1
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 June 30, 1999
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 0-21459
AMERUS LIFE HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
699 WALNUT STREET
DES MOINES, IOWA 50309-3948
(Address of principal executive offices)
IOWA 42-1459712
(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 August 6, 1999 was as follows:
Class A, Common Stock 25,426,170 shares
Class B, Common Stock 5,000,000 shares
Exhibit index - Page 45
Page 1 of 51
1
2
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION................................................................... 3
Item 1. Financial Statements............................................................... 3
Consolidated Balance Sheets June 30, 1999
(Unaudited) and December 31, 1998.................................................. 3
Consolidated Statements of Income (Unaudited)
For the Three Months Ended June 30, 1999 and 1998
and the Six Months Ended June 30, 1999 and 1998.................................... 5
Consolidated Statements of Comprehensive Income (Unaudited)
For the Three Months Ended June 30, 1999 and 1998
and the Six Months Ended June 30, 1999 and 1998.................................... 6
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 1999 and 1998.................................... 7
Notes to Consolidated Financial Statements
(Unaudited) ....................................................................... 9
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition ............................................................... 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 41
PART II - OTHER INFORMATION...................................................................... 42
Item 1. Legal Proceedings.................................................................. 42
Item 4. Submission of Matters to a Vote of Security Holders................................ 43
Item 6. Exhibits and Reports on Form 8-K................................................... 43
Signatures....................................................................................... 44
Exhibit Index.................................................................................... 45
2
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERUS LIFE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
1999 1998
--------------------------
(unaudited)
Assets
Investments:
Securities available for sale at fair value:
Fixed maturity securities $ 6,782,652 $ 6,710,246
Equity securities 41,834 68,483
Short-term investments 255 22,428
Mortgage loans on real estate 599,590 566,403
Real estate 431 633
Policy loans 110,809 110,786
Other investments 208,573 205,790
--------------------------
Total investments 7,744,144 7,684,769
Cash and cash equivalents 35,674 60,090
Accrued investment income 84,442 79,921
Premiums and fees receivable 4,331 4,385
Reinsurance receivables 9,397 6,174
Deferred policy acquisition costs 426,549 246,030
Value of business acquired 260,508 224,540
Investment in unconsolidated subsidiaries 30,351 29,602
Goodwill 211,746 215,506
Property and equipment 24,121 23,249
Deferred income taxes 14,562 --
Other assets 360,795 401,239
Closed Block assets 1,424,379 1,453,305
--------------------------
Total assets $10,630,999 $10,428,810
=========================
3
4
AMERUS LIFE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
1999 1998
----------------------------
(unaudited)
Liabilities and Stockholders' Equity
Policy reserves and policyowner funds:
Future life and annuity policy benefits $ 7,207,705 $ 7,185,417
Policyowner funds 313,183 95,974
7,520,888 7,281,391
----------------------------
Accrued expenses 32,143 41,323
Dividends payable to policyowners 1,878 1,168
Policy and contract claims 6,155 13,433
Income taxes payable 14,157 9,574
Deferred income taxes -- 11,398
Other liabilities 133,080 159,350
Debt 146,307 141,051
Closed Block liabilities 1,736,519 1,703,195
----------------------------
Total liabilities 9,591,127 9,361,883
----------------------------
Company-obligated mandatorily redeemable preferred
capital securities of subsidiary trusts holding solely
junior subordinated debentures of the Company 216,729 216,729
----------------------------
Stockholders' equity:
Preferred Stock, no par value, 20,000,000 shares
authorized, none issued -- --
Common Stock, Class A, no par value, 180,000,000
shares authorized: issued and outstanding; 25,424,174
shares (net of 4,309,279 treasury shares) in 1999 and
25,425,983 (net of 4,308,936 treasury shares) in 1998 25,424 25,426
Common Stock, Class B, no par value, 50,000,000 shares
authorized; 5,000,000 shares issued and outstanding 5,000 5,000
Paid-in capital 290,025 290,091
Accumulated other comprehensive income (27,550) 26,711
Unearned compensation (425) (240)
Retained earnings 530,669 503,210
----------------------------
Total stockholders' equity 823,143 850,198
----------------------------
Total liabilities and stockholders' equity $ 10,630,999 $ 10,428,810
============================
4
5
AMERUS LIFE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------------------- --------------------------
Revenues:
Insurance premiums $ 20,385 $ 21,432 $ 44,220 $ 38,726
Universal life and annuity product charges 18,900 17,872 36,086 34,252
Net investment income 130,378 126,822 260,696 259,995
Realized gains on investments 1,415 4,564 4,019 10,783
Contribution from the Closed Block 6,372 7,861 12,914 16,836
------------------------- -------------------------
177,450 178,551 357,935 360,592
------------------------- -------------------------
Benefits and expenses:
Policyowner benefits 101,277 111,930 210,696 219,286
Underwriting, acquisition, and insurance expenses 23,584 17,234 44,640 38,449
Amortization of deferred policy acquisition costs
and value of business acquired 19,586 15,731 36,571 30,688
Dividends to policyowners 1,047 395 2,023 710
------------------------- -------------------------
145,494 145,290 293,930 289,133
------------------------- -------------------------
Income from operations 31,956 33,261 64,005 71,459
Interest expense 7,541 5,928 14,770 12,610
------------------------- -------------------------
Income before income tax expense and equity in
earnings of unconsolidated subsidiary 24,415 27,333 49,235 58,849
Income tax expense 8,324 7,142 16,695 17,319
------------------------- -------------------------
Income before equity in earnings of unconsolidated
subsidiary 16,091 20,191 32,540 41,530
Equity in earnings of unconsolidated subsidiary 500 673 1,008 1,091
------------------------- -------------------------
Net income $ 16,591 $ 20,864 $ 33,548 $ 42,621
========================= =========================
Earnings per common share:
Basic $ 0.55 $ 0.60 $ 1.10 $ 1.23
========================= =========================
Diluted $ 0.54 $ 0.60 $ 1.10 $ 1.21
========================= =========================
Weighted average common shares outstanding
Basic 30,432,794 34,732,514 30,432,145 34,733,710
========================= =========================
Diluted 30,522,586 35,021,958 30,495,083 35,086,382
========================= =========================
5
6
AMERUS LIFE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------------------- --------------------
Net Income $ 16,591 $ 20,864 $ 33,548 $ 42,621
Other comprehensive income (loss), before tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during period (53,268) 3,656 (83,427) 8,715
Less: reclassification adjustment for gains included
in net income (3,276) 2,864 52 10,458
-------------------- --------------------
Other comprehensive income (loss), before tax (49,992) 792 (83,479) (1,743)
Income tax (expense) benefit related to items of other
comprehensive income 17,497 (277) 29,218 610
-------------------- --------------------
Other comprehensive income (loss), net of tax (32,495) 515 (54,261) (1,133)
-------------------- --------------------
Comprehensive income (loss) $(15,904) $ 21,379 $(20,713) $ 41,488
==================== ====================
6
7
AMERUS LIFE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
1999 1998
-----------------------------
Cash flows from operating activities
Net Income $ 33,548 $ 42,621
Adjustments to reconcile net income to net cash
provided by operating activities:
Policyowner assessments on universal life
and annuity products (26,876) (34,252)
Interest credited to policyowner account
balances 173,413 179,090
Realized investment (gains) losses (4,019) (10,783)
Goodwill amortization 3,760 3,645
VOBA amortization 16,058 14,048
Change in:
Accrued investment income (4,521) 2,912
Reinsurance ceded receivables (3,223) 1,170
Deferred policy acquisition costs (53,565) (36,875)
Liabilities for future policy benefits 250,952 (4,133)
Policy and contract claims and other
policyowner funds (8,510) 1,868
Income taxes:
Current 4,583 16,433
Deferred 12,225 (6,465)
Other, net 9,934 (10,831)
Change in Closed Block assets and
liabilities, net 34,189 109,318
-----------------------------
Net cash provided by operating activities 437,948 267,766
-----------------------------
Cash flows from investing activities
Purchase of fixed maturities available-for-sale (4,198,887) (3,160,567)
Maturities, calls, and principal reductions of
fixed maturities available for sale 3,950,066 3,312,538
Purchase of equity securities (113,066) (112,055)
Proceeds from sale of equity securities 102,327 119,296
Proceeds from repayment and sale of
mortgage loans 67,383 44,265
7
8
AMERUS LIFE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
1999 1998
------------------------
Purchase of mortgage loans (70,968) (99,077)
Purchase of real estate and other invested assets (50,780) (65,796)
Proceeds from sale of real estate and other
invested assets 19,688 15,317
Change in policy loans, net (23) 6,272
Tax on capital gains (5,994) 12,507
Other assets, net (2,863) 16,379
Change in Closed Block investments, net (30,241) (106,115)
----------------------
Net cash (used in) investing activities (331,359) (15,038)
----------------------
Cash flows from financing activities:
Deposits to policyowner account balances 458,220 421,044
Withdrawals from policyowner account balances (586,141) (570,647)
Change in debt, net 5,257 9,421
Purchase of treasury stock (408) (1,622)
Issuance of treasury stock 155 --
Dividends to shareholders (6,089) (6,946)
----------------------
Net cash (used in) financing activities (129,006) (148,750)
----------------------
Net increase (decrease) in cash (22,417) 103,978
Cash and cash equivalents at beginning of period 60,090 58,081
----------------------
Cash and cash equivalents at end of period $ 37,673 $ 162,059
======================
Supplemental disclosure of cash activities:
Interest paid $ 14,692 $ 12,069
======================
Income taxes paid $ 9,020 $ 24,541
======================
8
9
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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 Financial Statements. Operating results for the three
months and six months ended June 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. 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, 1998.
Certain amounts in the 1998 financial statements have been reclassified
to conform to the 1999 financial statement presentation.
SFAS 133
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 defines derivative instruments
and provides comprehensive accounting and reporting standards for the
recognition and measurement of derivative and hedging activities (including
certain instruments embedded in other contracts). It requires derivatives to be
recorded in the Consolidated Balance Sheet at fair value and establishes
criteria for hedges of changes in the fair value of assets, liabilities or firm
commitments, hedges or variable cash flows or forecasted transactions, and
hedges of foreign currency exposures of net investments in foreign operations.
Changes in the fair value of derivatives not meeting specific hedge accounting
criteria would be recognized in the Consolidated Statement of Operations. In
June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative Instruments
and Hedging Activities Deferral of the Effective Date of FASB Statement No.
133." SFAS No. 137 delays the effective date of SFAS No. 133 for all fiscal
quarters until fiscal years beginning after June 15, 2000. The Company is
evaluating SFAS No. 133 and has not determined its effect on the Consolidated
Financial Statements.
SOP 97-3
On January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." This statement provides guidance on when an insurance or other
enterprise should recognize a liability for guaranty fund and other assessments
and on how to measure such liability. The adoption of SOP 97-3 has no material
impact on the financial position or results of operations as the Company
currently estimates assessment liabilities when a determination of an insolvency
has occurred.
9
10
SOP 98-1
On January 1, 1999, the Company adopted the AICPA SOP 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use." This
SOP provides guidance for determining whether costs of software developed or
obtained for internal use should be capitalized or expensed as incurred. In the
past, the Company has expensed such costs as they were incurred. The adoption of
SOP 98-1 has no material impact on the financial position or results of
operations of the Company.
STATUTORY ACCOUNTING CODIFICATION
The NAIC has codified statutory accounting practices, which are
expected to constitute the only source of prescribed statutory accounting
practices and are effective in 2001. Codification will change prescribed
statutory accounting practices and may result in changes to the accounting
practices that insurance enterprises use to prepare their statutory financial
statements. The changes of codification will not have a material impact on
statutory surplus.
EARNINGS PER COMMON 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.
(2) CLOSED BLOCK
Summarized financial information of the Closed Block balance sheet as
of June 30, 1999 and December 31, 1998 and statements of income for the three
months and six months ended June 30, 1999 and 1998 are as follows (in
thousands):
10
11
June 30, December 31,
1999 1998
-----------------------
Assets:
Securities available for sale at fair value
Fixed maturity securities $1,099,261 $1,116,540
Short-term investments -- 8,875
Policy loans 182,986 181,866
Other investments -- 3,027
Cash and cash equivalents 7,156 4
Accrued investment income 15,510 14,445
Premiums and fees receivable 1,631 3,385
Deferred policy acquisition costs 104,889 117,479
Other assets 12,946 7,684
-----------------------
Total Assets $1,424,379 $1,453,305
=======================
Liabilities:
Future life and annuity policy benefits $1,552,226 $1,517,162
Policyowner funds 6,466 6,350
Accrued expenses 1,303 3,887
Dividends payable to policyowners 153,587 149,487
Policy and contract claims 5,023 8,395
Other liabilities 17,914 17,914
-----------------------
Total Liabilities $1,736,519 $1,703,195
=======================
Three Months Ended June 30,
1999 1998
---------------------------
Revenues and expenses:
Insurance premiums $ 49,638 $ 49,516
Universal life and annuity product charges 3,166 3,745
Net investment income 26,355 28,156
Realized gains on investments 210 7,308
Policyowner benefits (47,651) (50,341)
Underwriting, acquisition and insurance expenses (1,010) (1,525)
Amortization of deferred policy acquisition costs (5,037) (4,784)
Dividends to policyowners (19,299) (24,214)
--------------------
Contribution from the Closed Block before income taxes $ 6,372 $ 7,861
====================
11
12
Six Months Ended June 30,
1999 1998
-------------------------
Revenues and expenses:
Insurance premiums $ 98,598 $ 99,932
Universal life and annuity product charges 6,570 7,266
Net investment income 56,006 57,339
Realized gains on investments 662 8,177
Policyowner benefits (98,972) (99,372)
Underwriting, acquisition and insurance expenses (2,821) (2,886)
Amortization of deferred policy acquisition costs (12,590) (12,818)
Dividends to policyowners (34,539) (40,802)
--------------------
Contribution from the Closed Block before income taxes $ 12,914 $ 16,836
====================
12
13
(3) DEBT AND CAPITAL SECURITIES
Debt consists of the following (in thousands):
June 30, 1999 December 31, 1998
------------- -----------------
(Unaudited)
Federal Home Loan Bank
community investment long-term
advances with a weighted
average interest rate of 6.29% at
June 30, 1999
$ 16,307 $ 16,051
Revolving credit agreement 5,000 --
Senior Notes bearing interest at 6.95%
due June, 2005 125,000 125,000
-------- ---------
$146,307 $ 141,051
======== =========
June 30, 1999 December 31, 1998
------------- -----------------
(Unaudited)
AmerUs Capital I 8.85% Capital
Securities Series A due
February 1, 2007 $ 86,000 $ 86,000
AmerUs Capital II 7.00%
Adjustable Conversion-rate
Equity Security Units due
July 27, 2003 130,729 130,729
--------- ---------
$ 216,729 $ 216,729
========= =========
For an additional discussion of the terms of the above indebtedness
refer to the Company's consolidated financial statements as of December 31,
1998.
(4) FEDERAL INCOME TAXES
The effective income tax rate for the years ending June 30, 1999 and
1998 was lower than the prevailing corporate rate primarily as a result of
earned low income housing and historic rehabilitation credits which totaled $2.3
million and $2.8 million, respectively.
13
14
(5) COMMITMENTS AND CONTINGENCIES
AmerUs Life Insurance Company ("AmerUs Life") and its joint venture
partner are contingently liable in the event the joint venture, Ameritas
Variable Life Insurance Company ("AVLIC"), cannot meet its policyholder
obligations. At June 30, 1999, AVLIC had statutory assets of $2.24 million,
liabilities of $2,197.5 million, and surplus of $43.6 million.
The Company, AmerUs Life and their direct and indirect majority
shareholders AmerUs Group and American Mutual Holding Company (collectively
"AmerUs"), were defendants in a class action lawsuit, Bhat v. AmerUs Life
Insurance Company, which was filed in December 1996 in the United States
District Court for the Northern District of California. The complaint, as
amended in 1998, alleged that the defendants breached the terms of certain
universal life policies, breached certain other duties owed to policyowners, and
violated RICO in setting their cost of insurance rates and credited interest
rates. These allegations include a claim that the defendants passed an increase
in corporate income taxes (known as the deferred acquisition cost, or DAC, tax)
through to owners of those policies. The plaintiff, an insured under a universal
life policy issued by AmerUs Life, sought unspecified actual and punitive
damages and injunctive relief on behalf of himself and all similarly situated
policyowners of AmerUs Life with universal life insurance policies. AmerUs
denied the allegations contained in the complaint, including the existence of a
legitimate class. An earlier companion case filed in the same court in June 1996
was dismissed in October 1997.
The parties have entered into a nationwide class settlement of certain
contract and related issues for a substantial block of AmerUs Life's life
insurance policies. The settlement was approved by the court by order dated
April 2, 1999. No appeal has been filed and the time for filing an appeal has
expired.
Due to pending settlement negotiations, the Company incurred a charge
to income for 1998. Based upon current estimates of the costs associated with
the settlement, the Company established a reserve of $1.2 million at that time.
In the ordinary course of business, the Company and its subsidiaries
are also engaged in certain other litigation, none of which management believes
is material to the Company's results of operations.
(6) RELATED PARTY TRANSACTIONS
AmerUs Life has a master agreement of purchase and sale with AmerUs
Home Equity whereby AmerUs Life agrees to purchase whole loans from AmerUs Home
Equity from time to time. AmerUs Life also has a loan servicing agreement with
AmerUs Home Equity, whereby AmerUs Home Equity acts as servicer of the loans and
receives a servicing fee of 50 basis points of the outstanding principal
balances of the loans. During the six months ended June 30, 1999, AmerUs Life
purchased loans with a total outstanding principal balance of $13.1 million at
par.
(7) OPERATING SEGMENTS
The Company has two operating segments: Life Insurance and Annuities.
Products generally distinguish a segment. A brief description of each segment
follows:
14
15
LIFE INSURANCE
Open Block: The primary product offerings consist of whole life,
universal life and term life insurance policies. These products are
marketed on a national basis primarily through a Preferred Producer
agency system and a Personal Producing General Agent ("PPGA")
distribution system.
Closed Block: The Closed Block was established for insurance policies
which had a dividend scale in effect as of June 30, 1996. The Closed
Block was designed to provide reasonable assurance to owners of
insurance policies included therein that, after the Reorganization of
AmerUs Life, assets would be available to maintain the dividend scales
and interest credits in effect prior to the Reorganization if the
experience underlying such scales and credits continues. The primary
products included in the Closed Block are whole life, certain universal
life policies and term life insurance policies.
ANNUITIES
The Annuity segment markets fixed annuities on a national basis
primarily through independent brokers and marketing companies.
The Company uses the same accounting policies and procedures to measure
operating segment income and assets as it uses to measure its consolidated
operating income and assets with the exception of the elimination of certain
items which management believes are not necessarily indicative of overall
operating trends. These items are explained further in the Adjusted Operating
section of Management's Discussion and Analysis of Results of Operations and
Financial Condition. Operating segment income is generally income before
non-core realized gains and losses, interest expense and income tax. 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 are deemed not to be associated with any specific segment.
The contribution to the operating income of the life insurance segment from the
Closed Block is reported as a single line item.
There are no significant intersegment transactions.
There have been no material changes in segment assets since December
31, 1998.
Operating segment income is as follows:
15
16
Operating Segment Income
(in thousands)
Three Months Ended June 30, 1999
Life Total
Insurance Annuities Other Consolidated
--------------------------------------------------
Revenues:
Insurance premiums $ 15,396 $ 4,933 $ 56 $ 20,385
Universal life and annuity product charges 11,786 7,114 -- 18,900
Net investment income 22,864 106,676 838 130,378
Core realized gains on investments -- 2,857 -- 2,857
Contribution from the Closed Block 6,372 -- -- 6,372
------------------------------------------------
56,418 121,580 894 178,892
Benefits and expenses:
Policyowner benefits 24,000 77,257 20 101,277
Underwriting, acquisition, and insurance expenses 13,683 7,616 2,285 23,584
Amortization of deferred policy acquisition costs
and value of business acquired, net of
adjustment of $1,170 5,711 12,705 -- 18,416
Dividends to policyowners 1,047 -- -- 1,047
------------------------------------------------
44,441 97,578 2,305 144,324
------------------------------------------------
Adjusted income from operations $ 11,977 $ 24,002 (1,411) 34,568
======================
Non-core realized gains (losses) on investments (1,442) (1,442)
Amortization of deferred policy acquisition costs due
to realized gains or losses (1,170) (1,170)
Interest (expense) (7,541) (7,541)
Income tax (expense) (8,324) (8,324)
Equity in earnings of unconsolidated subsidiary 500 500
---------
Net income $ 16,591
=========
16
17
Operating Segment Income
(in thousands)
Life Total
Three Months Ended June 30, 1998 Insurance Annuities Other Consolidated
--------------------------------------------------
Revenues:
Insurance premiums $ 12,103 $ 9,242 $ 87 $ 21,432
Universal life and annuity product charges 11,621 6,251 -- 17,872
Net investment income 17,427 108,802 593 126,822
Core realized gains on investments -- 2,694 -- 2,694
Contribution from the Closed Block 7,861 -- -- 7,861
------------------------------------------------
49,012 126,989 680 176,681
Benefits and expenses:
Policyowner benefits 21,834 89,221 875 111,930
Underwriting, acquisition, and insurance expenses 10,543 7,228 (537) 17,234
Amortization of deferred policy acquisition costs --
and value of business acquired, net of
adjustment of $514 4,082 11,135 -- 15,217
Dividends to policyowners 395 -- -- 395
------------------------------------------------
36,854 107,584 338 144,776
------------------------------------------------
Adjusted income from operations $ 12,158 $ 19,405 342 31,905
======================
Non-core realized gains (losses) on investments 1,870 1,870
Amortization of deferred policy acquisition costs due
to realized gains or losses (514) (514)
Interest (expense) (5,928) (5,928)
Income tax expense (7,142) (7,142)
Equity in earnings of unconsolidated subsidiary 673 673
---------
Net income $ 20,864
=========
17
18
Operating Segment Income
(in thousands)
Life Total
Six Months Ended June 30, 1999 Insurance Annuities Other Consolidated
--------------------------------------------------
Revenues:
Insurance premiums $ 30,721 $ 13,403 $ 96 $ 44,220
Universal life and annuity product charges 23,607 12,479 -- 36,086
Net investment income 43,487 214,877 2,332 260,696
Core realized gains on investments -- 5,826 -- 5,826
Contribution from the Closed Block 12,914 -- -- 12,914
-----------------------------------------------
110,729 246,585 2,428 359,742
Benefits and expenses:
Policyowner benefits 48,586 162,002 108 210,696
Underwriting, acquisition, and insurance expenses 26,592 15,921 2,127 44,640
Amortization of deferred policy acquisition costs
and value of business acquired, net of
adjustment of $1,682 10,728 24,161 -- 34,889
Dividends to policyowners 2,023 -- -- 2,023
-----------------------------------------------
87,929 202,084 2,235 292,248
-----------------------------------------------
Adjusted income from operations $ 22,800 $ 44,501 193 67,494
======================
Non-core realized gains (losses) on investments (1,807) (1,807)
Amortization of deferred policy acquisition costs due
to realized gains or losses (1,682) (1,682)
Interest (expense) (14,770) (14,770)
Income tax (expense) (16,695) (16,695)
Equity in earnings of unconsolidated subsidiary 1,008 1,008
---------
Net income $ 33,548
=========
18
19
Operating Segment Income
(in thousands)
Life Total
Six Months Ended June 30, 1998 Insurance Annuities Other Consolidated
--------------------------------------------------
Revenues:
Insurance premiums $ 22,244 $ 16,319 $ 163 $ 38,726
Universal life and annuity product charges 23,281 10,971 -- 34,252
Net investment income 37,221 221,076 1,698 259,995
Core realized gains on investments -- 5,517 -- 5,517
Contribution from the Closed Block 16,836 -- -- 16,836
-----------------------------------------------
99,582 253,883 1,861 355,326
Benefits and expenses:
Policyowner benefits 42,814 175,540 932 219,286
Underwriting, acquisition, and insurance expenses 20,617 17,317 515 38,449
Amortization of deferred policy acquisition costs --
and value of business acquired, net of
adjustment of $1,293 9,956 19,439 -- 29,395
Dividends to policyowners 710 -- -- 710
-----------------------------------------------
74,097 212,296 1,447 287,840
-----------------------------------------------
Adjusted income from operations $ 25,485 $ 41,587 414 67,486
======================
Non-core realized gains (losses) on investments 5,266 5,266
Amortization of deferred policy acquisition costs due
to realized gains or losses (1,293) (1,293)
Interest (expense) (12,610) (12,610)
Income tax (expense) (17,319) (17,319)
Equity in earnings of unconsolidated subsidiary 1,091 1,091
---------
Net income $ 42,621
=========
19
20
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.
OVERVIEW
The Company is a holding company engaged through its subsidiaries in
the business of marketing, underwriting and distributing a broad range of
individual life insurance and annuity products to individuals and businesses in
49 states, the District of Columbia and the U.S. Virgin Islands. The Company has
two operating segments: Life Insurance and Annuities. The Life Insurance
segment's primary product offerings consist of whole life, universal life and
term life insurance policies. The primary product offerings of the Annuity
segment are fixed annuities.
In accordance with Generally Accepted Accounting Principals (GAAP),
universal life insurance premiums and annuity deposits received are reflected as
increases in liabilities for policyowner account balances and not as revenues.
Revenues reported for universal life and annuity products consist of policy
charges for the cost of insurance, administration charges and surrender charges
assessed against policyowner account balances. Surrender benefits paid relating
to universal life insurance policies and annuity products are reflected as
decreases in liabilities for policyowner account balances and not as expenses.
Amounts for interest credited to universal life and annuity policyowner account
balances and benefit claims in excess of policyowner account balances are
reported as expenses in the financial statements. The Company receives
investment income earned from the funds deposited into account balances by
universal life and annuity policyowners, the majority of which is passed through
to such policyowners in the form of interest credited.
Premium revenues reported for traditional life insurance products are
recognized as revenues when due. Future policy benefits and policy acquisition
costs are recognized as expenses over the life of the policy by means of a
provision for future policy benefits and amortization of deferred policy
acquisition costs.
The costs related to acquiring new business, including certain costs of
issuing policies and certain other variable selling expenses (principally
commissions), defined as deferred policy acquisition costs, are capitalized and
amortized as an expense primarily in proportion to expected profits or margins
from such policies. This amortization is adjusted when current or estimated
future gross profits or margins on the underlying policies vary from previous
estimates. For example, the amortization of deferred policy acquisition costs is
accelerated when policy terminations are higher than originally estimated or
when investments supporting the policies are sold at a gain prior to their
anticipated maturity. Death and other policyowner benefits reflect exposure to
mortality risk and fluctuate from period to period based on the level of claims
incurred within insurance retention limits. The profitability of the Company is
primarily affected by expense levels, interest spread results (i.e., the excess
of investment earnings over the interest credited to policyowners) and
fluctuations in mortality, persistency and other policyowner benefits. The
Company has the ability to mitigate adverse experience through adjustments to
credited interest rates, policyowner dividends or cost of insurance charges.
20
21
ADJUSTED OPERATING INCOME
The following table reflects net income adjusted to eliminate
certain items (net of applicable income taxes) which management believes are not
necessarily indicative of overall operating trends. For example, net realized
capital gains or losses on investments, excluding gains or losses on convertible
debt which are considered core earnings, are eliminated. Different items are
likely to occur in each period presented and others may have different opinions
as to which items may warrant adjustment. The adjusted operating income shown
below does not constitute net income computed in accordance with GAAP.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
--------------------- --------------------
(In thousands, except per share amounts)
Net Income $ 16,591 $ 20,864 $ 33,548 $ 42,621
Net realized (gains) losses on investments (A) (920) (2,967) (2,613) (7,573)
Core realized gains (losses) (B) 1,857 1,751 3,787 3,586
Amortization of deferred policy acquisition
costs due to realized gains or losses (C) 761 334 1,093 840
-------------------- --------------------
Adjusted Operating Income $ 18,289 $ 19,982 $ 35,815 $ 39,474
==================== ====================
Adjusted Operating Income per common share:
Basic (D) $ 0.60 $ 0.58 $ 1.18 $ 1.14
Diluted (E) $ 0.60 $ 0.57 $ 1.17 $ 1.13
(A) Represents realized gains or losses on investments adjusted for income
taxes on such amounts. Realized gains or losses may vary widely between
periods. Such amounts are determined by management's timing of
individual transactions and do not necessarily correspond to the
underlying operating trends.
(B) Represents gains on the convertible preferred stock and bond portfolio,
net of income taxes.
(C) Represents amortization of deferred policy acquisition costs due to
non-core realized gains or losses being included in product margins
adjusted for income taxes on such amounts.
(D) Basic adjusted operating income per common share for the three months
and six months ended June 30, 1999 and 1998 is calculated using 30.43
million and 34.73 million shares, respectively.
(E) Diluted adjusting operating income per common share for the three
months ended June 30, 1999 and 1998 is calculated using 30.52 million
and 35.02 million shares, respectively. Diluted adjusted operating
income per common share for the six months ended June 30, 1999 and 1998
is calculated using 30.50 million and 35.09 million shares,
respectively.
21
22
THE CLOSED BLOCK
The Closed Block was established on June 30, 1996. Insurance policies
which had a dividend scale in effect as of June 30, 1996, were included in the
Closed Block. The Closed Block was designed to provide reasonable assurance to
owners of insurance policies included therein that, after the reorganization of
AmerUs Life, assets would be available to maintain the dividend scales and
interest credits in effect prior to the reorganization if the experience
underlying such scales and credits continues.
The contribution to the operating income of the Company from the Closed
Block is reported as a single line item in the income statement. Accordingly,
premiums, product charges, investment income, realized gains (losses) on
investments, policyowner benefits and dividends attributable to the Closed
Block, less certain minor expenses including amortization of deferred policy
acquisition costs, are shown as a net number under the caption "Contribution
from the Closed Block". This results in material reductions in the respective
line items in the income statement while having no effect on net income. The
expenses associated with the administration of the policies included in the
Closed Block and the renewal commissions on these policies are not charged
against the Contribution from the Closed Block, but rather are grouped with
underwriting, acquisition and insurance expenses. Also, all assets allocated to
the Closed Block are grouped together and shown as a separate item titled
"Closed Block Assets". Likewise, all liabilities attributable to the Closed
Block are combined and disclosed as the "Closed Block Liabilities".
OPERATING SEGMENTS
The Company has two operating segments: Life Insurance and
Annuities. Products generally distinguish a segment. The Company uses the same
accounting policies and procedures to measure operating segment income as it
uses to measure its consolidated operating income with the exception of the
elimination of certain items which management believes are not necessarily
indicative of overall operating trends. These items are explained further in the
Adjusted Operating Income section of Management's Discussion and Analysis of
Results of Operations and Financial Condition. Revenues and benefits and
expenses are primarily attributed directly to each operating segment. Net
investment income and core realized gains (losses) on investments are allocated
based on the directly-related asset portfolios. Other revenues and expenses are
deemed not to be associated with any specific segment and primarily consist of
discontinued product lines such as group and health, non-core realized gains
(losses), and holding company revenues and expenses.
22
23
SALES
LIFE INSURANCE
The following table sets forth information regarding the Company's life
insurance sales activity by product:
Sales Activity by Product
For the Three Months Ended For the Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
--------------------------- -------------------
($ in thousands)
Traditional life insurance:
Participating whole life $ 4,739 $ 4,904 $ 9,644 $ 8,474
Term Life 1,036 1,638 2,448 3,094
Universal Life 3,795 2,149 7,005 4,325
----------------------- -----------------
Total (A) $ 9,570 $ 8,691 $19,097 $15,893
======================= =================
(A) Direct first year annualized premiums.
Life insurance sales as measured by annualized premiums increased 10.1%
to $9.6 million for the second quarter of 1999 compared to $8.7 million for the
second quarter of 1999 and 20.2% to $19.1 million for the first half of 1999
compared to $15.9 million for the same period in 1998. Sales of participating
whole life insurance continued at a strong pace that commenced during the second
half of 1998. Sales of universal life insurance for the first six months of 1999
increased by $2.7 million from the same period in 1998. Increased sales of
universal life were primarily attributable to a new universal life product
introduced in the fourth quarter of 1998.
23
24
The following table sets forth the Company's life insurance collected
premiums, including collected premiums associated with the Closed Block, for the
periods indicated:
Collected Premiums by Product
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
----------------------------- --------------------
($ in thousands)
Individual life premiums collected:
Traditional life:
First year and single $ 20,539 $ 19,791 $ 42,760 $ 39,302
Renewal 43,914 41,961 90,538 86,973
---------------------- ----------------------
Total 64,453 61,752 133,298 126,275
Universal life:
First year and single 5,828 4,655 10,926 8,733
Renewal 18,209 18,329 36,980 37,408
---------------------- ----------------------
Total 24,037 22,984 47,906 46,141
Total individual life 88,490 84,736 181,204 172,416
Reinsurance assumed 472 311 821 408
Reinsurance ceded (3,223) (2,587) (7,525) (5,423)
---------------------- ----------------------
Total individual life, net of reinsurance $ 85,739 $ 82,460 $ 174,500 $ 167,401
====================== ======================
Traditional life insurance premiums collected were $64.5 million for
the second quarter of 1999 compared to $61.8 million for the same period in 1998
and $133.3 million for the first half of 1999 compared to $126.3 million for the
first half of 1998. The increase in collected premiums was primarily the result
of increased whole life sales. Renewal direct collected premium was $3.6 million
higher in the first half of 1999 as compared to the same period in 1998
primarily due to continued favorable persistency and the compound effect of
higher sales in earlier periods.
Universal life insurance premiums collected were $24.0 million for the
second quarter of 1999 compared to $23.0 million for the second quarter of 1998.
Year-to-date universal life insurance premiums were $47.9 million in the first
half of 1999 compared to $46.1 million for the same period in 1998. The increase
in 1999 was primarily due to the new product introduced in the fourth quarter of
1998.
24
25
The following table sets forth information regarding the Company's life
insurance in force for each date presented:
Life Insurance in Force
As of June 30,
1999 1998
------------------------------
($ in thousands)
Individual life insurance:
Traditional life
Number of policies 251,820 255,767
GAAP life reserves $ 1,600,408 $ 1,509,998
Face amounts $20,196,000 $18,764,000
Universal life
Number of policies 113,695 116,409
GAAP life reserves $ 908,059 $ 881,951
Face amounts $12,161,000 $12,116,000
Total life insurance
Number of policies 365,515 372,176
GAAP life reserves $ 2,508,467 $ 2,391,949
Face amounts $32,357,000 $30,880,000
While the total policy count continues to decline consistent with
industry trends, the average size of policy continues to increase from $83,000
in 1998 to $88,400 in 1999. As a result, total insurance in force has grown to
$32.3 billion as of June 30, 1999.
25
26
ANNUITIES
The following table sets forth annuity collected premiums for the
periods indicated:
Collected Premiums by Product
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
---------------------- ----------------------
($ in thousands)
Fixed annuities $ 181,384 $ 205,959 $ 415,060 $ 373,920
Equity-index fixed annuities 4,576 9,076 9,215 15,811
---------------------- ----------------------
Total 185,960 215,035 424,275 389,731
Reinsurance ceded (122) (91) (187) (1,058)
---------------------- ----------------------
Total annuities, net of reinsurance $ 185,838 $ 214,944 $ 424,088 $ 388,673
====================== ======================
The Company markets its annuity products on a national basis through
networks of independent agents who are supervised by regional vice presidents
and directors or Independent Marketing Organizations (IMO's). The Company's
IMO's consist of approximately 60 contracted organizations, two wholly-owned
organizations, and one partially-owned organization. Annuity collected premiums
were $185.8 million for the second quarter of 1999 compared to $214.9 million
for the same period in 1998. Although the pace of annuity sales declined in the
second quarter due to consumer reaction to the interest rate environment,
year-to-date annuity collected premiums increased 9.1% to $424.1 million for the
first half of 1999 compared to $388.7 million for the first half of 1998. The
Company's acquisition of an IMO in the second half of 1998 and the Company's
investment in an IMO in the first quarter of 1999 contributed to the increase in
collected premiums.
26
27
The following table sets forth information regarding annuities in force
for each date presented:
Annuities in Force
As of June 30,
1999 1998
--------------------------
($ in thousands)
Deferred fixed annuities
Number of policies 174,134 183,763
GAAP life reserves $5,960,581 $5,950,672
Equity-index fixed annuities
Number of policies 6,484 5,516
GAAP life reserves $ 271,700 $ 209,223
Total annuities
Number of policies 180,618 189,279
GAAP life reserves $6,232,281 $6,159,895
The total number of annuity policies declined between periods while the
GAAP reserves on annuity policies increased. These changes between periods were
primarily attributable to an increase in the average size of policies sold
combined with surrenders of smaller average size policies.
27
28
RESULTS OF OPERATIONS
A summary of the Company's revenue follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
($ in thousands)
Insurance premiums
Life insurance - traditional $ 15,396 $ 12,103 $ 30,721 $ 22,244
Annuities - Immediate annuity &
supplementary contract premiums 4,933 9,242 13,403 16,319
Other 56 87 96 163
---------------------- ----------------------
Total insurance premiums 20,385 21,432 44,220 38,726
Product charges
Life insurance - universal life 11,786 11,621 23,607 23,281
Annuities 7,114 6,251 12,479 10,971
---------------------- ----------------------
Total product charges 18,900 17,872 36,086 34,252
Net investment income
Life insurance 22,864 17,427 43,487 37,221
Annuities 106,676 108,802 214,877 221,076
Other 838 593 2,332 1,698
---------------------- ----------------------
Total net investment income 130,378 126,822 260,696 259,995
Realized gains (losses) on investments
Life insurance - Core -- -- -- --
Annuities - Core 2,857 2,694 5,826 5,517
Other - All Non-Core (1,442) 1,870 (1,807) 5,266
---------------------- ----------------------
Total realized gains (losses) on investments 1,415 4,564 4,019 10,783
Contribution from the Closed Block 6,372 7,861 12,914 16,836
---------------------- ----------------------
Total revenues $ 177,450 $ 178,551 $ 357,935 $ 360,592
====================== ======================
28
29
Traditional life insurance premiums were $15.4 million for the second
quarter of 1999 compared to $12.1 million for the same period in 1998.
Year-to-date traditional life insurance premiums increased by $8.5 million to
$30.7 million for 1999 compared to $22.2 million for the same period in 1998.
The increase in traditional life insurance premiums was primarily the result of
continued favorable persistency and increased sales of whole life insurance
products.
Immediate annuity and supplementary contract premiums decreased by $4.3
million to $4.9 million for the second quarter of 1999 compared to $9.2 million
for the second quarter of 1998. Year-to-date, immediate annuity and
supplementary contract premiums were $13.4 million for 1999 compared to $16.3
million for the same period in 1998. The decrease in contract premiums in 1999
was primarily due to decreased immediate annuity sales.
Universal life product charges were $0.2 million higher in the second
quarter of 1999 compared to the same period in 1998 and $0.3 million higher for
the first six months of 1999 compared to the first six months of 1998. The
increase in product charges in 1999 was primarily due to increased cost of
insurance charges as a result of the normal aging of the block of business,
partially offset by higher reinsurance costs.
Annuity product charges were $7.1 million for the second quarter of
1999 compared to $6.3 million for the same period in 1998. Year-to-date, annuity
product charges increased by $1.5 million to $12.5 million for 1999 compared to
$11.0 million for the same period in 1998. The increase in product charges was
primarily due to increased surrender charges resulting from an increase in
lapses.
Total net investment income was $130.4 million for the second quarter
of 1999 compared to $126.8 million for the second quarter of 1998 and $260.7
million for the first six months of 1999 compared to $260.0 million for the same
period in 1998. The increase in 1999 net investment income was primarily
attributable to higher average invested assets (excluding market value
adjustments). Average invested assets (excluding market value adjustments) were
approximately $56.7 million higher in the first half of 1999 as compared to
1998. Partially offsetting the higher average invested assets was a lower
effective yield. The effective yield of the entire portfolio in the first half
of 1999 was 7.18% compared to 7.21% in 1998. The effective yield of the annuity
portion of the portfolio decreased 24 basis points to 6.70% for the first half
of 1999 as compared to 6.94% in 1998. The decrease in effective yields primarily
resulted from lower reinvestment rates throughout 1998 and in the first half of
1999 as compared to the portfolio rate at the beginning of the prior year
period.
Realized gains on investments were $1.4 million for the second quarter
of 1999 and $4.0 million for the first half of 1999 compared to $4.6 million and
$10.8 million, respectively, for the same periods in 1998. 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.
29
30
The Contribution from the Closed Block was $6.3 million for the second
quarter of 1999 compared to $7.9 million for the same period in 1998.
Year-to-date, the Contribution from the Closed Block was $12.9 million compared
to $16.8 million for 1998. The following table sets forth the operating results
of the Closed Block for the periods indicated:
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
--------------------------- ---------------------------
($ in thousands)
Revenues
Insurance premiums $ 49,638 $ 49,516 $ 98,598 $ 99,932
Universal life and annuity product charges 3,166 3,745 6,570 7,266
Net investment income 26,355 28,156 56,006 57,339
Realized gains (losses) on investments 210 7,308 662 8,177
----------------------- ---------------------
Total revenues 79,369 88,725 161,836 172,714
Benefits and expenses
Policyowner benefits 47,651 50,341 98,972 99,372
Underwriting, acquisition and insurance expenses 1,010 1,525 2,821 2,886
Amortization of deferred policy acquisition costs 5,037 4,784 12,590 12,818
Dividends to policyowners 19,299 24,214 34,539 40,802
----------------------- ---------------------
Total benefits and expenses 72,997 80,864 148,922 155,878
----------------------- ---------------------
Contribution from the Closed Block $ 6,372 $ 7,861 $ 12,914 $ 16,836
======================= =====================
Closed Block insurance premiums remained constant for the second
quarter of 1999 compared to the same period in 1998. Year-to-date, Closed Block
insurance premiums decreased by $1.3 million to $98.6 million compared to $99.9
million for the same period in 1998. The decrease in insurance premiums is
consistent with the reduction of the Closed Block's life insurance in force that
is expected to continue over the life of the Block. Similarly, the decrease in
product charges on universal life policies included in the Closed Block is
primarily the result of the reduction of such business in force.
Net investment income for the Closed Block was $26.4 million for the
second quarter of 1999 and $56.0 million for the first half of 1999 compared to
$28.2 million and $57.3 million, respectively, for the same periods in 1998. The
decrease was primarily attributable to lower effective yields, partially offset
by higher average invested assets (excluding market value adjustments).
Realized gains on investments of the Closed Block were $7.1 million
lower in the second quarter of 1999 compared to the second quarter of 1998 and
$7.5 million lower for the first half of 1999 compared to the same period in
1998. The level of realized gains is subject to fluctuation from period to
period depending on the prevailing interest rate and economic environment and
the timing of the sale of investments.
Closed Block policyowner benefits were $2.7 million lower in the second
quarter of 1999 and $0.4 million lower for the first half of 1999 compared to
the same periods in 1998. The decrease was primarily due to decreased death
benefits.
30
31
The amortization of deferred policy acquisition costs for the Closed
Block increased by $0.3 million to $5.0 million for the second quarter of 1999
compared to $4.8 million for the second quarter of 1998. Year-to-date, the
amortization of deferred policy acquisition costs for the Closed Block decreased
$0.2 million. Deferred policy acquisition costs are generally amortized in
proportion to gross margins. The increase in the quarter to quarter comparisons
primarily resulted from the restatement of the estimated future margins on the
Closed Block in the second quarter of 1998 which reduced 1998 amortization. The
decrease in the amortization of deferred policy acquisition costs year-to-date
corresponds to lower gross margins which resulted from lower realized gains in
the first half of 1999 as compared to the same period in 1998.
Closed Block dividends to policyowners decreased by $4.9 million to
$19.3 million for the second quarter of 1999 compared to $24.2 million for the
same period in 1998 and decreased $6.3 million to $34.5 million for the first
half of 1999 compared to $40.8 million for 1998. The decrease in 1999 was
primarily due to the decrease in deferred dividends resulting from lower
realized gains in 1999 as compared to the same periods in 1998.
31
32
A summary of the Company's policyowner benefits follows:
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
--------------------------- -------------------------
Life Insurance:
Traditional:
Death benefits $ 1,723 $ 643 $ 2,416 $ 1,040
Change in liability for future policy
benefits and other policy benefits 9,875 7,773 20,167 14,288
-------------------------- -------------------------
Total traditional 11,598 8,416 22,583 15,328
Universal:
Death benefits in excess of cash value 4,182 3,055 10,471 7,715
Interest credited on policyowner
account balances 7,686 9,632 15,217 17,572
Other 534 731 315 2,199
-------------------------- -------------------------
Total universal 12,402 13,418 26,003 27,486
-------------------------- -------------------------
Total life insurance benefits 24,000 21,834 48,586 42,814
Annuities
Interest credited to deferred annuity
account balances 68,280 71,572 138,020 147,314
Other annuity benefits 8,977 17,649 23,982 28,226
-------------------------- -------------------------
Total annuity benefits 77,257 89,221 162,002 175,540
Other benefits 20 875 108 932
-------------------------- -------------------------
Total policyowner benefits $ 101,277 $ 111,930 $ 210,696 $219,286
========================== ========================
Total life insurance benefits were $24.0 million for the second quarter
of 1999 compared to $21.8 million for the second quarter of 1998. Year-to-date,
total life insurance benefits increased $5.8 million to $48.6 million in 1999
compared to $42.8 million in 1998. The increase in life insurance benefits was
as expected as the traditional block of business continues to grow and as the
universal block of business ages. Partially offsetting the increases in death
benefits and higher policy reserves was a reduction in interest credited.
Interest credited on universal policyowner account balances decreased $1.9
million for the second quarter of 1999 and $2.4 million for the first half of
1999 compared to the same periods in 1998 primarily due to lower crediting
rates. The weighted average interest crediting rate on policyowner account
balances for 1999 was 5.75% compared to 6.18% for 1998.
32
33
Annuity benefits were $77.3 million for the second quarter of 1999
compared to $89.2 million for the same period in 1998. Year-to-date, annuity
benefits were $162.0 million in 1999 compared to $175.5 million in 1998. The
decrease is partially attributable to a lower weighted average crediting rate on
annuity account balances in 1999 compared to 1998, somewhat offset by higher
average liabilities. The weighted average crediting rate on deferred annuity
account balances was decreased 28 basis points to 5.00% for the first half of
1999 compared to 5.28% for the same period in 1998. Crediting rates were
decreased in response to the decrease in effective yields on the annuity
investment portfolio resulting in GAAP spreads widening 11 basis points for the
second quarter of 1999 as compared to the same period in 1998. Year-to-date,
GAAP spreads widened 4 basis points in 1999 as compared to 1998. Other annuity
benefits decreased for the second quarter and year-to-date periods in 1999 as
compared to the same periods in 1998 which corresponds to the change in
immediate annuity reserves and benefit payments on immediate annuities.
33
34
A summary of the Company's expenses follows:
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
-------------------------- -------------------------
($ in thousands)
Life Insurance
Underwriting, acquisition and
insurance expenses $ 13,683 $ 10,543 $ 26,592 $ 20,617
Amortization of deferred policy acquisition costs
and value of business acquired (VOBA), net
of adjustment of $389 and $1,197 for the
three months ended June 30, 1999 and
1998, respectively, and $704 and $1,471
for the six months ended June 30, 1999
and 1998, respectively 5,711 4,082 10,728 9,956
------------------- -------------------
Total life insurance 19,394 14,625 37,320 30,573
Annuities
Underwriting, acquisition and
insurance expenses 7,616 7,228 15,921 17,317
Amortization of deferred policy acquisition
and value of business acquired (VOBA), net
of adjustment of $781 and ($683) for the
three months ended June 30, 1999 and
1998, respectively, and $978 and ($178)
for the six months ended June 30, 1999
and 1998, respectively 12,705 11,135 24,161 19,439
------------------- -------------------
Total annuities 20,321 18,363 40,082 36,756
Amortization of deferred policy acquisition costs due
to realized gains or losses 1,170 514 1,682 1,293
Other 2,285 (537) 2,127 515
------------------- -------------------
Total expenses $ 43,170 $ 32,965 $ 81,211 $ 69,137
=================== ===================
Total life insurance expenses were $19.4 million for the second quarter
of 1999 compared to $14.6 million for the second quarter of 1998 and $37.3
million for the first half of 1999 compared to $30.6 million for the same period
in 1998. Underwriting, acquisition and insurance expenses were higher in 1999
compared to the same periods in 1998 primarily due to costs related to the Year
2000 Compliance Project and costs associated with the Company's enhancement of
its distribution systems. Amortization of deferred policy acquisition costs and
value of business acquired (VOBA) increased $1.6 million for the second quarter
of 1999 compared to the same period in 1998 and increased $0.7 million for the
first half of 1999 compared to the first half of 1998. Deferred policy
acquisition costs are generally amortized in proportion to gross margins. Higher
interest margins on those policies for which deferred costs are amortized
contributed to higher gross margins in 1999 as compared to 1998, resulting in
the increased amortization.
34
35
Total annuity expenses increased by $1.9 million to $20.3 million for
the second quarter of 1999 compared to $18.4 million for the second quarter of
1998. Year-to-date, total annuity expenses were $40.1 million compared to $36.8
million for the same period in 1998. Underwriting, acquisition and insurance
expenses decreased approximately $1.4 million in the first half of 1999 compared
to the same period in 1998 primarily due to cost savings realized from the
consolidation of acquired subsidiary operations. Amortization of deferred policy
acquisition costs and VOBA increased $1.6 million in the second quarter of 1999
and $4.7 million in the first half of 1999 as compared to the same periods in
1998. Gross margins increased due to higher interest margins and the reduced
expenses, resulting in the increased amortization.
Other expenses increased by $2.8 million for the second quarter of 1999
and $1.6 million for the first half of 1999 compared to the same periods in
1998. Expenses in 1998 were reduced by one-time benefits and 1999 expenses
included the amortization of the debt issuance costs on the capital securities
and senior notes issued in mid-1998. These two factors primarily contributed to
the increased other expenses in 1999.
A summary of the Company's income from operations by operating segment
follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
--------------------------- -------------------------
Life Insurance:
Open Block:
Revenues $ 50,046 $ 41,151 $ 97,815 $ 82,746
Benefits and Expenses (43,394) (36,459) (85,906) (73,387)
Dividends to policyowners (1,047) (395) (2,023) (710)
Closed Block contribution 6,372 7,861 12,914 16,836
---------------------- ----------------------
Adjusted pre-tax income from operations 11,977 12,158 22,800 25,485
Annuities:
Revenues 121,580 126,989 246,585 253,883
Benefits and Expenses (97,578) (107,584) (202,084) (212,296)
---------------------- ----------------------
Adjusted pre-tax income from operations 24,002 19,405 44,501 41,587
Other (1,411) 342 193 414
---------------------- ----------------------
Total adjusted pre-tax income from operations $ 34,568 $ 31,905 $ 67,494 $ 67,486
====================== ======================
Adjusted income from Life Insurance operations was $12.0 million for
the second quarter of 1999 compared to $12.2 million for the second quarter of
1998. Year-to-date, adjusted income from Life Insurance operations was $22.8
million in 1999 compared to $25.5 million in 1998. The decrease in adjusted
income in 1999 compared to 1998 was primarily due to increased costs related to
the Year 2000 Compliance Project and a decreased contribution from the Closed
Block.
Adjusted income from Annuity operations increased $4.6 million to $24.0
million for the second quarter of 1999 compared to $19.4 million for the same
period in 1998 and $2.9 million to $44.5 million for the first half of 1999
compared to $41.6 million in 1998. The increase in 1999 was primarily due to
increased interest spreads.
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Interest expense increased by $1.6 million in the second quarter of
1999 to $7.5 million compared to $5.9 million in the second quarter of 1998.
Year-to-date, interest expense increased $2.2 million in 1999 compared to 1998.
The increased interest expense in 1999 was primarily due to higher interest
rates on the senior notes and adjustable conversion-rate equity security units
outstanding during 1999 as compared to the revolving credit agreement borrowings
outstanding during 1998.
Income tax expense was $8.3 million for the second quarter of 1999
compared to $7.1 million for the second quarter of 1998 and $16.7 million for
the first half of 1999 compared to $17.3 million for the same period in 1998.
The effective tax rate in 1999 was 33.2% compared to 28.9% in 1998. The increase
in the effective tax rate in 1999 was primarily due to a decrease in tax credits
generated by affordable housing and historic rehabilitation investments.
The equity in earnings of unconsolidated subsidiary represents 34% of
the net income of AMAL Corporation, net of goodwill amortization. AMAL
Corporation is the parent company of Ameritas Variable Life Insurance Company,
the joint venture partner that markets variable life, and variable and fixed
annuity products.
Net income was $16.6 million for the second quarter of 1999 compared to
$20.9 million for the same period in 1998. Year-to-date, net income was $33.5
million in 1999 compared to $42.6 million in 1998. Pre-tax adjusted operating
income increased $2.7 million between second quarter periods and was level
between year-to-date periods, with decreases in the Life Insurance operations
being offset by increases in the Annuity operations. However, increased interest
expense, higher effective income tax rates, decreased realized gains, and the
reduction in net investment income resulting from the common stock buyback
program primarily contributed to the decrease in net income between the second
quarter periods and year-to-date periods.
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LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
The Company's cash flows from operations consist of dividends from
subsidiaries, if declared and paid, interest income on loans and advances to its
subsidiaries (including a surplus note issued to the Company by AmerUs Life),
investment income on assets held by the Company and fees which the Company
charges its subsidiaries and certain other of its affiliates for management
services, offset by the expenses incurred for debt service, salaries and other
expenses.
The Company intends to rely primarily on dividends and interest income
from its life insurance subsidiaries in order to make dividend payments to its
shareholders. The payment of dividends by its life insurance subsidiaries is
regulated under various state laws. Under Iowa law, AmerUs Life and Delta Life
may pay dividends only from the earned surplus arising from their respective
businesses and must receive the prior approval of the Iowa Insurance
Commissioner to pay any dividend that would exceed certain statutory
limitations. The current statute limits any dividend, together with dividends
paid out within the preceding 12 months, to the greater of (i) 10% of the
respective company's policyowners' surplus as of the preceding year end or (ii)
the net gain from operations for the previous calendar year. Iowa law gives the
Iowa Commissioner broad discretion to disapprove requests for dividends in
excess of these limits. The payment of dividends by AmVestors' subsidiaries,
American Investors Life Insurance Company, Inc. (American), and Financial
Benefit Life Insurance Company (FBL) is regulated under Kansas law, which has
statutory limitations similar to those in place in Iowa. Based on these
limitations and 1998 results, the Company's subsidiaries could pay an estimated
$60.7 million in dividends in 1999 without obtaining regulatory approval. Of
this amount, the Company's subsidiaries paid the Company $28 million in
dividends during the first six months of 1999.
The Company and its subsidiaries generated cash flows from operating
activities of $437.9 million and $267.8 million for the six months ended June
30, 1999 and 1998, respectively. Excess operating cash flows were primarily used
to increase the Company's investment portfolio and fund policyowner account
withdrawals.
The Company has a $150 million revolving credit facility with a
syndicate of lenders (the "Bank Credit Facility"). As of June 30, 1999, there
was a $5 million outstanding loan balance under the facility. The Bank Credit
Facility provides for typical events of default and covenants with respect to
the conduct of the business of the Company and its subsidiaries and requires the
maintenance of various financial levels and ratios. Among other covenants, the
Company (a) cannot have a leverage ratio greater than 0.35:1.0 or an interest
coverage ratio less than 2.5:1.0, (b) is prohibited from paying cash dividends
on its common stock in excess of an amount equal to 3% of its consolidated net
worth as of the last day of the preceding fiscal year, and (c) must cause
certain of its subsidiaries, including AmerUs Life and Delta Life, to maintain
certain ratings from A.M. Best and certain levels of risk-based capital.
The Company may from time to time review potential acquisition
opportunities. The Company anticipates that funding for any such acquisition may
be provided from available cash resources, from debt or equity financing or
stock-for-stock acquisitions. In the future, the Company anticipates that its
liquidity and capital needs will be met through interest and dividends from its
life insurance subsidiaries, accessing the public equity and debt markets
depending upon market conditions, or alternatively from bank financing.
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38
On February 15, 1999, the Company's controlling shareholder, American
Mutual Holding Company (American Mutual), a mutual insurance holding company,
announced that its board of directors had authorized management to review the
potential benefits of a demutualization of American Mutual. American Mutual is
owned by its members who are also policyowners of AmerUs Life. American Mutual
expects to complete the study and make a final decision in the third quarter
1999.
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-
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sensitive life products and annuities by their contractual withdrawal provisions
at June 30, 1999 (including liabilities in both the Closed Block and the general
account):
(dollars in millions)
Not subject to discretionary withdrawal $ 368.8
Subject to discretionary withdrawal with adjustments
Specified surrender charges (A) 4,145.8
Market value adjustments 1,582.2
---------
Subtotal 5,728.0
Subject to discretionary withdrawal without adjustments 1,276.0
---------
Total $ 7,372.8
=========
(A) Includes $1,171.9 million of liabilities with a contractual surrender
charge of less than five percent of the account balance.
Through its membership in the Federal Home Loan Bank (FHLB) of Des
Moines, AmerUs Life is eligible to borrow on a line of credit available to
provide it additional liquidity. Interest is payable at a current rate at the
time of any advance. As of June 30, 1999, AmerUs Life had a $25.0 million open
secured line of credit against which there were no borrowings. In addition to
the line of credit, AmerUs Life has long-term advances from the FHLB outstanding
of $16.3 million at June 30, 1999.
The Company's life insurance subsidiaries may also obtain liquidity
through sales of investments. The Company's investment portfolio as of June 30,
1999 had a carrying value of $9 billion, including Closed Block investments.
At June 30, 1999, the statutory surplus of the Company's subsidiaries
was approximately $430.7 million. The Company believes that this level of
statutory capital is more than adequate as each life insurance subsidiary's
risk-based capital is significantly in excess of required levels.
In the future, in addition to their cash flows from operations and
borrowing capacity, the life insurance subsidiaries would anticipate obtaining
their required capital from the Company as the Company will have access to the
public debt and equity markets.
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate the date value "2000". Many existing application software products
were designed to accommodate only a two-digit date position which represents the
year (e.g., the number "95" is stored on the system and represents the year
1995). As a result, the year 1999 (i.e., "99") is the maximum date value many
information technology (IT) systems will be able to process accurately.
The Company formed a Year 2000 working group to address potential
problems posed by this development to assure that the Company is prepared for
the year 2000. The Company's overall Year 2000 compliance initiatives include
the following components: (i) assessment of all business critical systems
(business critical systems include computer and embedded systems); processes and
external interfaces and dependencies; (ii) remediation or upgrading of business
critical systems; (iii) testing of both modified and updated systems as well as
integrated systems testing; (iv) implementation of modified and updated systems;
and (v) contingency planning.
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The Company has essentially completed the Year 2000 modifications and
conversions and testing will continue throughout the year. The Year 2000 Project
has four main components: IT Systems, Non-IT Systems, Business Partners and
Contingency Planning.
The IT Systems Project has been organized into three phases as follows:
inventory, remediation/replacement and integrated testing. The inventory phase
is complete. The mainframe remediation and the personal computer and network
remediation/replacement efforts are on schedule and substantially complete.
Individual systems testing was completed as part of the remediation efforts, and
the Company has completed full integration testing of mission critical systems.
Nonetheless, we will continue to test these systems throughout the year.
Non-IT Systems include administrative systems such as faxes and phone
systems. Facilities also contain non-IT systems such as elevators, heating and
cooling systems and security systems. Work on these embedded systems is
substantially complete. We will continue testing these systems throughout the
year.
All entities with which the Company does business are part of the
Business Partners component of the Year 2000 Project. The Company has completed
an inventory of business partners, and has identified the significance of
various partners to the Company's business. Correspondence has been initiated
with business partners to ascertain their Year 2000 readiness, and risk/impact
analysis of service or supply disruptions have been completed. Based upon the
results of analysis, action and contingency plans are being developed for
various business partners. This project is scheduled for completion in the third
quarter of 1999.
Despite efforts to address all Year 2000 needs in a timely and
effective manner, there are risks that some Year 2000 effects could cause
significant operational difficulties for the Company. Some causes of these risks
are the potential for unanticipated complications in making Year 2000
modifications, the possibility of oversights in the remediation process, and the
difficulty of hiring and retaining IT personnel in the current business
environment. While the Company does not expect any such operational difficulties
to be material, the potential for these occurrences cannot be fully assessed at
this time. For these reasons, the Company is in the process of developing
contingency plans to cover the risk of non-compliance due to Year 2000 failures
in Company systems or those of its business partners. Contingency Planning will
include an identification of critical business processes and development of
alternative methods of carrying them out in the event of any system failure.
This effort is scheduled for completion in the third quarter of 1999.
During the second quarter of 1998 the Company engaged an independent IT
consulting firm to review its Year 2000 Project plans, priorities and processes.
This review considered the Company's efforts as compared to industry "best
practices." This review verified the appropriateness of the Company's Year 2000
Project and provided additional direction for its continuation. In December of
1998 the Company hired an independent consulting firm to conduct a quality
assurance review of this project. Recommendations were evaluated and implemented
as appropriate.
Total estimated costs associated with Year 2000 modifications and
conversions are approximately $9 million. These costs are expensed as incurred.
For the six months ended June 30, 1999, the Company has incurred $3.8 million in
Year 2000 expenses, and $8.0 million since the beginning of the Year 2000
Project.
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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 our liabilities, primarily the Company's
lapsation, to determine duration, which is the present value of the fixed income
investment portfolios after consideration of the duration of these liabilities
and other factors, which management believes mitigates the overall effect of
interest rate risk for the Company.
The table below provides information about the Company's fixed maturity
investments and mortgage loans at June 30, 1999. The table presents cash flows
of principal amounts and related weighted average interest rates by expected
maturity dates. The cash flows are based on the earlier of the call date or the
maturity date or, for mortgage-backed securities, expected payment patterns.
Actual cash flows could differ from the expected amounts.
EXPECTED CASH FLOWS
(Dollars in millions)
6 mos
Amortized 1999 2000 2001 2002 2003 2004 Thereafter Cost
--------- ---- ---- ---- ---- ---- ---- ---------- ----
Fixed Maturity
Securities $ 179 $ 382 $ 483 $ 572 $ 839 $ 654 $ 3,821 $6,930
Average interest
rate 7.2% 7.2% 7.1% 7.0% 6.7% 6.6% 7.1%
Mortgage loans $ 4 $ 25 $ 21 $ 3 $ 4 $ 16 $ 527 $ 600
Average interest
rate 10.4% 9.4% 9.6% 9.5% 9.4% 9.8% 8.5%
Total $ 183 $ 407 $ 504 $ 575 $ 843 $ 670 $ 4,348 $7,530
====== ====== ====== ====== ====== ====== ======= ======
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
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maturity securities are comprised of U.S. Treasury, government agency,
mortgage-backed and corporate securities. Approximately 67% of fixed maturity
securities are issued by the U.S. Treasury or U.S. government agencies or are
rated A or better by Moody's, Standard and Poor's, or the NAIC. Less than 8% of
the bond portfolio is below investment grade. Fixed maturity securities have a
weighted average maturity of approximately 7.5 years.
Prepayment risk refers to the changes in prepayment patterns that can
either shorten or lengthen the expected timing of the principal repayments and
thus the average life and the effective yield of a security. Such risk exists
primarily within the Company's portfolio of mortgage-backed securities.
Management monitors such risk regularly. The Company invests primarily in those
classes of mortgage-backed securities that are less subject to prepayment risk.
The Company's use of derivatives is generally limited to hedging
purposes and has principally consisted of using interest rate swaps, caps,
swaptions and options. These instruments, viewed separately, subject the Company
to varying degrees of market and credit risk. However when used for hedging, the
expectation is that these instruments would reduce overall market risk. Credit
risk arises from the possibility that counterparties 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 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.
The Company, AmerUs Life and their direct and indirect majority
shareholders AmerUs Group and American Mutual Holding Company (collectively
"AmerUs"), were defendants in a class action lawsuit, Bhat v. AmerUs Life
Insurance Company, which was filed in December 1996 in the United States
District Court for the Northern District of California. The complaint, as
amended in 1998, alleged that the defendants breached the terms of certain
universal life policies, breached certain other duties owed to policyowners, and
violated RICO in setting their cost of insurance rates and credited interest
rates. These allegations include a claim that the defendants passed an increase
in corporate income taxes (known as the deferred acquisition cost, or DAC, tax)
through to owners of those policies. The plaintiff, an insured under a universal
life policy issued by AmerUs Life, sought unspecified actual and punitive
damages and injunctive relief on behalf of himself and all similarly situated
policyowners of AmerUs Life with universal life insurance policies. AmerUs
denied the allegations contained in the complaint, including the existence of a
legitimate class. An earlier companion case filed in the same court in June 1996
was dismissed in October 1997.
The parties have entered into a nationwide class settlement of certain
contract and related issues for a substantial block of AmerUs Life's life
insurance policies. The settlement was approved by the court by order dated
April 2, 1999. No appeal has been filed and the time for filing an appeal has
expired.
Due to pending settlement negotiations, the Company incurred a charge to
income for 1998. Based upon current estimates of the costs associated with the
settlement, the Company established a reserve of $1.2 million at that time.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of its shareholders on May 14,
1999. There were two matters voted upon at the meeting. The first was the
election of directors. The nominees, Messrs. Roger K. Brooks, Jack C. Pester and
John A. Wing and Ms. Maureen M. Culhane were elected to three-year terms. Other
directors continuing to serve are John R. Albers, Malcolm Candlish, Thomas F.
Gaffney, Sam C. Kalainov, Ralph W. Laster, Jr., and John W. Norris, Jr.
The second matter voted upon resulted in the ratification of the
appointment of KPMG LLP as independent auditors for the Company.
The results of the balloting were as follows:
AGAINST OR ABSTENTIONS
FOR WITHHELD BROKER NON-VOTES
--- -------- ----------------
Election of Directors:
Roger K. Brooks 26,883,462 1,218,444
Maureen M. Culhane 26,883,380 1,218,526
Jack C. Pester 26,879,392 1,222,514
John A. Wing 26,882,998 1,218,908
Ratification of KPMG LLP 28,070,192 12,512 19,202
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 was filed during the quarter ended
June 30, 1999:
None.
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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: August 13, 1999 AMERUS LIFE HOLDINGS, INC.
By /s/ Michael G. Fraizer
---------------------------------
Senior Vice President and
Chief Financial Officer
By /s/ Brenda J. Cushing
---------------------------------
Vice President and Controller
(Principal Accounting Officer)
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AMERUS LIFE HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit
No. Description
- ------- -----------
2.1 Plan of Reorganization dated October 27, 1995, filed as Exhibit 2.1
to the registration statement of the Registrant on Form S-1,
Registration Number 333-12239, is hereby incorporated by reference.
2.2 Amended and Restated Agreement and Plan of Merger, dated as of
September 19, 1997 and as amended and restated as of October 8,
1997, by and among the Registrant, AFC Corp. and AmVestors Financial
Corporation ("AmVestors"), filed as Exhibit 2.2 to the Registration
Statement of the Registrant on Form S-4, Registration Number
333-40065 is hereby incorporated by reference.
2.3 Agreement and Plan of Merger, dated as of August 13, 1997 and as
amended as of September 5, 1997, among the Registrant, a wholly
owned subsidiary of the Registrant and Delta Life Corporation, filed
as Exhibit 2.2 to Form 8-K of the Registrant dated October 8, 1997,
is hereby incorporated by reference.
3.1 Amended and Restated Articles of Incorporation of the Registrant
filed as Exhibit 3.5 to the registration statement of the Registrant
on Form S-1, Registration Number 333-12239, are hereby incorporated
by reference.
3.2 Bylaws of the Registrant, filed as Exhibit 3.2 to the registration
statement of the Registrant on Form S-1, Registration Number
333-12239, are hereby incorporated by reference.
3.3 Articles of Amendment of the Registrant dated September 25, 1998,
filed as Exhibit 3.3 on Form 10-K, dated March 30, 1999, is hereby
incorporated by reference.
4.1 Amended and Restated Trust Agreement dated as of February 3, 1997
among the Registrant, Wilmington Trust Company, as property trustee,
and the administrative trustees named therein (AmerUs Capital I
business trust), filed as Exhibit 3.6 to the registration statement
of the Registrant and AmerUs Capital I on Form S-1, Registration
Number 333-13713, is hereby incorporated by reference.
4.2 Indenture dated as of February 3, 1997 between the Registrant and
Wilmington Trust Company relating to the Company's 8.85% Junior
Subordinated Debentures, Series A, filed as Exhibit 4.1 to the
registration statement of the Registrant and AmerUs Capital I on
Form S-1, Registration Number, 333-13713, is hereby incorporated by
reference.
4.3 Guaranty Agreement dated as of February 3, 1997 between the
Registrant, as guarantor, and Wilmington Trust Company, as trustee,
relating to the 8.85% Capital Securities, Series A, issued by AmerUs
Capital I, filed as Exhibit 4.4 to the registration statement on
Form S-1, Registration Number, 333-13713, is hereby incorporated by
reference.
4.4 Common Stock Purchase Warrant, filed as Exhibit (10)(v) to Form 10-Q
of AmVestors Financial Corporation dated May 13, 1992, is hereby
incorporated by reference.
4.5 Amended and Restated Declaration of Trust of AmerUs Capital II,
dated as of July 27, 1998, among the Registrant, First Union Trust
Company and the administrative trustees named therein, relating to
the Registrant's 7.0% ACES Units, filed as Exhibit 4.5 on Form 10-Q,
dated August 13, 1998, is hereby incorporated by reference.
4.6 Certificate of Trust of AmerUs Capital III filed as Exhibit 4.7 to
the registration statement of the Registrant, AmerUs Capital II and
AmerUs Capital III, on Form S-3 (No. 333-50249), is hereby
incorporated by reference.
4.7 Common Trust Securities Guarantee Agreement, dated as of July 27,
1998, by the Registrant, relating to the Registrant's 7.0% ACES
Units, filed as Exhibit 4.7 on Form 10-Q, dated August 13, 1998, is
hereby incorporated by reference.
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4.8 QUIPS Guarantee Agreement, dated as of July 27, 1998, by the
Registrant, relating to the Registrant's 7.0% ACES Units, filed as
Exhibit 4.8 on Form 10-Q, dated August 13, 1998, is hereby
incorporated by reference.
4.9 Master Unit Agreement, dated as of July 27, 1998, between the
Registrant and First Union National Bank relating to the
Registrant's 7.0% ACES Units, filed as Exhibit 4.9 on Form 10-Q,
dated August 13, 1998, is hereby incorporated by reference.
4.10 Call Option Agreement, dated as of July 27, 1998, between Goldman,
Sachs & Co. and First Union National Bank relating to the
Registrant's 7.0% ACES Units, filed as Exhibit 4.10 on Form 10-Q,
dated August 13, 1998, is hereby incorporated by reference.
4.11 Pledge Agreement, dated as of July 27, 1998, among the Registrant,
Goldman, Sachs & Co. and First Union National Bank relating to the
Registrant's 7.0% ACES Units, filed as Exhibit 4.11 on Form 10-Q,
dated August 13, 1998, is hereby incorporated by reference.
4.12 Senior Indenture, dated as of June 16, 1998, by and between the
Registrant and First Union National Bank, as Indenture Trustee,
relating to the Registrant's 6.95% Senior Notes, filed as Exhibit
4.14 on Form 10-Q, dated August 13, 1998, is hereby incorporated by
reference.
4.13 Subordinated Indenture, dated as of July 27, 1998, by and between
the Registrant and First Union National Bank, as Indenture Trustee,
relating to the Registrant's 6.86% Junior Subordinated Deferrable
Interest Debentures, filed as Exhibit 4.15 on Form 10-Q, dated
August 13, 1998, is hereby incorporated by reference.
10.1 Amended and Restated Intercompany Agreement dated as of December 1,
1996, among American Mutual Holding Company, AmerUs Group Co. and
the Company. Filed as Exhibit 10.81 to the Registrant's registration
statement on Form S-1, Registration Number 333-12239, is hereby
incorporated by reference.
10.2 Joint Venture Agreement, dated as of June 30, 1996, between American
Mutual Insurance Company and Ameritas Life Insurance Corp., filed as
Exhibit 10.2 on Form 10-K, dated March 25, 1998, is hereby
incorporated by reference.
10.3 Management and Administration Service Agreement, dated as of April
1, 1996, among American Mutual Life Insurance Company, Ameritas
Variable Life Insurance Company and Ameritas Life Insurance Corp.,
filed as Exhibit 10.3 to the registration statement of the
Registrant on Form S-1, Registration Number 333-12239, is hereby
incorporated by reference.
10.4 AmerUs Life Holdings, Inc. Executive Stock Purchase Plan, dated
November 13, 1998, filed as Exhibit 4.11 to the registration
statement of the Registrant on Form S-8, Registration Number
333-72237, is hereby incorporated by reference.
10.5 AlloAmerUs Supplemental Executive Retirement Plan, effective January
1, 1996, filed as Exhibit 10.6 to the registration statement of the
Registrant on Form S-1, Registration Number 333-12239, is hereby
incorporated by reference.
10.6 American Mutual Life Insurance Company Supplemental Pension Plan
(which was curtailed as of December 31, 1995), filed as Exhibit 10.7
to the registration statement of the Registrant on Form S-1,
Registration Number 333-12239, is hereby incorporated by reference.
10.7 Central Life Assurance Company Supplemental Pension Plan (which was
curtailed as of December 31, 1995), filed as Exhibit 10.8 to the
registration statement of the Registrant on Form S-1, Registration
Number 333-12239, is hereby incorporated by reference.
10.8 Management Incentive Plan, filed as Exhibit 10.9 to the registration
statement of the Registrant on Form S-1, Registration Number
333-12239, is hereby incorporated by reference.
10.9 AmerUs Life Insurance Company Performance Share Plan, filed as
Exhibit 10.10 to the registration statement of the Registrant on
Form S-1, Registration Number 333-12239, is hereby incorporated by
reference.
10.10 AmerUs Life Stock Incentive Plan, filed as Exhibit 10.11 to the
registration statement of the Registrant on Form S-1, Registration
Number 333-12239, is hereby incorporated by reference.
10.11 AmerUs Life Non-Employee Director Stock Plan, filed as Exhibit 10.13
to the registration statement of the Registrant on Form S-1,
Registration Number 333-12239, is hereby incorporated by reference.
10.12 Form of Indemnification Agreement executed with directors and
certain officers, filed as Exhibit 10.33 to the registration
statement of the Registrant on Form S-1, Registration Number
333-12239, is hereby incorporated by reference.
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10.13 Tax Allocation Agreement dated as of November 4, 1996, filed as
Exhibit 10.68 to the registration statement of the Registrant on
Form S-1, Registration Number 333-12239, is hereby incorporated by
reference.
10.14 Agreement and Plan of Merger, dated as of August 13, 1997 and as
amended as of September 5, 1997, among the Registrant, a
wholly-owned subsidiary of the Registrant and Delta Life
Corporation, filed as Exhibit 2.2 to the Registrant's report on Form
8-K on October 8, 1997, is hereby incorporated by reference.
10.15 Purchase Agreement between AmerUs Life and AmerUs Bank dated March
5, 1997 relating to the sale of certain loans, filed as Exhibit
10.82 to the registration statement of the Registrant on Form S-4,
Registration Number 333-40065, is incorporated by reference.
10.16 Credit Agreement, dated as of October 23, 1997, among the
Registrant, Various Lender Institutions, the Co-Arrangers and The
Chase Manhattan Bank, as Administrative Agent , filed as Exhibit
10.84 to the registration statement of the Registrant on Form S-4,
Registration Number 333-40065, is incorporated by reference.
10.17 Coinsurance Agreement, effective February 1, 1996, between Delta
Life and Annuity Company and London Life Reinsurance Company, filed
as Exhibit 10.85 to the registration statement of the Registrant on
Form S-4, Registration Number 333-40065, is incorporated by
reference.
10.18 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.
10.19 1989 Non-Qualified Stock Option Plan adopted March 17, 1989, filed
as Exhibit (10)(q) to Form 10-K of AmVestors Financial Corporation,
dated April 12, 1989, is hereby incorporated by reference.
10.20 Amended and Restated Miscellaneous Service Agreement, dated as of
July 21, 1997, among American Mutual Holding Company, Registrant,
AmerUs Life Insurance Company, AmerUs Group Co., AmerUs Bank, AmerUs
Mortgage, Inc., Iowa Realty Co., Inc., Iowa Title Company, AmerUs
Insurance, Inc., AmerUs Properties, Inc., AmerUs Direct, Inc., filed
as Exhibit 10.57 on Form 10-K, dated March 25, 1998, is hereby
incorporated by reference.
10.21 Lease - Business Property, dated December 1, 1996, between AmerUs
Properties, Inc. and AmerUs Life Insurance Company, property 611
Fifth Avenue, Des Moines, Iowa, filed as Exhibit 10.58 on Form 10-K,
dated March 25, 1998, is hereby incorporated by reference.
10.22 First Amendment dated February 1, 1998 to Lease Agreement dated
December 1, 1996 between AmerUs Properties, Inc. and AmerUs Life
Insurance Company, property 611 Fifth Avenue, Des Moines, Iowa,
filed as Exhibit 10.59 on Form 10-K, dated March 25, 1998, is hereby
incorporated by reference.
10.23 Lease - Business Property, dated December 1, 1996, between AmerUs
Properties, Inc. and AmerUs Life Insurance Company, 1213 Cherry
Street, Des Moines, Iowa, filed as Exhibit 10.60 on Form 10-K, dated
March 25, 1998, is hereby incorporated by reference.
10.24 Lease - Business Property, dated December 1, 1996, between AmerUs
Properties, Inc. and the Registrant, property 418 Sixth Avenue
Moines, Iowa, filed as Exhibit 10.61 on Form 10-K, dated March 25,
1998, is hereby incorporated by reference.
10.25 Revised and Restated Lease - Business Property, dated May 28, 1998,
between AmerUs Properties, Inc. and the Registrant property, 699
Walnut Street, Des Moines, Iowa, filed as Exhibit 10.26 on Form
10-K, dated March 30, 1999, is hereby incorporated by reference.
10.26 Addendum, dated May 28, 1998 to lease dated May 28, 1998 between
AmerUs Properties and the Registrant, filed as Exhibit 10.27 on Form
10-K, dated March 30, 1999, is hereby incorporated by reference.
10.27 Addendum II, dated July 21, 1998, to lease dated May 28, 1998
between AmerUs Properties and the Registrant, filed as Exhibit 10.28
on Form 10-K, dated March 30, 1999, is hereby incorporated by
reference.
10.28 Servicing Agreement, dated March 5, 1997, between AmerUs Life
Insurance Company and AmerUs Properties, Inc., filed as Exhibit
10.64 on Form 10-K, dated March 25, 1998, is hereby incorporated by
reference.
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10.29 Consent dated as of May 20, 1998 to the Credit Agreement dated as of
October 23, 1997 among the Registrant, Various Lender Institutions,
the Co-Arrangers and The Chase Manhattan Bank, as Administrative
Agent, filed as Exhibit 10.72 on Form 10-Q, dated November 12, 1998,
is hereby incorporated by reference.
10.30 First Amendment dated as of May 30, 1997 to the Credit Agreement
dated as of October 23, 1997 among the Registrant, Various Lender
Institutions, the Co-Arrangers and The Chase Manhattan Bank, as
Administrative Agent, filed as Exhibit 10.73 on Form 10-Q, dated
November 12, 1998, is hereby incorporated by reference.
10.31 Second Amendment dated as of June 22, 1998 to the Credit Agreement
dated as of October 23, 1997 among the Registrant, Various Lender
Institutions, the Co-Arrangers and The Chase Manhattan Bank, as
Administrative Agent, filed as Exhibit 10.74 on Form 10-Q, dated
November 12, 1998, is hereby incorporated by reference.
10.32 Second Consent and Amendment dated as of October 2, 1998 to the
Credit Agreement dated as of October 23, 1997 among the Registrant,
Various Lender Institutions, the Co-Arrangers and The Chase
Manhattan Bank, as Administrative Agent, filed as Exhibit 10.75 on
Form 10-Q, dated November 12, 1998, is hereby incorporated by
reference.
10.33 MIP Deferral Plan dated as of September 1, 1998, filed as Exhibit
10.76 on Form 10-Q, dated November 12, 1998, is hereby incorporated
by reference.
10.34 Open Line of Credit Application and Terms Agreement, dated March 5,
1999, between Federal Home Loan Bank of Des Moines and AmerUs Life
Insurance Company, filed as Exhibit 10.34 on Form 10-Q dated May 14,
1999, is hereby incorporated by reference.
10.35 Origination Agreement, dated August 1, 1998, between AmerUs Home
Equity, Inc. and AmerUs Life Insurance Company, filed as Exhibit
10.36 on Form 10-K, dated March 30, 1999, is hereby incorporated by
reference.
10.36 Third Waiver to Credit Agreement dated as of November 16, 1998 to
the Credit Agreement dated as of October 23, 1997 among the
Registrant, Various Lender Institutions, the Co-Arrangers and The
Chase Manhattan Bank, as Administrative Agent, filed as Exhibit
10.37 on Form 10-K, dated March 30, 1999, is hereby incorporated by
reference.
10.37 Fourth Consent and Amendment, dated as of December 4, 1998 to the
Credit Agreement dated as of October 23, 1997 among the Registrant,
Various Lender Institutions, the Co-Arrangers and The Chase
Manhattan Bank, as Administrative Agent, filed as Exhibit 10.38 on
Form 10-K, dated March 30, 1999, is hereby incorporated by
reference.
10.38 Administrative Services Agreement, dated as of August 1, 1998, among
American Mutual Holding Company, Registrant, AmerUs Group, AmerUs
Home Equity, Inc., AmerUs Mortgage, Inc., AmerUs Properties, Inc.,
American Capital Management Group, Inc., AmerUs Life Insurance
Company, AmVestors Financial Corporation, American Investors Life
Insurance Company, Inc., and Delta Life and Annuity Company, filed
as Exhibit 10.39 on Form 10-K, dated March 30, 1999, is hereby
incorporated by reference.
10.39 Facility and Guaranty Agreement, dated February 12, 1999, among The
First National Bank of Chicago and the Registrant, filed as Exhibit
10.39 on Form 10-Q dated May 14, 1999, is hereby incorporated by
reference.
10.40 Form of Reimbursement Agreement, dated February 15, 1999, among the
Registrant and Roger K. Brooks, Victor N. Daley, Michael G. Fraizer,
Thomas C. Godlasky, Marcia S. Hanson, Mark V. Heitz and Gary R.
McPhail, filed as Exhibit 10.40 on Form 10-Q dated May 14, 1999, is
hereby incorporated by reference.
10.41 Amendment No. 1 to Facility Agreement, dated March 23, 1999, among
The First National Bank of Chicago and the Registrant, filed as
Exhibit 10.41 on Form 10-Q dated May 14, 1999, is hereby
incorporated by reference.
10.42 1999 Non-Employee Stock Option Plan, dated April 19, 1999, filed on
Form S-3, Registration Number 333-72643, is hereby incorporated by
reference.
10.43* Fifth Waiver and Amendment to Credit Agreement dated as of October
1, 1998 to the Credit Agreement dated as of October 23, 1997 among
the Registrant, Various Lender Institutions, the Co-Arrangers and
The Chase Manhattan Bank, as Administrative Agent.
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10.44* Sixth Amendment to Credit Agreement dated as of May 18, 1999 to the
Credit Agreement dated as of October 23, 1997 among the Registrant,
Various Lender Institutions, the Co-Arrangers and The Chase
Manhattan Bank, as Administrative Agent.
11* Statement Re: Computation of Per Share Earnings.
27.1* Financial Data Schedule.
99.1 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. and
American Investors Sales Group, Inc., filed as Exhibit 99.3 to the
registration statement of the Registrant on Form S-4, Registration
Number 333-40065, is incorporated by reference.
99.2 Agreement of Sale, dated as of October 22, 1997, by and between R.
Rex Lee and AmerUs Group, Co., filed as Exhibit 99.4 to the
registration statement of the Registrant on Form S-4, Registration
Number 333-40065, is incorporated by reference.
99.3 Retirement Agreement, dated June 27, 1997, by and between Victor N.
Daley and Registrant filed as Exhibit 99.5 on Form 10-K, dated March
30, 1999, is hereby incorporated by reference.
99.4* First Amendment to Employment Agreement, dated as of April 15, 1999,
to the Employment Agreement dated as of September 19, 1997, among
Mark V. Heitz, AmVestors Financial Corporation, American Investors
Life Insurance Company, Inc., AmVestors Investment Group, Inc.,
American Investors Sales Group, Inc., and the Registrant.
99.5* Supplemental Benefit Agreement, dated as of April 15, 1999, among
Roger K. Brooks and the Registrant.
99.6* Form of Supplemental Benefit Agreement, dated as of April 15, 1999,
among the Registrant and Victor N. Daley, Michael G. Fraizer, Thomas
C. Godlasky and Gary R. McPhail.
99.7* Amended and Restated Employment Agreement, dated as of April 15,
1999, among Marcia S. Hanson and the Registrant.
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* included herein
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