UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
----------------------------------------
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
COMMISSION FILE NUMBER 000-30898
AMERUS GROUP CO.
(Exact name of Registrant as specified in its charter)
699 WALNUT STREET
DES MOINES, IOWA 50309-3948
(Address of principal executive offices)
IOWA 42-1458424
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Registrant's telephone number, including area code (515) 362-3600
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 [ ]
The number of shares outstanding of each of the Registrant's classes of common
stock on November 9, 2001 was as follows:
Common Stock 41,762,136 shares
Exhibit index - Page 48
Page 1 of 54
1
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION................................................................... 4
Item 1. Financial Statements............................................................... 4
Consolidated Balance Sheets
September 30, 2001 (Unaudited) and December 31, 2000............................... 4
Consolidated Statements of Income (Unaudited)
For the Three and Nine Months Ended September 30, 2001 and 2000.................... 6
Consolidated Statements of Comprehensive Income (Unaudited)
For the Three and Nine Months Ended September 30, 2001 and 2000.................... 7
Consolidated Statements of Stockholders' Equity
For the Nine Months Ended September 30, 2001 (Unaudited) and
the Year Ended December 31, 2000................................................... 8
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2001 and 2000.............................. 9
Notes to Consolidated Financial Statements
(Unaudited) ....................................................................... 12
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition ............................................................... 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 45
PART II - OTHER INFORMATION...................................................................... 46
Item 1. Legal Proceedings.................................................................. 46
Item 6. Exhibits and Reports on Form 8-K................................................... 46
Signatures....................................................................................... 47
Index to Exhibits................................................................................ 48
2
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, liquidity 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; (9) the performance of the investment portfolio; (10) the
impact of purchase accounting adjustments; (11) expected life and annuity
product margins; and (12) 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.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERUS GROUP CO.
CONSOLIDATED BALANCE SHEETS
($ in thousands)
September 30, December 31,
2001 2000
------------------------------
(unaudited)
Assets
Investments:
Securities available-for-sale at fair value:
Fixed maturity securities $ 10,958,725 $ 8,261,647
Equity securities 70,045 152,903
Short-term investments 10,285 20,861
Securities held for trading purposes:
Fixed maturity securities 2,174,315 --
Equity securities 3,340 --
Loans 931,028 534,857
Real estate 1,779 3,226
Policy loans 511,116 312,662
Other investments 253,297 320,650
------------------------------
Total investments 14,913,930 9,606,806
Cash and cash equivalents 175,020 65,485
Accrued investment income 178,322 114,034
Premiums, fees and other receivables 7,329 9,652
Income taxes receivable 12,480 --
Reinsurance receivables 543,489 6,529
Deferred policy acquisition costs 501,372 437,312
Value of business acquired 574,911 468,430
Goodwill 227,040 183,491
Property and equipment 85,923 56,101
Other assets 527,580 491,296
Separate Account assets 296,043 --
Assets of discontinued operations 29,689 32,386
------------------------------
Total assets $ 18,073,128 $11,471,522
==============================
See accompanying notes to consolidated financial statements.
4
AMERUS GROUP CO.
CONSOLIDATED BALANCE SHEETS
($ in thousands)
September 30, December 31,
2001 2000
--------------------------------
(unaudited)
Liabilities and Stockholders' Equity
Policy reserves and policyowner funds:
Future life and annuity policy benefits $ 14,790,662 $ 9,482,625
Policyowner funds 491,301 325,251
----------------------------
15,281,963 9,807,876
Accrued expenses and other liabilities 546,052 216,451
Dividends payable to policyowners 228,545 158,473
Policy and contract claims 36,491 11,890
Income taxes payable -- 8,825
Deferred income taxes 66,231 5,904
Notes and contracts payable 260,488 215,627
Separate Account liabilities 296,043 --
Liabilities of discontinued operations 16,566 14,806
----------------------------
Total liabilities 16,732,379 10,439,852
Company-obligated mandatorily redeemable preferred
capital securities of subsidiary trusts holding solely
junior subordinated debentures of the Company 69,054 197,691
Stockholders' equity:
Preferred Stock, no par value, 20,000,000 shares
authorized, none issued -- --
Common Stock, no par value, 230,000,000 shares
authorized; 41,832,634 shares issued and
outstanding in 2001 (net of 1,648,100 treasury
shares) and 30,011,034 shares issued and
outstanding in 2000 41,833 30,011
Paid-in capital 1,125,618 809,894
Accumulated other comprehensive income (loss) 46,317 (11,164)
Unearned compensation (830) (146)
Unallocated ESOP shares (683) (683)
Retained earnings 59,440 6,067
----------------------------
Total stockholders' equity 1,271,695 833,979
----------------------------
Total liabilities and stockholders' equity $ 18,073,128 $ 11,471,522
============================
See accompanying notes to consolidated financial statements.
5
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except share data)
(Unaudited)
For The Three Months Ended For The Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
----------------------------- ----------------------------
Revenues:
Insurance premiums $ 101,947 $ 65,855 $ 249,676 $ 204,118
Universal life and annuity product charges 47,407 26,148 106,520 74,943
Net investment income 231,943 175,670 620,164 519,424
Realized/unrealized gains (losses) on investments (45,649) (7,292) (97,309) (11,552)
Other income 11,460 8,794 33,744 22,672
---------------------------- ----------------------------
347,108 269,175 912,795 809,605
---------------------------- ----------------------------
Benefits and expenses:
Policyowner benefits 205,270 157,659 533,967 469,985
Underwriting, acquisition and other expenses 40,800 30,574 107,255 91,820
Demutualization costs 249 3,732 451 10,437
Restructuring costs 6,527 -- 6,527 --
Amortization of deferred policy acquisition costs
and value of business acquired 31,270 20,938 86,512 67,128
Dividends to policyowners 26,191 18,732 68,416 56,226
---------------------------- ----------------------------
310,307 231,635 803,128 695,596
---------------------------- ----------------------------
Income from continuing operations 36,801 37,540 109,667 114,009
Interest expense 5,974 7,603 20,716 22,430
---------------------------- ----------------------------
Income before income tax expense and minority interest 30,827 29,937 88,951 91,579
Income tax expense 9,745 13,098 28,716 36,756
Minority interest -- 6,407 -- 21,677
---------------------------- ----------------------------
Net income from continuing operations 21,082 10,432 60,235 33,146
Discontinued operations (net of tax):
Income (loss) from discontinued operations 428 712 1,374 655
---------------------------- ----------------------------
Net income before cumulative effect of change in
accounting for derivatives 21,510 11,144 61,609 33,801
Cumulative effect of change in accounting for
derivatives, net of tax -- -- (8,236) --
---------------------------- ----------------------------
Net income $ 21,510 $ 11,144 $ 53,373 $ 33,801
============================ ============================
Net income from continuing operations per common share:
Basic $ 0.51 $ 0.55 $ 1.70 $ 1.85
============================ ============================
Diluted $ 0.50 $ 0.55 $ 1.68 $ 1.85
============================ ============================
Net income from discontinued operations per common share:
Basic $ 0.01 $ 0.04 $ 0.04 $ 0.04
============================ ============================
Diluted $ 0.01 $ 0.04 $ 0.04 $ 0.03
============================ ============================
Net income per common share:
Basic $ 0.52 $ 0.59 $ 1.51 $ 1.89
============================ ============================
Diluted $ 0.51 $ 0.59 $ 1.49 $ 1.88
============================ ============================
Weighted average common shares outstanding:
Basic 41,536,389 18,888,948 35,334,160 17,893,406
============================ ============================
Diluted 42,060,929 19,026,397 35,825,884 17,934,801
============================ ============================
See accompanying notes to consolidated financial statements.
6
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
(Unaudited)
For The Three Months Ended For The Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------------------------- --------------------------
Net income $ 21,510 $ 11,144 $ 53,373 $ 33,801
Other comprehensive income, before tax:
Unrealized gains (losses) on securities:
Transfer related to unrealized gain on available-
for-sale securities reclassified to trading -- -- (430) --
Unrealized holding gains arising during period 66,784 81,821 64,443 66,494
Less: reclassification adjustment for gains (losses)
included in net income (6,103) (4,156) (20,326) (4,514)
---------------------- ----------------------
Other comprehensive income, before tax 72,887 85,977 84,339 71,008
Income tax expense related to items of other
comprehensive income (25,510) (30,092) (29,519) (24,853)
---------------------- ----------------------
47,377 55,885 54,820 46,155
Amounts attributable to:
Minority interest -- (23,494) -- (19,580)
Change in accounting for derivatives -- -- 2,661 --
---------------------- ----------------------
Other comprehensive income, net of taxes 47,377 32,391 57,481 26,575
---------------------- ----------------------
Comprehensive income $ 68,887 $ 43,535 $ 110,854 $ 60,376
====================== ======================
See accompanying notes to consolidated financial statements.
7
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
September 30, 2001
($ in thousands)
Accumulated
Other
Comprehensive
Common Paid-In Income Unearned
Stock Capital (Loss) Compensation
----------- ---------- -------------- ------------
Balance at December 31, 1999 $ -- $ -- $ (78,628) $ (187)
2000:
Net income -- -- -- --
Net unrealized gain (loss) on securities -- -- 67,641 --
Stock issued under various incentive
plans, net of forfeitures 6 169 -- 105
Dividends declared on common stock -- -- -- --
Allocation of shares in leveraged ESOP -- 600 -- --
Minority interest ownership changes -- -- (177) --
Acquisition of minority interest 12,615 285,405 -- --
Demutualization of AmerUs Group 17,390 518,535 -- (64)
Other -- 5,185 -- --
----------- ----------- ----------- -----------
Balance at December 31, 2000 30,011 809,894 (11,164) (146)
2001 (unaudited):
Net income before cumulative effect
of change in accounting -- -- -- --
Change in accounting for derivatives -- -- 2,661 --
Transfer related to unrealized gain on
available-for-sale securities reclassified
to trading -- -- (430) --
Net unrealized gain (loss) on securities -- -- 62,633 --
Net unrealized gain (loss) on derivatives
designated as cash flow hedges -- -- (7,383) --
Stock issued under various incentive
plans, net of forfeitures 235 6,303 -- (684)
Purchase of treasury stock (1,229) (37,716) -- --
Acquisition of IL Holdings 9,047 223,358 -- --
Conversion of company-obligated
mandatorily redeemable preferred
capital securities 3,769 123,779 -- --
----------- ----------- ----------- -----------
Balance at September 30, 2001 $ 41,833 $ 1,125,618 $ 46,317 $ (830)
=========== =========== =========== ===========
Unallocated Total
ESOP Unassigned Retained Stockholders'
Shares Surplus Earnings Equity
----------- ----------- ----------- -----------
Balance at December 31, 1999 $ (797) $ 840,962 $ -- $ 761,350
2000:
Net income -- 33,801 18,039 51,840
Net unrealized gain (loss) on securities -- -- -- 67,641
Stock issued under various incentive
plans, net of forfeitures -- 273 -- 553
Dividends declared on common stock -- -- (11,972) (11,972)
Allocation of shares in leveraged ESOP 695 -- -- 1,295
Minority interest ownership changes (2) 94 -- (85)
Acquisition of minority interest -- -- -- 298,020
Demutualization of AmerUs Group (579) (875,130) -- (339,848)
Other -- -- -- 5,185
----------- ----------- ----------- -----------
Balance at December 31, 2000 (683) -- 6,067 833,979
2001 (unaudited):
Net income before cumulative effect
of change in accounting -- -- 61,609 61,609
Change in accounting for derivatives -- -- (8,236) (5,575)
Transfer related to unrealized gain on
available-for-sale securities reclassified
to trading -- -- -- (430)
Net unrealized gain (loss) on securities -- -- -- 62,633
Net unrealized gain (loss) on derivatives
designated as cash flow hedges -- -- -- (7,383)
Stock issued under various incentive
plans, net of forfeitures -- -- -- 5,854
Purchase of treasury stock -- -- -- (38,945)
Acquisition of IL Holdings -- -- -- 232,405
Conversion of company-obligated
mandatorily redeemable preferred
capital securities -- -- -- 127,548
----------- ----------- ----------- -----------
Balance at September 30, 2001 $ (683) $ -- $ 59,440 $ 1,271,695
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
8
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
For The Nine Months Ended
September 30,
2001 2000
----------------------------
Cash flows from operating activities
Net Income $ 53,373 $ 33,801
Less: Income from discontinued operations (1,374) (655)
Less: Cumulative effect of change in accounting
for derivatives 8,236 --
----------------------------
60,235 33,146
Adjustments to reconcile net income to net cash
provided by operating activities:
Policyowner assessments on universal life
and annuity products (87,820) (53,911)
Interest credited to policyowner account
balances 284,148 231,443
Change in option value of equity-indexed products
and market value adjustments on total
return strategy annuities (62,068) --
Realized/unrealized investment (gains) losses 97,309 11,552
Goodwill amortization 6,348 6,400
VOBA amortization 62,297 23,485
Minority interest -- 21,677
Change in:
Accrued investment income (10,974) (12,119)
Reinsurance receivables (246,854) 15,464
Securities held for trading purposes:
Fixed maturities 20,835 --
Equity securities (2,846) --
Short-term investments -- --
Deferred policy acquisition costs (156,155) (102,640)
Liabilities for future policy benefits 133,002 72,643
Accrued expenses and other liabilities (21,124) 39,268
Policy and contract claims and other
policyowner funds 25,250 (5,224)
Income taxes:
Current (17,829) (577)
Deferred 39,896 29,510
Other, net (11,392) (21,370)
----------------------------
Net cash provided by operating activities 60,235 288,747
----------------------------
Cash flows from investing activities:
Purchase of fixed maturities available-for-sale (3,538,411) (1,541,490)
Maturities, calls and principal reductions of
fixed maturities available-for-sale 2,862,430 1,343,427
Purchase of equity securities (61,381) (128,697)
Proceeds from sale of equity securities 60,032 21,734
Change in short-term investments, net 9,418 --
Purchase of loans (116,390) (70,587)
9
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
For The Nine Months Ended
September 30,
2001 2000
---------------------------
Proceeds from repayment and sale of loans 96,810 196,701
Purchase of real estate and other invested assets (89,325) (116,300)
Proceeds from sale of real estate and other
invested assets 91,009 129,471
Change in policy loans, net (915) (14,256)
Other assets, net (40,624) 1,413
Acquisitions, net of cash acquired 156,925 --
Purchase of minority interest -- (1,151)
---------------------------
Net cash (used in) investing activities (570,422) (179,735)
---------------------------
Cash flows from financing activities:
Deposits to policyowner account balances 1,504,357 1,104,648
Withdrawals from policyowner account balances (923,596) (1,050,272)
Change in debt, net 19,861 1,482
Dividends to shareholders -- (1,268)
Stock issued under various incentive plans, net of
forfeitures 5,868 --
Purchase of treasury stock (38,945) --
Conversion of company-obligated mandatorily
redeemable capital securities 154 --
---------------------------
Net cash provided by financing activities 567,699 54,590
---------------------------
Net increase (decrease) in cash 109,535 163,602
Cash and cash equivalents at beginning of period 65,485 297,698
---------------------------
Cash and cash equivalents at end of period $ 175,020 $ 461,300
==========================
Supplemental disclosure of cash activities:
Interest paid $ 23,340 $ 23,903
==========================
Income taxes paid $ 9,486 $ 6,592
==========================
10
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
For The Nine Months Ended
September 30,
2001 2000
--------------------------
Details of acquisition:
Fair value of assets acquired $ 5,671,628 $ --
Liabilities assumed 5,349,908 --
--------------------------
Carrying value of acquisitions 326,442 --
Common stock issued 232,405 --
Accrual of cash payout component of purchase price (9,000) --
Preliminary investment in ILGC (77,200)
Acquisition costs previously paid (2,857)
--------------------------
Cash paid 4,980 --
Less: Cash acquired 161,905 --
--------------------------
Net cash (received in) acquisitions $ 156,925 $ --
==========================
Details of acquisition of minority interest:
Minority interest ownership in assets acquired $ -- $ 4,750,145
Minority interest ownership of liabilities assumed -- 4,499,238
--------------------------
Fair value of minority interest acquired -- 250,907
Allocation of excess costs of acquiring the minority
interest over the fair value of identifiable assets
less liabilities -- 47,113
--------------------------
Value of common stock issued to acquire
minority interest $ -- $ 298,020
==========================
11
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States (GAAP) for interim financial information and the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by GAAP for annual financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. All adjustments were of a normal
recurring nature, unless otherwise noted in Management's Discussion and Analysis
and the Notes to the Consolidated Financial Statements. Operating results for
the nine months ended September 30, 2001 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2001 (see further
discussion in Management's Discussion and Analysis). For further information and
for capitalized terms not defined in this 10-Q, refer to the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2000.
The accompanying consolidated financial statements include the accounts
and operations of the Company and its wholly-owned subsidiaries, principally
AmerUs Life Insurance Company (ALIC), AmerUs Annuity Group Co. (AAG) (formerly
known as AmVestors Financial Corporation), AmerUs Capital Management Group, Inc.
(ACM), and ILICO Holdings, Inc., holding company of Indianapolis Life Insurance
Company (ILICO). All significant intercompany transactions and balances have
been eliminated in consolidation.
Certain amounts in the 2000 financial statements have been reclassified
to conform to the 2001 financial statement presentation.
(2) 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 calculated using the treasury stock
method.
(3) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 133 "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138, which requires
that all derivative instruments, including certain derivative instruments
embedded in other contracts, be reported on the balance sheet at fair value.
Accounting for gains and losses resulting from changes in the values of
derivatives is dependent upon the use of the derivative and its qualification
for special hedge accounting. In accordance with the provisions of SFAS No. 133,
the Company recorded a transition adjustment as of January 1, 2001 upon adoption
of the standard to recognize its derivative instruments at fair value resulting
in a pre-tax reduction to income of $12.4 million ($8.2 million after-tax) and
an increase to Accumulated Other Comprehensive Income (AOCI) of $2.7 million.
The reduction to income, which is classified as a "cumulative effect of change
in accounting for derivatives, net of tax" in the Consolidated Statements of
Income, is attributable to losses on basis swaps that were natural hedges and
losses on interest rate swaps reclassified from AOCI that
12
have been redesignated as cash flow hedges of floating rate funding agreement
liability effective January 1, 2001. In addition, the reduction to income
includes adjustments to fair value for options being used as natural hedges of
embedded options contained within equity-indexed annuity products. The increase
in AOCI, which is classified as "change in accounting for derivatives" in the
Consolidated Statements of Comprehensive Income, is attributable to the
reclassification of the interest rate swap's fair value adjustment from AOCI to
the Consolidated Statements of Income.
The Company uses financial instruments, including options, futures,
swaps, caps and swaptions to reduce its exposure to changes in interest rates
and to manage duration mismatches. The Company also uses call options to hedge
equity-indexed annuity products. The use of these financial instruments modifies
the exposure of these risks with the intent to reduce the risk and variability
to the Company. 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 not a party to leveraged derivatives.
Initially, upon adoption of the new derivative accounting requirements,
and prospectively, on the date a derivative contract is entered into, the
Company designates the derivative as either (1) a hedge of a recognized asset or
liability or an unrecognized firm commitment (a fair value hedge), (2) a hedge
of a forecasted transaction or of the variability of cash flows to be received
or paid related to a recognized asset or liability (a cash flow hedge), or (3) a
natural hedging instrument whose change in fair value is recognized to act as an
economic hedge against changes in the values of the hedged item and which does
not meet the accounting hedge criteria for SFAS No. 133 (a natural hedge).
For fair value hedges, both the effective and ineffective portion of
the changes in the fair value of the derivative, along with the gain or loss on
the hedged item that is attributable to the hedged risk, are recorded in
earnings and reported net in the Consolidated Statements of Income. The
effective portion of the changes in the fair value of a derivative that is
designated as a cash flow hedge is recorded in AOCI. When the hedged cash
transaction is realized, the gain or loss included in AOCI is reported net in
the Consolidated Statements of Income with the hedged cash transaction item. In
addition, the ineffective portion of the changes in the fair value of
derivatives designated as cash flow hedges are reported in net investment income
in the Consolidated Statements of Income. For derivatives designated as a
natural hedge, changes in fair value are classified as realized/unrealized gains
(losses) on investments in the Consolidated Statements of Income.
The Company formally documents its hedge relationships, including
identification of the hedging instruments and the hedged items, as well as its
risk management objectives and strategies for undertaking the hedge transaction.
Free standing derivatives are recorded in the Consolidated Balance Sheets at
fair value in other assets and option derivatives embedded in equity-indexed
annuity products are marked to fair value and classified in the Consolidated
Balance Sheets as "policy reserves and policyowner funds." This process includes
linking derivatives that are designated as hedges of specific assets,
liabilities, firm commitments or forecasted transactions. The Company also
formally assesses at inception and at least quarterly thereafter, whether the
derivatives that are used in hedging transactions, other than natural hedges,
are highly effective in offsetting changes in either the fair value or cash
flows of the hedged item. When a determination is made that a derivative ceases
to be a highly effective hedge, the Company will discontinue hedge accounting
for the hedge.
To manage interest rate risk, the Company has entered into interest
rate swaps that effectively fix the interest payments of a floating rate funding
agreement liability. These interest rate swap agreements are accounted for as
cash flow hedges.
13
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 Standard & Poor's 500 Composite Stock Price Index(R) (S&P 500
Index). 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 Index call options to hedge the growth in interest credited to the
customer as a direct result of increases in the S&P 500 Index. The amounts to be
paid or received pursuant to these agreements are accrued and recognized in
income over the life of the agreements. Both call options held by the Company
and the options embedded in the policy, which the Company has designated as a
natural hedge, are valued at fair value. The change in fair value for the call
options is included in realized/unrealized gains (losses) on investments and the
change in fair value of the embedded options is included in policyowner benefits
in the Consolidated Statements of Income.
The Company has certain fixed annuity products that credit interest
based on a total return strategy. Under the total return strategy, the
policyowner is allowed to allocate their premium payments to different asset
classes within the Company's general account assets to which the selected
strategy is linked, less certain charges. The total return adjustment is paid
when a policyowner accesses the funds. The Company guarantees a minimum return
of premium plus approximately 3% interest per annum over the life of the
contract. The general account assets backing the total return strategy of these
products are fixed maturity securities and are designated by the Company as held
for trading. Both the trading securities held by the Company and the annuity
contracts are valued at fair value. The change in fair value for the trading
securities is included in realized/unrealized gains (losses) on investments and
the change in fair value of the annuity contracts is included in policyowner
benefits in the Consolidated Statements of Income.
During the first nine months of 2001, realized/unrealized gains
(losses) on investments included an unrealized loss of $62.5 million from the
change in fair value on call options used as a natural hedge of embedded options
within equity-indexed annuities and a $14.5 million unrealized loss from the
change in fair value on the trading securities backing the total return strategy
products. Policyowner benefits included an offsetting adjustment from fair value
changes in options embedded within the equity-indexed products and fair value
changes on total return strategy annuity contracts totaling $62.1 million. In
addition, basis swaps were terminated during the first quarter of 2001 and an
increase in fair value of $1.8 million on those swaps was included in net
investment income. AOCI included an unrealized loss of $2.1 million from the
fair value change in interest rate swaps used to hedge the floating rate funding
agreement liability. The Company estimates that $0.6 million of derivative
losses included in AOCI will be reclassified into earnings within the next
twelve months. The ineffectiveness of the interest rate swap cash flow hedge was
not considered significant for the first nine months of 2001.
14
The following table summarizes the income (loss) impact of adopting
SFAS No. 133 in the cumulative effect of change in accounting for derivatives as
of January 1, 2001 and the market value adjustments on trading securities and
derivatives in the first nine months of 2001:
Cumulative Effect of
Change in Accounting Nine Months
for Derivatives Ended
($ in thousands) January 1, 2001 September 30, 2001
--------------- ------------------
Basis swaps (A) $ (921) $ --
Separate account swap (B) (4,100) --
Fixed maturity securities held for trading -- (14,497)
Options on equity-indexed annuities (4,056) (62,538)
Equity-indexed and total return strategy fixed
annuity liabilities (1,335) 62,068
Deferred (loss) (C) (899) --
Deferred policy acquisition cost amortization
impact of net annuity adjustments (1,127) 4,650
-------- --------
Pre-tax total (12,438) (10,317)
Income taxes 4,202 3,611
-------- --------
After-tax total $ (8,236) $ (6,706)
======== ========
(A) Terminated during first quarter 2001.
(B) Future adjustments are through AOCI.
(C) Balance eliminated in transition adjustment.
The cumulative effect of change in accounting for derivatives per
common share for the nine months ended September 30, 2001:
Basic $0.23
Diluted $0.23
Weighted average common shares outstanding:
Basic 35,334,160
Diluted 35,825,884
(4) CLOSED BLOCK
The Company has established two Closed Blocks. The first was
established on June 30, 1996 in connection with the reorganization of ALIC to a
stock form. The second was established on May 18, 2001 in connection with the
reorganization of ILICO to a stock form. Insurance policies which had a dividend
scale in effect as of each Closed Block establishment date, 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
ALIC and ILICO, 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. Effective with the first quarter
of 2001, the Company has adopted the Accounting Standards Executive Committee's
Statement of Position 00-3 (SOP 00-3) "Accounting by
15
Insurance Enterprises for Demutualizations and Formations of Mutual Holding
Companies and for Certain Long-Duration Participating Contracts." The provisions
of SOP 00-3 required the Company to modify its presentation of the Closed Block
in its Consolidated Financial Statements to no longer show the operations of the
Closed Block and the assets and liabilities of the Closed Block as single line
items. In addition, the SOP required the Company to report unrealized gains and
losses on Closed Block investments as a component of the Closed Block
policyholder dividend obligation rather than AOCI. At September 30, 2001, there
was an unrealized gain of $52.9 million included in the policyholder dividend
obligation.
Summarized balance sheet information of the combined Closed Blocks as
of September 30, 2001 and December 31, 2000 and statements of income for the
three months and nine months ended September 30, 2001 and 2000 are as follows:
September 30, December 31,
2001 2000
-----------------------------
(unaudited)
($ in thousands)
Assets:
Securities available-for-sale at fair value:
Fixed maturity securities $1,851,346 $1,191,592
Short-term investments -- --
Loans 104,811 --
Policy loans 366,679 201,092
Other investments -- 2,934
Cash and cash equivalents 8,245 3,025
Accrued investment income 31,908 16,811
Premiums and fees receivable 18,573 7,062
Deferred policy acquisition costs 42,402 48,126
Value of business acquired 160,765 71,830
Other assets 44,247 41,885
-----------------------
Total Assets $2,628,976 $1,584,357
=======================
Liabilities:
Future life and annuity policy benefits $2,835,675 $1,654,784
Policyowner funds 4,870 5,081
Accrued expenses and other liabilities 77,794 34,689
Dividends payable to policyowners 225,022 154,603
Policy and contract claims 8,948 5,495
-----------------------
Total Liabilities $3,152,309 $1,854,652
=======================
16
For The Three Months
Ended September 30,
2001 2000
--------------------
(unaudited)
Revenues and expenses:
Insurance premiums $ 73,634 $ 44,375
Universal life and annuity product charges 3,167 3,196
Net investment income 43,137 28,617
Realized gains (losses) on investments 1,889 371
Policyowner benefits (84,013) (50,018)
Underwriting, acquisition and other expenses (1,101) (412)
Amortization of deferred policy acquisition costs
and value of business acquired (5,496) (3,479)
Dividends to policyowners (24,338) (17,092)
--------------------
Contribution from the Closed Block
before income taxes $ 6,879 $ 5,558
====================
For The Nine Months
Ended September 30,
2001 2000
--------------------
(unaudited)
Revenues and expenses:
Insurance premiums $ 178,196 $ 138,777
Universal life and annuity product charges 9,496 9,453
Net investment income 106,534 83,440
Realized gains (losses) on investments 2,202 414
Policyowner benefits (194,912) (150,588)
Underwriting, acquisition and other expenses (2,788) (1,673)
Amortization of deferred policy acquisition costs
and value of business acquired (14,084) (10,808)
Dividends to policyowners (63,161) (51,889)
----------------------
Contribution from the Closed Block
before income taxes $ 21,483 $ 17,126
======================
(5) FEDERAL INCOME TAXES
The effective income tax rate for the three months and nine months
ending September 30, 2001 and 2000 varied from the prevailing corporate rate
primarily as a result of goodwill amortization, non-deductible demutualization
costs, low income housing and rehabilitation credits, and tax exempt income.
(6) ACQUISITIONS
On May 18, 2001, the Company completed the acquisition of ILICO for an
amount of cash, policy credits and shares of the Company's common stock equal to
the value of 9.3 million shares of the Company's common stock. The purchase
price totaled approximately $326 million. The acquisition was accounted for
using the purchase method of accounting and accordingly the total purchase price
was
17
allocated to the assets and liabilities of ILICO based on the relative fair
values as of May 18, 2001, with the excess of the purchase price over the fair
value of the assets acquired less the fair value of the liabilities assumed
recorded as goodwill. Purchase price allocations related to value of business
acquired (VOBA) were based on preliminary studies which will be finalized by
year end. In addition, management is finalizing studies on ILICO's variable and
private labeling businesses. As a result of these studies that are still in
process, the final purchase price allocations may differ from the amounts
reflected as of September 30, 2001. Although the final allocations may differ,
the consolidated financial statements as of September 30, 2001 reflect the
Company's best estimate based on currently available information and the
differences between the current and final allocations are not expected to be
material. Some of the VOBA allocations were finalized during the third quarter
of 2001 resulting in a decrease to VOBA and an increase in goodwill from the
amounts recorded as of June 30, 2001. Goodwill is being amortized over thirty
years. The operations of ILICO for the period of May 18, 2001 through September
30, 2001 have been included in the consolidated financial statement of income of
the Company.
The allocation of the purchase price of ILICO is as follows (in
millions):
Investments (including cash and short-term investments) $ 4,655.7
Receivables and other assets 408.9
Value of business acquired 221.3
Goodwill 44.8
Separate account assets 345.6
Policyowner reserves and funds (4,840.4)
Other liabilities (138.9)
Debt (25.0)
Separate account liabilities (345.6)
----------
Total investment in ILICO $ 326.4
==========
The following table sets forth certain pro forma operating data of the
Company for the nine months ended September 30, 2001 and 2000. This pro forma
data assumes the acquisition of ILICO occurred on January 1, 2000.
For The Nine Months Ended September 30,
2001 2000
--------------- ---------------
(in thousands, except per share data)
Pro Forma operating data:
Total revenue $ 1,090.9 $ 1,191.1
Net income from continuing operations 60,375.4 51,475.1
Net income 51,643.8 51,475.1
Diluted net income from continuing operations
per share of common stock $ 1.50 $ 1.91
Diluted net income per share of common stock $ 1.28 $ 1.91
18
Under the terms of the joint venture ALIC participates in with
Ameritas, ALIC had an option to purchase an additional 5% to 15% of AMAL if
certain premium growth targets were met. ALIC met the premium growth target
requirement for one 5% purchase option in January 2001. ALIC exercised the
option on March 28, 2001 and acquired an additional 5% ownership interest in
AMAL for $7.2 million. ALIC's ownership percentage in AMAL is now 39% and ALIC
has a remaining option to purchase an additional 5% to 10% of AMAL.
(7) CAPITAL SECURITIES
On July 27, 2001, the forward common stock purchase contract component
of the Company's adjustable conversion-rate equity security (ACES) units
matured. Under the terms of the contract, ACES unit holders had an obligation to
purchase Company common stock at a price of $31.5625 per share. In lieu of
paying cash to satisfy their purchase obligation, the ACES unit holders could
surrender the preferred security component of the ACES unit. Of the 4,080,500
ACES units outstanding, 4,075,625 were surrendered, and the remaining ACES unit
holders submitted cash of approximately $0.1 million to purchase Company common
stock. The number of shares of common stock to be issued by the Company was
based upon the average price of the Company's common stock for the twenty
consecutive trading days ending on July 26, 2001, compared to the stated ACES
unit amount of $31.5625. As a result of this, the Company issued approximately
3.8 million shares of common stock and retired approximately $128 million of
ACES debt.
(8) RESTRUCTURING CHARGES
During the third quarter of 2001, the Company began consolidating
various functions in connection with a restructuring of its life insurance and
annuity operations. The objective of the restructuring plan is to eliminate
duplicative general administrative, life insurance and annuity functions for all
business units. The elimination of duplicative functions will reduce on-going
operating costs for the Company. General administrative functions will be
transitioned so they are performed in Des Moines, Iowa. Life insurance processes
will be transitioned so they are performed primarily in Des Moines and
Indianapolis, Indiana and annuity functions will be transitioned to Topeka,
Kansas.
Restructuring charges have been included in operating expenses in the
consolidated statement of income for the quarter ended September 30, 2001. The
restructuring charges include severance and termination benefits pre-tax of $5.9
million related to the elimination of approximately 50 positions and other costs
pre-tax of $0.6 million. Actual pre-tax costs totaling $2.7 million have been
expended and an accrual for severance and termination benefits not yet paid
amounted to $3.8 million at September 30, 2001.
The Company has not finalized all restructuring activities as of
September 30, 2001. Additional activities will primarily involve relocation or
severance benefits for affected employees and various administrative, financial,
and actuarial system conversion costs. Expenditures for all restructuring
activities are expected to be completed by the fourth quarter of 2002.
(9) SUBSEQUENT EVENTS
On July 20, 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, Business Combinations, and No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"), which change the accounting for business
combinations, goodwill and other intangible assets. In particular, SFAS 142,
which will generally become effective January 1, 2002, adopts a nonamortization,
impairment-only model for the Company's goodwill and indefinite-lived intangible
assets. This includes a more stringent impairment test methodology for measuring
and recognizing impairment losses. The Company is
19
presently studying the impact that the new Statements will have on its
accounting policies. Under current GAAP standards, the Company has recorded
goodwill amortization expense of approximately $6.3 million and $6.4 million for
the nine months ended September 30, 2001 and 2000, respectively.
(10) 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
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, a Personal Producing
General Agent (PPGA) distribution system and marketing companies.
ANNUITIES
The Annuity segment markets individual fixed and variable 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 preferred stocks and bonds
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 continuing operations on the following operating segment income
tables. Operating segment income is generally income before non-core realized
gains and losses, interest expense, income tax and income or loss from
discontinued operations. 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 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 segment are grouped together in the All Other
category. These items primarily consist of holding company revenues and expenses
and the operations of the Company's real estate management subsidiary.
Assets are segmented based on policy liabilities directly attributable
to each segment. There are no significant intersegment transactions.
Operating segment income is as follows:
20
Operating Segment Income
($ in thousands)
For The Three Months Ended September 30, 2001
Total
Life Insurance Annuities All Other Consolidated
-------------- --------- --------- ------------
Revenues:
Insurance premiums $ 98,662 $ 3,022 $ 263 $101,947
Universal life and annuity product charges 37,672 9,735 -- 47,407
Net investment income 79,822 148,944 3,177 231,943
Core realized/unrealized gains (losses) on investments 1,889 (347) -- 1,542
Other income -- 9,207 2,253 11,460
----------------------------------------------------
218,045 170,561 5,693 394,299
Benefits and expenses:
Policyowner benefits 126,757 106,787 1,285 234,829
Underwriting, acquisition, and other expenses 21,567 17,149 2,084 40,800
Amortization of deferred policy acquisition costs
and value of business acquired, net of
non-core adjustment of ($7,321) 17,289 21,302 -- 38,591
Dividends to policyowners 26,191 -- -- 26,191
----------------------------------------------------
191,804 145,238 3,369 340,411
----------------------------------------------------
Adjusted pre-tax operating income $ 26,241 $ 25,323 $ 2,324 53,888
====================================
Non-core realized/unrealized (losses) on investments (47,191)
Change in option value of equity-indexed
annuity products and market value
adjustments on total return strategy annuities 29,559
Amortization of deferred policy acquisition costs
due to non-core realized gains or losses 7,321
Demutualization costs (249)
Restructuring costs (6,527)
--------
Income from continuing operations 36,801
Interest (expense) (5,974)
Income tax (expense) (9,745)
Income from discontinued operations, net of tax 428
Cumulative effect of change in accounting for derivatives, net of tax --
--------
Net income $ 21,510
========
21
Operating Segment Income
($ in thousands)
For The Three Months Ended September 30, 2000
Total
Life Insurance Annuities All Other Consolidated
-------------- --------- --------- ------------
Revenues:
Insurance premiums $ 61,355 $ 4,453 $ 47 $ 65,855
Universal life and annuity product charges 17,059 9,089 -- 26,148
Net investment income 51,417 117,545 6,708 175,670
Core realized/unrealized gains (losses) on investments 371 (4,080) -- (3,709)
Other income -- 5,899 2,895 8,794
------------------------------------------------------
130,202 132,906 9,650 272,758
Benefits and expenses:
Policyowner benefits 75,585 82,010 64 157,659
Underwriting, acquisition, and other expenses 11,309 12,659 6,606 30,574
Amortization of deferred policy acquisition costs
and value of business acquired, net of
non-core adjustment of ($2,551) 8,829 14,660 -- 23,489
Dividends to policyowners 18,732 -- -- 18,732
-----------------------------------------------------
114,455 109,329 6,670 230,454
-----------------------------------------------------
Adjusted pre-tax operating income $ 15,747 $ 23,577 $ 2,980 42,304
====================================
Non-core realized/unrealized (losses) on investments (3,583)
Amortization of deferred policy acquisition costs
due to non-core realized gains or losses 2,551
Demutualization costs (3,732)
--------
Income from continuing operations 37,540
Interest (expense) (7,603)
Income tax (expense) (13,098)
Minority interest (6,407)
Income from discontinued operations, net of tax 712
--------
Net income $ 11,144
========
22
Operating Segment Income
($ in thousands)
For The Nine Months Ended September 30, 2001
Total
Life Insurance Annuities All Other Consolidated
-------------- --------- --------- ------------
Revenues:
Insurance premiums $ 238,944 $ 10,216 $ 516 $ 249,676
Universal life and annuity product charges 80,627 25,893 -- 106,520
Net investment income 198,147 414,816 7,201 620,164
Core realized/unrealized gains (losses) on investments 2,202 -- -- 2,202
Other income -- 26,996 6,748 33,744
------------------------------------------------------
519,920 477,921 14,465 1,012,306
Benefits and expenses:
Policyowner benefits 293,144 301,021 1,870 596,035
Underwriting, acquisition, and other expenses 53,618 45,231 8,406 107,255
Amortization of deferred policy acquisition costs
and value of business acquired, net of
non-core adjustment of ($12,858) 39,022 60,348 -- 99,370
Dividends to policyowners 68,416 -- -- 68,416
------------------------------------------------------
454,200 406,600 10,276 871,076
------------------------------------------------------
Adjusted pre-tax operating income $ 65,720 $ 71,321 $ 4,189 141,230
=====================================
Non-core realized/unrealized (losses) on investments (99,511)
Change in option value of equity-indexed
annuity products and market value
adjustments on total return strategy annuities 62,068
Amortization of deferred policy acquisition costs
due to non-core realized gains or losses 12,858
Demutualization costs (451)
Restructuring costs (6,527)
-----------
Income from continuing operations 109,667
Interest (expense) (20,716)
Income tax (expense) (28,716)
Income from discontinued operations, net of tax 1,374
Cumulative effect of change in accounting for derivatives, net of tax (8,236)
-----------
Net income $ 53,373
===========
23
Operating Segment Income
($ in thousands)
For The Nine Months Ended September 30, 2000
Total
Life Insurance Annuities All Other Consolidated
-------------- --------- --------- ------------
Revenues:
Insurance premiums $187,185 $ 16,793 $ 140 $ 204,118
Universal life and annuity product charges 47,612 27,331 -- 74,943
Net investment income 156,519 347,118 15,787 519,424
Core realized/unrealized gains (losses) on investments 414 (8,027) -- (7,613)
Other income -- 15,412 7,260 22,672
----------------------------------------------------
391,730 398,627 23,187 813,544
Benefits and expenses:
Policyowner benefits 225,236 244,486 263 469,985
Underwriting, acquisition, and other expenses 37,714 38,292 15,814 91,820
Amortization of deferred policy acquisition costs
and value of business acquired, net of
non-core adjustment of ($6,267) 25,893 47,502 -- 73,395
Dividends to policyowners 56,226 -- -- 56,226
----------------------------------------------------
345,069 330,280 16,077 691,426
----------------------------------------------------
Adjusted pre-tax operating income $ 46,661 $ 68,347 $ 7,110 122,118
====================================
Non-core realized/unrealized (losses) on investments (3,939)
Amortization of deferred policy acquisition costs
due to non-core realized gains or losses 6,267
Demutualization costs (10,437)
---------
Income from continuing operations 114,009
Interest (expense) (22,430)
Income tax (expense) (36,756)
Minority interest (21,677)
Income from discontinued operations, net of tax 655
---------
Net income $ 33,801
=========
24
ITEM 2. 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
Consolidated Financial Statements and related notes.
NATURE OF OPERATIONS
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
all 50 states, the District of Columbia and the U.S. Virgin Islands. The Company
also owns a real estate management company through which it conducts limited
real estate management, development, syndication and marketing activities. 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 individual fixed and variable annuities.
The Company sold certain lines of business and made the decision to
exit certain other businesses in 1998. These businesses are referred to as
discontinued operations and include the following activities: banking,
residential real estate brokerage, residential land development, and mortgage
banking.
ADJUSTED NET OPERATING INCOME
The following table reflects net income adjusted to eliminate certain
items (net of applicable income taxes and minority interest) 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 preferred stock and bonds 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 its overall performance. Adjusted net operating
income as described here may not be comparable to similarly titled measures
reported by other companies. The adjusted net operating income shown below does
not constitute net income computed in accordance with GAAP.
25
For The Three Months Ended For The Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---------------------------- ----------------------------
($ in thousands, except per share data)
Net Income $ 21,510 $ 11,144 $ 53,373 $ 33,801
Net non-core realized (gains) losses (A) 5,085 1,370 14,579 285
Net amortization of deferred policy
acquisition costs due to non-core
realized gains or losses (B) (3,101) (1,045) (5,924) (2,431)
Net effect of accounting differences
from the adoption of SFAS 133 (C) 4,754 -- 7,295 --
Demutualization costs (D) 249 3,378 451 9,235
Restructuring costs (E) 4,189 -- 4,189 --
Discontinued operations (F) (428) (712) (1,374) (655)
Cumulative effect of change in
accounting for derivatives (G) -- -- 8,236 --
---------------------------- ----------------------------
Adjusted Net Operating Income $ 32,258 $ 14,135 $ 80,825 $ 40,235
============================ ============================
Adjusted Net Operating Income
per common share (H):
Basic $ 0.78 $ 0.75 $ 2.29 $ 2.25
============================ ============================
Diluted $ 0.77 $ 0.74 $ 2.26 $ 2.24
============================ ============================
Weighted average common
shares outstanding (H):
Basic 41,536,389 18,888,948 35,334,160 17,893,406
============================ ============================
Diluted 42,060,929 19,026,397 35,825,884 17,934,801
============================ ============================
(A) Represents total realized gains or losses on investments less core
realized gains or losses (defined as gains or losses on the convertible
preferred stock and bond portfolio) adjusted for income taxes and
minority interest on such amounts. Non-core 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 amortization of deferred policy acquisition costs on the
non-core realized gains or losses that are included in product margins,
adjusted for income taxes and minority interest on such amounts.
(C) Represents the net effect of SFAS No. 133 related accounting entries,
adjusted for income taxes. The accounting entries consist of market
value adjustments on trading
26
securities, derivatives, certain annuity contracts, and the associated
change in amortization of deferred acquisition costs resulting from
such adjustments.
(D) For the 2001 periods presented, represents costs directly related to
ILICO's demutualization. For the 2000 periods presented, represents
costs directly related to the Company's demutualization and merger with
AmerUs Life Holdings, Inc. (ALHI), adjusted for minority interest on
such amounts. The costs consist primarily of legal, actuarial and
consulting expenses.
(E) Represents costs of restructuring life insurance and annuity operations
to eliminate duplicative functions, adjusted for income taxes. The
costs consist primarily of severance and termination benefits.
(F) Represents the net income from the Company's discontinued operations.
(G) Represents the cumulative effect of change in accounting for
derivatives, net of income taxes, as of January 1, 2001, resulting from
the Company's adoption of SFAS No. 133. This statement is effective for
fiscal years beginning after June 15, 2000.
(H) The Company was formed in 1996 as a mutual holding company and
therefore, had no shares of common stock outstanding until its
demutualization on September 20, 2000. At that time, the Company
distributed 17.4 million shares of its common stock to its former
members and exchanged its common stock for the 12.9 million shares of
common stock held by the public in ALHI on a one-for-one basis. The
Company's operating income is primarily from its former subsidiary,
ALHI. The Company had owned shares of ALHI common stock since 1996.
Adjusted net operating income per share has been calculated on the
basis that the shares of stock the Company owned of ALHI were
distributed to members and outstanding from January 1, 1996 and the
shares exchanged for ALHI shares were outstanding from the date of
demutualization.
Adjusted net operating income increased $18.2 million to $32.3 million,
or $0.77 per diluted share, for the third quarter of 2001 compared to $14.1
million, or $0.74 per diluted share, for the third quarter of 2000. For the nine
months ended September 30, adjusted net operating income was $80.8 million in
2001 compared to $40.2 million in 2000. The increase in adjusted net operating
income in 2001 was primarily attributable to the acquisition of ILICO and the
reduction in income applicable to the minority interest. Excluding the effects
of these two items, adjusted net operating income remained approximately level
between years for both the three month and nine month periods. Adjusted net
operating income is analyzed further in the operating segment discussion.
SALES
LIFE INSURANCE
The following table sets forth information regarding the Company's life
insurance sales activity by product:
27
Sales Activity by Product (A)
First Year Annualized Premiums
For The Three Months Ended September 30, For The Nine Months Ended September 30,
2001 2000 2001 2000
---------------------------------------- ---------------------------------------
($ in thousands)
Traditional life insurance:
Whole life $ 1,255 $ 4,020 $ 4,773 $ 10,415
Interest-sensitive whole life 3,118 - 5,543 -
Term life 4,666 1,232 8,692 5,762
Universal life 7,519 2,445 13,220 8,903
Equity-indexed life 5,901 1,086 16,626 3,014
------------------------------ ------------------------------
$ 22,459 $ 8,783 $ 48,854 $ 28,094
============================== ==============================
(A) Sales numbers include direct sales and the Company's share of private label
sales.
Life insurance sales as measured by annualized premiums were $22.5
million in the third quarter of 2001 compared to $8.8 million in the third
quarter of 2000. Year-to-date, life insurance sales increased $20.8 million to
$48.9 million in 2001 compared to $28.1 million in 2000. Approximately $13.0
million of the increase for the quarter and $18.9 million of the increase
year-to-date was due to sales from ILICO, which was acquired during the second
quarter of 2001. Excluding the sales from ILICO, life insurance sales increased
8% and 7% for the 2001 three month and nine month periods, respectively, as
compared to 2000. The increases were from the Company's new equity-indexed
universal life products which allow the policyowner to elect an earnings
strategy for a portion of the account value whereby earnings are credited based
on increases in the S&P 500 Index, excluding dividends. The earnings credit is
subject to a participation rate and an annual cap. In the first nine months of
2001, sales of these products were $16.6 million as compared to $3.0 million for
the same period a year ago. The Company anticipates continued higher sales of
these products as compared to last year. The Company also privately labels
various whole life, term and interest-sensitive life products. The products are
designed by ILICO, issued by the Company's private label partners and then
assumed in whole or in part by the Company.
The following table sets forth the Company's life insurance collected
premiums, including collected premiums associated with the Closed Block, for the
periods indicated:
28
Collected Premiums by Product
For The Three Months Ended For The Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
--------------------------- ----------------------------
($ in thousands)
Individual life premiums collected:
Traditional life:
First year and single $ 29,218 $ 21,357 $ 75,309 $ 62,760
Renewal 77,813 45,564 192,034 139,460
------------------------ ------------------------
Total 107,031 66,921 267,343 202,220
Universal life:
First year and single 35,831 6,208 59,950 20,885
Renewal 38,198 19,192 82,566 56,250
------------------------ ------------------------
Total 74,029 25,400 142,516 77,135
------------------------ ------------------------
Total individual life 181,060 92,321 409,859 279,355
Reinsurance assumed 17,043 485 23,069 1,122
Reinsurance ceded (26,909) (7,503) (52,060) (19,973)
------------------------ ------------------------
Total individual life, net of reinsurance $171,194 $ 85,303 $380,868 $260,504
======================== ========================
Traditional life insurance premiums collected were $107.0 million for
the third quarter of 2001 compared to $66.9 million for the third quarter of
2000. For the first nine months of 2001, traditional life insurance premiums
increased $65.1 million to $267.3 million compared to $202.2 million in 2000.
The entire amount of the increase, for both 2001 reporting periods, was due to
the additional premiums from ILICO. Excluding the ILICO premiums, first year and
single premiums declined $3.1 million and renewal premium declined $1.3 million
for the third quarter of 2001 as compared to 2000. Year-to-date, first year and
single premium decreased approximately $5.8 million while renewal premium
remained level. The decrease in first year and single premium, exclusive of the
ILICO premium, was primarily due to the Company's shift in sales from whole and
term life to universal life.
Universal life insurance premiums collected were $74.0 million for the
third quarter of 2001 compared to $25.4 million for the same period in 2000 and
$142.5 million for the first nine months of 2001 compared to $77.1 million for
the first nine months of 2000. Approximately $40.1 million of universal life
insurance premiums in the third quarter and $47.3 million of universal life
insurance premiums in the nine month period of 2001 were from the ILICO
acquisition. The remaining increases in the 2001 reporting periods were due to
the new universal life products discussed previously.
Reinsurance assumed increased approximately $16.6 million for the third
quarter of 2001 and $21.9 million for the nine months ended September 30, 2001
as compared to the same periods in 2000. The entire amount of the increases are
from the ILICO acquisition. ILICO private labels various whole, universal and
term life products. The products are designed by ILICO, issued by ILICO's
private label partners and then assumed in whole or in part by ILICO.
29
Effective January 1, 2000, ALIC entered into additional reinsurance
agreements which effectively reduced ALIC'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. In addition, effective July 1, 2000, ALIC entered into a
reinsurance agreement covering its Closed Block policies. Under this agreement,
ALIC has reinsured approximately 90% of the Closed Block net amount at risk not
previously reinsured. Reinsurance ceded was $0.4 million higher for the third
quarter of 2001 and $5.8 million higher for the first nine months of 2001 as
compared to the same periods in 2000 due to these additional reinsurance
agreements. The remainder of the increase in ceded premium was from the ILICO
acquisition. ILICO's reinsurance agreements effectively reduce ILICO's retention
limit to $500,000.
The following table sets forth information regarding the Company's life
insurance in force for each date presented:
Individual Life Insurance in Force
As of September 30,
2001 2000
----------------------------------
($ in thousands)
Traditional life
Number of policies 401,316 248,132
GAAP life reserves $ 3,015,294 $ 1,722,442
Face amounts $ 45,630,000 $ 23,385,000
Universal life
Number of policies 166,989 113,134
GAAP life reserves $ 1,477,621 $ 948,778
Face amounts $ 21,917,000 $ 12,552,000
Total life insurance
Number of policies 568,305 361,266
GAAP life reserves $ 4,492,915 $ 2,671,220
Face amounts $ 67,547,000 $ 35,937,000
The acquisition of ILICO increased the number of policies in force by
213,000, GAAP life reserves by $1.7 billion, and face amounts by $21.1 billion.
ANNUITIES
The following table sets forth annuity collected premiums for the
periods indicated:
30
Collected Premiums by Product
For The Three Months Ended For The Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------------------------- --------------------------
($ in thousands)
Fixed annuities:
Deferred fixed annuities $ 261,033 $ 297,240 $ 992,024 $ 754,648
Multi-choice annuities 135,995 33,989 290,304 84,023
Equity-indexed annuities 31,902 62,654 101,590 203,745
Variable annuities 12,428 -- 16,625 --
-------------------------- --------------------------
Total 441,358 393,883 1,400,543 1,042,416
Reinsurance assumed -- -- -- --
Reinsurance ceded (66,232) (36) (170,965) (152)
-------------------------- --------------------------
Total annuities, net of reinsurance $ 375,126 $ 393,847 $ 1,229,578 $ 1,042,264
========================== ==========================
The Company primarily markets its annuity products on a national basis
through networks of independent agents who are supervised by regional vice
presidents or Independent Marketing Organizations (IMOs). The Company's IMOs
consist of approximately 76 contracted organizations and five wholly-owned
organizations. Annuity collected premiums were $441.4 million for the third
quarter of 2001 compared to $393.9 million for the same period in 2000.
Year-to-date, annuity collected premiums were $1,400.5 million in 2001 compared
to $1,042.4 million in 2000. Annuity collected premiums from ILICO were
approximately $61.1 million for the third quarter of 2001 and $90.8 million for
the first nine months of 2001. Excluding the acquisition of ILICO, annuity
collected premiums decreased $13.6 million for the third quarter and increased
$267.3 million for the first nine months of 2001 compared to the respective 2000
reporting periods. The increase in annuity collected premiums was primarily
attributable to the introduction of multi-choice annuity products in late-1999
and early-2000 and the acquisition of ILICO. The increase is primarily due to
the 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 indices, less
management fees, and funds may be moved between investment alternatives. This
product has continued to grow in popularity with consumers and agents since its
introduction. In addition to the increase in multi-choice annuities and ILICO
acquisition, fixed annuity collected premiums decreased in the third quarter of
2001 compared to 2000 due to decreased sales of deferred fixed annuity and
equity-indexed annuities as a result of the declining interest rate environment.
The increase in the first nine months of 2001, compared to 2000 is primarily due
to the increased sales of multi-choice annuities, as previously discussed, and
deferred fixed annuities due to product repricing and increased marketing
efforts which was partially offset by lower sales of equity-indexed annuities
caused by lower returns. With the acquisition of ILICO, the Company has variable
annuity products. Sales of variable annuities were $12.4 million for the third
quarter of 2001 and $16.6 million for the period from May 18, 2001, the
acquisition date, through September 30, 2001. The assets and liabilities related
to the variable annuities are shown on the Consolidated Balance Sheets as
"Separate Account assets" and "Separate Account liabilities".
31
Effective October 1, 2000, the Company entered into a reinsurance
agreement to cede 35% of certain fixed annuity production on a modified
coinsurance basis. As a result of this new agreement, fixed annuity production
ceded increased $59.4 million in the third quarter and $160.1 million in the
first nine months of 2001 as compared to the same periods in 2000. In addition,
ILICO reinsures approximately 75% of its fixed annuities on a modified
coinsurance basis which increased reinsurance ceded by approximately $6.8
million in the third quarter and $10.8 million in the first nine months of 2001
as compared to the same periods in 2000. The ILICO modified coinsurance
agreement also impacted the Company's balance sheet. At September 30, 2001,
reinsurance receivables were $543.5 million compared to $6.5 million at December
31, 2000.
The following table sets forth information regarding annuities in force
for each date presented:
Annuities in Force
As of September 30,
2001 2000
--------------------------------
($ in thousands)
Deferred fixed and immediate annuities
Number of policies 174,900 162,311
GAAP annuity reserves $ 6,770,093 $ 5,944,341
Multi-choice annuities
Number of policies 54,058 1,666
GAAP annuity reserves $ 2,886,131 $ 84,981
Equity-index annuities
Number of policies 17,010 13,810
GAAP annuity reserves $ 716,017 $ 640,306
Total annuities
Number of policies 245,968 177,787
GAAP annuity reserves $ 10,372,241 $ 6,669,628
The acquisition of ILICO increased the total number of annuity policies
by 58,000 and GAAP annuity reserves by $2.9 billion.
32
RESULTS OF OPERATIONS
A summary of the Company's revenues follows:
For The Three Months Ended For The Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---------------------------- ------------------------------
($ in thousands)
Insurance premiums
Life insurance - traditional $ 98,662 $ 61,355 $ 238,944 $ 187,185
Annuities - Immediate annuity &
supplementary contract premiums 3,022 4,453 10,216 16,793
All other 263 47 516 140
------------------------ -------------------------
Total insurance premiums 101,947 65,855 249,676 204,118
Product charges
Life insurance - universal life 37,672 17,059 80,627 47,612
Annuities 9,735 9,089 25,893 27,331
------------------------ -------------------------
Total product charges 47,407 26,148 106,520 74,943
Net investment income
Life insurance 79,822 51,417 198,147 156,519
Annuities 148,944 117,545 414,816 347,118
All other 3,177 6,708 7,201 15,787
------------------------ -------------------------
Total net investment income 231,943 175,670 620,164 519,424
Realized/unrealized gains (losses) on investments
Life insurance - core 1,889 371 2,202 414
Annuities - core (347) (4,080) - (8,027)
All other - non-core (47,191) (3,583) (99,511) (3,939)
------------------------ -------------------------
Total realized/unrealized gains (losses) on investments (45,649) (7,292) (97,309) (11,552)
Other income
Annuities 9,207 5,899 26,996 15,412
All other 2,253 2,895 6,748 7,260
------------------------ -------------------------
Total other income 11,460 8,794 33,744 22,672
------------------------ -------------------------
Total revenues $ 347,108 $ 269,175 $ 912,795 $ 809,605
======================== =========================
Traditional life insurance premiums were $98.7 million in the third
quarter of 2001 compared to $61.4 million in the third quarter of 2000. For the
nine months ended September 30, 2001, traditional life insurance premiums
increased $51.7 million to $238.9 million compared to $187.2 million for the
same period in 2000. The acquisition of ILICO added traditional life insurance
premiums of $40.2 million in the third quarter and $59.1 million in the nine
month period ended September 30, 2001. Excluding these ILICO premiums,
traditional life insurance premiums declined $2.9 million and $7.4 million for
the three months and nine months, respectively, ended September 30, 2001 as
compared to the same periods a year ago. The decrease in traditional life
insurance premiums in 2001 as compared to 2000 was primarily the result of the
shift in sales focus from traditional life products to universal life products
discussed previously. In addition, the new reinsurance agreements entered into
in 2000 resulted in an increase in
33
ceded premium for the first nine months of 2001 of approximately $5.0 million as
compared to a year ago. Partially offsetting the decline in first year premium
and the increase in ceded premium was increased renewal premium. Open block
renewal premium increased approximately $7.3 million in the first nine months of
2001 as compared to the same period a year ago primarily due to the maturing of
this block, while Closed Block renewal premium declined approximately $7.1
million due to an increase in lapses. Total life insurance lapse rates,
exclusive of ILICO, were 7.5% for the first nine months of 2001 as compared to
6.2% a year ago. This increase in lapses in the Closed Block followed the
completion of the Company's demutualization. The total life insurance lapse rate
including ILICO was 7.4% for the first nine months of 2001. As was the case with
the Company's demutualization, lapses are anticipated to increase at ILICO now
that its demutualization is completed.
Immediate annuity and supplementary contract premiums decreased by $1.5
million to $3.0 million for the third quarter of 2001 compared to $4.5 million
for the same period in 2000, and decreased $6.6 million for the nine months
ended September 30, 2001 as compared to the nine months ended September 30,
2000. A decrease in immediate annuity premiums was anticipated as a result of
pricing adjustments made on these products.
Universal life product charges were $37.7 million for the third quarter
of 2001 compared to $17.1 million for the third quarter of 2000. Year-to-date,
universal life product charges increased $33.0 million to $80.6 million in 2001
compared to $47.6 million in 2000. Approximately $19.3 million and $29.6 million
of the universal life product charges for the three months and nine months ended
September 30, 2001, respectively, were attributable to the acquisition of ILICO.
The 2001 year-to-date increase, excluding ILICO, primarily reflects the
increased sales of universal life products and increased cost of insurance
charges corresponding with the normal aging and growth of the block of business.
Annuity product charges were $9.7 million for the third quarter of 2001
compared to $9.1 million for the same period in 2000, and $25.9 million for the
first nine months of 2001 compared to $27.3 million for the first nine months of
2000. Annuity product charges from the acquisition of ILICO totaled
approximately $3.4 million for the three months and $5.8 million for the nine
months ended September 30, 2001. Excluding these ILICO amounts, annuity product
charges declined $2.8 million and $7.2 million for the three months and nine
months ended September 30, 2001, respectively as compared to the same periods in
2000. The decrease in product charges exclusive of ILICO was primarily due to
decreased surrenders of annuity policies with surrender charges. Surrenders
totaled approximately $689.1 million for the first nine months of 2001 compared
to $916.6 million for the first nine months of 2000. Annuity withdrawal rates
exclusive of ILICO averaged 12.8% in the first nine months of 2001 compared to
16.0% in the first nine months of 2000. Excluding internal replacements,
withdrawal rates decreased 3.7% to 10.4% for the first nine months of 2001
compared to 14.1% for the same period a year ago. Annuity withdrawal rates,
including ILICO from the acquisition date forward, averaged 14.4% for the first
nine months of 2001. Surrenders at ILICO from the acquisition date through
September 30, 2001 were approximately $207.7 million.
Total net investment income was $231.9 million for the third quarter of
2001 compared to $175.7 million for the same period in 2000 and $620.2 million
for the first nine months of 2001 compared to $519.4 million for the same period
in 2000. Approximately $54.5 million and $80.1 million of net investment income
for the three months and the nine months ended September 30, 2001, respectively,
was attributable to the acquisition of ILICO. Excluding ILICO, 2001 net
investment increased primarily due to higher average invested assets (excluding
market value adjustments) and higher effective yields as compared to 2000.
Average invested assets (excluding market value adjustments) increased
approximately $249.8 million and $123.1 million between quarterly and
year-to-date periods, respectively. The increase was primarily due to the growth
of the Company's life insurance and annuity businesses since last year.
Partially offsetting this growth in assets from the product lines was a
reduction in holding company cash equivalents. The cash equivalents were
generated primarily from the sale of the
34
Company's discontinued operations in mid-1998 and were carried as invested
assets of the Company until October 2000, when the Company distributed the funds
to its former Members in connection with its demutualization. Investment income
on the cash equivalents was approximately $4.1 million and $11.3 million for the
third quarter 2001 period and year-to-date 2001 period, respectively. Net
investment income for 2001 was also negatively impacted as compared to 2000 due
to lower equity earnings from the Company's variable products joint venture.
Equity loss from this joint venture was $0.02 million for the first nine months
of 2001 compared to equity income of $1.9 million for the same period in 2000.
This decline was consistent with the operating results of others in the variable
product industry.
The effective yield on the entire investment portfolio in the third
quarter of 2001 was 6.43% compared to 6.83% in the third quarter of 2000 and
6.80% for the first nine months of 2001 compared to 6.82% for the first nine
months of 2000. Excluding ILICO, 2001 third quarter and year-to-date yields
increased to 7.16% and 7.28%, respectively. The increase in yields, exclusive of
ILICO, primarily resulted from the market value adjustments the Company made to
its assets in connection with its reorganization, in the third quarter of 2000.
The overall yield is lower including ILICO primarily due to the higher
percentage of convertible securities ILICO carries in its investment portfolio.
The convertible securities are associated with ILICO's total return strategy
fixed annuity products. The effective yield on the deferred fixed annuity
portfolio increased 4 basis points to 7.03% for the third quarter of 2001 as
compared to 6.99% for the third quarter of 2000. Year-to-date, the yields
increased 35 basis points to 7.10% as compared to 6.75% for 2000. The deferred
fixed annuity portfolio yield was also positively impacted by the market value
adjustments made in the third quarter of 2000.
Total realized and unrealized gains and losses on investments were a
net loss of $45.6 million for the third quarter of 2001 compared to a net loss
of $7.3 million for the same period a year ago, and a net loss of $97.3 million
for the first nine months of 2001 compared to a net loss of $11.6 million for
the first nine months of 2000. The significant change between periods is
primarily driven by the Company's adoption of SFAS No. 133 "Accounting for
Certain Derivative Instruments and Hedging Activities." In accordance with this
Statement, the Company has adjusted its options to market value, which, due to
the economic environment, resulted in an unrealized loss of $28.4 million and
$62.5 million for the third quarter and first nine months of 2001, respectively.
The Company uses its options to hedge its equity-indexed annuity products. In
addition, the Company also has trading securities that back its total return
strategy fixed annuity products. The market value adjustment on the trading
securities resulted in a loss of $11.0 million and $14.5 million for the third
quarter and nine months of 2001, respectively. The majority of the unrealized
gains and losses on the options and trading securities are offset by similar
adjustments to the option portion of the equity-indexed annuity reserves and to
the total return strategy annuity reserves. The reserve adjustments are
reflected in the policyowner benefits line of the Consolidated Statements of
Income and are discussed in the next section of Management's Discussion and
Analysis of Results of Operations and Financial Condition. The remainder of the
third quarter and year-to-date 2001 realized and unrealized gains and losses on
investments consisted of $6.2 million and $20.3 million, respectively, of
realized losses on investments. 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.
Other income primarily consists of real estate operating income,
property management fees, structured finance fees from affordable housing
programs, Corporate Owned Life Insurance (COLI) income, and third party annuity
commissions received by wholly-owned IMOs. Other income increased approximately
$2.7 million in the third quarter of 2001 to $11.5 million as compared to $8.8
million in the third quarter of 2000. Year-to-date, other income was $33.7
million in 2001 compared to $22.7 million in 2000. Approximately $5.6 million of
the year-to-date 2001 increase in other income was due to increased operations
of IMOs purchased in the second quarter of 2000 and first quarter of 2001, and
the remainder reflects the income on a $100 million COLI investment the Company
made in the fourth
35
quarter of 2000. COLI is classified as an other asset and accordingly the income
from this asset appears in other income instead of net investment income.
A summary of the Company's policyowner benefits follows:
For The Three Months Ended For The Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------------------------- ---------------------------
($ in thousands)
Life Insurance:
Traditional
Death benefits $ 18,066 $ 9,956 $ 43,140 $ 31,929
Change in liability for future policy
benefits and other policy benefits 70,586 48,201 167,957 136,955
---------------------- ----------------------
Total traditional 88,652 58,157 211,097 168,884
Universal
Death benefits in excess of cash value 12,649 4,848 28,743 21,238
Interest credited on policyowner
account balances 19,330 10,856 45,583 32,337
Other 6,126 1,724 7,721 2,777
---------------------- ----------------------
Total universal 38,105 17,428 82,047 56,352
---------------------- ----------------------
Total life insurance benefits 126,757 75,585 293,144 225,236
Annuities
Interest credited to deferred annuity
account balances 83,737 68,821 238,565 199,106
Other annuity benefits 23,050 13,189 62,456 45,380
---------------------- ----------------------
Total annuity benefits 106,787 82,010 301,021 244,486
All other benefits 1,285 64 1,870 263
Change in option value of equity-indexed
products and market value adjustments on
total return strategy annuities (29,559) -- (62,068) --
---------------------- ----------------------
Total policyowner benefits $ 205,270 $ 157,659 $ 533,967 $ 469,985
====================== ======================
Total life insurance benefits were $126.8 million in the third quarter
of 2001 compared to $75.6 million in the third quarter of 2000. For the first
nine months of 2001, total life insurance benefits increased $67.9 million to
$293.1 million compared to $225.2 million in the same period in 2000. The
acquisition of ILICO in the second quarter of 2001 increased life insurance
benefits $54.0 million and $74.6 million for the three months and nine months
ended September 30, 2001, respectively. Excluding the impact of the ILICO
acquisition, total life insurance benefits decreased $2.8 million and $6.7
million for the three months and nine months ended September 30, 2001,
respectively as compared to the same periods in 2000. This decrease in life
insurance benefits exclusive of the impact of ILICO was primarily due to
favorable mortality resulting in decreased death benefits and change in
liability for future policy
36
benefits on traditional insurance policies which was partially offset by
unfavorable mortality on Closed Block universal life policies resulting in
increased death benefits and increased interest credited on universal life
policies. The weighted average crediting rate on universal life policyowner
account balances for the first nine months of 2001 decreased 6 basis points to
5.56% compared to 5.62% for the first nine months of 2000. The traditional life
benefits, excluding ILICO, decreased in the 2001 reporting periods as compared
to 2000. The Company experienced a decrease in the change in liability for
future policy benefits of $4.9 million due to the continued run-off of the
Closed Block policies. The Company has estimated and recorded life insurance
benefits from the terrorist attacks in the United States on September 11, 2001
to be approximately $1.2 million.
Annuity benefits were $106.8 million in the third quarter of 2001
compared to $82.0 million in the same period a year ago. Year-to-date, annuity
benefits increased $56.5 million to $301.0 million in 2001 compared to $244.5
million in 2000. Approximately $22.3 million and $37.4 million of the increase
in annuity benefits in the three month and nine month 2001 periods,
respectively, was due to the acquisition of ILICO in the second quarter of 2001.
Annuity benefits increased approximately $2.5 million and $19.1 million for the
three months and nine months ending September 30, 2001 as compared to 2000,
respectively, exclusive of the impact of the ILICO acquisition. Interest
credited to deferred annuity account balances increased $26.3 million, exclusive
of ILICO, in the first nine months of 2001 compared to the same period a year
ago. Between the 2001 and 2000 nine month periods, average deferred fixed
annuity account balances increased approximately $233.4 million and the weighted
average crediting rate on deferred fixed annuity account balances increased 17
basis points to 5.07%. The increase in crediting rates reflects the change in
product mix and the increase in the investment yields of the deferred fixed
annuity portfolio. Overall, spreads on deferred fixed annuities widened 20 basis
points to 205 basis points in the first nine months of 2001 as compared to the
same period a year ago. Including ILICO deferred fixed annuity products, the
weighted average crediting rate remained at 5.07% and spreads were 203 basis
points. Other annuity benefits declined approximately $7.3 million, exclusive of
ILICO, between nine month periods, which corresponds with the decline in
immediate annuity and supplementary contract premiums. ILICO added approximately
$23.1 million to the year-to-date 2001 other annuity benefits due to payments
made under modified coinsurance agreements.
Included in policyowner benefits is the fair value change in options
embedded within the equity-indexed products and fair value changes on total
return strategy fixed annuity contracts. These fair value changes are being
recorded in accordance with SFAS No. 133, which the Company adopted January 1,
2001. Based on the economic environment for the three months ended September 30,
2001, the fair value changes resulted in a $29.6 million decrease in reserve
balances while the year-to-date fair value changes in 2001 were a $62.1 million
decrease in reserve balances. As discussed previously, there is an offsetting
adjustment to these fair value changes in the realized/unrealized gains (losses)
on investments line of the Consolidated Income Statement related to the fair
value changes on the options that hedge the equity-indexed products and on the
trading securities that back the total return strategy products. All of these
fair value changes are excluded from adjusted net operating income, as they do
not indicate overall operating trends.
37
A summary of the Company's expenses follows:
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
----------------------- -----------------------
($ in thousands)
Life Insurance
Underwriting, acquisition and
other expenses $ 21,567 $ 11,309 $ 53,618 $ 37,714
Amortization of deferred policy acquisition costs
and value of business acquired (VOBA), net
of non-core adjustment of $76 and $28
for the three months ended September 30,
2001 and 2000, respectively, and $661 and
$111 for the nine months ended September 30,
2001 and 2000, respectively 17,289 8,829 39,022 25,893
---------------------- ----------------------
Total life insurance 38,856 20,138 92,640 63,607
Annuities
Underwriting, acquisition and
other expenses 17,149 12,659 45,231 38,292
Amortization of deferred policy acquisition costs
and value of business acquired (VOBA), net
of non-core adjustment of ($7,397) and
($2,579) for the three months ended September
30, 2001 and 2000, respectively, and ($13,519)
and ($6,378) for the nine months ended
September 30, 2001 and 2000, respectively 21,302 14,660 60,348 47,502
---------------------- ----------------------
Total annuities 38,451 27,319 105,579 85,794
Amortization of deferred policy acquisition costs due
to non-core realized gains or losses (7,321) (2,551) (12,858) (6,267)
All other expenses 2,084 6,606 8,406 15,814
Demutualization costs 249 3,732 451 10,437
Restructuring costs 6,527 -- 6,527 --
---------------------- ----------------------
Total expenses $ 78,846 $ 55,244 $ 200,745 $ 169,385
====================== ======================
Total life insurance expenses were $38.9 million in the third quarter
of 2001 compared to $20.1 million in the same period in 2000. For the first nine
months of 2001, life insurance expenses totaled $92.6 million compared to $63.6
million a year ago. The acquisition of ILICO in the second quarter of 2001
increased total life insurance expenses approximately $16.3 million and $22.8
million for the three months and nine months ended September 30, 2001,
respectively. Excluding the impact of the ILICO acquisition, underwriting,
acquisition and other expenses increased approximately $2.5 million in the third
quarter of 2001 and increased approximately $6.2 million in the first nine
months of 2001, as compared to the same periods a year ago. The increase in
expenses as compared to last year was
38
primarily due to general compensation increases, depreciation on the new life
insurance administrative system and distribution system enhancements.
Amortization of deferred policy acquisition costs and value of business acquired
(VOBA), exclusive of ILICO, increased approximately $0.6 million in the third
quarter of 2001 and increased approximately $2.2 million the first nine months
of 2001 compared to the comparable periods in 2000. Deferred policy acquisition
costs are generally amortized in proportion to gross margins. The increase in
amortization in 2001 as compared to 2000 is primarily associated with the
Company's market value adjustment completed at the end of the third quarter
2000. Additional VOBA was established as a result of the market value
adjustment.
Total annuity expenses increased by $11.2 million to $38.5 million in
the third quarter of 2001 compared to $27.3 million in the third quarter of
2000. Year-to-date, total annuity expenses were $105.6 million in 2001 compared
to $85.8 million in 2000. Approximately $3.3 million and $4.7 million of the
2001 total annuity expenses in the third quarter and year-to-date periods,
respectively, were due to the ILICO acquisition. Excluding these ILICO expenses,
underwriting, acquisition and insurance expenses increased approximately $1.9
million in the third quarter of 2001 compared to the same period a year ago and
increased approximately $3.7 million between year-to-date periods. The increase
in the 2001 reporting periods as compared to 2000 primarily reflects increased
employee and agent costs and expenses related to the new IMO acquired in January
of 2001. These increases are partially offset by a reduction in expenses from
the consolidation of annuity operations in Topeka. The increase in expense due
to the new IMO was offset by the increase in other income from the IMO discussed
previously. Exclusive of the impact of ILICO, amortization of deferred policy
acquisition costs and VOBA increased $5.9 million in the third quarter of 2001
as compared to the same period in 2000 and $11.2 million between year-to-date
periods. The increase in amortization was partially attributable to the general
growth in the deferred policy acquisition cost asset associated with the
continued growth in annuity sales. In addition, VOBA amortization was higher in
2001 due to the additional VOBA established in connection with the Company's
third quarter market value adjustment.
Other expenses decreased by $4.5 million in the third quarter of 2001
to $2.1 million compared to $6.6 million in the same period in 2000.
Year-to-date, other expenses were $8.4 million in 2001 compared to $15.8 million
in 2000. Other expenses primarily consist of expenses related to the real estate
management company and the holding company, and tend to fluctuate from period to
period depending on the properties under management each quarter. Beginning in
1999, the Company began decreasing the number of properties under management
and, accordingly, other expenses are also declining.
The 2000 demutualization costs consist primarily of legal, actuarial
and consulting expenses associated with the demutualization of the Company that
was completed in the third quarter of 2000. The 2001 demutualization costs are
associated with the demutualization of ILICO, which was completed in connection
with the Company's acquisition of ILICO. As these costs are not of a continuing
nature, they have been excluded from the Operating Segment amounts.
Restructuring costs relate to the Company's consolidation of various
functions in connection with a restructuring of its life insurance and annuity
operations, which began in the third quarter of 2001. The objective of the
restructuring plan is to eliminate duplicative life insurance, annuity and
general administrative functions for all business units. The elimination of
duplicative functions will reduce on-going operating costs for the Company.
General administrative functions will be transitioned so they are performed
primarily in Des Moines. Life insurance processes will be transitioned so they
are performed in Des Moines and Indianapolis and annuity functions will be
transitioned to Topeka. The restructuring charges includes severance and
termination benefits of $5.9 million related to the elimination of approximately
50 positions and other costs of $0.6 million. Actual pre-tax costs totaling $2.7
million have been expended and an accrual for severance and termination benefits
not yet paid amounted to $3.8 at September 30, 2001. The Company has not
finalized all restructuring activities as of September 30, 2001. Additional
activities will primarily involve relocation or severance benefits for affected
employees
39
and various administration, finance and actuarial system conversion costs.
Expenditures for all restructuring activities are expected to be completed in
the fourth quarter of 2002.
A summary of the Company's income from operations by operating segment
follows:
For The Three Months Ended For The Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
--------------------------- ---------------------------
($ in thousands)
Life Insurance:
Revenues $ 218,045 $ 130,202 $ 519,920 $ 391,730
Benefits and expenses (165,613) (95,723) (385,784) (288,843)
Dividends to policyowners (26,191) (18,732) (68,416) (56,226)
-------------------------- --------------------------
Adjusted pre-tax operating income 26,241 15,747 65,720 46,661
Annuities:
Revenues 170,561 132,906 477,921 398,627
Benefits and expenses (145,238) (109,329) (406,600) (330,280)
-------------------------- --------------------------
Adjusted pre-tax operating income 25,323 23,577 71,321 68,347
All other adjusted pre-tax operating (loss) 2,324 2,980 4,189 7,110
-------------------------- --------------------------
Total adjusted pre-tax operating income $ 53,888 $ 42,304 $ 141,230 $ 122,118
========================== ==========================
Adjusted pre-tax operating income from Life Insurance operations was
$26.2 million in the third quarter of 2001 compared to $15.7 million in the
third quarter of 2000. For the first nine months of 2001, adjusted pre-tax
operating income from Life Insurance operations increased $19.0 million to $65.7
million compared to $46.7 million in 2000. The acquisition of ILICO contributed
$9.8 million and $20.7 million of adjusted pre-tax operating income to the Life
Insurance segment in the third quarter and first nine months of 2001,
respectively. Exclusive of the impact of the ILICO acquisition, Life Insurance
operating income increased $0.7 million between quarterly periods and decreased
$1.7 million between year-to-date periods. Gross margins in the Life Insurance
segment remained level between year over year periods with the fluctuations in
insurance expenses and the decline in earnings from the Company's variable
products joint venture primarily impacting the overall results.
Adjusted pre-tax operating income from Annuity operations was $25.3
million in the third quarter of 2001 compared to $23.6 million in the same
period in 2000. Year-to-date, adjusted pre-tax operating income from Annuity
operations increased $3.0 million to $71.3 million in 2001 compared to $68.3
million in 2000. The acquisition of ILICO contributed $3.7 million and $2.5
million of adjusted pre-tax operating income to the Annuity segment in the third
quarter and first nine months of 2001, respectively. Excluding this contribution
from ILICO, Annuity operating income decreased $2.0 million between quarterly
periods and increased $0.5 million between year-to-date periods. The decrease in
the third quarter of 2001 was primarily due to lower margins on equity-indexed
annuity products and increased employee and agent costs. Year-to-date, the
decreased margins on the equity indexed annuity products and increased employee
and agent costs were offset by increased net IMO operations.
All other adjusted pre-tax operating income was $4.2 million in the
first nine months of 2001 compared to $7.1 million in the first nine months of
2000. The decrease in 2001 compared to 2000 was
40
primarily due to decreased investment income as the Company distributed
approximately $340 million of cash equivalents in October 2000 in connection
with its demutualization.
Interest expense decreased $1.6 million in the third quarter of 2001 to
$6.0 million compared to $7.6 million in the third quarter of 2000.
Year-to-date, interest expense was $20.7 million in 2001 compared to $22.4
million in 2000. The decreased interest expense in 2001 was primarily due to
lower borrowing rates in 2001 as compared to 2000 and the maturity of the ACES
units in July 2001. The 2001 interest expense also included approximately $0.8
million of interest expense from ILICO. ILICO has a $25 million, 8.66% surplus
note, due on April 1, 2011.
Income tax expense was $28.7 million in the first nine months of 2001
compared to $36.8 million in the same period in 2000. The effective tax rate was
32.3% and 40.1% for the first nine months of 2001 and 2000, respectively. The
decrease in the effective tax rate in 2001 reflected the decline in
nondeductible expenses associated with the Company's demutualization and
increased tax exempt income from the COLI investment.
Minority interest represents the minority stockholders ownership
percentage share of net income of ALHI prior to the Company's acquisition of
this Minority Interest. The minority shareholder ownership percentage was 42%
from January 1, 2000 through September 20, 2000, the date at which the Minority
Interest was acquired. As a result of the Company's acquisition of the Minority
Interest there is no net income applicable to the Minority Interest in 2001.
Net income from continuing operations increased $10.7 million to $21.1
million in the third quarter of 2001 compared to $10.4 million in the third
quarter of 2000. Year-to-date, net income from continuing operations was $60.2
million in 2001 and $33.1 million in 2000. Approximately $3.8 million and $7.9
million of the increase in the quarter and year-to-date periods, respectively,
was from the ILICO acquisition. The remainder was primarily due to the lower
effective tax rate and the reduction in net income applicable to the Minority
Interest.
The Company adopted SFAS No. 133 January 1, 2001. In accordance with
the provisions of the Statement, the Company has recorded the differences
between the previous carrying amounts of its derivative instruments and the fair
value of its derivative instruments, as of this initial application date, as the
effect of a change in accounting principle. The gross difference between
carrying amounts and fair value amounts of the Company's derivative instruments
was a reduction of approximately $11.3 million. The deferred policy acquisition
cost and VOBA amortization impact from the derivative adjustments was
approximately $1.1 million and the income tax benefit was $4.2 million,
resulting in the net cumulative effect of change in accounting for derivatives
of $8.2 million.
Net income was $21.5 million in the third quarter of 2001 compared to
$11.1 million in the third quarter of 2000 and $53.4 million in the first nine
months of 2001 compared to $33.8 million in the first nine months of 2000. The
acquisition of ILICO increased net income approximately $3.8 million and $7.9
million in the 2001 third quarter and year-to-date periods, respectively. In
addition, the lower effective tax rate and reduction in net income applicable to
Minority Interest also increased net income in the 2001 periods as compared to
2000. Year- to-date, the adoption of SFAS No. 133 in the first quarter of 2001
had a one-time cumulative effect of reducing net income by $8.2 million.
41
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
The Company's cash flows from operations consist of dividends from
subsidiaries, if declared and paid, interest from income on loans and advances
to its subsidiaries (including a surplus note issued to the Company by ALIC),
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. Generally, under the various state statutes,
the Company's life insurance subsidiaries dividends may be paid only from the
earned surplus arising from their respective businesses and must receive the
prior approval of the respective state regulator to pay any dividend that would
exceed certain statutory limitations. The current statutes generally limit 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. Generally, the various state laws give the state regulators broad
discretion to approve or disapprove requests for dividends in excess of these
limits. Based on these limitations and 2000 results, the Company's subsidiaries
could pay an estimated $102.9 million in dividends in 2001 without obtaining
regulatory approval. Of this amount, the Company's subsidiaries paid the Company
$30.0 million in the first nine months of 2001. The 2000 statutory results
exceeded prior years' statutory results primarily due to reinsurance
transactions entered into in 2000 and the acquisition of ILICO. As reinsurance
activity varies from year to year, 2001 statutory results may decline as
compared to 2000 and dividend capacity would change accordingly.
The Company has a $150 million revolving credit facility with a
syndicate of lenders (the "Bank Credit Facility"). As of September 30, 2001,
there was a $96 million outstanding loan balance under the Bank Credit Facility.
The Bank Credit Facility provides for typical events of default and covenants
with respect to the conduct of 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,
(b) cannot have an interest coverage ratio less than 2.50:1.0, (c) 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 (d) must cause certain of its life insurance subsidiaries to maintain
certain ratings from A.M. Best and certain levels of risk-based capital.
The Company has announced that its Board of Directors approved a stock
purchase program under which the Company may purchase up to three million shares
of its common stock at such times and under such conditions as the Company deems
advisable. The purchases may be made in the open market or by such other means
as the Company determines to be appropriate, including privately negotiated
purchases. The purchase program supercedes all prior purchase programs. The
funds for the purchase program would come from a combination of internal
sources, from its life insurance subsidiaries and utilization of its Bank Credit
Facility. During the third quarter of 2001, 1.2 million shares were repurchased
and were funded by additional borrowings of approximately $32 million on the
Bank Credit Facility.
42
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 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 September 30, 2001 (including liabilities in both the Closed Block and the
general account):
43
($ in millions)
---------------
Not subject to discretionary withdrawal $ 500.0
Subject to discretionary withdrawal with adjustments:
Specified surrender charges (A) 6,150.9
Market value adjustments 3,490.8
----------
Subtotal 9,641.7
----------
Subject to discretionary withdrawal without adjustments 1,643.7
----------
Total $ 11,785.4
==========
(A) Includes $836.2 million of statutory liabilities with a contractual
surrender charge of less than five percent of the account balance.
ALIC is a party to a $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 a
separate account and is further backed by the general account assets of ALIC.
The separate account assets are legally segregated and are not subject to claims
that arise out of any other business of ALIC. 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 ALIC may terminate at
any time.
ALIC and its joint venture partner are contingently liable in the event
the joint venture, AVLIC, cannot meet its obligations. At September 30, 2001,
AVLIC had statutory assets of $2,018.6 million, liabilities of $1,962.5 million
and surplus of $56.1 million.
Through their respective memberships in the Federal Home Loan Banks
(FHLB) of Des Moines and Topeka, ALIC and American Investors Life Insurance
Company, a subsidiary of AAG, are eligible to borrow under variable-rate short
term fed funds arrangements to provide additional liquidity. These borrowings
are secured and interest is payable at the current rate at the time of any
advance. There were no borrowings under these arrangements outstanding at
September 30, 2001. In addition, ALIC has long-term advances from the FHLB
outstanding of $14.5 million at September 30, 2001.
The Company's life insurance subsidiaries may also obtain liquidity
through sales of investments. The Company's investment portfolio as of September
30, 2001 had a carrying value of $14.9 billion, including Closed Block
investments.
At September 30, 2001, the statutory surplus of the Company's
subsidiaries was approximately $648.8 million. The Company believes that this
level of statutory capital is more than adequate as each 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 has access to the public
debt and equity markets.
44
ITEM 3. 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 the Company's liabilities, primarily the
Company's lapsation, to determine liability duration. The asset duration is
determined 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 September 30, 2001. 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
3 mos
Amortized 2001 2002 2003 2004 2005 2006 Thereafter Cost
--------- ---- ---- ---- ---- ---- ---- ---------- ----
($ in millions)
Fixed maturity securities $ 284 $ 756 $ 1,472 $ 1,352 $ 1,591 $ 1,113 $ 6,271 $ 12,839
Average interest rate 6.6% 6.3% 6.4% 6.2% 6.4% 6.7% 6.8%
Mortgage loans $ 14 $ 53 $ 53 $ 68 $ 69 $ 66 $ 608 $ 931
Average interest rate 8.2% 8.3% 8.2% 8.2% 8.2% 8.1% 7.9%
Total $ 298 $ 809 $ 1,525 $ 1,420 $ 1,660 $ 1,179 $ 6,879 $ 13,770
===================================================================================================
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 65% 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 7% of the bond portfolio is below investment
grade. Fixed maturity securities have a weighted average maturity of
approximately 7.04 years.
45
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 may fail to perform under
the terms of the contracts.
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
consist primarily of its investment in AMAL. The remainder of 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, the Company and its subsidiaries
are parties to certain litigation, none of which management believes is material
to the Company's results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits included as part of this report is set forth in the
Exhibit Index which immediately precedes such exhibits and is hereby
incorporated by reference herein.
(b) The following report on Form 8-K/A was filed during the
quarter ended September 30, 2001:
Form 8-K dated May 18, 2001 was amended by filing Form 8-K/A
on July 23, 2001 which included financial statements and pro
forma financial information for Indianapolis Life Insurance
Company in connection with the Company's completion of the
acquisition of Indianapolis Life Insurance Company.
46
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.
DATED: November 13, 2001 AMERUS GROUP CO.
By /s/ Thomas C. Godlasky
--------------------------------
Executive Vice President and
Chief Investment Officer
(Principal Financial Officer)
By /s/ Brenda J. Cushing
--------------------------------
Senior Vice President and
Controller
(Principal Accounting Officer)
47
AMERUS GROUP CO. 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 AmerUs Life Holdings, Inc. 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 AmerUs Life Holdings, Inc., AFC Corp. and AmVestors
Financial Corporation ("AmVestors"), filed as Exhibit 2.2 to the
Registration Statement of AmerUs Life Holdings, Inc. 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 AmerUs Life Holdings, Inc., a
wholly owned subsidiary of AmerUs Life Holdings, Inc. and Delta Life
Corporation, filed as Exhibit 2.2 to Form 8-K of AmerUs Life
Holdings, Inc. dated October 8, 1997, is hereby incorporated by
reference.
2.4 Combination and Investment Agreement, dated February 18, 2000, among
American Mutual Holding Company, AmerUs Life Holdings, Inc.,
Indianapolis Life Insurance Company and The Indianapolis Life Group
of Companies, Inc., filed as Exhibit 2.1 to AmerUs Life Holdings,
Inc.'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 AmerUs Life Holdings, Inc., filed
as Exhibit 2.5 on Form 10-K, dated March 8, 2000, is hereby
incorporated by reference.
2.6 Agreement and Plan of Merger, dated December 17, 1999, by and between
American Mutual Holding Company and AmerUs Life Holdings, Inc., filed
as Exhibit 2.6 on Form 10-K, dated March 8, 2000, is hereby
incorporated by reference.
2.7 Amendment No. 1 to Agreement and Plan of Merger, dated February 18,
2000, by and between American Mutual Holding Company and AmerUs Life
Holdings, Inc., filed as Exhibit 2.7 on Form 10-K, dated March 8,
2000, is hereby incorporated by reference.
2.8 Letter Agreement, dated December 17, 1999, by and between American
Mutual Holding Company and AmerUs Life Holdings, Inc., filed as
Exhibit 2.8 on Form 10-K, dated March 8, 2000, is hereby incorporated
by reference.
2.9 Notification Agreement, dated as of February 18, 2000, by and among
American Mutual Holding Company, AmerUs Life Holdings, Inc. and
Bankers Trust Company, filed as Exhibit 2.9 on Form 10-K, dated March
8, 2000, is hereby incorporated by reference.
2.10 Amendment No. 2 to Agreement and Plan of Merger, dated April 3, 2000,
by and between American Mutual Holding Company and AmerUs Life
Holdings, Inc., filed as Exhibit 2.10 on Form 10-Q, dated May 15,
2000, is hereby incorporated by reference.
2.11 Amendment No. 1 to the Purchase Agreement, dated April 3, 2000, by
and between American Mutual Holding Company and AmerUs Life Holdings,
Inc., filed as Exhibit 2.11 on Form 10-Q, dated May 15, 2000, is
hereby incorporated by reference.
2.12 Amendment to Combination and Investment Agreement dated February 18,
2000 among American Mutual Holding Company, AmerUs Life Holdings,
Inc., Indianapolis Life Insurance Company and The Indianapolis Life
Group of Companies, Inc., dated September 18, 2000, filed as Exhibit
2.2 to Form 8-K12G3 of the Registrant dated September 21, 2000, is
hereby incorporated by reference.
48
3.1 Amended and Restated Articles of Incorporation of the Registrant
filed as Exhibit 3.1 on Form 10-Q, dated November 14, 2000 is hereby
incorporated by reference.
3.2 Amended and Restated Bylaws of the Registrant, filed as Exhibit 3.2
on Form 10-Q, dated November 14, 2000 is hereby incorporated by
reference.
4.1 Amended and Restated Trust Agreement dated as of February 3, 1997
among AmerUs Life Holdings, Inc., 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 AmerUs Life Holdings, Inc. 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 AmerUs Life Holdings,
Inc. 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 AmerUs Life Holdings, Inc. 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 AmerUs Life
Holdings, Inc., 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.
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 AmerUs Life Holdings, Inc., First Union
Trust Company and the administrative trustees named therein, relating
to AmerUs Life Holdings, Inc.'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 AmerUs Life Holdings, Inc., 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 AmerUs Life Holdings, Inc., relating to AmerUs Life
Holdings, Inc.'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 AmerUs Life
Holdings, Inc., relating to AmerUs Life Holdings, Inc.'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 AmerUs Life
Holdings, Inc. and First Union National Bank relating to AmerUs Life
Holdings, Inc.'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 AmerUs Life
Holdings, Inc.'s 7.0% ACES Units, filed as Exhibit 4.10 on Form 10-Q,
dated August 13, 1998, is hereby incorporated by reference.
4.11 Pledge Agreement, dated as of July 27, 1998, among AmerUs Life
Holdings, Inc., Goldman, Sachs & Co. and First Union National Bank
relating to AmerUs Life Holdings, Inc.'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 AmerUs
Life Holdings, Inc. and First Union National Bank, as Indenture
Trustee, relating to the AmerUs Life Holdings, Inc.'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
AmerUs Life Holdings, Inc. and First Union National Bank, as
Indenture Trustee, relating to AmerUs Life Holdings, Inc.'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.
49
4.14 First Supplement to Indenture dated February 3, 1997 among American
Mutual Holding Company, AmerUs Life Holdings, Inc. and Wilmington
Trust Company as Trustee, relating to the Company's 8.85% Junior
Subordinated Debentures, Series A, dated September 20, 2000, filed as
Exhibit 4.14 on Form 10-Q dated November 14, 2000, is hereby
incorporated by reference.
4.15 Assignment and Assumption Agreement to Amended and Restated Trust
Agreement, dated February 3, 1997 between American Mutual Holding
Company and AmerUs Life Holdings, Inc., dated September 20, 2000,
filed as Exhibit 4.15 on Form 10-Q dated November 14, 2000, is hereby
incorporated by reference.
4.16 Assignment and Assumption to Guaranty Agreement, dated February 3,
1997 between American Mutual Holding Company and AmerUs Life
Holdings, Inc., dated September 20, 2000, filed as Exhibit 4.16 on
Form 10-Q, dated November 14, 2000, is hereby incorporated by
reference.
4.17 First Supplement to Subordinated Indenture, dated July 27, 1998,
relating to AmerUs Life Holdings, Inc.'s 6.86% Junior Subordinated
Deferrable Interest Debentures, among American Mutual Holding
Company, AmerUs Life Holdings, Inc. and First Union National Bank, as
Indenture Trustee, dated September 20, 2000, filed as Exhibit 4.17 on
Form 10-Q, dated November 14, 2000, is hereby incorporated by
reference.
4.18 First Supplement to Master Unit Agreement dated July 27, 1998,
relating to AmerUs Life Holdings, Inc.'s 7.0% ACES units, between
American Mutual Holding Company and First Union National Bank, as
Unit Agent, dated September 20, 2000, filed as Exhibit 4.18 on Form
10-Q, dated November 14, 2000, is hereby incorporated by reference.
4.19 Assignment and Assumption Agreement to the QUIPS Guarantee Agreement
dated July 27, 1998, relating to AmerUs Life Holdings, Inc.'s 7.0%
ACES units, between American Mutual Holding Company and AmerUs Life
Holdings, Inc., dated September 20, 2000, filed as Exhibit 4.19 on
Form 10-Q, dated November 14, 2000, is hereby incorporated by
reference.
4.20 Assignment and Assumption Agreement to the Common Trust Securities
Guarantee Agreement dated July 27, 1998, relating to AmerUs Life
Holdings, Inc.'s 7.0% ACES units, between American Mutual Holding
Company and AmerUs Life Holdings, Inc., dated September 20, 2000,
filed as Exhibit 4.20 on Form 10-Q, dated November 14, 2000, is
hereby incorporated by reference.
4.21 First Supplement to Purchase Contracts between American Mutual
Holding Company and Holders, as specified, dated September 20, 2000,
filed as Exhibit 4.21on Form 10-Q, dated November 14, 2000, is hereby
incorporated by reference.
4.22 First Supplement to the Pledge Agreement dated July 27, 1998,
relating to AmerUs Life Holdings, Inc.'s 7.0% ACES units, among
American Mutual Holding Company, Goldman Sachs & Co., as Call Option
Holder, the Chase Manhattan Bank, as Collateral Agent and First Union
National Bank, as Unit Agent, dated September 20, 2000, filed as
Exhibit 4.22 on Form 10-Q, dated November 14, 2000, is hereby
incorporated by reference.
4.23 First Supplement to Senior Indenture dated June 16, 1998, relating to
AmerUs Life Holdings, Inc.'s 6.95% Senior Notes, among American
Mutual Holding Company, AmerUs Life Holdings, Inc. and First Union
National Bank, as Trustee, dated September 20, 2000, filed as Exhibit
4.23 on Form 10-Q, dated November 14, 2000, is hereby incorporated by
reference.
10.1 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.
10.2 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 AmerUs Life Holdings,
Inc. on Form S-1, Registration Number 333-12239, is hereby
incorporated by reference.
50
10.3 AmerUs Life Holdings, Inc. Executive Stock Purchase Plan, dated
November 13, 1998, filed as Exhibit 4.11 to the registration
statement of AmerUs Life Holdings, Inc. on Form S-8, Registration
Number 333-72237, is hereby incorporated by reference.
10.4 AlloAmerUs Supplemental Executive Retirement Plan, effective January
1, 1996, filed as Exhibit 10.6 to the registration statement of
AmerUs Life Holdings, Inc. on Form S-1, Registration Number
333-12239, is hereby incorporated by reference.
10.5 Management Incentive Plan, filed as Exhibit 10.9 to the registration
statement of AmerUs Life Holdings, Inc. on Form S-1, Registration
Number 333-12239, is hereby incorporated by reference.
10.6 AmerUs Life Insurance Company Performance Share Plan, filed as
Exhibit 10.10 to the registration statement of AmerUs Life Holdings,
Inc. on Form S-1, Registration Number 333-12239, is hereby
incorporated by reference.
10.7 AmerUs Life Stock Incentive Plan, filed as Exhibit 10.11 to the
registration statement of AmerUs Life Holdings, Inc. on Form S-1,
Registration Number 333-12239, is hereby incorporated by reference.
10.8 AmerUs Life Non-Employee Director Stock Plan, filed as Exhibit 10.13
to the registration statement of AmerUs Life Holdings, Inc. on Form
S-1, Registration Number 333-12239, is hereby incorporated by
reference.
10.9 Form of Indemnification Agreement executed with directors and certain
officers, filed as Exhibit 10.33 to the registration statement of
AmerUs Life Holdings, Inc. on Form S-1, Registration Number
333-12239, is hereby incorporated by reference.
10.10 Tax Allocation Agreement dated as of November 4, 1996, filed as
Exhibit 10.68 to the registration statement of AmerUs Life Holdings,
Inc. on Form S-1, Registration Number 333-12239, is hereby
incorporated by reference.
10.11 Credit Agreement, dated as of October 23, 1997, among AmerUs Life
Holdings, Inc., Various Lender Institutions, the Co-Arrangers and The
Chase Manhattan Bank, as Administrative Agent , filed as Exhibit
10.84 to the registration statement of AmerUs Life Holdings, Inc. on
Form S-4, Registration Number 333-40065, is incorporated by
reference.
10.12 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.
10.13 Consent dated as of May 20, 1998 to the Credit Agreement dated as of
October 23, 1997 among AmerUs Life Holdings, Inc., 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 16, 1998, is hereby incorporated by reference.
10.14 First Amendment dated as of May 30, 1997 to the Credit Agreement
dated as of October 23, 1997 among AmerUs Life Holdings, Inc.,
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 16, 1998, is hereby incorporated by reference.
10.15 Second Amendment dated as of June 22, 1998 to the Credit Agreement
dated as of October 23, 1997 among AmerUs Life Holdings, Inc.,
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 16, 1998, is hereby incorporated by reference.
10.16 Second Consent and Amendment dated as of October 2, 1998 to the
Credit Agreement dated as of October 23, 1997 among AmerUs Life
Holdings, Inc., 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 16, 1998, is hereby incorporated by
reference.
10.17 MIP Deferral Plan dated as of September 1, 1998, filed as Exhibit
10.76 on Form 10-Q, dated November 16, 1998, is hereby incorporated
by reference.
10.18 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.
51
10.19 Third Waiver to Credit Agreement dated as of November 16, 1998 to the
Credit Agreement dated as of October 23, 1997 among AmerUs Life
Holdings, Inc., 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.
10.20 Fourth Consent and Amendment, dated as of December 4, 1998 to the
Credit Agreement dated as of October 23, 1997 among AmerUs Life
Holdings, Inc., 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.
10.21 Facility and Guaranty Agreement, dated February 12, 1999, among The
First National Bank of Chicago and AmerUs Life Holdings, Inc., filed
as Exhibit 10.39 on Form 10-Q dated May 14, 1999, is hereby
incorporated by reference.
10.22 Form of Reimbursement Agreement, dated February 15, 1999, among
AmerUs Life Holdings, Inc. 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.
10.23 Amendment No. 1 to Facility Agreement, dated March 23, 1999, among
The First National Bank of Chicago and AmerUs Life Holdings, Inc.,
filed as Exhibit 10.41 on Form 10-Q dated May 14, 1999, is hereby
incorporated by reference.
10.24 1999 Non-Employee Stock Option Plan, dated April 19, 1999, filed on
Form S-3, Registration Number 333-72643, is hereby incorporated by
reference.
10.25 Fifth Waiver and Amendment to Credit Agreement dated as of October 1,
1998 to the Credit Agreement dated as of October 23, 1997 among
AmerUs Life Holdings, Inc., 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.
10.26 Sixth Amendment to Credit Agreement dated as of May 18, 1999 to the
Credit Agreement dated as of October 23, 1997 among AmerUs Life
Holdings, Inc., 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.
10.27 Amendment No. 2 to Facility Agreement, dated January 25, 2000, among
The First National Bank of Chicago and the Registrant, filed as
Exhibit 10.44 on Form 10-K, dated March 8, 2000, is hereby
incorporated by reference.
10.28 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, filed as Exhibit 10.45 on Form
10-K, dated March 8, 2000, is hereby incorporated by reference.
10.29 Seventh Amendment to Credit Agreement dated as of December 23, 1999
to the Credit Agreement dated as of October 23, 1997 among AmerUs
Life Holdings, Inc., Various Lender Institutions, the Co-Arrangers
and The Chase Manhattan Bank, as Administrative Agent, filed as
Exhibit 10.46 on Form 10-K, dated March 8, 2000, is hereby
incorporated by reference.
10.30 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
AmerUs Life Holdings, Inc.'s report on Form 8-K/A on March 6, 2000,
are hereby incorporated by reference.
10.31 Advance, Pledge and Security Agreement, dated April 12, 2000, by and
between the Federal Home Loan Bank of Topeka and American Investors
Life Insurance Company, Inc., filed as Exhibit 10.48 on Form 10-Q,
dated May 15, 2000, is hereby incorporated by reference.
10.32 Institutional Custody Agreement, dated April 12, 2000, by and between
the Federal Home Loan Bank of Topeka and American Investors Life
Insurance Company, Inc., filed as Exhibit 10.49 on Form 10-Q, dated
May 15, 2000, is hereby incorporated by reference.
52
10.33 Line of Credit Application, dated April 12, 2000, by and between the
Federal Home Loan Bank of Topeka and American Investors Life
Insurance Company, Inc., filed as Exhibit 10.50 on Form 10-Q, dated
May 15, 2000, is hereby incorporated by reference.
10.34 Stock Purchase Agreement, dated February 1, 2000, by and among
AmVestors Financial Corporation, Creative Marketing International
Corporation and the Stockholders of Creative Marketing International
Corporation, filed as Exhibit 10.51 on Form 10-Q, dated May 15, 2000,
is hereby incorporated by reference.
10.35 Stock Purchase Agreement, dated February 23, 2000, by and among
American Investors Sales Group, Inc., Community Bank Marketing, Inc.
and Community Financial Services, Inc., filed as Exhibit 10.52 on
Form 10-Q, dated May 15, 2000, is hereby incorporated by reference.
10.36 Agreement for Advances, Pledge and Security Agreement, dated March
12, 1992, by and between Central Life Assurance Company and the
Federal Home Loan Bank of Des Moines, filed as Exhibit 10.53 on Form
10-Q, dated May 15, 2000, is hereby incorporated by reference.
10.37 Agreement for Advances, Pledge and Security Agreement, dated
September 1, 1995, by and between American Vanguard Life Insurance
Company and the Federal Home Loan Bank of Des Moines, filed as
Exhibit 10.54 on Form 10-Q, dated May 15, 2000, is hereby
incorporated by reference.
10.38 Agreement and Plan of Merger, dated September 30, 1998, by and among
AmVestors Financial Corporation, Senior Benefit Services of Kansas,
Inc., Senior Benefit Services Insurance Agency, Inc., National Senior
Benefit Services, Inc. and Richard McCarter, filed as Exhibit 10.55
on Form 10-Q, dated May 15, 2000, is hereby incorporated by
reference.
10.39 Eighth Amendment to Credit Agreement dated as of June 23, 2000 to the
Credit Agreement dated as of October 23, 1997 among AmerUs Life
Holdings, Inc., various Lender Institutions, the Co-Arrangers and The
Chase Manhattan Bank, as Administrative Agent, filed as Exhibit 10.57
on Form 10-Q, dated August 14, 2000, is hereby incorporated by
reference.
10.40 Affirmation Agreement to Facility and Guaranty Agreement dated
February 12, 1999 by American Mutual Holding Company, survivor of a
merger with AmerUs Life Holdings, Inc. in favor of the Agent and the
Lenders, dated September 20, 2000, filed as Exhibit 10.58 on Form
10-Q, dated November 14, 2000, is hereby incorporated by reference.
10.41 Amendment to Facility and Guaranty Agreement dated February 12, 1999
among The First National Bank of Chicago and AmerUs Group Co., dated
September 20, 2000, filed as Exhibit 10.59 on Form 10-Q, dated
November 14, 2000, is hereby incorporated by reference.
10.42 Acknowledgement and Assumption Agreement to Credit Agreement dated
October 23, 1997, among American Mutual Holding Company and The Chase
Manhattan Bank, as Administrative Agent for Various Lender
Institutions, dated September 20, 2000, filed as Exhibit 10.60 on
Form 10-Q, dated November 14, 2000, is hereby incorporated by
reference.
10.43 AmerUs Group Co. 2000 Stock Incentive Plan, dated November 15, 2000,
filed as Exhibit 99.9 to the registration statement of AmerUs Group
Co. on Form S-8, Registration Number 333-50030, is hereby
incorporated by reference.
10.44* Employment Agreement between Indianapolis Life Insurance Company and
Larry R. Prible dated May 11, 2000.
11* Statement Re: Computation of Earnings per share.
99.1 Retirement Agreement, dated March 14, 2000, by and between Victor N.
Daley and AmerUs Life Holdings, Inc., filed as Exhibit 99.8 on Form
10-Q, dated May 15, 2000, 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 AmerUs Life Holdings, Inc.,
filed as Exhibit 99.4 on Form 10-Q dated August 13, 1999, is hereby
incorporated by reference.
53
99.3 Supplemental Benefit Agreement, dated as of April 15, 1999, among
Roger K. Brooks and AmerUs Life Holdings, Inc., 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 AmerUs Life Holdings, Inc. 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 AmerUs Life Holdings, Inc., 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, AmerUs Life Holdings, Inc., Registrant, American
Mutual Holding Company, and all of their respective subsidiaries and
affiliates, filed as Exhibit 99.6 on Form 10-K, dated March 8, 2000,
is hereby incorporated by reference.
99.7 Form of Supplemental Benefit Agreement, dated as of February 7, 2000,
among AmerUs Life Holdings, Inc. and Victor N. Daley, Michael G.
Fraizer, Thomas C. Godlasky and Gary R. McPhail, filed as Exhibit
99.7 on Form 10-K, dated March 8, 2000 is hereby incorporated by
reference.
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* included herein
54