-backed securities
including CMOs at September 30, 1995, summarized by type of security were as
follows (dollars in millions):
Estimated fair value
--------------------------
Percent
Amortized of fixed
Type cost Amount maturities
- - ---- ---- ------ ----------
Pass-throughs and sequential and targeted amortization classes............ $ 813.0 $ 876.4 18%
Support classes........................................................... 103.4 117.4 2
Accrual (Z tranche) bonds................................................. 96.0 112.5 2
Planned amortization classes and accretion directed bonds................. 211.8 233.9 5
Subordinated classes ..................................................... 155.1 171.5 4
-------- -------- --
$1,379.3 $1,511.7 31%
======== ======== ==
Pass-throughs and sequential and targeted amortization classes have similar
prepayment variability. Pass-throughs have historically provided the best
liquidity in the mortgage-backed securities market and the best
price/performance ratio in a highly volatile interest rate environment. This
type of security is also frequently used as collateral in the dollar roll
market. Sequential classes pay in a strict sequence with all principal payments
received by the CMO paid to the sequential tranches in order of priority.
Targeted amortization classes provide a modest amount of prepayment protection
when prepayments on the underlying collateral increase from those assumed at
pricing and thus offer slightly better call protection than sequential classes
and pass-throughs.
Support classes absorb the prepayment risk from which planned amortization
and targeted amortization classes are protected. As such, they are usually
extremely sensitive to prepayments. Most of the Company's support classes are
higher average life instruments that generally will not lengthen if interest
rates rise further and will have a tendency to shorten if interest rates
decline. However, since these bonds have current values below par values, higher
prepayments will have the effect of increasing yields.
Accrual bonds are CMOs structured such that the payment of coupon interest
is deferred until principal payments begin on these bonds. On each accrual date,
the principal balance is increased by the amount of the interest (based upon the
stated coupon rate) that otherwise would have been payable. As such, these
securities act much the same as zero coupon bonds until cash payments begin.
Cash payments typically do not commence until earlier classes in the CMO
structure have been retired, which can be significantly influenced by the
prepayment experience of the underlying mortgage loan collateral in the CMO
structure. Because of the zero coupon element of these securities and the
potential uncertainty as to the timing of cash payments, their market values and
yields are more sensitive to changing interest rates than other CMOs,
pass-through securities and coupon bonds.
Planned amortization classes and accretion directed bonds are some of the
most stable and liquid instruments in the mortgage-backed securities market.
Planned amortization class bonds adhere to a fixed schedule of principal
payments provided that the underlying mortgage collateral experiences
prepayments within a certain range. Changes in prepayment rates are first
absorbed by support classes which insulate the planned amortization classes from
the consequences of both faster prepayments (average life shortening) and slower
prepayments (average life extension).
Subordinated CMO classes have both prepayment and credit risk. The
subordinated classes are used to lend credit enhancement to the senior
securities and as such, rating agencies require that this support not
deteriorate due to the prepayment of the subordinated securities. The credit
risk of subordinated classes is derived from the negative leverage of owning a
small percentage of the underlying mortgage loan collateral while bearing a
majority of the risk of loss due to homeowners' defaults.
At September 30, 1995, the mortgage loan portfolio was diversified across
76 properties with an average loan size of approximately $.9 million.
Approximately 99 percent of the loans are commercial loans including retail,
multifamily residential, office, industrial, nursing home, restaurant and other
properties. Less than 1 percent of mortgage loans were noncurrent at September
30, 1995. There were no realized losses on mortgage loans during the nine months
ended September 30, 1995 and 1994. At September 30, 1995, the Company had a loan
loss reserve of $1.4 million.
Borrowings under reverse repurchase agreements and dollar-roll transactions
were $60.8 million at September 30, 1995, and were collateralized by pledged
securities with fair values approximately equal to the borrowings. Such
borrowings averaged approximately $156.3 million during the first nine months of
1995.
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
STATUTORY INFORMATION
Statutory accounting practices prescribed or permitted for the Company's
insurance subsidiaries by regulatory authorities differ in many respects from
those governing the preparation of financial statements under generally accepted
accounting principles ("GAAP"). Accordingly, statutory operating results and
statutory capital and surplus may differ substantially from amounts reported in
the GAAP basis financial statements for comparable items. The Company's
insurance subsidiaries follow certain permitted accounting practices which are
not specifically prescribed in state laws, regulations, general administrative
rules and various NAIC publications. Such permitted accounting practices do not
enhance statutory surplus. Further, the Company's insurance subsidiaries do not
have any reinsurance agreements generally known as "surplus relief reinsurance"
which have the effect of increasing statutory surplus at inception and reducing
statutory surplus in subsequent years as amounts are recaptured by reinsurers.
After appropriate eliminations of intercompany accounts, the Company's life
insurance subsidiaries reported combined statutory net income of $23.8 million
for the nine months ended September 30, 1995, and the following amounts with
respect to their combined statutory capital and surplus at September 30, 1995
(dollars in millions):
Statutory capital and surplus.............................................. $215.6
Asset valuation reserve.................................................... 33.5
Interest maintenance reserve .............................................. 24.9
------
Total................................................................... $274.0
======
American Life and Casualty's surplus includes a surplus note with a balance
of $50.0 million at September 30, 1995. The payment of dividends and other
distributions, including surplus note payments, by American Life and Casualty is
subject to regulation by the Iowa Insurance Division. Currently, American Life
and Casualty may pay dividends or make other distributions without the prior
approval of the Iowa Insurance Division, unless such payments, together with all
other such payments within the preceding 12 months, exceed the greater of (1)
American Life and Casualty's net gain from operations (excluding net realized
capital gains or losses) for the preceding calendar year or (2) 10 percent of
its statutory surplus at the preceding December 31. For 1995, up to $38.1
million can be distributed as dividends or surplus note payments by American
Life and Casualty (of which $34.4 million had been distributed through September
30, 1995) without prior approval of the Iowa Insurance Division. In addition,
dividends and surplus note payments may be made only out of earned surplus, and
all surplus note payments are subject to prior approval by the Iowa Insurance
Division. At September 30, 1995, American Life and Casualty had earned surplus
of $110.2 million.
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Savings Bank Litigation involves a suit filed by the Company on
August 15, 1990 in the United States Court of Federal Claims (the "Court of
Federal Claims") against the United States of America for breach of certain
contractual agreements which were made by certain former government regulatory
agencies to induce the Company to capitalize its former savings bank subsidiary
(the "Savings Bank") in connection with the acquisition of four failed thrift
institutions in March 1988 and the subsequent seizure of the Savings Bank by the
Office of Thrift Supervision ("OTS") in July 1990. The Company claims that the
defendant breached its contractual agreements with respect to regulatory capital
and contends that this breach, which resulted in the disallowance of $21 million
of capital which the defendant contractually promised would be considered
capital assets for a specified period of time for regulatory accounting purposes
and such subsequent seizure, constitutes a breach of contract and an
unconstitutional taking of the Company's property.
The Savings Bank Litigation seeks monetary damages from the government,
including recovery of: (i) the Company's investment in the Savings Bank of
143,640 shares of the 1988 Series Preferred Stock and $8.4 million of cash and
(ii) compensation for costs incurred and the value of benefits conferred on the
defendant through the Company's purchase, operation and management of the
Savings Bank. Total damages sought by the Company exceed $30 million.
On July 24, 1992, the Court of Federal Claims granted the Company's
motion for summary judgment as to the defendant's liability for breach of
contract in the Savings Bank Litigation. The court also consolidated this case
with two others and certified these cases for interlocutory appeal to the United
States Court of Appeals for the Federal Circuit (the "Court of Appeals").
Subsequently, the Court of Appeals entered a judgment reversing the order of'
the Court of Federal Claims by a decision of two to one, and the Company filed a
Petition for Rehearing with Suggestion for Rehearing in Banc (the "Rehearing
Petition") with the Court of Appeals. On August 18, 1993, the Court of Appeals
accepted the Rehearing Petition, vacated the judgment which was entered in favor
of the defendant and withdrew its opinion accompanying such judgment. On August
30, 1995, the Court of Appeals, in banc, affirmed the summary judgment of the
Court of Federal Claims in the Company's favor by a decision of nine to two. The
United States of America has not indicated whether it intends to petition for
certiorari to the United States Supreme Court. In the event the case is not
taken up to the Supreme Court, a trial will be held in the Court of Federal
Claims to determine damages related to the breach of contract by the United
States.
In conjunction with the Acquisition, each share of Common Stock and each
common stock equivalent outstanding immediately prior to the Acquisition
received a Contingent Payment Right, designed to provide holders with certain
financial benefits that the Company may receive if the Company prevails in the
Savings Bank Litigation. If the rights of the holder of the 1988 Series
Preferred Stock were not an issue in the Savings Bank Litigation, the 1988
Series Preferred Stock would be convertible, at the option of the holder
thereof, into approximately $30 million in connection with the Acquisition.
If the Savings Bank Litigation results in the return of the 1988 Series
Preferred Stock to the Company, the $30 million amount referred to above will be
payable to the holders of the Contingent Payment Rights, together with any money
damages recovered by the Company, subject to certain adjustments and
limitations. If, however, the Company is unsuccessful in the Savings Bank
Litigation, the 1988 Series Preferred Stock will remain outstanding, and the $30
million will instead become payable to the holder of the 1988 Series Preferred
Stock upon the conversion thereof or as otherwise directed by the court. In
addition, the Company may be liable for dividends on the 1988 Series Preferred
Stock. Since the timing of a final determination of the Savings Bank Litigation
is uncertain, the Company is unable to predict when such $30 million will become
payable.
The Company, Vulcan Life and certain of its independent agents have been
named as defendants in litigation in the state of Alabama concerning life
insurance products sold to school teachers in the late 1980's. The cases are:
(i) Sentell, et al. v. Vulcan Life Insurance Company et al., filed in the
Circuit Court for Pickens County, Alabama, on August 22, 1994; (ii) Rembert, et
al. v. Vulcan Life Insurance Company et al., filed on June 29, 1995, and pending
in the United States District Court for the Southern District of Alabama,
Northern Division; (iii) Baldwin et al. v. Vulcan Life Insurance Company et al.,
filed on July 6, 1995, and pending in the United States District Court for the
Southern District of Alabama, Northern Division; (iv) Thomas, et al., v.
Charley, et al., filed in the Circuit Court of Wilcox County, Alabama on or
about December 20, 1994; and (v) Wheeler v. Vulcan Life Insurance Company, et
al., filed in the Circuit Court in Lamar County, Alabama on May 18, 1995 (all
cases are referred to herein as the "Vulcan Life Litigation"). The plaintiffs in
the Vulcan Life Litigation allege, among other things, that the agent defendants
misrepresented that the life products were part of an employee benefit plan and
that such plan would pay the premiums for their policies although, under the
Code, life insurance products may not be purchased through such a plan. The
plaintiffs allege that they purchased the life insurance products because of
such alleged misrepresentations. The plaintiffs have requested an award of
compensatory and punitive damages of unspecified amounts. The defendants have
denied any liability and have raised numerous defenses including the statute of
limitations.
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
In addition to the foregoing, the Company's subsidiaries are involved in
various pending or threatened legal proceedings arising from the conduct of
their businesses. These proceedings in some instances include claims for
punitive damages and similar types of relief in unspecified or substantial
amounts, in addition to amounts for alleged contractual liability or claims for
equitable relief. In management's opinion, after consultation with counsel and a
review of available facts, these proceedings will be ultimately resolved without
materially affecting the financial condition of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits.
11.1 Computation of Earnings Per Share - Primary and Fully Diluted.
27.0 Financial Data Schedule.
b) No reports on Form 8-K were filed for the quarter ended September 30, 1995.
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements 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 LIFE GROUP, INC.
Dated: November 10, 1995 By: /s/ ROLLIN M. DICK
-------------------
Rollin M. Dick,
Executive Vice President and
Chief Financial Officer
(authorized officer and principal
financial officer)