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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-K
Annual Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999 Commission File Number: 0-21459
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AMERUS LIFE HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
699 WALNUT STREET
DES MOINES, IOWA 50309-3948
(Address of principal executive offices, including zip code)
IOWA 42-1459712
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (515) 362-3600
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EXCHANGE
TITLE OF CLASS ON WHICH REGISTERED
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Class A Common Stock (no par value)......................... New York Stock Exchange
7.00% Adjustable Conversion-rate Equity Security Units
issued by AmerUs Capital II, a subsidiary trust............. New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
TITLE OF EACH CLASS
8.85% Capital Securities, Series A issued by
AmerUs Capital I, a subsidiary trust
Class A Common Stock Warrants
6.95% Senior Notes
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates of the
Registrant as of February 29, 2000: $255,600,922.
Number of shares outstanding of each of the Registrant's classes of common
stock on February 29, 2000 was as follows:
Class A, Common Stock....................................... 25,072,902 shares
Class B, Common Stock....................................... 5,000,000 shares
DOCUMENTS INCORPORATED BY REFERENCE
Notice of 2000 Annual Meeting of Shareholders and Proxy Statement
(incorporated into Part III)
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11
PART II
Market for Registrant's Common Equity and Related
Item 5. Stockholder Matters......................................... 12
Item 6. Selected Financial Data..................................... 13
Management's Discussion and Analysis of Results of
Item 7. Operations and Financial Condition.......................... 15
Quantitative and Qualitative Disclosures About Market
Item 7A. Risk........................................................ 32
Item 8. Financial Statements and Supplementary Data................. 33
Changes in and disagreements with Accountants on Accounting
Item 9. and Financial Disclosure.................................... 33
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 34
Item 11. Executive Compensation...................................... 34
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................. 34
Item 13. Certain Relationships and Related Transactions.............. 34
PART IV
Exhibits, Financial Statement Schedules, and Reports on Form
Item 14. 8-K......................................................... 34
Index to Exhibits......................................................... 35
Signatures................................................................ 41
Index to Consolidated Financial Statements................................ F-1
Index to Consolidated Financial Statement Schedules....................... S-1
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SAFE HARBOR STATEMENT
All statements, trend analyses and other information contained in this
report relative to markets for the Company's products and trends in the
Company's operations or financial results, as well as other statements including
words such as "anticipate", "believe", "plan", "estimate", "expect", "intend",
and other similar expressions, constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors which may cause actual results to be materially different from those
contemplated by the forward-looking statements. Such factors include, among
other things: (1) general economic conditions and other factors, including
prevailing interest rate levels and stock market performance, which may affect
the ability of the Company to sell its products, the market value of the
Company's investments and the lapse rate and profitability of policies; (2) the
Company's ability to achieve anticipated levels of operational efficiencies and
cost-saving initiatives and to meet cash requirements based upon projected
liquidity sources; (3) customer response to new products, distribution channels
and marketing initiatives; (4) mortality, morbidity, and other factors which may
affect the profitability of the Company's insurance products; (5) changes in the
Federal income tax laws and regulations which may affect the relative tax
advantages of some of the Company's products; (6) increasing competition in the
sale of insurance and annuities; (7) regulatory changes or actions, including
those relating to regulation of insurance products and of insurance companies;
(8) ratings assigned to the Company and its subsidiaries by independent rating
organizations which the Company believes are particularly important to the sale
of its products; and (9) unanticipated litigation. There can be no assurance
that other factors not currently anticipated by management will not also
materially and adversely affect the Company's results of operations.
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PART I
ITEM 1. BUSINESS
GENERAL
AmerUs Life Holdings, Inc. (the Company) is an insurance holding company
engaged through its subsidiaries in the business of marketing, underwriting and
distributing a broad range of individual life insurance and annuity products to
individuals and businesses in 49 states, the District of Columbia and the U.S.
Virgin Islands. The Company was formed in 1996 as a result of the creation of
the first mutual insurance holding company in the United States, the American
Mutual Holding Company (AMHC). AMHC owns approximately 58% of the Company. The
Company's principal subsidiaries are AmerUs Life Insurance Company (AmerUs
Life), Delta Life Corporation (Delta) and AmVestors Financial Corporation
(AmVestors).
AmerUs Life was originally incorporated in 1896 as a mutual insurance
company under the name Central Life Assurance Society of the United States. Its
name was changed to American Mutual Life Insurance Company in 1994 following the
merger of American Mutual Life Insurance Company into Central Life Assurance
Company. On June 30, 1996, American Mutual Life Insurance Company was converted
into a stock life insurance company pursuant to a plan of reorganization
involving the formation of AMHC (the Reorganization) and its name was changed to
AmerUs Life. AmerUs Life is licensed to do business in the District of Columbia
and in all states except New Hampshire and New York.
On October 23, 1997, the Company acquired all of the outstanding capital
stock of Delta for approximately $165 million in cash (the Delta Acquisition).
The principal asset of Delta is its wholly-owned subsidiary, Delta Life and
Annuity Company (Delta Life), an Iowa domiciled life insurance company formed in
1955 that is licensed in the District of Columbia and in all states except New
York.
On December 19, 1997, the Company acquired AmVestors in a stock exchange
valued at approximately $350 million (the AmVestors Acquisition). AmVestors'
principal operating subsidiaries are American Investors Life Insurance Company,
Inc. (American), a Kansas domiciled life insurance company licensed in 49 states
and the District of Columbia; and Financial Benefit Life Insurance Company
(FBL), a Kansas domiciled life insurance company doing business in 43 states,
the District of Columbia and the U.S. Virgin Islands.
The Company also participates in a joint venture with Ameritas Life
Insurance Corp. (Ameritas) (Ameritas Joint Venture) through AmerUs Life's 34%
ownership interest in AMAL Corporation, a Nebraska corporation (AMAL). AMAL's
operations are conducted through Ameritas Variable Life Insurance Company
(AVLIC) and Ameritas Investment Corp., a registered broker-dealer (AIC), its two
wholly-owned subsidiaries, which have been in business since 1983. AVLIC is
licensed to conduct business in 47 states and the District of Columbia. AIC is a
registered broker-dealer which is licensed to do business in all states except
New York. AmerUs Life's partner in the Ameritas Joint Venture, Ameritas, is a
Nebraska mutual life insurance company which has been in existence for more than
100 years.
On December 20, 1999, the Company and the Company's controlling
shareholder, AMHC, announced that their respective boards of directors had
approved plans for the demutualization of AMHC and the merger of the Company
into AMHC following the demutualization. Upon completion of the demutualization,
AMHC would be a public company. AMHC will change its name to AmerUs Group Co.
(AmerUs Group) and be traded on the New York Stock Exchange under the symbol
"AMH". Members of AMHC will receive approximately 17 million shares of AmerUs
Group and cash or policy credits in excess of $300 million as a result of the
demutualization. Shareholders of the Company will receive shares in AmerUs Group
in a one-for-one exchange. To complete the demutualization and merger, approval
is needed from the members of AMHC, the Iowa Commissioner of Insurance and
shareholders of the Company. Members of AMHC and shareholders of the Company
will be asked to approve the proposed demutualization and merger plans during
the second quarter of 2000.
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On February 18, 2000, the Company, AMHC and Indianapolis Life Insurance Co.
(ILICO) entered into a definitive agreement for a combination of the companies.
Under these terms, AMHC will proceed with its previously announced
demutualization. ILICO will demutualize separately and ILICO's members will
receive cash, policy credits and stock equivalent to the value of 11.25 million
shares of stock of AmerUs Group. Upon demutualization, ILICO will become a
subsidiary of AmerUs Group and will continue operations as a stock life
insurance company. As part of the transaction, AMHC made an initial investment
of $100 million in a downstream holding company of ILICO on February 18, 2000.
ILICO is a 95-year old mutual life insurance and annuity company based in
Indianapolis, Indiana. ILICO and its subsidiaries are licensed to do business in
all 50 states and the District of Columbia. At December 31, 1999, ILICO had
total assets of $6.1 billion and insurance in force of $30.3 billion. The
contemplated transactions are subject to normal closing conditions, including
appropriate policyholder/member, shareholder and regulatory approvals. The
Company expects the demutualization of ILICO and combination with AmerUs Group
to take place in the fourth quarter of 2000.
OPERATIONS
The Company has two operating segments: Life Insurance and Annuities.
Products generally distinguish a segment. The life insurance segment's primary
product offerings consist of whole life, universal life and term life insurance
policies. The annuity segment product offerings consist primarily of fixed
annuities.
Additional information concerning the Company's segments may be found in
"Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition" and Note 20 of the Consolidated Financial Statements that
begin on page F-1, both of which are incorporated herein by reference.
LIFE INSURANCE SEGMENT
PRODUCTS
The Company's individual life insurance premiums are from traditional life
insurance products and universal life insurance products, as set forth in the
following table:
SALES ACTIVITY BY PRODUCT
DIRECT FIRST YEAR ANNUALIZED PREMIUMS
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
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($ IN THOUSANDS)
Traditional life insurance:
Participating whole life............................... $16,409 $17,943 $16,843
Term Life.............................................. 7,012 6,111 4,751
Universal Life........................................... 14,314 10,005 8,916
------- ------- -------
Total (A).............................................. $37,735 $34,059 $30,510
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Traditional Life Insurance Products. The Company's traditional life
insurance products have a long history of being highly competitive within the
industry. Traditional life insurance products include participating whole life
and term life insurance products.
Participating whole life insurance is designed to provide benefits for the
life of the insured. This product generally provides for level premiums and a
level death benefit and requires payments in excess of the mortality cost in
earlier years to offset increasing mortality costs in later years. The Company
also offers a second to die whole life insurance product which insures two lives
and provides benefits upon the death of the second insured. The Company targets
its second to die products primarily to potential customers seeking to achieve
estate planning goals. Sales of participating whole life insurance decreased in
1999, which was consistent with the general industry decline of sales of this
product.
Term life insurance provides life insurance protection for a specific time
period (which generally can be renewed at an increased premium). Such policies
are mortality-based and offer no cash accumulation feature. Term life insurance
is a highly competitive and quickly changing market. Term life insurance sales
increased
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approximately 15% in 1999 primarily as a result of product repricing completed
in mid-1999 along with an increase in consumer demand for the product. Consumer
demand for term products was generally up in 1999 as a result of legislative
changes taking effect in January, 2000 which were anticipated to impact product
pricing. The increase in 1998 term life insurance sales was primarily due to the
introduction of three new term products in the first quarter of 1998.
Since 1989, the Company has offered a flexible life insurance product,
which is a combination of permanent participating whole life insurance,
increasing paid-up additions and decreasing term insurance coverage. These
products give policyowners additional flexibility in designing an appropriate
combination of permanent and term life insurance coverages to meet their
specific needs at varying premium levels.
For the year ended December 31, 1999, sales of participating whole life and
term life insurance products represented 43% and 19%, respectively, of first
year annualized premiums for all individual life insurance products sold by the
Company.
Universal Life Insurance Products. The Company offers universal life
insurance products, pursuant to which an insurance account is maintained for
each insurance policy. Premiums, net of specified expenses, are credited to the
account, as is interest, generally at a rate determined from time to time by the
Company. Specific charges are made against the account for the cost of insurance
and for expenses. The universal life policy provides flexibility as to the
amount and timing of premium payments and the level of death benefits provided.
The Company's universal life insurance products provide benefits for the
life of the insured. Within limits established by the Company and state
regulations, policyowners may vary the premiums and the amount of the policy's
death benefit as long as there are sufficient policy funds available to cover
all policy charges for the coming period. Increased sales of universal life in
1999, 1998 and 1997 were primarily attributable to new universal life products
introduced in each year. The weighted average crediting rate for universal life
insurance liabilities was 5.67% for the year 1999, 6.08% for the year 1998 and
6.23% for the year 1997. For the year ended December 31, 1999, sales of
universal life insurance products represented 38% of first year annualized
premiums for all individual life insurance products sold by the Company.
The following table sets forth the Company's collected individual life
premiums, including collected individual life premiums associated with the
Closed Block, for the periods indicated:
COLLECTED PREMIUMS BY PRODUCT
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
($ IN THOUSANDS)
Individual life premiums collected:
Traditional life:
First year and single............................... $ 84,044 $ 82,219 $ 74,132
Renewal............................................. 179,780 173,079 166,847
-------- -------- --------
Total............................................... 263,824 255,298 240,979
Universal life:
First year and single............................... 24,371 18,987 14,089
Renewal............................................. 72,192 73,410 73,779
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Total............................................... 96,563 92,397 87,868
Total individual life.................................... 360,387 347,695 328,847
Reinsurance assumed................................. 1,589 1,224 1,502
Reinsurance ceded................................... (17,571) (14,224) (13,155)
-------- -------- --------
Total individual life, net of reinsurance................ $344,405 $334,695 $317,194
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The following table sets forth information regarding the Company's life
insurance in force for each date presented:
LIFE INSURANCE IN FORCE
AS OF DECEMBER 31,
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1999 1998 1997
----------- ----------- -----------
($ IN THOUSANDS)
Individual life insurance:
Traditional life
Number of policies.............................. 249,282 254,033 258,087
GAAP life reserves.............................. $ 1,645,945 $ 1,554,681 $ 1,473,240
Face amounts.................................... $21,458,000 $19,559,000 $18,077,000
Universal life
Number of policies.............................. 112,906 115,056 117,824
GAAP life reserves.............................. $ 920,010 $ 897,159 $ 867,988
Face amounts.................................... $12,244,000 $12,153,000 $12,115,000
Total life insurance
Number of policies.............................. 362,188 369,089 375,911
GAAP life reserves.............................. $ 2,565,955 $ 2,451,840 $ 2,341,228
Face amounts.................................... $33,702,000 $31,712,000 $30,192,000
DISTRIBUTION SYSTEMS
The Company sells life insurance in 49 states, the District of Columbia and
the U.S. Virgin Islands. The states with the highest geographic concentration of
sales, based on statutory premiums, are California, Iowa, Minnesota, Texas and
Illinois. These states account for approximately 44% of the Company's statutory
premiums.
The Company's target customers are individuals in the middle and upper
income brackets and small businesses. The Company markets its life insurance
products on a national basis primarily through a Preferred Producer agency
system and a Personal Producing General Agent (PPGA) distribution system. The
Company currently employs 14 regional vice presidents who are responsible for
supervising the Preferred Producer agencies and/or PPGA agents within their
assigned geographic regions.
Under the Preferred Producer agency system, a contractual arrangement is
entered into with the Preferred Producer general agent for the sale of insurance
products by the Preferred Producer agents and brokers assigned to the Preferred
Producer general agent's agency. The Preferred Producer general agents are
primarily compensated by receiving a percentage of the first year commissions
paid to Preferred Producer agents and brokers in the Preferred Producer general
agent's agency and by renewal commissions on premiums subsequently collected on
that business. In addition, the Preferred Producers receive certain fringe
benefits and other allowances.
The Preferred Producer general agents are independent contractors and are
generally responsible for the expenses of operating their agencies, including
office and overhead expenses and the recruiting, selection, contracting,
training and development of Preferred Producer agents and brokers in their
agency. Currently, the Company has 40 Preferred Producer general agents in 23
states, through which approximately 750 Preferred Producer agents sell the
Company's products. While Preferred Producer agents in the Preferred Producer
agency system are non-exclusive, most agents use the Company's products for a
majority of their new business of the type of products offered by the Company.
No single Preferred Producer general agency accounts for more than 7% of the
total first year life commissions paid by the Company.
Preferred Producer agents are also independent contractors and are
primarily compensated by commissions on first year and renewal premiums
collected on business written by them plus certain fringe benefits and other
allowances. In addition, Preferred Producer agents can earn bonus commissions,
graded by production and persistency on their business.
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Under the PPGA system, the Company contracts primarily with individuals who
are experienced individual agents or head a small group of experienced
individual agents. These individuals are independent contractors and are
responsible for all of their own expenses. These individuals often sell products
for other insurance companies, and may offer selected products of the Company
rather than the Company's full line of insurance products. The PPGA system is
comprised of approximately 900 PPGA's, with approximately 1,100 agents.
PPGAs are compensated by commissions on first year and renewal premiums
collected on business written by themselves and the agents in their units. In
addition to a base commission, PPGAs may earn bonus commissions on their
business, graded by production and persistency.
The Company has also developed programs to sell life insurance through
select banks and brokerages. The customers targeted and the products sold are
similar to those of the Preferred Producer agency system and the PPGA system,
with an emphasis on wealth distribution and deferred compensation products in
the bank channel and an emphasis on universal life products in the brokerage
channel.
Under the bank distribution system, the Company contracts with banks and
marketing organizations for the sale of insurance products by agents who are
employees of the banks. Commissions are paid to the banks. Currently, the
Company has approximately 23 banks and 3 marketing organizations under contract
through which approximately 240 agents sell the Company's products. The Company
provides training and servicing support to the banks and marketing
organizations.
Under the brokerage distribution system, a contractual arrangement is
entered into with an independent brokerage general agent to promote the
Company's insurance products to their network of agents and brokers. The agent
receives a commission and the general agent receives an override commission on
the business produced. The Company currently has 19 brokerage general agents
under contract.
ANNUITY SEGMENT
PRODUCTS
The Company's annuity premiums consisted of approximately 89% from fixed
annuity products and 11% from equity-index annuity products in 1999. Annuity
premiums increased significantly in 1998 due to the Company's acquisition of
Delta and AmVestors in the fourth quarter of 1997. The following table sets
forth annuity collected premiums for the periods indicated:
COLLECTED PREMIUMS BY PRODUCT
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
($ IN THOUSANDS)
Fixed annuities.......................................... $834,636 $756,106 $ 70,298
Equity-index annuities................................... 104,265 36,418 11,755
-------- -------- --------
Total.................................................. 938,901 792,524 82,053
Reinsurance assumed...................................... 59,561 -- --
Reinsurance ceded........................................ (273) (1,247) (2,276)
-------- -------- --------
Total annuities, net of reinsurance...................... $998,189 $791,277 $ 79,777
======== ======== ========
Fixed Annuity Products. The Company offers a broad portfolio of fixed
annuity products. Annuities provide for the payment of periodic benefits over a
specified time period. Benefits may commence immediately or may be deferred to a
future date. Fixed annuities generally are backed by a general investment
account and credited with a rate of return that is periodically reset.
The Company offers a variety of interest rate crediting strategies on its
fixed annuity products. These strategies include initial interest crediting
rates with guarantees for periods of one to five years. Following the initial
guarantee period, the Company may adjust the credited interest rate annually,
subject to the minimum interest rates specified in the contracts. Such minimum
guarantee rates currently range from 3% to 5%. The
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Company also offers an interest rate crediting strategy that credits the policy
with a return generally based upon the interest rates it earns on assets
supporting the respective policies less management fees.
Equity-Index Annuities. The Company offers equity-index annuity products
that are based on Standard & Poor's 500 Composite Stock Price
Index -- Registered Trademark. Earnings credited to these products generally are
linked to increases in the anniversary date values of the applicable index, less
management fees.
In the third quarter of 1999, the Company entered into a reinsurance
agreement for the assumption of a block of equity-index annuities totaling $59.6
million from its joint venture partner, AVLIC. In conjunction with this
transaction, the Company now directly issues this equity-index product, which
contributed to the increased sales in 1999. In addition, the Company introduced
a new equity-linked product in mid-1999 which had a positive impact on sales.
In December 1999, the Company introduced a multi-choice annuity product
which provides for various earnings strategies under one product, such as a
long-term equity index, an annual equity index, an investment grade bond index,
and a guaranteed one-year rate. Earnings are credited to this product based on
the increases in the applicable indexes, less management fees, and funds may be
moved between investment alternatives.
The following table sets forth information regarding annuities in force for
each date presented:
ANNUITIES IN FORCE
AS OF DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
($ IN THOUSANDS)
Deferred fixed and immediate annuities
Number of policies................................. 169,854 179,294 191,680
GAAP reserves...................................... $5,951,002 $5,975,320 $5,971,225
Equity-index annuities
Number of policies................................. 9,099 5,040 5,202
GAAP reserves...................................... $ 437,862 $ 239,934 $ 162,995
Total annuities
Number of policies................................. 178,953 184,334 196,882
GAAP reserves...................................... $6,388,864 $6,215,254 $6,134,220
DISTRIBUTION SYSTEMS
The Company sells annuities in 49 states, the District of Columbia and the
U.S. Virgin Islands. The states with the highest geographic concentration of
sales, based on statutory premiums, are Iowa, California, Illinois, Florida and
Texas. These states account for approximately 54% of the Company's statutory
premiums.
The Company directs its marketing efforts towards the asset accumulation,
conservative savings, and retirement markets. The Company markets its annuity
products on a national basis primarily through networks of independent agents.
The independent agents are supervised by regional vice presidents and regional
directors or Independent Marketing Organizations (IMOs). In addition, the
Preferred Producer Agency and PPGA systems discussed previously are utilized to
market select annuity products.
The regional vice presidents and regional directors are primarily
responsible for recruiting agents and servicing those agents in an effort to
promote the Company's products. The regional vice presidents' and regional
directors' marketing support activities include informational mailings,
seminars, and case consultations, all of which are designed to educate agents
about annuities in general and the Company in particular. Regional vice
presidents and regional directors are paid a base salary plus incentive
compensation based on the business produced by agents within their territory.
There are currently four regional vice presidents and regional directors
covering the southeastern, western, southwestern and midwestern regions of the
United States.
The Company's IMOs consist of approximately 70 contracted organizations,
two wholly-owned organizations and one partially-owned organization. The IMOs
are responsible for recruiting, servicing and educating
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agents in an effort to promote the Company's products. The IMOs receive an
override commission based on the business produced by their agents.
The Company currently has approximately 8,300 independent agents licensed
to sell its products. The Company also maintains contact with approximately
56,000 agents that are not currently licensed, but have either sold the
Company's annuities in the past or have expressed an interest in doing so. These
agents continue to receive periodic mailings related to interest rate and
commission changes, and new product introductions, and are reappointed as
required in order to represent the Company in selling its products. However, in
order to save costs associated with reappointing agents, the Company does not
automatically relicense an agent that has not written business for twelve
months.
No single agent accounted for more than 0.9% of the Company's annuity sales
in 1999. The Company does not have exclusive agency agreements with its agents
and management believes most of these agents sell products similar to those sold
by the Company for other insurance companies.
The Company also sells annuities through the bank channel discussed
previously in the Life Insurance Segment section. The customers targeted and the
products sold are similar to those sold by the independent agent networks.
Subsequent to year end, the Company purchased an 80% ownership interest in an
independent marketing organization that is associated with over 700 community
banks in the southeast region of the United States. Fixed annuity products are
the primary product focus of this organization.
AMERITAS JOINT VENTURE
The Company's investment in the Ameritas Joint Venture affords the Company
access to a line of existing variable life insurance and annuity products while
providing a lower-cost entry into an established business, thereby eliminating
significant start-up costs and allowing for immediate potential earnings.
The Ameritas Joint Venture offers through AVLIC fixed annuity products,
flexible premium and single premium variable universal life insurance products
and variable annuities. Variable products provide for allocation of funds to a
general account or to one or more separate accounts under which the owner bears
the investment risk. Through AVLIC's fund managers, owners of variable annuities
and life insurance policies are able to choose from a range of investment funds
offered by each manager.
Under the terms of the joint venture agreement, AmerUs Life and Ameritas
write their new single and flexible premium deferred fixed annuities and
variable annuities and variable life insurance through the Ameritas Joint
Venture. AmerUs Life has retained the right to continue to issue replacement
business to its fixed annuity customers in existence prior to the effective date
of the joint venture agreement. AmerUs Life also offers equity-index annuity
products directly.
The variable life insurance products and the fixed and variable annuities
offered by the Ameritas Joint Venture are distributed through the Company's
Preferred Producer general agency, PPGA, and Bank distribution systems, as well
as through the distribution systems of Ameritas and AVLIC.
Under the terms of the joint venture agreement, AmerUs Life has an option
to purchase an additional 5% to 15% of AMAL if certain premium growth targets
are met. AmerUs Life and Ameritas each have guaranteed the policyholder
obligations of AVLIC. The guarantee of each party is joint and several, and will
remain in effect until certain conditions are met.
As of December 31, 1999, AMAL had total consolidated assets of $2,756.0
million and total consolidated shareholder's equity of $86.8 million on a GAAP
basis. AVLIC had $5.4 billion of insurance in force and $41.6 million in surplus
as of December 31, 1999, on a statutory basis.
COMPETITION
The Company operates in a highly competitive industry. Numerous life
insurance companies and other entities, including banks and other financial
institutions, compete with the Company, many of which have greater financial and
other resources as compared to the Company. The Company believes that the
principal competitive factors in the sale of insurance products are product
features, price, commission structure,
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perceived stability of the insurer, financial strength ratings, value-added
service and name recognition. Many other companies are capable of competing for
sales in the Company's target markets (including companies that do not presently
compete in such markets). The Company's ability to compete for sales is
dependent upon its ability to address the competitive factors described above.
In addition to competing for sales, the Company competes for qualified
agents and brokers to distribute its products. Strong competition exists among
insurance companies for agents and brokers with demonstrated ability. Management
believes that the bases of competition for the services of such agents and
brokers are commission structure, support services, prior relationships and the
strength of an insurer's products. Although the Company believes that it has
good relationships with its agents and brokers, its ability to compete will
depend on its continued ability to attract and retain qualified persons.
As of December 31, 1999, AmerUs Life's financial strength rating was: rated
"A" (Excellent) by A.M. Best Company; rated "Baa1" (Adequate) by Moody's
Investors Service; and rated "A" (Strong) by Standard & Poor's.
Delta Life's financial strength rating was: rated "A" (Excellent) by A.M.
Best Company; rated "Baa1" (Adequate) by Moody's Investors Service; and rated
"BBB" (Good) by Standard & Poor's.
American's financial strength rating was: rated "A-" (Excellent) by A.M.
Best Company; rated "Baa1" (Adequate) by Moody's Investors Service; and rated
"A" (Strong) by Standard & Poor's.
FBL's financial strength rating was "B+" (Very Good) at A.M. Best Company
and "BBB" (Good) by Standard & Poor's.
INSURANCE UNDERWRITING
The Company follows detailed, uniform underwriting practices and procedures
in its insurance business which are designed to assess risks before issuing
coverage to qualified applicants. The Company has professional underwriters who
evaluate policy applications on the basis of information provided by applicants
and others.
REINSURANCE
In accordance with industry practices, the Company reinsures portions of
its life insurance and disability income exposure with unaffiliated insurance
companies under traditional indemnity reinsurance arrangements. Such reinsurance
arrangements are in accordance with standard reinsurance practices within the
industry. The Company enters into these arrangements to assist in diversifying
their risks and to limit the maximum loss on risks that exceed policy retention
limits. The Company's maximum retention limit for life insurance policies was
$1,000,000 per life insured. Effective January 1, 2000, the Company entered into
additional reinsurance agreements which effectively reduced the Company's
retention limit to $100,000 for the majority of policies issued since July 1,
1996 and for the majority of new business going forward. Indemnity reinsurance
does not fully discharge the Company's obligation to pay claims on business it
reinsures. The Company, as the ceding company, remains responsible for policy
claims to the extent the reinsurer fails to pay such claims. The Company
annually monitors the creditworthiness of its primary reinsurers, and has
experienced no material reinsurance recoverability problems in recent years.
As of December 31, 1999, the Company had reinsurance arrangements in place
for life insurance having a face amount of approximately $5.6 billion with 19
unaffiliated reinsurers. All but one of the companies with which the Company had
life reinsurance arrangements as of such date were rated "A" or better by A.M.
Best. As of December 31, 1999, the Company's top five reinsurers (by face amount
reinsured) constituted approximately 87% of the total face amount reinsured by
the Company as of such date. Of these top five reinsurers, three are rated "A+"
and the other two "A" by A.M. Best.
The Company reinsures 25% of its equity-index annuity reserves with an
unaffiliated reinsurer which is rated "A+" by A.M. Best. The Company also
reinsures approximately 1% of its deferred annuities with an unaffiliated
company which is rated "A" by A.M. Best.
9
12
EMPLOYEES
As of December 31, 1999, the Company had 694 full-time employees. None of
these employees are covered by a collective bargaining agreement and the Company
believes that its relations with employees are satisfactory.
SUBSIDIARIES
The Company was formed in August, 1996 in connection with the creation of
the first mutual insurance holding company in the United States. The Company has
primarily four wholly-owned subsidiaries: AmerUs Life, an Iowa life insurance
company; Delta, an Iowa corporation; AmVestors, a Kansas corporation and AmerUs
Capital Management Group, Inc. (ACM), an Iowa corporation. AmerUs Life has two
wholly-owned subsidiaries: CLA Assurance Company, an Iowa life insurance
company; and American Vanguard Life Insurance Company, an Iowa life insurance
company. In addition, AmerUs Life currently owns a 34% interest in AMAL
Corporation, through whose wholly-owned subsidiaries the Ameritas Joint Venture
operates. Delta primarily has one wholly-owned subsidiary, Delta Life, an Iowa
life insurance company. AmVestors primarily has two wholly-owned subsidiaries:
American, a Kansas life insurance company; and FBL, a Kansas life insurance
company. ACM has one wholly-owned subsidiary, ACM Properties, Inc.
REGULATION
The Company is indirectly controlled by a mutual insurance holding company,
AMHC. Mutual insurance holding companies are subject to regulation by the Iowa
Insurance Division. This includes compliance with the Iowa Insurance Holding
Company Systems Act. The Iowa Commissioner of Insurance also has jurisdiction
over an intermediate holding company, such as the Company, as if it were a
mutual insurance holding company.
AMHC and the Company are also each subject to the Iowa Insurer Supervision,
Rehabilitation and Liquidation Act, Iowa Code Chapter 507C. In addition, the
assets of AMHC and the Company are available to satisfy claims of AmerUs Life in
the event the Iowa Commissioner initiates a proceeding under Chapter 507C. AMHC
and the Company may not merge with or be acquired by another entity without
approval of the Iowa Commissioner. In addition, in the case of a merger of AMHC
with another mutual company, separate approval by the Iowa Attorney general is
required.
In addition to rules establishing the terms and conditions pursuant to
which the Iowa Commissioner will approve the sale of stock of an intermediate
insurance holding company or a subsidiary stock insurance company resulting from
a reorganization pursuant to Iowa law, the Iowa Commissioner has adopted rules
that limit the activities and affiliations that are permissible for a mutual
insurance holding company. The Iowa Commissioner also has issued rules which,
under certain circumstances, require prior approval by the Iowa Commissioner of
the issuance of stock by the Company.
Shares of the capital stock of the Company which carry the right to cast a
majority of the votes entitled to be cast by all of the outstanding shares of
the Company are required by Iowa law to at all times be owned, directly or
indirectly, by AMHC and may not be conveyed, transferred, assigned, pledged,
subjected to a security interest or lien, encumbered, or otherwise hypothecated
or alienated by AMHC or any intermediate holding company.
AmerUs Life, Delta Life, American and FBL are subject to regulation and
supervision by the states in which they transact business. State insurance laws
generally establish supervisory agencies with broad administrative and
supervisory powers related to granting and revoking licenses, transacting
business, establishing guaranty fund associations, licensing agents, approving
policy forms, regulating sales practices, regulating premium rates for some
lines of business, establishing reserve requirements, prescribing the form and
content of required financial statements and reports, determining the
reasonableness and adequacy of statutory capital and surplus, and regulating the
type and amount of investments permitted.
Every state in which the Company's insurance companies are licensed
administers a guaranty fund, which provides for assessments of licensed insurers
for the protection of policyowners of insolvent insurance
10
13
companies. Assessments can be partially recovered through a reduction in future
premium taxes in some states.
Risk-based capital ("RBC") standards for life insurance companies were
adopted by the National Association of Insurance Commissioners ("NAIC") in 1992
and require insurance companies to calculate and report for statutory basis
financial statements information under a risk-based capital formula. The formula
is embodied in the NAIC Model Act, which has been adopted by many states,
including Iowa and Kansas. RBC requirements are intended to allow insurance
regulators to identify at an early stage inadequately capitalized insurance
companies based upon the types and mixtures of risks inherent in such companies'
operations. The formula includes components for asset risk, liability risk,
interest rate exposure and other factors. As of December 31, 1999, AmerUs
Life's, Delta Life's, American's and FBL's RBC levels were 508%, 541%, 441% and
473%, respectively, of each of their respective authorized control level RBC
thresholds.
ITEM 2. PROPERTIES
The Company leases approximately 69,000 square feet at 699 Walnut Street,
Des Moines, Iowa from an unaffiliated party. The Company's executive offices and
corporate operations, including legal, tax, finance, human resources,
investments, communications and technology, are at this location.
The Company also leases approximately 103,000 square feet at 611 Fifth
Avenue, Des Moines, Iowa from an unaffiliated party. The life insurance segment
and the annuity segment occupy approximately 70,000 square feet and 10,000
square feet, respectively, of this space. The remaining space is primarily
utilized for technology and cafeteria facilities.
The Company owns a 105,000 square foot office building in Topeka, Kansas.
The annuity segment occupies approximately 60,000 square feet of this facility
and the remaining space is leased to third parties.
The Company also leases approximately 48,000 square feet from unaffiliated
parties for special technology projects, such as administration system
conversions, and for records and supply storage.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company has been publicly traded since 1997. On February 20, 1998, the
AmerUs Class A Common Stock was listed and trading began on the New York Stock
Exchange (NYSE) under the symbol "AMH." Prior to such listing, the Company's
Class A Common Stock was listed and traded on the Nasdaq National Market System
(the Nasdaq) under the symbol "AMRS." The following table sets forth, for the
periods indicated, the high and low sales prices per share of AmerUs Class A
Common Stock as quoted on Nasdaq or the NYSE, as applicable, and the quarterly
dividends per share declared during such quarter.
AMERUS
CLASS A COMMON STOCK (A)
----------------------------
HIGH LOW DIVIDENDS
---- --- ---------
1998
First Quarter............................................... 36 1/4 30 7/8 .10
Second Quarter.............................................. 34 7/16 30 5/8 .10
Third Quarter............................................... 33 1/16 21 15/16 .10
Fourth Quarter.............................................. 24 1/8 14 3/4 .10
1999
First Quarter............................................... 24 11/16 16 13/16 .10
Second Quarter.............................................. 28 21 5/16 .10
Third Quarter............................................... 28 3/4 21 3/16 .10
Fourth Quarter.............................................. 25 3/4 20 1/2 .10
HOLDERS
As of February 29, 2000, the number of holders of record of each class of
common equity of the Company was as follows:
NUMBER OF
HOLDERS
---------
Class A Common stock........................................ 2,381
Class B Common stock........................................ 1
DIVIDENDS
The Company's Board of Directors has declared and paid a quarterly dividend
of $0.10 per share of Common Stock, beginning in the second quarter of 1997. The
Board of Directors has approved moving from a quarterly dividend to an annual
dividend beginning in 2000. The declaration and payment of dividends in the
future is subject to the discretion of the Company's Board of Directors and will
be dependent upon the Company's financial condition, results of operations, cash
requirements, future prospects, regulatory restrictions on the payment of
dividends by the Company's life insurance subsidiaries and other factors deemed
relevant by the Company's Board of Directors.
The Company is an insurance holding company whose principal assets consist
of all of the outstanding shares of the common stock of its life insurance
subsidiaries. The Company's ongoing ability to pay dividends to its shareholders
and meet its other obligations, including operating expenses and any debt
service, primarily depends upon the receipt of sufficient funds from its life
insurance subsidiaries in the form of dividends, interest payments or loans.
Based on statutory insurance regulations and 1998 results, the Company's
subsidiaries could have paid an estimated $60.7 million in dividends in 1999
without obtaining regulatory approval. Of this amount, the Company's
subsidiaries paid the Company $48 million in dividends in 1999. Based on 1999
results, the
12
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Company's subsidiaries can pay an estimated $61.1 million in dividends in 2000
without obtaining regulatory approval.
Under its bank credit facility, the Company is prohibited from paying
dividends on its Common Stock in excess of an amount equal to 3% of the
Company's consolidated net worth as of the last day of the preceding fiscal
year.
In connection with the 8.85% Capital Securities, Series A (the "Capital
Securities"), issued in 1997 by AmerUs Capital I, the Company's subsidiary
trust, and the 7.00% Adjustable Conversion-rate Equity Security Units (ACES),
issued in 1998 by AmerUs Capital II, the Company's subsidiary trust, the Company
has agreed not to declare or pay any dividends on the Company's capital stock
(including the Class A Common Stock) during any period for which the Company
elects to extend interest payments on its junior subordinated debentures, except
for stock dividends paid by the Company where the dividend stock is the same
stock as that on which the dividend is being paid. Dividends on the Company's
capital stock cannot be paid until all accrued interest on the Capital
Securities and ACES has been paid.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain financial and operating data of the
Company. The selected consolidated financial data below for each of the five
years ending December 31, 1999 are derived from the Consolidated Financial
Statements of the Company, which financial statements have been audited by KPMG
LLP, independent auditors.
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1999 1998 1997 (A) 1996 (B) 1995
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE DATA)
CONSOLIDATED INCOME STATEMENT DATA:
Revenues:
Insurance premiums................. $ 89.5 $ 81.2 $ 48.1 $ 138.5 $ 244.1
Product charges.................... 74.7 73.0 47.3 52.2 57.3
Net investment income.............. 540.1 503.4 224.5 228.6 285.2
Realized gains (losses) on
investments..................... 3.2 (0.1) 13.8 66.0 51.4
Other income....................... 1.4 1.7 -- -- --
Contributions form the Closed Block
(B)............................. 25.2 31.4 31.0 19.9 --
--------- --------- --------- --------- ---------
Total revenues....................... 734.1 690.6 364.7 505.2 638.0
--------- --------- --------- --------- ---------
Benefits and expenses:
Policyowner benefits............... 442.4 430.8 196.0 264.7 374.6
Total expenses..................... 161.7 141.5 73.7 95.1 101.1
Dividends to policyowners.......... 4.5 2.6 1.6 26.3 49.4
--------- --------- --------- --------- ---------
Total benefits and expenses.......... 608.6 574.9 271.3 386.1 525.1
--------- --------- --------- --------- ---------
Income from operations............... 125.5 115.7 93.4 119.1 112.9
Interest expense..................... 28.3 27.1 15.0 2.1 2.4
--------- --------- --------- --------- ---------
Income before income tax expense and
equity in earnings of
unconsolidated subsidiary.......... 97.2 88.6 78.4 117.0 110.5
Income tax expense................... 32.1 28.4 22.0 43.8 41.2
--------- --------- --------- --------- ---------
Income before equity in earnings of
unconsolidated subsidiary.......... 65.1 60.2 56.4 73.2 69.3
Equity in earnings of unconsolidated
subsidiary......................... 1.6 2.6 1.7 1.0 --
--------- --------- --------- --------- ---------
Net Income........................... $ 66.7 $ 62.8 $ 58.1 $ 74.2 $ 69.3
========= ========= ========= ========= =========
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AS OF OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1999 1998 1997 (A) 1996 (B) 1995
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE DATA)
Earnings per common share:
Basic (C).......................... $ 2.20 $ 1.88 $ 2.47 $ 3.20 $ 2.99
Diluted (D)........................ $ 2.20 $ 1.86 $ 2.46 $ 3.20 $ 2.99
Dividends declared per common
share.............................. $ 0.40 $ 0.40 $ 0.30 $ -- $ --
CONSOLIDATED BALANCE SHEET DATA:
Total invested assets.............. $ 7,691.2 $ 7,684.8 $ 7,695.5 $ 2,880.8 $ 3,965.0
Total assets....................... $10,719.4 $10,424.5 $10,254.0 $ 4,384.2 $ 4,371.9
Total liabilities.................. $ 9,771.6 $ 9,357.6 $ 9,240.0 $ 3,926.7 $ 3,832.0
Company-obligated mandatorily
redeemable preferred
securities...................... $ 214.8 $ 216.7 $ 86.0 $ -- $ --
Total stockholders' equity (E)..... $ 733.0 $ 850.2 $ 928.0 $ 457.5 $ 539.9
OTHER OPERATING DATA (UNAUDITED):
Adjusted net operating income (F).... $ 74.3 $ 68.9 $ 49.1 $ 37.6 $ 38.5
Adjusted net operating income per
common share:
Basic (G).......................... $ 2.46 $ 2.06 $ 2.08 $ 1.62 $ 1.66
Diluted (H)........................ $ 2.45 $ 2.04 $ 2.08 $ 1.62 $ 1.66
- ---------------
(A) Consolidated Income Statement Data for 1997 includes the results for Delta,
subsequent to the acquisition date of October 23, 1997 and the results for
AmVestors, subsequent to the acquisition date of December 19, 1997, and
Consolidated Balance Sheet Data includes year-end data for Delta and
AmVestors.
(B) The Company formed the Closed Block on June 30, 1996. Invested assets
allocated to the Closed Block are classified as Closed Block assets.
Revenues and expenses associated with the Closed Block are shown net as a
single line item. Accordingly, the individual income statement components
for 1999, 1998 and 1997 are not fully comparable with those of 1996 and 1995
due to the establishment of the Closed Block on June 30, 1996.
(C) Retroactively reflects the pro forma effect of the issuance of 23.16 million
shares of common stock at the beginning of 1995. The 1999, 1998, 1997 and
1996 calculations reflect 30.23 million, 33.46 million, 23.54 million and
23.16 million of weighted average common shares outstanding, respectively.
(D) Retroactively reflects the pro forma effect of the issuance of 23.16 million
shares of common stock at the beginning of 1995. The 1999, 1998, 1997 and
1996 calculations reflect 30.31 million, 33.70 million, 23.57 million and
23.16 million of weighted average diluted common shares outstanding,
respectively.
(E) Amounts reported prior to June 30, 1996 reflect policyowners' equity.
(F) Adjusted net operating income reflects net income adjusted to eliminate
certain items (net of applicable income taxes) which management believes are
not necessarily indicative of overall operating trends, including net
realized gains or losses on investments. Different items are likely to occur
in each period presented and others may have different opinions as to which
items may warrant adjustment. The adjusted net operating income shown does
not constitute net income computed in accordance with GAAP.
(G) Basic adjusted net operating income per common share is calculated using the
number of shares reflected in (C) above.
(H) Diluted adjusted net operating income per common share is calculated using
the number of shares reflected in (D) above.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following analysis of the consolidated results of operations and
financial condition of the Company should be read in conjunction with the
Selected Consolidated Financial and Operating Data and Consolidated Financial
Statements and related notes.
OVERVIEW
The Company is a holding company engaged through its subsidiaries in the
business of marketing, underwriting and distributing a broad range of individual
life insurance and annuity products to individuals and businesses in 49 states,
the District of Columbia and the U.S. Virgin Islands. The Company has two
reportable operating segments: Life Insurance and Annuities. The Life Insurance
segment's primary product offerings consist of whole life, universal life and
term life insurance policies. The primary product offerings of the Annuity
segment are fixed annuities.
In accordance with Generally Accepted Accounting Principals (GAAP),
universal life insurance premiums and annuity deposits received are reflected as
increases in liabilities for policyowner account balances and not as revenues.
Revenues reported for universal life and annuity products consist of policy
charges for the cost of insurance, administration charges and surrender charges
assessed against policyowner account balances. Surrender benefits paid relating
to universal life insurance policies and annuity products are reflected as
decreases in liabilities for policyowner account balances and not as expenses.
Amounts for interest credited to universal life and annuity policyowner account
balances and benefit claims in excess of policyowner account balances are
reported as expenses in the financial statements. The Company receives
investment income earned from the funds deposited into account balances by
universal life and annuity policyowners, the majority of which is passed through
to such policyowners in the form of interest credited.
Premium revenues reported for traditional life insurance products are
recognized as revenues when due. Future policy benefits and policy acquisition
costs are recognized as expenses over the life of the policy by means of a
provision for future policy benefits and amortization of deferred policy
acquisition costs.
The costs related to acquiring new business, including certain costs of
issuing policies and certain other variable selling expenses (principally
commissions), defined as deferred policy acquisition costs, are deferred. The
method of amortizing deferred policy acquisition costs for life insurance
products varies, dependent upon whether the contract is participating or
non-participating. Participating contracts are those which are expected to pay
dividends to policyowners in proportion to their relative contribution to the
Company's statutory surplus. Non-participating life insurance deferred policy
acquisition costs are amortized over the premium-paying period of the related
policies in proportion to the ratio of annual premium revenues to total
anticipated premium revenues using assumptions consistent with those used in
computing policy benefit reserves. Deferred acquisition costs for participating
policies are amortized as an expense primarily in proportion to expected profits
or margins from such policies. This amortization is adjusted when current or
estimated future gross profits or margins on the underlying policies vary from
previous estimates. For example, the amortization of deferred policy acquisition
costs is accelerated when policy terminations are higher than originally
estimated or when investments supporting the policies are sold at a gain prior
to their anticipated maturity. Death and other policyowner benefits reflect
exposure to mortality risk and fluctuate from period to period based on the
level of claims incurred within insurance retention limits. The profitability of
the Company is primarily affected by expense levels, interest spread results
(i.e., the excess of investment earnings over the interest credited to
policyowners) and fluctuations in mortality, persistency and other policyowner
benefits. The Company has the ability to mitigate adverse experience through
adjustments to credited interest rates, policyowner dividends or cost of
insurance charges.
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18
ADJUSTED NET OPERATING INCOME
The following table reflects net income adjusted to eliminate certain items
(net of applicable income taxes) which management believes do not necessarily
indicate overall operating trends. For example, net realized capital gains or
losses on investments, excluding gains or losses on convertible debt which are
considered core earnings, are eliminated. Net realized capital gains or losses
on investments may be realized at the sole discretion of management and are
often realized in accordance with tax planning strategies. Therefore, net
realized capital gains or losses do not reflect the Company's ongoing earnings
capacity. Different items are likely to occur in each period presented and
others may have different opinions as to which items may warrant adjustment.
Adjusted net operating income is the basis used by the Company in assessing
overall performance. Adjusted net operating income as described here may not be
comparable to similarly titled measures reported by other companies. The
adjusted operating income shown below does not constitute net income computed in
accordance with GAAP.
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net Income.................................. $66,654 $62,829 $58,059 $74,173 $69,348
Net non-core realized (gains) losses
calculated as follows:
Total net realized (gains) losses on
investments (A)........................ (2,108) 72 (9,431) (43,221) (33,349)
Add back net core realized gains (losses)
(B).................................... 6,608 6,110 -- -- --
------- ------- ------- ------- -------
Net non-core realized (gains) losses... 4,500 6,182 (9,431) (43,221) (33,349)
Net amortization of deferred policy
acquisition costs due to non-core realized
gains or losses (C)....................... 1,387 (129) 423 669 1,105
Reorganization costs (D).................... 1,762 -- -- 1,522 1,426
Equity add-on tax (E)....................... -- -- -- 4,480 --
------- ------- ------- ------- -------
Adjusted Net Operating Income............... $74,303 $68,882 $49,051 $37,623 $38,530
======= ======= ======= ======= =======
Adjusted Net Operating Income per common
share:
Basic (F)................................. $ 2.46 $ 2.06 $ 2.08 $ 1.62 $ 1.66
Diluted (G)............................... $ 2.45 $ 2.04 $ 2.08 $ 1.62 $ 1.66
- ---------------
(A) Represents total realized gains or losses (core and non-core) on investments
adjusted for income taxes on such amounts. Realized gains or losses may vary
widely between periods. Such amounts are determined by management's timing
of individual transactions and do not necessarily correspond to the
underlying operating trends.
(B) Represents gains on the convertible preferred stock and bond portfolio, net
of income taxes. Such amounts are included in the total realized gains or
losses adjustment in footnote (A). As these gains or losses are reflective
of the Company's operating activities, they are added back to net income.
(C) Represents amortization of deferred policy acquisition costs due to non-core
realized gains or losses being included in product margins adjusted for
income taxes on such amounts.
(D) Represents costs in 1999 directly related to the Company's proposed merger
with its controlling shareholder, AMHC, following the proposed
demutualization of AMHC. These costs consist primarily of legal and
consulting expenses. See further discussion of the proposed reorganization
plans in Item 1. The 1996 and 1995 costs were directly related to the
conversion of AmerUs Life into a stock company and consisted primarily of
printing, postage, legal and consulting costs. These costs each year were
not of a continuing nature and were not expected to have any effect on
future operations.
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19
(E) Represents the mutual life insurance company equity add-on tax, which is
applicable only to mutual life insurance companies and which is not
applicable to the Company after June 30, 1996, due to AmerUs Life's
conversion into a stock company.
(F) Basic adjusted operating income per common share for 1999, 1998 and 1997 is
calculated using 30.23 million, 33.46 million and 23.54 million shares,
respectively. Basic adjusted operating income per common share for 1996 and
1995 is calculated using 23.16 million shares.
(G) Diluted adjusted operating income per common share for 1999, 1998 and 1997
is calculated using 30.31 million, 33.70 million and 23.57 million shares,
respectively. Diluted adjusted operating income per common share for 1996
and 1995 is calculated using 23.16 million shares.
ACQUISITIONS
The Company acquired all of the outstanding stock of Delta on October 23,
1997, for approximately $165 million in cash. The transaction was accounted for
as a purchase and accordingly, the Company's results of operations include Delta
from the date of purchase. The Company acquired all of the outstanding stock of
AmVestors on December 19, 1997, in a stock exchange valued at approximately $350
million. This transaction was also accounted for as a purchase and the Company's
results of operations include AmVestors from the date of purchase. (See Note 15
of the Consolidated Financial Statements for the discussion of the Company's
acquisitions.)
THE CLOSED BLOCK
The Closed Block was established on June 30, 1996. Insurance policies which
had a dividend scale in effect as of June 30, 1996, were included in the Closed
Block. The Closed Block was designed to provide reasonable assurance to owners
of insurance policies included therein that, after the reorganization of AmerUs
Life, assets would be available to maintain the dividend scales and interest
credits in effect prior to the Reorganization if the experience underlying such
scales and credits continues.
The contribution to the operating income of the Company from the Closed
Block is reported as a single line item in the income statement. Accordingly,
premiums, product charges, investment income, realized gains (losses) on
investments, policyowner benefits and dividends attributable to the Closed
Block, less certain minor expenses including amortization of deferred policy
acquisition costs, are shown as a net number under the caption "Contribution
from the Closed Block". This results in material reductions in the respective
line items in the income statement while having no effect on net income. The
expenses associated with the administration of the policies included in the
Closed Block and the renewal commissions on these policies are not charged
against the Contribution from the Closed Block, but rather are grouped with
underwriting, acquisition and insurance expenses. Also, all assets allocated to
the Closed Block are grouped together and shown as a separate item titled
"Closed Block Assets". Likewise, all liabilities attributable to the Closed
Block are combined and disclosed as the "Closed Block Liabilities".
OPERATING SEGMENTS
The Company has two reportable operating segments: Life Insurance and
Annuities. Products generally distinguish a segment. The Company uses the same
accounting policies and procedures to measure operating segment income as it
uses to measure its consolidated income from operations with the exception of
the elimination of certain items which management believes are not necessarily
indicative of overall operating trends. These items are explained further in the
Adjusted Net Operating Income section of Management's Discussion and Analysis of
Results of Operations and Financial Condition. Revenues and benefits and
expenses are primarily attributed directly to each operating segment. Net
investment income and core realized gains (losses) on investments are allocated
based on the directly-related asset portfolios. Other revenues and expenses
which are deemed not to be associated with any specific reportable segment are
grouped together in the All Other category. These items primarily consist of
discontinued product lines such as group and health and holding company revenues
and expenses. The Company assesses the performance of its operating
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segments before interest expense, income taxes, and equity in earnings of its
unconsolidated subsidiary, AMAL.
RESULTS OF OPERATIONS
A summary of the Company's revenue follows:
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
($ IN THOUSANDS)
Insurance premiums
Life insurance -- traditional.......................... $ 64,263 $ 51,261 $ 30,733
Annuities -- Immediate annuity & supplementary contract
premiums............................................ 25,122 29,610 17,238
All other.............................................. 136 326 156
-------- -------- --------
Total insurance premiums............................... 89,521 81,197 48,127
Product charges
Life insurance -- universal life....................... 46,841 46,224 45,637
Annuities.............................................. 27,835 26,757 1,669
-------- -------- --------
Total product charges.................................. 74,676 72,981 47,306
Net investment income
Life insurance......................................... 93,350 70,952 73,407
Annuities.............................................. 442,851 432,299 147,924
All other.............................................. 3,871 121 3,100
-------- -------- --------
Total net investment income............................ 540,072 503,372 224,431
Realized gains (losses) on investments
Life insurance -- core................................. -- -- --
Annuities -- core...................................... 10,166 9,400 --
All other -- non-core.................................. (6,922) (9,512) 13,791
-------- -------- --------
Total realized gains (losses) on investments........... 3,244 (112) 13,791
Other income............................................. 1,467 1,700 --
Contribution from the Closed Block....................... 25,166 31,478 31,044
-------- -------- --------
Total revenues......................................... $734,146 $690,616 $364,699
======== ======== ========
Traditional life insurance premiums increased by $13.0 million to $64.3
million in 1999 compared to $51.3 million in 1998 and $30.7 million in 1997. The
increase in traditional life insurance premiums was primarily the result of the
growth of the business since the formation of the Closed Block in June, 1996 and
continued favorable persistency.
Immediate annuity and supplementary contract premiums were $25.1 million in
1999 compared to $29.6 million in 1998 and $17.2 million in 1997. The decrease
in premiums in 1999 was primarily due to decreased immediate annuity sales while
the increase in annuity and supplementary contract premiums in 1998 was
primarily due to the acquisitions of Delta and AmVestors. Without these
acquisitions, immediate annuity and supplementary contract premiums increased by
$2.5 million in 1998 due to increased immediate annuity sales.
Universal life product charges increased by $0.6 million in 1999 to $46.8
million compared to $46.2 million in 1998 and $45.6 million in 1997. The
increase in product charges each year was primarily due to increased cost of
insurance charges as a result of the normal aging of the block of business,
partially offset by higher reinsurance costs.
Annuity product charges increased by $1.0 million in 1999 to $27.8 million
compared to $26.8 million in 1998 and $1.7 million in 1997. Increased surrender
charges and expense loads on deferred annuities primarily contributed to the
increase in 1999 while the increase in 1998 was primarily due to the
acquisitions of Delta
18
21
and AmVestors. Annuity product charges for 1998 and 1997 included $23.5 million
and $0.7 million, respectively, from Delta and AmVestors.
Total net investment income was $540.1 million in 1999 compared to $503.4
million in 1998 and $224.4 in 1997. The increase in 1999 net investment income
was primarily attributable to higher average invested assets (excluding market
value adjustments) and a higher effective yield compared to 1998. Average
invested assets (excluding market value adjustments) increased approximately
$343.7 million in 1999 compared to 1998 primarily due to the Company's increased
investment funds from two structured asset-backed commercial paper vehicles. See
further discussion of these vehicles in the Liquidity and Capital Resources
section. The increase in 1998 net investment income was primarily due to the
acquisitions of Delta and AmVestors. Net investment income in 1998 and 1997
included $322.0 million and $30.2 million, respectively, from Delta and
AmVestors. The effective yield of the entire portfolio in 1999 was 7.15%
compared to 6.98% in 1998 and 7.49% in 1997. Yields in 1998 were impacted by a
decline in value on hedge funds and long-term private partnership investments
resulting in lower net investment income in both the life insurance and annuity
segments in that year. The effective yield of the annuity portion of the
portfolio decreased 10 basis points to 6.68% in 1999 compared to 6.78% in 1998
and 7.24% in 1997. The decrease in the 1999 effective yield primarily resulted
from lower reinvestment rates throughout 1998 and the majority of 1999 compared
to the portfolio rate at the beginning of the prior year period.
Realized gains on investments were $3.2 million in 1999 compared to
realized losses of $0.1 million and realized gains of $13.8 million in 1998 and
1997, respectively. The level of realized gains and losses will fluctuate from
period to period depending on the prevailing interest rate and economic
environment and the timing of the sale of investments.
All other income primarily consists of structured finance fees from
affordable housing programs.
The Contribution from the Closed Block was $25.2 million in 1999 compared
to $31.5 million in 1998 and $31.0 million in 1997. The following table sets
forth the operating results of the Closed Block for the years ended December 31,
1999, 1998 and 1997:
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
($ IN THOUSANDS)
Revenues
Insurance premiums..................................... $189,444 $198,178 $206,145
Universal life and annuity product charges............. 12,463 13,695 13,599
Net investment income.................................. 108,117 115,762 113,759
Realized gains (losses) on investments................. (380) 10,324 718
-------- -------- --------
Total revenues...................................... 309,644 337,959 334,221
Benefits and expenses
Policyowner benefits................................... 193,482 200,783 206,638
Underwriting, acquisition and insurance expenses....... 4,408 5,042 5,477
Amortization of deferred policy acquisition costs...... 20,337 26,286 31,471
Dividends to policyowners.............................. 66,251 74,370 59,591
-------- -------- --------
Total benefits and expenses......................... 284,478 306,481 303,177
-------- -------- --------
Contribution from the Closed Block....................... $ 25,166 $ 31,478 $ 31,044
======== ======== ========
Closed Block insurance premiums decreased by $8.8 million in 1999 to $189.4
million compared to $198.2 million in 1998 and $206.1 million in 1997. The
decrease in insurance premiums each year is consistent with the reduction of the
Closed Block's life insurance in force that is expected to continue over the
life of the Block. Similarly, the 1999 decrease in product charges or universal
life policies included in the Closed Block is primarily the result of the
reduction of such business in force.
19
22
Net investment income for the Closed Block decreased by $7.7 million in
1999 to $108.1 million compared to $115.8 million in 1998 and $113.8 million in
1997. The decrease in 1999 was primarily attributable to lower effective yields,
partially offset by higher average invested assets (excluding market value
adjustments) while the increase in 1998 was primarily attributable to the growth
in average invested assets (excluding market value adjustments) resulting from
the reinvestment of investment earnings.
Realized losses on investments of the Closed Block were $0.4 million in
1999 compared to realized gains of $10.3 million in 1998 and $0.7 million in
1997. The level of realized gains and losses will fluctuate from period to
period depending on the prevailing interest rate and economic environment and
the timing of the sale of investments.
Closed Block policyowner benefits decreased by $7.3 million in 1999 to
$193.5 million compared to $200.8 million in 1998 and $206.6 million in 1997.
The decrease in policyowner benefits each year is primarily due to lower death
benefits and to the reduction of life reserves which is consistent with the
reduction of the Closed Block's life insurance in force that is expected over
the life of the Block.
The amortization of deferred policy acquisition costs for the Closed Block
decreased by $6.0 million in 1999 to $20.3 million compared to $26.3 million in
1998 and $31.5 million in 1997. The decrease in the amortization of deferred
policy acquisition costs each year is consistent with the projected reduction in
the gross margins of the Closed Block as the life insurance in force declines.
Closed Block dividends to policyowners decreased by $8.1 million to $66.3
million in 1999 compared to $74.4 million in 1998 and $59.6 million in 1997. The
decrease in 1999 was primarily due to the decrease in deferred dividends
resulting from lower realized gains while the increase in 1998 primarily
resulted from increased deferred dividends associated with the higher realized
gains that year.
A summary of the Company's policyowner benefits follows:
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
($ IN THOUSANDS)
Life Insurance
Traditional:
Death benefits...................................... $ 9,398 $ 4,475 $ 1,401
Change in liability for future policy benefits and
other policy benefits............................. 41,306 31,773 19,968
-------- -------- --------
Total traditional................................. 50,704 36,248 21,369
Universal:
Death benefits in excess of cash value.............. 21,978 17,928 20,254
Interest credited on policyowner account balances... 30,365 34,317 32,750
Other............................................... 1,107 2,949 3,452
-------- -------- --------
Total universal................................... 53,450 55,194 56,456
-------- -------- --------
Total life insurance benefits....................... 104,154 91,442 77,825
Annuities
Interest credited to deferred annuity account
balances............................................ 281,063 282,465 81,834
Other annuity benefits................................. 56,920 56,828 35,739
-------- -------- --------
Total annuity benefits.............................. 337,983 339,293 117,573
All other benefits....................................... 291 21 578
-------- -------- --------
Total policyowner benefits............................... $442,428 $430,756 $195,976
======== ======== ========
Total life insurance benefits increased by $12.8 million in 1999 to $104.2
million compared to $91.4 million in 1998 and $77.8 million in 1997. An increase
in life insurance benefits is expected as the traditional block of business
continues to grow and as the universal block of business ages. However, in the
last half of 1999 the Company experienced higher than expected death benefits.
The Company does not believe
20
23
that this is an indication of a change in long-term mortality trends but more of
a fluctuation which is not unusual from time to time. Partially offsetting the
increases in death benefits and higher policy reserves in 1999 was a reduction
in interest credited. Interest credited on universal policyowner account
balances decreased $3.9 million in 1999 to $30.4 million compared to $34.3
million in 1998 primarily due to a reduction in crediting rates. The weighted
average interest crediting rate on policyowner account balances for 1999 was
5.67% compared to 6.08% for 1998. Interest credited on universal policyowner
account balances in 1998 was $1.5 higher than 1997. The increase was primarily
due to higher account values, partially offset by lower interest crediting
rates. The weighted average interest crediting rate decreased 15 basis points to
6.08% for 1998 compared to 6.23% for 1997.
Annuity benefits were $338.0 million in 1999 compared to $339.3 million in
1998 and $117.6 million in 1997. The decrease in 1999 was primarily attributable
to a lower weighted average crediting rate on annuity balances in 1999 compared
to 1998, partially offset by higher average liabilities. The weighted average
crediting rate on deferred annuity account balances was decreased 24 basis
points to 4.95% for 1999 compared to 5.19% for 1998 and 5.25% for 1997.
Crediting rates were decreased in response to the decrease in effective yields
on the annuity investment portfolio resulting in GAAP spreads widening 14 basis
points in 1999 as compared to 1998. Other annuity benefits increased in 1999 as
compared to 1998. Other annuity benefits in 1999 included approximately $13.1
million of interest expense on two insurance contracts issued to two commercial
paper conduits during the year. See further discussion of these conduits in the
Liquidity and Capital Resources section. Partially offsetting this increased
expense was a decrease in immediate annuity reserves and benefit payments on
immediate annuities, which corresponds with the reduction in immediate annuity
sales. The increase in annuity benefits in 1998 was primarily due to the
acquisitions of Delta and AmVestors.
A summary of the Company's expenses follows:
YEARS ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- -------
($ IN THOUSANDS)
Life Insurance
Underwriting, acquisition and other expenses............ $ 53,376 $ 43,376 $38,496
Amortization of deferred policy acquisition costs and
value of business acquired (VOBA), net of non-core
adjustment of $282, $1,038 and $892 for the years
ended December 31, 1999, 1998 and 1997,
respectively......................................... 17,268 21,360 16,423
-------- -------- -------
Total life insurance................................. 70,644 64,736 54,919
Annuities
Underwriting, acquisition and other expenses............ 30,900 35,592 7,365
Amortization of deferred policy acquisition costs and
value of business acquired (VOBA), net of non-core
adjustment of $1,852, ($1,237) and ($242) for the
years ended December 31, 1999, 1998 and 1997,
respectively......................................... 48,378 39,053 6,703
-------- -------- -------
Total annuities...................................... 79,278 74,645 14,068
Amortization of deferred policy acquisition costs due to
non-core realized gains or losses....................... 2,134 (199) 650
All other expenses........................................ 7,843 2,448 4,138
Reorganization costs...................................... 1,762 -- --
-------- -------- -------
Total expenses............................................ $161,661 $141,630 $73,775
======== ======== =======
Total life insurance expenses were $70.6 million in 1999 compared to $64.7
million in 1998 and $54.9 million in 1997. Underwriting, acquisition and
insurance expenses increased each year, primarily due to costs related to the
Year 2000 Compliance Project and costs associated with the Company's enhancement
of its administration and distribution systems. Amortization of deferred policy
acquisition costs and value of
21
24
business acquired (VOBA) decreased $4.1 million in 1999 and increased $5.0
million in 1998. Deferred policy acquisition costs are generally amortized in
proportion to gross margins. In 1999, modifications were made to the dividend
scale of traditional products to coincide with the decline in investment yields,
resulting in increased estimated future gross margins. These modifications
primarily contributed to the decreased amortization in 1999. Lower death
benefits in 1998 on those policies for which deferred costs are amortized
contributed to higher gross margins in 1998, resulting in the increased
amortization that year.
Total annuity expenses increased by $4.7 million in 1999 to $79.3 million
compared to $74.6 million in 1998 and $14.1 million in 1997. Underwriting,
acquisition and insurance expenses decreased $4.7 million in 1999 primarily due
to cost savings realized from the consolidation of acquired subsidiary
operations. Amortization of deferred policy acquisition costs and VOBA increased
$9.3 million in 1999. Gross margins increased due to higher interest spreads and
the reduced expenses, resulting in the increased amortization. The increase in
annuity expenses in 1998 was primarily attributable to the acquisitions of Delta
and AmVestors.
All other expenses increased by $5.4 million in 1999 and decreased by $1.7
million in 1998. Expenses in 1998 were reduced by certain one-time benefits and
1999 expenses included the amortization of the debt issuance costs on the
capital securities and senior notes issued in mid-1998 and additional holding
company expenses primarily related to air transportation, conferences, incentive
compensation and corporate development programs. The 1997 other expenses
included a $1.3 million write-off of expenses related to a former bank credit
facility which was replaced by a new agreement in 1997.
The 1999 reorganization costs consist of legal and consulting expenses
associated with the Company's proposed merger with its controlling shareholder,
AMHC, following the proposed demutualization of AMHC. See further discussion of
these proposed reorganization plans in Item 1. As these costs are not of a
continuing nature, they have been excluded from the operating segment amounts.
A summary of the Company's adjusted pre-tax operating income by operating
segment follows:
YEARS ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
($ IN THOUSANDS)
Life Insurance
Open Block:
Revenues......................................... $ 204,454 $ 168,437 $ 149,777
Benefits and Expenses............................ (174,798) (156,178) (132,744)
Dividends to policyowners........................ (4,526) (2,558) (1,587)
Closed Block contribution........................... 25,166 31,478 31,044
--------- --------- ---------
Adjusted pre-tax operating income................... 50,296 41,179 46,490
Annuities
Revenues............................................ 505,974 498,066 166,831
Benefits and Expenses............................... (417,261) (413,938) (131,641)
--------- --------- ---------
Adjusted pre-tax operating income................... 88,713 84,128 35,190
All other adjusted pre-tax operating (loss)........... (2,660) (322) (1,460)
--------- --------- ---------
Total adjusted pre-tax operating income............... $ 136,349 $ 124,985 $ 80,220
========= ========= =========
Adjusted pre-tax operating income from Life Insurance operations increased
by $9.1 million in 1999 to $50.3 million compared to $41.2 million in 1998 and
$46.5 million in 1997. The increase in 1999 compared to 1998 was primarily due
to increased investment income and decreased deferred policy acquisition cost
amortization which was partially offset by a decreased contribution from the
Closed Block and increased costs related to the Year 2000 Compliance Project and
enhancement of the Company's administration and distribution systems. The
decrease in 1998 was primarily due to lower net investment income and increased
costs related to the Year 2000 Compliance Project and costs associated with the
Company's development of alternative distribution systems.
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25
Adjusted pre-tax operating income from Annuity operations increased by $4.6
million in 1999 to $88.7 million compared to $84.1 million in 1998 and $35.2
million in 1997. The increase in 1999 was primarily due to increased spreads
while the increase in 1998 was primarily due to the acquisitions of Delta and
AmVestors.
All other adjusted pre-tax operating losses increased $2.4 million in 1999
and decreased $1.2 million in 1998. The changes from year to year primarily
related to the changes in expenses discussed previously.
Interest expense increased by $1.2 million in 1999 to $28.3 million
compared to $27.1 million in 1998 and $15.0 million in 1997. The increased
interest expense in 1999 was primarily due to higher interest rates on the
senior notes and adjusted conversion-rate equity security units outstanding
during 1999 as compared to the revolving credit agreement borrowings outstanding
during 1998. The increased interest expense in 1998 was primarily due to
increased debt levels from the 1997 fourth quarter acquisitions of Delta and
AmVestors.
Income tax expense increased by $3.7 million in 1999 to $32.1 million
compared to $28.4 million in 1998 and $22.0 million in 1997. The effective tax
rate in 1999 was 32.5% compared to 31.2% in 1998 and 27.5% in 1997. The increase
in the effective rate in 1999 was primarily due to a $0.3 million decrease in
tax credits generated by affordable housing and historic rehabilitation
investments and the capitalization of $1.8 million of demutualization costs for
income tax purposes. The increase in the effective tax rate in 1998 was
primarily due to a $2.4 million increase in goodwill amortization and a $0.8
million decrease in tax credits generated by affordable housing and historic
rehabilitation investments. Tax credits generated from these investments totaled
$5.2 million in 1999 compared to $5.5 million in 1998 and $6.3 million in 1997.
The equity in earnings of unconsolidated subsidiary represents 34% of the
net income of AMAL Corporation, net of goodwill amortization. AMAL Corporation
is the joint venture partner through which the Company markets variable life and
variable annuity products and selected fixed annuity products.
Net income increased by $3.9 million to $66.7 million in 1999 compared to
$62.8 million in 1998 and $58.1 million in 1997. The increase in 1999 net income
resulted from the increased pre-tax adjusted operating income from the Life
Insurance operations and Annuity operations, which was partially offset by
reorganization costs, increased interest expense, higher effective income tax
rates, and lower income from AMAL Corporation. The increase in net income in
1998 was primarily from increased annuity operating income which was partially
offset by lower realized gains on investments and increased interest expense and
a higher effective income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
The Company's cash flows from operations consist of dividends from
subsidiaries, if declared and paid, interest income on loans and advances to its
subsidiaries (including a surplus note issued to the Company by AmerUs Life),
investment income on assets held by the Company and fees which the Company
charges its subsidiaries and certain other of its affiliates for services,
offset by the expenses incurred for debt service, salaries and other expenses.
The Company intends to rely primarily on dividends and interest income from
its life insurance subsidiaries in order to make dividend payments to its
shareholders. The payment of dividends by its life insurance subsidiaries is
regulated under various state laws. Under Iowa law, AmerUs Life and Delta Life
may pay dividends only from the earned surplus arising from their respective
businesses and must receive the prior approval of the Iowa Insurance
Commissioner to pay any dividend that would exceed certain statutory
limitations. The current statute limits any dividend, together with dividends
paid out within the preceding 12 months, to the greater of (i) 10% of the
respective company's policyowners' surplus as of the preceding year end or (ii)
the net gain from operations for the previous calendar year. Iowa law gives the
Iowa Commissioner broad discretion to disapprove requests for dividends in
excess of these limits. The payment of dividends by AmVestors' subsidiaries,
American and FBL is regulated under Kansas law, which has statutory limitations
similar to those in place in Iowa. Based on these limitations and 1998 results,
the Company's subsidiaries could have paid an estimated $60.7 million in
dividends in 1999 without obtaining regulatory
23
26
approval. Of this amount, the Company's subsidiaries paid the Company $48
million in dividends in 1999. Based on 1999 results, the Company's subsidiaries
could pay an estimated $61.1 million in dividends in 2000 without obtaining
regulatory approval.
The Company and its subsidiaries generated cash flows from operating
activities of $632.3 million, $479.4 million and $224.4 million for the years
ended December 31, 1999, 1998 and 1997, respectively. Excess operating cash
flows were primarily used to increase the Company's investment portfolio, fund
policyowner account withdrawals and purchase common stock for the treasury.
The Company has a $150 million revolving credit facility with a syndicate
of lenders (the "Bank Credit Facility"). As of December 31, 1999, there was a
$32 million outstanding loan balance under the facility. The Bank Credit
Facility provides for typical events of default and covenants with respect to
the conduct of the business of the Company and its subsidiaries and requires the
maintenance of various financial levels and ratios. Among other covenants, the
Company (a) cannot have a leverage ratio greater than 0.35:1.0 or an interest
coverage ratio less than 2.5:1.0, (b) is prohibited from paying cash dividends
on its common stock in excess of an amount equal to 3% of its consolidated net
worth as of the last day of the preceding fiscal year, and (c) must cause
certain of its subsidiaries, including AmerUs Life and Delta Life, to maintain
certain ratings from A.M. Best and certain levels of adjusted capital and
surplus and risk-based capital.
During 1999, the Company entered into two $250 million separate account
funding agreements, of which one remained outstanding as of December 31, 1999.
Under this agreement, a five-year floating rate insurance contract is issued to
a commercial paper conduit. The funding agreement is secured by assets in the
Company's separate account and is further backed by the general account assets.
The separate account assets are legally segregated and are not subject to the
claims that arise out of any other business of the Company. The separate account
assets and liabilities are included with general account assets in the financial
statements. The funding agreement may not be cancelled by the commercial paper
conduit unless there is a default under the agreement, but the Company may
terminate at any time.
During 1999 and 1998, the Company purchased 385,200 shares and 4,325,019
shares of common stock for the treasury at a total cost of $8.9 million and
$102.1 million, respectively.
LIFE INSURANCE SUBSIDIARIES
The cash flows of the Company's life insurance subsidiaries consist
primarily of premium income, deposits to policyowner account balances, income
from investments, sales, maturities and calls of investments and repayments of
investment principal. Cash outflows are primarily related to withdrawals of
policyowner account balances, investment purchases, payment of policy
acquisition costs, payment of policyowner benefits, payment of debt, income
taxes and current operating expenses. Life insurance companies generally produce
a positive cash flow from operations, as measured by the amount by which cash
flows are adequate to meet benefit obligations to policyowners and normal
operating expenses as they are incurred. The remaining cash flow is generally
used to increase the asset base to provide funds to meet the need for future
policy benefit payments and for writing new business.
Management anticipates that funds to meet its short-term and long-term
capital expenditures, cash dividends to shareholders and operating cash needs
will come from existing capital and internally generated funds. Management
believes that the current level of cash and available-for-sale and short-term
securities, combined with expected net cash inflows from operations, maturities
of fixed maturity investments, principal payments on mortgage-backed securities
and its insurance products, will be adequate to meet the anticipated short-term
cash obligations of the Company's life insurance subsidiaries.
Matching the investment portfolio maturities to the cash flow demands of
the type of insurance being provided is an important consideration for each type
of life insurance product and annuity. The Company continuously monitors
benefits and surrenders to provide projections of future cash requirements. As
part of this monitoring process, the Company performs cash flow testing of its
assets and liabilities under various scenarios to evaluate the adequacy of
reserves. In developing its investment strategy, the Company establishes a level
of cash and securities which, combined with expected net cash inflows from
operations, maturities of
24
27
fixed maturity investments and principal payments on mortgage-backed securities,
are believed adequate to meet anticipated short-term and long-term benefit and
expense payment obligations. There can be no assurance that future experience
regarding benefits and surrenders will be similar to historic experience since
withdrawal and surrender levels are influenced by such factors as the interest
rate environment and the claims-paying and financial strength ratings of the
Company's life insurance subsidiaries.
The Company takes into account asset/liability management considerations in
the product development and design process. Contract terms for the Company's
interest-sensitive products include surrender and withdrawal provisions which
mitigate the risk of losses due to early withdrawals. These provisions generally
do one or more of the following: limit the amount of penalty-free withdrawals,
limit the circumstances under which withdrawals are permitted, or assess a
surrender charge or market value adjustment relating to the underlying assets.
The following table summarizes liabilities for interest-sensitive life products
and annuities by their contractual withdrawal provisions at December 31, 1999
(including liabilities in both the Closed Block and the general account):
(DOLLARS IN MILLIONS)
---------------------
Not subject to discretionary withdrawal..................... $ 366.5
Subject to discretionary withdrawal with adjustments:
Specified surrender charges(A)............................ 4,378.4
Market value adjustments.................................. 1,474.3
--------
Subtotal.................................................. 5,852.7
--------
Subject to discretionary withdrawal without adjustments..... 1,400.8
--------
Total....................................................... $7,620.0
========
- ---------------
(A) Includes $1,216.3 million of statutory liabilities with a contractual
surrender charges of less than five percent of the account balance.
AmerUs Life and its joint venture partner are contingently liable in the
event the joint venture, AVLIC, cannot meet its policyholder obligations. At
December 31, 1999, AVLIC had statutory assets of $2,559.1 million, liabilities
of $2,517.5 million, and surplus of $41.6 million.
Through its membership in the Federal Home Loan Bank (FHLB) of Des Moines,
AmerUs Life is eligible to borrow on a line of credit available to provide it
additional liquidity. Interest is payable at a current rate at the time of any
advance. As of December 31, 1999, AmerUs Life had a $25 million open secured
line of credit against which there were no borrowings. In addition to the line
of credit, AmerUs Life has long-term advances from the FHLB outstanding of $16.1
million at December 31, 1999.
The Company's life insurance subsidiaries may also obtain liquidity through
sales of investments. The Company's investment portfolio as of December 31, 1999
had a carrying value of $9 billion, including Closed Block investments.
At December 31, 1999, the statutory surplus of the Company's subsidiaries
was approximately $425.0 million. The Company believes that this level of
statutory capital is more than adequate as each life insurance subsidiary's
risk-based capital is significantly in excess of required levels.
In the future, in addition to their cash flows from operations and
borrowing capacity, the life insurance subsidiaries would anticipate obtaining
their required capital from the Company as the Company will have access to the
public debt and equity markets.
INVESTMENT PORTFOLIO
GENERAL
The Company maintains a diversified portfolio of investments which is
supervised by an experienced in-house staff of investment professionals. The
Company employs sophisticated asset/liability management techniques in order to
achieve competitive yields, while maintaining risk at acceptable levels. The
asset
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28
portfolio is segmented by liability type, with tailored investment strategies
for specific product lines. Investment policies and significant individual
investments are subject to approval by the Investment Committee of the Board of
Directors of each of the life insurance companies and are overseen by the
Investment Committee of the Board of Directors of the Company. Management
regularly monitors individual assets and asset groups, in addition to monitoring
the overall asset mix. In addition, the insurance company boards and the
Investment Committee review investment guidelines and monitor internal controls.
INVESTMENT STRATEGY
The Company's investment philosophy is to employ an integrated
asset/liability management approach with separate investment portfolios for
specific product lines, such as traditional life, universal life and annuities,
to generate attractive risk-adjusted returns on capital. Essential to this
philosophy is coordinating investments in the investment portfolio with product
strategies, focusing on risk-adjusted returns and identifying and evaluating
associated business risks.
Investment policies and strategies have been established based on the
specific characteristics of each product line. The portfolio investment policies
and strategies establish asset duration, quality and other guidelines. The
Company utilizes analytical systems to establish an optimal asset mix for each
line of business. The Company seeks to manage the asset/liability mismatch and
the associated interest rate risk through active management of the investment
portfolio. Financial, actuarial, investment, product development and product
marketing professionals work together throughout the product development,
introduction and management phases to jointly develop and implement product
features, initial and renewal crediting strategies, and investment strategies
based on extensive modeling of a variety of factors under a number of interest
rate scenarios.
INVESTED ASSETS
The Company maintains a diversified portfolio of investments, including
public and private fixed maturity securities, commercial mortgage loans and
equity real estate. The Company's objective is to maintain a high-quality,
diversified fixed maturity securities portfolio that produces a yield and total
return that supports the various product line liabilities and the Company's
earnings goals.
The Closed Block was formed to give certain policyowners additional
assurances as to the dividend policies of the Company. As a result of
establishing the Closed Block on June 30, 1996, the Company allocated certain
assets from its investment portfolio to the Closed Block (see Note 1 to the
Consolidated Financial Statements for further discussion). The following table
summarizes consolidated invested assets by asset category as of December 31,
1999 and 1998, and sets forth the allocation of such assets between the Closed
Block and the general account. The remaining information relating to the
Company's investment portfolio presents information about the investment
portfolio on a combined basis (including invested assets in both the Closed
Block and the general account).
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CONSOLIDATED INVESTED ASSETS
DECEMBER 31,
-------------------------------------------------------------------------------
1999 1998
-------------------------------------- --------------------------------------
CARRYING CARRYING CARRYING CARRYING
VALUE VALUE VALUE VALUE
CLOSED GENERAL % OF CLOSED GENERAL % OF
BLOCK ACCOUNT COMBINED TOTAL BLOCK ACCOUNT COMBINED TOTAL
-------- -------- -------- ----- -------- -------- -------- -----
(DOLLARS IN MILLIONS)
Fixed maturity securities
Public.......................... $1,002.3 $5,953.2 $6,955.5 77.5% $ 948.8 $6,343.8 $7,292.6 81.1%
Private......................... 85.4 727.5 812.9 9.1% 167.7 402.7 570.4 6.3%
-------- -------- -------- ----- -------- -------- -------- -----
Subtotal...................... 1,087.7 6,680.7 7,768.4 86.6% 1,116.5 6,746.5 7,863.0 87.4%
Equity securities................. -- 14.6 14.6 0.2% -- 32.2 32.2 0.4%
Mortgage loans.................... -- 615.2 615.2 6.9% -- 566.4 566.4 6.3%
Policy loans...................... 188.0 109.9 297.9 3.3% 181.9 110.8 292.7 3.3%
Real estate investments........... -- 1.5 1.5 0.0% -- 0.6 0.6 0.0%
Other invested assets............. 0.6 269.2 269.8 3.0% 3.0 205.8 208.8 2.3%
Short-term investments............ -- 0.1 0.1 0.0% 8.9 22.5 31.4 0.3%
-------- -------- -------- ----- -------- -------- -------- -----
Total invested assets......... $1,276.3 $7,691.2 $8,967.5 100.0% $1,310.3 $7,684.8 $8,995.1 100.0%
======== ======== ======== ===== ======== ======== ======== =====
FIXED MATURITY SECURITIES
The fixed maturity securities portfolio consists primarily of investment
grade corporate fixed maturity securities, high-quality MBS and United States
government and agency obligations. As of December 31, 1999 fixed maturity
securities were $7,768.4 million, or 86.6% of the carrying value of invested
assets with public and private fixed maturity securities constituting $6,955.5
million, or 89.5%, and $812.9 million, or 10.5%, of total fixed maturity
securities, respectively.
The following table summarizes the composition of the fixed maturity
securities by category as of December 31, 1999 and 1998:
COMPOSITION OF FIXED MATURITY SECURITIES
DECEMBER 31,
-----------------------------------------
1999 1998
------------------- -------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
--------- ------- --------- -------
(DOLLARS IN MILLIONS)
U.S. government/agencies.............................. $ 349.2 4.5% $ 76.3 1.0%
State and political subdivisions...................... 45.4 0.6% 49.5 0.6%
Foreign government bonds.............................. 159.3 2.1% 128.8 1.6%
Corporate bonds....................................... 4,442.0 57.1% 4,209.3 53.6%
Redeemable preferred stocks........................... 261.1 3.4% 113.1 1.4%
Asset-backed bonds.................................... 737.3 9.5% 877.2 11.2%
MBS
U.S. government/agencies............................ 1,420.6 18.2% 2,110.0 26.8%
Non-government/agencies............................. 353.5 4.6% 298.8 3.8%
-------- ------ -------- ------
Subtotal-MBS........................................ 1,774.1 22.8% 2,408.8 30.6%
-------- ------ -------- ------
Total............................................ $7,768.4 100.0% $7,863.0 100.0%
======== ====== ======== ======
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The following table summarizes fixed maturity securities by remaining
maturity as of December 31, 1999:
REMAINING MATURITY OF FIXED MATURITY SECURITIES
CARRYING % OF
VALUE TOTAL
---------- --------
(DOLLARS IN MILLIONS)
Due:
In one year or less (2000)................................ $ 108.9 1.4%
One to five years (2001-2005)............................. 2,119.8 27.3%
Five to 10 years (2006-2010).............................. 2,157.8 27.8%
10 to 20 years (2011-2020)................................ 892.2 11.5%
Over 20 years (2021 and after)............................ 715.6 9.2%
-------- ------
Subtotal............................................... 5,994.3 77.2%
MBS....................................................... 1,774.1 22.8%
-------- ------
Total.................................................. $7,768.4 100.0%
======== ======
The Company's portfolio of investment grade fixed maturity securities is
diversified by number and type of issuer. As of December 31, 1999, investment
grade fixed maturity securities included the securities of over 627 issuers,
with 2,213 different issues of securities. No non-government/agency issuer
represents more than 0.5% of investment grade fixed maturity securities.
Below-investment grade fixed maturity securities as of December 31, 1999,
included the securities of 113 issuers representing 6.1% of total invested
assets, with the largest being a $16.9 million investment.
As of December 31, 1999, 80.5% of total invested assets were investment
grade fixed maturity securities. The following table sets forth the credit
quality, by NAIC designation and Standard & Poor's rating equivalents, of fixed
maturity securities as of December 31, 1999:
FIXED MATURITY SECURITIES BY NAIC DESIGNATION
DECEMBER 31, 1999
PUBLIC PRIVATE TOTAL
----------------- ----------------- -----------------
NAIC CARRYING % OF CARRYING % OF CARRYING % OF
DESIGNATION STANDARD & POOR'S EQUIVALENT DESIGNATION VALUE TOTAL VALUE TOTAL VALUE TOTAL
----------- ---------------------------------------- -------- ------ -------- ------ -------- ------
(DOLLARS IN MILLIONS)
A- or higher......................
1 $4,485.5 64.4% $618.6 76.2% $5,104.1 65.7%
BBB- to BBB+......................
2 1,942.6 27.9% 175.1 21.5% 2,117.7 27.2%
-------- ------ ------ ------ -------- ------
Total investment grade............ 6,428.1 92.3% 793.7 97.7% 7,221.8 92.9%
-------- ------ ------ ------ -------- ------
BB- to BB+........................
3 332.0 4.8% 17.5 2.1% 349.5 4.5%
B- to B+..........................
4 184.3 2.7% -- 0.0% 184.3 2.4%
CCC or lower......................
5 & 6 11.1 0.2% 1.7 0.2% 12.8 0.2%
-------- ------ ------ ------ -------- ------
Total below investment grade......................... 527.4 7.7% 19.2 2.3% 546.6 7.1%
-------- ------ ------ ------ -------- ------
Total................................................ $6,955.5 100.0% $812.9 100.0% $7,768.4 100.0%
======== ====== ====== ====== ======== ======
MBS investments are mortgage-related securities including commercial
mortgage-backed securities (CMBS), collateralized mortgage obligations (CMOs),
and pass-through mortgage securities. Asset-backed securities are both
residential and non-residential including exposure to home equity loans, home
improvement loans, manufactured housing loans as well as securities backed by
loans on automobiles, credit cards, and other collateral or collateral bond
obligations. Residential mortgage pass-through and CMOs total $1,630.5 million
or 18.2% of total invested assets. Asset-backed residential mortgages total
$361.3 million or 4.0% of total invested assets. As of December 31, 1999, MBS
were $1,774.1 million or 19.8%, of total invested
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assets of which $1,420.6 million or 80.0% of MBS were from government sponsored
enterprises. Other MBS were $353.5 million or 20.0%, of MBS as of December 31,
1999. Management believes that the quality of assets in the MBS portfolio is
generally high, with 94% of such assets representing agency backed or "AAA"
rated securities.
The Company uses interest rate swaps, caps, and options to reduce its
exposure to changes in interest rates and to manage duration mismatches. The
Company also uses call options to hedge equity-indexed annuities. Although the
Company is subject to the risk that counterparties will fail to perform, credit
standings of counterparties are monitored regularly. The Company only enters
into transactions with highly rated counterparties. The Company is also subject
to the risk associated with changes in the value of contracts. However, such
adverse changes in value generally are offset by changes in the value of the
items being hedged. The notional principal amounts of the swaps, caps, and
options, which represent the extent of the Company's involvement in such
contracts but not the risk of loss, at December 31, 1999, amounted to $640.9
million. The swaps had no carrying value at December 31, 1999 and a fair value
which amounted to a net receivable position of $3.3 million at December 31,
1999. The carrying value and fair value of options amounted to $91.9 million and
$121.7 million, respectively. The interest rate caps and options are reflected
as "other investments" on the Company's consolidated financial statements as of
December 31, 1999. The net amount payable or receivable from interest rate swaps
and caps are accrued as an adjustment to interest income.
MORTGAGE LOANS
As of December 31, 1999, mortgage loans in the Company's investment
portfolio were $615.2 million, or 6.9% of the aggregate carrying value of
invested assets, including the Closed Block. As of December 31, 1999, commercial
mortgage loans and residential mortgage loans comprised 73.2% and 26.8%,
respectively, of the mortgage loans in the Company's investment portfolio.
Commercial mortgage loans consist primarily of fixed-rate mortgage loans.
As of December 31, 1999, the Company held 380 individual commercial mortgage
loans with an average balance of $1.2 million.
As of December 31, 1999, no loans in the Company's loan portfolio (as
measured by principal balance) were classified as delinquent or in foreclosure.
As of the same date, only two loans aggregating $2.5 million, or 0.4%, of the
Company's loan portfolio (as measured by principal balance) were classified as
restructured. During 1999, the Company had no foreclosures.
EQUITY REAL ESTATE
In recent years the Company has significantly reduced its equity real
estate portfolio. As of December 31, 1999, the carrying value of investment real
estate, including the Closed Block, was $1.5 million.
OTHER
The Company held $297.9 million of policy loans on individual insurance
products as of December 31, 1999. Policy loans are permitted to the extent of a
policy's contractual limits and are fully collateralized by policy cash values.
As of December 31, 1999, the Company held equity securities of $14.6
million. The largest holding of equity securities, Federal Home Loan Bank, had a
carrying value of $12.3 million as of December 31, 1999.
The Company held $269.9 million of other invested assets (including
short-term investments) on December 31, 1999. Other invested assets consist
primarily of various joint venture and limited partnership investments and
derivatives.
EFFECTS OF INFLATION AND INTEREST RATE CHANGES
The Company does not believe that inflation has had a material effect on
its consolidated results of operations.
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Interest rate changes may have temporary effects on the sale and
profitability of the annuities and life insurance products offered by the
Company. For example, if interest rates rise, competing investments (such as
annuities or life insurance products offered by the Company's competitors,
certificates of deposit, mutual funds, and similar instruments) may become more
attractive to potential purchasers of the Company's products until the Company
increases the interest rate credited to owners of its annuities and life
insurance products. In contrast, as interest rates fall, the Company attempts to
adjust its credited rates to compensate for the corresponding decline in
reinvestment rates. The Company monitors interest rates and sells annuities and
life insurance policies that permit flexibility to make interest rate changes as
part of its management of interest spreads. However, the profitability of the
Company's products is based upon persistency, mortality and expenses, as well as
interest rate spreads.
The Company manages its investment portfolio in part to reduce its exposure
to interest rate fluctuations. In general, the market value of its fixed
maturity portfolio increases or decreases in an inverse relationship with
fluctuations in interest rates, and net investment income increases or decreases
in a direct relationship with interest rate changes.
The Company has developed an asset/liability management approach with
separate investment portfolios for major product lines such as traditional life,
universal life and annuities. Investment policies and strategies have been
established based on the specific characteristics of each product line. The
portfolio investment policies and strategies establish asset duration, quality
and other guidelines. The Company utilizes analytical systems to establish an
optimal asset mix for each line of business. The Company seeks to manage the
asset/liability mismatch and the associated interest rate risk through active
management of the investment portfolio. Financial, actuarial, investment,
product development and product marketing professionals work together throughout
the product development, introduction and management phases to jointly develop
and implement product features, initial and renewal crediting strategies, and
investment strategies based on extensive modeling of a variety of factors under
a number of interest rate scenarios.
In force reserves and the assets allocated to each segment are modeled on a
regular basis to analyze projected cash flows under a variety of economic
scenarios. The result of this modeling is used to modify asset allocation,
investment portfolio duration and convexity and renewal crediting strategies.
The Company invests in CMOs as part of its basic portfolio strategy, but uses
other types of derivatives only as a hedge against the effects of interest rate
fluctuations or to synthetically alter the investment characteristics of
specific assets. For a further discussion and disclosure of the nature and
extent of the Company's use of derivatives, see Note 14 to the Consolidated
Financial Statements.
FEDERAL INCOME TAX MATTERS
The Company and its non-life subsidiaries file a consolidated federal
income tax return. The life insurance subsidiaries file separate federal income
tax returns. The separate return method is used to compute the Company's
provision for federal income taxes. Deferred income tax assets and liabilities
are determined based on differences among the financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and laws.
EMERGING ACCOUNTING MATTERS
SFAS 133 AND 137
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 defines derivative instruments
and provides comprehensive accounting and reporting standards for the
recognition and measurement of derivative and hedging activities (including
certain instruments embedded in other contracts). It requires derivatives to be
recorded in the consolidated balance sheet at fair value and establishes
criteria for hedges of changes in the fair value of assets, liabilities or firm
commitments, hedges or variable cash flows or forecasted transactions, and
hedges of foreign currency exposures of net investments in foreign operations.
Changes in the fair value of derivatives not meeting specific hedge accounting
criteria would be recognized in the consolidated statement of operations. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of
30
33
the Effective Date of FASB Statement No. 133." SFAS No. 137 delays the effective
date of SFAS No. 133 for all fiscal quarters until fiscal years beginning after
June 15, 2000. The Company is evaluating SFAS No. 133 and has not determined its
effect on the consolidated financial statements.
SOP 97-3
On January 1, 1999, the Company adopted the American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments." This
statement provides guidance on when an insurance or other enterprise should
recognize a liability for guaranty fund and other assessments and on how to
measure such liability. The adoption of SOP 97-3 had no material impact on the
financial position or results of operations as the Company currently estimates
assessment liabilities when a determination of an insolvency has occurred.
SOP 98-1
On January 1, 1999, the Company adopted AICPA SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This SOP
provides guidance for determining whether costs of software developed or
obtained for internal use should be capitalized or expensed as incurred. In the
past, the Company has expensed such costs as they were incurred. The adoption of
SOP 98-1 had no material impact on the financial position or results of
operations of the Company.
STATUTORY ACCOUNTING CODIFICATION
The NAIC has codified statutory accounting practices, which are expected to
constitute the only source of prescribed statutory accounting practices and are
effective in 2001. Codification will change prescribed statutory accounting
practices and may result in changes to the accounting practices that insurance
enterprises use to prepare their statutory financial statements. The changes of
codification will not have a material impact on statutory surplus.
YEAR 2000 COMPLIANCE
In connection with the year 2000, an important business issue emerged
regarding how existing application software programs and operating systems could
accommodate the date value "2000". Many existing application software products
were designed to accommodate only a two-digit date position which represents the
year (i.e., the number "95" is stored on the system and represents the year
1995). As a result, the year 1999 (i.e., "99") is the maximum date value many
information technology systems will be able to process accurately.
The Company formed a Year 2000 working group to address potential problems
posed by this development to assure that the Company was prepared for the year
2000. The Company's overall Year 2000 compliance initiatives included the
following components: (i) assessment of all business critical systems (business
critical systems include computer and embedded systems); processes and external
interfaces and dependencies; (ii) remediation or upgrading of business critical
systems; (iii) testing of both modified and updated systems as well as
integrated systems testing; (iv) implementation of modified and updated systems;
and (v) contingency planning.
The Company completed the Year 2000 modifications, conversions and testing
and, to date, has not experienced any significant operational difficulties in
2000.
Total costs associated with Year 2000 modifications and conversions were
approximately $8.5 million, with approximately $4.3 million incurred for the
year ended December 31, 1999. These costs were expensed as incurred.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The main objectives in managing the investment portfolios of the Company
and its insurance subsidiaries are to maximize investment income and total
investment returns while minimizing credit risks in order to provide maximum
support to the insurance underwriting operations. Investment strategies are
developed based on many factors including asset liability management, regulatory
requirements, fluctuations in interest rates and consideration of other market
risks. Investment decisions are centrally managed by investment professionals
based on guidelines established by management and approved by the boards of
directors.
Market risk represents the potential for loss due to adverse changes in the
fair value of financial instruments. The market risks related to financial
instruments of the Company and its subsidiaries primarily relate to the
investment portfolio, which exposes the Company to risks related to interest
rates and, to a lesser extent, credit quality and prepayment variation.
Analytical tools and monitoring systems are in place to assess each of these
elements of market risk.
Interest rate risk is the price sensitivity of a fixed income security to
changes in interest rates. Management views these potential changes in price
within the overall context of asset and liability management. Company actuaries
estimate the payout pattern of our liabilities, primarily the Company's
lapsation, to determine duration, which is the present value of the fixed income
investment portfolios after consideration of the duration of these liabilities
and other factors, which management believes mitigates the overall effect of
interest rate risk for the Company.
The table below provides information about the Company's fixed maturity
investments and mortgage loans at December 31, 1999. The table presents cash
flows of principal amounts and related weighted average interest rates by
expected maturity dates. The cash flows are based on the earlier of the call
date or the maturity date or, for mortgage-backed securities, expected payment
patterns. Actual cash flows could differ from the expected amounts.
EXPECTED CASH FLOWS
AMORTIZED 2000 2001 2002 2003 2004 THEREAFTER COST
--------- ---- ---- ---- ---- ---- ---------- ------
(DOLLARS IN MILLIONS)
Fixed maturity securities...... $321 $381 $457 $826 $669 $ 4,353 $7,007
Average interest rate.......... 7.0% 6.9% 7.0% 6.5% 6.4% 7.3%
Mortgage loans................. $ 55 $ 49 $ 35 $ 38 $ 48 $ 390 $ 615
Average interest rate.......... 9.4% 9.5% 9.5% 9.2% 9.3% 8.4%
Total..................... $376 $430 $492 $864 $717 $ 4,743 $7,622
==== ==== ==== ==== ==== ========== ======
The Company and its subsidiaries have consistently invested in high quality
marketable securities. As a result, management believes that the Company has
minimal credit quality risk. Fixed maturity securities are comprised of U.S.
Treasury, government agency, mortgage-backed and corporate securities.
Approximately 72% of fixed maturity securities are issued by the U.S. Treasury
or U.S. government agencies or are rated A or better by Moody's, Standard and
Poor's, or the NAIC. Less than 8% of the bond portfolio is below investment
grade. Fixed maturity securities have an average maturity of approximately 7.64
years.
Prepayment risk refers to the changes in prepayment patterns that can
either shorten or lengthen the expected timing of the principal repayments and
thus the average life and the effective yield of a security. Such risk exists
primarily within the Company's portfolio of mortgage-backed securities.
Management monitors such risk regularly. The Company invests primarily in those
classes of mortgage-backed securities that are less subject to prepayment risk.
The Company's use of derivatives is generally limited to hedging purposes
and has principally consisted of using interest rate swaps, caps, swaptions and
options. These instruments, viewed separately, subject the Company to varying
degrees of market and credit risk. However when used for hedging, the
expectation is that these instruments would reduce overall market risk. Credit
risk arises from the possibility that counterparties
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35
may fail to perform under the terms of the contracts. (See Note 14 of the
Consolidated Financial Statements for additional information).
Equity price risk is the potential loss arising from changes in the value
of equity securities. In general, equities have more year-to-year price
variability than intermediate term grade bonds. However, returns over longer
time frames have been consistently higher. The Company's equity securities are
high quality and readily marketable.
All of the above risks are monitored on an ongoing basis. A combination of
in-house systems and proprietary models and externally licensed software are
used to analyze individual securities as well as each portfolio. These tools
provide the portfolio managers with information to assist them in the evaluation
of the market risks of the portfolio.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements begin on page F-1.
Reference is made to the Index to Financial Statements on page F-1 herein.
Additional financial statement schedules begin on page S-1. Reference is
made to the Index to Financial Statement Schedules on page S-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
The Notice of 2000 Annual Meeting of Shareholders and Proxy Statement,
which, when filed pursuant to Regulation 14A under the Securities Exchange Act
of 1934, are incorporated by reference in this Annual Report on Form 10-K
pursuant to General Instruction G(3) of Form 10-K, provides the information
required under Part III (Items 10. Directors and Executive Officers of the
Registrant, 11. Executive Compensation, 12. Security Ownership of Certain
Beneficial Owners and Management and 13. Certain Relationships and Related
Transactions).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements. Reference is made to the index on page F-1 of
the report.
2. Financial Statement Schedules. Reference is made to the Index on page
S-1 of the report.
3. Exhibits Reference is made to the Index to Exhibits on page 35 of the
report.
(b) Reports on Form 8-K
1. Form 8-K dated December 17, 1999, announcing the board of directors
approval of plans for the demutualization of AMHC.
2. Form 8-K dated January 12, 2000, announcing the combination of the
Company, AMHC and ILICO.
3. Form 8-K/A dated January 13, 2000, amending Form 8-K dated January
12, 2000, to include conformed signature page.
4. Form 8-K dated February 21, 2000, announcing the definitive agreement
between the Company, AMHC and ILICO.
5. Form 8-K/A dated March 6, 2000, amending Form 8-K dated February 21,
2000, to include Combination and Investment Agreement among AMHC, the
Company, ILICO and The Indianapolis Life Group of Companies, Inc. and
the Investment Advisory Agreements between AmerUs Capital Management
Group, Inc. and ILICO, Bankers Life Insurance Company of New York, IL
Annuity and Insurance Company and Western Security Life Insurance
Company.
34
37
AMERUS LIFE HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
2.1 Plan of Reorganization dated October 27, 1995, filed as
Exhibit 2.1 to the registration statement of the Registrant
on Form S-1, Registration Number 333-12239, is hereby
incorporated by reference.
2.2 Amended and Restated Agreement and Plan of Merger, dated as
of September 19, 1997 and as amended and restated as of
October 8, 1997, by and among the Registrant, AFC Corp. and
AmVestors Financial Corporation ("AmVestors"), filed as
Exhibit 2.2 to the Registration Statement of the Registrant
on Form S-4, Registration Number 333-40065 is hereby
incorporated by reference.
2.3 Agreement and Plan of Merger, dated as of August 13, 1997
and as amended as of September 5, 1997, among the
Registrant, a wholly owned subsidiary of the Registrant and
Delta Life Corporation, filed as Exhibit 2.2 to Form 8-K of
the Registrant dated October 8, 1997, is hereby incorporated
by reference.
2.4 Combination and Investment Agreement, dated February 18,
2000, among American Mutual Holding Company, the Registrant,
Indianapolis Life Insurance Company and The Indianapolis
Life Group of Companies, Inc., filed as Exhibit 2.1 to the
Registrant's report on Form 8-K/A on March 6, 2000, is
hereby incorporated by reference.
2.5* Purchase Agreement, dated as of February 18, 2000, by and
between American Mutual Holding Company and the Registrant.
2.6* Agreement and Plan of Merger, dated December 17, 1999, by
and between American Mutual Holding Company and the
Registrant.
2.7* Amendment No. 1 to Agreement and Plan of Merger, dated
February 18, 2000, by and between American Mutual Holding
Company and the Registrant.
2.8* Letter agreement, dated December 17, 1999, by and between
American Mutual Holding Company and the Registrant.
2.9* Notification Agreement, dated as of February 18, 2000, by
and among American Mutual Holding Company, the Registrant
and Bankers Trust Company.
3.1 Amended and Restated Articles of Incorporation of the
Registrant filed as Exhibit 3.5 to the registration
statement of the Registrant on Form S-1, Registration Number
333-12239, are hereby incorporated by reference.
3.2 Bylaws of the Registrant, filed as Exhibit 3.2 to the
registration statement of the Registrant on Form S-1,
Registration Number 333-12239, are hereby incorporated by
reference.
3.3 Articles of Amendment of the Registrant dated September 25,
1998, filed as Exhibit 3.3 on Form 10-K, dated March 30,
1999, is hereby incorporated by reference.
4.1 Amended and Restated Trust Agreement dated as of February 3,
1997 among the Registrant, Wilmington Trust Company, as
property trustee, and the administrative trustees named
therein (AmerUs Capital I business trust), filed as Exhibit
3.6 to the registration statement of the Registrant and
AmerUs Capital I on Form S-1, Registration Number 333-13713,
is hereby incorporated by reference.
4.2 Indenture dated as of February 3, 1997 between the
Registrant and Wilmington Trust Company relating to the
Company's 8.85% Junior Subordinated Debentures, Series A,
filed as Exhibit 4.1 to the registration statement of the
Registrant and AmerUs Capital I on Form S-1, Registration
Number, 333-13713, is hereby incorporated by reference.
4.3 Guaranty Agreement dated as of February 3, 1997 between the
Registrant, as guarantor, and Wilmington Trust Company, as
trustee, relating to the 8.85% Capital Securities, Series A,
issued by AmerUs Capital I, filed as Exhibit 4.4 to the
registration statement on Form S-1, Registration Number,
333-13713, is hereby incorporated by reference.
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38
EXHIBIT
NO. DESCRIPTION
- ------- -----------
4.4 Common Stock Purchase Warrant, filed as Exhibit (10)(v) to
Form 10-Q of AmVestors Financial Corporation dated May 13,
1992, is hereby incorporated by reference.
4.5 Amended and Restated Declaration of Trust of AmerUs Capital
II, dated as of July 27, 1998, among the Registrant, First
Union Trust Company and the administrative trustees named
therein, relating to the Registrant's 7.0% ACES Units, filed
as Exhibit 4.5 on Form 10-Q, dated August 13, 1998, is
hereby incorporated by reference.
4.6 Certificate of Trust of AmerUs Capital III filed as Exhibit
4.7 to the registration statement of the Registrant, AmerUs
Capital II and AmerUs Capital III, on Form S-3 (No.
333-50249), is hereby incorporated by reference.
4.7 Common Trust Securities Guarantee Agreement, dated as of
July 27, 1998, by the Registrant, relating to the
Registrant's 7.0% ACES Units, filed as Exhibit 4.7 on Form
10-Q, dated August 13, 1998, is hereby incorporated by
reference.
4.8 QUIPS Guarantee Agreement, dated as of July 27, 1998, by the
Registrant, relating to the Registrant's 7.0% ACES Units,
filed as Exhibit 4.8 on Form 10-Q, dated August 13, 1998, is
hereby incorporated by reference.
4.9 Master Unit Agreement, dated as of July 27, 1998, between
the Registrant and First Union National Bank relating to the
Registrant's 7.0% ACES Units, filed as Exhibit 4.9 on Form
10-Q, dated August 13, 1998, is hereby incorporated by
reference.
4.10 Call Option Agreement, dated as of July 27, 1998, between
Goldman, Sachs & Co. and First Union National Bank relating
to the Registrant's 7.0% ACES Units, filed as Exhibit 4.10
on Form 10Q, dated August 13, 1998, is hereby incorporated
by reference.
4.11 Pledge Agreement, dated as of July 27, 1998, among the
Registrant, Goldman, Sachs & Co. and First Union National
Bank relating to the Registrant's 7.0% ACES Units, filed as
Exhibit 4.11 on Form 10-Q, dated August 13, 1998, is hereby
incorporated by reference.
4.12 Senior Indenture, dated as of June 16, 1998, by and between
the Registrant and First Union National Bank, as Indenture
Trustee, relating to the Registrant's 6.95% Senior Notes,
filed as Exhibit 4.14 on Form 10-Q, dated August 13, 1998,
is hereby incorporated by reference.
4.13 Subordinated Indenture, dated as of July 27, 1998, by and
between the Registrant and First Union National Bank, as
Indenture Trustee, relating to the Registrant's 6.86% Junior
Subordinated Deferrable Interest Debentures, filed as
Exhibit 4.15 on Form 10-Q, dated August 13, 1998, is hereby
incorporated by reference.
10.1 Amended and Restated Intercompany Agreement dated as of
December 1, 1996, among American Mutual Holding Company,
AmerUs Group Co. and the Company. Filed as Exhibit 10.81 to
the Registrant's registration statement on Form S-1,
Registration Number 333-12239, is hereby incorporated by
reference.
10.2 Joint Venture Agreement, dated as of June 30, 1996, between
American Mutual Insurance Company and Ameritas Life
Insurance Corp., filed as Exhibit 10.2 on Form 10-K, dated
March 25, 1998, is hereby incorporated by reference.
10.3 Management and Administration Service Agreement, dated as of
April 1, 1996, among American Mutual Life Insurance Company,
Ameritas Variable Life Insurance Company and Ameritas Life
Insurance Corp., filed as Exhibit 10.3 to the registration
statement of the Registrant on Form S-1, Registration Number
333-12239, is hereby incorporated by reference.
10.4 AmerUs Life Holdings, Inc. Executive Stock Purchase Plan,
dated November 13, 1998, filed as Exhibit 4.11 to the
registration statement of the Registrant on Form S-8,
Registration Number 333-72237, is hereby incorporated by
reference.
36
39
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.5 All#AmerUs Supplemental Executive Retirement Plan, effective
January 1, 1996, filed as Exhibit 10.6 to the registration
statement of the Registrant on Form S-1, Registration Number
333-12239, is hereby incorporated by reference.
10.6 Management Incentive Plan, filed as Exhibit 10.9 to the
registration statement of the Registrant on Form S-1,
Registration Number 333-12239, is hereby incorporated by
reference.
10.7 AmerUs Life Insurance Company Performance Share Plan, filed
as Exhibit 10.10 to the registration statement of the
Registrant on Form S-1, Registration Number 333-12239, is
hereby incorporated by reference.
10.8 AmerUs Life Stock Incentive Plan, filed as Exhibit 10.11 to
the registration statement of the Registrant on Form S-1,
Registration Number 333-12239, is hereby incorporated by
reference.
10.9 AmerUs Life Non-Employee Director Stock Plan, filed as
Exhibit 10.13 to the registration statement of the
Registrant on Form S-1, Registration Number 333-12239, is
hereby incorporated by reference.
10.10 Form of Indemnification Agreement executed with directors
and certain officers, filed as Exhibit 10.33 to the
registration statement of the Registrant on Form S-1,
Registration Number 333-12239, is hereby incorporated by
reference.
10.11 Tax Allocation Agreement dated as of November 4, 1996, filed
as Exhibit 10.68 to the registration statement of the
Registrant on Form S-1, Registration Number 333-12239, is
hereby incorporated by reference.
10.12 Agreement and Plan of Merger, dated as of August 13, 1997
and as amended as of September 5, 1997, among the
Registrant, a wholly-owned subsidiary of the Registrant and
Delta Life Corporation, filed as Exhibit 2.2 to the
Registrant's report on Form 8-K on October 8, 1997, is
hereby incorporated by reference.
10.13 Credit Agreement, dated as of October 23, 1997, among the
Registrant, Various Lender Institutions, the Co-Arrangers
and The Chase Manhattan Bank, as Administrative Agent, filed
as Exhibit 10.84 to the registration statement of the
Registrant on Form S-4, Registration Number 333-40065, is
incorporated by reference.
10.14 Coinsurance Agreement, effective February 1, 1996, between
Delta Life and Annuity Company and London Life Reinsurance
Company, filed as Exhibit 10.85 to the registration
statement of the Registrant on Form S-4, Registration Number
333-40065, is incorporated by reference.
10.15 AmVestors Financial Corporation 1996 Incentive Stock Option
Plan, filed as Exhibit (4)(a) to Registration Statement of
AmVestors Financial Corporation on Form S-8, Registration
Number 333-14571 dated October 21, 1996, is hereby
incorporated by reference.
10.16 1989 Non-Qualified Stock Option Plan adopted March 17, 1989,
filed as Exhibit (10)(q) to Form 10-K of AmVestors Financial
Corporation, dated April 12, 1989, is hereby incorporated by
reference.
10.17 Lease -- Business Property, dated December 1, 1996, between
AmerUs Properties, Inc. and AmerUs Life Insurance Company,
property 611 Fifth Avenue, Des Moines, Iowa, filed as
Exhibit 10.58 on Form 10-K, dated March 25, 1998, is hereby
incorporated by reference.
10.18 First Amendment dated February 1, 1998 to Lease Agreement
dated December 1, 1996 between AmerUs Properties, Inc. and
AmerUs Life Insurance Company, property 611 Fifth Avenue,
Des Moines, Iowa, filed as Exhibit 10.59 on Form 10-K, dated
March 25, 1998, is hereby incorporated by reference.
10.19* Lease -- Business Property, dated December 1, 1999, between
AmerUs Properties, Inc. and AmerUs Life Insurance Company,
property 611 Fifth Avenue, Des Moines, Iowa.
10.20* Lease -- Assignment & Assumption Agreement -- Business
Property, dated December 15, 1999, between AmerUs
Properties, Inc. and 611 Fifth Avenue, L.L.C., property 611
Fifth Avenue, Des Moines, Iowa.
37
40
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.21 Lease -- Business Property, dated December 1, 1996, between
AmerUs Properties, Inc. and AmerUs Life Insurance Company,
1213 Cherry Street, Des Moines, Iowa, filed as Exhibit 10.60
on Form 10-K, dated March 25, 1998, is hereby incorporated
by reference.
10.22 Lease -- Business Property, dated December 1, 1996, between
AmerUs Properties, Inc. and the Registrant, property 418
Sixth Avenue Moines, Iowa, filed as Exhibit 10.61 on Form
10-K, dated March 25, 1998, is hereby incorporated by
reference.
10.23 Revised and Restated Lease -- Business Property, dated May
28, 1998, between AmerUs Properties, Inc. and the Registrant
property, 699 Walnut Street, Des Moines, Iowa, filed as
Exhibit 10.26 on Form 10-K, dated March 30, 1999, is hereby
incorporated by reference.
10.24 Addendum, dated May 28, 1998 to lease dated May 28, 1998
between AmerUs Properties and the Registrant, filed as
Exhibit 10.27 on Form 10-K, dated March 30, 1999, is hereby
incorporated by reference.
10.25 Addendum II, dated July 21, 1998, to lease dated May 28,
1998 between AmerUs Properties and the Registrant, filed as
Exhibit 10.28 on Form 10-K, dated March 30, 1999, is hereby
incorporated by reference.
10.26 Servicing Agreement, dated March 5, 1997, between AmerUs
Life Insurance Company and AmerUs Properties, Inc., filed as
Exhibit 10.64 on Form 10-K, dated March 25, 1998, is hereby
incorporated by reference.
10.27 Consent dated as of May 20, 1998 to the Credit Agreement
dated as of October 23, 1997 among the Registrant, Various
Lender Institutions, the Co-Arrangers and The Chase
Manhattan Bank, as Administrative Agent, filed as Exhibit
10.72 on Form 10-Q, dated November 12, 1998, is hereby
incorporated by reference.
10.28 First Amendment dated as of May 30, 1997 to the Credit
Agreement dated as of October 23, 1997 among the Registrant,
Various Lender Institutions, the Co-Arrangers and The Chase
Manhattan Bank, as Administrative Agent, filed as Exhibit
10.73 on Form 10-Q, dated November 12, 1998, is hereby
incorporated by reference.
10.29 Second Amendment dated as of June 22, 1998 to the Credit
Agreement dated as of October 23, 1997 among the Registrant,
Various Lender Institutions, the Co-Arrangers and The Chase
Manhattan Bank, as Administrative Agent, filed as Exhibit
10.74 on Form 10-Q, dated November 12, 1998, is hereby
incorporated by reference.
10.30 Second Consent and Amendment dated as of October 2, 1998 to
the Credit Agreement dated as of October 23, 1997 among the
Registrant, Various Lender Institutions, the Co-Arrangers
and The Chase Manhattan Bank, as Administrative Agent, filed
as Exhibit 10.75 on Form 10-Q, dated November 12, 1998, is
hereby incorporated by reference.
10.31 MIP Deferral Plan dated as of September 1, 1998, filed as
Exhibit 10.76 on Form 10-Q, dated November 12, 1998, is
hereby incorporated by reference.
10.32 Open Line of Credit Application and Terms Agreement, dated
March 5, 1999, between Federal Home Loan Bank of Des Moines
and AmerUs Life Insurance Company, filed as Exhibit 10.34 on
Form 10-Q dated May 14, 1999, is hereby incorporated by
reference.
10.33 Origination Agreement, dated August 1, 1998, between AmerUs
Home Equity, Inc. and AmerUs Life Insurance Company, filed
as Exhibit 10.36 on Form 10-K, dated March 30, 1999, is
hereby incorporated by reference.
10.34 Third Waiver to Credit Agreement dated as of November 16,
1998 to the Credit Agreement dated as of October 23, 1997
among the Registrant, Various Lender Institutions, the
Co-Arrangers and The Chase Manhattan Bank, as Administrative
Agent, filed as Exhibit 10.37 on Form 10-K, dated March 30,
1999, is hereby incorporated by reference.
38
41
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.35 Fourth Consent and Amendment, dated as of December 4, 1998
to the Credit Agreement dated as of October 23, 1997 among
the Registrant, Various Lender Institutions, the
Co-Arrangers and The Chase Manhattan Bank, as Administrative
Agent, filed as Exhibit 10.38 on Form 10-K, dated March 30,
1999, is hereby incorporated by reference.
10.36 Administrative Services Agreement, dated as of August 1,
1998, among American Mutual Holding Company, Registrant,
AmerUs Group, AmerUs Home Equity, Inc., AmerUs Mortgage,
Inc., AmerUs Properties, Inc., American Capital Management
Group, Inc., AmerUs Life Insurance Company, AmVestors
Financial Corporation, American Investors Life Insurance
Company, Inc., and Delta Life and Annuity Company, filed as
Exhibit 10.39 on Form 10-K, dated March 30, 1999, is hereby
incorporated by reference.
10.37 Facility and Guaranty Agreement, dated February 12, 1999,
among The First National Bank of Chicago and the Registrant,
filed as Exhibit 10.39 on Form 10-Q dated May 14, 1999, is
hereby incorporated by reference.
10.38 Form of Reimbursement Agreement, dated February 15, 1999,
among the Registrant and Roger K. Brooks, Victor N. Daley,
Michael G. Fraizer, Thomas C. Godlasky, Marcia S. Hanson,
Mark V. Heitz and Gary R. McPhail, filed as Exhibit 10.40 on
Form 10-Q dated May 14, 1999, is hereby incorporated by
reference.
10.39 Amendment No. 1 to Facility Agreement, dated March 23, 1999,
among The First National Bank of Chicago and the Registrant,
filed as Exhibit 10.41 on Form 10-Q dated May 14, 1999, is
hereby incorporated by reference.
10.40 1999 Non-Employee Stock Option Plan, dated April 19, 1999,
filed on Form S-3, Registration Number 333-72643, is hereby
incorporated by reference.
10.41 Fifth Waiver and Amendment to Credit Agreement dated as of
October 1, 1998 to the Credit Agreement dated as of October
23, 1997 among the Registrant, Various Lender Institutions,
the Co-Arrangers and The Chase Manhattan Bank, as
Administrative Agent, filed as Exhibit 10.43 on Form 10-Q
dated August 13, 1999, is hereby incorporated by reference.
10.42 Sixth Amendment to Credit Agreement dated as of May 18, 1999
to the Credit Agreement dated as of October 23, 1997 among
the Registrant, Various Lender Institutions, the
Co-Arrangers and The Chase Manhattan Bank, as Administrative
Agent, filed as Exhibit 10.44 on Form 10-Q dated August 13,
1999, is hereby incorporated by reference.
10.43* Administrative Services Agreement, dated as of January 1,
2000, among American Mutual Holding Company, the Registrant,
AmerUs Group Co., AmerUs Home Equity, Inc. AmerUs Mortgage,
Inc., AmerUs Properties, Inc., American Capital Management
Group, Inc., AmerUs Life Insurance Company, AmVestors
Financial Corporation, and Delta Life and Annuity Company.
10.44* Amendment No. 2 to Facility Agreement, dated January 25,
2000, among The First National Bank of Chicago and the
Registrant.
10.45* Irrevocable Standby Letter of Credit Application and Terms
Agreement, dated February 1, 2000, between Federal Home Loan
Bank of Des Moines and AmerUs Life Insurance Company.
10.46* Seventh Amendment to Credit Agreement dated as of December
23, 1999 to the Credit Agreement dated as of October 23,
1997 among the Registrant, Various Lender Institutions, the
Co-Arrangers and The Chase Manhattan Bank, as Administrative
Agent.
10.47 Investment Advisory Agreements, dated as of February 18,
2000, by and between Indianapolis Life Insurance Company,
Bankers Life Insurance Company of New York, IL Annuity and
Insurance Company, Western Security Life Insurance Company
and AmerUs Capital Management Group, Inc. filed as Exhibits
10.1, 10.3, 10.4 and 10.2, respectively, to the Registrant's
report on Form 8-K/A on March 6, 2000, are hereby
incorporated by reference.
12* Computation of Ratios of Earnings to Fixed Charges.
39
42
EXHIBIT
NO. DESCRIPTION
- ------- -----------
21.1* List of Subsidiaries of the Registrant.
23.1* Consent of KPMG LLP.
27.1* Financial Data Schedule.
99.1 Retirement Agreement, dated June 27, 1997, by and between
Victor N. Daley and Registrant filed as Exhibit 99.5 on Form
10-K, dated March 30, 1999, is hereby incorporated by
reference.
99.2 First Amendment to Employment Agreement, dated as of April
15, 1999, to the Employment Agreement dated as of September
19, 1997, among Mark V. Heitz, AmVestors Financial
Corporation, American Investors Life Insurance Company,
Inc., AmVestors Investment Group, Inc., American Investors
Sales Group, Inc., and the Registrant, filed as Exhibit 99.4
on Form 10-Q dated August 13, 1999, is hereby incorporated
by reference.
99.3 Supplemental Benefit Agreement, dated as of April 15, 1999,
among Roger K. Brooks and the Registrant, filed as Exhibit
99.5 on Form 10-Q dated August 13, 1999, is hereby
incorporated by reference.
99.4 Form of Supplemental Benefit Agreement, dated as of April
15, 1999, among the Registrant and Victor N. Daley, Michael
G. Fraizer, Thomas C. Godlasky and Gary R. McPhail, filed as
Exhibit 99.6 on Form 10-Q dated August 13, 1999, is hereby
incorporated by reference.
99.5 Amended and Restated Employment Agreement, dated as of April
15, 1999, among Marcia S. Hanson and the Registrant, filed
as Exhibit 99.7 on Form 10-Q dated August 13, 1999, is
hereby incorporated by reference.
99.6* Agreement and Release, dated as of December 31, 1999, by and
between Marcia S. Hanson, Registrant, AmerUs Group Co.,
American Mutual Holding Company, and all of their respective
subsidiaries and affiliates.
99.7* Form of Supplemental Benefit Agreement, dated as of February
7, 2000, among the Registrant and Victor N. Daley, Michael
G. Fraizer, Thomas C. Godlasky and Gary R. McPhail.
- ---------------
* included herein
40
43
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.
AMERUS LIFE HOLDINGS, INC.
/s/ ROGER K. BROOKS
--------------------------------------
Roger K. Brooks
Chairman, President and Chief
Executive Officer
Date: March 8, 2000
POWER OF ATTORNEY
We, the undersigned officers and directors of AmerUs Life Holdings, Inc.,
hereby severally and individually constitute and appoint Michael G. Fraizer,
Brenda J. Cushing and James A. Smallenberger, and each of them, the true and
lawful attorneys and agents of each of us to execute in the name, place and
stead of each of us (individually and in any capacity stated below) any and all
amendments to this Annual Report on Form 10-K and all instruments necessary or
advisable in connection therewith and to file the same with the Securities and
Exchange Commission, each of said attorneys and agents to have the power to act
with or without the others and to have full power and authority to do and
perform in the name and on behalf of each of the undersigned every act
whatsoever necessary or advisable to be done on the premises as fully and to all
intents and purposes as any of the undersigned might or could do in person, and
we hereby ratify and confirm our signatures as they may be signed by or said
attorneys and agents or each of them to any and all such amendments and
instruments.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
/s/ ROGER K. BROOKS Chairman, President and Chief Executive Officer
- ------------------------------------------ (principal executive officer) and Director
Roger K. Brooks
/s/ MICHAEL G. FRAIZER Executive Vice President and Chief Financial Officer
- ------------------------------------------ (principal financial officer)
Michael G. Fraizer
/s/ BRENDA J. CUSHING Vice President and Controller
- ------------------------------------------ (principal accounting officer)
Brenda J. Cushing
/s/ JOHN R. ALBERS Director
- ------------------------------------------
John R. Albers
/s/ MALCOLM CANDLISH Director
- ------------------------------------------
Malcolm Candlish
/s/ MAUREEN M. CULHANE Director
- ------------------------------------------
Maureen M. Culhane
/s/ THOMAS F. GAFFNEY Director
- ------------------------------------------
Thomas F. Gaffney
41
44
/s/ SAM C. KALAINOV Director
- ------------------------------------------
Sam C. Kalainov
/s/ RALPH W. LASTER, JR. Director
- ------------------------------------------
Ralph W. Laster, Jr.
/s/ JOHN W. NORRIS, JR. Director
- ------------------------------------------
John W. Norris, Jr.
/s/ JACK C. PESTER Director
- ------------------------------------------
Jack C. Pester
/s/ JOHN A. WING Director
- ------------------------------------------
John A. Wing
42
45
AMERUS LIFE HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-3 through F-4
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997.......................... F-5
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1999, 1998 and 1997.............. F-6
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997.............. F-7
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.......................... F-8 through F-10
Notes to Consolidated Financial Statements.................. F-11 through F-50
Separate financial statements of subsidiaries not consolidated and 50% or
less owned persons accounted for by the equity method have been omitted because
they do not individually constitute a significant subsidiary.
F-1
46
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
AmerUs Life Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of AmerUs Life
Holdings, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, comprehensive income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AmerUs Life
Holdings, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Des Moines, Iowa
February 2, 2000, except as to Note 19,
which is as of February 21, 2000
F-2
47
AMERUS LIFE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
ASSETS
Investments:
Securities available for sale at fair value (note 2 and
6):
Fixed maturity securities.............................. $ 6,680,755 $ 6,746,544
Equity securities...................................... 14,585 32,185
Short-term investments................................. 155 22,428
Mortgage loans on real estate (note 3).................... 615,186 566,403
Real estate............................................... 1,538 633
Policy loans.............................................. 109,864 110,786
Other investments......................................... 269,158 205,790
----------- -----------
Total investments.................................... 7,691,241 7,684,769
Cash and cash equivalents................................... 23,090 60,090
Accrued investment income................................... 91,591 79,921
Premiums and fees receivable................................ 6,910 4,385
Reinsurance receivables..................................... 17,535 6,174
Deferred policy acquisition costs (note 4).................. 529,663 246,030
Value of business acquired (note 5)......................... 230,542 224,540
Investment in unconsolidated subsidiary..................... 30,683 29,602
Goodwill.................................................... 206,324 215,506
Property and equipment...................................... 23,046 23,249
Deferred income taxes (note 7).............................. 72,691 --
Other assets................................................ 383,415 396,947
Closed Block assets......................................... 1,412,622 1,453,305
----------- -----------
Total assets........................................... $10,719,353 $10,424,518
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
48
AMERUS LIFE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy reserves and policyowner funds:
Future life and annuity policy benefits................... $ 7,390,991 $ 7,185,417
Policyowner funds......................................... 282,026 98,019
----------- -----------
7,673,017 7,283,436
Accrued expenses............................................ 36,309 41,323
Dividends payable to policyowners........................... 2,248 2,104
Policy and contract claims.................................. 12,221 10,452
Income taxes payable........................................ 16,532 5,282
Deferred income taxes (note 7).............................. -- 11,398
Other liabilities........................................... 102,083 159,350
Debt (note 6)............................................... 173,088 141,051
Closed Block liabilities.................................... 1,756,064 1,703,195
----------- -----------
Total liabilities...................................... 9,771,562 9,357,591
----------- -----------
Company-obligated mandatorily redeemable preferred capital
securities of subsidiary trusts holding solely junior
subordinated debentures of the Company (note 6)........... 214,791 216,729
----------- -----------
Stockholders' equity (note 12):
Preferred Stock, no par value, 20,000,000 shares
authorized, none issued................................ -- --
Common Stock, Class A, no par value, 180,000,000 shares
authorized: issued and outstanding; 25,070,854 shares
(net of 4,662,305 treasury shares) in 1999 and
25,425,983 shares (net of 4,308,936 treasury shares) in
1998................................................... 25,071 25,426
Common Stock, Class B, no par value, 50,000,000 shares
authorized; 5,000,000 shares issued and outstanding.... 5,000 5,000
Paid-in capital........................................... 282,831 290,091
Accumulated other comprehensive income (loss)............. (135,964) 26,711
Unearned compensation..................................... (323) (240)
Unallocated ESOP shares (note 8).......................... (1,378) --
Retained earnings......................................... 557,763 503,210
----------- -----------
Total stockholders' equity........................... 733,000 850,198
----------- -----------
Total liabilities and stockholders' equity........... $10,719,353 $10,424,518
=========== ===========
See accompanying notes to consolidated financial statements.
F-4
49
AMERUS LIFE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Revenues:
Insurance premiums.............................. $ 89,521 $ 81,197 $ 48,127
Universal life and annuity product charges...... 74,676 72,981 47,306
Net investment income (note 2).................. 540,072 503,372 224,431
Realized gains (losses) on investments (note
2)........................................... 3,244 (112) 13,791
Other income.................................... 1,467 1,700 --
Contribution from the Closed Block.............. 25,166 31,478 31,044
----------- ----------- -----------
734,146 690,616 364,699
----------- ----------- -----------
Benefits and expenses:
Policyowner benefits............................ 442,428 430,756 195,976
Underwriting, acquisition, and other expenses... 93,881 81,416 49,999
Amortization of deferred policy acquisition
costs and value of business acquired (notes 4
and 5)....................................... 67,780 60,214 23,776
Dividends to policyowners....................... 4,526 2,558 1,587
----------- ----------- -----------
608,615 574,944 271,338
----------- ----------- -----------
Income from operations............................ 125,531 115,672 93,361
Interest expense (note 6)......................... 28,320 27,075 14,980
----------- ----------- -----------
Income before income tax expense and equity in
earnings of unconsolidated subsidiary........... 97,211 88,597 78,381
Income tax expense (note 7)....................... 32,115 28,422 22,022
----------- ----------- -----------
Income before equity in earnings of unconsolidated
subsidiary...................................... 65,096 60,175 56,359
Equity in earnings of unconsolidated subsidiary... 1,558 2,654 1,700
----------- ----------- -----------
Net income................................... $ 66,654 $ 62,829 $ 58,059
=========== =========== ===========
Earnings per common share (note 16):
Basic........................................... $ 2.20 $ 1.88 $ 2.47
=========== =========== ===========
Diluted......................................... $ 2.20 $ 1.86 $ 2.46
=========== =========== ===========
Weighted average common shares outstanding
Basic........................................... 30,229,682 33,458,140 23,536,666
=========== =========== ===========
Diluted......................................... 30,306,649 33,695,752 23,572,259
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
50
AMERUS LIFE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- -------- --------
Net Income.............................................. $ 66,654 $ 62,829 $ 58,059
Other comprehensive income (loss), before tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during
period........................................... (254,937) (36,716) 51,717
Less: reclassification adjustment for gains
(losses) included in net income.................. (3,190) 6,477 18,531
Minimum pension liability adjustment............... 1,478 (1,478) --
--------- -------- --------
Other comprehensive income (loss), before tax......... (250,269) (44,671) 33,186
Income tax (expense) benefit related to items of other
comprehensive income (note 7)...................... 87,594 15,635 (12,739)
--------- -------- --------
Other comprehensive income (loss), net of tax........... (162,675) (29,036) 20,447
--------- -------- --------
Comprehensive income (loss)............................. $ (96,021) $ 33,793 $ 78,506
========= ======== ========
See accompanying notes to consolidated financial statements
F-6
51
AMERUS LIFE HOLDINGS, INC .
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER UNALLOCATED TOTAL
----------------- PAID-IN COMPREHENSIVE UNEARNED ESOP RETAINED SHAREHOLDERS
CLASS A CLASS B CAPITAL INCOME (LOSS) COMPENSATION SHARES EARNINGS EQUITY
------- ------- ---------- ------------- ------------ ----------- -------- ------------
Balance at December 31,
1996.................... $14,500 $5,000 $ -- $ 35,300 $ -- $ -- $402,710 $457,510
1997:
Net income................ -- -- -- -- -- -- 58,059 58,059
Net unrealized gain on
securities.............. -- -- -- 20,447 -- -- -- 20,447
Issuance of common
stock................... 15,235 -- 383,686 -- -- -- -- 398,921
Dividends declared on
common stock............ -- -- -- -- -- -- (6,946) (6,946)
------- ------ -------- --------- ----- ------- -------- --------
Balance at December 31,
1997.................... $29,735 $5,000 $383,686 $ 55,747 $ -- $ -- $453,823 $927,991
1998:
Net income................ -- -- -- -- -- -- 62,829 62,829
Net unrealized (loss) on
securities.............. -- -- -- (28,076) -- -- -- (28,076)
Minimum pension liability
adjustment.............. -- -- -- (960) -- -- -- (960)
Stock issued under various
incentive plans, net of
forfeitures............. 14 -- 635 -- (240) -- -- 409
Purchase of treasury
stock................... (4,325) -- (97,810) -- -- -- -- (102,135)
Issuance of treasury
stock................... 2 -- 661 -- -- -- -- 663
Retirement of
company-obligated
mandatorily redeemable
preferred capital
securities (note 6)..... -- -- 2,919 -- -- -- -- 2,919
Dividends declared on
common stock............ -- -- -- -- -- -- (13,442) (13,442)
------- ------ -------- --------- ----- ------- -------- --------
Balance at December 31,
1998.................... $25,426 $5,000 $290,091 $ 26,711 $(240) $ -- $503,210 $850,198
1999:
Net income................ -- -- -- -- -- -- 66,654 66,654
Net unrealized (loss) on
securities.............. -- -- -- (163,635) -- -- -- (163,635)
Minimum pension liability
adjustment.............. -- -- -- 960 -- -- -- 960
Stock issued under various
incentive plans, net of
forfeitures............. 30 -- 788 -- (83) -- -- 735
Purchase of treasury
stock................... (385) -- (8,531) -- -- -- -- (8,916)
Retirement of
company-obligated
mandatorily redeemable
preferred capital
securities (note 6)..... -- -- 355 -- -- -- -- 355
Dividends declared on
common stock............ -- -- -- -- -- -- (12,101) (12,101)
Adoption of leveraged ESOP
(note 8)................ -- -- -- -- -- (1,778) (1,778)
Allocation of shares in
leveraged ESOP (note
8)...................... -- -- 128 -- -- 400 -- 528
------- ------ -------- --------- ----- ------- -------- --------
Balance at December 31,
1999.................... $25,071 $5,000 $282,831 $(135,964) $(323) $(1,378) $557,763 $733,000
======= ====== ======== ========= ===== ======= ======== ========
See accompanying notes to consolidated financial statements.
F-7
52
AMERUS LIFE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income........................................ $ 66,654 $ 62,829 $ 58,059
Adjustments to reconcile net income to net cash
provided by operating activities:
Policyowner assessments on universal life and
annuity products............................. (54,944) (71,104) (43,441)
Interest credited to policyowner account
balances..................................... 311,428 316,782 114,584
Realized investment (gains) losses.............. (3,244) 112 (13,791)
Goodwill amortization........................... 7,403 7,531 602
VOBA amortization............................... 32,604 32,932 2,790
Change in:
Accrued investment income.................... (11,670) 4,792 (351)
Reinsurance receivables...................... (11,361) 29 (1,548)
Deferred policy acquisition costs............ (118,078) (117,452) (30,365)
Liabilities for future policy benefits....... 329,948 104,303 (8,966)
Policy and contract claims and other
policyowner funds.......................... (291) 8,885 (2,727)
Income taxes:
Current.................................... 11,250 (1,607) (1,552)
Deferred................................... 11,478 2,619 2,156
Other, net...................................... 1,537 22,849 12,970
Change in Closed Block assets and liabilities,
net.......................................... 59,548 105,911 135,970
------------ ------------ ------------
Net cash provided by operating activities......... 632,262 479,411 224,390
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed maturities available-for-sale... (11,253,044) (3,449,439) (1,473,579)
Maturities, calls and principal reductions of
fixed maturities available for sale............. 10,865,639 3,544,178 1,356,762
Purchase of equity securities..................... (213,935) (323,295) (53,850)
Proceeds from sale of equity securities........... 229,101 331,641 67,794
Proceeds from repayment and sale of mortgage
loans........................................... 132,257 118,947 171,082
F-8
53
AMERUS LIFE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Purchase of mortgage loans........................... (175,909) (231,004) (137,222)
Purchase of real estate and other invested assets.... (119,037) (266,416) (22,524)
Proceeds from sale of real estate and other invested
assets............................................. 53,642 232,494 --
Change in policy loans, net.......................... 922 7,079 (9,625)
Other assets, net.................................... 2,469 (5,978) 89,109
Acquisitions, net of cash acquired................... -- -- (153,798)
Change in Closed Block investments, net.............. (54,373) (93,364) (103,401)
----------- ----------- -----------
Net cash (used in) investing activities............ (532,268) (135,157) (269,252)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits to policyowner account balances............. 1,023,252 855,181 122,531
Withdrawals from policyowner account balances........ (1,169,228) (1,087,856) (233,537)
Change in debt, net.................................. 32,037 (125,384) 78,054
Purchase of treasury stock........................... (8,916) (102,135) --
Issuance of treasury stock........................... 735 663 --
Dividends to shareholders............................ (12,101) (13,442) (6,946)
Issuance of company-obligated mandatorily redeemable
capital securities................................. -- 144,963 86,000
Retirement of company-obligated mandatorily
redeemable capital securities...................... (1,523) (14,235) --
Adoption and allocation of shares in leveraged
ESOP............................................... (1,250) -- --
Net proceeds from initial public stock offering...... -- -- 55,027
----------- ----------- -----------
Net cash provided by (used in) financing
activities...................................... (136,994) (342,245) 101,129
----------- ----------- -----------
Net increase (decrease) in cash.................... (37,000) 2,009 56,267
Cash and cash equivalents at beginning of period..... 60,090 58,081 1,814
----------- ----------- -----------
Cash and cash equivalents at end of period........... $ 23,090 $ 60,090 $ 58,081
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH ACTIVITIES
Interest paid........................................ $ 28,424 $ 26,641 $ 10,420
=========== =========== ===========
Income taxes paid.................................... $ 9,267 $ 17,566 $ 42,801
=========== =========== ===========
F-9
54
AMERUS LIFE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Details of acquisitions
Fair value of assets acquired...................... $ -- $ -- $ 5,744,191
Liabilities assumed................................ -- -- 5,190,829
----------- ----------- -----------
Carrying value of acquisitions..................... -- -- 553,362
Common stock issued................................ -- -- (343,894)
Warrants, options and SAR's rolled over............ -- -- (23,184)
Payments made on liabilities included above........ -- -- 25,800
----------- ----------- -----------
Cash paid.......................................... -- -- 212,084
Less: Cash acquired................................ -- -- 58,286
----------- ----------- -----------
Net cash paid for acquisitions..................... $ -- $ -- $ 153,798
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-10
55
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
AmerUs Life Holdings, Inc.'s (the Company) operations consist primarily of
marketing, underwriting, and distributing life insurance, annuities, and related
products to individuals throughout the United States. The Company's products are
sold through a Preferred Producer agency system, a Personal Producing General
Agents (PPGA) system and national networks of independent agents. The life
insurance and annuity operations are the Company's two operating segments.
ORGANIZATION
The Company was formed on August 1, 1996 in conjunction with a plan of
reorganization (the Reorganization) of the former American Mutual Life Insurance
Company (American Mutual Life). Pursuant to this Reorganization which became
effective on June 30, 1996, American Mutual Life was converted to a mutual
insurance holding company structure whereby American Mutual Holding Company
(AMHC), a mutual insurance holding company, was formed. Additionally, American
Mutual Life was converted to a stock life insurance company and renamed AmerUs
Life Insurance Company (AmerUs Life). All of the initial shares of capital stock
of AmerUs Life were issued to AMHC.
On August 1, 1996, AMHC contributed all of its shares of capital stock of
AmerUs Life to AmerUs Group Co. (AmerUs Group). On the same date, the Company
was formed and all of its shares of capital stock were issued to AmerUs Group.
As a result of the Reorganization, AMHC indirectly owned, through AmerUs
Group, 14,500,000 shares of Class A Common Stock and 5,000,000 shares of Class B
Common Stock of the Company. The Class B Common Stock must be held, directly or
indirectly, by AMHC. The Class B Common Stock is generally convertible on a
share-for-share basis for Class A Common Stock. Each share of Class A and Class
B Common Stock entitles its holder to one vote per share; however, the voting
rights of the Class B shares are adjusted to ensure that votes of the Class B
shares together with the votes of Class A shares held by the Class B
shareholders will always have a majority of the votes. AMHC must directly or
indirectly control a majority of the voting shares of the Company. In addition,
as long as the members of AMHC own directly or indirectly more than 50 percent
of the voting power of the outstanding voting stock, AMHC is entitled to equity
purchase rights which provide for the Company to notify AMHC in writing of a
proposed sale of voting stock or any options, warrants, or rights to acquire
voting stock. AMHC has the right to purchase the same proportionate number of
shares being offered for sale as AMHC owns of the total shares at the time of
the registration.
CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company and its
wholly-owned subsidiaries have been prepared in conformity with Generally
Accepted Accounting Principles (GAAP) which, as to the insurance company
subsidiaries, differ from statutory accounting practices prescribed or permitted
by regulatory authorities.
The accompanying consolidated financial statements include the accounts and
operations of the Company and its wholly-owned subsidiaries, principally, AmerUs
Life, AmVestors Financial Corporation (AmVestors), Delta Life Corporation
(Delta) and AmerUs Capital Management Group, Inc. (ACM). All significant
intercompany transactions and balances have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
F-11
56
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain balances for 1997 and 1998 have been reclassified to conform to the
1999 presentation format.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company includes cash and amounts
due from other financial institutions and interest-bearing deposits in other
financial institutions purchased with original maturities of three months or
less in cash and cash equivalents. Amounts of interest-bearing deposits included
as cash equivalents at December 31, 1999 and 1998 were $48.9 million and $86.5
million, respectively.
CLOSED BLOCK
The Reorganization contained an arrangement, known as a closed block (the
Closed Block), to provide for dividends on policies that were generally in force
on June 30, 1996 and were within the classes of individual policies for which
AmerUs Life had a dividend scale in effect at the time of the Reorganization.
The primary products included in the Closed Block are whole life, certain
universal life policies and term life insurance policies. The Closed Block was
designed to give reasonable assurance to owners of affected policies that assets
will be available to support such policies, including maintaining dividend
scales in effect at the time of the Reorganization, if the experience underlying
such scales continues. The assets, including revenue therefrom, allocated to the
Closed Block will accrue solely to the benefit of the owners of policies
included in the Closed Block until the Closed Block is no longer in effect. The
Company will not be required to support the payment of dividends and interest
credits on the Closed Block policies from its general funds, although it could
choose to provide such support. The Company will continue to pay guaranteed
benefits under all policies, including policies included in the Closed Block, in
accordance with their terms. In the event that the Closed Block assets were
insufficient to meet the benefits of the Closed Block guaranteed benefits,
general assets would be utilized to meet the contractual benefits of the Closed
Block policyholders.
The estimated net cash flows assumed in determining the Closed Block
funding consist of premiums from policies included in the Closed Block,
investment income from Closed Block assets, proceeds from maturities and
dispositions of Closed Block assets, less benefits paid on Closed Block
policies, certain expenses funded in the Closed Block, and dividends on Closed
Block policies based on current payable dividend scales. To the extent that the
actual cash flows from the assets allocated to the Closed Block are, in the
aggregate, more favorable than assumed in establishing the Closed Block, total
dividends paid to the Closed Block policyholders in future years will be greater
than the total dividends that would have been paid to such policyholders if the
current payable dividend scales had been continued. Conversely, to the extent
that the actual cash flows from the assets allocated to the Closed Block are, in
the aggregate, less favorable than assumed in establishing the Closed Block,
total dividends paid to the Closed Block policyholders in future years will be
less than the total dividends that would have been paid to such policyholders if
the current payable dividend scales had been continued.
The financial information of the Closed Block, while prepared on a GAAP
basis, reflects its contractual provisions and not its actual results of
operations and financial position. Closed Block underwriting, acquisition and
insurance expenses include premium taxes and guarantee fund assessments. All
other underwriting, acquisition and insurance expenses related to the Closed
Block operations are charged to operations outside the Closed Block;
accordingly, the contribution from the Closed Block does not represent the
actual profitability of the Closed Block operations. Operating costs and
expenses outside of the Closed Block are, therefore, disproportionate to the
business outside of the Closed Block. Unrealized gains and losses on investments
are included outside of the Closed Block as a component of other comprehensive
income and will be included in the Closed Block operations upon their
realization. Unrealized gains and losses are not included in the determination
of the policyholder obligation.
F-12
57
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information of the Closed Block as of December 31,
1999, 1998 and 1997 and for the years ended December 31, 1999, 1998 and 1997, is
as follows (in thousands):
DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
ASSETS:
Securities available for sale at fair value
Fixed maturity securities (amortized cost
1999 -- $1,133,717; 1998 -- $1,074,208;
1997 -- $1,004,976)................................ $1,087,672 $1,116,540 $1,053,066
Short-term investments................................ -- 8,875 660
Policy loans............................................ 188,035 181,866 168,368
Other investments....................................... 602 3,027 591
Cash and cash equivalents............................... 5,910 4 21
Accrued investment income............................... 14,949 14,445 12,617
Premiums and fees receivable............................ 957 3,385 3,591
Deferred policy acquisition costs....................... 97,141 117,479 143,765
Other assets............................................ 17,356 7,684 9,169
---------- ---------- ----------
Total Assets....................................... $1,412,622 $1,453,305 $1,391,848
========== ========== ==========
LIABILITIES:
Future life and annuity policy benefits................. $1,581,923 $1,517,162 $1,448,725
Policyowner funds....................................... 8,905 6,350 6,786
Accrued expenses........................................ -- 3,887 5,980
Dividends payable to policyowners....................... 152,984 149,487 135,985
Policy and contract claims.............................. 4,670 8,395 5,966
Other liabilities....................................... 7,582 17,914 19,990
---------- ---------- ----------
Total Liabilities.................................. $1,756,064 $1,703,195 $1,623,432
========== ========== ==========
REVENUES AND EXPENSES:
Insurance premiums...................................... $ 189,444 $ 198,178 $ 206,145
Universal life and annuity product charges.............. 12,463 13,695 13,599
Net investment income................................... 108,117 115,762 113,759
Realized gains (losses) on investments.................. (380) 10,324 718
Policyowner benefits.................................... (193,482) (200,783) (206,638)
Underwriting, acquisition and other expenses............ (4,408) (5,042) (5,477)
Amortization of deferred policy acquisition costs....... (20,337) (26,286) (31,471)
Dividends to policyowners............................... (66,251) (74,370) (59,591)
---------- ---------- ----------
Contribution from the Closed Block before income
taxes................................................. $ 25,166 $ 31,478 $ 31,044
========== ========== ==========
INVESTMENTS
Investments in fixed maturity and equity securities that are to be held for
indefinite periods of time are reported as securities available-for-sale.
Securities available-for-sale are reported in the accompanying consolidated
financial statements at fair value. Any valuation changes resulting from changes
in the fair value of these securities are reflected as a component of
stockholders' equity, except for certain policies of Delta Life which have
specific investments identified and for which valuation changes and related
unrealized gains and losses are included in future life and annuity policy
benefits. These unrealized gains or losses in stockholders' equity, excluding
certain Delta Life unrealized gains or losses as described above, are reported
net of taxes and adjustments to deferred policy acquisition costs and value of
business acquired.
F-13
58
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Premiums and discounts on fixed maturity securities are amortized or
accreted over the life of the related security as an adjustment to yield using
the effective interest method. Realized gains and losses are included in
earnings and are determined using the specific identification method. The
carrying value of investments is reduced to its estimated realizable value if a
decline in fair value is considered other than temporary with such reduction
charged to earnings.
Mortgage loans on real estate and other long-term investments are stated at
cost less amortized discounts and allowances for possible losses. Policy loans
are stated at their aggregate unpaid balances. Real estate acquired by
foreclosure is stated at the lower of cost or fair value less estimated costs to
sell.
Investments in real estate and mortgage loans on real estate are considered
impaired when the Company determines that collection of all amounts due under
the contractual terms is doubtful or carrying values exceed the fair value of
underlying collateral. The Company adjusts real estate and mortgage loans on
real estate to their estimated net realizable value at the point at which it
determines an impairment is other than temporary. Interest income on impaired
mortgage loans is recognized when cash is received. In addition, the Company has
established a valuation allowance for mortgage loans on real estate and other
invested assets. Valuation allowances for other than temporary impairments in
value are netted against the asset categories to which they apply, and additions
to valuation allowances are included in total investment results.
The Company has one $250 million separate account funding agreement. Under
this agreement, a five-year floating rate insurance contract is issued to a
commercial paper conduit. The funding agreement is secured by assets in the
Company's separate account and is further backed by the general account assets.
The separate account assets are legally segregated and are not subject to claims
that arise out of any other business of the Company. The separate account assets
and liabilities are included with general account assets in the financial
statements. The funding agreement may not be cancelled by the commercial paper
conduit unless there is a default under the agreement, but the Company may
terminate at any time.
Investments in partnerships and joint ventures are accounted for under the
equity method whereby the Company initially records the investment at cost.
Subsequently, the Company increases or decreases the carrying amount of the
investment for its share of income or loss, respectively, of the investee. The
Company is primarily a limited partner in such investments.
MORTGAGE LOANS
Loans are stated at the principal amounts outstanding, net of unearned
income, deferred loan fees, discounts, and allowances for possible losses.
Unearned income, net deferred loan fees, premiums, and discounts on loans which
are probable of collection are amortized over the terms of the loans using a
method that approximates the interest method. A loan is considered impaired if
it is probable that contractual amounts due will not be collected. Impaired
loans are valued at the fair value of the underlying collateral. Accrued
interest receivable in arrears which management believes is doubtful of
collection is charged against income. Subsequent interest income is not
recognized on such loans until collected or until determined by management to be
collectible.
REAL ESTATE
Real estate is stated at cost less accumulated depreciation. Depreciation
is calculated over the estimated useful lives using primarily accelerated
depreciation methods.
INTEREST RATE SWAPS, CAPS, SWAPTIONS AND OPTIONS
The Company uses interest rate swaps, caps, swaptions and options as part
of its overall interest rate risk management strategy for certain life insurance
and annuity products. The book values of the underlying hedged investments or
anticipated investment transactions are amortized over the remaining lives of
the
F-14
59
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
hedged investments as adjustments to investment income. Certain agreements hedge
assets which are carried at fair value; accordingly, such underlying hedged
investments are also carried at fair value. Any unamortized gains or losses are
recognized when the underlying investments are sold.
Interest rate swap contracts are used to convert the interest rate
characteristics (fixed or variable) of certain investments to match those of the
related insurance liabilities that the investments are supporting. The net
interest effect of such swap transactions is reported as an adjustment of
interest income as incurred.
Interest rate caps are used to limit the effects of changing interest rates
on yields of variable rate or short-term assets or liabilities. The initial cost
of any such agreement is amortized to investment income over the life of the
agreement. Periodic payments that are receivable as a result of the agreements
are accrued as an adjustment of investment income.
Swaption agreements are used in conjunction with interest rate caps to
protect against rising rates. Swaption agreements involve the right to enter
into a swap transaction at a pre-specified price. The initial cost of a swaption
agreement is amortized to investment income over the life of the agreement.
The Company has equity-indexed annuity products that guarantee the return
of principal to the customer and credits interest based on a percentage of the
gain in the S&P 500 Index -Registered Trademark-. A portion of the premium from
each customer is invested in investment grade fixed income securities to cover
the minimum guaranteed value due the customer at the end of the term. A portion
of the premium is used to purchase S&P 500 call options to hedge the growth in
interest credited to the customer as a direct result of increases in the S&P 500
Index -Registered Trademark-. The amounts to be paid or received pursuant to
these agreements are accrued and recognized in income over the life of the
agreements. The initial cost of an option agreement is amortized to income over
the life of the agreement.
POLICY ACQUISITION COSTS
Certain commissions, policy issue and underwriting costs, and other
variable costs incurred to acquire or renew traditional life insurance,
universal life insurance, and annuity products have been deferred. The method of
amortizing deferred policy acquisition costs for traditional life insurance
products varies, dependent upon whether the contract is participating or
non-participating. Participating contracts are those which are expected to pay
dividends to policyowners in proportion to their relative contribution to the
Company's statutory surplus. Deferred policy acquisition costs for participating
traditional life insurance are generally amortized over the life of the policies
in proportion to the present value of estimated gross margins. Non-participating
traditional life insurance deferred policy acquisition costs are amortized over
the premium-paying period of the related policies in proportion to the ratio of
annual premium revenues to total anticipated premium revenues using assumptions
consistent with those used in computing policy benefit reserves. For universal
life insurance and annuity products, deferred policy acquisition costs are
generally amortized in proportion to the present value of estimated gross
margins from surrender charges and investment, mortality, and expense margins.
The amortization for participating traditional life, universal life, and annuity
products is adjusted retrospectively when current or estimated future gross
margins on the underlying policies vary from previous estimates. The deferred
policy acquisition cost asset is adjusted for the impact on estimated gross
profits of net unrealized gains and losses on securities.
VALUE OF BUSINESS ACQUIRED
Value of Business Acquired (VOBA) from insurance companies acquired
represents the portion of the purchase price allocated to the right to receive
future cash flows from insurance contracts existing at the date of the
acquisition. This cost of policies purchased represents the actuarially
determined present value of the projected future cash flows from the acquired
policies.
F-15
60
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The expected future cash flows used in determining such value are based on
actuarially determined projections of future premium receipts, mortality,
surrenders, operating expenses, changes in insurance liabilities, investment
yields on the assets retained to support the policy liabilities and other
factors. These projections take into account all factors known or expected at
the valuation date, based on the judgment of management. The actual experience
on purchased business may vary from projections due to differences in renewal
premium, investment spread, investment gains or losses, mortality and morbidity
costs and other factors.
The discount rate used to determine the value of policies purchased is the
rate of return required in order to invest in the business being acquired.
Factors in determining this rate include the cost of capital required to fund
the acquisition; the acquired company's compatibility with other Company
activities that may impact future cash flows; the complexity of the acquired
company; and recent discount rates used by others to determine valuations to
acquire similar blocks of business.
VOBA is amortized based on the incidence of the expected cash flows using
the interest rate credited to the underlying policies. If cash flows differ from
expectations, the amortization of the VOBA is adjusted. The VOBA asset is
adjusted for the impact on estimated gross profits of net unrealized gains and
losses on securities. Each year, the recoverability of the VOBA is evaluated and
if the evaluation indicates that the existing insurance liabilities, together
with the present value of future net cash flows from the blocks of business
acquired, is insufficient to recover the VOBA, the difference is charged to
expense as an additional write-off of the VOBA.
GOODWILL
Goodwill represents the excess of the amount paid to acquire a company over
the fair value of its net assets. Goodwill is amortized on a straight-line basis
over a thirty year period. The value of goodwill is monitored based on the
estimates of future earnings. If it is determined that future earnings do not
support the recoverability of goodwill, its carrying value is reduced by a
corresponding charge to expense.
RECOGNITION OF REVENUES
Premiums for traditional life insurance products (including those products
with fixed and guaranteed premiums and benefits and which consist principally of
whole life insurance policies and certain annuities with life contingencies) are
recognized as revenues when due. For limited payment life insurance policies,
premiums are recorded as income when due with any excess profit deferred and
recognized over the expected lives of the contracts. Amounts received as
payments for universal life insurance policies and for annuity products
(including deferred annuities and annuities without life contingencies) are not
recorded as premium revenue. Revenues for such contracts consist of policy
charges for the cost of insurance, policy administration charges, and surrender
charges assessed against policyowner account balances during the period. All
insurance-related revenue is reported net of reinsurance ceded.
FUTURE POLICY BENEFITS
The liability for future policy benefits for traditional life insurance is
computed using the net level method, utilizing the guaranteed interest and
mortality rates used in calculating cash surrender values as described in the
contracts. Reserve interest assumptions range from 2.00 percent to 7.50 percent.
The weighted average assumed interest rate for all traditional life policy
reserves was 4.33 percent in 1999, 4.30 percent in 1998 and 4.27 percent in
1997. Policy benefit claims are charged to expense in the period that the claims
are incurred. All insurance-related benefits, losses, and expenses are reported
net of reinsurance ceded.
F-16
61
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future policy benefit reserves for universal life insurance and annuity
products are computed under a retrospective deposit method and represent policy
account balances before applicable surrender charges. Policy benefits and claims
that are charged to expense include benefit claims incurred in the period in
excess of related policy account balances. The weighted average interest
crediting rates for universal life products were 5.67 percent in 1999, 6.08
percent in 1998 and 6.23 percent in 1997. The range of interest crediting rates
for annuity products, excluding bonus interest payouts, was 4.00 to 7.00 percent
in 1999, 1998 and 1997.
PARTICIPATING POLICIES
Participating policies entitle the policyowners to receive dividends based
on actual interest, mortality, morbidity, and expense experience for the related
policies. These dividends are distributed to the policyowners through an annual
dividend using current dividend scales which are approved by the board of
directors. Nearly 100 percent of traditional life policies are currently paying
dividends and traditional life policies represent approximately 64 percent of
the Company's individual life policies in force (based on face amounts).
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and is depreciated principally
under the straight-line method.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) 123, "Accounting for
Stock-Based Compensation," requires increased disclosure of compensation expense
arising from stock compensation plans. SFAS 123 encourages rather than requires
companies to adopt a new method of accounting for stock compensation awards
based on their estimated fair value at the date they are granted. Companies are
permitted to continue accounting under APB Opinion 25 which requires
compensation cost be recognized based on the difference, if any, between the
quoted market price of the stock on the date of grant and the amount an employee
must pay to acquire the stock. The Company has elected to continue to apply APB
Opinion 25 in its consolidated financial statements and has disclosed proforma
net income and earnings per share information.
GUARANTY FUND ASSESSMENTS
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyowners and claimants in the event of insolvency of
other life insurance companies. As of December 31, 1999, the Company has accrued
for the gross amount of guaranty fund assessments for known insolvencies net of
estimated recoveries of premium tax offsets.
BENEFIT PLAN COSTS
The Company recognizes pension costs for its defined benefit plans in
accordance with SFAS 87, "Employers' Accounting for Pensions." Pension costs are
funded according to regulations provided under the Internal Revenue Code.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Under SFAS 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," the cost of postretirement benefits must be recognized on an
accrual basis as employees perform services to earn the benefits.
F-17
62
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company and its non-life insurance subsidiaries file a consolidated
federal income tax return. The life insurance subsidiaries file separate federal
income tax returns. The separate return method is used to compute the Company's
provision for federal income taxes. Deferred income tax assets and liabilities
are determined based on differences among the financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and laws.
EARNINGS PER SHARE
Basic earnings per share of common stock are computed by dividing net
income by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share assumes the issuance of common shares
applicable to stock options and warrants and is calculated using the treasury
stock method.
TREASURY STOCK
The Company accounts for its treasury stock using the par value method.
Shares purchased for treasury are not retired and are reissued as needed.
EMERGING ACCOUNTING MATTERS
SFAS 133 AND 137
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 defines derivative instruments
and provides comprehensive accounting and reporting standards for the
recognition and measurement of derivative and hedging activities (including
certain instruments embedded in other contracts). It requires derivatives to be
recorded in the consolidated balance sheet at fair value and establishes
criteria for hedges of changes in the fair value of assets, liabilities or firm
commitments, hedges of variable cash flows or forecasted transactions, and
hedges of foreign currency exposures of net investments in foreign operations.
Changes in the fair value of derivatives not meeting specific hedge accounting
criteria would be recognized in the consolidated statement of operations. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of FASB Statement No.
133." SFAS No. 137 delays the effective date of SFAS No. 133 for all fiscal
quarters until fiscal years beginning after June 15, 2000. The Company is
evaluating SFAS No. 133 and has not determined its effect on the consolidated
financial statements.
SOP 97-3
On January 1, 1999, the Company adopted the American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments." This
statement provides guidance on when an insurance or other enterprise should
recognize a liability for guaranty fund and other assessments and on how to
measure such liability. The adoption of SOP 97-3 had no material impact on the
financial position or results of operations as the Company currently estimates
assessment liabilities when a determination of an insolvency has occurred.
SOP 98-1
On January 1, 1999, the Company adopted AICPA SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This SOP
provides guidance for determining whether costs of software developed or
obtained for internal use should be capitalized or expensed as incurred. In the
past, the Company has expensed such costs as they were incurred. The adoption of
SOP 98-1 had no material impact on the financial position or results of
operations of the Company.
F-18
63
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATUTORY ACCOUNTING CODIFICATION
The NAIC has codified statutory accounting practices, which are expected to
constitute the only source of prescribed statutory accounting practices and are
effective in 2001. Codification will change prescribed statutory accounting
practices and may result in changes to the accounting practices that insurance
enterprises use to prepare their statutory financial statements. The changes of
codification will not have a material impact on statutory surplus.
BUSINESS RISKS
The Company operates in a business environment which is subject to various
risks and uncertainties. Such risks and uncertainties include interest rate
risk, legal and regulatory changes and default risk.
Interest rate risk is the potential for interest rates to change, which can
cause fluctuations in the value of investments. To the extent that fluctuations
in interest rates cause the duration of assets and liabilities to differ, the
Company may have to sell assets prior to their maturity and realize losses.
Interest rate exposure for the investment portfolio is managed through
asset/liability management techniques which attempt to match the duration of the
assets with the estimated duration of the liabilities. The Company also utilizes
derivative investment contracts to manage interest rate risk.
The potential also exists for changes in the legal or regulatory
environment in which the Company operates, which can create additional costs and
expenses not anticipated by the Company in pricing its products. In other words,
regulatory initiatives or new legal theories may create costs for the Company
beyond those recorded in the financial statements. The Company mitigates this
risk by operating in a geographically diverse area, which reduces its exposure
to any single jurisdiction, closely monitoring the regulatory environment to
anticipate changes and by using underwriting practices which identify and
minimize the potential adverse impact of this risk.
Default risk is the risk that issuers of securities owned by the Company
may default or that other parties, including reinsurers, may not be able to pay
amounts due the Company. The Company attempts to minimize this risk by adhering
to a conservative investment strategy, holding a well diversified portfolio of
assets to minimize concentrations, maintaining sound reinsurance and credit and
collection policies and providing allowances or reserves for any amounts deemed
uncollectible.
F-19
64
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) INVESTMENTS
The Company's investments at December 31, 1999 and 1998 classified as
available-for-sale securities are summarized as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Fixed maturity securities available-for-sale at
December 31, 1999
Corporate bonds.............................. $3,903,988 $18,332 $212,372 $3,709,948
U.S. government bonds........................ 360,808 44 11,679 349,173
State and political subdivisions............. 47,208 -- 1,761 45,447
Foreign government bonds..................... 157,460 6,078 4,175 159,363
Asset-backed bonds........................... 660,399 32 47,899 612,532
Mortgage-backed bonds........................ 1,608,846 3,382 58,780 1,553,448
Redeemable preferred stock................... 267,795 5,144 22,095 250,844
---------- ------- -------- ----------
Total fixed maturities
available-for-sale...................... $7,006,504 $33,012 $358,761 $6,680,755
========== ======= ======== ==========
Equity securities available-for-sale........... $ 13,440 $ 1,735 $ 590 $ 14,585
========== ======= ======== ==========
Short-term investments available-for-sale...... $ 155 $ -- $ -- $ 155
========== ======= ======== ==========
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Fixed maturity securities available-for-sale at
December 31, 1998
Corporate bonds.............................. $3,405,967 $121,783 $ 21,032 $3,506,718
U.S. government bonds........................ 73,661 2,639 12 76,288
State and political subdivisions............. 47,347 2,134 -- 49,481
Foreign government bonds..................... 130,557 6,455 8,218 128,794
Asset-backed bonds........................... 726,991 5,382 17,258 715,115
Mortgage-backed bonds........................ 2,141,129 29,595 1,719 2,169,005
Redeemable preferred stock................... 105,843 2,613 7,313 101,143
---------- ------- -------- ----------
Total fixed maturities
available-for-sale...................... $6,631,495 $170,601 $ 55,552 $6,746,544
========== ======= ======== ==========
Equity securities available-for-sale........... $ 47,446 $ 1,690 $ 16,951 $ 32,185
========== ======= ======== ==========
Short-term investments available-for-sale...... $ 22,428 $ -- $ -- $ 22,428
========== ======= ======== ==========
F-20
65
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated fair value of investments in fixed
maturity securities at December 31, 1999, are summarized by stated maturity as
follows:
AMORTIZED FAIR
COST VALUE
---------- ----------
(IN THOUSANDS)
Fixed maturities available-for-sale
Due in 2000............................................... $ 96,137 $ 96,420
Due in 2001 -- 2005....................................... 1,904,087 1,849,422
Due in 2006 -- 2010....................................... 1,961,843 1,833,885
Due after 2010............................................ 1,435,591 1,347,580
Mortgage-backed securities................................ 1,608,846 1,553,448
---------- ----------
$7,006,504 $6,680,755
========== ==========
The foregoing data is based on the stated maturities of the securities.
Actual maturities will differ for some securities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
The ratings of the Company's fixed maturity securities at December 31, 1999
are summarized as follows (in thousands):
Treasuries and AAA.......................................... $2,473,459
AA.......................................................... 451,471
A........................................................... 1,633,532
BBB......................................................... 1,596,128
BB.......................................................... 366,656
Less than BB................................................ 159,509
----------
$6,680,755
==========
Ratings are those assigned primarily by Standard & Poor's when available,
with remaining ratings as assigned by Moody's and converted to a generally
comparable Standard & Poor's rating. Bonds not rated by either organization are
included based on the rating prescribed by the Securities Valuation Office of
the National Association of Insurance Commissioners (NAIC). NAIC Class 1 is
considered equivalent to an A or higher rating; Class 2, BBB; Class 3, BB; and
Classes 4-6, less than BB.
Major categories of investment income are summarized as follows:
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Fixed maturity securities................................... $490,123 $456,338 $185,433
Equity securities........................................... 821 1,340 2,118
Mortgage loans on real estate............................... 53,996 45,999 30,373
Real estate................................................. 36 1,629 1,048
Policy loans................................................ 6,580 6,632 5,215
Other....................................................... (2,171) 817 10,036
-------- -------- --------
Gross investment income..................................... 549,385 512,755 234,223
Investment expenses......................................... 9,313 9,383 9,792
-------- -------- --------
Net investment income....................................... $540,072 $503,372 $224,431
======== ======== ========
F-21
66
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment expenses include depreciation on real estate of none, $0.9
million and $0.3 million in the years ended December 31, 1999, 1998 and 1997,
respectively.
Realized gains and losses on investments and provisions for loan losses are
summarized as follows:
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
-------- -------- -------
(IN THOUSANDS)
Securities available-for-sale
Fixed maturity securities
Gross realized gains................................... $ 57,194 $ 45,897 $15,862
Gross realized losses.................................. (44,944) (32,003) (9,335)
Equity securities
Gross realized gains................................... 3,841 7,800 3,670
Gross realized losses.................................. (18,296) (7,771) (57)
Other investments........................................... 1,052 (3,661) 8,219
Provision for loan losses................................... 4,397 (10,374) (4,568)
-------- -------- -------
$ 3,244 $ (112) $13,791
======== ======== =======
The unrealized appreciation on invested assets available-for-sale is
reported as a separate component of stockholders' equity, reduced by adjustments
to deferred acquisition costs, VOBA, and a provision for deferred income taxes.
A summary of the components of the net unrealized appreciation on invested
assets carried at fair value is as follows:
YEARS ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
--------- -------- --------
(IN THOUSANDS)
Unrealized appreciation
Fixed maturity securities................................ $(283,908) $104,676 $119,507
Equity securities........................................ 1,145 (15,261) 1,218
Other investments........................................ (76) 674 304
Closed Block investments................................. (46,045) 42,332 48,090
Deferred policy acquisition costs and value of business
acquired................................................. 119,961 (82,286) (83,426)
Deferred income taxes...................................... 72,959 (22,464) (29,946)
--------- -------- --------
$(135,964) $ 27,671 $ 55,747
========= ======== ========
The change in unrealized appreciation on fixed maturity securities was a
decrease of $389 million, a decrease of $15 million and an increase of $41
million for the years ended December 31, 1999, 1998 and 1997, respectively; the
corresponding amounts for equity securities were a $16 million increase, a $16
million decrease and a $3 million decrease, respectively.
At December 31, 1999, investments in fixed maturity securities with a
carrying amount of $26.3 million were on deposit with state insurance
departments to satisfy regulatory requirements.
No investment in any person or its affiliates exceeded 10 percent of
stockholders' equity at December 31, 1999.
F-22
67
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) MORTGAGE LOANS ON REAL ESTATE
Mortgage loans on real estate consist of commercial and residential
mortgage loan investments as follows:
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Commercial loans............................................ $463,707 $393,842 $460,591
Residential and other mortgage loans........................ 169,525 194,860 17,166
Valuation allowance......................................... (18,046) (22,299) (15,284)
-------- -------- --------
Total mortgage loans...................................... $615,186 $566,403 $462,473
======== ======== ========
The Company manages its credit risk associated with these loans by
diversifying its mortgage portfolio by property type and geographic location and
by seeking favorable loan to value ratios on secured properties. The states with
the highest concentration of mortgage loans were Florida, Texas, and Tennessee
with principal balances of $93.6 million, $84.5 million and $38.4 million,
respectively.
At December 31, 1999 and 1998, the Company's investment in mortgage loans
included $1.7 million and $15.4 million, respectively, in loans that are
considered to be impaired, for which the related allowance for credit losses are
$0.9 million and $4.0 million, respectively. The average recorded investment in
impaired loans during the years ended December 31, 1999 and 1998 was $8.5
million and $18.9 million, respectively. For the years ended December 31, 1999
and 1998, the Company recorded $1.9 million and $0.3 million, respectively, in
interest income on those impaired loans.
The amounts the Company will ultimately realize from these loans could
differ materially from their carrying values because of future developments
affecting the underlying collateral or the borrower's ability to repay the loans
and leases. As of December 31, 1999, there were no material commitments to lend
additional funds to customers whose loans were classified as nonaccrual or
restructured.
No mortgage loan on any one individual property exceeded $13 million at
December 31, 1999.
Provisions for losses are summarized as follows:
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Balance at beginning of year................................ $22,299 $15,284 $11,622
Charge offs, net of recoveries............................ 144 (2,259) (855)
Write down on mortgages sold/transferred to real estate... -- (1,100) (51)
------- ------- -------
Net increase (decrease) for year............................ 144 (3,359) (906)
Provision for losses...................................... (4,397) 10,374 4,568
------- ------- -------
Balance at end of year...................................... $18,046 $22,299 $15,284
======= ======= =======
Write downs on loans sold or transferred to real estate fluctuate between
periods in relation to foreclosure activity and the related underlying
collateral values.
F-23
68
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) DEFERRED POLICY ACQUISITION COSTS
A summary of the policy acquisition costs deferred and amortized are as
follows:
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Balance at beginning of year............................. $319,774 $202,322 $171,957
Policy acquisition costs deferred........................ 153,254 144,734 51,351
Policy acquisition costs amortized....................... (35,176) (27,282) (20,986)
-------- -------- --------
437,852 319,774 202,322
Unrealized (gain) loss on available-for-sale
securities............................................. 91,811 (73,744) (83,426)
-------- -------- --------
Balance at end of year................................... $529,663 $246,030 $118,896
======== ======== ========
The components of the deferred policy acquisition costs are as follows:
DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Universal life insurance................................. $123,425 $116,734 $117,673
Annuity products......................................... 207,396 127,115 39,783
Participating traditional life insurance................. 84,265 58,403 36,006
Non-participating traditional life insurance............. 22,766 17,522 8,860
-------- -------- --------
437,852 319,774 202,322
Unrealized (gain) loss on available-for-sale
securities............................................. 91,811 (73,744) (83,426)
-------- -------- --------
$529,663 $246,030 $118,896
======== ======== ========
Commissions represent approximately 79 percent of deferred policy
acquisition costs.
(5) VALUE OF BUSINESS ACQUIRED
A summary of VOBA established and amortized is as follows:
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Balance at beginning of the year............................ $233,082 $266,014 $ --
Value of business acquired during the year.................. 1,914 -- 268,804
Amortization of VOBA asset.................................. (32,604) (32,932) (2,790)
-------- -------- --------
202,392 233,082 266,014
Unrealized (gain) loss on available-for-sale securities..... 28,150 (8,542) --
-------- -------- --------
Balance at end of year...................................... $230,542 $224,540 $266,014
======== ======== ========
F-24
69
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amortization is recognized in proportion to expected future gross profits
over a 20 year period and is based on the average interest crediting rates which
range from 4.05% to 7.61% for 1999 and over the next five years. Interest
accrued on the unamortized VOBA amounted to $13.0 million and $14.6 million in
1999 and 1998, respectively, which is netted with the VOBA amortization expense.
The estimated amortization for the next five years is as follows:
2000.................................................. 36,468
2001.................................................. 32,855
2002.................................................. 28,119
2003.................................................. 23,472
2004.................................................. 18,116
(6) DEBT AND CAPITAL SECURITIES
Debt consists of the following:
DECEMBER 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
Federal Home Loan Bank community investment long-term
advances with a weighted average interest rate of 6.29% at
December 31, 1999, maturing at various dates through
January, 2014 (A)......................................... $ 16,088 $ 16,051
Revolving credit agreement (B).............................. 32,000 --
Senior notes bearing interest at 6.95% due June, 2005....... 125,000 125,000
-------- --------
$173,088 $141,051
======== ========
- ---------------
(A) The Company has multiple credit arrangements with the Federal Home Loan Bank
(FHLB). In addition to the long-term advances disclosed above, the Company
has a $25 million open secured line of credit and periodically, the Company
borrows amounts under repurchase agreements, of which no amount was
outstanding under either type of facility at December 31, 1999. The carrying
value of the securities pledged to the FHLB under all agreements was $17.7
million at December 31, 1999.
(B) The revolving credit agreement provides for a maximum borrowing of $150
million in 1999 with the balance maturing in October, 2002. The interest
rate is variable, however, the Company may elect to fix the rate for periods
from 30 days to six months. The loan agreement contains various financial
and operating covenants which, among other things, limit future indebtedness
and restrict the amount of future dividend payments.
F-25
70
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Capital securities consist of the following:
DECEMBER 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
AmerUs Capital I 8.85% Capital
Securities Series A due February 1, 2007 (A).............. $ 86,000 $ 86,000
AmerUs Capital II 7.00% Adjustable
Conversion-rate Equity Security Units are due July 27,
2003 (B).................................................. 128,791 130,729
-------- --------
$214,791 $216,729
======== ========
- ---------------
(A) The Capital Securities were issued through a wholly-owned subsidiary trust,
AmerUs Capital I. The sole asset of the trust is the junior subordinated
debentures of the Company in the principal amount of $88.66 million with
interest at 8.85% maturing February 1, 2027. The Company has fully and
unconditionally guaranteed the obligation of the trust under the Capital
Securities and is obligated to mandatorily redeem the securities on February
1, 2027. The Company may prepay the securities at anytime after February 1,
2007.
(B) The Adjustable Conversion-rate Equity Security Units were issued through a
wholly-owned subsidiary trust, AmerUs Capital II. Each unit consists of a
forward common stock purchase contract for a share at a price of $31.5625
per share on July 27, 2001, and a quarterly income preferred security
bearing interest at 6.86% and due July 27, 2003. The Company repurchased
451,000 units on December 31, 1998 at an average unit price of $22.89. On
September 10, 1999, the Company repurchased 61,400 units at an average unit
price of $24.80. These transactions resulted in gains of $2.9 million and
$0.4 million, respectively, which have been reflected as additions to
paid-in capital as the gains are primarily attributable to the change in
value of the forward common stock purchase contract. The Company is
obligated to mandatorily redeem the capital securities on July 27, 2003. At
December 31, 1999, 4,080,500 units were outstanding.
Maturities of debt and capital securities are as follows for each of the
five years ending December 31:
(IN THOUSANDS)
--------------
Year ending December 31,
2000................................................... $ 461
2001................................................... 491
2002................................................... 32,524
2003................................................... 129,349
2004................................................... 595
Thereafter................................................ 224,459
--------
$387,879
========
Interest expense on the debt and capital securities totaled $28.3 million,
$27.1 million and $14.9 million in the years ended December 31, 1999, 1998 and
1997, respectively.
F-26
71
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) INCOME TAXES
Comprehensive federal income tax expense is summarized as follows:
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
(IN THOUSANDS)
Income tax expense (benefit) on:
Operations............................................... $ 32,115 $28,422 $22,022
Other comprehensive income............................... (87,594) (15,635) 12,739
-------- ------- -------
$(55,479) $12,787 $34,761
======== ======= =======
The effective income tax rate on pre-tax income varies from the prevailing
corporate federal income tax rate and is summarized as follows:
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
Corporate federal income tax rate........................... 35.00% 35.00% 35.00%
Tax-exempt investment income................................ (0.72%) (0.34%) (0.54%)
Acquisitions costs and reorganization expenses.............. 0.62% -- 0.22%
Goodwill amortization....................................... 2.62% 3.01% 0.39%
Net benefit of tax credits.................................. (5.28%) (6.04%) (7.88%)
Other items, net............................................ 0.28% (0.48%) 0.31%
------ ------ ------
Effective tax rate.......................................... 32.52% 31.15% 27.50%
====== ====== ======
The Company's federal income tax expense (benefit) is summarized as
follows:
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Current..................................................... $17,140 $25,803 $19,866
Deferred.................................................... 14,975 2,619 2,156
------- ------- -------
Total federal income tax expense............................ $32,115 $28,422 $22,022
======= ======= =======
F-27
72
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The significant components of net deferred income tax assets (liabilities)
are summarized as follows:
DECEMBER 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
Deferred income tax assets
Policy reserves and policyholder funds.................... $292,533 $248,011
Policy acquisition costs capitalized for tax.............. 49,188 14,920
Deferred policy acquisition costs related to unrealized
appreciation........................................... -- 23,953
Net unrealized depreciation on available-for-sale
securities............................................. 114,945 --
Deferred compensation..................................... 9,085 14,881
Credit carryover.......................................... 14,412 --
Other invested assets..................................... 2,407 --
Other..................................................... 17,636 31,617
-------- --------
Total gross deferred income tax asset.................. 500,206 333,382
-------- --------
Deferred income tax liabilities
Deferred policy acquisition costs......................... (182,489) (123,205)
Net unrealized appreciation on available-for-sale
securities............................................. -- (71,510)
Deferred policy acquisition costs related to unrealized
depreciation........................................... (41,986) --
Reinsurance receivable.................................... (113,521) (50,743)
Value of business acquired................................ (70,837) (81,579)
Other..................................................... (18,682) (17,743)
-------- --------
Total gross deferred income tax liability.............. (427,515) (344,780)
-------- --------
Net deferred income tax asset (liability).............. $ 72,691 $(11,398)
======== ========
The Company is required to establish a "valuation allowance" for any
portion of the deferred tax asset that management believes will not be realized.
In the opinion of management, it is more likely than not that it will realize
the benefit of the deferred tax assets, and, therefore, no such valuation
allowance has been established.
Federal income tax returns for the Company for years through 1992 are
closed to further assessment of taxes. The Internal Revenue Service is examining
federal income tax returns of the Company for 1993 through 1996. Management
believes adequate provisions have been made for any additional taxes which may
become due with respect to open years.
(8) EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PLANS
The Company has defined benefit pension plans which covered substantially
all of the Company's employees, as well as employees of certain other subsidiary
companies of AMHC. The plans provided for benefits based upon years of service
and the employee's compensation. The Company froze the defined benefit pension
plans effective December 31, 1995, and has recognized its portion of a
curtailment gain amounting to $6.2 million. Effective January 1, 1996, the
defined benefit pension plans were replaced by a defined contribution savings
and retirement plan which also replaced the Company's defined contribution
pension plans.
F-28
73
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
Change in benefit obligation
Benefit obligation at beginning of year................... $ 42,202 $ 40,865
Interest cost............................................. 2,690 2,916
Amendments................................................ 1,141 799
Actuarial (gain)/loss..................................... (3,987) 627
Settlements............................................... 632 --
Actual benefits paid...................................... (10,640) (3,005)
-------- --------
Benefit obligation at end of year...................... $ 32,038 $ 42,202
======== ========
Change in plan assets
Fair value of plan assets at beginning of year............ $ 43,591 $ 43,392
Actual return on plan assets.............................. (2,399) 3,250
Company contribution...................................... 5,898 348
Benefits paid and transfers............................... (10,640) (3,399)
-------- --------
Fair value of plan assets at end of year............... $ 36,450 $ 43,591
======== ========
Reconciliation of funded status
Accumulated benefit obligation............................ $(32,038) $(42,202)
Projected benefit obligation.............................. (32,038) (42,202)
Market value of plan assets............................... 36,450 43,591
-------- --------
Funded status............................................. 4,412 1,389
Unrecognized transition obligation........................ (16) (55)
Unrecognized prior service cost........................... 421 248
Unrecognized net (gain)/loss.............................. 1,122 812
-------- --------
Prepaid benefit cost...................................... $ 5,939 $ 2,394
======== ========
Amounts recognized in the consolidated balance sheet consist
of
Liabilities
Accrued pension cost................................... $ (3,374) $ (7,158)
Additional minimum liability........................... -- (1,898)
-------- --------
Total accrued pension liability...................... $ (3,374) $ (9,056)
======== ========
Assets
Prepaid pension cost................................... $ 9,313 $ 9,312
Intangible asset....................................... -- 420
-------- --------
Total assets......................................... $ 9,313 $ 9,732
======== ========
Other comprehensive income
Accumulated other comprehensive income.................... $ -- $ 1,718
Prepaid pension cost...................................... $ 5,939 $ 2,394
Weighted-average assumptions as of end of year
Discount rate............................................. 8.00% 6.75%
Expected return on plan assets............................ 8.00% 8.00%
Rate of compensation increase............................. N/A N/A
F-29
74
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Components of net periodic benefit cost
Service cost.............................................. $ -- $ -- $ 784
Interest cost............................................. 2,690 2,916 3,457
Expected return on plan assets............................ (3,368) (3,463) (4,006)
Amortization of transition obligation..................... (5) (6) (61)
Amortization of prior service cost........................ (32) 769 (30)
Recognized actuarial loss................................. 27 40 22
-------- -------- --------
Net periodic benefit cost................................. $ (688) $ 256 $ 166
Settlement cost........................................... 2,408 -- 141
-------- -------- --------
Total expense.......................................... $ 1,720 $ 256 $ 307
======== ======== ========
DEFINED CONTRIBUTION PENSION PLANS
The Company has a defined contribution savings and retirement plan. Company
contributions are non-discretionary and consist of a matching contribution of an
amount equal to 125 percent of employee contributions, up to 4 percent of annual
employee compensation, and an annual contribution of an amount equal to 4
percent of annual employee compensation. Beginning in 1999, the Company uses a
combination of cash and Company common stock for the annual contribution. The
shares for this purpose are provided by the Company's leveraged Employee Stock
Ownership Plan. Compensation expense for the employer match and annual
contribution amounted to $4.1 million, $3.1 million and $3.7 million in 1999,
1998 and 1997, respectively, including $0.5 million of ESOP compensation expense
in 1999.
LEVERAGED EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the acquisition of AmVestors, the Company has a
leveraged Employee Stock Ownership Plan (ESOP) which was sponsored by AmVestors
for all AmVestors full-time employees with one year of service. The ESOP
acquired AmVestors stock, which was subsequently exchanged for the Company's
stock, through the proceeds of a note payable to American Investors Life
Insurance Company, a subsidiary of AmVestors. The note bears interest at 7.0%
and is payable in annual installments through December 30, 2002. The note had an
unpaid principal balance of $1.4 million and $1.8 million at December 31, 1999
and 1998, respectively.
The Company makes annual contributions to the ESOP equal to the ESOP's debt
service less dividends received by the ESOP. All dividends received by the ESOP
are used to pay debt service. The ESOP shares initially were pledged as
collateral for its debt. As the debt is repaid, shares are released from
collateral and allocated to active employees of the Company and certain other
subsidiaries of AMHC, based on the proportion of debt service paid in the year.
Beginning in 1999, the released shares are used to fund a portion of the
Company's annual defined contribution savings and retirement plan contribution.
The Company accounts for its ESOP in accordance with Statement of Position
93-6. Accordingly, as shares are released from collateral, compensation expense,
or a reduction in the annual defined contribution savings and retirement plan
liability, is reported equal to the current market price of the shares, and the
shares become outstanding for earnings-per-share (EPS) computations. ESOP
compensation expense was $0.5 million, $0.4 million and $0.3 million for the
years ended December 31, 1999, 1998 and 1997, respectively.
F-30
75
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The ESOP shares were as follows:
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Allocated shares............................................ 169,439 148,336 152,149
Unallocated shares.......................................... 79,307 102,362 123,909
-------- -------- --------
Total ESOP shares........................................... 248,746 250,698 276,058
======== ======== ========
Fair market value of unallocated shares (in thousands)...... $ 1,824 $ 2,250 $ 4,570
NONQUALIFIED PENSION PLAN
The Company has a nonqualified pension plan covering substantially all of
AmerUs Life's career and general agents. Accumulated benefits of the plan are
unfunded and have been included in other liabilities at December 31, 1999 and
1998, amounting to $21.2 million, and $16.9 million, respectively. Total
nonqualified pension expense amounted to $0.9 million, $0.5 million, and $0.7
million for the years ended December 31, 1999, 1998 and 1997, respectively.
POSTRETIREMENT PLANS
The Company has postretirement benefit plans which provide eligible
participants and dependents with certain medical, dental and life insurance
benefits. The Company's plan for medical and life insurance benefits is combined
with that of the subsidiaries of AMHC.
F-31
76
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31,
------------------
1999 1998
------- -------
(IN THOUSANDS)
Change in benefit obligation
Benefit obligation at beginning of year................... $ 7,585 $ 8,918
Service cost.............................................. 166 268
Interest cost............................................. 481 536
Plan participants' contributions.......................... 58 52
Actuarial (gain)/loss..................................... (964) (519)
Settlements............................................... -- (904)
Actual benefits paid...................................... (651) (766)
------- -------
Benefit obligation at end of year...................... $ 6,675 $ 7,585
======= =======
Change in plan assets
Fair value of plan assets at beginning of year............ $ -- $ --
Company contribution...................................... 593 714
Plan participant contribution............................. 58 52
Benefits paid............................................. (651) (766)
------- -------
Fair value of plan assets at end of year............... $ -- $ --
======= =======
Reconciliation of funded status
Accumulated postretirement benefit obligation............. $(6,675) $(7,585)
Market value of plan assets............................... -- --
------- -------
Funded status............................................. $(6,675) $(7,585)
Unrecognized prior service cost........................... 740 823
Unrecognized net (gain)/loss.............................. (2,723) (1,470)
------- -------
Prepaid/(accrued) benefit cost............................ $(8,658) $(8,232)
======= =======
Weighted-average assumptions as of end of year
Discount rate............................................. 8.00% 6.75%
Initial weighted health care cost trend rate.............. 7.20% 7.50%
Ultimate health care cost trend rate...................... 5.00% 5.00%
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
(IN THOUSANDS)
Components of net periodic benefit cost
Service cost.............................................. $ 166 $ 268 $ 363
Interest cost............................................. 481 536 592
Amortization of prior service cost........................ 83 83 83
Recognized actuarial loss................................. (68) (62) (59)
----- ----- -----
Net periodic benefit cost................................. 662 825 979
Settlement (gain)......................................... -- (904) --
----- ----- -----
Total (income) expense................................. $ 662 $ (79) $ 979
===== ===== =====
F-32
77
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in the
assumed health care cost trend rates would have the following effects in 1999:
1% POINT 1% POINT
INCREASE (DECREASE)
-------- ----------
(IN THOUSANDS)
Effect on total of service and interest cost components..... $ 4.3 $ (6.3)
Effect on postretirement benefit obligation................. $46.4 $(48.6)
(9) RELATED PARTY TRANSACTIONS
The following summarizes transactions of the Company with affiliates:
YEARS ENDED DECEMBER 31,
----------------------------
1999 1998 1997
------ -------- --------
(IN THOUSANDS)
Dividend to AmerUs Group.................................... $6,953 $ 6,948 $ 5,012
Management, administrative, data processing, rent and other
services fee income from affiliates....................... 7,412 10,750 10,983
Interest income from financings of affiliates............... 1,350 3,154 5,300
Interest expense paid to an affiliate on capital
securities................................................ 1,699 1,387 --
Commissions paid to affiliates for the sale of insurance
products.................................................. -- 877 1,833
Rent paid to an affiliate................................... 3,525 3,205 1,790
Real estate management and mortgage servicing fees paid to
an affiliate.............................................. 1,213 1,421 1,050
Investments in partnerships and joint ventures in which an
affiliate has an interest................................. 5,788 7,149 11,987
Investments in mortgages and other loans from affiliated
companies and joint ventures.............................. 22,088 20,873 46,004
Contribution of joint venture interests and sale of
partnership interests to partnerships in which an
affiliate has an interest................................. -- 4,739 10,979
Purchase of limited partnership interests and notes
receivable from an affiliate.............................. 8,756 -- --
Purchase of mortgage loans from affiliates.................. 13,100 175,496 111,361
Sale of limited partnership interest to an affiliate........ -- 11,933 --
Redemption of adjustable conversion-rate equity security
units from an affiliate................................... -- 10,324 --
Assumption of equity-index annuities from an affiliate...... 59,561 -- --
(10) REINSURANCE
At December 31, 1999, the Company's maximum retention limit for acceptance
of risk on life insurance was $1 million. The Company has indemnity reinsurance
agreements with various companies whereby life insurance in excess of its
retention limits are reinsured. Insurance in force ceded to nonaffiliated
companies under risk sharing arrangements at December 31, 1999, 1998 and 1997,
totaled approximately $5,616 million, $3,779 million and $4,102 million,
respectively.
In January, 2000, the Company's maximum retention limit was reduced to $0.1
million for the majority of policies issued since July 1, 1996 and for the
majority of new business going forward.
F-33
78
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net premiums and amounts earned were as follows:
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
(IN THOUSANDS)
Direct premiums and amounts assessed against
policyholders............................................ $101,622 $89,848 $56,307
Reinsurance assumed........................................ 1,750 1,036 1,375
Reinsurance ceded.......................................... (13,851) (9,687) (9,555)
-------- ------- -------
Net premiums and amounts earned............................ $ 89,521 $81,197 $48,127
======== ======= =======
At December 31, 1999 and 1998, the Company reinsured 25% and 39%,
respectively, of its equity index annuity reserves amounting to $108.6 million
and $92.6 million, respectively, with an unaffiliated reinsurer. As of the same
dates, the Company also reinsured approximately 1% in each year of its deferred
annuity reserves amounting to $44.2 million and $59.3 million, respectively,
with an unaffiliated reinsurer.
In the third quarter of 1999, the Company entered into a reinsurance
agreement for the assumption of a block of equity-index annuities of its joint
venture partner, AVLIC. The Company received assets of approximately $57 million
and assumed liabilities of approximately $59 million. A value of business
acquired asset of approximately $2 million was recorded in connection with this
transaction.
The Company is contingently liable for the portion of the policies
reinsured under each of its existing reinsurance agreements in the event the
reinsurance companies are unable to pay their portion of any reinsured claim.
Management believes that any liability from this contingency is unlikely.
However, to limit the possibility of such losses, the Company evaluates the
financial condition of its reinsurers and monitors concentration of credit risk.
(11) COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements with various partnerships in which
a subsidiary of AMHC has an interest. Pursuant to these agreements the Company
is obligated to make future capital contributions to the partnerships of up to
$58.3 million.
The Company is party to financial instruments in the normal course of
business to meet the financing needs of its customers having risk exposure not
reflected in the balance sheet. These financial instruments include commitments
to extend credit, guarantees and standby letters of credit. Commitments to
extend credit are agreements to lend to customers. Commitments generally have
fixed expiration dates and may require payment of a fee. Since many commitments
expire without being drawn upon, the total amount of commitments does not
necessarily represent future cash requirements. The Company has also guaranteed
two loans for a fee. At December 31, 1999, outstanding commitments to extend
credit totaled approximately $25.7 million and loan guarantees totaled
approximately $6.6 million.
The Company has an agreement with Bank One, N.A. whereby the Company
guarantees the payment of loans made to certain of the Company's managers and
executives for the purpose of purchasing Common Stock and ACES pursuant to the
Stock Purchase Program. The liability of the Company in respect of the principal
amount of loans is limited to $25 million. The Company has also guaranteed
interest and all other fees and obligations owing on the loans. Each participant
in the program has agreed to repay the Company for any amounts paid by the
Company under the guarantee in accordance with a reimbursement agreement entered
into between the participant and the Company.
AmerUs Life and its joint venture partner are contingently liable in the
event the joint venture, Ameritas Variable Life Insurance Company (AVLIC),
cannot meet its policyholder obligations. At December 31,
F-34
79
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999, AVLIC had statutory assets of $2,559.1 million, liabilities of $2,517.4
million, and surplus of $41.6 million.
In the ordinary course of business, the Company and its subsidiaries are
engaged in certain litigation, none of which management believes is material to
the Company's results of operations.
(12) STOCKHOLDERS' EQUITY
Generally, the stockholders' equity of the Company's insurance subsidiaries
available for distribution to the Company is limited to the amounts that the
insurance subsidiaries' net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements; however,
payments of such amounts as dividends may be subject to approval by regulatory
authorities. In 2000, the Company's insurance subsidiaries can distribute
approximately $61.1 million in the form of dividends to the Company without
prior approval of such regulatory authorities.
STOCK OPTION PLANS
The Company has two stock incentive plans authorizing the issuance of
incentive and non-qualified stock options to employees, officers and
non-employee directors of the Company. The Company has reserved 1,400,000 shares
and 150,000 shares of Class A Common Stock for issuance under these plans.
In conjunction with the acquisition of AmVestors, the Company has two
additional plans in which no additional shares may be granted. They are a
non-qualified stock option plan and an incentive stock option plan.
The Company also has a non-employee stock option plan authorizing the
issuance of stock options or SARs to insurance agents and other non-employees of
the Company. The Company has reserved 100,000 shares of Class A Common Stock for
issuance under this plan. The terms and conditions under this plan are the same
as under the employee stock incentive plans.
The option price per share under all plans may not be less than the fair
value of the Company's common stock on the date of grant and the term of the
option may not be longer than ten years. Generally, all options have a
three-year vesting schedule with one-third of the options granted vesting at the
end of each of the three years.
A summary of the Company's stock option plan follows:
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
Outstanding, beginning of year................... 1,327,473 $25.02 1,485,709 $23.57 -- $ --
Granted at market price.......................... 275,750 21.61 163,550 31.19 684,000 28.09
Conversion of Amvestors stock options............ -- -- -- -- 801,709 19.72
Exercised........................................ (10,442) 19.15 (268,786) 20.51 -- --
Forfeited........................................ (83,017) 28.04 (53,000) 28.19 -- --
--------- ------ --------- ------ --------- ------
Outstanding, end of year......................... 1,509,764 $24.27 1,327,473 $25.02 1,485,709 $23.57
========= ====== ========= ====== ========= ======
Exercisable, end of year......................... 940,543 $23.62 700,381 $22.03 801,709 $19.72
========= ====== ========= ====== ========= ======
F-35
80
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
under the Company's option plan as of December 31, 1999:
OPTIONS OUTSTANDING
--------------------------------------
WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OPTIONS CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE IN YEARS PRICE
- ------------------------ ----------- ------------- --------
$10.88-$14.50.............................................. 13,448 4.9 $13.01
$14.51-$18.12.............................................. 105,225 4.3 15.17
$18.13-$21.75.............................................. 417,954 7.2 19.66
$21.76-$23.37.............................................. 243,604 5.1 23.35
$23.38-$29.00.............................................. 590,333 7.5 27.88
$29.01-$32.62.............................................. 99,200 8.5 31.19
$32.63-$36.25.............................................. 40,000 8.0 35.63
--------- --- ------
1,509,764 6.9 $24.27
========= === ======
The following table summarizes information about stock options exercisable
under the Company's option plan as of December 31, 1999:
OPTIONS EXERCISABLE
-----------------------
WEIGHTED
AVERAGE
OPTIONS EXERCISE
RANGE OF EXERCISE PRICES EXERCISABLE PRICE
- ------------------------ ----------- --------
$10.88-$14.50............................................... 13,448 $13.01
$14.51-$18.12............................................... 105,225 15.17
$18.13-$21.75............................................... 240,541 19.12
$21.76-$23.37............................................... 133,082 23.24
$23.38-$29.00............................................... 394,833 27.88
$29.01-$32.62............................................... 33,409 31.19
$32.63-$36.25............................................... 20,005 35.42
------- ------
940,543 $23.62
======= ======
The estimated weighted average fair value of options granted in 1999, 1998
and 1997 was $9.63, $13.03 and $11.68 per share, respectively. The Company
applies Accounting Principles Board Opinion 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation expense has
been recognized for its option plans. Had compensation expense for the Company's
option plans been determined based on the fair value at the grant dates for
awards under those plans consistent with the method prescribed by SFAS 123, the
Company's net earnings and diluted earnings per share for the years ended
December 31, 1999, 1998 and 1997 would have been reduced to the pro forma
amounts indicated below:
F-36
81
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
Net earnings (in thousands):
As reported............................................... $66,654 $62,829 $58,059
Pro forma................................................. $64,461 $61,051 $57,357
Basic earnings per share:
As reported............................................... $ 2.20 $ 1.88 $ 2.47
Pro forma................................................. $ 2.13 $ 1.82 $ 2.44
Diluted earnings per share:
As reported............................................... $ 2.20 $ 1.86 $ 2.46
Pro forma................................................. $ 2.13 $ 1.81 $ 2.43
The fair value of options granted was estimated on the date of grant using
the Black-Scholes pricing model with an expected life equal to the contractual
expiration and the following weighted average assumptions:
1999 1998 1997
----- ----- -----
Expected Volatility......................................... 37.00% 25.00% 25.00%
Risk-free Interest Rate..................................... 5.39% 5.69% 6.29%
Dividend Yield.............................................. 1.86% 1.26% 1.43%
RESTRICTED STOCK
The Company has awarded common stock to eligible employees and non-employee
directors under the two stock incentive plans. The plans have restriction
periods of two to three years tied to employment and/or service. A portion of
the awards were recorded at the market value on the date of the grant as
unearned compensation since common shares were legally issued on that date. The
initial values of these grants are amortized over the restriction periods, net
of forfeitures. The remaining awards, for which common shares will not be issued
until the end of the restriction period, are being accrued net of forfeitures
over the required service period at the market value on the date of issuance.
Restricted stock and compensation expense information is as follows:
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
Outstanding, beginning of year........................... 17,899 $31.07 -- $ -- -- $ --
Granted at market price.................................. 18,946 23.01 19,949 31.17 -- --
Exercised................................................ -- -- -- -- -- --
Forfeited................................................ (600) 31.56 (2,050) 31.56 -- --
------ ------ ------ ------ ------ ------
Outstanding, end of year................................. 36,245 $26.85 17,899 $31.07 -- $ --
====== ====== ====== ====== ====== ======
Compensation expense (in thousands)...................... $ 335 $ 264 $ --
====== ====== ======
STOCK APPRECIATION RIGHTS
As part of the stock incentive plans and the non-employee stock option
plan, the Board of Directors is authorized to grant stock appreciation rights
("SARs") to employees, officers, agents and other non-employees in tandem with
stock options. A SAR can be exercised only to the extent the option with respect
to
F-37
82
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which it is granted is not exercised, and is subject to the same terms and
conditions as the option to which it relates. Issuance of SARs is made at the
sole discretion of the Board of Directors.
The Company's SARs are summarized as follows:
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1999 1998 1997
----------------- ------------------ -----------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------- -------- ------ --------
Rights outstanding, beginning of year....................... -- $ -- 81,024 $21.94 -- $ --
Granted at market price..................................... 13,500 23.31 -- -- -- --
Conversion of Amvestors rights.............................. -- -- -- -- 81,024 21.94
Exercised................................................... -- -- (81,024) 21.94 -- --
------ ------ ------- ------ ------ ------
Rights outstanding, end of year............................. 13,500 $23.31 -- $ -- 81,024 $21.94
====== ====== ======= ====== ====== ======
Compensation expense (in thousands)......................... $ -- $ -- $ --
====== ====== ======
STOCK WARRANTS
In conjunction with the acquisition of AmVestors, the Company has
outstanding warrants to purchase shares of the Company's Class A common stock.
The Company's stock warrant activity is summarized as follows:
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Warrants outstanding, beginning of year..................... 473,596 477,770 --
Acquisition of AmVestors warrants........................... -- -- 477,770
Exercise of warrants........................................ -- (4,174) --
-------- -------- --------
Warrants outstanding, end of year........................... 473,596 473,596 477,770
======== ======== ========
Compensation expense (in thousands)......................... $ -- $ -- $ --
======== ======== ========
The remaining warrants are exercisable at $24.42 per share and expire on
April 2, 2002.
(13) STATUTORY ACCOUNTING PRACTICES
The Company's insurance subsidiaries' statutory net income was $49.4
million, $61.0 million and $59.0 million in the years ended December 31, 1999,
1998, and 1997, respectively. The Company's insurance subsidiaries' statutory
surplus and capital was $444.6 million, $472.1 million and $577.3 million at
December 31, 1999, 1998 and 1997, respectively. The minimum capital and surplus
requirements in the states of Iowa and Kansas are $5.0 million and $1.2 million,
respectively.
The Company's insurance subsidiaries are domiciled in Iowa and Kansas and
prepare their statutory-basis financial statements in accordance with accounting
practices prescribed or permitted by those respective state insurance
departments. Prescribed statutory accounting practices include state laws,
regulations, and general administrative rules, as well as a variety of
publications of the NAIC. Permitted statutory accounting practices encompass all
accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state and may change
in the future. The NAIC has codified statutory accounting practices which are
expected to constitute the only source of prescribed statutory accounting
practices and are effective in 2001. Codification will change prescribed
statutory accounting practices and may result in changes to the accounting
practices that insurance enterprises
F-38
83
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
use to prepare their statutory financial statements. The Company is currently
evaluating the impact of codification on its statutory financial statements,
however, the changes will not have a material impact on statutory surplus.
The respective insurance departments impose minimum risk-based capital
(RBC) requirements on insurance enterprises that were developed by the NAIC. The
formulas for determining the amount of RBC specify various weighting factors
that are applied to financial balances or various levels of activity based on
the perceived degree of risk. Regulatory compliance is determined by a ratio
(the Ratio) of the enterprise's regulatory total adjusted capital, as defined by
the NAIC, to its authorized control level, RBC, as defined by the NAIC.
Enterprises below specific trigger points or ratios are classified within
certain levels, each of which requires specified corrective action. The life
insurance subsidiaries have exceeded the authorized control level RBC
requirements in each of the years since the inception of the RBC requirement in
1993.
(14) FINANCIAL INSTRUMENTS
The Company utilizes a variety of off balance sheet financial instruments
as part of its efforts to hedge and manage fluctuations in the market value of
its portfolio of available-for-sale securities, attributable to changes in
general interest rate levels, and to manage duration mismatch of assets and
liabilities. Those instruments include interest rate exchange agreements (swaps,
caps, and swaptions) and equity-indexed agreements (options) and involve
elements of credit and market risks in excess of the amounts recognized in the
accompanying financial statements at a given point in time. The contract or
notional amounts of those instruments reflect the extent of involvement in the
various types of financial instruments.
The Company's exposure to credit risk is the risk of loss from a
counterparty failing to perform according to the terms of the contract. That
exposure includes settlement risk (i.e., the risk that the counterparty defaults
after the Company has delivered funds or securities under terms of the contract)
that would result in an accounting loss and replacement cost risk (i.e., the
cost to replace the contract at current market rates should the counterparty
default prior to settlement date). To limit exposure associated with
counterparty nonperformance on interest rate exchange agreements, the Company
enters into transactions with only highly rated counterparties.
The credit risk on all financial instruments, whether on or off the balance
sheet, is controlled through an ongoing credit review, approval, and monitoring
process. The Company determines, on an individual counterparty basis, the need
for collateral or other security to support financial instruments with credit
risk and establishes individual and aggregate counterparty exposure limits.
F-39
84
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's outstanding derivative positions shown in notional or
contract amounts, along with their carrying value and estimated fair values, are
summarized as follows:
DECEMBER 31, 1999
----------------------------------
NOTIONAL CARRYING FAIR
AMOUNT VALUE VALUE
---------- -------- --------
(IN THOUSANDS)
Interest rate caps....................................... $ -- $ -- $ --
Interest rate swaps...................................... 385,000 -- 3,336
Options.................................................. 255,914 91,888 121,701
Futures.................................................. -- -- --
---------- ------- --------
$ 640,914 $91,888 $125,037
========== ======= ========
DECEMBER 31, 1998
----------------------------------
NOTIONAL CARRYING FAIR
AMOUNT VALUE VALUE
---------- -------- --------
(IN THOUSANDS)
Interest rate caps....................................... $1,050,000 $ 1,749 $ 457
Interest rate swaps...................................... 200,000 -- (1,879)
Options.................................................. 86,035 49,167 70,862
Futures.................................................. -- -- (298)
---------- ------- --------
$1,336,035 $50,916 $ 69,142
========== ======= ========
INTEREST RATE EXCHANGE AGREEMENTS
The Company enters into interest rate exchange agreements to reduce and
manage interest rate risk associated with individual assets and liabilities and
its overall aggregate portfolio. Interest rate swap agreements, which expire in
2002, 2003 and 2004, generally involve the exchange of interest payments. The
interest rate cap agreements involve the payment of a maximum fixed interest
rate when an indexed rate exceeds that fixed rate. Swaption agreements involve
the right to enter into a swap transaction at a pre-specified price. These
agreements are used in conjunction with interest rate caps to protect against
rising rates. The amounts to be received or paid pursuant to those agreements
are accrued and recognized in the accompanying consolidated statements of income
through an adjustment to investment income over the life of the agreements. The
net effect on income from amortization and interest paid or received was a
decrease of $1.5 million, $0.8 million and $0.5 million in 1999, 1998 and 1997,
respectively. Gains or losses realized on closed or terminated agreements
accounted for as hedges are deferred and amortized to investment income on a
constant yield basis over the shorter of the life of the agreements or the
expected remaining life of the underlying assets or liabilities.
EQUITY-INDEXED AGREEMENTS
The Company enters into financial agreements to manage the equity risk in
its equity-indexed annuities. Call options, which expire beginning in 2000
through 2009, are linked to the index in which the equity-indexed annuity
crediting rates are based. This allows the Company to participate in index
increases if the market advances as a hedge against the higher credited rates.
The amounts to be received or paid pursuant to these agreements are accrued and
recognized as an adjustment to income over the life of the agreements.
F-40
85
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows unrealized gains and losses on derivative
positions:
DECEMBER 31, 1999
-----------------------------------------------------
TOTAL NET UNREALIZED
NOTIONAL UNREALIZED UNREALIZED GAINS
VALUE GAINS (LOSSES) (LOSSES)
---------- ---------- ---------- --------------
(IN THOUSANDS)
Interest rate caps............................ $ -- $ -- $ -- $ --
Interest rate swaps........................... 385,000 3,336 -- 3,336
Options....................................... 255,914 29,813 -- 29,813
Futures....................................... -- -- -- --
---------- ------- ------- -------
$ 640,914 $33,149 $ -- $33,149
========== ======= ======= =======
DECEMBER 31, 1998
-----------------------------------------------------
TOTAL NET UNREALIZED
NOTIONAL UNREALIZED UNREALIZED GAINS
VALUE GAINS (LOSSES) (LOSSES)
---------- ---------- ---------- --------------
(IN THOUSANDS)
Interest rate caps............................ $1,050,000 $ -- $(1,292) $(1,292)
Interest rate swaps........................... 200,000 -- (1,879) (1,879)
Options....................................... 86,035 21,695 -- 21,695
Futures....................................... -- -- (298) (298)
---------- ------- ------- -------
$1,336,035 $21,695 $(3,469) $18,226
========== ======= ======= =======
MATURITY SCHEDULE BY YEAR FOR DERIVATIVE PRODUCTS
-----------------------------------------------------
2000 2001 2002 2003 2004
------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
Pay fixed swaps:
Notional amount.......... $ -- $ -- $50,000 $150,000 $185,000
Weighted average:
Receive rate(A).......... 6.313% 6.313% 6.313% 6.339% 6.490%
Pay rate(B).............. 6.258% 6.258% 6.258% 6.281% 6.407%
Options:
Notional amount.......... $79,524 $ -- $ -- $ 44,194 $ 53,205
MATURITY SCHEDULE BY YEAR FOR DERIVATIVE PRODUCTS
---------------------------------------------------
2005 2006 2007 2008 2009
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Pay fixed swaps:
Notional amount.......... $ -- $ -- $ -- $ -- $ --
Weighted average:
Receive rate(A).......... -- -- -- -- --
Pay rate(B).............. -- -- -- -- --
Options:
Notional amount.......... $52,156 $12,200 $ 4,700 $ 3,830 $ 6,105
- ---------------
(A) The actual variable rates in the agreements are based on a constant maturity
treasury (CMT) plus a spread and the table assumes that such rates will
remain constant at December 31, 1999, levels. To the extent that actual
interest rate information will change accordingly.
(B) The actual variable rates in the agreements are based on three-month LIBOR
and the table assumes that such at December 31, 1999, levels. To the extent
that actual rates change, the variable interest rate information will change
accordingly.
(15) ACQUISITIONS
On October 23, 1997, the Company acquired all of the outstanding capital
stock of Delta in exchange for cash of approximately $165 million. The
acquisition was accounted for using the purchase method of accounting with
goodwill of $69.4 million established which is being amortized on a
straight-line basis over 30 years. The operations of Delta for the period from
October 23, 1997 through December 31, 1997 have been included in the
consolidated statement of income of the Company.
On December 19, 1997, the Company acquired AmVestors in a stock exchange
valued at approximately $350 million. The acquisition was accounted for using
the purchase method of accounting with goodwill of $152.9 million established
which is being amortized on a straight-line basis over 30 years. The operations
of
F-41
86
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AmVestors for the period of December 19, 1997 through December 31, 1997 have
been included in the consolidated statement of income of the Company.
The following table sets forth certain pro forma operating data of the
Company for the year ended December 31, 1997. This pro forma data assumes the
acquisitions of Delta and AmVestors occurred on January 1, 1997.
YEAR ENDED DECEMBER 31,
1997
-----------------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Pro forma operating data:
Total revenue............................................. $712,400
Net income................................................ $ 75,000
Diluted earnings per share of common stock.................. $ 2.14
(16) EARNINGS PER SHARE (EPS)
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------- -------------------------
NUMBER PER NUMBER PER NUMBER PER
NET OF SHARE NET OF SHARE NET OF SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- ------ ------ ------- ------ ------ ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Basic EPS
Net Income............................. $66,654 30,230 $2.20 $62,829 33,458 $1.88 $58,059 23,537 $ 2.47
Effect of dilutive securities
Options................................ -- 77 -- -- 162 (0.01) -- 29 (0.01)
Warrants............................... -- -- -- -- 76 (0.01) -- 5 --
Stock appreciation rights.............. -- -- -- -- -- -- -- 1 --
------- ------ ----- ------- ------ ----- ------- ------ ------
Diluted EPS.............................. $66,654 30,307 $2.20 $62,829 33,696 $1.86 $58,059 23,572 $ 2.46
======= ====== ===== ======= ====== ===== ======= ====== ======
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Values of Financial Instruments,"
requires disclosures of fair value information about financial instruments,
whether recognized or not recognized in a company's balance sheet, for which it
is practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using discounted cash flow or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rates and estimates of the amount and
timing of future cash flows. SFAS 107 excludes certain insurance liabilities and
other non-financial instruments from its disclosure requirements. The fair value
amounts presented herein do not include an amount for the value associated with
customer or agent relationships, the expected interest margin (interest earnings
over interest credited) to be earned in the future on investment-type products
or other intangible items. Accordingly, the aggregate fair value amounts
presented herein do not necessarily represent the underlying value of the
Company; likewise, care should be exercised in deriving conclusions about the
Company's business or financial condition based on the fair value information
presented herein.
The Company closely monitors the level of its insurance liabilities, the
level of interest rates credited to its interest-sensitive products and the
assumed interest margin provided for within the pricing structure of its other
products. Those amounts are taken into consideration in the Company's overall
management of interest rate risk that attempts to minimize exposure to changing
interest rates through the matching of investment maturities with amounts
expected to be due under insurance contracts. As such, the Company believes that
it has reduced the volatility inherent in its fair value adjusted stockholders'
equity, although such volatility will
F-42
87
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not be reduced completely. The Company has used discount rates in the
determination of fair values for its liabilities that are consistent with market
yields for related assets. The use of the asset market yield is consistent with
management's opinion that the risks inherent in the Company's asset and
liability portfolios are similar and the fact that fair values for both assets
and liabilities generally will react in much the same manner during periods of
interest rate changes. However, that assumption might not result in fair values
that are consistent with values obtained through an actuarial appraisal of the
Company's business or values that might arise in a negotiated transaction.
The following presentation reflects fair values for those instruments
specifically covered by SFAS 107, along with fair value amounts for those
traditional insurance liabilities for which disclosure is permitted but not
required; the fair values for all other assets and liabilities have been
reported at their carrying amounts.
VALUATION METHODS AND ASSUMPTIONS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Short-term investments and other investments: the carrying amounts for
these instruments approximate their fair values.
Fixed maturities and equity securities: fair values for bonds are based on
quoted market prices or dealer quotes. If a quoted market price is not
available, fair value is estimated using values obtained from independent
pricing services or, in the case of private placements, are estimated by
discounting expected future cash flows using a current market rate applicable to
the yield, credit quality, and maturity of the investments. The fair values for
preferred and common stocks are based on quoted market prices.
Mortgage loans on real estate: for all performing fixed interest rate
loans, the estimated net cash flows to maturity were discounted to derive an
estimated market value. The discount rate used was based on the individual
loan's remaining weighted average life and a basis point spread based on the
market conditions for the type of loan and credit quality. These spreads were
over the December 31, 1999, United States Treasury yield curve. Performing
variable rate commercial loans and residential loans were valued at the current
outstanding balance. Loans which have been restructured, in foreclosure,
significantly delinquent or are to affiliates were valued primarily at the lower
of the estimated net cash flows to maturity discounted at a market rate of
interest or the current outstanding principal balance.
Hedging instruments: fair values for derivative securities are based on
pricing models or formulas using current assumptions and are classified as other
assets or other liabilities.
Policy reserves: fair values of the Company's liabilities under contracts
not involving significant mortality or morbidity risks (annuities primarily) are
stated at the cost the Company would incur to extinguish the liability (i.e.,
the cash surrender value).
Debt and capital securities: fair values for debt are estimated using
discounted cash flow analysis based on the Company's current incremental
borrowing rate for similar types of borrowing arrangements.
The carrying amounts of other financial assets, dividends payable to
policyowners and policy reserves including significant mortality or morbidity
risks approximate their fair values.
F-43
88
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated fair values of the Company's significant financial
instruments are as follows:
DECEMBER 31,
----------------------------------------------------
1999 1998
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
FINANCIAL ASSETS:
Securities available-for-sale:
Fixed maturities...................... $6,680,755 $6,680,755 $6,746,544 $6,746,544
========== ========== ========== ==========
Equity securities..................... $ 14,585 $ 14,585 $ 32,185 $ 32,185
========== ========== ========== ==========
Short-term investments................ $ 155 $ 155 $ 22,428 $ 22,428
========== ========== ========== ==========
Mortgage loans on real estate........... $ 615,186 $ 639,102 $ 566,403 $ 616,806
========== ========== ========== ==========
Other investments, excluding options.... $ 177,270 $ 177,270 $ 156,623 $ 156,623
========== ========== ========== ==========
Interest rate swaps:
Net receivable position............... $ -- $ 3,336 $ -- $ --
========== ========== ========== ==========
Net payable position.................. $ -- $ -- $ -- $ (1,879)
========== ========== ========== ==========
Interest rate caps...................... $ -- $ -- $ 1,749 $ 457
========== ========== ========== ==========
Options................................. $ 91,888 $ 121,701 $ 49,167 $ 70,862
========== ========== ========== ==========
Futures................................. $ -- $ -- $ -- $ (298)
========== ========== ========== ==========
FINANCIAL LIABILITIES:
Policy reserves for annuities........... $6,264,417 $6,140,936 $6,203,214 $5,977,945
========== ========== ========== ==========
Debt and capital securities............. $ 387,879 $ 387,879 $ 357,780 $ 357,780
========== ========== ========== ==========
(18) REORGANIZATION
On December 20, 1999 the Company and the Company's controlling shareholder,
AMHC, announced that their respective boards of directors had approved plans for
the demutualization of AMHC and the merger of the Company into AMHC following
the demutualization. Upon completion of the demutualization, AMHC would be a
public company and will change its name to AmerUs Group Co. (AmerUs Group).
Members of AMHC will receive approximately 17 million shares of AmerUs Group and
cash or policy credits in excess of $300 million as a result of the
demutualization. Shareholders of the Company will receive shares in AmerUs Group
in a one-for-one exchange. Upon completion of the demutualization, AmerUs Group
will consist of the Company and AMHC's non-life subsidiaries, principally AmerUs
Properties, Inc. and AmerUs Home Equity.
Approval for the demutualization and merger is needed from the members of
AMHC, the Iowa Insurance Commissioner and shareholders of the Company. The
Company expects to ask for approval of these transactions during the second
quarter of 2000.
(19) SUBSEQUENT EVENTS
On February 18, 2000, the Company, AMHC and Indianapolis Life Insurance Co.
(ILICO) entered into a definitive agreement for a combination of the companies.
Under these terms, AMHC will proceed with its previously announced
demutualization. ILICO will demutualize separately and ILICO's members will
receive cash, policy credits and stock equivalent to the value of 11.25 million
shares of stock of AmerUs Group. Upon
F-44
89
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
demutualization, ILICO will become a subsidiary of AmerUs Group and will
continue operations as a stock life insurance company.
As part of the transaction, AMHC made an initial investment of $100 million
in a downstream holding company of ILICO on February 18, 2000.
ILICO is a 95-year old mutual life insurance and annuity company based in
Indianapolis, Indiana. ILICO and its subsidiaries are licensed to do business in
all 50 states and the District of Columbia. At December 31, 1999, ILICO had
total assets of $6.1 billion and insurance in force of $30.3 billion.
The contemplated transactions are subject to normal closing conditions,
including appropriate policyholder/member, shareholder and regulatory approvals.
The Company expects the demutualization of ILICO and combination into AmerUs
Group to take place in the fourth quarter of 2000.
On February 1, 2000, the Company acquired an independent marketing
organization for approximately $18.1 million. Additional consideration may be
paid contingent on the earnings of the acquired company over the next five
years. The assets of the acquired company were approximately $1.6 million as of
December 31, 1999 and the revenues were approximately $10.0 million for the year
then ended.
(20) OPERATING SEGMENTS
The Company has two operating segments: Life Insurance and Annuities.
Products generally distinguish a segment. A brief description of each segment
follows:
LIFE INSURANCE
Open Block: The primary product offerings consist of whole life, universal
life and term life insurance policies. These products are marketed on a national
basis primarily through a Preferred Producer agency system and a Personal
Producing General Agent ("PPGA") distribution system.
Closed Block: Closed Block was established for insurance policies which
had a dividend scale in effect as of June 30, 1996. The Closed Block was
designed to provide reasonable assurance to owners of insurance policies
included therein that, after the Reorganization of AmerUs Life, assets would be
available to maintain the dividend scales and interest credits in effect prior
to the Reorganization if the experience underlying such scales and credits
continues. The primary products included in the Closed Block are whole life,
certain universal life policies and term life insurance policies.
ANNUITIES
The Annuity segment markets fixed annuities on a national basis primarily
through independent brokers and marketing companies. The Annuity segment also
includes one insurance contract issued to a commercial paper conduit.
The Company uses the same accounting policies and procedures to measure
operating segment income and assets as it uses to measure its consolidated
income from operations and assets with the exception of the elimination of
certain items which management believes are not necessarily indicative of
overall operating trends. For example, net realized capital gains or losses on
investments, excluding gains or losses on convertible debt which are considered
core earnings, are not included as part of operating segment income. These items
are shown between adjusted pre-tax operating income and income from operations
on the following operating segment income tables. Operating segment income is
generally income before non-core realized gains and losses, interest expense,
income taxes and equity in earnings of its unconsolidated subsidiary, AMAL.
Premiums, product charges, policyowner benefits, insurance expenses,
amortization of deferred policy acquisition costs and VOBA and dividends to
policyowners are attributed directly to each operating segment. Net investment
income and core realized gains and losses on investments are allocated
F-45
90
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
based on directly-related assets required for transacting the business of that
segment. Other revenues and benefits and expenses which are deemed not to be
associated with any specific reportable segment are grouped together in the All
Other category. These items primarily consist of discontinued product lines such
as group and health, and holding company revenues and expenses. The contribution
to the operating income of the life insurance segment from the Closed Block is
reported as a single line item.
Assets are segmented based on policy liabilities directly attributable to
each segment. All assets allocated to the Closed Block are grouped together and
shown as a separate item entitled "Closed Block Assets."
There are no significant intersegment transactions.
Operating segment income and assets are as follows:
OPERATING SEGMENT INCOME
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1999
------------------------------------------------
LIFE TOTAL
INSURANCE ANNUITIES ALL OTHER CONSOLIDATED
--------- --------- --------- ------------
Revenues:
Insurance premiums............................. $ 64,263 $ 25,122 $ 136 $ 89,521
Universal life and annuity product charges..... 46,841 27,835 -- 74,676
Net investment income.......................... 93,350 442,851 3,871 540,072
Core realized gains on investments............. -- 10,166 -- 10,166
Other income................................... -- -- 1,467 1,467
Contribution from the Closed Block............. 25,166 -- -- 25,166
-------- -------- ------- --------
229,620 505,974 5,474 741,068
Benefits and expenses:
Policyowner benefits........................... 104,154 337,983 291 442,428
Underwriting, acquisition, and other
expenses.................................... 53,376 30,900 7,843 92,119
Amortization of deferred policy acquisition
costs and value of business acquired, net of
non-core adjustment of $2,134............... 17,268 48,378 -- 65,646
Dividends to policyowners...................... 4,526 -- -- 4,526
-------- -------- ------- --------
179,324 417,261 8,134 604,719
-------- -------- ------- --------
Adjusted pre-tax operating income................ $ 50,296 $ 88,713 $(2,660) 136,349
======== ======== =======
Non-core realized gains (losses) on
investments................................. (6,922)
Amortization of deferred policy acquisition
costs due to non-core realized gains or
losses...................................... (2,134)
Reorganization costs........................... (1,762)
--------
Income from operations........................... 125,531
Interest (expense)............................... (28,320)
Income tax (expense)............................. (32,115)
Equity in earnings of unconsolidated
subsidiary..................................... 1,558
--------
Net income....................................... $ 66,654
========
F-46
91
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPERATING SEGMENT INCOME
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------
LIFE ALL TOTAL
INSURANCE ANNUITIES OTHER CONSOLIDATED
--------- --------- ------ ------------
Revenues:
Insurance premiums.............................. $ 51,261 $ 29,610 $ 326 $ 81,197
Universal life and annuity product charges...... 46,224 26,757 -- 72,981
Net investment income........................... 70,952 432,299 121 503,372
Core realized gains on investments.............. -- 9,400 -- 9,400
Other income.................................... -- -- 1,700 1,700
Contribution from the Closed Block.............. 31,478 -- -- 31,478
-------- -------- ------ --------
199,915 498,066 2,147 700,128
Benefits and expenses:
Policyowner benefits............................ 91,442 339,293 21 430,756
Underwriting, acquisition, and other expenses... 43,376 35,592 2,448 81,416
Amortization of deferred policy acquisition
costs and value of business acquired, net of
non-core adjustment of ($199)................ 21,360 39,053 -- 60,413
Dividends to policyowners....................... 2,558 -- -- 2,558
-------- -------- ------ --------
158,736 413,938 2,469 575,143
-------- -------- ------ --------
Adjusted pre-tax operating income................. $ 41,179 $ 84,128 $ (322) 124,985
======== ======== ======
Non-core realized gains (losses) on
investments.................................. (9,512)
Amortization of deferred policy acquisition
costs due to non-core realized gains or
losses....................................... 199
--------
Income from operations............................ 115,672
Interest (expense)................................ (27,075)
Income tax (expense).............................. (28,422)
Equity in earnings of unconsolidated subsidiary... 2,654
--------
Net income................................... $ 62,829
========
F-47
92
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPERATING SEGMENT INCOME
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------
LIFE TOTAL
INSURANCE ANNUITIES ALL OTHER CONSOLIDATED
--------- --------- --------- ------------
Revenues:
Insurance premiums............................. $ 30,733 $ 17,238 $ 156 $ 48,127
Universal life and annuity product charges..... 45,637 1,669 -- 47,306
Net investment income.......................... 73,407 147,924 3,100 224,431
Core realized gains on investments............. -- -- -- --
Other income................................... -- -- -- --
Contribution from the Closed Block............. 31,044 -- -- 31,044
-------- -------- ------- --------
180,821 166,831 3,256 350,908
Benefits and expenses:
Policyowner benefits........................... 77,825 117,573 578 195,976
Underwriting, acquisition, and other
expenses.................................... 38,496 7,365 4,138 49,999
Amortization of deferred policy acquisition
costs and value of business acquired, net of
non-core adjustment of $650................. 16,423 6,703 -- 23,126
Dividends to policyowners...................... 1,587 -- -- 1,587
-------- -------- ------- --------
134,331 131,641 4,716 270,688
-------- -------- ------- --------
Adjusted pre-tax operating income................ $ 46,490 $ 35,190 $(1,460) 80,220
======== ======== =======
Non-core realized gains (losses) on
investments................................. 13,791
Amortization of deferred policy acquisition
costs due to non-core realized gains or
losses...................................... (650)
--------
Income from operations........................... 93,361
Interest (expense)............................... (14,980)
Income tax (expense)............................. (22,022)
Equity in earnings of unconsolidated
subsidiary..................................... 1,700
--------
Net income.................................. $ 58,059
========
F-48
93
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPERATING SEGMENT ASSETS
(IN THOUSANDS)
LIFE TOTAL
INSURANCE ANNUITIES ALL OTHER CONSOLIDATED
---------- ---------- --------- ------------
DECEMBER 31, 1999
Investments.................................. $1,258,204 $6,396,039 $36,998 $ 7,691,241
Deferred policy acquisition costs and VOBA... 290,952 469,253 -- 760,205
Other assets................................. 197,669 622,750 34,866 855,285
Closed Block assets.......................... 1,412,622 -- -- 1,412,622
---------- ---------- ------- -----------
Total assets................................. $3,159,447 $7,488,042 $71,864 $10,719,353
========== ========== ======= ===========
DECEMBER 31, 1998
Investments.................................. $1,163,503 $6,510,465 $10,801 $ 7,684,769
Deferred policy acquisition costs and VOBA... 140,379 330,191 -- 470,570
Other assets................................. 93,807 680,228 41,839 815,874
Closed Block assets.......................... 1,453,305 -- -- 1,453,305
---------- ---------- ------- -----------
Total assets................................. $2,850,994 $7,520,884 $52,640 $10,424,518
========== ========== ======= ===========
DECEMBER 31, 1997
Investments.................................. $1,224,307 $6,467,265 $ 3,966 $ 7,695,538
Deferred policy acquisition costs and VOBA... 98,817 286,093 -- 384,910
Other assets................................. 68,254 671,687 41,771 781,712
Closed Block assets.......................... 1,391,848 -- -- 1,391,848
---------- ---------- ------- -----------
Total assets................................. $2,783,226 $7,425,045 $45,737 $10,254,008
========== ========== ======= ===========
F-49
94
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(21) QUARTERLY RESULTS (UNAUDITED)
1999 QUARTERLY DATA
QUARTER ENDED
----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER COMMON SHARE)
Total revenues (excluding realized
gains)................................ $ 177,881 $ 176,035 $ 187,530 $ 189,456
Realized gains (losses)................. $ 2,604 $ 1,415 $ 145 $ (920)
Total benefits and expenses............. $ 148,435 $ 145,494 $ 156,127 $ 158,559
Net income.............................. $ 16,957 $ 16,591 $ 16,688 $ 16,418
Weighted average number of common
shares -- basic....................... 30,432,955 30,432,794 30,372,452 29,992,335
Weighted average number of common
shares -- diluted..................... 30,469,673 30,522,586 30,534,084 30,065,430
Earnings per common share -- basic...... $ 0.56 $ 0.55 $ 0.55 $ 0.54
Earnings per common share -- diluted.... $ 0.56 $ 0.54 $ 0.55 $ 0.55
1998 QUARTERLY DATA
QUARTER ENDED
----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER COMMON SHARE)
Total revenues (excluding realized
gains)................................ $ 175,822 $ 173,987 $ 165,874 $ 175,045
Realized gains (losses)................. $ 6,219 $ 4,564 $ (8,393) $ (2,502)
Total benefits and expenses............. $ 143,843 $ 145,290 $ 142,104 $ 143,707
Net income.............................. $ 21,757 $ 20,863 $ 6,862 $ 13,347
Weighted average number of common
shares -- basic....................... 34,734,918 34,732,514 33,726,221 30,680,339
Weighted average number of common
shares -- diluted..................... 34,831,363 35,021,958 33,951,365 30,712,432
Earnings per common share -- basic...... $ 0.63 $ 0.60 $ 0.20 $ 0.45
Earnings per common share -- diluted.... $ 0.62 $ 0.60 $ 0.20 $ 0.44
F-50
95
AMERUS LIFE HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
SCHEDULE PAGE
- -------- ----
Independent Auditors' Report on Schedules............................ S-2
I Summary of Investments -- Other than Investments in Related S-3
Parties.....................................................
II Condensed Financial Information of Registrant............... S-4 through S-7
III Supplementary Insurance Information......................... S-10
IV Reinsurance................................................. S-11
V Valuation and Qualifying Accounts........................... S-12
All other schedules are omitted for the reason that they are not required,
amounts are not sufficient to require submission of the schedule, or that the
equivalent information has been included in the consolidated financial
statements and notes thereto.
S-1
96
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
The Board of Directors and Stockholders
AmerUs Life Holdings, Inc.:
Under date of February 2, 2000, except as to note 19 which is as of
February 21, 2000, we reported on the consolidated balance sheets of AmerUs Life
Holdings, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 1999, as contained in Part II, Item 8 of the annual report on Form
10-K for the year 1999. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related consolidated
financial statement schedules as listed in the accompanying index. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG LLP
Des Moines, Iowa
February 2, 2000, except as to note 4
which is as of February 21, 2000
S-2
97
AMERUS LIFE HOLDINGS, INC.
SCHEDULE I
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1999
-------------------------------------
AMOUNT AT
WHICH
SHOWN IN
AMORTIZED MARKET THE BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- ------------------ ---------- ---------- -----------
(IN THOUSANDS)
Fixed Maturities:
Bonds
United States Government and government agencies
and authorities.................................. $1,682,889 $1,626,760 $1,626,760
States, municipalities and political
subdivisions..................................... 47,208 45,447 45,447
Foreign governments................................ 157,460 159,363 159,363
Public utilities................................... 541,682 511,630 511,630
Convertibles and bonds with warrants attached...... 89,276 89,828 89,828
All other corporate bonds.......................... 4,220,194 3,996,883 3,996,883
Redeemable preferred stock............................ 267,795 250,844 250,844
---------- ---------- ----------
Total fixed maturities........................... $7,006,504 $6,680,755 $6,680,755
Equity securities:
Common stocks
Banks, trust and insurance companies............... 12,188 13,523 13,523
Industrial, miscellaneous and all other............ 1,252 1,062 1,062
---------- ---------- ----------
Total equity securities.......................... $ 13,440 $ 14,585 $ 14,585
Mortgage loans on real estate........................... 615,186 615,186
Real estate............................................. 1,538 1,538
Policy loans............................................ 109,864 109,864
Other long-term investments............................. 268,984 269,158 269,158
Short-term investments.................................. 155 155
---------- ----------
Total investments.................................. $8,015,671 $7,691,241
========== ==========
S-3
98
AMERUS LIFE HOLDINGS, INC.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(PARENT COMPANY)
DECEMBER 31,
------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
ASSETS
Investments:
Securities available-for-sale at fair value:
Equity securities...................................... $ 861 $ 3,095
Short-term investments................................. -- 7,753
Other investments......................................... 60,017 50,009
Investments in subsidiaries, at equity...................... 1,046,904 1,161,541
Accrued investment income................................... 1,541 2,544
Property and equipment...................................... 5,290 --
Income taxes receivable..................................... 7,407 5,218
Deferred income taxes....................................... 11,892 --
Other assets................................................ 12,122 12,100
---------- ----------
Total assets........................................... $1,146,034 $1,242,260
========== ==========
See accompanying notes to condensed financial statements.
S-4
99
AMERUS LIFE HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(PARENT COMPANY)
DECEMBER 31,
------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Checks written in excess of bank balance.................. $ 64 $ 108
Other liabilities......................................... 32,658 43,082
Debt (note 2)............................................. 158,378 125,000
---------- ----------
Total liabilities...................................... 191,100 168,190
---------- ----------
Capital Securities (note 2)................................. 221,934 223,872
---------- ----------
Stockholders' equity:
Preferred Stock, no par value, 20,000,000 shares
authorized, none issued................................ -- --
Common Stock, Class A, no par value, 180,000,000 shares
authorized: issued and outstanding; 25,070,854 shares
(net of 4,662,305 treasury shares) in 1999 and
25,425,983 (net of 4,308,936 treasury shares) in
1998................................................... 25,071 25,426
Common Stock, Class B, no par value, 50,000,000 shares
authorized; 5,000,000 shares issued and outstanding.... 5,000 5,000
Paid-in capital........................................... 282,831 290,091
Accumulated other comprehensive income (loss)............. (135,964) 26,711
Unearned compensation..................................... (323) (240)
Unallocated ESOP shares................................... (1,378) --
Retained earnings......................................... 557,763 503,210
---------- ----------
Total stockholders' equity............................. 733,000 850,198
---------- ----------
Total liabilities and stockholders' equity............. $1,146,034 $1,242,260
========== ==========
See accompanying notes to condensed financial statements.
S-5
100
AMERUS LIFE HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME
(PARENT COMPANY)
YEARS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- -------
(IN THOUSANDS)
Revenues:
Equity in undistributed earnings of subsidiaries.......... $ 97,460 $70,267
Net investment income..................................... 4,673 18,693
Realized losses........................................... (17,794) (2,091)
-------- -------
84,339 86,869
Expenses:
Operating expenses........................................ 7,655 2,307
Interest expense.......................................... 25,595 25,695
-------- -------
33,250 28,002
-------- -------
Income before income taxes.................................. 51,089 58,867
Income tax benefit.......................................... 15,565 3,962
-------- -------
Net income.................................................. $ 66,654 $62,829
======== =======
See accompanying notes to condensed financial statements.
S-6
101
AMERUS LIFE HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(PARENT COMPANY)
YEARS ENDED DECEMBER 31,
------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 66,654 $ 62,829
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings.......................... (97,460) (70,267)
Dividends from subsidiaries............................... 62,400 142,350
Realized investment losses................................ 17,794 2,091
Change in:
Accrued investment income................................. 1,003 2,215
Income taxes.............................................. (14,171) (3,063)
Other, net................................................ (8,251) (11,035)
--------- ---------
Net cash provided by operating activities.............. 27,969 125,120
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments..................................... (136,491) (27,292)
Sale of investments......................................... 135,286 3,955
Purchase of property and equipment.......................... (7,868) --
Proceeds from sale of property and equipment................ 415 --
--------- ---------
Net cash (used in) investing activities................ (8,658) (23,337)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in checks written in excess of balance............... (44) 108
Change in debt and capital securities, net.................. 31,440 10,212
Purchase of treasury stock, net of issuance................. (8,181) (101,063)
Capital contribution to subsidiaries........................ (30,425) (10,000)
Dividends paid to stockholders.............................. (12,101) (13,442)
--------- ---------
Net cash (used in) financing activities................ (19,311) (114,185)
--------- ---------
Net increase (decrease) in cash............................. -- (12,402)
Cash at beginning of period................................. -- 12,402
--------- ---------
Cash at end of period....................................... $ -- $ --
========= =========
See accompanying notes to condensed financial statements.
S-7
102
AMERUS LIFE HOLDINGS, INC.
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
AmerUs Life Holdings, Inc. (the Company) is the parent company of its
primary subsidiaries, AmerUs Life Insurance Company (AmerUs Life), AmVestors
Financial Corporation (AmVestors), Delta Life Corporation (Delta) and AmerUs
Capital Management Group, Inc. (ACM). The Company's investment in its
subsidiaries is stated at cost plus equity in undistributed earnings of the
subsidiaries. The Company's share of net income of its unconsolidated
subsidiaries is included in income using the equity method. These financial
statements should be read in conjunction with AmerUs Life Holdings, Inc.
consolidated financial statements.
(2) DEBT AND CAPITAL SECURITIES
Debt and capital securities consists of the following (in thousands):
1999 1998
-------- --------
Revolving Credit Agreement(A)............................... $ 32,000 $ --
ESOP Note(B)................................................ 1,378 --
Senior notes bearing interest at 6.95% due June 2005........ 125,000 125,000
Junior Subordinated debentures bearing interest at
8.85%(C).................................................. 88,660 88,660
Junior Subordinated debentures bearing interest at
7.00%(D).................................................. 133,274 135,212
-------- --------
$380,312 $348,872
======== ========
- ---------------
(A) The revolving credit agreement provides for a maximum borrowing of $150
million with the balance maturing in October 2002. The interest rate is
variable, however, the Company may elect to fix the rate for periods from 30
days to six months. The loan agreement contains various financial and
operating covenants which, among other things, limit future indebtedness and
restrict the amount of future dividend payments.
(B) In connection with the acquisition of AmVestors, the Company has a leveraged
Employee Stock Ownership Plan (ESOP) which was sponsored by AmVestors for
all AmVestors full-time employees with one year of service. The ESOP
acquired AmVestors stock, which was subsequently exchanged for Company
stock, through the proceeds of a note payable to American Investors Life
Insurance Company, a subsidiary of AmVestors. The note bears interest at
7.0% and is payable in annual installments through December 31, 2002.
(C) The Company issued $88.66 million of junior subordinated debentures to a
wholly-owned subsidiary trust in connection with capital securities issued
by the trust. The debentures bear interest at the rate of 8.85% and mature
February 1, 2027.
(D) The Company issued $149.4 million of junior subordinated debentures to a
wholly-owned subsidiary trust in connection with adjustable conversion-rate
equity security units issued by the trust. The debentures bear interest at
the rate of 7.00% and mature July 27, 2003.
S-8
103
AMERUS LIFE HOLDINGS, INC.
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of long-term debt and capital securities are as follows for each
of the five years ending December 31:
(IN THOUSANDS)
Year ending December 31:
2000................................................... $ --
2001................................................... --
2002................................................... 33,378
2003................................................... 133,274
2004................................................... --
Thereafter................................................ 213,660
--------
$380,312
========
(3) REORGANIZATION
On December 20, 1999 the Company and the Company's controlling shareholder,
AMHC, announced that their respective boards of directors had approved plans for
the demutualization of AMHC and the merger of the Company into AMHC following
the demutualization. Upon completion of the demutualization, AMHC would be a
public company and will change its name to AmerUs Group Co. (AmerUs Group).
Members of AMHC will receive approximately 17 million shares of AmerUs Group and
cash or policy credits in excess of $300 million as a result of the
demutualization. Shareholders of the Company will receive shares in AmerUs Group
in a one-for-one exchange. Upon completion of the demutualization, AmerUs Group
will consist of the Company and AMHC's non-life subsidiaries, principally AmerUs
Properties, Inc. and AmerUs Home Equity.
Approval for the demutualization and merger is needed from the members of
AMHC, the Iowa Insurance Commissioner and shareholders of the Company. The
Company expects to ask for approval of these transactions during the second
quarter of 2000.
(4) SUBSEQUENT EVENTS
On February 18, 2000, the Company, AMHC and Indianapolis Life Insurance Co.
(ILICO) entered into a definitive agreement for a combination of the companies.
Under these terms, AMHC will proceed with its previously announced
demutualization. ILICO will demutualize separately and ILICO's members will
receive cash, policy credits and stock equivalent to the value of 11.25 million
shares of stock of AmerUs Group. Upon demutualization, ILICO will become a
subsidiary of AmerUs Group and will continue operations as a stock life
insurance company.
As part of the transaction, AMHC made an initial investment of $100 million
in a downstream holding company of ILICO on February 18, 2000.
ILICO is a 95-year old mutual life insurance and annuity company based in
Indianapolis, Indiana. ILICO and its subsidiaries are licensed to do business in
all 50 states and the District of Columbia. At December 31, 1999, ILICO had
total assets of $6.1 billion and insurance in force of $30.3 billion.
The contemplated transactions are subject to normal closing conditions,
including appropriate policyholder/member, shareholder and regulatory approvals.
The Company expects the demutualization of ILICO and combination into AmerUs
Group to take place in the fourth quarter of 2000.
S-9
104
AMERUS LIFE HOLDINGS, INC.
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
AMERUS LIFE HOLDINGS, INC.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
DEFERRED BENEFITS,
POLICY FUTURE POLICY OTHER POLICY CLAIMS,
ACQUISITION BENEFITS, LOSSES CLAIMS & NET LOSSES &
COSTS & CLAIMS & LOSS UNEARNED BENEFITS PREMIUM INVESTMENT SETTLEMENT
SEGMENT VOBA EXPENSES(1) PREMIUMS PAYABLE(2) REVENUE INCOME EXPENSES
- ------- ----------- ---------------- -------- ------------ -------- ---------- ----------
LIFE INSURANCE(3)
12/31/1999................... $388,093 $2,596,073 $ -- $16,891 $253,707 $201,467 $368,413
12/31/1998................... $257,858 $2,638,249 $ -- $18,525 $249,439 $186,714 $369,153
12/31/1997................... $242,582 $2,524,216 $ -- $ 8,461 $236,878 $187,166 $345,642
ANNUITIES
12/31/1999................... $469,253 $6,823,004 $ -- $ -- $ 25,122 $442,851 $337,983
12/31/1998................... $330,191 $6,302,489 $ -- $ -- $ 29,610 $432,299 $339,293
12/31/1997................... $286,093 $6,215,935 $ -- $ -- $ 17,238 $147,924 $117,573
OTHER
12/31/1999................... $ -- $ -- $ -- $ -- $ 136 $ 3,871 $ 291
12/31/1998................... $ -- $ 17,801 $ -- $ 322 $ 326 $ 121 $ 21
12/31/1997................... $ -- $ 17,005 $ -- $ 2,053 $ 156 $ 3,100 $ 577
TOTAL(3)
12/31/1999................... $857,346 $9,419,077 $ -- $16,891 $278,965 $648,189 $706,687
12/31/1998................... $588,049 $8,958,539 $ -- $18,847 $279,375 $619,134 $708,467
12/31/1997................... $528,675 $8,757,156 $ -- $10,514 $254,272 $338,190 $463,792
AMORTIZATION
OF DEFERRED
POLICY
ACQUISITION OTHER
COSTS & OPERATING PREMIUMS
SEGMENT VOBA EXPENSES WRITTEN
- ------- ------------ --------- --------
LIFE INSURANCE(3)
12/31/1999................... $37,887 $57,784 n/a
12/31/1998................... $48,684 $48,418 n/a
12/31/1997................... $48,786 $43,973 n/a
ANNUITIES
12/31/1999................... $50,230 $30,900 n/a
12/31/1998................... $37,816 $35,592 n/a
12/31/1997................... $ 6,461 $ 7,365 n/a
OTHER
12/31/1999................... $ -- $ 9,605 n/a
12/31/1998................... $ -- $ 2,448 n/a
12/31/1997................... $ -- $ 4,138 n/a
TOTAL(3)
12/31/1999................... $88,117 $98,289 n/a
12/31/1998................... $86,500 $86,458 n/a
12/31/1997................... $55,247 $55,476 n/a
- ---------------
(1) Policy reserves, policyowner funds and dividends payable to policyowners
(2) Policy and contract claims
(3) Includes Closed Block amounts
S-10
105
AMERUS LIFE HOLDINGS, INC.
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
AMERUS LIFE HOLDINGS, INC.
SCHEDULE IV
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
----------- ---------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1999
Life insurance in force.......... $33,046,944 $5,616,065 $655,021 $28,085,900 2.33%
=========== ========== ======== =========== =====
Premiums
Life insurance................. $ 74,878 $ 12,365 $ 1,750 $ 64,263 2.72%
Annuities...................... 25,122 -- -- 25,122 --%
Other.......................... 1,622 1,486 -- 136 --%
----------- ---------- -------- ----------- -----
Total premiums................... $ 101,622 $ 13,851 $ 1,750 $ 89,521 1.95%
=========== ========== ======== =========== =====
YEAR ENDED DECEMBER 31, 1998
Life insurance in force.......... $31,092,285 $3,778,838 $626,086 $27,939,533 2.24%
=========== ========== ======== =========== =====
Premiums
Life insurance................. $ 58,536 $ 8,311 $ 1,036 $ 51,261 2.02%
Annuities...................... 29,610 -- -- 29,610 --%
Other.......................... 1,702 1,376 -- 326 --%
----------- ---------- -------- ----------- -----
Total premiums................... $ 89,848 $ 9,687 $ 1,036 $ 81,197 1.28%
=========== ========== ======== =========== =====
YEAR ENDED DECEMBER 31, 1997
Life insurance in force.......... $30,312,097 $4,102,216 $500,613 $26,710,494 1.87%
=========== ========== ======== =========== =====
Premiums
Life insurance................. $ 37,581 $ 8,223 $ 1,375 $ 30,733 4.47%
Annuities...................... 17,238 -- -- 17,238 --%
Other.......................... 1,488 1,332 -- 156 --%
----------- ---------- -------- ----------- -----
Total premiums................... $ 56,307 $ 9,555 1,375 $ 48,127 2.86%
=========== ========== ======== =========== =====
S-11
106
AMERUS LIFE HOLDINGS, INC.
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
AMERUS LIFE HOLDINGS, INC.
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1999, 1998 AND 1997
PROVISIONS
BALANCE AT CHARGED TO CHARGED TO ON MORTGAGES
BEGINNING COSTS AND MORTGAGES SOLD OR BALANCE AT
OF PERIOD EXPENSES ACQUIRED TRANSFERRED END OF PERIOD
---------- ---------- ---------- ------------ -------------
(IN THOUSANDS)
Mortgage Loans
1999......................................... $22,299 $ 144 $(4,397) $ -- $18,046
1998......................................... $15,284 $(2,259) $10,374 $(1,100) $22,299
1997......................................... $11,622 $ (855) $ 4,568 $ (51) $15,284
S-12