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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001 Commission File Number: 000-30898
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AMERUS GROUP CO.
(Exact name of Registrant as specified in its charter)
699 WALNUT STREET
DES MOINES, IOWA 50309-3948
(Address of principal executive offices, including zip code)
IOWA 42-1458424
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (515) 362-3600
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EXCHANGE
TITLE OF CLASS ON WHICH REGISTERED
-------------- -----------------------
Common Stock (no par value)................................. New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
Common Stock Warrants
Indicate by check mark whether the Registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]. No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec. 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. Yes [X]. No [ ]
Aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 13, 2002: $1,519,431,737
Number of shares outstanding of each of the Registrant's classes of common
stock on March 13, 2002 was as follows:
Common Stock................................................ 40,208,262 shares
DOCUMENTS INCORPORATED BY REFERENCE
Notice of 2002 Annual Meeting of Shareholders and Proxy Statement
(incorporated into Part III)
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TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 16
Item 6. Selected Financial Data..................................... 18
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition.......................... 20
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 43
Item 8. Financial Statements and Supplementary Data................. 44
Item 9. Changes in and disagreements with Accountants on Accounting
and Financial Disclosure.................................... 45
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 46
Item 11. Executive Compensation...................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 46
Item 13. Certain Relationships and Related Transactions.............. 46
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 46
Index to Exhibits..................................................... 47
Signatures............................................................ 53
Power of Attorney..................................................... 53
Index to Consolidated Financial Statements............................ F-1
Index to Consolidated Financial Statement Schedules................... S-1
SAFE HARBOR STATEMENT
All statements, trend analyses and other information contained in this
report relative to markets for our products and trends in our operations or
financial results, as well as other statements including words such as
"anticipate", "believe", "plan", "estimate", "expect", "intend", and other
similar expressions, constitute forward-looking statements under the Private
Securities Litigation Reform Act of 1995. Factors that may cause our actual
results to differ materially from those contemplated by these forward-looking
statements include, among others, the following possibilities: (a) general
economic conditions and other factors, including prevailing interest rate levels
and stock market performance, which may affect our ability to sell our products,
the market value of our investments and the lapse rate and profitability of our
policies; (b) our ability to achieve anticipated levels of operational
efficiencies and cost-saving initiatives and to meet cash requirements based
upon projected liquidity sources; (c) customer response to new products,
distribution channels and marketing initiatives; (d) mortality, morbidity, and
other factors which may affect the profitability of our insurance products; (e)
our ability to develop and maintain effective risk management policies and
procedures and to maintain adequate reserves for future policy benefits and
claims; (f) changes in the federal income tax laws and regulations which may
affect the relative tax advantages of some of our products; (g) increasing
competition in the sale of insurance and annuities and the recruitment of sales
representatives; (h) regulatory changes or actions, including those relating to
regulation of insurance products and of insurance companies; (i) our ratings and
those of our subsidiaries by independent rating organizations which we believe
are particularly important to the sale of our products; (j) the performance of
our investment portfolios; (k) the impact of changes in standards of accounting
for derivatives and business combinations, goodwill and other intangibles and
purchase accounting adjustments; (l) our ability to integrate the business and
operations of acquired entities; (m) expected life and annuity product margins;
(n) the impact of anticipated investment transactions; and (o) unanticipated
litigation or regulatory investigations.
There can be no assurance that other factors not currently anticipated by
us will not materially and adversely affect our results of operations. You are
cautioned not to place undue reliance on any forward-looking statements made by
us or on our behalf. Forward-looking statements speak only as of the date the
statement was made. We undertake no obligation to update or revise any
forward-looking statement.
1
PART I
ITEM 1. BUSINESS
DEFINITIONS
When used in this document, the terms "AmerUs," "we," "our" and "us" refer
to AmerUs Group Co. (including American Mutual Holding Company and AmerUs Life
Holdings, Inc. as predecessor entities of AmerUs Group Co.) and our consolidated
subsidiaries, unless otherwise specified or indicated by the context.
GENERAL
We are a holding company whose subsidiaries are primarily engaged in the
business of marketing, underwriting and distributing a broad range of individual
life insurance and annuity products to individuals and businesses in all 50
states, the District of Columbia and the U.S. Virgin Islands. We have two
reportable operating segments: life insurance and annuities. The life insurance
segment's primary product offerings consist of whole life, interest-sensitive
whole life, equity-indexed life, universal life and term life insurance
policies. The primary product offerings of the annuity segment are individual
fixed annuities.
We were founded in 1896 as the mutual insurer Central Life Assurance
Company. In 1996, we became the first Mutual Holding Company, or MHC, a
structure that allows mutuals to access the public equity markets, which AmerUs
did in 1997 with its initial public offering. In 2000, AmerUs reorganized its
MHC structure through a full demutualization and became a 100% public stock
company.
We have had positive organic growth in our businesses. We have also
successfully executed a series of strategic acquisitions that have helped
generate sales growth, as well as balance our product and geographic
distribution. The following is a summary of these acquisitions and the benefits
created:
- In 1994, Central Life Assurance Company and American Mutual Life
Insurance Co. merged providing us with significant scale in our life
insurance operations. The merger resulted in our becoming one of the 25
largest mutual insurers in America at that time.
- In October 1997, the acquisition of Delta Life Corporation launched our
annuity business. At the time of the acquisition, Delta Life had about
$2.0 billion in assets and specialized in single-premium deferred annuity
and equity-indexed annuity products.
- In December 1997, we acquired AmVestors Financial Corporation,
predecessor to AmerUs Annuity Group Co., which specialized in the sale of
annuity products. The acquisition further strengthened our presence in
asset accumulation and retirement and savings markets.
- In 2001, we acquired Indianapolis Life Insurance Company, an Indiana life
insurance company, which had $5.8 billion in consolidated assets at the
time of the acquisition. The acquisition allowed us to strengthen our
life insurance business and ultimately provided us with a better balance
of annuities and life insurance products.
We sold certain lines of business and made the decision to exit certain
other businesses in 1998. These businesses are referred to as discontinued
operations and include the following activities: banking, residential real
estate brokerage, residential land development and mortgage banking.
SUBSIDIARIES
We have three main wholly-owned subsidiaries: AmerUs Life Insurance
Company, or ALIC, an Iowa life insurance company; AmerUs Annuity Group Co., or
AAG, a Kansas corporation and AmerUs Capital Management Group, Inc., or ACM, an
Iowa corporation. AmerUs Group Co. and ALIC own all of ILICO Holdings, Inc., an
Indiana corporation.
AAG owns, directly or indirectly, three Kansas life insurance companies:
American Investors Life Insurance Company, Inc., or American; Delta Life and
Annuity Company, or Delta; and Financial Benefit Life Insurance Company, or FBL.
2
ILICO Holdings, Inc., has one wholly-owned subsidiary, Indianapolis Life
Insurance Company or ILIC, an Indiana life insurance company. ILIC has one
wholly-owned subsidiary, The Indianapolis Life Group of Companies, Inc., or IL
Group. IL Group has four wholly-owned subsidiaries: Bankers Life of New York, or
Bankers Life, a New York life insurance company; IL Securities, Inc., an Indiana
corporation; IL Annuity and Insurance Company, or IL Annuity, a Kansas life
insurance company; and Western Security Life Insurance Company, or WSLIC, an
Arizona life insurance company. Effective on March 5, 2002, IL Group was
dissolved and its four wholly-owned subsidiaries become direct subsidiaries of
ILIC. When used in this document, the term "ILICO" refers to ILICO Holdings,
Inc. and its consolidated subsidiaries.
ORGANIZATION AS OF DECEMBER 31, 2001
[ORG. CHART]
REORGANIZATION
We were formerly known as American Mutual Holding Company, or AMHC and were
a mutual insurance holding company, with our principal asset being a 58%
interest in AmerUs Life Holdings, Inc., or ALHI. Public stockholders owned the
remaining 42% interest in ALHI, and we refer to their interest as the minority
interest. ALHI was a holding company which directly or indirectly owned three
principal life insurance subsidiaries: ALIC, American and Delta. On September
20, 2000, we converted to stock form, changed our name to AmerUs Group Co. and
acquired the minority interest of ALHI by issuing our common stock in exchange
for the outstanding shares of ALHI held by the public. The value of the stock
exchange was approximately $298 million and ALHI was merged into us
simultaneously with the stock exchange.
Prior to our conversion to a stock company, which is referred to as a
demutualization, we were owned by individuals and entities who held insurance
policies or annuity contracts issued by ALIC. Such individuals and entities were
considered members. In connection with our demutualization, we distributed cash,
policy credits and our newly issued common stock to those members in exchange
for their membership interests. The value of the distribution totaled
approximately $792 million.
The acquisition of the minority interest of ALHI by us was accounted for as
a purchase and 42% of the book value of the assets and liabilities of ALHI were
adjusted to market value as of the acquisition date. Approximately 42% of the
ALHI earnings for our fiscal periods prior to the acquisition date are deducted
from our results of operations on the line titled "minority interest" in our
consolidated statements of income. From the acquisition date forward, our
results of operations include 100% of such earnings.
3
RECENT ACQUISITION
On May 18, 2001, we completed the acquisition of ILICO for an amount of
cash, policy credits and shares of our common stock equal to the value of 9.3
million shares of our common stock. The purchase price totaled approximately
$326 million. The acquisition was accounted for as a purchase and the total
purchase price was allocated to the assets and liabilities of ILICO based on the
relative fair values as of the acquisition date. See further discussion in note
15 to the consolidated financial statements.
FINANCIAL INFORMATION
We measure our profit or loss and total assets by operating segments. We
have two reportable operating segments: life insurance and annuities. See a
further discussion of our operating segments in "Item 7 Management's Discussion
and Analysis of Results of Operations and Financial Condition."
LIFE INSURANCE SEGMENT
PRODUCTS
Our individual life insurance premiums are from traditional life insurance
products, universal life insurance products and equity-indexed life insurance
products as set forth in the following table:
SALES ACTIVITY BY PRODUCT(A)
DIRECT FIRST YEAR ANNUALIZED PREMIUMS
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
--------- --------- ---------
($ IN THOUSANDS)
Traditional life insurance:
Whole life............................................. $ 6,842 $14,161 $16,409
Interest-sensitive whole life.......................... 12,411 -- --
Term life.............................................. 14,400 7,223 7,012
Universal life........................................... 21,794 10,992 14,314
Equity-indexed life...................................... 25,865 7,137 --
------- ------- -------
Total.................................................. $81,312 $39,513 $37,735
======= ======= =======
---------------
(A) Sales number include direct sales and the Company's share of private label
sales.
Traditional Life Insurance Products. Our traditional life insurance
products have a long history of being highly competitive within the industry.
Traditional life insurance products include whole life, interest-sensitive whole
life and term life insurance products.
Whole life insurance is designed to provide benefits for the life of the
insured. This product generally provides for level premiums and a level death
benefit and requires payments in excess of the mortality cost in earlier years
to offset increasing mortality costs in later years. Sales of whole life
insurance decreased in 2001 and 2000, as compared to each prior year due in part
to our introduction of new equity-indexed life products which has resulted in a
shift in focus from whole life to equity-indexed products. In addition, there
has been an overall general industry decline in sales of whole life products.
Interest-sensitive whole life insurance also provides benefits for the life
of the insured; however, it has flexible premium and benefit patterns not
available with traditional whole life plans. Cash value accumulation is interest
sensitive and responds to current interest and mortality rates. Sales of
interest-sensitive whole life insurance in 2001 are all attributable to ILICO.
Term life insurance provides life insurance protection for a specific time
period (which generally can be renewed at an increased premium). Such policies
are mortality-based and offer no cash accumulation feature. Term life insurance
is a highly competitive and quickly changing market. Term life insurance sales
(excluding sales from ILICO of $8.9 million in 2001) decreased in 2001 due to
the highly competitive market and
4
increased in 2000 as a result of product repricing completed in mid-1999 along
with an increase in consumer demand for the product related to legislative
changes which took effect in January, 2000.
We also distribute term products of ILICO through strategic alliances with
private label partners. Under private label arrangements, ILICO designs and
issues products that are distributed through the field forces of other life
insurance companies, our private label partners and ILICO reinsures a portion of
the risks on those products, our private label sales.
For the year ended December 31, 2001, sales of whole life,
interest-sensitive whole life and term life insurance products, including our
share of private label sales, represented 8%, 15% and 18%, respectively, of
first year annualized premiums for all individual life insurance products sold.
Universal Life Insurance Products. We offer universal life insurance
products, pursuant to which an insurance account is maintained for each
insurance policy. Premiums, net of specified expenses, are credited to the
account, as is interest, generally at a rate determined from time to time by us.
Specific charges are made against the account for the cost of insurance and for
expenses. The universal life policy provides flexibility as to the amount and
timing of premium payments and the level of death benefits provided.
Our universal life insurance products provide benefits for the life of the
insured. Within our limits and state regulations, policyowners may vary the
premiums and the amount of the death benefit of their policies as long as there
are sufficient policy funds available to cover all policy charges for the next
coverage period. Sales of universal life (excluding sales from ILICO of $15.8
million in 2001) decreased in 2001 and 2000 primarily attributable to the
introduction of equity-indexed life products in 2000. The weighted average
crediting rate for universal life insurance liabilities was 5.63% (5.64%
excluding ILICO) for the year 2001, 5.62% for the year 2000 and 5.67% for the
year 1999. For the year ended December 31, 2001, sales of universal life
insurance products represented 27% of first year annualized premiums for all
individual life insurance products sold.
Equity-Indexed Life Products. We also offer equity-indexed life insurance
products which are similar in structure to universal life products but allow the
policyowner to elect an earnings strategy for a portion of the account value
earnings. Earnings are credited based on increases in the Standard & Poor's 500
Composite Stock Index(R) (S&P 500 Index), excluding dividends. The earnings
credit is subject to a participation rate and an annual cap. Equity-indexed life
insurance sales increased in 2001 following product introduction in 2000. Sales
of the equity-indexed life product as a percentage of first year individual life
insurance annualized premiums was approximately 32% in 2001.
5
The following table sets forth our collected life insurance premiums,
including collected premiums associated with the closed block, for the periods
indicated:
COLLECTED PREMIUMS BY PRODUCT
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
-------- -------- --------
($ IN THOUSANDS)
Individual life premiums collected:
Traditional life:
First year and single............................... $113,126 $ 83,849 $ 84,044
Renewal............................................. 274,784 185,078 179,780
-------- -------- --------
Total............................................... 387,910 268,927 263,824
Universal life:
First year and single............................... 45,597 27,306 24,371
Renewal............................................. 109,485 73,737 72,192
-------- -------- --------
Total............................................... 155,082 101,043 96,563
-------- -------- --------
Equity-indexed life:
First year and single............................... 40,504 5,265 --
Renewal............................................. 4,212 -- --
-------- -------- --------
Total............................................... 44,716 5,265 --
-------- -------- --------
Total individual life.................................... 587,708 375,235 360,387
Reinsurance assumed.................................... 30,740 1,464 1,589
Reinsurance ceded...................................... (74,152) (40,740) (17,571)
-------- -------- --------
Total individual life, net of reinsurance................ $544,296 $335,959 $344,405
======== ======== ========
Traditional life insurance premiums collected were $387.9 million for 2001
compared to $268.9 million for 2000 and $263.8 million for 1999. The increase in
2001 was due to the additional premiums from ILICO. Excluding the ILICO
premiums, first year and single premiums decreased $6.2 million between the 2001
and 2000 periods which was consistent with the lower whole life and term sales,
as previously discussed. Renewal direct collected premium, excluding ILICO
premiums, was $0.6 million lower in 2001 as compared to 2000 primarily due to
unfavorable persistency of the closed block as it continues to run-off,
partially offset by continued favorable persistency of the open block. Renewal
direct collected premium was $5.3 million higher in 2000 as compared to 1999
primarily due to continued favorable persistency of the open block and the
continued growth of the open block of business.
Universal life insurance premiums collected were $155.1 million for 2001
compared to $101.0 million for 2000 and $96.6 million for 1999. Approximately
$67.1 million of universal life insurance premiums for 2001 were from ILICO. The
remaining decrease in 2001 compared to 2000 was primarily due to decreased sales
of universal life products.
Equity-indexed life premiums collected were $44.7 million for 2001 compared
to $5.3 million for 2000 and zero for 1999. The increases in 2001 and 2000 as
compared to each prior year result from the product introduction in 2000.
Reinsurance assumed increased approximately $29.3 million in 2001. The
entire amount of the increase is from the ILICO acquisition. ILICO private
labels various term life products. The products are designed by ILICO, issued by
ILICO's private label partners and then assumed in whole or in part by ILICO.
Beginning January 1, 2000, ALIC entered into a new reinsurance arrangement
that reduced its retention to 10% of the net amount of risk on any one policy
not to exceed company retention limits for the majority of policies issued since
July 1, 1996 and for the majority of new business going forward. ALIC's
retention limits on any one life vary by age and rating table and are generally
between $500,000 and $1,000,000. In addition, effective July 1, 2000, ALIC
entered into a reinsurance agreement covering its closed block policies. Under
this agreement, ALIC has reinsured approximately 90% of the closed block net
amount at risk not previously
6
reinsured. As a result of these new agreements, ceded reinsurance premium was
$35.0 million in 2001 and $40.7 million in 2000 compared to $17.6 million in
1999. The remainder of the increase in ceded premium amounting to $39.2 million
was from the ILICO acquisition. ILICO's reinsurance agreements effectively
reduce ILICO's retention limit to $500,000.
The following table sets forth information regarding our life insurance in
force for each date presented:
INDIVIDUAL LIFE INSURANCE IN FORCE
AS OF DECEMBER 31,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
($ IN THOUSANDS)
Traditional life
Number of policies.............................. 403,444 245,143 249,282
GAAP life reserves.............................. $ 3,010,057 $ 1,744,038 $ 1,645,946
Face amounts.................................... $48,286,000 $23,466,000 $21,458,000
Universal life
Number of policies.............................. 153,615 110,323 112,906
GAAP life reserves.............................. $ 1,472,260 $ 943,569 $ 920,009
Face amounts.................................... $20,161,000 $12,257,000 $12,244,000
Equity-indexed life
Number of policies.............................. 10,591 2,930 --
GAAP life reserves.............................. $ 51,004 $ 13,015 $ --
Face amounts.................................... $ 2,028,000 $ 478,000 $ --
Total life insurance
Number of policies.............................. 567,650 358,396 362,188
GAAP life reserves.............................. $ 4,533,321 $ 2,700,622 $ 2,565,955
Face amounts.................................... $70,475,000 $36,201,000 $33,702,000
The acquisition of ILICO in 2001 increased the number of policies in force
by 213,000, GAAP life reserves by $1.7 billion and face amounts by $31.2
billion.
DISTRIBUTION SYSTEMS
Our subsidiaries sell life insurance in all 50 states, the District of
Columbia and the U.S. Virgin Islands. The states with the highest geographic
concentration of sales, based on statutory premiums, are California, Iowa,
Minnesota, New York and Texas in 2001. These states account for approximately
40% of our statutory premiums.
Our target customers are individuals in the middle and upper income
brackets and small businesses. We market our life insurance products on a
national basis primarily through a Preferred Producer agency system, a Personal
Producing General Agent (PPGA) distribution system and through Independent
Marketing Organizations (IMOs). We currently employ 16 regional vice presidents
who are responsible for supervising these distribution systems within their
assigned geographic regions.
Under the Preferred Producer agency system, a contractual arrangement is
entered into with the Preferred Producer general agent for the sale of insurance
products by the Preferred Producer agents and brokers assigned to the Preferred
Producer general agent's agency. The Preferred Producer general agents are
primarily compensated by receiving a percentage of the first year commissions
paid to Preferred Producer agents and brokers in the Preferred Producer general
agent's agency and by renewal commissions on premiums subsequently collected on
that business. In addition, the Preferred Producers receive certain fringe
benefits and other allowances.
The Preferred Producer general agents are independent contractors and are
generally responsible for the expenses of operating their agencies, including
office and overhead expenses and the recruiting, selection, contracting,
training and development of Preferred Producer agents and brokers in their
agency. As of
7
December 31, 2001, we had 61 Preferred Producer general agents in 25 states,
through which approximately 1,000 Preferred Producer agents sell our products.
While Preferred Producer agents in the Preferred Producer agency system are
non-exclusive, most agents use our products for a majority of their new business
for the type of products offered by us. No single Preferred Producer general
agency accounts for more than 2% of the total first year life commissions paid
by us.
Preferred Producer agents are also independent contractors and are
primarily compensated by commissions on first year and renewal premiums
collected on business written by them plus certain fringe benefits and other
allowances. In addition, Preferred Producer agents can earn bonus commissions,
graded by production and persistency on their business.
Under the PPGA system, we contract primarily with individuals who are
experienced individual agents or head a small group of experienced individual
agents. These individuals are independent contractors and are responsible for
all of their own expenses. These individuals often sell products for other
insurance companies, and may offer selected products we offer rather than our
full line of insurance products. The PPGA system is comprised of approximately
1,300 PPGAs, with approximately 3,600 agents.
PPGAs are compensated by commissions on first year and renewal premiums
collected on business written by themselves and the agents in their units. In
addition to a base commission, PPGAs may earn bonus commissions on their
business, graded by production and persistency.
We have also developed programs to sell life insurance through select IMOs.
The customers targeted and the products sold are similar to those of the
Preferred Producer agency system and the PPGA system.
Under the IMO system, a contractual arrangement is entered into with an IMO
to promote our insurance products to their network of agents and brokers. The
IMO receives a commission and override commission on the business produced. We
currently have approximately 65 IMOs under contract.
We also distribute term and second-to die products of ILICO through
strategic alliances with private label partners. Under private label
arrangements, ILICO designs and manufactures products that are distributed
through the field forces of other life insurance companies, our private label
partners. We have 33 private label partners of which two are actively writing
new business.
ANNUITY SEGMENT
PRODUCTS
We offer a broad portfolio of annuity products. Annuities provide for the
payment of periodic benefits over a specified time period. Benefits may commence
immediately or may be deferred to a future date. Fixed annuities generally are
backed by a general investment account and credited with a rate of return that
is periodically reset. Variable annuities provide for the policyholder to direct
all or a portion of his or her account balance into an investment that
effectively passes the risks and rewards of holding that investment to the
policyholders. Our collected annuity premiums consisted of approximately 67%
from deferred fixed annuity products, approximately 25% from multi-choice
annuity products, approximately 7% from equity-indexed
8
annuity products and approximately 1% from variable annuity products in 2001.
The following table sets forth annuity collected premiums for the periods
indicated:
COLLECTED PREMIUMS BY PRODUCT
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
---------- ---------- --------
($ IN THOUSANDS)
Fixed annuities:
Deferred fixed annuities............................ $1,322,725 $1,107,147 $834,636
Multi-choice annuities.............................. 480,600 115,309 1,600
Equity-indexed annuities............................ 131,443 259,194 102,665
Variable annuities.................................... 27,483 -- --
---------- ---------- --------
Total............................................ 1,962,251 1,481,650 938,901
Reinsurance assumed................................... 194,317 -- 59,561
Reinsurance ceded..................................... (175,485) (34,534) (273)
---------- ---------- --------
Total annuities, net of reinsurance................... $1,981,083 $1,447,116 $998,189
========== ========== ========
Deferred Fixed Annuity Products. We offer a variety of interest rate
crediting strategies on our deferred fixed annuity products. These strategies
include initial interest crediting rates with guarantees for periods of one to
five years. Following the initial guarantee period, we may adjust the credited
interest rate annually, subject to the minimum interest rates specified in the
contracts. Such minimum guarantee rates currently range from 3% to 4.5%. We also
offer an interest rate crediting strategy that credits the policy with a return
generally based upon the interest rates it earns on assets supporting the
respective policies less management fees. Excluding ILICO, deferred fixed
annuity collected premiums increased $198.2 million in 2001 compared to 2000 and
increased $272.5 million in 2000 compared to 1999. The increases were primarily
attributable to product repricing and increased marketing efforts.
Effective October 1, 2000, we entered into a reinsurance agreement to cede
35% of certain fixed annuity production on a modified coinsurance basis. Fixed
annuity production ceded under this agreement totaled approximately $160.3
million in 2001 and $34.2 million in 2000. In the fourth quarter of 2001, the
agreement was cancelled and the previously ceded premiums were recaptured
amounting to $194.3 million. In addition, ILICO reinsures approximately 75% of
its fixed annuities on a modified coinsurance basis which increased reinsurance
ceded by approximately $15.2 million in 2001.
Multi-choice Annuities. In December 1999, we introduced multi-choice
annuity products which provide for various earnings strategies under one
product, such as a long-term equity index, an annual equity index, an investment
grade bond index, a convertible bond index and a guaranteed one-year rate.
Earnings are credited to these products based on the increases in the applicable
indexes, less applicable fees, and funds may be moved between investment
alternatives. This product has continued to grow in popularity with consumers
and agents since its introduction. Excluding ILICO, multi-choice annuity
premiums increased $237.9 million in 2001 and $113.7 million in 2000 as compared
to each prior period.
Equity-Indexed Annuities. We offer equity-indexed annuity products that
are based on the S&P 500 Index. Earnings credited to these products generally
are linked to increases in the anniversary date values of the applicable index,
less applicable fees. Equity-indexed annuity sales declined in 2001 as compared
to 2000 primarily due to the lower returns on the S&P 500 Index this past year.
In addition, the ILICO acquisition did not impact equity-indexed sales as ILICO
did not sell this product in 2001.
In the third quarter of 1999, we entered into a reinsurance agreement for
the assumption of a block of equity-indexed annuities totaling $59.6 million
from our joint venture partner, Ameritas Variable Life Insurance Company
(AVLIC). In conjunction with this transaction, we now directly issue this
equity-indexed product, which contributed to the increased sales in 2000.
Variable Annuities. With the acquisition of ILICO, we have variable
annuity products. Sales of variable annuities were $27.5 million for the period
from May 18, 2001, the acquisition date, through December 31,
9
2001. The assets and liabilities related to the variable annuities are shown on
the consolidated balance sheets as "separate account assets" and "separate
account liabilities". We anticipate that most of our future direct sales of
variable annuities to be reduced significantly because we expect that our agents
will in the future be making sales of variable annuities through our Ameritas
Joint Venture. See "Ameritas Joint Venture" below.
The following table sets forth information regarding annuities in force for
each date presented:
ANNUITIES IN FORCE
AS OF DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ---------- ----------
($ IN THOUSANDS)
Deferred fixed and immediate annuities
Number of policies................................ 176,857 161,087 169,854
GAAP annuity reserves............................. $ 6,909,793 $5,956,929 $5,951,002
Multi-choice annuities
Number of policies................................ 56,520 2,487 22
GAAP annuity reserves............................. $ 3,013,825 $ 112,319 $ 1,600
Equity-indexed annuities
Number of policies................................ 17,401 14,939 9,807
GAAP annuity reserves............................. $ 736,146 $ 680,669 $ 436,262
Total fixed annuities
Number of policies................................ 250,778 178,513 179,683
GAAP annuity reserves............................. $10,659,764 $6,749,917 $6,388,864
The acquisition of ILICO in 2001 increased the total number of annuity
policies by 57,000 and GAAP annuity reserves by $2.9 billion.
DISTRIBUTION SYSTEMS
We sell annuities in all 50 states, the District of Columbia and the U.S.
Virgin Islands. The states with the highest geographic concentration of sales,
based on statutory premiums, are California, Florida, Iowa, Pennsylvania and
Texas in 2001. These states account for approximately 40% of our statutory
premiums.
We direct our marketing efforts towards the asset accumulation,
conservative savings and retirement markets. We market our annuity products on a
national basis primarily through networks of independent agents. The independent
agents are supervised by regional vice presidents and regional directors or
IMOs. In addition, the Preferred Producer Agency and PPGA systems discussed
previously are utilized to market certain annuity products.
The regional vice presidents and regional directors are primarily
responsible for recruiting agents and servicing those agents in an effort to
promote our products. The regional vice presidents' and regional directors'
marketing support activities include informational mailings, seminars and case
consultations, all of which are designed to educate agents about annuities in
general and our company in particular. Regional vice presidents and regional
directors are paid a base salary plus incentive compensation based on the
business produced by agents within their territory. There are currently three
regional vice presidents and regional directors covering the southeastern,
western, southwestern and midwestern regions of the United States.
Our IMOs consist of approximately 57 contracted organizations and four
wholly-owned organizations. The IMOs are responsible for recruiting, servicing
and educating agents in an effort to promote our products. The IMOs receive an
override commission based on the business produced by their agents. Our
wholly-owned organizations accounted for approximately 25% of our annuity sales
in 2001 and three contracted organizations accounted for approximately 29% of
2001 total annuity sales. No single agent accounted for more than 1% of total
annuity sales in 2001. We do not have exclusive agency agreements with our
agents and we believe most of these agents sell products similar to ours for
other insurance companies.
At December 31, 2001, we had approximately 33,000 independent agents
licensed to sell our annuity products. We also maintain contact with
approximately 67,000 agents that are not currently licensed, but have
10
either sold our annuities in the past or have expressed an interest in doing so.
These agents continue to receive periodic mailings related to interest rate and
commission changes, and new product introductions, and are reappointed as
required in order to represent us in selling our products. However, in order to
save costs associated with reappointing agents, we do not automatically
relicense an agent that has not written business for twelve months.
We also sell annuities through a bank distribution system. The customers
targeted and the products sold are similar to those sold by the independent
agent networks. We have an 80% ownership interest in an independent marketing
organization that is associated with over 900 community banks in the southeast
region of the United States. Fixed annuity products are the primary product
focus of this organization.
Under the bank distribution system, we contract with banks and marketing
organizations for the sale of annuities by agents who are employees of the
banks. Commissions are paid to the banks. At December 31, 2001, we had
approximately 91 banks and 9 marketing organizations under contract through
which approximately 478 agents sell our products. We provide training and
servicing support to the banks and marketing organizations.
AMERITAS JOINT VENTURE
We participate in a joint venture, the Ameritas Joint Venture, with
Ameritas Life Insurance Corp. (or Ameritas) through ALIC's 39% ownership
interest in AMAL Corporation, a Nebraska corporation. AMAL Corporation's
operations are conducted through Ameritas Variable Life Insurance Company, (or
AVLIC), and Ameritas Investment Corp. (or AIC), a registered broker-dealer, its
two wholly-owned subsidiaries, which have been in business since 1983. AVLIC is
licensed to conduct business in 47 states and the District of Columbia. AIC is a
registered broker-dealer which is licensed to conduct business in all states
except New York. Our partner in the Ameritas Joint Venture, Ameritas, is a
Nebraska mutual life insurance company which has been in existence for more than
100 years. Our and Ameritas' ownership percentages of the Ameritas Joint Venture
may change if we or they contribute additional variable life or variable annuity
business, production or other assets to the Ameritas Joint Venture. We and
Ameritas are in discussions about contributing additional businesses to the
joint venture and we currently expect Ameritas will contribute more business
than we will. We anticipate the dilution to be less than 10%.
Our investment in the Ameritas Joint Venture provides access to a line of
existing variable life insurance and annuity products while providing a
lower-cost entry into an established business, helping to eliminate significant
start-up costs and allowing for immediate potential earnings.
The Ameritas Joint Venture offers through AVLIC fixed annuity products,
flexible premium and single premium variable universal life insurance products
and variable annuities. Variable products provide for allocation of funds to a
general account or to one or more separate accounts under which the owner bears
the investment risk. Through AVLIC's fund managers, owners of variable annuities
and life insurance policies are able to choose from a range of investment funds
offered by each manager.
Under the current terms of the joint venture agreement, ALIC and Ameritas
write their new single and flexible premium deferred fixed annuities and
variable annuities and variable life insurance through the Ameritas Joint
Venture. ALIC has retained the right to offer equity-indexed annuity products
directly and to continue to issue replacement business to its fixed annuity
customers in existence prior to the effective date of the joint venture
agreement.
The variable life insurance products and the fixed and variable annuities
offered by the Ameritas Joint Venture are distributed through our Preferred
Producer general agency, PPGA and Bank distribution systems, as well as through
the distribution systems of Ameritas and AVLIC.
Under the current terms of the joint venture agreement, we purchased an
additional 5% of AMAL Corporation on March 28, 2001 for $7.2 million as certain
premium growth targets were met bringing our total ownership in AMAL Corporation
to 39%. We have a remaining option to purchase an additional 5% to 10% of AMAL
Corporation. ALIC and Ameritas Life Insurance Company each have guaranteed the
policyholder
11
obligations of AVLIC. The guarantee of each party is joint and several, and will
remain in effect until certain conditions are met.
As of December 31, 2001, AMAL Corporation had total consolidated assets of
$2,414.3 million and total consolidated shareholder's equity of $112.4 million
on a GAAP basis. AVLIC had $6,627.3 million of insurance in force and $60.5
million in surplus as of December 31, 2001, on a statutory basis.
COMPETITION
We operate in a highly competitive industry. We compete with numerous life
insurance companies and other entities including banks and other financial
institutions, many of which have greater financial and other resources. We
believe that the principal competitive factors in the sale of insurance products
are product features, price, commission structure, perceived stability of the
insurer, financial strength ratings, value-added service and name recognition.
Many other companies are capable of competing for sales in our target markets
(including companies that do not presently compete in such markets). Our ability
to compete for sales is dependent upon our ability to address the competitive
factors.
In addition to competing for sales, we compete for qualified agents and
brokers to distribute products. Strong competition exists among insurance
companies for agents and brokers with demonstrated ability. We believe that the
bases of competition for the services of such agents and brokers are commission
structure, support services, prior relationships and the strength of an
insurer's products. Although we believe that we have good relationships with our
agents and brokers, our ability to compete will depend on our continued ability
to attract and retain qualified persons.
RATINGS
Ratings with respect to claims-paying ability and financial strength are an
increasingly important factor in establishing the competitive position of
insurance companies. The following are the ratings as of March 1, 2002 for our
insurance subsidiaries:
COMPANY RATING SERVICE RATING TYPE RATING
------- -------------- ----------- ------
American.................... Standard & Poor's insurer financial strength A+ (strong)
American.................... A. M. Best financial condition A (excellent)
American.................... Moody's insurance financial strength A3 (good)
ALIC........................ Standard & Poor's insurer financial strength A+ (strong)
ALIC........................ A. M. Best financial condition A (excellent)
ALIC........................ Moody's insurance financial strength A3 (good)
Bankers Life................ Standard & Poor's insurer financial strength A+ (strong)
Bankers Life................ A. M. Best financial condition A (excellent)
Bankers Life................ Fitch claims-paying AA- (very strong)
Delta....................... Standard & Poor's insurer financial strength BBB+ (good)
Delta....................... A. M. Best financial condition A (excellent)
Delta....................... Moody's insurance financial strength A3 (good)
FBL......................... Standard & Poor's insurer financial strength BBB+ (good)
FBL......................... A. M. Best financial condition B+ (very good)
IL Annuity.................. Standard & Poor's claims-paying A (strong)
IL Annuity.................. A. M. Best financial condition A (excellent)
IL Annuity.................. Fitch claims-paying AA- (very strong)
ILICO....................... Standard & Poor's insurer financial strength A+ (strong)
ILICO....................... A. M. Best financial condition A (excellent)
ILICO....................... Moody's insurance financial strength A3 (good)
ILICO....................... Fitch claims-paying AA- (very strong)
12
COMPANY RATING SERVICE RATING TYPE RATING
------- -------------- ----------- ------
WSLIC....................... Standard & Poor's insurer financial strength A+ (strong)
WSLIC....................... A. M. Best financial condition A (excellent)
WSLIC....................... Fitch claims-paying AA- (very strong)
INSURANCE UNDERWRITING
We follow detailed, uniform underwriting practices and procedures in our
insurance business which are designed to assess risks before issuing coverage to
qualified applicants. We have professional underwriters who evaluate policy
applications on the basis of information provided by applicants and others.
REINSURANCE
In accordance with industry practices, we reinsure portions of our life
insurance exposure with unaffiliated insurance companies under traditional
indemnity reinsurance arrangements. Such reinsurance arrangements are in
accordance with standard reinsurance practices within the industry. We enter
into these arrangements to assist in diversifying risks and to limit the maximum
loss on risks that exceed policy retention limits. Indemnity reinsurance does
not fully discharge our obligation to pay claims on business we reinsure. As the
ceding company, we remain responsible for policy claims to the extent the
reinsurer fails to pay such claims. We annually monitor the creditworthiness of
our primary reinsurers, and have experienced no material reinsurance
recoverability problems in recent years. Due to the ILICO acquisition,
reinsurance receivables increased as shown on our balance sheet to $732.0
million at December 31, 2001 compared to $318.4 million at December 31, 2000.
We reinsure mortality risk on individual life insurance policies. Our
retention is between $100,000 and $1,000,000 on any single life depending on the
type of policy reinsured. We also reinsure certain annuity business primarily on
a modified coinsurance basis.
At December 31, 2001, we ceded life insurance with a face amount of $49.5
billion with 36 unaffiliated reinsurers. The following is a summary of our
principal life reinsurers as of December 31, 2001:
% OF TOTAL
FACE A.M. BEST FACE AMOUNT
REINSURER AMOUNT CEDED RATING REINSURED
--------- ------------ --------- -----------
(IN BILLIONS)
RGA Reinsurance Company............................... $19.7 A+ 40%
Lincoln National Life Insurance Company............... 9.2 A+ 19
Life Reassurance Corporation of America............... 3.4 A++ 7
Swiss Re Life & Health America Inc. .................. 2.8 A++ 6
Transamerica Occidental Life Insurance Company........ 2.5 A+ 5
At December 31, 2001, we ceded fixed, equity-indexed and multi-choice
annuities having reserves of $1.7 billion. The following is a summary of our
principal annuity reinsurers as of December 31, 2001:
% OF TOTAL
A.M. BEST FACE AMOUNT
REINSURER RESERVES CEDED RATING REINSURED
--------- -------------- --------- -----------
(IN BILLIONS)
Transamerica Occidental Life Insurance Company........ $1.2 A+ 71%
RGA Reinsurance Company............................... 0.4 A+ 24
EMPLOYEES
As of December 31, 2001, we had 1,133 full-time employees. None of these
employees are covered by a collective bargaining agreement and we believe that
our relations with our employees are satisfactory.
13
REGULATION
We are subject to regulation by the states in which our insurance
subsidiaries are domiciled and/or transact business. State insurance laws
generally establish supervisory agencies with broad administrative and
supervisory powers related to granting and revoking licenses, transacting
business, regulating the payment of dividends to stockholders, establishing
guaranty fund associations, licensing agents, approving policy forms, regulating
sales practices, regulating premium rates for some lines of business,
establishing reserve requirements, prescribing the form and content of required
financial statements and reports, determining the reasonableness and adequacy of
statutory capital and surplus, and regulating the type and amount of investments
permitted.
Every state in which our insurance companies are licensed administers a
guaranty fund, which provides for assessments of licensed insurers for the
protection of policyowners of insolvent insurance companies. Assessments can be
partially recovered through a reduction in future premium taxes in some states.
Risk-based capital, or RBC, standards for life insurance companies were
adopted by the National Association of Insurance Commissioners, known as the
NAIC and require insurance companies to calculate and report for statutory basis
financial statements information under a risk-based capital formula. The RBC
requirements are intended to allow insurance regulators to identify at an early
stage inadequately capitalized insurance companies based upon the types and
mixtures of risks inherent in such companies' operations. The formula includes
components for asset risk, liability risk, interest rate exposure and other
factors. As of December 31, 2001, each of our life insurance companies' RBC
levels were in excess of authorized control level RBC thresholds.
Although the federal government generally does not directly regulate the
insurance business, federal initiatives often have an impact on the business in
a variety of ways. Current and proposed federal measures that may significantly
affect the insurance business include limitations on antitrust immunity, minimum
solvency requirements and the recent removal of barriers restricting banks from
engaging in the insurance and mutual fund business.
ITEM 2. PROPERTIES
The following table summarizes the properties we lease and own:
SQUARE FEET OCCUPIED BY:
--------------------------------------------
LIFE ANNUITY LEASED TO TOTAL
PROPERTY ADDRESS SEGMENT SEGMENT OTHER(1) THIRD PARTIES SQUARE FEET USE OF OTHER SQUARE FEET
---------------- ------- ------- -------- ------------- ----------- -------------------------------
Properties leased from
unaffiliated parties:
699 Walnut Street -- -- 53,000 16,000 69,000 Executive offices and corporate
Des Moines, Iowa operations
611 Fifth Avenue Des Moines, 62,000 2,000 56,000 -- 120,000 Technology, corporate
Iowa operations and cafeteria
facilities
65 Froehlich Farms Boulevard 15,000 3,000 6,000 -- 24,000 Technology and cafeteria
Woodbury, New York facilities
Various -- -- 49,000 -- 49,000 Corporate operations and
records and supply storage
Properties owned:
555 South Kansas Avenue -- 60,000 -- 45,000 105,000
Topeka, Kansas
2960 North Meridian 117,000 27,000 46,000 8,000 198,000 Technology and cafeteria
Indianapolis, Indiana facilities
---------------
(1) Other includes shared services that are utilized by both the life and
annuity segments.
14
ITEM 3. LEGAL PROCEEDINGS
We are involved in litigation and a party to regulatory proceedings arising
in the ordinary course of our business, including class action lawsuits. At this
time we do not believe that such litigation or proceedings will have a material
adverse effect on our business or results of operations. In addition, we
recently became aware of a dispute between the retrocessionaire and our
reinsurer for a block of annuity business written by IL Annuity which we
acquired as part of our acquisition of ILICO. We have been having discussions
with that reinsurer and they have informed us of potential claims. Based on
currently available information, we do not believe that any such claim, if made
against us, will have a material adverse effect on our results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
On September 20, 2000, AMHC, our predecessor company, converted from a
mutual insurance holding company owned by the policyholders of ALIC (the AmerUs
Members) to a stock company 100% owned by its stockholders (the
Demutualization). In connection with the Demutualization, the AmerUs Members
received cash and policy credits equal to approximately $340 million and
17,390,165 shares of our common stock. The Company stock issued to AmerUs
Members, in exchange for their ownership interest, was exempt from registration
under Section 3(a) (10) of the Securities Act of 1933. Reliance on the exemption
was based on a Request For No Action Letter filed with the Securities and
Exchange Commission (the Commission) on April 7, 2000 and the Commission's
response received on May 23, 2000. In addition, we issued 12,614,579 shares of
common stock in exchange for the shares of ALHI held by the public. Please refer
to "Item 1. Business -- Reorganization" for a complete discussion.
On May 18, 2001, ILIC converted from a mutual insurance company owned by
its policyholders (ILIC Members) to a stock company indirectly wholly owned by
AmerUs Group Co. (Sponsored Demutualization). In connection with the Sponsored
Demutualization, we issued to the ILIC Members, in exchange for their ownership
interest in ILIC, approximately 9 million shares of AmerUs Group Co.'s common
stock and approximately $9 million of cash and policy credits. The per share
price used to determine the amount of cash and policy credits distributed to
ILIC Members was $35.63, which was the average closing price of the common stock
for the 10 trading days beginning with the effective date of the Sponsored
Demutualization, May 18, 2001. The common stock issued to the ILIC Members in
exchange for their ownership interest in ILIC was exempt from registration under
Section 3(a)(10) of the Securities Act of 1933. Reliance on the exemption was
based on a Request For No Action Letter filed with the Commission on January 29,
2001 and the Commission's response received on January 30, 2001.
Our common stock is listed and traded on the New York Stock Exchange (NYSE)
under the symbol "AMH." The following table sets forth, for the periods
indicated, the high and low sales prices per share of AmerUs Group Co. common
stock as quoted on the NYSE and the dividends per share declared during such
quarter.
AMERUS COMMON STOCK
---------------------------------
HIGH LOW DIVIDENDS
-------- -------- ---------
2000
First Quarter*.............................................. $24.0000 $16.5625 $0.10
Second Quarter*............................................. $22.4375 $18.0000 $0.00
Third Quarter............................................... $26.2500 $21.4375 $0.00
Fourth Quarter.............................................. $32.3750 $24.4375 $0.40
2001
First Quarter............................................... $32.0000 $27.0000 $0.00
Second Quarter.............................................. $36.5000 $28.5600 $0.00
Third Quarter............................................... $35.2000 $30.9000 $0.00
Fourth Quarter.............................................. $36.4300 $30.2700 $0.40
---------------
* Information is that of ALHI, predecessor to AmerUs Group Co.
HOLDERS
As of March 4, 2002, the number of holders of record of each class of
common equity was as follows:
NUMBER OF
HOLDERS
---------
Common stock................................................ 164,085
16
DIVIDENDS
We had declared and paid a quarterly dividend of $0.10 per share of common
stock, from the second quarter of 1997 through the first quarter of 2000.
Beginning in 2000, our Board of Directors approved moving from a quarterly
dividend of $0.10 per share of common stock to an annual dividend of $0.40 per
share of common stock beginning in 2000. The declaration and payment of
dividends in the future is subject to the discretion of the Board of Directors
and will be dependent upon the financial condition, results of operations, cash
requirements, future prospects, regulatory restrictions on the payment of
dividends by the life insurance subsidiaries and other factors deemed relevant
by the Board of Directors.
Under our bank credit facility, we are prohibited from paying dividends on
common stock in excess of an amount equal to 3% of the consolidated net worth as
of the last day of the preceding fiscal year.
In connection with the 8.85% Capital Securities, Series A (the "Capital
Securities"), issued in 1997 by AmerUs Capital I, a subsidiary trust, we have
agreed not to declare or pay any dividends on the Company's capital stock
(including the common stock) during any period for which we elect to extend
interest payments on our junior subordinated debentures, except for stock
dividends where the dividend stock is the same stock as that on which the
dividend is being paid. Dividends on our capital stock cannot be paid until all
accrued interest on the Capital Securities has been paid.
On July 27, 2001, the forward common stock purchase contract component of
the Company's adjustable conversion-rate equity security (ACES) units matured.
Under the terms of the contract, ACES unit holders had an obligation to purchase
Company common stock at a price of $31,5625 per share. In lieu of paying cash to
satisfy their purchase obligation, the ACES unit holders could surrender the
preferred security component of the ACES unit. Of the 4,080,500 ACES units
outstanding, 4,075,625 were surrendered, and the remaining ACES unit holders
submitted cash of approximately $0.1 million to purchase Company common stock.
The number of shares of common stock to be issued by the Company was based upon
the average price of the Company's common stock for the twenty consecutive
trading days ending on July 26, 2001, compared to the stated ACES unit amount of
$31.5625. As a result of this, the Company issued approximately 3.8 million
shares of common stock and retired approximately $128 million of ACES debt. The
remaining contracts are 6.86% quarterly income preferred securities (QUIPS)
which mature July 27, 2003. Dividends on our capital stock cannot be paid until
all accrued interest on the QUIPS have been paid.
We also have warrants outstanding to purchase shares of common stock. The
warrants are exercisable at $24.42 per share and expire in April 2002.
On March 6, 2002, we issued $185 million of optionally convertible
equity-linked accreting notes due in 2032. The notes will be convertible into
shares of common stock if the sale price of the common stock exceeds specified
levels and in certain other circumstances. The notes are senior subordinated
debt, subordinated in right of payment to all existing and future senior debt
and senior to all existing and future junior subordinated debt. The net proceeds
of the offering will be used to repay approximately $120 million of existing
debt under the Revolving Credit Agreement, repurchase approximately $59 million
of common stock and other corporate purposes.
As a holding company, our principal assets consist of all of the
outstanding shares of the common stock of our life insurance subsidiaries. Our
ongoing ability to pay dividends to shareholders and meet other obligations,
including operating expenses and any debt service, primarily depends upon the
receipt of sufficient funds from our life insurance subsidiaries in the form of
dividends, interest payments or loans.
Based on statutory insurance regulations and 2000 results, our insurance
subsidiaries could have paid an estimated $102.9 million in dividends in 2001
without obtaining regulatory approval. Of this amount, our subsidiaries paid to
us $59.4 million in dividends in 2001. Based on 2001 results, our subsidiaries
can pay an estimated $80.5 million in dividends in 2002 without obtaining
regulatory approval.
17
ITEM 6. SELECTED FINANCIAL DATA
Effective January 2, 2001, we adopted the Accounting Standards Executive
Committee's Statement of Position 00-3 "Accounting by Insurance Enterprises for
Demutualizations and Formations of Mutual Holdings Companies and for Certain
Long-Duration participating Contracts," or SOP 00-3. The provisions of SOP 00-3
resulted in a modification of the presentation of the closed blocks in our
consolidated financial statements to no longer show the operations of the closed
blocks and the assets and liabilities of the closed blocks as single line items.
In addition, SOP 00-3 required the reporting of unrealized gains and losses on
closed block investments as a component of the closed block policyholder
dividend obligation rather than accumulated other comprehensive income in total
stockholders' equity. As a result, unrealized gains (losses) amounting to $6.0
million at December 31, 2000, ($10.7 million) at December 31, 1999, $27.6
million at December 31, 1998 and $31.1 million at December 1997 were
reclassified from accumulated other comprehensive income to dividends payable to
policyowners.
The following table sets forth certain financial and operating data of the
Company.
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2001 (A) 2000 1999 1998 1997 (A)
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE DATA)
CONSOLIDATED INCOME STATEMENT DATA:
Revenues:
Insurance premiums.................. $ 313.6 $ 274.2 $ 279.0 $ 279.4 $ 254.3
Product charges..................... 146.1 99.9 90.8 87.7 60.9
Net investment income............... 873.2 699.5 665.4 629.9 342.5
Realized/unrealized gains (losses)
on investments................... (90.6) (29.0) (1.4) 11.0 12.6
Other income........................ 45.2 34.6 20.3 15.5 18.3
--------- --------- --------- --------- ---------
Total revenues........................ 1,287.5 1,079.2 1,054.1 1,023.5 688.6
--------- --------- --------- --------- ---------
Benefits and expenses:
Policyowner benefits................ 760.7 632.4 640.6 632.6 402.6
Total insurance and other
expenses......................... 283.1 227.5 216.0 193.6 132.5
Dividends to policyowners........... 98.9 74.3 70.8 77.0 61.6
--------- --------- --------- --------- ---------
Total benefits and expenses........... 1,142.7 934.2 927.4 903.2 596.7
--------- --------- --------- --------- ---------
Income from continuing operations..... 144.8 145.0 126.7 120.3 91.9
Interest expense...................... 26.0 29.7 29.0 27.9 16.9
--------- --------- --------- --------- ---------
Income before tax expense and minority
interest............................ 118.8 115.3 97.7 92.4 75.0
Income tax expense.................... 39.5 42.5 33.7 29.1 19.3
Minority interest..................... -- 21.7 28.1 26.9 16.2
--------- --------- --------- --------- ---------
Net income from continuing
operations.......................... 79.3 51.1 35.9 36.4 39.5
Discontinued operations (net of tax):
Income (loss) from discontinued
operations....................... 1.8 0.7 2.5 (7.8) 14.9
Gain on sale of discontinued
operations....................... -- -- -- 74.9 --
--------- --------- --------- --------- ---------
Net income before cumulative effect of
change in accounting for
derivatives......................... 81.1 51.8 38.4 103.5 54.4
Cumulative effect of change in
accounting for derivatives, net of
tax................................. (8.2) -- -- -- --
--------- --------- --------- --------- ---------
Net income............................ $ 72.9 $ 51.8 $ 38.4 $ 103.5 $ 54.4
========= ========= ========= ========= =========
Net income from continuing operations
per share (B):
Basic............................... $ 2.15 $ 2.44 $ 2.07 $ 2.10 $ 2.32
Diluted............................. $ 2.12 $ 2.43 $ 2.06 $ 2.07 $ 2.32
Weighted average number of shares
outstanding (in millions) (B):
Basic............................... 36.9 20.9 17.4 17.4 17.0
Diluted............................. 37.5 21.0 17.5 17.6 17.0
Dividends declared per common share
(C)................................. $ 0.40 $ 0.40 $ -- $ -- $ --
18
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2001 (A) 2000 1999 1998 1997 (A)
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE DATA)
CONSOLIDATED BALANCE SHEET DATA:
Total invested assets............... $15,052.4 $ 9,606.8 $ 9,059.7 $ 9,166.0 $ 9,042.8
Total assets........................ $18,299.2 $11,471.5 $11,091.9 $10,786.8 $12,007.2
Total liabilities................... $16,991.6 $10,445.8 $ 9,813.1 $ 9,433.4 $10,768.9
Minority interest................... $ -- $ -- $ 309.1 $ 364.3 $ 460.5
Company-obligated mandatorily
redeemable preferred
securities....................... $ 69.1 $ 197.7 $ 197.7 $ 199.6 $ 86.0
Total stockholders' equity.......... $ 1,238.5 $ 828.0 $ 772.0 $ 789.5 $ 691.8
OTHER OPERATING DATA:
Adjusted net operating income (D)..... $ 114.0 $ 62.3 $ 49.1 $ 39.3 $ 33.0
Adjusted net operating income per
common share (E):
Basic............................... $ 3.09 $ 2.98 $ 2.82 $ 2.26 $ 1.94
Diluted............................. $ 3.05 $ 2.96 $ 2.81 $ 2.23 $ 1.94
Ratio of earnings to fixed charges
(F)................................. 5.04x 4.69x 4.28x 3.64x 4.40x
---------------
(A) Financial Data for 1997 includes the results for Delta, subsequent to the
acquisition date of October 23, 1997 and the results for AAG, subsequent to
the acquisition date of December 19, 1997. Financial data for 2001 includes
the results for ILICO, subsequent to the acquisition date of May 18, 2001.
(B) Our predecessor, AMHC, was originally formed in 1996 as a mutual holding
company and therefore, had no shares of common stock outstanding until its
demutualization on September 20, 2000. On September 20, 2000, we
distributed 17.4 million shares of common stock to our former members and
exchanged our common stock for the 12.9 million shares of common stock held
by the public in ALHI, our former subsidiary and another of our predecessor
entities, on a one-for-one basis. Our operating income for the full fiscal
years presented above primarily reflects the operating income of ALHI.
Therefore, adjusted net operating income and net income from continuing
operations per share was calculated based on the number of shares of stock
we owned of ALHI from January 1, 1996 through September 20, 2000. Since
then, adjusted net operating income and net income from continuing
operations per share has been calculated based on the shares of our common
stock actually outstanding.
(C) We did not have common stock until our demutualization on September 20,
2000, therefore, there were no dividends to declare on common stock for the
years 1997 through 1999. ALHI, our predecessor to our company did declare
dividends on its common stock of $0.40 per share, $0.40 per share, and
$0.30 per share for the years ended December 31, 1999, 1998 and 1997,
respectively.
(D) Adjusted net operating income reflects net income adjusted to eliminate
certain items (net of applicable income taxes and minority interest) which
our management believes are not indicative of overall operating trends,
including net realized gains or losses on investments. Different items are
likely to occur in each period presented and others may have different
opinions as to which items may warrant adjustment. The adjusted net
operating income shown does not constitute net income computed in
accordance with accounting principles generally accepted in the United
States (or GAAP). See additional description of Adjusted Net Operating
Income included in Item 7.
(E) Basic and diluted adjusted net operating income per common share is
calculated using the weighted average number of shares as shown in the
table above.
(F) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income from operations before income taxes, fixed
charges and pre-tax earnings required to cover preferred stock dividend
requirements. "Fixed charges" consist of interest expense on debt,
amortization of debt expense and preferred stock dividend requirements.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following analysis of the consolidated results of operations and
financial condition should be read in conjunction with the Selected Financial
Data and Consolidated Financial Statements and related notes.
OVERVIEW
We are a holding company whose subsidiaries are primarily engaged in the
business of marketing, underwriting and distributing a broad range of individual
life insurance and annuity products to individuals and businesses in all 50
states, the District of Columbia and the U.S. Virgin Islands. We have two
reportable operating segments: life insurance and annuities. The life insurance
segment's primary product offerings consist of whole life, interest-sensitive
whole life, equity-indexed life, universal life and term life insurance
policies. The primary product offerings of the annuity segment are individual
fixed annuities.
In accordance with accounting principles generally accepted in the United
States, or GAAP, universal life insurance premiums and annuity deposits that we
receive are reflected as increases in liabilities for policyowner account
balances and not as revenues. 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. Revenues 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. 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 our financial
statements. We receive 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 our 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.
Policy acquisition costs consist of the costs related to acquiring new life
insurance and annuity business, including costs of issuing policies and other
variable selling expenses (principally commissions). The method of amortizing
deferred policy acquisition costs for life insurance products varies depending
upon whether the contract is participating or non-participating. Participating
life insurance contracts are those which are expected to pay dividends to
policyowners in proportion to their relative contribution to our statutory
surplus. Deferred policy acquisition costs for participating policies are
amortized as an expense primarily in proportion to expected profits or margins
from such policies. The amortization period and amount are 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. Non-participating life insurance
deferred policy acquisition costs are amortized over the premium-paying period
of the related policies in proportion to the ratio of annual premium revenues to
total anticipated premium revenues using assumptions consistent with those used
in computing policy benefit reserves. For universal life insurance and annuity
products, deferred policy acquisition costs are generally amortized in
proportion to the present value of estimated gross margins from surrender
charges and investment, mortality and expense margins.
Policyowner benefits including death benefits, represent our exposure to
mortality risk and fluctuate from period to period based on the level of claims
made by policyowners within our insurance retention limits. Our profitability is
primarily affected by expense levels, interest spread results (the excess of
investment earnings over interest credited to policyowners) during any
measurement period, and fluctuations in mortality, persistency and other
policyowner benefits. We have the ability to mitigate adverse experience through
adjustments to credited interest rates, policyowner dividends or cost of
insurance charges.
20
ADJUSTED NET OPERATING INCOME
The following table reflects net income adjusted to eliminate certain items
(net of applicable income taxes and minority interest) which our management
believes do not necessarily indicate overall operating trends. For example, net
realized capital gains or losses on investments, excluding our gains or losses
on convertible preferred stock and bonds which we consider to be core earnings,
are eliminated. Net realized capital gains or losses on investments may be
realized at the sole discretion of management and are often realized in
accordance with tax planning strategies. Therefore, our management believes that
our net realized capital gains or losses or investments do not properly reflect
earnings capacity for the periods presented below. Different items of adjustment
are likely to occur in different periods presented and others may have different
opinions as to which items may warrant adjustment. Adjusted net operating income
is the basis we use to assess our overall performance. Adjusted net operating
income as described by us may not be comparable to similarly titled measures
reported by other companies, including insurance companies. The adjusted net
operating income shown below does not constitute our net income computed in
accordance with GAAP.
Our adjusted net operating income is not comparable to the adjusted net
operating income of ALHI, our predecessor prior to our demutualization in 2000,
which was the reporting entity in prior Securities and Exchange Commission
filings. The principal difference is the reduction of our adjusted net operating
income due to the minority interests' equity in earnings through September 20,
2000, when ALHI was reorganized to form our company. The minority interests'
equity in earnings was $21.7 million, $28.1 million, $26.9 million and $16.2
million for the years ended December 31, 2000 through December 31, 1997,
respectively.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Income........................... $72,907 $51,840 $38,436 $103,499 $54,434
Net non-core realized (gains) losses
(A)................................ 25,475 5,153 6,030 2,946 (6,791)
Net amortization of deferred policy
acquisition costs due to non-core
realized gains or losses (B)....... (3,613) (4,028) 805 (74) 305
Net effect of accounting differences
from the adoption of SFAS 133
(C)................................ 6,417 -- -- -- --
Demutualization costs (D)............ 969 10,063 6,322 -- --
Restructuring costs (E).............. 5,476 -- -- -- --
Discontinued operations (F).......... (1,820) (717) (2,504) (67,053) (14,923)
Cumulative effect of change in
accounting for derivatives (G)..... 8,236 -- -- -- --
---------- ---------- ---------- ---------- ----------
Adjusted Net Operating Income........ $114,047 $62,311 $49,089 $39,318 $33,025
========== ========== ========== ========== ==========
Adjusted Net Operating Income per
common share (H):
Basic.............................. $ 3.09 $ 2.98 $ 2.82 $ 2.26 $ 1.94
========== ========== ========== ========== ==========
Diluted............................ $ 3.05 $ 2.96 $ 2.81 $ 2.23 $ 1.94
========== ========== ========== ========== ==========
Weighted average common shares
outstanding (H):
Basic.............................. 36,949,198 20,922,371 17,390,165 17,372,136 16,983,071
========== ========== ========== ========== ==========
Diluted............................ 37,453,428 21,035,518 17,467,132 17,609,748 17,018,664
========== ========== ========== ========== ==========
---------------
(A) Represents total realized gains or losses on investments less core realized
gains or losses (defined as gains or losses from the closed block and gains
or losses on the convertible preferred stock and bond portfolio) adjusted
for income taxes and minority interest on such amounts. Non-core realized
gains or losses may vary widely between periods. Such amounts are
determined by management's timing of individual transactions and do not
necessarily correspond to the underlying operating trends.
21
(B) Represents amortization of deferred policy acquisition costs on the
non-core realized gains or losses that are included in our product margins,
adjusted for income taxes and minority interest on such amounts.
(C) Represents the net effect of Statement of Financial Accounting Standard
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," related accounting entries, adjusted for income taxes. The
accounting entries consist of market value adjustments on trading
securities, derivatives, certain annuity contracts, and the associated
change in amortization of deferred acquisition costs resulting from such
adjustments.
(D) For 2001 represents costs directly related to ILIC's demutualization. For
2000 and 1999 represents costs directly related to our demutualization and
merger with ALHI, adjusted for minority interest on such amounts. The costs
consist primarily of legal, actuarial and consulting expenses.
(E) Represents costs of restructuring our life insurance and annuity operations
to eliminate duplicative functions, adjusted for income taxes. The costs
consist primarily of severance and termination benefits.
(F) Represents the net income (loss) from our discontinued operations.
(G) Represents the cumulative effect of change in accounting for derivatives,
net of income taxes, as of January 1, 2001, resulting from our adoption of
SFAS 133. This statement is effective for fiscal years beginning after June
15, 2000.
(H) Our predecessor, AMHC, was originally formed in 1996 as a mutual holding
company and, therefore, had no shares of common stock outstanding until the
demutualization of our group on September 20, 2000. On September 20, 2000,
we distributed 17.4 million shares of our common stock to our former
members and exchanged our common stock for the 12.9 million shares of
common stock held by the public in ALHI, our former subsidiary and another
of our predecessor entities, on a one-for-one basis. Our operating income
primarily reflects the operating income of ALHI. Therefore, adjusted net
operating income per share was calculated based on the number of shares of
stock we owned of ALHI from January 1, 1996 through September 20, 2000.
Since then, adjusted net operating income per share has been calculated
based on the shares of our common shares actually outstanding.
Adjusted net operating income was $114.0 million, or $3.05 per diluted
share, for 2001 compared to $62.3 million, or $2.96 per diluted share, for 2000
and $49.1 million, or $2.81 per diluted share, for 1999. The increase in
adjusted net operating income in 2001 compared to 2000 was primarily
attributable to the acquisition of ILICO and the reduction in income applicable
to the minority interests. In addition, adjusted net operating income in 2000
was impacted by some non-recurring items as explained in the following
paragraph. The increase in adjusted net operating income in 2000 compared to
1999 was primarily attributable to the reduction in income applicable to the
minority interest and the growth in invested assets. Adjusted net operating
income is analyzed further in the operating segment discussion.
Our adjusted net operating income for 2000 included the following items:
$7.3 million of after-tax earnings on the cash balances which were distributed
to our former members in connection with our demutualization in September 2000,
non-recurring costs of $1.5 million, after-tax, related to AMHC, our
predecessor, and a $1.6 million reduction due to our equity investment in IL
Group. The loss on this equity investment in IL Group occurred in the third
quarter of 2000. Adjusting for these factors would have reduced
22
our 2000 adjusted net operating income to $58.1 million, or $2.76 per diluted
share, as shown in the following table:
FOR THE YEAR ENDED
DECEMBER 31, 2000
---------------------------
DOLLAR PER SHARE
AMOUNTS AMOUNTS
---------- -------------
($ IN THOUSANDS, EXCEPT PER
SHARE DATA)
Adjusted Net Operating Income............................... $62,311 $ 2.96
After-tax earnings on cash balances distributed in
connection with the demutualization of the Company........ (7,338) (0.35)
After-tax non-recurring mutual holding company costs........ 1,515 0.07
Reduction due to equity investment in IL Group not
performing at the Company's investment expectations, net
of minority interest and taxes............................ 1,635 0.08
------- ----------
$58,123 $ 2.76
======= ==========
Weighted average number of diluted shares outstanding....... 21,035,518
THE CLOSED BLOCK
We have established two closed blocks of policies: (a) the first on June
30, 1996 in connection with the reorganization of our subsidiary, ALIC, to a
stock company, and (b) the second on March 31, 2001 in connection with the
reorganization of ILIC to a stock company. Each closed block consists of
insurance policies issued by ALIC or ILIC which had a dividend scale in effect
as of the establishment dates of the closed block. The closed blocks were
designed to provide reasonable assurance to the owners of these insurance
policies that, after the reorganization of ALIC and ILIC, assets would be
available to maintain the dividend scales and interest credits in effect prior
to each reorganization, if the experience underlying such scales and credits
continues.
Effective January 1, 2001, we adopted the Accounting Standards Executive
Committee's Statement of Position 00-3 "Accounting by Insurance Enterprises for
Demutualizations and Formations of Mutual Holding Companies and for Certain
Long-Duration Participating Contracts," (or SOP 00-3) The provisions of SOP 00-3
resulted in a modification of the presentation of the closed block in our
consolidated financial statements to no longer show the operations of the closed
block and the assets and liabilities of the closed block as single line items.
In addition, SOP 00-3 required the reporting of unrealized gains and losses on
closed block investments as a component of the closed block policyholder
dividend obligation rather than accumulated other comprehensive income in total
stockholders' equity. As a result, unrealized gains (losses) amounting to $6.0
million at December 31, 2000 and ($10.7) million at December 31, 1999 were
reclassified from accumulated other comprehensive income to dividends payable to
policyowners. There was no net income effect of adopting SOP 00-3.
OPERATING SEGMENTS
We have two reportable operating segments: life insurance and annuities.
Products generally distinguish a segment. We use the same accounting policies
and procedures to measure operating segment income as we use to measure our
consolidated income from operations other than the elimination of certain items
which management believes are not necessarily indicative of overall operating
trends. These items are explained further under "Adjusted Net Operating Income."
Revenues, benefits and expenses are primarily attributed directly to each
operating segment. Net investment income and core realized gains and losses on
investments are allocated according to the asset portfolios to which they
relate. Investment realized gains and losses from the closed block and from
convertible preferred stocks and bonds are considered core realized gains and
losses. All other gains and losses are considered non-core. Other revenues and
expenses which are deemed not to be associated with any specific reportable
segment are grouped together in the all other operations category. These items
primarily consist of holding company revenues and expenses and the operations of
our real estate management subsidiary. We assess the performance of our
operating segments before interest expense, income
23
taxes and minority interest. Income from operations and operating segment
information do not include discontinued operations which are comprised of the
former banking, residential real estate brokerage, residential land development
and mortgage banking businesses.
RESULTS OF OPERATIONS
A summary of our life segment operations follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
-------- -------- --------
($ IN THOUSANDS)
Revenues:
Insurance premiums...................................... $300,690 $252,157 $253,707
Universal life product charges.......................... 110,403 65,126 62,962
Net investment income................................... 283,330 212,100 202,517
Core realized gains (losses) on investments............. 8,720 (695) (380)
-------- -------- --------
Total revenues.......................................... 703,143 528,688 518,806
-------- -------- --------
Benefits and expenses:
Policyowner benefits:
Traditional:
Death benefits..................................... 22,080 47,953 44,470
Change in liability for future policy benefits and
other policy benefits........................... 245,263 185,433 185,797
Universal:
Death benefits in excess of cash value............. 39,589 25,816 26,116
Interest credited on policyowner account
balances........................................ 63,287 47,158 43,804
Other.............................................. 13,940 1,817 1,107
-------- -------- --------
Total policyowner benefits......................... 384,159 308,177 301,294
Underwriting, acquisition and other expenses.............. 69,035 51,532 57,784
Amortization of deferred policy acquisition costs and
value of business acquired (VOBA), net of non-core
adjustment of $2,697, $483 and $282 for the years ended
December 31, 2001, 2000 and 1999, respectively.......... 56,996 35,570 37,605
Dividends to policyowners................................. 98,945 74,338 70,777
-------- -------- --------
Total benefits and expenses............................. 609,135 469,617 467,460
-------- -------- --------
Adjusted pre-tax operating income -- Life Insurance
segment................................................. $ 94,008 $ 59,071 $ 51,346
======== ======== ========
Traditional life insurance premiums were $300.7 million in 2001 compared to
$252.2 million in 2000 and $253.7 million in 1999. The acquisition of ILICO
added traditional life insurance premiums of $96.7 million in 2001. Excluding
these ILICO premiums, traditional life insurance premiums declined in 2001 and
2000 primarily as a result of the new reinsurance agreements entered into in
2000 which increased ceded premium for 2001 approximately $50.7 million compared
to 2000. Approximately $11.1 million of additional premiums were ceded to
reinsurers in 2000 compared to 1999. In addition, premiums decreased in both
years due to the shift in sales focus from traditional life products to
universal life products previously discussed. Partially offsetting the decline
in first year premium and the increase in ceded premium was increased renewal
premium. Open block renewal premium increased approximately $12.5 million in
2001 and $19.4 million in 2000 primarily due to the maturing of this block,
while closed block renewal premium declined approximately $4.1 million in 2001
and $4.0 million in 2000 due to an increase in lapses. Total life insurance
lapse rates, exclusive of ILICO, were 7.3% for 2001, 6.4% for 2000 and 7.3% for
1999. This increase in lapses followed the completion of our demutualization.
The total life insurance lapse rate including ILICO was 7.7% for 2001.
Universal life product charges were $110.4 million in 2001 compared to
$65.1 million in 2000 and $63.0 million in 1999. Approximately $42.8 million of
the universal life product charges for 2001 were
24
attributable to the acquisition of ILICO. The increases for 2001, excluding
ILICO, and 2000 primarily reflect the increased sales of universal life products
and increased cost of insurance charges corresponding with the normal aging and
growth of the block of business.
Net investment income was $283.3 million in 2001 compared to $212.1 million
in 2000 and $202.5 million in 1999. Approximately $71.0 million of net
investment income for 2001 was attributable to the acquisition of ILICO.
Excluding ILICO, net investment income increased $0.2 million primarily due to
higher average invested assets (excluding market value adjustments) offset by
lower effective yields as compared to the respective prior year. Average
invested assets (excluding market value adjustments), exclusive of the ILICO
acquisition increased approximately $94.7 million in 2001 compared to 2000 and
$116.5 million in 2000 compared to 1999. The increases were primarily due to the
growth of our life insurance business.
The effective yield on the investment portfolio was 7.32% in 2001 compared
to 7.94% in 2000 and 7.90% in 1999. Excluding ILICO, 2001 yields decreased to
7.64%. The decrease in yields in 2001, exclusive of ILICO, primarily resulted
from the lower interest rate market. The increase in 2000 yields primarily
related to the purchase accounting market value adjustments made to our assets
in connection with our reorganization, in the third quarter of 2000.
Core realized gains and losses on investments were a net gain of $8.7
million in 2001 compared to a net loss of $0.7 million in 2000 and a net loss of
$0.4 million in 1999. Realized gains and losses from ILICO totaled a net gain of
$5.4 million in 2001. These realized gains and losses are part of the closed
block operation and are therefore included in the life segment operating income.
The level of realized gains and losses will fluctuate from year to year
depending on the prevailing interest rate and economic environment and the
timing of our sales of investments.
Total policyowner benefits were $384.2 million in 2001 compared to $308.2
million in 2000 and $301.3 million in 1999. The acquisition of ILICO in 2001
increased life insurance benefits $127.4 million in 2001. Excluding the impact
of the ILICO acquisition, total policyowner benefits decreased $51.4 million in
2001 as compared to 2000 and increased $6.9 million in 2000 compared to 1999.
The 2001 decrease in traditional life insurance benefits, exclusive of the
impact of ILICO, was primarily due to the new reinsurance agreements entered
into in 2000 and favorable mortality of the closed block both of which resulted
in decreased death benefits and change in liability for future policy benefits.
In addition, traditional life insurance benefits decreased due to increased
reinsurance recovery benefits of the closed block of $43.2 million in 2001
related to the new reinsurance agreements entered into in 2000. The 2000
increase in traditional life insurance benefits was due to higher death benefits
and reserves related to increased persistency as policyholders held their
policies awaiting our demutualization distribution. Universal life benefits,
excluding ILICO, decreased approximately $1.8 million in 2001 compared to 2000
and $3.8 million in 2000 compared to 1999 due to favorable mortality on closed
block policies partially offset by increased interest credited related to more
policies in-force as sales have increased. The weighted average crediting rate
on universal life policyowner account balances was 5.63% for 2001 (5.64%
excluding ILICO) compared to 5.62% for 2000 and 5.67% for 1999. We estimated
life insurance benefits from the terrorist attacks in the United States on
September 11, 2001 to be approximately $1.2 million.
Underwriting, acquisition and other expenses were $69.0 million in 2001
compared to $51.5 million in 2000 and $57.8 million in 1999. The acquisition of
ILICO in the second quarter of 2001 increased expenses approximately $19.5
million in 2001. Excluding the impact of the ILICO acquisition, underwriting,
acquisition and other expenses decreased $2.0 million in 2001 as compared to
2000 and $6.3 million in 2000 as compared to 1999. The 2001 decrease in
expenses, exclusive of the impact of ILICO, was primarily due to increased
reinsurance commission and expense allowances in 2001 which were partially
offset by general compensation increases, depreciation on the new life insurance
administrative system and distribution system enhancements. Expenses declined in
2000 as compared to 1999. This was primarily due to the increased technology
costs incurred in 1999 related to the Year 2000 Compliance Project and the
enhancement of distribution systems.
The amortization of deferred policy acquisition costs and value of business
acquired amounted to $57.0 million in 2001 compared to $35.6 million in 2000 and
$37.6 million in 1999. Amortization of deferred
25
policy acquisition costs and value of business acquired (VOBA), exclusive of
ILICO, increased $9.7 million in 2001 as compared to 2000 and decreased $2.0
million in 2000 as compared to 1999. Deferred policy acquisition costs and VOBA
are generally amortized in proportion to gross margins. The 2001 increase was
primarily due to increased amortization associated with higher policy lapses
which reduces future margins to amortize such costs resulting in more current
year expense. The 2000 decrease was primarily due to reduced amortization
consistent with the projected reduction in the gross margins of the closed block
as the life insurance in force declines which was partially offset by increased
amortization in the open block for higher margins experienced in 2000.
Dividends to policyowners were $98.9 million in 2001 compared to $74.3
million in 2000 and $70.8 million in 1999. Dividends to policyowners, exclusive
of ILICO, decreased $0.2 million in 2001 compared to 2000 and increased $3.6
million in 2000 compared to 1999. The increased levels in 2001 and 2000 as
compared to 1999 were primarily due to the maturing of the closed block.
Adjusted pre-tax operating income from our life insurance operations was
$94.0 million in 2001 compared to $59.1 million in 2000 and $51.3 million in
1999. The acquisition of ILICO contributed $32.6 million of adjusted pre-tax
operating income to our life insurance segment in 2001. Exclusive of the impact
of the ILICO acquisition, our life insurance operating income increased $2.3
million in 2001 compared to 2000 and increased $7.8 million in 2000 compared to
1999. Gross margins in our life insurance segment remained level in 2001 with
the fluctuations in insurance expenses primarily impacting the overall results.
The increase in 2000 was primarily due to increased investment income combined
with decreased technology expenses, favorable mortality costs and a favorable
impact of approximately $1.2 million from the market value adjustment in the
third quarter of 2000.
A summary of our annuity segment operations follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
-------- -------- --------
($ IN THOUSANDS)
Revenues:
Immediate annuity and supplementary contract premiums..... $12,828 $21,820 $25,122
Annuity product charges................................... 35,652 34,814 27,835
Net investment income..................................... 577,913 468,404 443,359
Core realized gains (losses) on investments............... -- (16,597) 11,239
Other income:
Income from IMOs....................................... 27,724 18,982 4,735
Other.................................................. 8,474 2,805 1,569
------- ------- -------
Total revenues....................................... 662,591 530,228 513,859
------- ------- -------
Benefits and expenses:
Policyowner benefits:
Interest credited on policyowner account balances...... 329,376 263,017 282,136
Other annuity benefits................................. 97,501 60,543 56,920
------- ------- -------
Total policyowner benefits........................... 426,877 323,560 339,056
Underwriting, acquisition and other expenses:
Expenses from IMOs..................................... 19,510 16,211 4,680
Other.................................................. 41,401 36,343 32,524
Amortization of deferred policy acquisition costs and
value of business acquired (VOBA), net of non-core
adjustment of ($5,685), ($9,205) and $1,852 for the
years ended December 31, 2001, 2000 and 1999,
respectively........................................... 78,891 65,902 48,378
------- ------- -------
Total benefits and expenses............................ 566,679 442,016 424,638
------- ------- -------
Adjusted pre-tax operating income -- Annuities segment...... $95,912 $88,212 $89,221
======= ======= =======
26
Immediate annuity and supplementary contract premiums were $12.8 million in
2001, including $0.5 million for ILICO, compared to $21.8 million in 2000 and
$25.1 million in 1999. A decrease in immediate annuity premiums was anticipated
as a result of pricing adjustments made on these products.
Annuity product charges were $35.7 million in 2001 compared to $34.8
million in 2000 and $27.8 million in 1999. Annuity product charges from the
acquisition of ILICO totaled $9.1 million for 2001. Excluding these ILICO
amounts, annuity product charges declined $8.2 million in 2001 as compared to
2000 and increased $7.0 million in 2000 as compared to 1999. The decrease in
product charges in 2001, exclusive of ILICO, was primarily due to decreased
surrenders of annuity policies with surrender charges. Surrenders totaled
approximately $884.7 million for 2001 compared to $1,258.6 million for 2000 and
$1,014.0 million for 1999. The increase in product charges in 2000 was primarily
due to increased surrender and expense charges resulting from the larger annuity
block of business in force and increased surrender charges associated with an
increase in withdrawals. Annuity withdrawal rates, exclusive of ILICO, averaged
10.7% in 2001 compared to 16.7% in 2000 and 14.7% for 1999. Excluding internal
replacements, withdrawal rates decreased 4.8% to 9.2% for 2001 compared to 14.0%
for 2000 and 13.4% for 1999. Annuity withdrawal rates, including ILICO from the
acquisition date forward, averaged 12.5% for 2001. Surrenders at ILICO from the
acquisition date through December 31, 2001 were approximately $337.9 million.
Net investment income was $577.9 million for 2001 compared to $468.4
million for 2000 and $443.4 million for 1999. Approximately $64.0 million of net
investment income for 2001 was attributable to the acquisition of ILICO.
Excluding ILICO, net investment increased primarily due to higher average
invested assets (excluding market value adjustments) and higher effective yields
as compared to the respective prior year. Average invested assets (excluding
market value adjustments) increased to approximately $468.0 million in 2001
compared to 2000 and $278.9 million in 2000 compared to 1999. The increase was
primarily due to the growth of our annuity business.
The effective yield on the investment portfolio was 6.38% in 2001 compared
to 6.85% in 2000 and 6.65% in 1999. Excluding ILICO, 2001 yields increased to
7.01%. The increase in yields, exclusive of ILICO, primarily resulted from the
market value adjustments we made to our assets in connection with our
reorganization in the third quarter of 2000. The overall yield is lower
including ILICO primarily due to the higher percentage of convertible securities
ILICO carries in its investment portfolio. The convertible securities are
associated with ILICO's total return strategy fixed annuity products. The
effective yield on the deferred fixed annuity portfolio was 7.07% in 2001
compared to 6.98% in 2000 and 6.68% in 1999. The deferred fixed annuity
portfolio yield was also positively impacted by the market value adjustments
made in the third quarter of 2000.
There were no core realized gains and losses on investments in 2001
compared to a net loss of $16.6 million in 2000 and a net gain of $11.2 million
in 1999. The convertible preferred stocks and bonds were moved to trading
securities in 2001. Core realized gains and losses in 2000 and 1999 were
primarily related to sales of convertible preferred stocks and bonds. Prior to
2001, the level of realized gains and losses fluctuated from period to period
depending on the prevailing interest rate and economic environment and the
timing of our sales of investments.
Other income primarily consists of third party annuity commissions received
by wholly-owned IMOs and Corporate Owned Life Insurance (or COLI) income. Other
income was $36.2 million for 2001 compared to $21.8 million for 2000 and $6.3
million for 1999. The increase in other income was due to increased revenue of
independent marketing organizations purchased in the first quarter of 2001 and
second quarter of 2000 and income on COLI investments made in the second quarter
of 2001 of $50 million and fourth quarter of 2000 of $100 million. COLI is
classified as an other asset so the income from this asset appears in other
income instead of net investment income.
Annuity benefits were $426.9 million in 2001 compared to $323.6 million in
2000 and $339.1 million in 1999. Approximately $61.1 of the increase in annuity
benefits in 2001 was due to the acquisition of ILICO in the second quarter of
2001. Annuity benefits increased approximately $42.2 million in 2001, exclusive
of the impact of the ILICO acquisition, and decreased $15.5 million in 2000.
Excluding ILICO, interest credited to deferred annuity account balances
increased $45.5 million in 2001 compared to 2000 and decreased
27
$19.1 million in 2000 compared to 1999. In 2001, average deferred fixed annuity
account balances, excluding ILICO, increased approximately $304.4 million and
the weighted average crediting rate on deferred fixed annuity account balances
increased 12 basis points to 5.07%. The 2001 increase in crediting rates
reflects the change in product mix and the increase in the investment yields of
the deferred fixed annuity portfolio. Overall, spreads on deferred fixed
annuities, excluding ILICO, were reduced 1 basis point to 202 basis points in
2001 as compared 2000. In 2000 as compared to 1999, average deferred fixed
annuity account balances decreased approximately $15.0 million and the weighted
average crediting rate on deferred fixed annuity account balances remained
constant at 4.95%. The 2000 decrease in crediting rates reflects the decrease in
the investment yields of the deferred fixed annuity portfolio. Overall, spreads
on deferred fixed annuities widened 30 basis points to 203 basis points in 2000
as compared 1999. Including ILICO deferred fixed annuity products, the weighted
average crediting rate increased to 5.07% and spreads were 200 basis points.
Other annuity benefits declined approximately $3.2 million, exclusive of ILICO,
in 2001 which corresponds with the decline in immediate annuity and
supplementary contract premiums and increased $3.6 million in 2000 due the
issuance of two insurance contracts to two commercial paper conduits in
mid-1999, one of which was terminated in the fourth quarter of 1999. ILICO added
approximately $40.2 million to the 2001 other annuity benefits due to payments
made under modified coinsurance agreements.
Underwriting, acquisition and other expenses were $60.9 million in 2001
compared to $52.6 million in 2000 and $37.2 million in 1999. Approximately $3.3
million of such expenses was due to the ILICO acquisition. Excluding these ILICO
expenses, underwriting, acquisition and insurance expenses increased
approximately $5.1 million in 2001 compared to 2000 and increased $15.4 million
in 2000 compared to 1999. The increase between the reporting years primarily
reflects increased employee and agent costs and expenses related to the new
independent marketing organizations acquired in January 2001 and April 2000.
These increases are partially offset by a reduction in expenses from the
consolidation of annuity operations in Topeka. The increase in expenses due to
the new independent marketing organizations was offset by the increase in other
income from the independent marketing organizations previously discussed.
Amortization of deferred policy acquisition costs and value of business
acquired amounted to $78.9 million in 2001 compared to $65.9 million in 2000 and
$48.4 million in 1999. Exclusive of the impact of ILICO, amortization of
deferred policy acquisition costs and VOBA increased $11.0 million in 2001 as
compared to 2000 and increased $17.5 million in 2000 as compared to 1999. The
increase in amortization was partially attributable to the general growth in the
deferred policy acquisition cost asset associated with the continued growth in
annuity sales. In addition, VOBA amortization was higher in 2001 and 2000 due to
the additional VOBA established in connection with our market value adjustment
in the third quarter of 2000.
Adjusted pre-tax operating income from our annuity operations was $95.9
million in 2001 compared to $88.2 million in 2000 and $89.2 million in 1999. The
acquisition of ILICO contributed $7.2 million in 2001. Excluding this
contribution from ILICO, our annuity operating income increased $0.5 million in
2001 compared to 2000 and decreased $1.0 million in 2000 compared to 1999. The
slight increase in 2001 was primarily due to increased net independent marketing
organizations' operating income offset by increased employee and agent costs.
28
A summary of our other operations follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
-------- -------- --------
($ IN THOUSANDS)
Revenues:
Insurance premiums........................................ $ 132 $ 230 $ 136
Net investment income..................................... 11,931 19,021 19,521
Other income.............................................. 9,006 12,788 13,987
------- ------- -------
Total revenues......................................... 21,069 32,039 33,644
------- ------- -------
Benefits and expenses:
Other policyowner benefits................................ 2,459 676 291
Underwriting, acquisition and other expenses.............. 10,525 19,381 25,787
------- ------- -------
Total benefits and expenses............................ 12,984 20,057 26,078
------- ------- -------
Adjusted pre-tax operating income -- Other operations....... $ 8,085 $11,982 $ 7,566
======= ======= =======
Adjusted pre-tax operating income from our other operations was $8.1
million in 2001 compared to $12.0 million in 2000 and $7.6 million in 1999.
Other operations primarily consist of holding company revenues and expenses and
operations of our real estate management subsidiary. Revenues declined in 2001
as compared to prior years primarily from the reduction in holding company cash
equivalents of approximately $340 million. The cash equivalents were generated
primarily from the sale of our discontinued operations in mid-1998 and were
carried as invested assets until October 2000, when we distributed the funds to
our former members in connection with our demutualization. Additionally,
revenues declined in 2001 from the reduction of properties under management.
Accordingly, the expenses associated with these properties declined in 2001 as
well. We began decreasing our properties under management in 1999 as this
business was not a part of our core strategy of life insurance and annuity
operations.
29
A summary of our adjusted pre-tax operating income by segment and the
remaining line items of our consolidated statements of income follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
-------- -------- --------
($ IN THOUSANDS)
Adjusted pre-tax operating income:
Life Insurance............................................ $94,008 $59,071 $51,346
Annuities................................................. 95,912 88,212 89,221
Other operations.......................................... 8,085 11,982 7,566
------- ------- -------
Total adjusted pre-tax operating income................ 198,005 159,265 148,133
Non-operating increases (decreases) to income:
Non-core realized/unrealized gains (losses) on
investments............................................ (99,349) (11,683) (12,261)
Fair value change in option value of equity-indexed
annuity products and market value adjustments on total
return strategy annuities.............................. 52,747 -- --
Amortization of DAC & VOBA due to non-core realized gains
or losses.............................................. 2,988 8,722 (2,134)
Demutualization costs..................................... (969) (11,265) (7,062)
Restructuring costs....................................... (8,566) -- --
------- ------- -------
Income from continuing operations...................... 144,856 145,039 126,676
Interest expense............................................ (26,011) (29,723) (28,983)
Income tax expense.......................................... (39,522) (42,516) (33,654)
Minority interest........................................... -- (21,677) (28,107)
------- ------- -------
Net income from continuing operations..................... 79,323 51,123 35,932
Income from discontinued operations......................... 1,820 717 2,504
Cumulative effect of change in accounting for derivatives,
net of tax................................................ (8,236) -- --
------- ------- -------
Net income................................................ $72,907 $51,840 $38,436
======= ======= =======
Total adjusted pre-tax operating income was $198.0 million in 2001 compared
to $159.3 million in 2000 and $148.1 million in 1999. The acquisition of ILICO
contributed $39.8 million to 2001 adjusted pre-tax operating income. The
increase in 2000 adjusted pre-tax operating income as compared to 1999 was
primarily from the life insurance segment and other operations, as previously
discussed.
Non-core realized/unrealized gains (losses) on investments were a loss
amounting to $99.3 million in 2001 compared to losses of $11.7 million in 2000
and $12.3 million in 1999. The significant change in 2001 was primarily driven
by our adoption of SFAS No. 133 "Accounting for Certain Derivative Instruments
and Hedging Activities." In accordance with this statement, we adjusted our
options to market value, which, due to the economic environment, resulted in an
unrealized loss of $54.2 million in 2001. We use options to hedge our
equity-indexed annuity products. In addition, we also have trading securities
that back our total return strategy fixed annuity products. The market value
adjustment on the trading securities resulted in a loss of $5.9 million in 2001.
The majority of the unrealized gains and losses on the options and trading
securities are offset by similar adjustments to the option portion of the
equity-indexed annuity reserves and to the total return strategy annuity
reserves. The reserve adjustments are reflected in the policyowner benefits line
of the consolidated statements of income and are explained in the following
paragraph. The remainder of the 2001 realized and unrealized gains and losses on
investments of $39.2 million consisted primarily of writedowns on investments
mainly related to telecommunications and emerging markets investments, during
2001. 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 investment sales.
The fair value change in options embedded within our equity-indexed
products and the fair value changes on our total return strategy fixed annuity
contracts was a $52.7 million decrease in reserve balances. These fair value
changes are being recorded in accordance with SFAS No. 133, which we adopted
January 1, 2001. As previously discussed, these fair value changes are offset by
similar adjustments and unrealized gains
30
(losses) on investments related to the fair value changes on the options that
hedge the equity-indexed products and on the trading securities that back the
total return strategy products.
Amortization of deferred policy acquisition costs and VOBA due to realized
and unrealized gains (losses) on investments which are not considered part of
the core business amounted to an expense reduction of $3.0 million in 2001 on
net losses compared to an expense reduction of $8.7 million in 2000 on net
losses and additional expense of $2.1 million in 1999 on net gains. The
amortization fluctuates from period to period depending on the related non-core
realized/unrealized gains and losses.
The 1999 and 2000 demutualization costs consist primarily of legal,
actuarial and consulting expenses associated with our demutualization that was
completed in the third quarter of 2000. The 2001 demutualization costs are
associated with the demutualization of ILIC, which was completed when we
acquired ILICO in May 2001. Since these costs are not ongoing, they have been
excluded from our operating segment amounts.
Restructuring costs relate to our consolidation of various functions in
connection with a restructuring of our life insurance and annuity operations,
which began in the third quarter of 2001. The objective of the restructuring
plan is to eliminate duplicative life insurance, annuity and general
administrative functions for all business units. The elimination of duplicative
functions will reduce on-going operating costs. General administrative functions
will be transitioned so they are performed primarily in Des Moines. Life
insurance processes will be transitioned so they are performed primarily in Des
Moines and Indianapolis and annuity functions will be transitioned to Topeka.
The restructuring charges to date included severance and termination benefits of
$6.8 million related to the elimination of approximately 80 positions and other
costs of $1.8 million. Actual pre-tax costs totaling $6.5 million have been
expended and an accrual for severance and termination benefits not yet paid
amounted to $2.1 million at December 31, 2001. Additional activities will
primarily involve relocation or severance benefits for affected employees and
various administrative, financial and actuarial system conversion costs. System
conversion costs will be expensed as incurred and are expected to primarily be
completed by the fourth quarter of 2003.
Interest expense was $26.0 million in 2001 compared to $29.7 million in
2000 and $29.0 million in 1999. The decreased interest expense in 2001 was
primarily due to lower borrowing rates in 2001 as compared to 2000 and the
maturity of the adjustable conversion-rate equity security units in July 2001.
The 2001 interest expense also included approximately $1.3 million of interest
expense from ILIC. ILIC has a $25 million, 8.66% surplus note, due on April 1,
2011. The increased interest expense in 2000 was primarily due to higher average
outstanding borrowings during 2000 compared to 1999. The additional borrowings
in 2000 were primarily used to support insurance company operations, affordable
housing investments, fund the acquisition of a new independent marketing
organization, and fund a portion of the initial investment in IL Group.
Income tax expense was $39.5 million in 2001 compared to $42.5 million in
2000 and $33.7 million in 1999. The effective tax rate was 33.2% for 2001, 36.9%
for 2000 and 34.4% for 1999. The decrease in the effective tax rate in 2001
reflected the decline in nondeductible expenses associated with our
demutualization and increased tax exempt income from the COLI investment. The
increase in the effective tax rate in 2000 was due to the nondeductible expenses
associated with our demutualization combined with lower tax credits from
affordable housing and historic rehabilitation investments.
Minority interest represents the minority stockholders ownership percentage
share of net income of ALHI prior to our acquisition of this minority interest.
The minority shareholder ownership percentage was 42% through September 20,
2000, the date at which the minority interest was acquired. As a result of our
acquisition of the minority interest there is no net income applicable to the
minority interest in 2001.
Net income from continuing operations was $79.3 million in 2001 compared to
$51.1 million in 2000 and $35.9 million in 1999. Approximately $17.7 million of
the increase in 2001 was from the ILICO acquisition. The remainder was primarily
due to the lower effective tax rate and the reduction in net income applicable
to the minority interest. The 2000 increase was primarily due to the results of
our life insurance operations previously discussed and the reduction in net
income applicable to the minority interest.
We adopted SFAS No. 133 on January 1, 2001. In accordance with the
provisions of the statement, we recorded the differences between the previous
carrying amounts of our derivative instruments and the fair
31
value of our derivative instruments, as of this initial application date, as the
effect of a change in accounting principle. The gross difference between
carrying amounts and fair value amounts of our derivative instruments was a
reduction of approximately $11.3 million. The deferred policy acquisition cost
and VOBA amortization impact from the derivative adjustments was approximately
$1.1 million and the income tax benefit was $4.2 million, resulting in the net
cumulative effect of change in accounting for derivatives of $8.2 million.
Net income was $72.9 million in 2001 compared to $51.8 million in 2000 and
$38.4 million in 1999. The acquisition of ILICO increased net income
approximately $17.7 million in 2001. In addition, the lower effective tax rate
and reduction in net income applicable to minority interest also increased net
income in 2001 as compared to 2000. The adoption of SFAS No. 133 in 2001 had a
one-time cumulative effect of reducing net income by $8.2 million.
LIQUIDITY AND CAPITAL RESOURCES
AMERUS GROUP CO.
As a holding company, AmerUs Group Co.'s cash flows from operations consist
of dividends from subsidiaries, if declared and paid, interest from income on
loans and advances to subsidiaries (including a surplus note issued to us by
ALIC), investment income on our assets and fees which we charge our
subsidiaries, offset by the expenses incurred for debt service, salaries and
other expenses.
We intend to rely primarily on dividends, interest income and fee income
from our life insurance subsidiaries in order to make dividend payments to our
shareholders. The payment of dividends by our life insurance subsidiaries is
regulated under various state laws. Generally, under the various state statutes,
our life insurance subsidiaries dividends may be paid only from the earned
surplus arising from their respective businesses and must receive the prior
approval of the respective state regulator to pay any dividend that would exceed
certain statutory limitations. The current statutes generally limit any
dividend, together with dividends paid out within the preceding 12 months, to
the greater of (i) 10% of the respective company's policyowners' surplus as of
the preceding year end or (ii) the net gain from operations for the previous
calendar year. Generally, the various state laws give the state regulators broad
discretion to approve or disapprove requests for dividends in excess of these
limits. Based on these limitations and 2001 results, our life insurance
subsidiaries could pay us an estimated $80.5 million in dividends in 2002
without obtaining regulatory approval.
We generated cash flows from operating activities of $97.1 million, $373.3
million and $741.2 million for the years ended December 31, 2001, 2000 and 1999,
respectively. Operating cash flows were primarily used to increase our
investment portfolio.
We have a $175 million revolving credit facility with a syndicate of
lenders (or Revolving Credit Agreement), which replaced a similar $150 million
revolving credit facility in December 2001. As of December 31, 2001, there was a
$150 million outstanding loan balance under the facility. The Revolving Credit
Agreement provides for typical events of default and covenants with respect to
the conduct of business and requires the maintenance of various financial levels
and ratios. Among other covenants, we (a) cannot have a leverage ratio greater
than 0.35:1.0, (b) cannot have an interest coverage ratio less than 2.50:1.0 (c)
are prohibited from paying cash dividends on common stock in excess of an amount
equal to 3% of consolidated net worth as of the last day of the preceding fiscal
year, and (d) must cause our life insurance subsidiaries to maintain certain
levels of risk-based capital.
Our Board of Directors has approved a stock purchase program effective
February 11, 2002, under which we may purchase up to three million shares of our
common stock at such times and under such conditions, as we deem advisable. The
purchases may be made in the open market or by such other means as we determine
to be appropriate, including privately negotiated purchases. The purchase
program supercedes all prior purchase programs. The funds for the purchase
program would come from a combination of internal sources, from our life
insurance subsidiaries and utilization of our Revolving Credit Agreement. During
2001, 1.4 million shares were repurchased and were funded by additional
borrowings of approximately $32 million on the Revolving Credit Agreement.
32
On March 6, 2002, we issued $185 million of optionally convertible
equity-linked accreting notes due in 2032. The notes will be convertible into
shares of common stock if the sale price of the common stock exceeds specified
levels and in certain other circumstances. The notes are senior subordinated
debt, subordinated in right of payment to all existing and future senior debt
and senior to all existing and future junior subordinated debt. The net proceeds
of the offering will be used to repay approximately $120 million existing debt
under the Revolving Credit Agreement, repurchase approximately $59 million of
common stock and other corporate purposes.
LIFE INSURANCE SUBSIDIARIES
The cash flows of our 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 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 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. We continuously monitor benefits and
surrenders to provide projections of future cash requirements. As part of this
monitoring process, we perform cash flow testing of assets and liabilities under
various scenarios to evaluate the adequacy of reserves. In developing investment
strategy, we establish 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 life
insurance subsidiaries.
We take into account asset/liability management considerations in the
product development and design process. Contract terms for the
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
33
summarizes liabilities for interest-sensitive life products and annuities by
their contractual withdrawal provisions at December 31, 2001 (including
liabilities in the closed blocks and the general account):
$( IN MILLIONS)
---------------
Not subject to discretionary withdrawal..................... $ 434.1
Subject to discretionary withdrawal with adjustments:
Specified surrender charges (A)........................... 6,376.1
Market value adjustments.................................. 3,467.8
---------
Subtotal.................................................. 9,843.9
---------
Subject to discretionary withdrawal without adjustments..... 1,554.7
---------
Total....................................................... $11,832.7
=========
---------------
(A) Includes $834.4 million of statutory liabilities with a contractual
surrender charge of less than five percent of the account balance.
ALIC is a party to a $250 million fixed separate funding agreement. Under
this agreement, a five-year floating rate insurance contract is issued to a
commercial paper conduit. The funding agreement is secured by segregated assets
and is further backed by the general account assets of ALIC. The assets are
legally segregated and are not subject to claims that arise out of any other
business of ALIC. The segregated assets and liabilities are included with
general account assets in the financial statements. The funding agreement may
not be cancelled by the commercial paper conduit unless there is a default under
the agreement, but ALIC may terminate the agreement at any time.
In addition, there are variable separate account assets and liabilities
representing funds that are separately administered, principally for variable
annuity contracts, and for which the contractholder bears the investment risk.
Separate account assets and liabilities are reported at fair value and amounted
to $328 million at December 31, 2001. Separate account contractholders have no
claim against the asset of the general account. The operations of the separate
accounts are not included in the accompanying consolidated financial statements.
Through their respective memberships in the Federal Home Loan Banks (FHLB)
of Des Moines and Topeka, ALIC and American are eligible to borrow under
variable-rate short term fed funds arrangements to provide additional liquidity.
These borrowings are secured and interest is payable at the current rate at the
time of any advance. There were no borrowings under these arrangements
outstanding at December 31, 2001. In addition, ALIC has long-term fixed rate
advances from FHLB outstanding of $14.4 million at December 31, 2001.
The life insurance subsidiaries may also obtain liquidity through sales of
investments. The investment portfolio as of December 31, 2001 had a carrying
value of $15 billion, including closed block investments.
At December 31, 2001, the statutory surplus of the life insurance
subsidiaries was approximately $690 million. Management believes that each life
insurance company has statutory capital which provides adequate risk based
capital that exceeds required levels.
In the future, in addition to cash flows from operations and borrowing
capacity, the life insurance subsidiaries would anticipate obtaining their
required capital from AmerUs Group Co. as we have access to the public debt and
equity markets.
SUMMARY OF CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Our contractual obligations primarily consist of amounts owed for debts,
capital securities and operating lease commitments. See note 8 to the
consolidated financial statements for further discussion about the debt
34
and capital securities and note 12 for additional information regarding leases.
Maturities of debt and capital securities and lease obligations are as follows
for each of the five years ending December 31, 2001:
OBLIGATION TOTAL 2002 2003 2004 2005 2006 THEREAFTER
---------- -------- ------ ------ -------- -------- ------ ----------
($ IN THOUSANDS)
Revolving credit agreement...... $150,000 $ -- $ -- $150,000 $ -- $ -- $ --
Senior notes.................... 125,000 -- -- -- 125,000 -- --
Surplus notes................... 25,000 -- -- -- -- -- 25,000
Federal Home Loan Bank
advances...................... 14,369 498 532 568 606 647 11,518
Capital Securities -- Series
A............................. 68,900 -- -- -- -- -- 68,900
QUIPS........................... 154 -- 154 -- -- -- --
Other........................... 1,205 -- -- 1,205 -- -- --
Operating leases................ 13,555 2,997 2,764 2,778 2,012 1,502 1,502
-------- ------ ------ -------- -------- ------ --------
$398,183 $3,495 $3,450 $154,551 $127,618 $2,149 $106,920
======== ====== ====== ======== ======== ====== ========
We have an agreement with Bank One, N.A. whereby we guarantee the payment
of loans made to certain managers and executives for the purpose of purchasing
common stock and ACES pursuant to the stock purchase program. Our liability in
respect of the principal amount of loans is limited to $25 million. We have also
guaranteed interest and all other fees and obligations owing on the loans. Each
participant in the program has agreed to repay any amounts paid by us under the
guarantee in accordance with a reimbursement agreement with the participant.
We are party to financial instruments in the normal course of business to
meet the financing needs of our customers having risk exposure not reflected in
the balance sheet. These financial instruments include commitments to extend
credit, guarantees and standby letters of credit primarily related to our
commercial real estate portfolio. Commitments to extend credit are agreements to
lend to customers. Commitments generally have fixed expiration dates and may
require payment of a fee. Since many commitments expire without being drawn
upon, the total amount of commitments does not necessarily represent future cash
requirements. At December 31, 2001, outstanding commitments to extend credit
totaled approximately $11.0 million and loan guarantees totaled approximately
$6.3 million.
We have obligations to make future capital contributions to various
partnerships of up to $7.1 million, to loan funds up to $6.9 million to
partnerships and to fund private placement investments of $25.0 million
ALIC and its joint venture partner are contingently liable in the event the
joint venture, AVLIC, cannot meet its obligations. At December 31, 2001, AVLIC
had statutory assets of $2,226.5 million, liabilities of $2,166.0 million and
surplus of $60.5 million.
We are contingently liable for the portion of the policies reinsured under
existing reinsurance agreements in the event the reinsurance companies are
unable to pay their portion of any reinsured claim. Management believes that any
liability from this contingency is unlikely. However, to limit the possibility
of such losses, we evaluate the financial condition of reinsurers and monitor
concentration of credit risk.
INVESTMENT PORTFOLIO
GENERAL
We maintain a diversified portfolio of investments which is supervised by
an experienced in-house staff of investment professionals. Sophisticated
asset/liability management techniques are employed in order to achieve
competitive yields, while maintaining risk at acceptable levels. The asset
portfolio is segmented by liability type, with tailored investment strategies
for specific product lines. Investment policies and significant individual
investments are subject to approval by the Board of Directors of each of the
life insurance companies and are overseen by the Investment and Risk Management
Committee of our Board of Directors. Management regularly monitors individual
assets and asset groups, in addition to monitoring the overall asset mix. In
addition, the insurance companies' boards and the Investment and Risk Management
Committee review investment guidelines and monitor internal controls.
35
INVESTMENT STRATEGY
Our investment philosophy is to employ an integrated asset/liability
management approach with separate investment portfolios for specific product
lines, such as traditional life, universal life, equity-indexed life, deferred
fixed annuities, multi-choice annuities, equity-indexed annuities, and variable
annuities to generate attractive risk-adjusted returns on capital. Essential to
this philosophy is coordinating investments in the investment portfolio with
product strategies, focusing on risk-adjusted returns and identifying and
evaluating associated business risks.
Investment policies and strategies have been established based on the
specific characteristics of each product line. The portfolio investment policies
and strategies establish asset duration, quality and other guidelines.
Analytical systems are utilized to establish an optimal asset mix for each line
of business. We seek to manage the asset/liability mismatch and the associated
interest rate risk through active management of the investment portfolio.
Financial, actuarial, investment, product development and product marketing
professionals work together throughout the product development, introduction and
management phases to jointly develop and implement product features, initial and
renewal crediting strategies, and investment strategies based on extensive
modeling of a variety of factors under a number of interest rate scenarios.
INVESTED ASSETS
We maintain a diversified portfolio of investments, including public and
private fixed maturity securities and commercial mortgage loans. Our objective
is to maintain a high-quality, diversified fixed maturity securities portfolio
that produces a yield and total return that supports the various product line
liabilities and our earnings goals.
The following table summarizes invested assets by asset category as of
December 31, 2001 and 2000:
INVESTED ASSETS
DECEMBER 31,
--------------------------------------
2001 2000
------------------ -----------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
--------- ------ -------- ------
($ IN MILLIONS)
Fixed maturity securities
Public.............................................. $11,790.3 78.3% $7,199.0 74.9%
Private............................................. 1,422.2 9.4% 1,062.6 11.1%
--------- ------ -------- ------
Subtotal............................................ 13,212.5 87.7% 8,261.6 86.0%
Equity securities..................................... 67.9 0.5% 152.9 1.6%
Loans................................................. 944.5 6.3% 534.9 5.6%
Policy loans.......................................... 506.3 3.4% 312.7 3.3%
Real estate........................................... 1.4 0.0% 3.2 0.0%
Other investments..................................... 300.7 2.0% 320.6 3.3%
Short-term investments................................ 19.1 0.1% 20.9 0.2%
--------- ------ -------- ------
Total invested................................... $15,052.4 100.0% $9,606.8 100.0%
========= ====== ======== ======
FIXED MATURITY SECURITIES
The fixed maturity securities portfolio consists primarily of investment
grade corporate fixed maturity securities, high-quality mortgage-backed
securities (or MBS) and United States government and agency obligations. As of
December 31, 2001 fixed maturity securities were $13,212.5 million, or 87.7% of
the carrying value of invested assets with public and private fixed maturity
securities constituting $11,790.3 million, or 89.2%, and $1,422.2 million, or
10.8%, of total fixed maturity securities, respectively.
36
The following table summarizes the composition of the fixed maturity
securities by category as of December 31, 2001 and 2000:
COMPOSITION OF FIXED MATURITY SECURITIES
DECEMBER 31,
------------------------------------------
2001 2000
-------------------- -------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
---------- ------- --------- -------
($ IN MILLIONS)
U.S. government/agencies.............................. $ 773.5 5.9% $ 476.8 5.8%
State and political subdivisions...................... 48.3 0.4% 47.3 0.6%
Foreign government bonds.............................. 134.2 1.0% 151.0 1.8%
Corporate bonds....................................... 9,224.1 69.8% 5,198.4 62.9%
Redeemable preferred stocks........................... 156.6 1.2% 207.2 2.5%
Asset-backed bonds.................................... 746.0 5.6% 646.5 7.8%
MBS
U.S. government/agencies............................ 1,291.2 9.8% 1,139.2 13.8%
Non-government/agencies............................. 838.6 6.3% 395.2 4.8%
--------- ------ -------- ------
Subtotal-MBS........................................ 2,129.8 16.1% 1,534.4 18.6%
--------- ------ -------- ------
Total............................................ $13,212.5 100.0% $8,261.6 100.0%
========= ====== ======== ======
The following table summarizes fixed maturity securities by remaining
maturity as of December 31, 2001:
REMAINING MATURITY OF
FIXED MATURITY
SECURITIES
----------------------
CARRYING % OF
VALUE TOTAL
----------- --------
($ IN MILLIONS)
Due:
In one year or less (2002)................................ $ 292.1 2.2%
One to five years (2003-2007)............................. 4,524.1 34.2%
Five to 10 years (2008-2012).............................. 3,297.3 25.0%
10 to 20 years (2013-2022)................................ 1,851.1 14.0%
Over 20 years (2023 and after)............................ 1,118.1 8.5%
--------- ------
Subtotal............................................... 11,082.7 83.9%
MBS....................................................... 2,129.8 16.1%
--------- ------
Total.................................................. $13,212.5 100.0%
========= ======
The portfolio of investment grade fixed maturity securities is diversified
by number and type of issuer. As of December 31, 2001, investment grade fixed
maturity securities included the securities of over 672 issuers, with 2,225
different issues of securities. No non-government/agency issuer represents more
than 1% of investment grade fixed maturity securities.
Below-investment grade fixed maturity securities as of December 31, 2001,
included the securities of 139 issuers representing 5.8% of total invested
assets, with the largest being a $27.2 million investment.
37
As of December 31, 2001, 82% of total invested assets were investment grade
fixed maturity securities. The following table sets forth the credit quality, by
NAIC designation and Standard & Poor's rating equivalents, of fixed maturity
securities as of December 31, 2001:
FIXED MATURITY SECURITIES BY NAIC DESIGNATION
DECEMBER 31, 2001
PUBLIC PRIVATE TOTAL
------------------ ----------------- ------------------
NAIC STANDARD & POOR'S EQUIVALENT CARRYING % OF CARRYING % OF CARRYING % OF
DESIGNATION DESIGNATION VALUE TOTAL VALUE TOTAL VALUE TOTAL
----------- ---------------------------- --------- ------ -------- ------ --------- ------
(DOLLARS IN MILLIONS)
1 A- or higher............ $ 7,054.5 59.8% $1,070.8 75.3% $ 8,125.3 61.5%
2 BBB- to BBB+............ 3,903.3 33.1% 315.0 22.1% 4,218.3 31.9%
--------- ------ -------- ------ --------- ------
Total investment grade.. 10,957.8 92.9% 1,385.8 97.4% 12,343.6 93.4%
--------- ------ -------- ------ --------- ------
3 BB to BB+............... 565.5 4.8% 32.5 2.3% 598.0 4.5%
4 BB to BB+............... 231.6 2.0% 2.5 0.2% 234.1 1.8%
5 & 6 CCC or lower............ 35.4 0.3% 1.4 0.1% 36.8 0.3%
--------- ------ -------- ------ --------- ------
Total below investment grade............. 832.5 7.1% 36.4 2.6% 868.9 6.6%
--------- ------ -------- ------ --------- ------
Total.................................... $11,790.3 100.0% $1,422.2 100.0% $13,212.5 100.0%
========= ====== ======== ====== ========= ======
MBS investments are mortgage-related securities including commercial
mortgage-backed securities (or CMBS), collateralized mortgage obligations (or
CMOs), and pass-through mortgage securities. Asset-backed securities are both
residential and non-residential including exposure to home equity loans, home
improvement loans, manufactured housing loans as well as securities backed by
loans on automobiles, credit cards, and other collateral or collateral bond
obligations. Residential mortgage pass-through and CMOs total $1,711.0 million
or 11.4% of total invested assets. Asset-backed residential mortgages total
$448.6 million or 3% of total invested assets. As of December 31, 2001, MBS were
$2,129.8 million or 14.2%, of total invested assets of which $1,291.2 million or
60.6% of MBS were from government sponsored enterprises. Other MBS were $838.6
million or 39.4% of MBS as of December 31, 2001. Management believes that the
quality of assets in the MBS portfolio is generally high, with 92.7% of such
assets representing agency backed or "AAA" rated securities.
Interest rate swaps and options are used to reduce exposure to changes in
interest rates and to manage duration mismatches. Call options are used to hedge
equity-indexed annuities. Credit default swaps are coupled with a bond to
synthetically create an investment cheaper than the equivalent instrument traded
in the cash market. Although we are subject to the risk that counterparties will
fail to perform, credit standings of counterparties are monitored regularly. We
only enter into transactions with highly rated counterparties. We are also
subject to the risk associated with changes in the value of contracts. However,
such adverse changes in value generally are offset by changes in the value of
the items being hedged. The notional principal amounts of the swaps and options,
which represent the extent of our involvement in such contracts but not the risk
of loss, at December 31, 2001, amounted to $1,141.3 million. The interest rate
swaps had a carrying value of a net payable position of $10.3 million at
December 31, 2001. The credit default swaps had a carrying value of a net
payable position of $0.2 million at December 31, 2001. The carrying value of
options amounted to $72.1 million at December 31, 2001. For each of these
derivatives, the carrying value is equal to fair value as of December 31, 2001.
The derivatives are reflected as other investments on the consolidated financial
statements as of December 31, 2001. The net amount payable or receivable from
interest rate and credit default swaps are accrued as an adjustment to interest
income. Effective January 1, 2001, we adopted SFAS 133. See note 4 to the
consolidated financial statements for further discussion of the impact of
adopting SFAS 133.
38
MORTGAGE LOANS
As of December 31, 2001, mortgage loans in the investment portfolio were
$944.5 million, or 6.3% of the aggregate carrying value of invested assets. As
of December 31, 2001, commercial mortgage loans and residential mortgage loans
comprised 99% and 1%, respectively, of total mortgage loans. Commercial mortgage
loans consist primarily of fixed-rate mortgage loans. As of December 31, 2001,
we held 769 individual commercial mortgage loans with an average balance of $1.2
million.
As of December 31, 2001, six loans in the loan portfolio with a principal
balance of $4.9 million were classified as delinquent and no loans were in
foreclosure. As of the same date, only one loan aggregating $1.1 million, or
0.1%, of the loan portfolio (as measured by principal balance) was classified as
restructured. During 2001, we had one foreclosure with a principal balance of
$2.0 million.
OTHER
We held $506.3 million of policy loans on individual insurance products as
of December 31, 2001. Policy loans are permitted to the extent of a policy's
contractual limits and are fully collateralized by policy cash values.
As of December 31, 2001, we held equity securities of $67.9 million. The
largest holding of equity securities, AMAL Corporation, had a carrying value of
$44.3 million as of December 31, 2001. This holding is part of our Ameritas
Joint Venture.
We held $321.2 million of other invested assets (including short-term
investments and real estate) on December 31, 2001. Other invested assets consist
primarily of various joint venture and limited partnership investments and
derivatives.
STRUCTURED SECURITIES ARRANGEMENTS
We have utilized a limited number of structured finance arrangements. The
structures primarily consist of interests in collateralized bond obligations and
special-purpose entities with principal protected limited partnership interests.
Neither AmerUs Group nor any management members have operating control or
management oversight of the entities and accordingly the entities are not
consolidated but rather accounted for as available for sale debt securities or
equity method investments. In addition, we do not have any continued obligation
or commitment to provide additional financing to the entities. At December 31,
2001, approximately $600 million of such structured finance investments were
included in invested assets.
EFFECTS OF INFLATION AND INTEREST RATE CHANGES
Management does not believe that inflation has had a material effect on the
consolidated results of operations.
Interest rate changes may have temporary effects on the sale and
profitability of the annuities and life insurance products offered. For example,
if interest rates rise, competing investments (such as annuities or life
insurance products offered by competitors, certificates of deposit, mutual
funds, and similar instruments) may become more attractive to potential
purchasers of our products until we increase the interest rate credited to
owners of our annuities and life insurance products. In contrast, as interest
rates fall, we attempt to adjust credited rates to compensate for the
corresponding decline in reinvestment rates. We monitor interest rates and sell
annuities and life insurance policies that permit flexibility to make interest
rate changes as part of management of interest spreads. However, the
profitability of our products is based upon persistency, mortality and expenses,
as well as interest rate spreads.
We manage our investment portfolio in part to reduce exposure to interest
rate fluctuations. In general, the market value of our fixed maturity portfolio
increases or decreases in an inverse relationship with fluctuations in interest
rates, and net investment income increases or decreases in a direct relationship
with interest rate changes.
39
We have developed an asset/liability management approach with separate
investment portfolios for major product lines such as traditional life,
universal life, equity-indexed life, deferred annuities, multi-choice annuities,
equity-indexed annuities and variable annuities. Investment policies and
strategies have been established based on the specific characteristics of each
product line. The portfolio investment policies and strategies establish asset
duration, quality and other guidelines. Analytical systems are utilized to
establish an optimal asset mix for each line of business. We seek to manage the
asset/liability mismatch and the associated interest rate risk through active
management of the investment portfolio. Financial, actuarial, investment,
product development and product marketing professionals work together throughout
the product development, introduction and management phases to jointly develop
and implement product features, initial and renewal crediting strategies, and
investment strategies based on extensive modeling of a variety of factors under
a number of interest rate scenarios.
In force reserves and the assets allocated to each segment are modeled on a
regular basis to analyze projected cash flows under a variety of economic
scenarios. The result of this modeling is used to modify asset allocation,
investment portfolio duration and renewal crediting strategies. We invest in
CMOs as part of our basic portfolio strategy, but use other types of derivatives
to hedge against the effects of interest rate fluctuations or to hedge growth in
policyowner liabilities for certain annuity products and a funding agreement.
For a further discussion and disclosure of the nature and extent of the use of
derivatives, see note 4 to the consolidated financial statements.
FEDERAL INCOME TAX MATTERS
AmerUs Group and our non-life subsidiaries file a consolidated federal
income tax return. The life insurance subsidiaries file separate federal income
tax returns. The separate return method is used to compute the provision for
allocating federal income taxes. Deferred income tax assets and liabilities are
determined based on differences among the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that effect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities. The
following are considered our critical accounting policies due to their
subjective nature and significance to the financial statements.
VALUATION OF FINANCIAL INSTRUMENTS
In determining if and when a decline in market value below amortized cost
is other-than-temporary, we evaluate the market conditions, offering prices,
trends of earnings, price multiples, and other key measures for our investments
in marketable equity securities and debt instruments. When such a decline in
value is deemed to be other-than-temporary, we recognize an impairment loss in
the current period operating results to the extent of the decline.
Securities in our portfolio with a carrying value of approximately $1,350
million at December 31, 2001 do not have readily determinable market prices. For
these securities, we estimate their fair value by comparison to similar
securities with quoted prices when possible. Otherwise, we use our most recent
purchases and sales of similar unquoted securities, independent broker quotes,
or internally prepared valuations (including those based on estimates of future
profitability) to estimate the fair value of those securities. All such
investments are classified as available for sale. Our ability to liquidate our
positions in these securities will be impacted to a significant degree by the
lack of an actively traded market, and we may not be able to dispose of these
investments in a timely manner. Although we believe our estimates reasonably
reflect the fair value of those securities, our key assumptions about the
risk-free interest rates, risk premiums, performance of underlying collateral
(if any), and other factors may not be realized in the event of an actual sale.
40
DERIVATIVES
We hold derivative financial instruments to hedge growth in policyowner
liabilities for certain annuity products, to hedge the interest variability of a
funding agreement and to hedge market risk for fixed income investments. These
derivatives qualify for hedge accounting or are considered economic hedges as
discussed in detail in note 4 to our consolidated financial statements. We do
not participate in speculative derivatives trading.
Hedge accounting results when we designate and document the hedging
relationships involving derivative instruments. Economic hedging instruments are
those instruments whose change in fair value acts as a natural hedge against the
change in fair value of hedged assets or liabilities with both changes wholly or
partially being offset in earnings.
To hedge interest rate risk, we use S&P 500 Index call options to hedge the
growth in interest credited to the customer as provided by our equity-indexed
annuity products. We also use interest rate swaps to effectively provide for
fixed interest payments of a floating rate funding agreement liability and hedge
market risk from fixed income investments. Credit default swaps are coupled with
a bond to synthetically create an instrument cheaper than an equivalent
investment traded in the cash market.
We have not changed our methods of calculating the fair values of
derivatives or the underlying assumptions. The fair values of these derivatives
will change over time as cash receipts and payments are made and as market
conditions change.
Our derivative instruments are not subject to a multiple or use of leverage
on the underlying price index. We do not believe we are exposed to more than a
nominal amount of credit risk in our interest rate hedges as the counterparties
are established, well-capitalized financial institutions. Information about the
fair values, notional amounts, and contractual terms of these instruments can be
found in note 4 to our consolidated financial statements and the section titled
"Quantitative and Qualitative Disclosures About Market Risk."
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED
We generally amortize our deferred policy acquisition costs based on a
percentage of our expected gross margins (EGMs) over the life of the policies.
Our estimated EGMs are computed based on assumptions related to the underlying
policies written, including the lives of the underlying policies, growth rate of
the assets supporting the liabilities, and level of expenses necessary to
maintain the policies over their entire life. We amortize deferred policy
acquisition costs by estimating the present value of the EGMs over the lives of
the insurance policies and then calculate a percentage of the policy acquisition
cost deferred as compared to the present value of the EGMs. That percentage is
used to amortize the deferred policy acquisition cost such that the amount
amortized over the life of the policies results in a constant percentage of
amortization when related to the actual and future gross margins.
Because the EGMs are only an estimate of the profits we expect to recognize
from these policies, the EGMs are adjusted at each balance sheet date to take
into consideration the actual gross profits to date and any changes in the
remaining expected future gross margins. When EGMs are adjusted, we also adjust
the amortization of the deferred policy acquisition costs amount to maintain a
constant percentage over the entire life of the policies.
We amortize the value of business acquired based on the incidence of the
expected cash flows from insurance contracts using the interest rate credited to
the underlying policies. The expected future cash flows are based on actuarially
determined projections of future premium receipts, mortality, surrenders,
operating expenses, changes in insurance liabilities, investment yields on the
assets retained to support the policy liabilities and other factors. These
projections take into account all factors known or expected by management. The
actual cash flows may vary from expected levels due to differences in renewal
premium, investment spread, investment gains or losses, mortality and morbidity
costs and other factors.
41
PURCHASE ACCOUNTING VALUATIONS
We followed the purchase method of accounting for our acquisition of ILICO
in May 2001 and the acquisition of the 42% minority interest of ALHI in
September 2000. Under the purchase method, we were required to determine the
fair value of the acquired assets and liabilities. The fair value of the assets
and liabilities were determined as follows:
Investments -- based on quoted market prices, or in cases where quoted
market prices were not available, by using discounted cash flow or other
valuation techniques.
Receivables and other assets -- reflected at replacement values or
realizable values based on the present value of amounts to be received
determined at appropriate interest rates less amounts considered
uncollectible.
Value of business acquired -- actuarially determined the future
profits from in force business calculated at a 15% risk discount rate using
current best estimate assumptions.
Policyowner reserves and funds -- established at the present value of
all future benefits and expenses associated with the policies using current
best estimate assumptions.
Other liabilities and debt -- determined as the present value of
amounts to be paid using appropriate interest rates.
The excess of the purchase price over the fair value of the net assets
acquired for ILICO was recorded as goodwill amounting to $21 million in 2001.
The excess of the fair value of the net assets over the purchase price of the
minority interest of ALHI was recorded as a reduction of goodwill amounting to
$34 million in 2000.
EMERGING ACCOUNTING MATTERS
SFAS NO. 133
Effective January 1, 2001, we adopted SFAS 133 which requires all
derivative instruments be reported on the balance sheet at fair value. We
recorded a transition adjustment as a decrease to net income as a cumulative
effect of an accounting change amounting to $8.2 million after tax and an
increase in accumulated other comprehensive income amounting to $2.7 million.
See note 4 to the consolidated financial statements for additional information.
SOP 00-3
We adopted the Accounting Standards Executive Committee's Statement of
Position 00-3, "Accounting by Insurance Enterprises for Demutualizations and
Formations of Mutual Holding Companies and for Certain Long-Duration
Participating Contracts," in 2001. SOP 00-3 modified the presentation of the
closed block in the consolidated financial statement and reporting of unrealized
gains and losses on closed block investments. As a result, unrealized gains
(losses), net of deferred income taxes, amounting to $6.0 million at December
31, 2000 and ($10.7) million at December 31, 1999 were reclassified from
accumulated other comprehensive income to dividends payable to policyowners.
There was no net income effect of adopting SOP 00-3. See note 2 to the
consolidated financial statements for additional information.
STATUTORY ACCOUNTING CODIFICATION
The life insurance subsidiaries adopted the NAIC's codified statutory
accounting practices effective January 1, 2001 which resulted in an increase to
statutory surplus of approximately $25 million, excluding ILICO.
SFAS NO. 141 AND SFAS NO. 142
In July 2001, the Financial Accounting Standards Board issued SFAS 141,
"Business Combinations," and SFAS 142, "Goodwill and Other Intangible Assets."
SFAS 141 requires the purchase method of
42
accounting be used for all business combinations initiated or completed after
June 30, 2001. SFAS 141 also specifies criteria intangible assets acquired in a
purchase method business acquisition must meet to be recognized apart from
goodwill. SFAS 142 will require goodwill and intangible assets with indefinite
useful lives to no longer be amortized but instead tested for impairment at
least annually. In addition, a reassessment of useful lives and residual values
of all intangible assets will be required. Any transitional impairment loss will
be recognized as the cumulative effect of a change in accounting principle in
the consolidated statement of income as of January 1, 2002.
At December 31, 2001, we had unamortized goodwill of $195.5 million.
Amortization expense related to goodwill was $8.3 million for 2001. We do not
anticipate a material impact to our consolidated financial statements as a
result of adopting SFAS 141 and 142. We will have one year following adoption to
determine the amount of any impairment.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The main objectives in managing our investment portfolios and our 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 our financial
instruments primarily relate to the investment portfolio, which exposes us 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. Actuarial
professionals estimate the payout pattern of our liabilities, primarily lapses,
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 variable and equity-indexed products, profitability on the portion of
the policyholder's account balance invested in the fixed general account option,
if any, is also affected by the spreads between interest yields on investments
and rates credited to the policies. For the variable products, the policyholder
assumes essentially all the investment earnings risk for the portion of the
account balance invested in the separate accounts. For the equity-indexed
products, we purchase call options that are designed to match the return owed to
contract holders who elect to participate in one or more market indices.
Profitability on the portion of the equity-indexed products tied to market
indices is significantly impacted by the spread on interest earned on
investments and the sum of (1) cost of underlying call options purchased to
match the returns owed to contract holders and (2) minimum interest guarantees
owed to the contract holder, if any. Profitability on the equity-indexed
annuities is also impacted by changes in the fair value of the embedded option
which provides the contract holder the right to participate in market index
returns after the next anniversary date of the contract. This impacts
profitability as we only purchase one-year call options to fund the returns owed
to the contract holders at the inception of each contract year. This practice
matches with the contract holders' rights to switch to different indices on each
anniversary date. The value of the forward starting options embedded in the
equity-indexed can fluctuate with changes in assumptions as to future volatility
of the market indices, risk free interest rates, market returns and the lives of
the contracts.
The table below provides information about our fixed maturity investments
and mortgage loans for both our trading and other than trading portfolios at
December 31, 2001. The table presents cash flows of principal amounts and
related weighted average interest rates by expected maturity dates. The cash
flows are based on
43
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
AS OF DECEMBER 31, 2001
AMORTIZED FAIR
AMORTIZED 2002 2003 2004 2005 2006 THEREAFTER COST VALUE
--------- ---- ------ ------ ------ ------ ---------- --------- -------
($ IN MILLIONS)
Fixed maturity securities
available-for-sale........... $712 $1,178 $1,047 $1,311 $1,158 $5,495 $10,901 $11,037
Average interest rate.......... 7.5% 6.7% 6.3% 6.8% 7.0% 7.2%
Fixed maturity securities held
for trading purposes......... $ 92 $ 232 $ 242 $ 316 $ 137 $1,156 $ 2,175 $ 2,175
Average interest rate.......... 3.2% 4.1% 4.2% 4.0% 5.0% 4.6%
Mortgage loans................. $ 54 $ 54 $ 69 $ 69 $ 66 $ 633 $ 945 $ 981
Average interest rate.......... 8.1% 8.2% 8.2% 8.1% 8.1% 7.9%
Total..................... $858 $1,464 $1,358 $1,696 $1,361 $7,284 $14,021 $14,193
==== ====== ====== ====== ====== ====== ======= =======
We have consistently invested in high quality marketable securities. As a
result, management believes that there is minimal credit quality risk. Fixed
maturity securities are comprised of U.S. Treasury, government agency,
mortgage-backed and corporate securities. Approximately 64% 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. Approximately 7%
of the bond portfolio is below investment grade. Fixed maturity securities have
an average maturity of approximately 6.9 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 portfolio of mortgage-backed securities. Management
monitors such risk regularly. We invest primarily in those classes of
mortgage-backed securities that are less subject to prepayment risk.
Our use of derivatives is generally limited to hedging purposes and has
principally consisted of using interest rate swaps and options. These
instruments, viewed separately, subject us 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. See note 4 of the consolidated financial statements for additional
information.
Equity price risk is the potential loss arising from changes in the value
of equity securities. In general, equities have more year-to-year price
variability than intermediate term grade bonds. However, returns over longer
time frames have been consistently higher. Our equity securities consist
primarily of the investment in AMAL previously discussed. The remainder of our
equity securities are of high quality and readily marketable.
All of the above risks are monitored on an ongoing basis. A combination of
in-house systems and proprietary models and externally licensed software are
used to analyze individual securities as well as each portfolio. These tools
provide the portfolio managers with information to assist them in the evaluation
of the market risks of the portfolio.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements begin on page F-1. Reference is made
to the Index to Financial Statements on page F-1 herein.
Additional financial statement schedules begin on page S-1. Reference is
made to the Index to Financial Statement Schedules on page S-1 herein.
44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
KPMG LLP was the independent auditors for AmerUs Group Co. On February 19,
2001, management notified KPMG LLP that their appointment as independent
auditors would be terminated effective upon issuance of KPMG LLP reports on the
consolidated financial statements for the year ended December 31, 2000. Ernst &
Young LLP was engaged as independent auditors effective upon KPMG LLP
termination. The decision to change auditors was recommended by the audit
committee of the board of directors and approved by the board of directors.
In connection with the audits of the two fiscal years ended December 31,
2000, there were no disagreements with KPMG LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements if not resolved to their satisfaction would have
caused them to make reference in connection with their opinion to the subject
matter of the disagreement.
The audit reports of KPMG LLP on the consolidated financial statements of
AmerUs Group Co. and subsidiaries as of and for the years ended December 31,
2000 and 1999, did not contain any adverse opinion or disclaimer of opinion, nor
were they qualified or modified as to uncertainty, audit scope, or accounting
principles.
45
PART III
The Notice of 2002 Annual Meeting of Shareholders and Proxy Statement,
which, when filed pursuant to Regulation 14A under the Securities Exchange Act
of 1934, is incorporated by reference in this Annual Report on Form 10-K
pursuant to General Instruction G(3) of Form 10-K, provides the information
required under Part III (Items 10. Directors and Executive Officers of the
Registrant, 11. Executive Compensation, 12. Security Ownership of Certain
Beneficial Owners and Management and 13. Certain Relationships and Related
Transactions).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements. Reference is made to the Index on page F-1 of the
report.
2. Financial Statement Schedules. Reference is made to the Index on page S-1
of the report.
3. Exhibits Reference is made to the Index to Exhibits on page 47 of the
report.
(b) The following report on Form 8-K was filed during the quarter ended December
31, 2001:
Form 8-K dated November 13, 2001, which included the Company's investor
presentation presented at the Company's investor conference held on November
13, 2001.
46
AMERUS GROUP CO. AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
2.1 Plan of Reorganization dated October 27, 1995, filed as
Exhibit 2.1 to the Registration Statement of AmerUs Life
Holdings, Inc. on Form S-1, Registration Number 333-12239,
is hereby incorporated by reference.
2.2 Amended and Restated Agreement and Plan of Merger, dated as
of September 19, 1997 and as amended and restated as of
October 8, 1997, by and among AmerUs Life Holdings, Inc.,
AFC Corp. and AmVestors Financial Corporation ("AmVestors"),
filed as Exhibit 2.2 to the Registration Statement of AmerUs
Life Holdings, Inc. on Form S-4, Registration Number
333-40065 is hereby incorporated by reference.
2.3 Agreement and Plan of Merger, dated as of August 13, 1997
and as amended as of September 5, 1997, among AmerUs Life
Holdings, Inc., a wholly owned subsidiary of AmerUs Life
Holdings, Inc. and Delta Life Corporation, filed as Exhibit
2.2 to Form 8-K of AmerUs Life Holdings, Inc. dated October
8, 1997, is hereby incorporated by reference.
2.4 Combination and Investment Agreement, dated February 18,
2000, among American Mutual Holding Company, AmerUs Life
Holdings, Inc., Indianapolis Life Insurance Company and The
Indianapolis Life Group of Companies, Inc., filed as Exhibit
2.1 to AmerUs Life Holdings, Inc.'s report on Form 8-K/A on
March 6, 2000, is hereby incorporated by reference.
2.5 Purchase Agreement, dated as of February 18, 2000, by and
between American Mutual Holding Company and AmerUs Life
Holdings, Inc., filed as Exhibit 2.5 on Form 10-K, dated
March 8, 2000, is hereby incorporated by reference.
2.6 Agreement and Plan of Merger, dated December 17, 1999, by
and between American Mutual Holding Company and AmerUs Life
Holdings, Inc., filed as Exhibit 2.6 on Form 10-K, dated
March 8, 2000, is hereby incorporated by reference.
2.7 Amendment No. 1 to Agreement and Plan of Merger, dated
February 18, 2000, by and between American Mutual Holding
Company and AmerUs Life Holdings, Inc., filed as Exhibit 2.7
on Form 10-K, dated March 8, 2000, is hereby incorporated by
reference.
2.8 Letter Agreement, dated December 17, 1999, by and between
American Mutual Holding Company and AmerUs Life Holdings,
Inc., filed as Exhibit 2.8 on Form 10-K, dated March 8,
2000, is hereby incorporated by reference.
2.9 Notification Agreement, dated as of February 18, 2000, by
and among American Mutual Holding Company, AmerUs Life
Holdings, Inc. and Bankers Trust Company, filed as Exhibit
2.9 on Form 10-K, dated March 8, 2000, is hereby
incorporated by reference.
2.10 Amendment No. 2 to Agreement and Plan of Merger, dated April
3, 2000, by and between American Mutual Holding Company and
AmerUs Life Holdings, Inc., filed as Exhibit 2.10 on Form
10-Q, dated May 15, 2000, is hereby incorporated by
reference.
2.11 Amendment No. 1 to the Purchase Agreement, dated April 3,
2000, by and between American Mutual Holding Company and
AmerUs Life Holdings, Inc., filed as Exhibit 2.11 on Form
10-Q, dated May 15, 2000, is hereby incorporated by
reference.
2.12 Amendment to Combination and Investment Agreement dated
February 18, 2000 among American Mutual Holding Company,
AmerUs Life Holdings, Inc., Indianapolis Life Insurance
Company and The Indianapolis Life Group of Companies, Inc.,
dated September 18, 2000, filed as Exhibit 2.2 to Form
8-K12G3 of the Registrant dated September 21, 2000, is
hereby incorporated by reference.
3.1 Amended and Restated Articles of Incorporation of the
Registrant filed as Exhibit 3.1 on Form 10-Q, dated November
14, 2000 is hereby incorporated by reference.
3.2* Amended and Restated Bylaws of the Registrant.
47
EXHIBIT
NO. DESCRIPTION
------- -----------
4.1 Amended and Restated Trust Agreement dated as of February 3,
1997 among AmerUs Life Holdings, Inc., Wilmington Trust
Company, as property trustee, and the administrative
trustees named therein (AmerUs Capital I business trust),
filed as Exhibit 3.6 to the registration statement of AmerUs
Life Holdings, Inc. and AmerUs Capital I on Form S-1,
Registration Number 333-13713, is hereby incorporated by
reference.
4.2 Indenture dated as of February 3, 1997 between AmerUs Life
Holdings, Inc. and Wilmington Trust Company relating to the
Company's 8.85% Junior Subordinated Debentures, Series A,
filed as Exhibit 4.1 to the registration statement of AmerUs
Life Holdings, Inc. and AmerUs Capital I on Form S-1,
Registration Number, 333-13713, is hereby incorporated by
reference.
4.3 Guaranty Agreement dated as of February 3, 1997 between
AmerUs Life Holdings, Inc., as guarantor, and Wilmington
Trust Company, as trustee, relating to the 8.85% Capital
Securities, Series A, issued by AmerUs Capital I, filed as
Exhibit 4.4 to the registration statement on Form S-1,
Registration Number, 333-13713, is hereby incorporated by
reference.
4.4 Common Stock Purchase Warrant, filed as Exhibit (10)(v) to
Form 10-Q of AmVestors Financial Corporation dated May 13,
1992, is hereby incorporated by reference.
4.5 Amended and Restated Declaration of Trust of AmerUs Capital
II, dated as of July 27, 1998, among AmerUs Life Holdings,
Inc., First Union Trust Company and the administrative
trustees named therein, relating to AmerUs Life Holdings,
Inc.'s 7.0% ACES Units, filed as Exhibit 4.5 on Form 10-Q,
dated August 13, 1998, is hereby incorporated by reference.
4.6 Certificate of Trust of AmerUs Capital III filed as Exhibit
4.7 to the registration statement of AmerUs Life Holdings,
Inc., AmerUs Capital II and AmerUs Capital III, on Form S-3
(No. 333-50249), is hereby incorporated by reference.
4.7 Common Trust Securities Guarantee Agreement, dated as of
July 27, 1998, by AmerUs Life Holdings, Inc., relating to
AmerUs Life Holdings, Inc.'s 7.0% ACES Units, filed as
Exhibit 4.7 on Form 10-Q, dated August 13, 1998, is hereby
incorporated by reference.
4.8 QUIPS Guarantee Agreement, dated as of July 27, 1998, by
AmerUs Life Holdings, Inc., relating to AmerUs Life
Holdings, Inc.'s 7.0% ACES Units, filed as Exhibit 4.8 on
Form 10-Q, dated August 13, 1998, is hereby incorporated by
reference.
4.9 Master Unit Agreement, dated as of July 27, 1998, between
AmerUs Life Holdings, Inc. and First Union National Bank
relating to AmerUs Life Holdings, Inc.'s 7.0% ACES Units,
filed as Exhibit 4.9 on Form 10-Q, dated August 13, 1998, is
hereby incorporated by reference.
4.10 Call Option Agreement, dated as of July 27, 1998, between
Goldman, Sachs & Co. and First Union National Bank relating
to AmerUs Life Holdings, Inc.'s 7.0% ACES Units, filed as
Exhibit 4.10 on Form 10-Q, dated August 13, 1998, is hereby
incorporated by reference.
4.11 Pledge Agreement, dated as of July 27, 1998, among AmerUs
Life Holdings, Inc., Goldman, Sachs & Co. and First Union
National Bank relating to AmerUs Life Holdings, Inc.'s 7.0%
ACES Units, filed as Exhibit 4.11 on Form 10-Q, dated August
13, 1998, is hereby incorporated by reference.
4.12 Senior Indenture, dated as of June 16, 1998, by and between
AmerUs Life Holdings, Inc. and First Union National Bank, as
Indenture Trustee, relating to the AmerUs Life Holdings,
Inc.'s 6.95% Senior Notes, filed as Exhibit 4.14 on Form
10-Q, dated August 13, 1998, is hereby incorporated by
reference.
4.13 Subordinated Indenture, dated as of July 27, 1998, by and
between AmerUs Life Holdings, Inc. and First Union National
Bank, as Indenture Trustee, relating to AmerUs Life
Holdings, Inc.'s 6.86% Junior Subordinated Deferrable
Interest Debentures, filed as Exhibit 4.15 on Form 10-Q,
dated August 13, 1998, is hereby incorporated by reference.
48
EXHIBIT
NO. DESCRIPTION
------- -----------
4.14 First Supplement to Indenture dated February 3, 1997 among
American Mutual Holding Company, AmerUs Life Holdings, Inc.
and Wilmington Trust Company as Trustee, relating to the
Company's 8.85% Junior Subordinated Debentures, Series A,
dated September 20, 2000, filed as Exhibit 4.14 on Form 10-Q
dated November 14, 2000, is hereby incorporated by
reference.
4.15 Assignment and Assumption Agreement to Amended and Restated
Trust Agreement, dated February 3, 1997 between American
Mutual Holding Company and AmerUs Life Holdings, Inc., dated
September 20, 2000, filed as Exhibit 4.15 on Form 10-Q dated
November 14, 2000, is hereby incorporated by reference.
4.16 Assignment and Assumption to Guaranty Agreement, dated
February 3, 1997 between American Mutual Holding Company and
AmerUs Life Holdings, Inc., dated September 20, 2000, filed
as Exhibit 4.16 on Form 10-Q, dated November 14, 2000, is
hereby incorporated by reference.
4.17 First Supplement to Subordinated Indenture, dated July 27,
1998, relating to AmerUs Life Holdings, Inc.'s 6.86% Junior
Subordinated Deferrable Interest Debentures, among American
Mutual Holding Company, AmerUs Life Holdings, Inc. and First
Union National Bank, as Indenture Trustee, dated September
20, 2000, filed as Exhibit 4.17 on Form 10-Q, dated November
14, 2000, is hereby incorporated by reference.
4.18 First Supplement to Master Unit Agreement dated July 27,
1998, relating to AmerUs Life Holdings, Inc.'s 7.0% ACES
units, between American Mutual Holding Company and First
Union National Bank, as Unit Agent, dated September 20,
2000, filed as Exhibit 4.18 on Form 10-Q, dated November 14,
2000, is hereby incorporated by reference.
4.19 Assignment and Assumption Agreement to the QUIPS Guarantee
Agreement dated July 27, 1998, relating to AmerUs Life
Holdings, Inc.'s 7.0% ACES units, between American Mutual
Holding Company and AmerUs Life Holdings, Inc., dated
September 20, 2000, filed as Exhibit 4.19 on Form 10-Q,
dated November 14, 2000, is hereby incorporated by
reference.
4.20 Assignment and Assumption Agreement to the Common Trust
Securities Guarantee Agreement dated July 27, 1998, relating
to AmerUs Life Holdings, Inc.'s 7.0% ACES units, between
American Mutual Holding Company and AmerUs Life Holdings,
Inc., dated September 20, 2000, filed as Exhibit 4.20 on
Form 10-Q, dated November 14, 2000, is hereby incorporated
by reference.
4.21 First Supplement to Purchase Contracts between American
Mutual Holding Company and Holders, as specified, dated
September 20, 2000, filed as Exhibit 4.21 on Form 10-Q,
dated November 14, 2000, is hereby incorporated by
reference.
4.22 First Supplement to the Pledge Agreement dated July 27,
1998, relating to AmerUs Life Holdings, Inc.'s 7.0% ACES
units, among American Mutual Holding Company, Goldman Sachs
& Co., as Call Option Holder, the Chase Manhattan Bank, as
Collateral Agent and First Union National Bank, as Unit
Agent, dated September 20, 2000, filed as Exhibit 4.22 on
Form 10-Q, dated November 14, 2000, is hereby incorporated
by reference.
4.23 First Supplement to Senior Indenture dated June 16, 1998,
relating to AmerUs Life Holdings, Inc.'s 6.95% Senior Notes,
among American Mutual Holding Company, AmerUs Life Holdings,
Inc. and First Union National Bank, as Trustee, dated
September 20, 2000, filed as Exhibit 4.23 on Form 10-Q,
dated November 14, 2000, is hereby incorporated by
reference.
10.1 Joint Venture Agreement, dated as of June 30, 1996, between
American Mutual Insurance Company and Ameritas Life
Insurance Corp., filed as Exhibit 10.2 on Form 10-K, dated
March 25, 1998, is hereby incorporated by reference.
10.2 Management and Administration Service Agreement, dated as of
April 1, 1996, among American Mutual Life Insurance Company,
Ameritas Variable Life Insurance Company and Ameritas Life
Insurance Corp., filed as Exhibit 10.3 to the registration
statement of AmerUs Life Holdings, Inc. on Form S-1,
Registration Number 333-12239, is hereby incorporated by
reference.
49
EXHIBIT
NO. DESCRIPTION
------- -----------
10.3 AmerUs Life Holdings, Inc. Executive Stock Purchase Plan,
dated November 13, 1998, filed as Exhibit 4.11 to the
registration statement of AmerUs Life Holdings, Inc. on Form
S-8, Registration Number 333-72237, is hereby incorporated
by reference.
10.4 AllRAmerUs Supplemental Executive Retirement Plan, effective
January 1, 1996, filed as Exhibit 10.6 to the registration
statement of AmerUs Life Holdings, Inc. on Form S-1,
Registration Number 333-12239, is hereby incorporated by
reference.
10.5 Management Incentive Plan, filed as Exhibit 10.9 to the
registration statement of AmerUs Life Holdings, Inc. on Form
S-1, Registration Number 333-12239, is hereby incorporated
by reference.
10.6 AmerUs Life Insurance Company Performance Share Plan, filed
as Exhibit 10.10 to the registration statement of AmerUs
Life Holdings, Inc. on Form S-1, Registration Number
333-12239, is hereby incorporated by reference.
10.7 AmerUs Life Stock Incentive Plan, filed as Exhibit 10.11 to
the registration statement of AmerUs Life Holdings, Inc. on
Form S-1, Registration Number 333-12239, is hereby
incorporated by reference.
10.8 AmerUs Life Non-Employee Director Stock Plan, filed as
Exhibit 10.13 to the registration statement of AmerUs Life
Holdings, Inc. on Form S-1, Registration Number 333-12239,
is hereby incorporated by reference.
10.9 Form of Indemnification Agreement executed with directors
and certain officers, filed as Exhibit 10.33 to the
registration statement of AmerUs Life Holdings, Inc. on Form
S-1, Registration Number 333-12239, is hereby incorporated
by reference.
10.10 Tax Allocation Agreement dated as of November 4, 1996, filed
as Exhibit 10.68 to the registration statement of AmerUs
Life Holdings, Inc. on Form S-1, Registration Number
333-12239, is hereby incorporated by reference.
10.11 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.
10.12* AmerUs Group Co. Amended and Restated MIP Deferral Plan
dated as of May 10, 2001.
10.13 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.
10.14 Facility and Guaranty Agreement, dated February 12, 1999,
among The First National Bank of Chicago and AmerUs Life
Holdings, Inc., filed as Exhibit 10.39 on Form 10-Q dated
May 14, 1999, is hereby incorporated by reference.
10.15 Form of Reimbursement Agreement, dated February 15, 1999,
among AmerUs Life Holdings, Inc. and Roger K. Brooks, Victor
N. Daley, Michael G. Fraizer, Thomas C. Godlasky, Marcia S.
Hanson, Mark V. Heitz and Gary R. McPhail, filed as Exhibit
10.40 on Form 10-Q dated May 14, 1999, is hereby
incorporated by reference.
10.16 Amendment No. 1 to Facility Agreement, dated March 23, 1999,
among The First National Bank of Chicago and AmerUs Life
Holdings, Inc., filed as Exhibit 10.41 on Form 10-Q dated
May 14, 1999, is hereby incorporated by reference.
10.17 1999 Non-Employee Stock Option Plan, dated April 19, 1999,
filed on Form S-3, Registration Number 333-72643, is hereby
incorporated by reference.
10.18 Amendment No. 2 to Facility Agreement, dated January 25,
2000, among The First National Bank of Chicago and the
Registrant, filed as Exhibit 10.44 on Form 10-K, dated March
8, 2000, is hereby incorporated by reference.
10.19* Amendment No. 3 to Facility Agreement dated December 12,
2001, among the First National Bank of Chicago and the
Registrant.
50
EXHIBIT
NO. DESCRIPTION
------- -----------
10.20 Irrevocable Standby Letter of Credit Application and Terms
Agreement, dated February 1, 2000, between Federal Home Loan
Bank of Des Moines and AmerUs Life Insurance Company, filed
as Exhibit 10.45 on Form 10-K, dated March 8, 2000, is
hereby incorporated by reference.
10.21 Investment Advisory Agreements, dated as of February 18,
2000, by and between Indianapolis Life Insurance Company,
Bankers Life Insurance Company of New York, IL Annuity and
Insurance Company, Western Security Life Insurance Company
and AmerUs Capital Management Group, Inc. filed as Exhibits
10.1, 10.3, 10.4 and 10.2, respectively, to AmerUs Life
Holdings, Inc.'s report on Form 8-K/A on March 6, 2000, are
hereby incorporated by reference.
10.22 Advance, Pledge and Security Agreement, dated April 12,
2000, by and between the Federal Home Loan Bank of Topeka
and American Investors Life Insurance Company, Inc., filed
as Exhibit 10.48 on Form 10-Q, dated May 15, 2000, is hereby
incorporated by reference.
10.23 Institutional Custody Agreement, dated April 12, 2000, by
and between the Federal Home Loan Bank of Topeka and
American Investors Life Insurance Company, Inc., filed as
Exhibit 10.49 on Form 10-Q, dated May 15, 2000, is hereby
incorporated by reference.
10.24 Line of Credit Application, dated April 12, 2000, by and
between the Federal Home Loan Bank of Topeka and American
Investors Life Insurance Company, Inc., filed as Exhibit
10.50 on Form 10-Q, dated May 15, 2000, is hereby
incorporated by reference.
10.25 Stock Purchase Agreement, dated February 1, 2000, by and
among AmVestors Financial Corporation, Creative Marketing
International Corporation and the Stockholders of Creative
Marketing International Corporation, filed as Exhibit 10.51
on Form 10-Q, dated May 15, 2000, is hereby incorporated by
reference.
10.26 Stock Purchase Agreement, dated February 23, 2000, by and
among American Investors Sales Group, Inc., Community Bank
Marketing, Inc. and Community Financial Services, Inc.,
filed as Exhibit 10.52 on Form 10-Q, dated May 15, 2000, is
hereby incorporated by reference.
10.27 Agreement for Advances, Pledge and Security Agreement, dated
March 12, 1992, by and between Central Life Assurance
Company and the Federal Home Loan Bank of Des Moines, filed
as Exhibit 10.53 on Form 10-Q, dated May 15, 2000, is hereby
incorporated by reference.
10.28 Agreement for Advances, Pledge and Security Agreement, dated
September 1, 1995, by and between American Vanguard Life
Insurance Company and the Federal Home Loan Bank of Des
Moines, filed as Exhibit 10.54 on Form 10-Q, dated May 15,
2000, is hereby incorporated by reference.
10.29 Agreement and Plan of Merger, dated September 30, 1998, by
and among AmVestors Financial Corporation, Senior Benefit
Services of Kansas, Inc., Senior Benefit Services Insurance
Agency, Inc., National Senior Benefit Services, Inc. and
Richard McCarter, filed as Exhibit 10.55 on Form 10-Q, dated
May 15, 2000, is hereby incorporated by reference.
10.30 Affirmation Agreement to Facility and Guaranty Agreement
dated February 12, 1999 by American Mutual Holding Company,
survivor of a merger with AmerUs Life Holdings, Inc. in
favor of the Agent and the Lenders, dated September 20,
2000, filed as Exhibit 10.58 on Form 10-Q, dated November
14, 2000, is hereby incorporated by reference.
10.31 Amendment to Facility and Guaranty Agreement dated February
12, 1999 among The First National Bank of Chicago and AmerUs
Group Co., dated September 20, 2000, filed as Exhibit 10.59
on Form 10-Q, dated November 14, 2000, is hereby
incorporated by reference.
10.32 Acknowledgement and Assumption Agreement to Credit Agreement
dated October 23, 1997, among American Mutual Holding
Company and The Chase Manhattan Bank, as Administrative
Agent for Various Lender Institutions, dated September 20,
2000, filed as Exhibit 10.60 on Form 10-Q, dated November
14, 2000, is hereby incorporated by reference.
51
EXHIBIT
NO. DESCRIPTION
------- -----------
10.33 AmerUs Group Co. 2000 Stock Incentive Plan, dated November
15, 2000, filed as Exhibit 99.9 to the registration
statement of AmerUs Group Co. on Form S-8, Registration
Number 333-50030, is hereby incorporated by reference.
10.34 Employment Agreement between Indianapolis Life Insurance
Company and Larry R. Prible dated May 11, 2000, filed as
Exhibit 10.44 on Form 10-Q, dated November 13, 2001, is
hereby incorporated by reference.
10.35* Credit Agreement dated December 12, 2001, among AmerUs Group
Co., Various Lending Institutions, the Bank of New York,
Mellon Bank N.A., and Fleet National Bank as Co-Arrangers
and J P Morgan Chase Bank as Administrative Agent and
Co-Arranger.
12* Computation of Ratios of Earnings to Fixed Charges.
16.1 Letter re Change in Certifying Accountant, filed as Exhibit
16.1 on Form 10-K dated March 9, 2001, is hereby
incorporated by reference.
21.1* List of Subsidiaries of the Registrant.
23.1* Consent of Ernst & Young LLP.
23.2* Consent of KPMG LLP.
99.1 Retirement Agreement, dated March 14, 2000, by and between
Victor N. Daley and AmerUs Life Holdings, Inc., filed as
Exhibit 99.8 on Form 10-Q, dated May 15, 2000, is hereby
incorporated by reference.
99.2 First Amendment to Employment Agreement, dated as of April
15, 1999, to the Employment Agreement dated as of September
19, 1997, among Mark V. Heitz, AmVestors Financial
Corporation, American Investors Life Insurance Company,
Inc., AmVestors Investment Group, Inc., American Investors
Sales Group, Inc., and AmerUs Life Holdings, Inc., filed as
Exhibit 99.4 on Form 10-Q dated August 13, 1999, is hereby
incorporated by reference.
99.3 Supplemental Benefit Agreement, dated as of April 15, 1999,
among Roger K. Brooks and AmerUs Life Holdings, Inc., filed
as Exhibit 99.5 on 10-Q dated August 13, 1999, is hereby
incorporated by reference.
99.4 Form of Supplemental Benefit Agreement, dated as of April
15, 1999, among AmerUs Life Holdings, Inc. and Victor N.
Daley, Michael G. Fraizer, Thomas C. Godlasky and Gary R.
McPhail, filed as Exhibit 99.6 on Form 10-Q dated August 13,
1999, is hereby incorporated by reference.
99.5 Amended and Restated Employment Agreement, dated as of April
15, 1999, among Marcia S. Hanson and AmerUs Life Holdings,
Inc., filed as Exhibit 99.7 on Form 10-Q dated August 13,
1999, is hereby incorporated by reference.
99.6 Agreement and Release, dated as of December 31, 1999, by and
between Marcia S. Hanson, AmerUs Life Holdings, Inc.,
Registrant, American Mutual Holding Company, and all of
their respective subsidiaries and affiliates, filed as
Exhibit 99.6 on Form 10-K, dated March 8, 2000, is hereby
incorporated by reference.
99.7 Form of Supplemental Benefit Agreement, dated as of February
7, 2000, among AmerUs Life Holdings, Inc. and Victor N.
Daley, Michael G. Fraizer, Thomas C. Godlasky and Gary R.
McPhail, filed as Exhibit 99.7 on Form 10-K, dated March 8,
2000 is hereby incorporated by reference.
---------------
* included herein
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERUS GROUP CO.
/s/ ROGER K. BROOKS
--------------------------------------
Roger K. Brooks
Chairman, President and Chief
Executive Officer
Date: March 15, 2002
POWER OF ATTORNEY
We, the undersigned officers and directors of AmerUs Group Co., hereby
severally and individually constitute and appoint Melinda S. Urion, Brenda J.
Cushing and James A. Smallenberger, and each of them, the true and lawful
attorneys and agents of each of us to execute in the name, place and stead of
each of us (individually and in any capacity stated below) any and all
amendments to this Annual Report on Form 10-K and all instruments necessary or
advisable in connection therewith and to file the same with the Securities and
Exchange Commission, each of said attorneys and agents to have the power to act
with or without the others and to have full power and authority to do and
perform in the name and on behalf of each of the undersigned every act
whatsoever necessary or advisable to be done on the premises as fully and to all
intents and purposes as any of the undersigned might or could do in person, and
we hereby ratify and confirm our signatures as they may be signed by or said
attorneys and agents or each of them to any and all such amendments and
instruments.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
/s/ ROGER K. BROOKS Chairman, President and Chief Executive Officer
------------------------------------------ (principal executive officer) and Director
Roger K. Brooks
/s/ MELINDA S. URION Executive Vice President and Chief Financial Officer
------------------------------------------ (principal financial officer)
Melinda S. Urion
/s/ BRENDA J. CUSHING Senior Vice President and Controller (principal
------------------------------------------ accounting officer)
Brenda J. Cushing
/s/ JOHN R. ALBERS Director
------------------------------------------
John R. Albers
/s/ JOSEPH A. BORGEN Director
------------------------------------------
Joseph A. Borgen
/s/ MALCOLM CANDLISH Director
------------------------------------------
Malcolm Candlish
/s/ ALECIA A. DECOUDREAUX Director
------------------------------------------
Alecia A. DeCoudreaux
53
/s/ THOMAS F. GAFFNEY Director
------------------------------------------
Thomas F. Gaffney
/s/ RALPH W. LASTER, JR. Director
------------------------------------------
Ralph W. Laster, Jr.
Director
------------------------------------------
John W. Norris, Jr.
/s/ ANDREW J. PAINE, JR. Director
------------------------------------------
Andrew J. Paine, Jr.
/s/ JACK C. PESTER Director
------------------------------------------
Jack C. Pester
/s/ JOHN A. WING Director
------------------------------------------
John A. Wing
/s/ F. A. WITTERN, JR. Director
------------------------------------------
F. A. Wittern, Jr.
54
AMERUS GROUP CO.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Reports............................... F-2 through F-3
Consolidated Balance Sheets as of December 31, 2001 and
2000...................................................... F-4 through F-5
Consolidated Statements of Income for the Years Ended
December 31, 2001, 2000 and 1999.......................... F-6
Consolidated Statements of Comprehensive Income (Loss) for
the Years Ended December 31, 2001, 2000 and 1999.......... F-7
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2001, 2000 and 1999.............. F-8 through F-9
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999.......................... F-10 through F-11
Notes to Consolidated Financial Statements.................. F-12 through F-54
Separate financial statements of subsidiaries not consolidated and 50% or
less owned persons accounted for by the equity method have been omitted because
they do not individually constitute a significant subsidiary.
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
AmerUs Group Co.
We have audited the accompanying consolidated balance sheet of AmerUs Group
Co. as of December 31, 2001, and the related consolidated statements of income,
comprehensive income, stockholders' equity, and cash flows for the year ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit. The financial statements of AmerUs Group Co. as of December 31,
2000 and for each of the two years in the period then ended, were audited by
other auditors whose report dated February 5, 2001, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 2001 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of AmerUs Group Co. at December 31, 2001, and the consolidated results
of its operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, in 2001
the Company changed its method of accounting for derivative instruments and its
method of accounting for its closed block of business.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 5, 2002
F-2
REPORT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
AmerUs Group Co.:
We have audited the accompanying consolidated balance sheet of AmerUs Group
Co. and subsidiaries as of December 31, 2000, and the related consolidated
statements of income, comprehensive income, stockholders' equity, and cash flows
for each of the two years in the period then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AmerUs Group
Co. and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows each of the two years in the period then ended
in conformity with accounting principles generally accepted in the United States
of America.
/s/ KPMG LLP
Des Moines, Iowa
February 5, 2001
F-3
AMERUS GROUP CO.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
DECEMBER 31,
--------------------------
2001 2000
----------- -----------
(RESTATED)
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities.............................. $11,037,425 $ 8,261,647
Equity securities...................................... 55,865 152,903
Short-term investments................................. 14,881 20,861
Securities held for trading purposes, at fair value:
Fixed maturity securities.............................. 2,175,106 --
Equity securities...................................... 12,013 --
Short-term investments................................. 4,212 --
Mortgage Loans............................................ 944,532 534,857
Real estate............................................... 1,405 3,226
Policy loans.............................................. 506,318 312,662
Other investments......................................... 300,676 320,650
----------- -----------
Total investments...................................... 15,052,433 9,606,806
Cash and cash equivalents................................... 179,376 65,485
Accrued investment income................................... 174,238 114,034
Premiums, fees and other receivables........................ 9,920 9,652
Reinsurance receivables..................................... 732,030 318,356
Deferred income taxes....................................... 642,680 437,312
Value of business acquired.................................. 583,829 468,430
Goodwill.................................................... 195,484 183,491
Property and equipment...................................... 83,221 56,101
Deferred income taxes....................................... 12,140 --
Other assets................................................ 270,888 179,469
Separate account assets..................................... 328,385 --
Assets of discontinued operations........................... 34,528 32,386
----------- -----------
Total assets........................................... $18,299,152 $11,471,522
=========== ===========
See accompanying notes to consolidated financial statements.
F-4
AMERUS GROUP CO.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
DECEMBER 31,
--------------------------
2001 2000
----------- -----------
(RESTATED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy reserves and policyowner funds:
Future life and annuity policy benefits................ $15,102,001 $ 9,482,625
Policyowner funds...................................... 432,941 325,251
----------- -----------
15,534,942 9,807,876
Accrued expenses and other liabilities.................... 488,949 216,451
Dividends payable to policyowners......................... 221,224 167,741
Policy and contract claims................................ 33,147 11,890
Income taxes payable...................................... 45,809 8,825
Deferred income taxes..................................... -- 2,660
Notes and contracts payable............................... 315,574 215,627
Separate account liabilities.............................. 328,385 --
Liabilities of discontinued operations.................... 23,551 14,806
----------- -----------
Total liabilities...................................... 16,991,581 10,445,876
Company-obligated mandatorily redeemable preferred capital
securities of subsidiary trusts holding solely junior
subordinated debentures of the Company.................... 69,054 197,691
Stockholders' equity:
Preferred Stock, no par value, 20,000,000 shares
authorized, none issued................................ -- --
Common Stock, no par value, 230,000,000 shares authorized;
41,759,450 shares issued and outstanding in 2001 (net
of 1,746,548 treasury shares) and 30,011,034 shares
issued and outstanding in 2000......................... 41,759 30,011
Paid-in capital........................................... 1,122,853 809,894
Accumulated other comprehensive income (loss)............. 12,669 (17,188)
Unearned compensation..................................... (727) (146)
Unallocated ESOP shares................................... (224) (683)
Retained earnings......................................... 62,187 6,067
----------- -----------
Total stockholders' equity............................. 1,238,517 827,955
----------- -----------
Total liabilities and stockholders' equity............. $18,299,152 $11,471,522
=========== ===========
See accompanying notes to consolidated financial statements.
F-5
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF INCOME
($ IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
(RESTATED) (RESTATED)
Revenues:
Insurance premiums.............................. $ 313,650 $ 274,207 $ 278,965
Universal life and annuity product charges...... 146,055 99,940 90,797
Net investment income........................... 873,174 699,525 665,397
Realized/unrealized (losses) on investments..... (90,629) (28,975) (1,402)
Other income.................................... 45,204 34,575 20,291
----------- ----------- -----------
1,287,454 1,079,272 1,054,048
----------- ----------- -----------
Benefits and expenses:
Policyowner benefits............................ 760,748 632,413 640,641
Underwriting, acquisition and other expenses.... 140,471 123,467 120,775
Demutualization costs........................... 969 11,265 7,062
Restructuring costs............................. 8,566 -- --
Amortization of deferred policy acquisition
costs and value of business acquired......... 132,899 92,750 88,117
Dividends to policyowners....................... 98,945 74,338 70,777
----------- ----------- -----------
1,142,598 934,233 927,372
----------- ----------- -----------
Income from continuing operations................. 144,856 145,039 126,676
Interest expense.................................. 26,011 29,723 28,983
----------- ----------- -----------
Income before income tax expense and minority
interest........................................ 118,845 115,316 97,693
Income tax expense................................ 39,522 42,516 33,654
Minority interest................................. -- 21,677 28,107
----------- ----------- -----------
Net income from continuing operations............. 79,323 51,123 35,932
Discontinued operations (net of tax):
Income from discontinued operations............. 1,820 717 2,504
----------- ----------- -----------
Net income before cumulative effect of change in
accounting for derivatives...................... 81,143 51,840 38,436
Cumulative effect of change in accounting for
derivatives, net of tax......................... (8,236) -- --
----------- ----------- -----------
Net income........................................ $ 72,907 $ 51,840 $ 38,436
=========== =========== ===========
Net income from continuing operations per common
share:
Basic........................................... $ 2.15 $ 2.44 $ 2.07
=========== =========== ===========
Diluted......................................... $ 2.12 $ 2.43 $ 2.06
=========== =========== ===========
Net income from discontinued operations per common
share:
Basic........................................... $ 0.05 $ 0.03 $ 0.14
=========== =========== ===========
Diluted......................................... $ 0.05 $ 0.03 $ 0.14
=========== =========== ===========
Net income per common share:
Basic........................................... $ 1.97 $ 2.48 $ 2.21
=========== =========== ===========
Diluted......................................... $ 1.95 $ 2.46 $ 2.20
=========== =========== ===========
Weighted average common shares outstanding:
Basic........................................... 36,949,198 20,922,371 17,390,165
=========== =========== ===========
Diluted......................................... 37,453,428 21,035,518 17,467,132
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-6
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
($ IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
-------- ---------- ----------
(RESTATED) (RESTATED)
Net income................................................. $ 72,907 $ 51,840 $ 38,436
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Transfer related to unrealized gain on
available-for-sale securities reclassified to
trading............................................. (662) -- --
Unrealized holding gains (losses) arising during
period.............................................. 31,298 92,221 (204,164)
Less: Reclassification adjustment for (losses)
included in net income.............................. (14,792) (15,994) (8,909)
Minimum pension liability adjustment.................. (3,587) -- 1,478
-------- -------- --------
Other comprehensive income (loss), before tax............ 41,841 108,215 (193,777)
Income tax (expense) benefit related to items of other
comprehensive income.................................. (14,645) (37,875) 67,822
-------- -------- --------
27,196 70,340 (125,955)
Amounts attributable to:
Minority interest..................................... -- (19,580) 69,194
Change in accounting for derivatives.................. 2,661 -- --
-------- -------- --------
Other comprehensive income (loss), net of taxes............ 29,857 50,760 (56,761)
-------- -------- --------
Comprehensive income (loss)................................ $102,764 $102,600 $(18,325)
======== ======== ========
See accompanying notes to consolidated financial statements.
F-7
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DECEMBER 31, 2001
($ IN THOUSANDS)
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE UNALLOCATED
COMMON PAID-IN INCOME UNEARNED ESOP UNASSIGNED RETAINED
STOCK CAPITAL (LOSS) COMPENSATION SHARES SURPLUS EARNINGS
------- ---------- ------------- ------------ ----------- ---------- --------
Balance at December 31, 1998:
As previously reported........ $ -- $ -- $16,329 $(137) $ -- $ 800,869 $ --
Reclassification of unrealized
gain to dividends payable in
connection with adoption of
SOP 00-3.................... -- -- (27,516) -- -- -- --
------- ---------- ------- ----- ------- --------- --------
As restated................... -- -- (11,187) (137) -- 800,869 --
1999:
Net income.................... -- -- -- -- -- 38,436 --
Net unrealized (loss) on
securities.................. -- -- (57,911) -- -- -- --
Stock issued under various
incentive plans, net of
forfeitures................. -- -- -- (48) -- 473 --
Retirement of
company-obligated
mandatorily redeemable
preferred capital
securities.................. -- -- -- -- -- 205 --
Adoption of leveraged ESOP.... -- -- -- -- (1,028) -- --
Allocation of shares in
leveraged ESOP.............. -- -- -- -- 231 74 --
Minimum pension liability..... -- -- 960 -- -- -- --
Minority interest ownership
changes..................... -- -- 190 (2) -- 905 --
------- ---------- ------- ----- ------- --------- --------
Balance at December 31,
1999........................ -- -- (67,948) (187) (797) 840,962 --
2000:
Net income.................... -- -- -- -- -- 33,801 18,039
Net unrealized gain (loss) on
securities.................. -- -- 50,937 -- -- -- --
Stock issued under various
incentive plans, net of
forfeitures................. 6 169 -- 105 -- 273 --
Dividends declared on common
stock....................... -- -- -- -- -- -- (11,972)
Allocation of shares in
leveraged ESOP.............. -- 600 -- -- 695 -- --
Minority interest ownership
changes..................... -- -- (177) -- (2) 94 --
Acquisition of minority
interest.................... 12,615 285,405 -- -- -- -- --
Demutualization of AmerUs
Group....................... 17,390 518,535 -- (64) (579) (875,130) --
Other......................... -- 5,185 -- -- -- -- --
------- ---------- ------- ----- ------- --------- --------
Balance at December 31,
2000........................ 30,011 809,894 (17,188) (146) (683) -- 6,067
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Balance at December 31, 1998:
As previously reported........ $ 817,061
Reclassification of unrealized
gain to dividends payable in
connection with adoption of
SOP 00-3.................... (27,516)
----------
As restated................... 789,545
1999:
Net income.................... 38,436
Net unrealized (loss) on
securities.................. (57,911)
Stock issued under various
incentive plans, net of
forfeitures................. 425
Retirement of
company-obligated
mandatorily redeemable
preferred capital
securities.................. 205
Adoption of leveraged ESOP.... (1,028)
Allocation of shares in
leveraged ESOP.............. 305
Minimum pension liability..... 960
Minority interest ownership
changes..................... 1,093
----------
Balance at December 31,
1999........................ 772,030
2000:
Net income.................... 51,840
Net unrealized gain (loss) on
securities.................. 50,937
Stock issued under various
incentive plans, net of
forfeitures................. 553
Dividends declared on common
stock....................... (11,972)
Allocation of shares in
leveraged ESOP.............. 1,295
Minority interest ownership
changes..................... (85)
Acquisition of minority
interest.................... 298,020
Demutualization of AmerUs
Group....................... (339,848)
Other......................... 5,185
----------
Balance at December 31,
2000........................ 827,955
F-8
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
DECEMBER 31, 2001
($ IN THOUSANDS)
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE UNALLOCATED
COMMON PAID-IN INCOME UNEARNED ESOP UNASSIGNED RETAINED
STOCK CAPITAL (LOSS) COMPENSATION SHARES SURPLUS EARNINGS
------- ---------- ------------- ------------ ----------- ---------- --------
2001:
Net income.................... -- -- -- -- -- -- 72,907
Change in accounting for
derivatives................. -- -- 2,661 -- -- -- --
Transfer related to unrealized
gain on available-for-sale
securities reclassified to
trading..................... -- -- (430) -- -- -- --
Net unrealized gain (loss) on
securities.................. -- -- 35,891 -- -- -- --
Net unrealized gain (loss) on
derivatives designated as
cash flow hedges............ -- -- (5,933) -- -- -- --
Stock issued under various
incentive plans, net of
forfeitures................. 338 8,921 -- (581) -- -- --
Dividends declared on common
stock....................... -- -- -- -- -- -- (16,787)
Purchase of treasury stock.... (1,406) (43,579) -- -- -- -- --
Acquisition of ILICO.......... 9,047 223,358 -- -- -- -- --
Conversion of
company-obligated
mandatorily redeemable
preferred capital
securities.................. 3,769 123,779 -- -- -- -- --
Allocation of shares in
leveraged ESOP.............. -- 480 -- -- 459 -- --
Minimum pension liability
adjustment.................. -- -- (2,332) -- -- -- --
------- ---------- ------- ----- ------- --------- --------
Balance at December 31,
2001........................ $41,759 $1,122,853 $12,669 $(727) $ (224) $ -- $ 62,187
======= ========== ======= ===== ======= ========= ========
TOTAL
STOCKHOLDERS'
EQUITY
-------------
2001:
Net income.................... 72,907
Change in accounting for
derivatives................. 2,661
Transfer related to unrealized
gain on available-for-sale
securities reclassified to
trading..................... (430)
Net unrealized gain (loss) on
securities.................. 35,891
Net unrealized gain (loss) on
derivatives designated as
cash flow hedges............ (5,933)
Stock issued under various
incentive plans, net of
forfeitures................. 8,678
Dividends declared on common
stock....................... (16,787)
Purchase of treasury stock.... (44,985)
Acquisition of ILICO.......... 232,405
Conversion of
company-obligated
mandatorily redeemable
preferred capital
securities.................. 127,548
Allocation of shares in
leveraged ESOP.............. 939
Minimum pension liability
adjustment.................. (2,332)
----------
Balance at December 31,
2001........................ $1,238,517
==========
See accompanying notes to consolidated financial statements.
F-9
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(RESTATED) (RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.......................................... $ 72,907 $ 51,840 $ 38,436
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting for
derivatives.................................... 8,236 -- --
Policyowner assessments on universal life and
annuity products............................... (121,547) (72,952) (67,405)
Interest credited to policyowner account
balances....................................... 392,663 310,175 325,940
Change in option value of equity-indexed products
and market value adjustments on total return
strategy annuities............................. (52,747) -- --
Realized/unrealized (gains) losses on
investments.................................... 90,629 28,975 1,402
Goodwill amortization............................ 8,324 8,259 7,403
VOBA amortization................................ 83,520 41,974 32,604
Minority interest................................ -- 21,677 28,107
Change in:
Accrued investment income........................ (6,891) (6,889) (10,799)
Reinsurance receivables.......................... (123,569) (3,929) 11,479
Securities held for trading purposes:
Fixed maturities............................... 49,329 -- --
Equity securities.............................. (11,342) -- --
Short-term investments......................... (4,186) -- --
Deferred policy acquisition costs................ (269,274) (142,297) (97,740)
Liabilities for future policy benefits........... 54,746 133,371 354,839
Accrued expenses and other liabilities........... (64,984) 10,919 (26,149)
Policy and contract claims and other policyowner
funds.......................................... (48,423) (5,500) (1,036)
Income taxes:
Current........................................ 39,092 (12,563) 7,271
Deferred....................................... (7,914) 20,691 14,405
Other, net.......................................... 8,545 (10,500) 122,450
----------- ----------- -----------
Net cash provided by operating activities........ 97,114 373,251 741,207
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed maturities available-for-sale..... (4,673,375) (1,954,326) (4,374,512)
Proceeds from sale of fixed maturities
available-for-sale............................... 2,745,381 949,325 2,806,876
Maturities, calls and principal reductions of fixed
maturities available-for-sale.................... 1,006,631 690,060 1,103,762
Purchase of equity securities....................... (51,190) (141,532) (214,060)
Proceeds from sale of equity securities............. 57,013 30,933 229,101
Change in short-term investments, net............... 5,656 (22,353) 31,148
Purchase of loans................................... (150,143) (90,964) (176,997)
Proceeds from repayment and sale of loans........... 118,479 202,270 208,232
Purchase of real estate and other invested assets... (104,438) (104,284) (113,992)
Proceeds from sale of real estate and other invested
assets........................................... 48,417 122,113 53,642
Change in policy loans, net......................... 3,883 (14,763) (5,247)
Other assets, net................................... (75,997) (104,999) (8,667)
Acquisitions, net of cash acquired.................. 156,925 --
Purchase of minority interest....................... -- (969) (8,181)
----------- ----------- -----------
Net cash (used in) investing activities.......... (912,758) (439,489) (468,895)
----------- ----------- -----------
F-10
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
($ IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(RESTATED) (RESTATED)
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposits to policyowner account balances............ 2,137,698 1,567,284 1,045,060
Withdrawals from policyowner account balances....... (1,231,109) (1,435,150) (1,177,981)
Change in debt, net................................. 74,947 19,364 28,075
Dividends to shareholders........................... (16,787) (13,240) (5,171)
Stock issued under various incentive plans, net of
forfeitures...................................... 8,678 -- --
Purchase of treasury stock.......................... (44,985) -- --
Retirement and conversion of company-obligated
mandatorily redeemable capital securities........ 154 -- (1,523)
Adoption and allocation of shares in leveraged
ESOP............................................. 939 1,295 (1,250)
Cash paid for demutualization distribution.......... -- (306,168) --
Other, net.......................................... -- 640 --
----------- ----------- -----------
Net cash provided by (used in) financing
activities..................................... 929,535 (165,975) (112,790)
----------- ----------- -----------
Net increase (decrease) in cash.................. 113,891 (232,213) 159,522
Cash and cash equivalents at beginning of period...... 65,485 297,698 138,176
----------- ----------- -----------
Cash and cash equivalents at end of period............ $ 179,376 $ 65,485 $ 297,698
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH ACTIVITIES:
Interest paid....................................... $ 29,325 $ 39,415 $ 31,998
=========== =========== ===========
Income taxes paid................................... $ 1,914 $ 4,043 $ 6,137
=========== =========== ===========
DETAILS OF ACQUISITION:
Fair value of assets acquired....................... $ 5,676,350 $ -- $ --
Liabilities assumed................................. 5,349,908 -- --
----------- ----------- -----------
Carrying value of acquisitions...................... 326,442 -- --
Common stock issued................................. (232,405) -- --
Accrual of cash payout component of purchase
price............................................ (9,000) -- --
Preliminary investment in ILGC...................... (77,200)
Acquisition costs previously paid................... (2,857)
----------- ----------- -----------
Cash paid........................................... 4,980 -- --
Less: Cash acquired................................. 161,905 -- --
----------- ----------- -----------
Net cash (received in) acquisitions................. $ (156,925) $ -- $ --
=========== =========== ===========
DETAILS OF ACQUISITION OF MINORITY INTEREST:
Minority interest ownership in assets acquired...... $ -- $ 4,750,145 $ --
Minority interest ownership of liabilities
assumed.......................................... -- 4,499,238 --
----------- ----------- -----------
Fair value of minority interest acquired............ -- 250,907 --
Allocation of excess costs of acquiring the minority
interest over the fair value of identifiable
assets less liabilities.......................... -- 47,113 --
----------- ----------- -----------
Value of common stock issued to acquire minority
interest......................................... $ -- $ 298,020 $ --
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-11
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
AmerUs Group Co. (Company) is a holding company engaged through its
subsidiaries in the business of marketing, underwriting and distributing a broad
range of individual life insurance and annuity products to individuals and
businesses in all 50 states, the District of Columbia and the U.S. Virgin
Islands. The Company also owns a real estate management company through which it
conducts limited real estate management, development, syndication and marketing
activities. The Company has two reportable operating segments: Life Insurance
and Annuities. The Life Insurance segment's primary product offerings consist of
whole life, interest-sensitive whole life, equity-indexed life, universal life
and term life insurance policies. The primary product offerings of the Annuity
segment are fixed annuities.
The Company sold certain lines of business and made the decision to exit
certain other businesses in 1998. These businesses are referred to as
discontinued operations and include the following activities: banking,
residential real estate brokerage, residential land development, and mortgage
banking.
DEMUTUALIZATION
The Company was formerly known as American Mutual Holding Company (AMHC)
and was a mutual insurance holding company whose principal asset was a 58%
interest in AmerUs Life Holdings, Inc. (ALHI). Public stockholders owned the
remaining 42% interest in ALHI (Minority Interest). ALHI was a holding company
which directly or indirectly owned three principal life insurance subsidiaries:
AmerUs Life Insurance Company (ALIC), American Investors Life Insurance Company,
Inc. (American) and Delta Life and Annuity Company (Delta). On September 20,
2000, AMHC converted to stock form, changed its name to AmerUs Group Co. and
acquired the Minority Interest of ALHI by issuing AmerUs Group Co. common stock
in exchange for the outstanding shares of ALHI held by the public. The value of
the stock exchange was approximately $298 million and ALHI merged into the
Company simultaneously with the stock exchange.
Prior to the conversion of the Company to a stock form, the Company was
owned by individuals and entities who held insurance policies or annuity
contracts issued by ALIC (Members). In the conversion, which is referred to as a
demutualization, the Company distributed cash, policy credits and its newly
issued common stock to its Members in exchange for their membership interests.
The value of the distribution totaled approximately $792 million.
The acquisition of the ALHI Minority Interest by the Company was accounted
for as a purchase and accordingly 42% of the book value of the assets and
liabilities of ALHI were adjusted to market value as of the acquisition date.
Approximately 42% of the ALHI earnings for the reporting periods up to the
acquisition date are reduced from the Company's results of operations on the
line titled minority interest on the Company's consolidated statements of
income. From the acquisition date forward, the Company's results of operations
include 100% of these earnings.
CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company and its
wholly-owned subsidiaries have been prepared in conformity with Generally
Accepted Accounting Principles (GAAP) which, as to the insurance company
subsidiaries, differ from statutory accounting practices prescribed or permitted
by regulatory authorities.
The accompanying consolidated financial statements include the accounts and
operations of the Company and its wholly-owned subsidiaries, principally, ALIC,
AmerUs Annuity Group Co. (AAG, formerly AmVestors Financial Corporation
(AmVestors)) and AmerUs Capital Management Group, Inc. (ACM). The Company and
ALIC together own all of ILICO Holdings, Inc. (ILICO), the holding company of
F-12
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Indianapolis Life Insurance Company (ILIC) and its subsidiaries. As discussed in
note 15, ILICO was acquired in May 2001. All significant intercompany
transactions and balances have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The valuation of financial
instruments, derivatives, amortization of deferred policy acquisition costs and
value of business acquired, and purchase accounting valuations are areas which
involve a high degree of estimation to determine their reported amounts. These
areas are described in more detail in the following policies.
Certain balances for 1999 and 2000 have been reclassified to conform to the
2001 presentation format primarily related to the presentation of the Closed
Block with the adoption of the Accounting Standards Executive Committee's
Statement of Position 00-3 "Accounting by Insurance Enterprises for
Demutualizations and Formations of Mutual Insurance Holding Companies and for
Certain Long-Duration Participating Contracts" (SOP 00-3).
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company includes cash and amounts
due from other financial institutions and interest-bearing deposits in other
financial institutions purchased with original maturities of three months or
less in cash and cash equivalents. Amounts of interest-bearing deposits included
as cash equivalents at December 31, 2001 and 2000 were $186.4 million and $85.4
million, respectively.
CLOSED BLOCK
The Company has established two Closed Blocks of policies: (a) the first on
June 30, 1996 in connection with the reorganization of ALIC to a stock company,
and (b) the second on March 31, 2001 in connection with the reorganization of
ILIC to a stock company (collectively, the Closed Block). Insurance policies
which had a dividend scale in effect as of each Closed Block establishment date
were included in the Closed Block. The Closed Block was designed to give
reasonable assurance to owners of insurance policies that, after the
reorganization of ALIC and ILIC, 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 crediting continues. The assets,
including revenue therefrom, allocated to the Closed Block will accrue solely to
the benefit of the owners of policies included in the Closed Block until the
Closed Block is no longer in effect. The Company will continue to pay guaranteed
benefits under all policies, including policies included in the Closed Block, in
accordance with their terms. In the event that the Closed Block's assets were
insufficient to meet the benefits of the Closed Block's guaranteed benefits,
general assets would be utilized to meet the contractual benefits of the Closed
Block's policyholders.
Effective January 1, 2001, the Company adopted SOP 00-3. The provisions of
SOP 00-3 required the Company to modify its presentation of the Closed Block in
its Consolidated Financial Statements to no longer show the operations of the
Closed Block and the assets and liabilities of the Closed Block as single line
items. In addition, SOP 00-3 required the Company to report unrealized gains and
losses on the Closed Block's investments as a component of the Closed Block's
policyholder dividend obligation rather than AOCI. As a result, unrealized gains
(losses) net of deferred taxes amounting to $6.0 million at December 31, 2000,
($10.7) million at December 31, 1999 and $27.5 million at December 31, 1998 were
classified from accumulated other comprehensive income to dividends payable to
policyowners. There was no net income effect of adopting SOP 00-3.
F-13
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENTS
Investments in fixed maturity securities, equity securities and short-term
investments that are to be held for indefinite periods of time are reported as
securities available-for-sale and are reported in the accompanying consolidated
financial statements at fair value. Any valuation changes resulting from changes
in the fair value of these securities are reflected as a component of
stockholders' equity, except for certain policies which have specific
investments identified and for which valuation changes and related unrealized
gains and losses are included in future life and annuity policy benefits. These
unrealized gains or losses in stockholders' equity are reported net of taxes and
adjustments to deferred policy acquisition costs and value of business acquired.
Fixed maturity and equity securities that are bought and held principally to
back our total return strategy fixed annuity products are reported as trading
securities and are carried at fair value with unrealized gains or losses
reported in operations. Premiums and discounts on fixed maturity securities are
amortized or accreted over the life of the related security as an adjustment to
yield using the effective interest method. For loan-backed and structured
securities included in fixed maturity securities, income is recognized using a
constant effective yield based on currently anticipated prepayments.
Investments are considered impaired when the Company determines that
collection of principal or interest is doubtful and adjusts such investments to
fair value when it is determined an impairment is other than temporary.
Market values of fixed maturity securities are reported based on quoted
market prices, where available. Market values of fixed maturity securities not
actively traded in a liquid market are estimated using a matrix calculation
assuming a spread (based on interest rates and a risk assessment of the bonds)
over U.S. Treasury bonds. Market values of the conversion features embedded in
convertible fixed maturity securities is estimated using an option-pricing
model. Market values of redeemable preferred stocks and equity securities are
based on the latest quoted market prices, or for those not readily marketable,
generally at values which are representative of the market values of comparable
issues.
Loans and other long-term investments are stated at cost less amortized
discounts and allowances for possible losses. Policy loans are stated at their
aggregate unpaid balances. Investments in loans and real estate are considered
impaired when the Company determines that collection of all amounts due under
the contractual terms is doubtful or carrying values exceed the fair value of
underlying collateral. The Company adjusts such assets to their estimated net
realizable value at the point at which it determines an impairment is other than
temporary. Interest income on impaired mortgage loans is recognized when cash is
received. In addition, the Company has established a valuation allowance for
loans, real estate, and other invested assets. Valuation allowances for other
than temporary impairments in value are netted against the asset categories to
which they apply, and additions to valuation allowances are included in total
investment results.
Real estate is stated at cost less accumulated depreciation. Depreciation
is calculated over the estimated useful lives using primarily accelerated
depreciation methods.
The Company has one $250 million fixed separate funding agreement. Under
this agreement, a five-year floating rate insurance contract is issued to a
commercial paper conduit. The funding agreement is secured by assets in the
Company's segregated account and is further backed by the general account
assets. The segregated assets are legally segregated and are not subject to
claims that arise out of any other business of the Company. The segregated
assets and liabilities are included with general account assets in the financial
statements. The funding agreement may not be cancelled by the commercial paper
conduit unless there is a default under the agreement, but the Company may
terminate the agreement at any time.
Investments in partnerships in which the Company's ownership percentage
exceeds 3% and joint ventures are generally accounted for under the equity
method whereby the Company initially records the investment at cost.
Subsequently, the Company increases or decreases the carrying amount of the
investment for its share of income or loss, respectively, of the investee.
Investments in partnerships in which the Company's ownership
F-14
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
percentage is less than 3% are generally accounted for under the cost method
whereby dividends received by the investee are recognized as income. The Company
is primarily a limited partner in such investments. These investments are shown
as other investments and totaled approximately $75.1 million and $99.5 million
at December 31, 2001 and 2000, respectively.
Realized gains and losses are included in earnings and are determined using
the specific identification method. The carrying value of investments is reduced
to its estimated realizable value if a decline in fair value is considered other
than temporary with such reduction charged to earnings.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses financial instruments including options, futures, swaps,
caps and swaptions to reduce its exposure to changes in interest rates and to
manage duration mismatches. The Company also uses call options to hedge
equity-indexed annuity products. The use of these financial instruments modifies
the exposure of these risks with the intent to reduce the risk and variability
to the Company. Although the Company is subject to the risk that counterparties
will fail to perform, credit standings of counterparties are monitored
regularly. The Company is not a party to leveraged derivatives. Derivative
instruments are included in other assets.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS 137 and 138. SFAS 133 requires that all
derivative instruments, including certain derivative instruments embedded in
other contracts, be reported on the consolidated balance sheet at fair value.
Accounting for gains and losses resulting from changes in the fair values of
derivatives is dependent upon the use of the derivative and its qualification
for special hedge accounting.
Prior to the adoption of SFAS 133, the net interest effect of interest rate
swap transactions was recorded as an adjustment to investment income over the
periods covered by the agreements. The initial cost of other hedging instruments
was amortized over their remaining lives as adjustments to investment income.
Certain agreements that hedged assets carried at fair value were also carried at
fair value. Any unamortized gains or losses were recognized when the underlying
investments were sold.
POLICY ACQUISITION COSTS
Certain commissions, policy issue and underwriting costs, and other
variable costs, including bonus interest, incurred to acquire or renew
traditional life insurance, universal life insurance, and annuity products are
deferred. The method of amortizing deferred policy acquisition costs for
traditional life insurance products varies, dependent upon whether the contract
is participating or non-participating. Participating contracts are those which
are expected to pay dividends to policyowners in proportion to their relative
contribution to the Company's statutory surplus. Deferred policy acquisition
costs for participating traditional life insurance are generally amortized over
the life of the policies in proportion to the present value of estimated gross
margins. Non-participating traditional life insurance deferred policy
acquisition costs are amortized over the premium-paying period of the related
policies in proportion to the ratio of annual premium revenues to total
anticipated premium revenues using assumptions consistent with those used in
computing policy benefit reserves. For universal life insurance and annuity
products, deferred policy acquisition costs are generally amortized in
proportion to the present value of estimated gross margins from surrender
charges and investment, mortality, and expense margins. The amortization for
participating traditional life, universal life, and annuity products is adjusted
retrospectively when current or estimated future gross margins on the underlying
policies vary from previous estimates. The deferred policy acquisition cost
asset is also adjusted for the impact on estimated gross profits of net
unrealized gains and losses on securities.
F-15
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
VALUE OF BUSINESS ACQUIRED
Value of business acquired (VOBA) from insurance companies represents the
portion of the purchase price allocated to the right to receive future cash
flows from insurance contracts existing at the date of the acquisition. This
cost of policies purchased represents the actuarially determined present value
of the projected future cash flows from the acquired policies.
The expected future cash flows used in determining such value are based on
actuarially determined projections of future premium receipts, mortality,
surrenders, operating expenses, changes in insurance liabilities, investment
yields on the assets retained to support the policy liabilities and other
factors. These projections take into account all factors known or expected at
the valuation date, based on the judgment of management. The actual experience
on purchased business may vary from projections due to differences in renewal
premium, investment spread, investment gains or losses, mortality and morbidity
costs and other factors.
The discount rate used to determine the value of policies purchased is the
rate of return required in order to invest in the business being acquired.
Factors in determining this rate include the cost of capital required to fund
the acquisition; the acquired company's compatibility with other Company
activities that may impact future cash flows; the complexity of the acquired
company; and recent discount rates used by others to determine valuations to
acquire similar blocks of business.
VOBA is amortized based on the incidence of the expected cash flows using
the interest rate credited to the underlying policies. If cash flows differ from
expectations, the amortization of the VOBA is adjusted. The VOBA asset is
adjusted for the impact on estimated gross profits of net unrealized gains and
losses on securities. Each year, the recoverability of the VOBA is evaluated and
if the evaluation indicates that the existing insurance liabilities, together
with the present value of future net cash flows from the blocks of business
acquired, is insufficient to recover the VOBA, the difference is charged to
expense as an additional write-off of the VOBA.
GOODWILL
Goodwill represents the excess of the amount paid to acquire a company over
the fair value of its net assets. Goodwill is amortized on a straight-line basis
over a thirty year period. The value of goodwill is monitored based on the
estimates of future earnings. If it is determined that future earnings do not
support the recoverability of goodwill, its carrying value is reduced by a
corresponding charge to expense.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and is depreciated principally
under the straight-line method.
SEPARATE ACCOUNT
Separate account assets and liabilities represent funds that are separately
administered, principally for variable annuity contracts, and for which the
contractholder, rather than the Company, bears the investment risk. Separate
account contractholders have no claim against the assets of the general funds of
the Company. Separate account assets are reported at fair value. The operations
of the separate accounts are not included in the accompanying consolidated
financial statements.
RECOGNITION OF REVENUES
Premiums for traditional life insurance products (including those products
with fixed and guaranteed premiums and benefits and which consist principally of
whole life insurance policies and certain annuities with life contingencies) are
recognized as revenues when due. For limited payment life insurance policies,
F-16
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
premiums are recorded as income when due with any excess profit deferred and
recognized over the expected lives of the contracts. Amounts received as
payments for universal life insurance policies and for annuity products
(including deferred annuities and annuities without life contingencies) are not
recorded as premium revenue. Revenues for such contracts consist of policy
charges for the cost of insurance, policy administration charges, and surrender
charges assessed against policyowner account balances during the period. All
insurance-related revenue is reported net of reinsurance ceded.
FUTURE POLICY BENEFITS
The liability for future policy benefits for traditional life insurance is
computed using the net level method, utilizing the guaranteed interest and
mortality rates used in calculating cash surrender values as described in the
contracts. Reserve interest assumptions range from 2.00 percent to 7.50 percent.
The weighted average assumed interest rate for all traditional life policy
reserves was 4.81 percent in 2001, 4.35 percent in 2000 and 4.33 percent in
1999. Policy benefit claims are charged to expense in the period that the claims
are incurred. All insurance-related benefits, losses, and expenses are reported
net of reinsurance ceded.
Future policy benefit reserves for universal life insurance and annuity
products are computed under a retrospective deposit method and represent policy
account balances before applicable surrender charges. Policy benefits and claims
that are charged to expense include benefit claims incurred in the period in
excess of related policy account balances. The weighted average interest
crediting rates for universal life products were 5.63 percent in 2001, 5.62
percent in 2000 and 5.67 percent in 1999. The range of interest crediting rates
for annuity products, excluding bonus interest payouts, was 3.00 to 7.16 percent
in 2001 and 4.00 to 7.16 percent in 2000 and 1999.
REINSURANCE
The Company enters into reinsurance agreements with other companies in the
normal course of business. The Company may assume reinsurance or cede
reinsurance to other companies. Premiums and expenses are reported net of
reinsurance ceded. The Company is contingently liable for the portion of the
policies reinsured under each of its existing reinsurance agreements in the
event the reinsurance companies are unable to pay their portion of any reinsured
claim. Management believes that any liability from this contingency is unlikely.
However, to limit the possibility of such losses, the Company evaluates the
financial condition of its reinsurers and monitors concentration of credit risk.
PARTICIPATING POLICIES
Participating policies entitle the policyowners to receive dividends based
on actual interest, mortality, morbidity, and expense experience for the related
policies. These dividends are distributed to the policyowners through an annual
dividend using current dividend scales which are approved by the board of
directors. Approximately 66 percent in 2001 and 100 percent in 2000 of
traditional life policies are currently paying dividends and traditional life
policies represent approximately 69 percent in 2001 and 65 percent in 2000 of
the Company's individual life policies in force (based on face amounts).
STOCK-BASED COMPENSATION
The Company accounts for stock based compensation in accordance with APB
Opinion 25 in its consolidated financial statements and has disclosed proforma
net income and earnings per share information as required by SFAS 123,
"Accounting for Stock-Based Compensation."
F-17
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GUARANTY FUND ASSESSMENTS
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyowners and claimants in the event of insolvency of
other life insurance companies. As of December 31, 2001 and 2000, the Company
has accrued for the gross amount of guaranty fund assessments for known
insolvencies net of estimated recoveries of premium tax offsets.
BENEFIT PLAN COSTS
The Company accounts for its pension benefits and other post retirement
benefits other than pensions, including medical and life insurance, using the
full accrual method.
INCOME TAXES
The Company and its non-life insurance subsidiaries file a consolidated
federal income tax return. The life insurance subsidiaries file separate federal
income tax returns. The separate return method is used to compute the Company's
provision for allocating federal income taxes. Deferred income tax assets and
liabilities are determined based on differences among the financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes all changes in stockholders' equity
during a period except those resulting from investments by and distributions to
stockholders. Other comprehensive income (loss) excludes net realized investment
gains included in net income which merely represent transfers from unrealized to
realized gains and losses. These amounts totaled ($14.8) million, ($16.0)
million and ($8.9) million in 2001, 2000 and 1999, respectively.
EARNINGS PER SHARE
Basic earnings per share of common stock are computed by dividing net
income by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share assumes the issuance of common shares
applicable to stock options and warrants and is calculated using the treasury
stock method.
TREASURY STOCK
The Company accounts for its treasury stock using the par value method.
Shares purchased for treasury are not retired and are reissued as needed. Common
stock and paid-in capital are presented net of treasury stock of $1.7 million
and $56.2 million, respectively, at December 31, 2001.
EMERGING ACCOUNTING MATTERS
SFAS 141 AND SFAS 142
In July 2001, the Financial Accounting Standards Board issued SFAS 141,
"Business Combinations," and SFAS 142, "Goodwill and Other Intangible Assets."
SFAS 141 requires the purchase method of accounting be used for all business
combinations initiated or completed after June 30, 2001. SFAS 141 also specifies
criteria intangible assets acquired in a purchase method business acquisition
must meet to be recognized apart from goodwill. SFAS 142 will require goodwill
and intangible assets with indefinite useful lives to no longer be amortized but
instead tested for impairment at least annually. In addition, a reassessment of
useful lives and residual values of all intangible assets will be required. Any
transitional impairment loss will
F-18
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
be recognized as the cumulative effect of a change in accounting principle in
the Company's consolidated statement of income as of January 1, 2002.
At December 31, 2001, the Company had unamortized goodwill of $195.5
million. Amortization expense related to goodwill was $8.3 million for 2001. The
Company does not anticipate a material impact to the consolidated financial
statements as a result of adopting SFAS 141 and 142. The Company will have one
year following adoption to determine the amount of any impairment.
BUSINESS RISKS
The Company operates in a business environment which is subject to various
risks and uncertainties. Such risks and uncertainties include interest rate
risk, legal and regulatory changes and default risk.
Interest rate risk is the potential for interest rates to change, which can
cause fluctuations in the value of investments. To the extent that fluctuations
in interest rates cause the duration of assets and liabilities to differ, the
Company may have to sell assets prior to their maturity and realize losses.
Interest rate exposure for the investment portfolio is managed through
asset/liability management techniques which attempt to match the duration of the
assets with the estimated duration of the liabilities. The Company also utilizes
derivative investment contracts to manage interest rate risk.
The potential also exists for changes in the legal or regulatory
environment in which the Company operates, which can create additional costs and
expenses not anticipated by the Company in pricing its products. In other words,
regulatory initiatives or new legal theories may create costs for the Company
beyond those recorded in the financial statements. The Company mitigates this
risk by operating in a geographically diverse area, which reduces its exposure
to any single jurisdiction, closely monitoring the regulatory environment to
anticipate changes and by using underwriting practices which identify and
minimize the potential adverse impact of this risk.
Default risk is the risk that issuers of securities owned by the Company
may default or that other parties, including reinsurers, may not be able to pay
amounts due the Company. The Company attempts to minimize this risk by adhering
to a conservative investment strategy, holding a well diversified portfolio of
assets to minimize concentrations, maintaining sound reinsurance and credit and
collection policies and providing allowances or reserves for any amounts deemed
uncollectible.
F-19
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) CLOSED BLOCK
The Closed Block is presented on a pre-tax basis and accordingly does not
include current or deferred taxes. Summarized financial information of the
Closed Block as of December 31, 2001, 2000 and 1999 and for the years then ended
is as follows:
DECEMBER 31,
--------------------------------------
2001 2000 1999
---------- ---------- ----------
($ IN THOUSANDS)
LIABILITIES:
Future life and annuity policy benefits............... $2,835,423 $1,654,784 $1,581,923
Policyowner funds..................................... 4,656 5,081 5,445
Accrued expenses and other liabilities................ 69,678 36,621 3,549
Dividends payable to policyowners..................... 154,139 138,991 136,553
Policy and contract claims............................ 8,843 5,495 8,130
Policyowner dividend obligation....................... 61,486 24,916 --
---------- ---------- ----------
Total Liabilities................................ 3,134,225 1,865,888 1,735,600
---------- ---------- ----------
ASSETS:
Fixed maturity securities (amortized cost
2001 -- $1,785,042; 2000 -- $1,182,324;
1999 -- $1,133,717)................................. 1,829,060 1,191,592 1,087,672
Loans................................................. 105,901 -- --
Policy loans.......................................... 363,981 201,092 188,035
Other investments..................................... 4,653 2,934 602
Cash and cash equivalents............................. 18,382 3,025 5,910
Accrued investment income............................. 32,396 16,811 14,949
Premiums and fees receivable.......................... 22,414 7,062 957
Other assets.......................................... 41,827 41,885 17,356
---------- ---------- ----------
Total Assets..................................... 2,418,614 1,464,401 1,315,481
---------- ---------- ----------
Maximum future earnings to be recognized from assets
and liabilities of the Closed Block................. $ 715,611 $ 401,487 $ 420,119
========== ========== ==========
CHANGE IN POLICYOWNER DIVIDEND OBLIGATION:
Balance at beginning of year.......................... $ 24,916 $ -- $ 57,957
Impact on net income before income taxes.............. 1,820 (783) 806
Unrealized investment gains (losses).................. 34,750 25,699 (58,763)
---------- ---------- ----------
Balance at end of year................................ $ 61,486 $ 24,916 $ --
========== ========== ==========
OPERATIONS:
Insurance premiums.................................... $ 220,291 $ 185,350 $ 189,444
Universal life and annuity product charges............ 12,200 12,485 12,463
Net investment income................................. 132,402 97,952 87,780
Realized gains (losses) on investments................ 8,719 (695) (380)
Policyowner benefits.................................. (239,688) (200,850) (193,482)
Underwriting, acquisition and other expenses.......... (5,958) (1,415) (4,408)
Dividends to policyowners............................. (91,609) (68,324) (66,251)
---------- ---------- ----------
Contribution from the Closed Block before income
taxes............................................... $ 36,357 $ 24,503 $ 25,166
========== ========== ==========
F-20
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31,
--------------------------------------
2001 2000 1999
---------- ---------- ----------
($ IN THOUSANDS)
MAXIMUM FUTURE EARNINGS FROM CLOSED BLOCK ASSETS AND
LIABILITIES:
Beginning of year..................................... $ 401,487 $ 420,119 $ 409,701
Pretax contribution from the Closed Block............. (36,357) (24,503) (25,166)
Federal income taxes funded by the Closed Block....... 5,336 21,492 5,970
Acquisition of Minority Interest adjustment........... -- 13,993 --
Establishment of ILICO Closed Block................... 345,145 -- --
Unrealized losses limited to zero policyowner dividend
obligation.......................................... -- (29,614) 29,614
---------- ---------- ----------
Balance at end of year................................ $ 715,611 $ 401,487 $ 420,119
========== ========== ==========
(3) INVESTMENTS
The Company's investments at December 31, 2001 and 2000 classified as
securities available-for-sale and securities held for trading purposes are
summarized as follows (the amortized cost for securities held for trading
purposes represents carrying value):
2001
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
($ IN THOUSANDS)
FIXED MATURITY SECURITIES AVAILABLE-FOR-SALE:
Corporate bonds............................. $ 7,236,357 $228,831 $110,355 $ 7,354,833
U.S. government bonds....................... 484,923 21,378 277 506,024
State and political subdivisions............ 45,729 2,619 -- 48,348
Foreign government bonds.................... 128,785 7,467 2,083 134,169
Asset-backed bonds.......................... 773,648 14,897 44,866 743,679
Mortgage-backed bonds....................... 2,057,230 42,578 4,940 2,094,868
Redeemable preferred stock.................. 174,580 1,810 20,886 155,504
----------- -------- -------- -----------
Total fixed maturities
available-for-sale..................... 10,901,252 319,580 183,407 11,037,425
----------- -------- -------- -----------
FIXED MATURITY SECURITIES HELD FOR TRADING
PURPOSES:
Corporate bonds............................. 1,869,228 -- -- 1,869,228
U.S. government bonds....................... 267,536 -- -- 267,536
Asset-backed bonds.......................... 2,308 -- -- 2,308
Mortgage-backed bonds....................... 34,908 -- -- 34,908
Redeemable preferred stock.................. 1,126 -- -- 1,126
----------- -------- -------- -----------
Total fixed maturities held for trading
purposes............................... 2,175,106 -- -- 2,175,106
----------- -------- -------- -----------
Total fixed maturities................... $13,076,358 $319,580 $183,407 $13,212,531
=========== ======== ======== ===========
Equity securities available-for-sale.......... $ 55,455 $ 839 $ 429 $ 55,865
Equity securities held for trading purposes... 12,013 -- -- 12,013
----------- -------- -------- -----------
Total equity securities.................. $ 67,468 $ 839 $ 429 $ 67,878
=========== ======== ======== ===========
Short-term investments available-for-sale..... $ 14,829 $ 52 $ -- $ 14,881
Short-term investments held for trading
purposes.................................... 4,212 -- -- 4,212
----------- -------- -------- -----------
Total short-term investments............. $ 19,041 $ 52 $ -- $ 19,093
=========== ======== ======== ===========
F-21
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
($ IN THOUSANDS)
Fixed maturity securities available-for-sale:
Corporate bonds............................... $5,216,096 $ 91,798 $109,446 $5,198,448
U.S. government bonds......................... 464,984 12,448 632 476,800
State and political subdivisions.............. 46,494 770 1 47,263
Foreign government bonds...................... 152,472 2,492 3,931 151,033
Asset-backed bonds............................ 664,188 5,975 23,637 646,526
Mortgage-backed bonds......................... 1,522,965 18,864 7,471 1,534,358
Redeemable preferred stock.................... 217,042 1,099 10,922 207,219
---------- -------- -------- ----------
Total fixed maturities
available-for-sale....................... $8,284,241 $133,446 $156,040 $8,261,647
========== ======== ======== ==========
Equity securities available-for-sale............ $ 152,835 $ 816 $ 748 $ 152,903
========== ======== ======== ==========
Short-term investments available-for-sale....... $ 22,508 $ 20 $ 1,667 $ 20,861
========== ======== ======== ==========
The amortized cost and estimated fair value of investments in fixed
maturity securities at December 31, 2001, are summarized by stated maturity as
follows:
AMORTIZED FAIR
COST VALUE
----------- -----------
($ IN THOUSANDS)
Fixed maturities available-for-sale:
Due in 2002............................................... $ 251,471 $ 255,313
Due in 2003 - 2007........................................ 3,680,458 3,774,595
Due in 2008 - 2012........................................ 2,831,873 2,837,983
Due after 2012............................................ 2,080,220 2,074,666
Mortgage-backed securities................................ 2,057,230 2,094,868
----------- -----------
$10,901,252 $11,037,425
=========== ===========
Fixed maturities held for trading purposes:
Due in 2002............................................... $ 36,775 $ 36,775
Due in 2003 - 2007........................................ 749,505 749,505
Due in 2008 - 2012........................................ 459,337 459,337
Due after 2012............................................ 894,581 894,581
Mortgage-backed securities................................ 34,908 34,908
----------- -----------
$ 2,175,106 $ 2,175,106
=========== ===========
F-22
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The foregoing data is based on the stated maturities of the securities.
Actual maturities will differ for some securities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Major categories of investment income are summarized as follows:
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
($ IN THOUSANDS)
Fixed maturity securities................................... $760,670 $599,331 $568,975
Equity securities........................................... 4,546 7,795 2,379
Loans....................................................... 64,723 43,527 56,002
Real estate................................................. 53 36 1,528
Policy loans................................................ 29,004 19,833 17,598
Other....................................................... 27,599 39,990 28,228
-------- -------- --------
Gross investment income..................................... 886,595 710,512 674,710
Investment expenses......................................... 13,421 10,987 9,313
-------- -------- --------
Net investment income....................................... $873,174 $699,525 $665,397
======== ======== ========
Realized and unrealized gains and losses on investments and provisions for
loan losses are summarized as follows:
YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
-------- -------- --------
($ IN THOUSANDS)
Securities available-for-sale:
Fixed maturity securities
Gross realized gains.................................. $ 52,101 $ 33,606 $ 58,237
Gross realized losses................................. (75,295) (52,524) (46,367)
Equity securities
Gross realized gains.................................. 833 1 3,841
Gross realized losses................................. (12) (1,492) (18,296)
Other investments.......................................... (9,313) 8,869 (4,287)
Provision for loan losses.................................. 1,106 2,225 4,397
Realized/unrealized gains (losses) on option assets........ (54,186) (19,660) 1,073
-------- -------- --------
Realized/unrealized gains (losses) on securities available
for sale................................................. (84,766) (28,975) (1,402)
Realized/unrealized (losses) on securities held for trading
purposes................................................. (5,863) -- --
-------- -------- --------
Total................................................. $(90,629) $(28,975) $ (1,402)
======== ======== ========
The unrealized appreciation (depreciation) on invested assets
available-for-sale is reported as a separate component of stockholders' equity,
reduced by adjustments to deferred acquisition costs, VOBA, future life and
annuity policy benefits, and a provision for deferred income taxes. Unrealized
appreciation (depreciation) attributable to the Closed Block amounting to $44.0
million at December 31, 2001, $9.3 million at December 31, 2000 and ($16.4)
million at December 31, 1999 have been included in dividends payable to
policyowners.
F-23
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the components of the net unrealized appreciation
(depreciation) on invested assets carried at fair value and other components of
accumulated other comprehensive income is as follows:
DECEMBER 31,
-------------------
2001 2000
-------- --------
($ IN THOUSANDS)
Unrealized appreciation (depreciation):
Securities available-for-sale:
Fixed maturity securities.............................. $136,173 $(22,594)
Equity securities...................................... 410 68
Short-term investments................................. 52 (1,647)
Other investments......................................... (9,128) --
Deferred policy acquisition costs and VOBA.................. (60,209) 21,904
Policy reserves and policyowner funds....................... (203) (14,913)
Deferred income taxes....................................... (6,821) 9,262
Policyowner dividend obligation............................. (44,018) (9,268)
Minimum pension liability adjustment........................ (3,587) --
-------- --------
$ 12,669 $(17,188)
======== ========
The change in unrealized appreciation (depreciation) on fixed maturity
securities was an increase of $169.4 million, an increase of $296.5 million and
a decrease of $462.7 million for the years ended December 31, 2001, 2000 and
1999, respectively; the corresponding amounts for equity securities were a $0.3
million increase, a $0.8 million decrease and $16.1 million increase,
respectively.
At December 31, 2001, investments in fixed maturity securities with a
carrying amount of $55.6 million were on deposit with state insurance
departments to satisfy regulatory requirements.
No investment in any person or its affiliates exceeded 10 percent of
stockholders' equity at December 31, 2001.
Other investments include investments which are carried on the equity
method of accounting. Distributions from such equity method investments amounted
to $7.7 million, $4.4 million and $1.8 million in 2001, 2000 and 1999,
respectively.
(4) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted SFAS 133 which requires that
all derivative instruments, including certain derivative instruments embedded in
other contracts, be reported on the balance sheet at fair value. Accounting for
gains and losses resulting from changes in the values of derivatives is
dependent upon the use of the derivative and its qualification for special hedge
accounting. In accordance with the provisions of SFAS 133, the Company recorded
a transition adjustment as of January 1, 2001 upon adoption of the standard to
recognize its derivative instruments at fair value resulting in a pre-tax
reduction to income of $12.4 million ($8.2 million after-tax) and an increase to
accumulated other comprehensive income (AOCI) of $2.7 million, net of tax. The
reduction to income, which is classified as a "cumulative effect of change in
accounting for derivatives, net of tax" in the consolidated statements of
income, is attributable to losses on basis swaps that were natural hedges and
losses on interest rate swaps reclassified from AOCI that have been redesignated
as cash flow hedges of a floating rate funding agreement liability effective
January 1, 2001. In addition, the reduction to income includes adjustments to
fair value for options being used as natural hedges of embedded options
contained within equity-indexed annuity products. The increase in AOCI, which is
classified as "change in accounting for derivatives" in the consolidated
statements of comprehensive income,
F-24
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
is attributable to the reclassification of the interest rate swap's fair value
adjustment from AOCI to the consolidated statements of income.
Initially, upon adoption of the new derivative accounting requirements, and
prospectively, on the date a derivative contract is entered into, the Company
designates the derivative as either (1) a hedge of a recognized asset or
liability or an unrecognized firm commitment (a fair value hedge), (2) a hedge
of a forecasted transaction or of the variability of cash flows to be received
or paid related to a recognized asset or liability (a cash flow hedge), or (3) a
natural hedging instrument whose change in fair value is recognized to act as an
economic hedge against changes in the values of the hedged item and which does
not meet the accounting hedge criteria for SFAS 133 (a natural hedge).
For fair value hedges, both the effective and ineffective portion of the
changes in the fair value of the derivative, along with the gain or loss on the
hedged item that is attributable to the hedged risk, are recorded in earnings
and reported net in the consolidated statements of income. The effective portion
of the changes in the fair value of a derivative that is designated as a cash
flow hedge is recorded in AOCI. When the hedged cash transaction is realized,
the gain or loss included in AOCI is reported net in the consolidated statements
of income with the hedged cash transaction item. In addition, the ineffective
portion of the changes in the fair value of derivatives designated as cash flow
hedges are reported in net investment income in the consolidated statements of
income. For derivatives designated as a natural hedge, changes in fair value are
classified as realized/unrealized gains (losses) on investments in the
consolidated statement of income.
The Company formally documents its hedge relationships, including
identification of the hedging instruments and the hedged items, as well as its
risk management objectives and strategies for undertaking the hedge transaction.
Free standing derivatives are recorded in the consolidated balance sheets at
fair value in other assets and option derivatives embedded in equity-indexed
annuity products are marked to fair value and classified in the consolidated
balance sheets as "policy reserves and policyowner funds." This process includes
linking derivatives that are designated as hedges of specific assets,
liabilities, firm commitments or forecasted transactions. The Company also
formally assesses at inception and at least quarterly thereafter, whether the
derivatives that are used in hedging transactions, other than natural hedges,
are highly effective in offsetting changes in either the fair value or cash
flows of the hedged item. When a determination is made that a derivative ceases
to be a highly effective hedge, the Company will discontinue hedge accounting
for the hedge.
To manage interest rate risk, the Company has entered into interest rate
swaps that effectively fix the interest payments of a floating rate funding
agreement liability and other interest swaps that hedge market risk from fixed
income securities. These interest rate swap agreements are accounted for as cash
flow and fair value hedges, respectively. Credit default swaps are coupled with
a bond to synthetically create an investment cheaper than the equivalent
instrument traded in the cash market.
The Company has equity-indexed annuity products that guarantee the return
of principal to the customer and credits interest based on a percentage of the
gain in the Standard & Poor's 500 Composite Stock Price Index(R)(S&P 500 Index).
A portion of the premium from each customer is invested in investment grade
fixed income securities to cover the minimum guaranteed value due the customer
at the end of the term. A portion of the premium is used to purchase S&P 500
Index call options to hedge the growth in interest credited to the customer as a
direct result of increases in the S&P 500 Index. The amounts to be paid or
received pursuant to these agreements are accrued and recognized in income over
the life of the agreements. Both call options held by the Company and the
options embedded in the policy, which the Company has designated as a natural
hedge, are valued at fair value. The change in fair value for the call options
is included in realized/unrealized gains (losses) on investments and the change
in fair value of the embedded options is included in policyowner benefits in the
consolidated statements of income.
The Company has certain fixed annuity products that credit interest based
on a total return strategy. Under the total return strategy, the policyowner is
allowed to allocate their premium payments to different
F-25
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
asset classes within the Company's general account assets to which the selected
strategy is linked, less certain charges. The total return adjustment is paid
when a policyowner accesses the funds. The Company guarantees a minimum return
of premium plus approximately 3% interest per annum over the life of the
contract. The general account assets backing the total return strategy of these
products are fixed maturity securities and are designated by the Company as held
for trading. Both the trading securities held by the Company and the annuity
contracts are valued at fair value. The change in fair value for the trading
securities is included in realized/unrealized gains (losses) on investments and
the change in fair value of the annuity contracts is included in policyowner
benefits in the consolidated statements of income.
During 2001, realized/unrealized gains (losses) on investments included an
unrealized loss of $54.2 million from the change in fair value on call options
used as a natural hedge of embedded options within equity-indexed annuities and
a $5.9 million unrealized loss from the change in fair value on the trading
securities backing the total return strategy products. Policyowner benefits
included an offsetting adjustment from fair value changes in options embedded
within the equity-indexed products and fair value changes on total return
strategy annuity contracts totaling $52.7 million. In addition, basis swaps were
terminated during 2001 and an increase in fair value of $1.8 million from the
fair value change in interest rate swaps used to hedge the floating rate funding
agreement liability. The Company estimates that $0.3 million of derivative
losses included in AOCI will be reclassified into earnings within the next
twelve months. The ineffectiveness of the interest rate swap cash flow hedge was
not considered significant for 2001.
The following table summarizes the income (loss) impact of adopting SFAS
133 in the cumulative effect of change in accounting for derivatives as of
January 1, 2001 and the market value adjustment on trading securities and
derivatives for 2001:
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
FOR DERIVATIVES ON YEAR ENDED
JANUARY 1, 2001 DECEMBER 31, 2001
-------------------- -----------------
Basis swaps (A)........................................... $ (921) $ --
Separate account swap (B)................................. (4,100) --
Fixed maturity securities held for trading................ -- (5,863)
Options on equity-indexed annuities....................... (4,056) (54,186)
Equity-indexed and total return strategy fixed annuity
liabilities............................................. (1,335) 52,747
Deferred (loss) (C)....................................... (899) --
Deferred policy acquisition cost amortization impact of
net annuity adjustments................................. (1,127) (1,664)
-------- --------
Pre-tax total........................................... (12,438) (8,966)
Income taxes............................................ 4,202 3,138
-------- --------
After-tax total......................................... $ (8,236) $ (5,828)
======== ========
---------------
(A) Terminated during 2001.
(B) Future adjustments are through AOCI.
(C) Balance eliminated in transition adjustment.
F-26
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The cumulative effect of change in accounting for derivatives per common
share for 2001 was:
Basic....................................................... $0.22
Diluted..................................................... $0.22
Weighted average common shares outstanding for 2001 were:
Basic.................................................... 36,949,198
Diluted.................................................. 37,453,428
The Company's outstanding derivative positions shown in notional or
contract amounts, along with their carrying value and estimated fair values, are
summarized as follows:
DECEMBER 31, 2001
--------------------------------
NOTIONAL CARRYING FAIR
AMOUNT VALUE VALUE
---------- -------- --------
($ IN THOUSANDS)
Interest rate swaps......................................... $ 218,500 $(10,343) $(10,343)
Credit default swaps........................................ 100,000 (218) (218)
Options..................................................... 822,826 72,136 72,136
---------- -------- --------
$1,141,326 $ 61,575 $ 61,575
========== ======== ========
DECEMBER 31, 2000
-----------------------------
NOTIONAL CARRYING FAIR
AMOUNT VALUE VALUE
-------- -------- -------
($ IN THOUSANDS)
Interest rate swaps......................................... $385,000 $ (4,738) $(5,984)
Options..................................................... 572,743 101,397 97,340
-------- -------- -------
$957,743 $ 96,659 $91,356
======== ======== =======
In 2000 and 1999, prior to the adoption of SFAS 133, the amounts to be
received or paid pursuant to interest swap agreements were accrued and
recognized in the consolidated statements of income through an adjustment to
investment income over the life of the agreements. The net effect on income from
amortization and interest paid or received was none and a decrease of $1.5
million in 2000 and 1999, respectively. Gains or losses realized on closed or
terminated agreements accounted for as hedges were deferred and amortized to
investment income on a constant yield basis over the shorter of the life of the
agreements or the expected remaining life of the underlying assets or
liabilities. The amounts to be received or paid pursuant to call option
agreements were accrued and recognized as an adjustment to income over the life
of the agreements.
The following table shows unrealized gains and losses on derivative
products prior to adoption of SFAS 133:
DECEMBER 31, 2000
-----------------------------------------------
NET
TOTAL UNREALIZED
NOTIONAL UNREALIZED UNREALIZED GAINS
VALUE GAINS (LOSSES) (LOSSES)
-------- ---------- ---------- ----------
($ IN THOUSANDS)
Interest rate swaps................................ $385,000 $-- $(1,246) $(1,246)
Options............................................ 572,743 -- (4,057) (4,057)
-------- --- ------- -------
$957,743 $-- $(5,303) $(5,303)
======== === ======= =======
F-27
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows the maturities of derivative products as of
December 31, 2001:
MATURITY SCHEDULE BY YEAR FOR DERIVATIVE PRODUCTS
--------------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
-------- ------- -------- ------- ------- ------- ------- ------ ------- -------
($ IN THOUSANDS)
Interest rate swaps:
Notional amount.... $ -- $ -- $192,500 $ -- $ -- $ -- $20,000 $6,000 $ -- $ --
Weighted average:
Receive rate (A)... 1.952% 1.952% 1.952% 1.953% 1.953% 1.953% 1.953% 2.144% -- --
Pay rate (B)....... 6.108% 6.108% 6.108% 5.038% 5.038% 5.038% 5.038% 5.133% -- --
Credit default swaps:
Notional amount.... $ 10,000 $30,000 $ 50,000 $10,000 $ -- $ -- $ -- $ -- $ -- $ --
Weighted average:
Receive rate (C)... 0.820% 0.830% 0.860% 0.960% -- -- -- -- -- --
Options:
Notional amount.... $614,552 $41,297 $ 48,346 $39,326 $14,000 $10,200 $ 5,330 $5,905 $20,420 $23,450
---------------
(A) The actual variable rates in the agreements are based on one-month LIBOR
and the table assumes that such rates will remain constant at December 31,
2001 levels. To the extent that actual rates change, the variable interest
rate information will change accordingly.
(B) The actual rates in the agreement are fixed.
(C) The actual rates in the agreements are fixed based on the amount of credit
protection granted.
(5) MORTGAGE LOANS
Mortgage loans consisted of the following:
DECEMBER 31,
-------------------
2001 2000
-------- --------
($ IN THOUSANDS)
Single-family real estate................................... $ 8,410 $ 31,762
Multi-family real estate.................................... 60,591 40,366
Commercial real estate...................................... 891,351 478,221
Other....................................................... 1,430 179
-------- --------
961,782 550,528
Allowance for credit losses................................. (17,250) (15,671)
-------- --------
$944,532 $534,857
======== ========
The Company manages its credit risk associated with these loans by
diversifying its mortgage portfolio by property type and geographic location and
by seeking favorable loan to value ratios on secured properties. At December 31,
2001, the states with the highest concentration of mortgage loans were Florida,
Texas and Ohio with principal balances of $134.8 million, $126.6 million and
$73.0 million, respectively.
At December 31, 2001 and 2000, the Company's investment in loans included
$1.1 million and $0.9 million, respectively, in loans that are considered to be
impaired, for which the related allowance for credit losses are $0.8 million and
$0.9 million, respectively. The average recorded investment in impaired loans
during the years ended December 31, 2001, and 2000 was $1.0 million and $0.9
million, respectively. For the years ended December 31, 2001, 2000, and 1999 the
Company recorded $0.1 million, $0.2 million and $2.1 million, respectively, in
interest income on those impaired loans.
The amounts the Company will ultimately realize from these loans could
differ materially from their carrying values because of future developments
affecting the underlying collateral or the borrower's ability to
F-28
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
repay the loans and leases. As of December 31, 2001, there were no material
commitments to lend additional funds to customers whose loans were classified as
nonaccrual or restructured.
No mortgage loan on any one individual property exceeded $8.0 million at
December 31, 2001.
Provisions for losses are summarized as follows:
YEARS ENDED DECEMBER 31,
---------------------------
2001 2000 1999
------- ------- -------
($ IN THOUSANDS)
Balance at beginning of year................................ $15,671 $18,046 $22,299
Charge offs, net of recoveries.............................. (3,690) (150) 144
Acquired during the year.................................... 6,375 -- --
Provision for losses........................................ (1,106) (2,225) (4,397)
------- ------- -------
Balance at end of year...................................... $17,250 $15,671 $18,046
======= ======= =======
Write downs on loans sold or transferred to real estate fluctuate between
periods in relation to foreclosure activity and the related underlying
collateral values.
(6) DEFERRED POLICY ACQUISITION COSTS
A summary of the policy acquisition costs deferred and amortized are as
follows:
YEARS ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
-------- --------- --------
($ IN THOUSANDS)
Balance at beginning of year................................ $404,143 $ 534,993 $437,253
Policy acquisition costs deferred........................... 318,653 193,073 153,253
Policy acquisition costs amortized.......................... (49,379) (50,776) (55,513)
Amortization of cumulative effect of change in accounting
for derivatives........................................... (727) -- --
Acquisition of minority interest............................ -- (273,147) --
-------- --------- --------
672,690 404,143 534,993
Unrealized (gain) loss on available-for-sale securities..... (30,010) 33,169 91,811
-------- --------- --------
Balance at end of year...................................... $642,680 $ 437,312 $626,804
======== ========= ========
F-29
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) VALUE OF BUSINESS ACQUIRED
A summary of VOBA established and amortized is as follows:
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
($ IN THOUSANDS)
Balance at beginning of the year............................ $479,695 $202,392 $233,082
VOBA established during the year............................ 6,422 1,308 1,914
Amortization of VOBA asset.................................. (83,520) (41,974) (32,604)
Amortization of cumulative effect of change in accounting
for derivatives........................................... (400) -- --
Acquired during the year.................................... 211,831 -- --
Acquisition of minority interest............................ -- 317,969 --
-------- -------- --------
614,028 479,695 202,392
Unrealized (gain) loss on available-for-sale securities..... (30,199) (11,265) 28,150
-------- -------- --------
Balance at end of year...................................... $583,829 $468,430 $230,542
======== ======== ========
Amortization is recognized in proportion to expected future gross profits
over a 20 year period and is based on the average interest crediting rates which
range from 1.37% to 7.61% for 2001 and over the next five years. Interest
accrued on the unamortized VOBA amounted to $28.5 million, $15.4 million and
$13.0 million in 2001, 2000 and 1999, respectively, which is netted with the
VOBA amortization expense. The estimated amortization for the next five years is
as follows ($ in thousands):
2002................................................. $77,967
2003................................................. 72,934
2004................................................. 63,788
2005................................................. 55,979
2006................................................. 48,218
(8) NOTES, CONTRACTS PAYABLE AND CAPITAL SECURITIES
Notes and contracts payable are as follows:
DECEMBER 31,
--------------------
2001 2000
-------- --------
($ IN THOUSANDS)
Federal Home Loan Bank community investment long-term
advances with a weighted average interest rate of 6.37%
and 6.28% at December 31, 2001 and 2000, respectively,
maturing at various dates through June, 2012 (A).......... $ 14,369 $ 15,627
Senior notes bearing interest at 6.95% due June, 2005....... 125,000 125,000
Revolving credit agreement (B).............................. 150,000 75,000
Surplus notes bearing interest at 8.66% due on April 11,
2011 (C).................................................. 25,000 --
Note payable to a bank bearing interest at 7.24% due March,
2004...................................................... 1,205 --
-------- --------
$315,574 $215,627
======== ========
---------------
(A) The Company has multiple credit arrangements with the Federal Home Loan
Bank (FHLB). In addition to the long-term advances disclosed above, the
Company is eligible to borrow under variable-rate short term fed funds
arrangements of which no amount was outstanding at December 31, 2001. The
carrying
F-30
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value of the securities pledged to the FHLB under all agreements was $15.1
million at December 31, 2001.
(B) The revolving credit agreement provides for a maximum borrowing of $175
million with the balance maturing in December 2004. This agreement replaced
a $150 million revolving credit agreement in 2001. The interest rate is
variable, however, the Company may elect to fix the rate for periods from
30 days to six months. The loan agreement contains various financial and
operating covenants which, among other things, limit future indebtedness
and restrict the amount of future dividend payments.
(C) Payment of interest and principal on the surplus note, may only be paid
from ILIC's earnings, subject to approval by the Indiana Department of
Insurance.
Capital securities consist of the following:
DECEMBER 31,
--------------------
2001 2000
-------- --------
($ IN THOUSANDS)
AmerUs Capital I 8.85% Capital Securities Series A due
February 1, 2027 (A)...................................... $ 68,900 $ 68,900
AmerUs Capital II 7.00% Adjustable Conversion-rate Equity
Security Units are due July 27, 2003 (B).................. 154 128,791
-------- --------
$ 69,054 $197,691
======== ========
---------------
(A) The Capital Securities were issued through a wholly-owned subsidiary trust,
AmerUs Capital I. The sole asset of the trust is the junior subordinated
debentures of the Company in the principal amount of $88.66 million with
interest at 8.85% maturing February 1, 2027. The Company has fully and
unconditionally guaranteed the obligation of the trust under the Capital
Securities and is obligated to mandatorily redeem the securities on
February 1, 2027. The Company may prepay the securities at anytime after
February 1, 2007.
(B) The Adjustable Conversion-rate Equity Security Units (ACES) were issued
through a wholly-owned subsidiary trust, AmerUs Capital II. Each unit
consisted of a forward common stock purchase contract for a share at a
price of $31.5625 per share on July 27, 2001, and a quarterly income
preferred security bearing interest at 6.86% and due July 27, 2003. On July
27, 2001, the forward common stock purchase contract component of the
Company's ACES units matured. In lieu of paying cash to satisfy their
purchase obligation, the ACES unit holders could surrender the preferred
security component of the ACES unit. Of the 4,080,500 ACES units
outstanding, 4,075,625 were surrendered, and the remaining ACES unit
holders submitted cash of approximately $0.1 million to purchase Company
common stock. The number of shares of common stock to be issued by the
Company was based upon the average price of the Company's common stock for
the twenty consecutive trading days ending on July 26, 2001, compared to
the stated ACES unit amount of $31.5625. As a result of this, the Company
issued approximately 3.8 million shares of common stock and retired
approximately $128 million of ACES debt. The Company is obligated to
mandatorily redeem the capital securities on July 27, 2003. At December 31,
2001, 4,875 units of quarterly income preferred securities were
outstanding.
F-31
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of debt and capital securities are as follows for each of the five
years ending December 31:
($ IN THOUSANDS)
----------------
2002........................................................ $ 498
2003........................................................ 686
2004........................................................ 151,773
2005........................................................ 125,606
2006........................................................ 647
Thereafter.................................................. 105,418
--------
$384,628
========
(9) INCOME TAXES
Comprehensive federal income tax expense (benefit) is summarized as
follows:
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
------- ------- --------
($ IN THOUSANDS)
Income tax expense (benefit)
Continuing operations.................................... $39,522 $42,516 $ 33,654
Discontinued operations.................................. 1,247 500 1,766
Other comprehensive income............................... 14,645 37,875 (67,822)
Cumulative effect of change in accounting................ 4,202 -- --
------- ------- --------
$59,616 $80,891 $(32,402)
======= ======= ========
The effective income tax rate on pre-tax income varies from the prevailing
corporate federal income tax rate and is summarized as follows:
YEARS ENDED DECEMBER 31,
--------------------------
2001 2000 1999
------ ------ ------
Corporate federal income tax rate........................... 35.00% 35.00% 35.00%
Acquisitions costs and reorganization expenses.............. 0.64 3.91 2.59
Net benefit of tax credits.................................. (1.59) (2.14) (6.38)
Goodwill amortization....................................... 2.37 2.51 2.72
Dividend received deduction................................. (1.23) (2.57) (0.13)
Tax exempt income........................................... (2.50) (0.42) (0.03)
Other items, net............................................ 0.57 0.58 0.68
------ ------ ------
Effective tax rate........................................ 33.26% 36.87% 34.45%
====== ====== ======
The Company's federal income tax expense (benefit) from continuing
operations is summarized as follows:
YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
-------- -------- --------
($ IN THOUSANDS)
Current.................................................. $ 43,661 $ 21,825 $ 19,249
Deferred................................................. (4,139) 20,691 14,405
-------- -------- --------
Total income tax expense............................... $ 39,522 $ 42,516 $ 33,654
======== ======== ========
F-32
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The significant components of net deferred income tax assets (liabilities)
are summarized as follows:
DECEMBER 31,
--------------------
2001 2000
-------- --------
($ IN THOUSANDS)
Deferred income tax assets:
Policy reserves, policyowner funds and dividends.......... $562,970 $223,676
Deferred policy acquisition costs and VOBA related to
unrealized appreciation................................ 21,074 --
Net unrealized depreciation on available-for-sale
securities and investments reflected in AOCI........... -- 16,928
Employee benefits and deferred compensation............... 25,431 9,846
Credit carryover.......................................... 35,647 7,067
Other invested assets..................................... 4,566 7,270
Unearned income........................................... 10,125 8,752
Other..................................................... 9,775 5,297
-------- --------
Total gross deferred income tax asset.................. 669,588 278,836
Valuation allowance.................................... 15,773 --
-------- --------
653,815 278,836
-------- --------
Deferred income tax liabilities:
Deferred policy acquisition costs......................... (139,317) (86,715)
Net unrealized appreciation on available-for-sale
securities and investments reflected in AOCI........... (27,895) --
Deferred policy acquisition costs and VOBA related to
unrealized depreciation................................ -- (7,666)
Value of business acquired................................ (214,910) (167,782)
Reinsurance receivables................................... (258,491) (2,285)
Other..................................................... (1,062) (17,048)
-------- --------
Total gross deferred income tax liability.............. (641,675) (281,496)
-------- --------
Net deferred income tax asset (liability).............. $ 12,140 $ (2,660)
======== ========
The Company is required to establish a "valuation allowance" for any
portion of the deferred tax asset that management believes will not be realized.
A valuation allowance has been established at December 31, 2001 for certain
credit carryovers which may not be realized.
Federal income tax returns for the Company for years through 1992 are
closed to further assessment of taxes. The Internal Revenue Service is examining
federal income tax returns of the Company for 1993 through 1998. Management
believes adequate provisions have been made for any additional taxes which may
become due with respect to open years.
(10) EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PLANS
The Company has a defined benefit pension plan which covered substantially
all of the Company's employees. The plan provided for benefits based upon years
of service and the employee's compensation. The Company froze the plan effective
December 31, 1995. Effective January 1, 1996, the plan was replaced by a defined
contribution savings and retirement plan which also replaced the Company's
defined contribution pension plans.
In addition, ILICO has a noncontributory defined benefit pension plan,
which generally covered all qualified employees that had attained the age of
twenty-one. Benefits were based on years of service and
F-33
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation levels during employment. All plan assets consisted primarily of
deposit administration funds and group annuity contracts held by ILICO. The
Company froze the plan effective December 31, 2001 and merged this plan into the
Company's defined benefit pension plan. The Company is filing a request with the
IRS for approval to offer ILICO employees distribution options under a qualified
spin-off plan. Effective January 1, 2002, the plan participants are included in
the Company's defined contribution savings and retirement plan.
The plan's funded status, reconciled to amounts recognized in the
consolidated financial statements is as follows:
DECEMBER 31,
--------------------
2001 2000
-------- --------
($ IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of year................... $ 33,387 $ 32,038
Service cost.............................................. 1,035 --
Interest cost............................................. 4,154 2,455
Actuarial loss............................................ 3,885 1,640
Addition for ILICO plan in May 2001....................... 40,232 --
Actual benefits paid...................................... (4,074) (2,746)
-------- --------
Benefit obligation at end of year...................... $ 78,619 $ 33,387
======== ========
Change in plan assets:
Fair value of plan assets at beginning of year............ $ 38,004 $ 36,450
Actual return on plan assets.............................. 5,119 4,151
Addition for ILICO plan in May 2001....................... 29,183 --
Company contribution...................................... 317 149
Benefits paid and transfers............................... (4,073) (2,746)
-------- --------
Fair value of plan assets at end of year............... $ 68,550 $ 38,004
======== ========
Reconciliation of funded status
Accumulated benefit obligation............................ $(78,619) $(33,387)
Projected benefit obligation.............................. (78,619) (33,387)
Market value of plan assets............................... 68,550 38,004
-------- --------
Funded status............................................. (10,069) 4,617
Unrecognized transition obligation........................ (7) (7)
Unrecognized prior service cost........................... 342 293
Unrecognized net loss..................................... 3,735 904
-------- --------
Prepaid (accrued) benefit cost............................ $ (5,999) $ 5,807
======== ========
Amounts recognized in the consolidated balance sheet consist
of:
Liabilities
Accrued pension cost................................... $ (7,787) $ (3,283)
Additional minimum liability........................... (4,070) --
Assets
Prepaid pension cost................................... 1,788 9,090
Intangible asset....................................... 483 --
Accumulated other comprehensive income.................... 3,587 --
-------- --------
Net prepaid (accrued) pension cost..................... $ (5,999) $ 5,807
======== ========
F-34
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31,
--------------------
2001 2000
-------- --------
($ IN THOUSANDS)
Weighted-average assumptions as of end of year
Discounted rate........................................... 7.00% 7.50%
Expected return on plan assets............................ 7.50% 8.00%
Rate of compensation increase............................. N/A N/A
YEARS ENDED DECEMBER 31,
-----------------------------
2001 2000 1999
------- ------- -------
($ IN THOUSANDS)
Components of net periodic benefit cost:
Service cost.............................................. $ 1,035 $ -- $ --
Interest cost............................................. 4,154 2,455 2,690
Expected return on plan assets............................ (4,064) (2,829) (3,368)
Amortization of transition obligation..................... (1) (2) (5)
Amortization of prior service cost........................ (49) (76) (32)
Recognized actuarial loss................................. -- -- 27
------- ------- -------
Net periodic benefit cost................................. $ 1,075 $ (452) $ (688)
Settlement cost........................................... -- -- 2,408
------- ------- -------
Total expense.......................................... $ 1,075 $ (452) $ 1,720
======= ======= =======
DEFINED CONTRIBUTION PENSION PLANS
The Company has a defined contribution savings and retirement plan. Company
contributions are non-discretionary and consist of a matching contribution of an
amount equal to 125 percent of the first 4 percent of employee contributions and
an annual core contribution of an amount equal to 4 percent of annual employee
compensation. The Company uses a combination of cash and Company common stock
for the annual contribution. The shares for this purpose are provided by the
Company's leveraged Employee Stock Ownership Plan. Compensation expense for the
employer match and annual contribution amounted to $4.2 million, $4.3 million
and $4.4 million, including $0.9 million, $1.3 million and $0.5 million of ESOP
compensation expense, in 2001, 2000 and 1999, respectively.
In addition, ILICO has a defined contribution savings plan. Company
contributions are non-discretionary and consist of a matching contribution equal
to 50 percent of the first 3 percent of employee contributions. This plan was
merged in the Company's defined contribution savings and retirement plan as of
October 1, 2001; however, certain provisions of the plan remained in effect
through December 31, 2001. Compensation expense for the employer match amounted
to $0.3 million in 2001.
LEVERAGED EMPLOYEE STOCK OWNERSHIP PLAN
The Company has a leveraged Employee Stock Ownership Plan (ESOP) which was
sponsored by AmVestors for all AmVestors full-time employees with one year of
service. The ESOP acquired AmVestors stock, which was subsequently exchanged for
the Company's stock, through the proceeds of a note payable to American, a
subsidiary of AmVestors. The note bears interest at 7.0% and is payable in
annual installments through December 30, 2002. The note had an unpaid principal
balance of $0.2 million and $0.7 million at December 31, 2001 and 2000,
respectively.
The Company makes annual contributions to the ESOP equal to the ESOP's debt
service less dividends received by the ESOP. All dividends received by the ESOP
are used to pay debt service. The ESOP shares
F-35
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
initially were pledged as collateral for its debt. As the debt is repaid, shares
are released from collateral and allocated to active employees of the Company
based on the proportion of debt service paid in the year. Beginning in 1999, the
released shares are used to fund a portion of the Company's annual defined
contribution savings and retirement plan contribution.
The Company accounts for its ESOP in accordance with SOP 93-6. Accordingly,
as shares are released from collateral, compensation expense, or a reduction in
the annual defined contribution savings and retirement plan liability, is
reported equal to the current market price of the shares, and the shares become
outstanding for earnings-per-share (EPS) computations. ESOP compensation expense
was $0.9 million, $1.3 million and $0.5 million for the years ended December 31,
2001, 2000 and 1999, respectively.
The ESOP shares were as follows:
DECEMBER 31,
-------------------
2001 2000
-------- --------
Allocated shares............................................ 211,987 199,624
Unallocated shares.......................................... 12,912 39,307
-------- --------
Total ESOP shares........................................... 224,899 238,931
======== ========
Fair market value of unallocated shares (in thousands)...... $ 463 $ 1,273
======== ========
NONQUALIFIED PENSION PLAN
The Company has a nonqualified pension plan covering substantially all of
ALIC's career and general agents. Accumulated benefits of the plan are unfunded
and have been included in other liabilities at December 31, 2001 and 2000,
amounting to $21.6 million, and $22.4 million, respectively. Total nonqualified
pension expense amounted to $2.0 million, $0.6 million, and $0.9 million for the
years ended December 31, 2001, 2000 and 1999, respectively.
POSTRETIREMENT PLANS
The Company has postretirement benefit plans which provide eligible
participants and dependents with certain medical, dental and life insurance
benefits.
DECEMBER 31,
------------------
2001 2000
-------- -------
($ IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of year................... $ 7,843 $ 6,675
Service cost.............................................. 204 158
Interest cost............................................. 792 574
Plan participants' contributions.......................... 191 73
Amendments................................................ 253 --
Actuarial (gain) loss..................................... (175) 1,021
Addition for ILICO plan in May 2001....................... 6,723 --
Actual benefits paid...................................... (1,133) (658)
-------- -------
Benefit obligation at end of year...................... $ 14,698 $ 7,843
======== =======
F-36
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31,
------------------
2001 2000
-------- -------
($ IN THOUSANDS)
Change in plan assets:
Fair value of plan assets at beginning of year............ $ -- $ --
Company contribution...................................... 942 585
Plan participant contribution............................. 191 73
Benefits paid............................................. (1,133) (658)
-------- -------
Fair value of plan assets at end of year............... $ -- $ --
======== =======
Reconciliation of funded status:
Accumulated postretirement benefit obligation............. $(14,698) $(7,843)
Market value of plan assets............................... -- --
-------- -------
Funded status............................................. $(14,698) $(7,843)
Unrecognized prior service cost........................... 581 381
Unrecognized net (gain)................................... (1,097) (984)
-------- -------
Accrued benefit cost................................... $(15,214) $(8,446)
======== =======
Weighted-average assumptions as of end of year:
Discount rate............................................. 7.00% 7.50%
Initial weighted health care cost trend rate.............. 8.00% 6.90%
Ultimate health care cost trend rate...................... 5.00% 5.00%
YEARS ENDED
DECEMBER 31,
------------------
2001 2000 1999
---- ---- ----
($ IN THOUSANDS)
Components of net periodic benefit cost:
Service cost.............................................. $204 $158 $166
Interest cost............................................. 792 574 481
Amortization of prior service cost........................ 53 74 83
Amortization of net (gain)................................ (61) (40) (68)
---- ---- ----
Net periodic benefit cost................................. $988 $766 $662
==== ==== ====
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in the
assumed health care cost trend rates would have the following effects in 2001:
1% POINT 1% POINT
INCREASE (DECREASE)
-------- ----------
($ IN THOUSANDS)
Effect on total of service and interest cost components..... $ 40 $ (36)
Effect of postretirement benefit obligation................. $813 $(725)
(11) REINSURANCE
The Company has indemnity reinsurance agreements with various companies
whereby life insurance in excess of its retention limits is reinsured. The
Company's retention of the net amount at risk is generally between $100,000 and
$1,000,000. Insurance in force ceded to nonaffiliated companies under risk
sharing arrangements at December 31, 2001 and 2000, totaled approximately
$49,454 million and $25,208 million,
F-37
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. In addition, fixed, equity-indexed and multi-choice annuities are
reinsured primarily on a modified coinsurance basis.
Net premiums and amounts earned were as follows:
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
($ IN THOUSANDS)
Direct premiums and amounts assessed against
policyholders............................................. $381,166 $304,325 $296,890
Reinsurance assumed......................................... 26,351 1,385 1,750
Reinsurance ceded........................................... (93,867) (31,503) (19,675)
-------- -------- --------
Net premiums and amounts earned............................. $313,650 $274,207 $278,965
======== ======== ========
Reinsurance recoveries on ceded reinsurance contracts were $98.4 million,
$20.6 million and $31.4 million during 2001, 2000 and 1999, respectively.
Effective October 1, 2000, the Company entered into a reinsurance agreement
to cede 35% of certain fixed annuity production on a modified coinsurance basis.
In 2001, the contract was cancelled and the previous reinsurance activity was
recaptured. Fixed annuity production ceded under this agreement totaled
approximately $160.1 million and $34.2 million in 2001 and 2000, respectively,
and $194.3 million was assumed in 2001 as part of the recapture.
The Company has entered into modified coinsurance arrangements to cede
between 70% and 80% of certain annuity products. Future policy benefit reserves
include $1,684.4 million at December 31, 2001 that are subject to transfer
pursuant to these agreements. Under modified coinsurance, the Company transfers
the risks and rewards of the business to the assuming company; however, the
ceding company retains the assets and liabilities associated with the business.
(12) COMMITMENTS AND CONTINGENCIES
At December 31, 2001, the Company is obligated to make future capital
contributions to various partnerships of up to $7.1 million, to loan funds up to
$6.9 million to partnerships and to fund private placement investments of $25.0
million.
The Company is party to financial instruments in the normal course of
business to meet the financing needs of its customers having risk exposure not
reflected in the balance sheet. These financial instruments include commitments
to extend credit, guarantees and standby letters of credit. Commitments to
extend credit are agreements to lend to customers. Commitments generally have
fixed expiration dates and may require payment of a fee. Since many commitments
expire without being drawn upon, the total amount of commitments does not
necessarily represent future cash requirements. The Company has also guaranteed
two loans for a fee. At December 31, 2001, outstanding commitments to extend
credit totaled approximately $11.0 million and loan guarantees totaled
approximately $6.3 million.
The Company has an agreement with Bank One, N.A. whereby the Company
guarantees the payment of loans made to certain of the Company's managers and
executives for the purpose of purchasing Common Stock and ACES pursuant to the
Stock Purchase Program. The liability of the Company in respect of the principal
amount of loans is limited to $25 million. The Company has also guaranteed
interest and all other fees and obligations owing on the loans. Each participant
in the program has agreed to repay the Company for any amounts paid by the
Company under the guarantee in accordance with a reimbursement agreement entered
into between the participant and the Company.
AmerUs and its joint venture partner are contingently liable in the event
the joint venture, Ameritas Variable Life Insurance Company (AVLIC), cannot meet
its policyholder obligations. At December 31,
F-38
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2001, AVLIC had statutory assets of $2,226.5 million, liabilities of $2,166.0
million, and surplus of $60.5 million.
The Company leases office space under various operating leases. Rental
expense for operating leases amounted to $2.8 million, $2.4 million and $0.5
million in 2001, 2000 and 1999, respectively. At December 31, 2001, future
minimum annual lease commitments under these non-cancelable operating leases
were as follows ($ in thousands):
2002........................................................ $ 2,997
2003........................................................ 2,764
2004........................................................ 2,778
2005........................................................ 2,012
2006........................................................ 1,502
Thereafter.................................................. 1,502
-------
$13,555
=======
The Company is involved in litigation and a party to regulatory proceedings
arising in the ordinary course of business, including class action lawsuits. At
this time the Company does not believe that such litigation or proceedings will
have a material adverse effect on the business or results of operations. In
addition, the Company recently became aware of a dispute between the
retrocessionaire and a reinsurer for a block of annuity business written by IL
Annuity which was acquired as part of the acquisition of ILICO. We have been
having discussions with that reinsurer and they have informed us of potential
claims. Based on currently available information, we do not believe that any
such claim, if made against the Company, will have a material adverse effect on
the results of operations.
(13) STOCKHOLDERS' EQUITY
Generally, the stockholders' equity of the Company's insurance subsidiaries
available for distribution to the Company is limited to the amounts that the
insurance subsidiaries' net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements; however,
payments of such amounts as dividends may be subject to approval by regulatory
authorities. In 2002, the Company's insurance subsidiaries can distribute
approximately $80.5 million in the form of dividends to the Company without
prior approval of such regulatory authorities.
STOCK OPTION PLANS
The Company has three stock incentive plans authorizing the issuance of
incentive and non-qualified stock options to employees, officers and
non-employee directors of the Company. The Company has reserved 3,150,000 shares
of Common Stock for issuance under these plans.
In conjunction with the acquisition of AmVestors, the Company has two
additional plans in which no additional shares may be granted. They are a
non-qualified stock option plan and an incentive stock option plan.
The option price per share under all plans may not be less than the fair
value of the Company's common stock on the date of grant and the term of the
option may not be longer than ten years. Generally, all options have a
three-year vesting schedule with one-third of the options granted vesting at the
end of each of the three years.
F-39
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's stock option plan follows:
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
2001 2000 1999
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
Outstanding, beginning of year................... 1,942,054 $22.65 1,509,764 $24.27 1,327,473 $25.02
Granted at market price.......................... 776,250 31.73 628,000 20.15 275,750 21.61
Exercised........................................ (169,778) 24.99 (9,441) 21.41 (10,442) 19.15
Forfeited........................................ (178,392) 33.66 (186,269) 27.47 (83,017) 28.04
--------- ------ --------- ------ --------- ------
Outstanding, end of year......................... 2,370,134 $24.64 1,942,054 $22.65 1,509,764 $24.27
========= ====== ========= ====== ========= ======
Exercisable, end of year......................... 1,329,557 $23.35 1,115,832 $23.87 940,543 $23.62
========= ====== ========= ====== ========= ======
The following table summarizes information about stock options outstanding
under the Company's option plan as of December 31, 2001:
OPTIONS OUTSTANDING
--------------------------------------
WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OPTIONS CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE IN YEARS PRICE
------------------------ ----------- ------------- --------
$11.48-$15.31.............................................. 86,271 2.0 $14.58
$15.32-$19.14.............................................. 56,774 3.0 17.24
$19.15-$22.96.............................................. 933,456 7.0 19.96
$22.97-$26.79.............................................. 196,032 3.1 23.48
$26.80-$30.62.............................................. 861,417 7.4 29.07
$30.63-$34.44.............................................. 126,684 7.0 31.25
$34.45-$38.27.............................................. 109,500 8.2 35.79
--------- --- ------
2,370,134.. 6.6 $24.64
========= === ======
The following table summarizes information about stock options exercisable
under the Company's option plan as of December 31, 2001:
OPTIONS EXERCISABLE
-----------------------
WEIGHTED
AVERAGE
OPTIONS EXERCISE
RANGE OF EXERCISE PRICES EXERCISABLE PRICE
------------------------ ----------- --------
$11.48-$15.31............................................... 86,271 $14.58
$15.32-$19.14............................................... 53,441 17.16
$19.15-$22.96............................................... 508,428 19.80
$22.97-$26.79............................................... 170,066 23.42
$26.80-$30.62............................................... 388,167 27.88
$30.63-$34.44............................................... 85,684 31.19
$34.45-$38.27............................................... 37,500 35.58
--------- ------
1,329,557 $23.35
========= ======
F-40
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of options granted was estimated on the date of grant using
the Black-Scholes pricing model with an expected life equal to the contractual
expiration and the following weighted average assumptions:
2001 2000 1999
------ ----- -----
Expected Volatility......................................... 32.00% 37.00% 37.00%
Risk-free Interest Rate..................................... 5.36% 6.82% 5.39%
Dividend Yield.............................................. 1.27% 1.99% 1.86%
Weighted average fair value of options granted.............. $14.33 $9.40 $9.63
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its stock option plans. Accordingly, no
compensation expense has been recognized for its option plans. Had compensation
expense for the Company's option plans been determined based on the fair value
at the grant dates for awards under those plans consistent with the method
prescribed by SFAS 123, the Company's net earnings and diluted earnings per
share for the years ended December 31, 2001, 2000 and 1999 would have been
reduced to the pro forma amounts indicated below:
YEARS ENDED DECEMBER 31,
-----------------------------
2001 2000 1999
------- ------- -------
Net earnings ($ in thousands):
As reported............................................... $72,907 $51,840 $38,436
Pro forma................................................. $70,142 $50,285 $36,243
Basic earnings per share:
As reported............................................... $ 1.97 $ 2.48 $ 2.21
Pro forma................................................. $ 1.90 $ 2.40 $ 2.08
Diluted earnings per share:
As reported............................................... $ 1.95 $ 2.46 $ 2.20
Pro forma................................................. $ 1.87 $ 2.39 $ 2.07
NONVESTED STOCK
The Company has awarded common stock to eligible employees and non-employee
directors under the two stock incentive plans. The plans have restriction
periods of one to five years tied to employment and/or service. The awards were
recorded at the market value on the date of the grant as unearned compensation
since common shares were legally issued on that date. The initial values of
these grants are amortized over the restriction periods, net of forfeitures.
Nonvested stock and compensation expense information is as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
2001 2000 1999
------------------ ------------------ -----------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------ --------
Outstanding, beginning of year........................... 30,835 $24.35 36,245 $26.85 17,899 $31.07
Granted at market price.................................. 34,803 33.78 12,466 20.26 18,946 23.01
Exercised................................................ (14,003) 29.32 (17,576) 26.47 -- --
Forfeited................................................ -- -- (300) 31.56 (600) 31.56
------- ------ ------- ------ ------ ------
Outstanding, end of year................................. 51,635 $29.36 30,835 $24.35 36,245 $26.85
======= ====== ======= ====== ====== ======
Compensation expense ($ in thousands).................... $ 648 $ 435 $ 335
====== ====== ======
F-41
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NON-EMPLOYEE STOCK OPTIONS
As part of the stock incentive plans and the non-employee stock option
plan, the Board of Directors is authorized to grant stock appreciation rights
("SARs") to employees, officers, agents and other non-employees in tandem with
stock options. A SAR can be exercised only to the extent the option with respect
to which it is granted is not exercised, and is subject to the same terms and
conditions as the option to which it relates. Issuance of SARs is made at the
sole discretion of the Board of Directors. The Company has reserved 100,000
shares of Common Stock for issuance under this plan. The terms and conditions
under this plan are the same as under the employee stock incentive plans.
The Company's SARs are summarized as follows:
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
2001 2000 1999
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
Outstanding, beginning of year.............................. 25,000 $22.22 13,500 $23.31 -- $ --
Granted at market price..................................... 16,900 27.77 11,500 20.94 13,500 23.31
Exercised................................................... (1,668) 22.73 -- -- -- --
Forfeited................................................... (999) 22.67 -- -- -- --
------ ------ ------ ------ ------ ------
Outstanding, end of year.................................... 39,233 $24.58 25,000 $22.22 13,500 $23.31
====== ====== ====== ====== ====== ======
Compensation expense ($ in thousands)....................... $ 179 $ 103 $ --
====== ====== ======
STOCK WARRANTS
In conjunction with the acquisition of AmVestors, the Company has
outstanding warrants to purchase shares of the Company's Common Stock. The
Company's stock warrant activity is summarized as follows:
YEARS ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
--------- -------- --------
Warrants outstanding, beginning of year..................... 473,596 473,596 473,596
Exercise of warrants........................................ (126,334) -- --
--------- -------- --------
Warrants outstanding, end of year........................... 347,262 473,596 473,596
========= ======== ========
Compensation expense ($ in thousands)....................... $ -- $ -- $ --
========= ======== ========
The remaining warrants are exercisable at $24.42 per share and expire on
April 2, 2002.
(14) STATUTORY ACCOUNTING PRACTICES
The Company's insurance subsidiaries had a statutory net loss of $6.9
million for the year ended December 31, 2001 and statutory net income of $69.4
million and $49.4 million for the years ended December 31, 2000 and 1999,
respectively. The Company's insurance subsidiaries' statutory surplus and
capital was $690.4 million and $472.7 million at December 31, 2001 and 2000,
respectively. The minimum capital and surplus requirements are met in all the
states in which the insurance subsidiaries are domiciled.
The Company's insurance subsidiaries are domiciled in Arizona, Indiana,
Iowa, Kansas and New York and prepare their statutory-basis financial statements
in accordance with accounting practices prescribed or permitted by those
respective state insurance departments. The National Association of Insurance
Commissioners (NAIC) has codified statutory accounting practices which have been
adopted without exception by the states in which the insurance subsidiaries are
domiciled and which constitute the only source of prescribed statutory
accounting practices. Codification was effective January 1, 2001 and changed
prescribed statutory
F-42
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounting practices and resulted in changes to the accounting practices
insurance enterprises used to prepare statutory financial statements. The impact
of adopting Codification was an increase to statutory surplus of approximately
$25 million, excluding ILICO.
The respective insurance departments impose minimum risk-based capital
(RBC) requirements on insurance enterprises that were developed by the NAIC. The
formulas for determining the amount of RBC specify various weighting factors
that are applied to financial balances or various levels of activity based on
the perceived degree of risk. Regulatory compliance is determined by a ratio of
the enterprise's regulatory total adjusted capital, to its authorized control
level RBC. The life insurance subsidiaries exceed the authorized control level
RBC requirements.
(15) ACQUISITIONS
On May 18, 2001, the Company completed the acquisition of ILICO for an
amount of cash, policy credits and shares of the Company's common stock equal to
the value of 9.3 million shares of the Company's common stock. The purchase
price totaled approximately $326 million. The acquisition was accounted for
using the purchase method of accounting and accordingly the total purchase price
was allocated to the assets and liabilities of ILICO based on the relative fair
values as of May 18, 2001, with the excess of the purchase price over the fair
value of the assets acquired less the fair value of the liabilities assumed
recorded as goodwill. The final allocations may differ from the amounts
reflected at December 31, 2001. Although final allocations may differ, the
consolidated financial statements as of December 31, 2001 reflect the Company's
best estimate based on currently available information and the differences
between the current and final allocations are not expected to be material.
Goodwill is being amortized over thirty years (see further discussion regarding
SFAS 141 and 142 in note 1). The operations of ILICO for the period of May 18,
2001 through December 31, 2001 have been included in the consolidated statement
of income of the Company.
The allocation of the purchase price of ILICO is as follows ($ in
millions):
Investments (including cash and short-term investments)..... $ 4,655.7
Receivables and other assets................................ 405.6
Value of business acquired.................................. 211.8
Goodwill.................................................... 20.9
Separate account assets..................................... 345.6
Policyowner reserves and funds.............................. (4,796.4)
Other liabilities........................................... (146.2)
Debt........................................................ (25.0)
Separate account liabilities................................ (345.6)
---------
Total investment in ILICO.............................. $ 326.4
=========
In conjunction with the Company's demutualization previously discussed, on
September 20, 2000, the Company acquired the 42% Minority Interest of its
subsidiary, ALHI, in a stock exchange valued at approximately $298 million. ALHI
merged into the Company simultaneously with the stock exchange. The acquisition
of the ALHI minority interest by the Company was accounted for as a purchase and
accordingly 42% of the book value of the assets and liabilities of ALHI were
adjusted to market value as of the acquisition date. Goodwill was reduced by
approximately $34 million. Approximately 42% of the ALHI earnings for the
reporting periods up to the acquisition date are reduced from the Company's
results of operations in minority interest on the Company's consolidated
statements of income. From the acquisition date forward, the Company's results
of operations include 100% of these earnings.
Demutualization costs associated with the Company's demutualization of
$11.3 million and $7.1 million are included in expenses for the years ended
December 31, 2000 and 1999, respectively. Demutualization costs
F-43
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for the ILICO demutualization of $1.0 million are included in expenses in 2001.
These costs consist primarily of legal, actuarial and consulting expenses
associated with the Company's and ILICO's demutualizations.
The following table sets forth certain pro forma operating data of the
Company for the years ended December 31, 2001 and 2000, as if the acquisition of
ILICO occurred at the beginning of each period presented.
DECEMBER 31,
-------------------------
2001 2000
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Pro Forma operating data:
Total revenue............................................. $1,467,944 $1,538,933
Net income from continuing operations..................... 91,747 83,514
Net income................................................ 83,015 83,514
Diluted net income from continuing operations per share of
common stock.............................................. $ 2.25 $ 2.78
Diluted net income per share of common stock................ $ 2.03 $ 2.78
Under the terms of the joint venture ALIC participates in with AVLIC, ALIC
had an option to purchase an additional 5% to 15% of AMAL Corporation (AMAL) if
certain premium growth targets were met. ALIC met the premium growth target
requirement for one 5% purchase option in January 2001. ALIC exercised the
option on March 28, 2001 and acquired an additional 5% ownership interest in
AMAL for $7.2 million. ALIC's ownership percentage in AMAL is now 39% and ALIC
has a remaining option to purchase an additional 5% to 10% of AMAL.
(16) RESTRUCTURING CHARGES
During the third quarter of 2001, the Company began consolidating various
functions in connection with a restructuring of its life insurance and annuity
operations. The objective of the restructuring plan is to eliminate duplicative
general administrative, life insurance and annuity functions for all business
units. The elimination of duplicative functions will reduce on-going operating
costs for the Company. General administrative functions will be transitioned so
they are performed primarily in Des Moines, Iowa. Life insurance processes will
be transitioned so they are performed primarily in Des Moines and Indianapolis,
Indiana and annuity functions will be transitioned to Topeka, Kansas.
Restructuring charges have been included in operating expenses in the
consolidated statement of income for 2001, and include severance and termination
benefits pre-tax of $6.8 million related to the elimination of approximately 80
positions and other costs pre-tax of $1.8 million. Actual pre-tax costs totaling
$6.5 million have been expended and a pre-tax accrual for severance and
termination benefits not yet paid amounted to $2.1 million at December 31, 2001.
Details of the pre-tax restructuring charges are as follows:
ACCRUAL AT
2001 CASH DECEMBER 31,
CHARGE PAYMENTS 2001
------ -------- ------------
($ IN THOUSANDS)
Severance and termination benefits.......................... $6,802 $(4,701) $2,101
Other costs................................................. 1,764 (1,764) --
------ ------- ------
$8,566 $(6,465) $2,101
====== ======= ======
The Company has not finalized all restructuring activities as of December
31, 2001. Additional activities will primarily involve relocation or severance
benefits for affected employees and various administrative, financial and
actuarial system conversion costs. System conversion costs will be expensed as
incurred and are expected to primarily be completed by the fourth quarter of
2003.
F-44
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) EARNINGS PER SHARE (EPS)
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------- ------------------------------- -------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NET NUMBER OF PER SHARE NET NUMBER OF PER SHARE NET NUMBER OF PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- --------- --------- ------- --------- --------- ------- --------- ---------
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Basic EPS
Net income from continuing
operations.............. $79,323 36,949 $ 2.15 $51,123 20,922 $ 2.44 $35,932 17,390 $ 2.07
Effect of dilutive
securities
Options................... -- 395 (0.02) -- 114 (0.01) -- 77 (0.01)
Warrants.................. -- 109 (0.01) -- -- -- -- -- --
Stock appreciation
rights.................. -- -- -- -- -- -- --
------- ------ ------ ------- ------ ------ ------- ------ ------
Diluted EPS................. $79,323 37,453 $ 2.12 $51,123 21,036 $ 2.43 $35,932 17,467 $ 2.06
======= ====== ====== ======= ====== ====== ======= ====== ======
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Values of Financial Instruments,"
requires disclosures of fair value information about financial instruments,
whether recognized or not recognized in a company's balance sheet, for which it
is practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using discounted cash flow or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rates and estimates of the amount and
timing of future cash flows. SFAS 107 excludes certain insurance liabilities and
other non-financial instruments from its disclosure requirements. The fair value
amounts presented herein do not include an amount for the value associated with
customer or agent relationships, the expected interest margin (interest earnings
over interest credited) to be earned in the future on investment-type products
or other intangible items. Accordingly, the aggregate fair value amounts
presented herein do not necessarily represent the underlying value of the
Company; likewise, care should be exercised in deriving conclusions about the
Company's business or financial condition based on the fair value information
presented herein.
The Company closely monitors the level of its insurance liabilities, the
level of interest rates credited to its interest-sensitive products and the
assumed interest margin provided for within the pricing structure of its other
products. Those amounts are taken into consideration in the Company's overall
management of interest rate risk that attempts to minimize exposure to changing
interest rates through the matching of investment maturities with amounts
expected to be due under insurance contracts. As such, the Company believes that
it has reduced the volatility inherent in its fair value adjusted stockholders'
equity, although such volatility will not be reduced completely. The Company has
used discount rates in the determination of fair values for its liabilities that
are consistent with market yields for related assets. The use of the asset
market yield is consistent with management's opinion that the risks inherent in
the Company's asset and liability portfolios are similar and the fact that fair
values for both assets and liabilities generally will react in much the same
manner during periods of interest rate changes. However, that assumption might
not result in fair values that are consistent with values obtained through an
actuarial appraisal of the Company's business or values that might arise in a
negotiated transaction.
The following presentation reflects fair values for those instruments
specifically covered by SFAS 107, along with fair value amounts for those
traditional insurance liabilities for which disclosure is permitted but not
required; the fair values for all other assets and liabilities have been
reported at their carrying amounts.
F-45
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
VALUATION METHODS AND ASSUMPTIONS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Short-term investments, policy loans and other investments: the
carrying amounts for these instruments approximate their fair values.
Fixed maturities and equity securities: fair values for bonds are
based on quoted market prices or dealer quotes. If a quoted market price is
not available, fair value is estimated using values obtained from
independent pricing services or, in the case of private placements, are
estimated by discounting expected future cash flows using a current market
rate applicable to the yield, credit quality, and maturity of the
investments. The fair values for preferred and common stocks are based on
quoted market prices.
Loans: for all performing fixed interest rate loans, the estimated
net cash flows to maturity were discounted to derive an estimated market
value. The discount rate used was based on the individual loan's remaining
weighted average life and a basis point spread based on the market
conditions for the type of loan and credit quality. These spreads were over
the United States Treasury yield curve as of each respective year end.
Performing variable rate commercial loans and residential loans were valued
at the current outstanding balance. Loans which have been restructured, in
foreclosure, significantly delinquent or are to affiliates were valued
primarily at the lower of the estimated net cash flows to maturity
discounted at a market rate of interest or the current outstanding
principal balance.
Derivative instruments: fair values for derivative securities are
based on broker prices using current assumptions and are classified as
other assets or other liabilities.
Policy reserves: fair values of the Company's liabilities under
contracts not involving significant mortality or morbidity risks (annuities
primarily) are stated at the cost the Company would incur to extinguish the
liability (i.e., the cash surrender value).
Notes payable, contracts payable and capital securities: fair values
for notes payable, contracts payable and capital securities are estimated
using discounted cash flow analysis based on the Company's current
incremental borrowing rate for similar types of borrowing arrangements.
The carrying amounts of cash and cash equivalents; accrued investment
income; premiums, fees and other receivables; dividends payable to policyowners;
reinsurance receivables; and approximate their fair values. Assets and
liabilities related to separate accounts are reported at fair value in the
consolidated balance sheets.
F-46
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated fair values of the Company's significant financial
instruments are as follows:
DECEMBER 31,
------------------------------------------------------
2001 2000
-------------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ---------- ----------
($ IN THOUSANDS)
FINANCIAL ASSETS:
Securities available-for-sale:
Fixed maturity securities.......... $11,037,425 $11,037,425 $8,261,647 $8,261,647
=========== =========== ========== ==========
Equity securities.................. $ 55,865 $ 55,865 $ 152,903 $ 152,903
=========== =========== ========== ==========
Short-term investments............. $ 14,881 $ 14,881 $ 20,861 $ 20,861
=========== =========== ========== ==========
Securities held for trading purposes:
Fixed maturity securities.......... $ 2,175,106 $ 2,175,106 $ -- $ --
=========== =========== ========== ==========
Equity securities.................. $ 12,013 $ 12,013 $ -- $ --
=========== =========== ========== ==========
Short-term investments............. $ 4,212 $ 4,212 $ -- $ --
=========== =========== ========== ==========
Loans................................. $ 944,532 $ 981,160 $ 534,857 $ 568,551
=========== =========== ========== ==========
Policy loans.......................... $ 506,318 $ 506,318 $ 312,662 $ 312,662
=========== =========== ========== ==========
Derivatives:
Interest rate swaps................ $ (10,343) $ (10,343) $ (4,738) $ (5,984)
=========== =========== ========== ==========
Credit default swaps:.............. $ (218) $ (218) $ -- $ --
=========== =========== ========== ==========
Options............................ $ 72,136 $ 72,136 $ 101,397 $ 97,340
=========== =========== ========== ==========
FINANCIAL LIABILITIES:
Policy reserves....................... $11,476,346 $10,711,609 $6,438,681 $6,333,026
=========== =========== ========== ==========
Notes, contracts payable and capital
securities......................... $ 384,628 $ 351,482 $ 413,318 $ 413,318
=========== =========== ========== ==========
(19) DISCONTINUED OPERATIONS
The Company is in the process of selling its residential real estate
operations which is expected to be completed in 2002. Revenue from these
operations is not material to the consolidated statements of operations. The
Company does not expect to have a loss on the disposition.
F-47
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The results of the residential real estate operations have been classified
as discontinued operations. Operating income and loss from discontinued
operations are as follows ($ in thousands, except per share data):
YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
($ IN THOUSANDS)
Operating income (loss) from discontinued operations,
net of income taxes of $1,247, $500 and $1,766,
respectively........................................ $ 1,820 $ 717 $ 2,504
=========== =========== ===========
Net income from discontinued operations per common
share:
Basic............................................... $ 0.05 $ 0.03 $ 0.14
Diluted............................................. $ 0.05 $ 0.03 $ 0.14
Weighted average common shares outstanding:
Basic............................................... 36,949,198 20,922,371 17,390,165
Diluted............................................. 37,453,428 21,035,518 17,467,132
(20) OPERATING SEGMENTS
The Company has two operating segments: Life Insurance and Annuities.
Products generally distinguish a segment. A brief description of each segment
follows:
LIFE INSURANCE
The primary product offerings consist of whole life, interest-sensitive
whole life, term life, universal life and equity-indexed life insurance
policies. These products are marketed on a national basis primarily through a
Preferred Producer agency system, a Personal Producing General Agent
distribution system and Independent Marketing Organizations.
ANNUITIES
The Annuity segment markets individual fixed annuities on a national basis
primarily through independent brokers and marketing companies. The Annuity
segment also includes one insurance contract issued to a commercial paper
conduit.
The Company uses the same accounting policies and procedures to measure
operating segment income and assets as it uses to measure its consolidated
income from operations and assets with the exception of the elimination of
certain items which management believes are not necessarily indicative of
overall operating trends. For example, net realized capital gains or losses on
investments, excluding gains or losses on convertible debt which are considered
core earnings, are not included as part of operating segment income. These items
are shown between adjusted pre-tax operating income and income from operations
on the following operating segment income tables. Operating segment income is
generally income before non-core realized/unrealized gains and losses and the
related amortization of deferred policy acquisition costs and VOBA, change in
option value of equity-indexed annuity products and market value adjustments on
total return strategy annuities, demutualization costs, restructuring costs,
interest expense, income tax expense, income from discontinued operations and
cumulative effect of change in accounting. Premiums, product charges,
policyowner benefits, insurance expenses, amortization of deferred policy
acquisition costs and VOBA and dividends to policyowners are attributed directly
to each operating segment. Net investment income and core realized gains and
losses on investments are allocated based on directly-related assets required
for transacting the business of that segment. Other revenues and benefits and
expenses which are deemed not to be associated with any specific reportable
segment are grouped together in the All Other category. These items
F-48
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
primarily consist of holding company revenues and expenses and the operations of
the Company's real estate management subsidiary.
Assets are segmented based on policy liabilities directly attributable to
each segment. There are no significant intersegment transactions. Depreciation
and amortization, excluding amortization of deferred policy acquisition costs
and VOBA as previously discussed, are not significant.
F-49
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Operating segment income and assets are as follows:
OPERATING SEGMENT INCOME
($ IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2001
------------------------------------------------
LIFE TOTAL
INSURANCE ANNUITIES ALL OTHER CONSOLIDATED
--------- --------- --------- ------------
Revenues:
Insurance premiums............................... $300,690 $12,828 $ 132 $ 313,650
Universal life and annuity product charges....... 110,403 35,652 -- 146,055
Net investment income............................ 283,330 577,913 11,931 873,174
Core realized/unrealized gains (losses) on
investments................................... 8,720 -- -- 8,720
Other income..................................... -- 36,198 9,006 45,204
-------- ------- ------- ----------
703,143 662,591 21,069 1,386,803
Benefits and expenses:
Policyowner benefits............................. 384,159 426,877 2,459 813,495
Underwriting, acquisition, and other expenses.... 69,035 60,911 10,525 140,471
Amortization of deferred policy acquisition costs
and value of business acquired, net of
non-core adjustment of ($2,988)............... 56,996 78,891 -- 135,887
Dividends to policyowners........................ 98,945 -- -- 98,945
-------- ------- ------- ----------
609,135 566,679 12,984 1,188,798
-------- ------- ------- ----------
Adjusted pre-tax operating income.................. $ 94,008 $95,912 $ 8,085 198,005
======== ======= =======
Non-core realized/unrealized (losses) on
investments................................... (99,349)
Change in option value of equity-indexed annuity
products and market value adjustments on total
return strategy annuities..................... 52,747
Amortization of deferred policy acquisition costs
and VOBA due to non-core realized gains or
losses........................................ 2,988
Demutualization costs............................ (969)
Restructuring costs.............................. (8,566)
----------
Income from continuing operations.................. 144,856
Interest (expense)................................. (26,011)
Income tax (expense)............................... (39,522)
Income from discontinued operations, net of tax.... 1,820
Cumulative effect of change in accounting for
derivatives, net of tax.......................... (8,236)
----------
Net income............................... $ 72,907
==========
F-50
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPERATING SEGMENT INCOME
($ IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2000
-----------------------------------------------------
TOTAL
LIFE INSURANCE ANNUITIES ALL OTHER CONSOLIDATED
-------------- --------- --------- ------------
Revenues:
Insurance premiums............................. $252,157 $21,820 $ 230 $ 274,207
Universal life and annuity product charges..... 65,126 34,814 -- 99,940
Net investment income.......................... 212,100 468,404 19,021 699,525
Core realized/unrealized gains (losses) on
investments................................. (695) (16,597) -- (17,292)
Other income................................... -- 21,787 12,788 34,575
-------- ------- ------- ----------
528,688 530,228 32,039 1,090,955
Benefits and expenses:
Policyowner benefits........................... 308,177 323,560 676 632,413
Underwriting, acquisition, and other
expenses.................................... 51,532 52,554 19,381 123,467
Amortization of deferred policy acquisition
costs and value of business acquired, net of
non-core adjustment of ($8,722)............. 35,570 65,902 -- 101,472
Dividends to policyowners...................... 74,338 -- -- 74,338
-------- ------- ------- ----------
469,617 442,016 20,057 931,690
-------- ------- ------- ----------
Adjusted pre-tax operating income................ $ 59,071 $88,212 $11,982 159,265
======== ======= =======
Non-core realized/unrealized (losses) on
investments................................. (11,683)
Amortization of deferred policy acquisition
costs and VOBA due to non-core realized
gains or losses............................. 8,722
Demutualization costs.......................... (11,265)
----------
Income from continuing operations................ 145,039
Interest (expense)............................... (29,723)
Income tax (expense)............................. (42,516)
Minority interest................................ (21,677)
Income from discontinued operations, net of
tax............................................ 717
----------
Net income.................................. $ 51,840
==========
F-51
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPERATING SEGMENT INCOME
($ IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------
TOTAL
LIFE INSURANCE ANNUITIES ALL OTHER CONSOLIDATED
-------------- --------- --------- ------------
Revenues:
Insurance premiums............................. $253,707 $ 25,122 $ 136 $ 278,965
Universal life and annuity product charges..... 62,962 27,835 -- 90,797
Net investment income.......................... 202,517 443,359 19,521 665,397
Core realized/unrealized gains (losses) on
investments................................. (380) 11,239 -- 10,859
Other income................................... -- 6,304 13,987 20,291
-------- -------- ------- ----------
518,806 513,859 33,644 1,066,309
Benefits and expenses:
Policyowner benefits........................... 301,294 339,056 291 640,641
Underwriting, acquisition, and other
expenses.................................... 57,784 37,204 25,787 120,775
Amortization of deferred policy acquisition
costs and value of business acquired, net of
non-core adjustment of $2,134............... 37,605 48,378 -- 85,983
Dividends to policyowners...................... 70,777 -- -- 70,777
-------- -------- ------- ----------
467,460 424,638 26,078 918,176
-------- -------- ------- ----------
Adjusted pre-tax operating income................ $ 51,346 $ 89,221 $ 7,566 148,133
======== ======== =======
Non-core realized/unrealized (losses) on
investments................................. (12,261)
Amortization of deferred policy acquisition
costs and VOBA due to non-core realized
gains or losses............................. (2,134)
Demutualization costs.......................... (7,062)
----------
Income from continuing operations................ 126,676
Interest (expense)............................... (28,983)
Income tax (expense)............................. (33,654)
Minority interest................................ (28,107)
Income from discontinued operations, net of
tax............................................ 2,504
----------
Net income.................................. $ 38,436
==========
F-52
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPERATING SEGMENT INCOME
($ IN THOUSANDS)
TOTAL
LIFE INSURANCE ANNUITIES ALL OTHER CONSOLIDATED
-------------- ----------- --------- ------------
DECEMBER 31, 2001
Investments................................ $4,595,113 $10,432,660 $ 24,660 $15,052,433
Deferred policy acquisition costs and
VOBA..................................... 613,945 612,564 -- 1,226,509
Other assets............................... 547,812 1,340,123 132,275 2,020,210
---------- ----------- -------- -----------
Total assets............................... $5,756,870 $12,385,347 $156,935 $18,299,152
========== =========== ======== ===========
DECEMBER 31, 2000
Investments................................ $2,673,659 $ 6,859,314 $ 73,833 $ 9,606,806
Deferred policy acquisition costs and
VOBA..................................... 365,819 539,923 -- 905,742
Other assets............................... 216,088 660,738 82,148 958,974
---------- ----------- -------- -----------
Total assets............................... $3,255,566 $ 8,059,975 $155,981 $11,471,522
========== =========== ======== ===========
DECEMBER 31, 1999
Investments................................ $2,555,199 $ 6,406,034 $ 98,480 $ 9,059,713
Deferred policy acquisition costs and
VOBA..................................... 388,093 469,253 -- 857,346
Other assets............................... 200,407 622,751 351,738 1,174,896
---------- ----------- -------- -----------
Total assets............................... $3,143,699 $ 7,498,038 $450,218 $11,091,955
========== =========== ======== ===========
(21) QUARTERLY RESULTS (UNAUDITED)
2001 QUARTERLY DATA
QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
($ IN THOUSANDS, EXCEPT EARNINGS PER COMMON SHARE)
Total revenues (excluding realized
gains)................................. $ 272,893 $ 325,604 $ 383,332 $ 396,254
Realized gains (losses).................. $ (39,835) $ (11,825) $ (45,649) $ 6,680
Total benefits and expenses.............. $ 196,247 $ 277,724 $ 300,882 $ 367,745
Net income from continuing operations.... $ 19,458 $ 19,695 $ 21,082 $ 19,088
Weighted average number of shares:
Basic.................................. 29,973,039 34,364,932 41,536,389 41,741,649
Diluted................................ 30,365,387 34,528,541 42,060,929 42,288,468
Net income from continuing operations per
share:
Basic.................................. $ 0.65 $ 0.57 $ 0.51 $ 0.46
Diluted................................ $ 0.64 $ 0.57 $ 0.50 $ 0.45
F-53
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000 QUARTERLY DATA
QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
($ IN THOUSANDS, EXCEPT EARNINGS PER COMMON SHARE)
Total revenues (excluding realized
gains)................................. $ 272,547 $ 272,144 $ 276,467 $ 287,089
Realized gains (losses).................. $ 2,903 $ (7,162) $ (7,292) $ (17,424)
Total benefits and expenses.............. $ 234,127 $ 229,837 $ 231,635 $ 238,634
Net income from continuing operations.... $ 14,984 $ 7,730 $ 10,432 $ 17,977
Weighted average number of shares:
Basic.................................. 17,390,165 17,390,165 18,888,948 29,933,019
Diluted................................ 17,453,374 17,407,252 19,026,397 30,239,946
Net income per share:
Basic.................................. $ 0.86 $ 0.44 $ 0.55 $ 0.60
Diluted................................ $ 0.86 $ 0.44 $ 0.55 $ 0.59
The Company was formed in 1996 as a mutual holding company and therefore,
had no shares of common stock outstanding until its demutualization on September
20, 2000. At that time, the Company distributed 17.4 million shares of its
common stock to its former members and exchanged its common stock for the 12.9
million shares of common stock held by the public in ALHI on a one-for-one
basis. The Company's income primarily reflects the results of its former
subsidiary, ALHI. Therefore, net income from continuing operations per share has
been calculated based on the number of shares of stock the Company owned of ALHI
from January 1, 1999 through September 20, 2000. Thereafter, net income from
continuing operations per share has been calculated based on the shares actually
outstanding.
F-54
AMERUS GROUP CO.
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
SCHEDULE PAGE
-------- ----
Independent Auditors' Reports on Schedules........................... S-2 through S-3
I Summary of Investments -- Other than Investments in Related S-4
Parties.....................................................
II Condensed Financial Information of Registrant............... S-5 through S-10
III Supplementary Insurance Information......................... S-11
IV Reinsurance................................................. S-12
All other schedules are omitted for the reason that they are not required,
amounts are not sufficient to require submission of the schedule, or that the
equivalent information has been included in the consolidated financial
statements and notes thereto.
S-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS, ON SCHEDULES
The Board of Directors and Stockholders
AmerUs Group Co.
We have audited the consolidated balance sheet of AmerUs Group Co. as of
December 31, 2001, and the related consolidated statements of income,
comprehensive income, stockholders' equity, and cash flows for the year then
ended, and have issued our report thereon dated February 5, 2002 (included
elsewhere in this Annual Report on Form 10-K). Our audit also included the 2001
financial schedules listed on page S-1 of this Annual Report on Form 10-K. These
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audit.
In our opinion, the 2001 financial statement schedules referred to above,
when considered in relation to the 2001 basic financial statements taken as a
whole, present fairly in all material respects the information set forth
therein. As discussed in Note 1 to the consolidated financial statement, in 2001
the Company changed its method of accounting for derivative instruments and its
method of accounting for its closed block of business.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 5, 2002
S-2
REPORT OF KPMG LLP, INDEPENDENT AUDITORS, ON SCHEDULES
The Board of Directors and Stockholders
AmerUs Group Co.
Under date of February 5, 2001, we reported on the consolidated balance
sheets of AmerUs Group Co. and subsidiaries as of December 31, 2000, and the
related consolidated statements of income, stockholders' equity, comprehensive
income, and cash flows for each of the two years in the period then ended as
contained in Part II, Item 8 of the annual report on Form 10-K for the year
2000. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related 2000 and 1999 consolidated financial
statement schedules as listed in the accompanying index. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such 2000 and 1999 financial statement schedules, when
considered in relation to the 2000 and 1999 basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
/s/ KPMG LLP
Des Moines, Iowa
February 5, 2001
S-3
AMERUS GROUP CO.
SCHEDULE I
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2001
----------------------------------------
AMOUNT AT
WHICH
SHOWN IN
AMORTIZED THE BALANCE
TYPE OF INVESTMENT COST(1) MARKET VALUE SHEET
------------------ ----------- ------------ -----------
($ IN THOUSANDS)
Fixed Maturities:
Bonds
United States Government and government agencies
and authorities................................ $ 1,729,081 $ 1,773,310 $ 1,773,310
States, municipalities and political
subdivisions................................... 45,729 48,348 48,348
Foreign governments.............................. 128,785 134,169 134,169
Public utilities................................. 1,178,219 1,183,826 1,183,826
Convertibles and bonds with warrants attached.... 1,411,139 1,411,139 1,411,139
All other corporate bonds........................ 8,408,825 8,506,235 8,506,235
Redeemable preferred stock.......................... 174,580 155,504 155,504
----------- ----------- -----------
Total fixed maturities......................... $13,076,358 $13,212,531 $13,212,531
Equity securities:
Common stocks
Banks, trust and insurance companies............. 53,393 54,042 54,042
Industrial, miscellaneous and all other.......... 2,062 1,823 1,823
Non-redeemable preferred stocks.................. 12,013 12,013 12,013
----------- ----------- -----------
Total equity securities........................ $ 67,468 $ 67,878 $ 67,878
Mortgage loans on real estate......................... 944,532 944,532
Real estate........................................... 1,405 1,405
Policy loans.......................................... 506,318 506,318
Other long-term investments........................... 300,676 300,676
Short-term investments................................ 19,041 19,093 19,093
----------- -----------
Total investments.............................. $14,915,798 $15,052,433
=========== ===========
---------------
(1) On the basis of cost adjusted for repayments and amortization of premiums
and accrual of discounts for fixed maturities, other long-term investments
and short-term investments; original cost for equity securities; unpaid
principal balance for mortgage loans on real estate and policy loans; and
original cost less accumulated depreciation for investment real estate.
S-4
AMERUS GROUP CO.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(PARENT COMPANY)
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
($ IN THOUSANDS)
ASSETS
Investments:
Equity securities available-for-sale at fair value........ $ 482 $ 31,134
Loans..................................................... 37 179
Other investments......................................... 50,000 83,000
Investments in subsidiaries, at equity...................... 1,561,066 1,136,446
Cash and cash equivalents................................... 42,208 11,529
Accrued investment income................................... 1,125 424
Property and equipment...................................... 11,853 10,165
Income taxes receivable..................................... -- 1,291
Deferred income taxes....................................... 8,511 9,359
Other assets................................................ 7,495 18,730
---------- ----------
Total assets........................................... $1,682,777 $1,302,257
========== ==========
See accompanying notes to condensed financial statements.
S-5
AMERUS GROUP CO.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(PARENT COMPANY)
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
($ IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued expenses and other liabilities.................... $ 50,077 $ 68,785
Income taxes payable...................................... 10,850 --
Debt (note 2)............................................. 276,430 200,683
---------- ----------
Total liabilities...................................... 337,357 269,468
---------- ----------
Minority interest........................................... 30,706 --
Capital securities (note 2)................................. 76,197 204,834
---------- ----------
Stockholders' equity:
Preferred Stock, no par value, 20,000,000 shares
authorized, none issued................................ -- --
Common Stock, no par value, 230,000,000 shares authorized;
41,759,450 shares issued and outstanding in 2001 (net
of 1,746,548 treasury shares) and 30,011,034 shares
issued and outstanding in 2000......................... 41,759 30,011
Paid-in capital........................................... 1,122,853 809,894
Accumulated other comprehensive income (loss)............. 12,669 (17,188)
Unearned compensation..................................... (727) (146)
Unallocated ESOP shares................................... (224) (683)
Retained earnings......................................... 62,187 6,067
---------- ----------
Total stockholders' equity............................. 1,238,517 827,955
---------- ----------
Total liabilities and stockholders' equity............. $1,682,777 $1,302,257
========== ==========
See accompanying notes to condensed financial statements.
S-6
AMERUS GROUP CO.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME
(PARENT COMPANY)
YEARS ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
------- -------- --------
($ IN THOUSANDS)
Revenues:
Equity in undistributed earnings of subsidiaries........ $87,009 $ 79,297 $ 66,377
Net investment income................................... 5,191 14,337 17,147
Realized losses......................................... -- -- (1,000)
Other income............................................ 13 -- 16
------- -------- --------
92,213 93,634 82,540
Expenses:
Operating expenses...................................... 4,832 5,626 10,255
Demutualization costs................................... -- 8,284 5,300
Restructuring costs..................................... 1,843 -- --
Interest expense........................................ 23,583 6,021 38
------- -------- --------
30,258 19,931 15,593
------- -------- --------
Income before income tax expense and minority interest.... 61,955 73,703 66,947
Income tax (expense) benefit.............................. 10,016 (903) (2,908)
Minority interest......................................... (763) (21,677) (28,107)
------- -------- --------
Net income from continuing operations..................... 71,208 51,123 35,932
Income (loss) from discontinued operations, net of tax.... 1,820 717 2,504
------- -------- --------
Net income before cumulative effect of change in
accounting for derivatives.............................. 73,028 51,840 38,436
Cumulative effect of change in accounting for derivatives,
net of tax.............................................. (121) -- --
------- -------- --------
Net income................................................ $72,907 $ 51,840 $ 38,436
======= ======== ========
See accompanying notes to condensed financial statements.
S-7
AMERUS GROUP CO.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(PARENT COMPANY)
YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
-------- --------- --------
($ IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 72,907 $ 51,840 $ 38,436
Adjustments to reconcile net income to net cash provided
by (used by) operating activities:
Cumulative effect of change in accounting............. 121 -- --
Equity in undistributed earnings...................... (87,009) (79,297) (66,377)
Dividends from subsidiaries........................... 75,900 48,848 43,798
Realized investment losses............................ -- -- 1,000
Minority interest..................................... 763 21,677 28,107
Change in:
Income taxes.......................................... 12,141 9,771 7,616
Other, net............................................ (20,529) (7,918) 101,456
-------- --------- --------
Net cash provided by operating activities.......... 54,294 44,921 154,036
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments................................. (19,505) (15,000) (125)
Sale of investments..................................... 18,000 13,653 --
Purchase of property and equipment
Proceeds from sale of property and equipment
Proceeds from repayment of loans........................ 142 131 40,121
Cash received in merger with ALHI....................... -- 2,914 --
Acquisition of ILICO.................................... (4,980) -- --
Other assets, net....................................... (1,675) (637) (3,351)
-------- --------- --------
Net cash (used in) provided by investing
activities....................................... (8,018) 1,061 36,645
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in debt and capital securities, net.............. 75,747 14,305 --
Allocation of shares in leveraged ESOP.................. 938 1,295 --
Purchase of treasury stock, net of issuance............. (39,305) -- --
Cash paid for demutualization distribution.............. -- (306,168) --
Capital contribution to subsidiaries.................... (30,000) -- --
Dividends paid to stockholders.......................... (16,787) (11,971) --
Other, net.............................................. 117 173 --
-------- --------- --------
Net cash (used in) financing activities............ (15,597) (302,366) --
-------- --------- --------
Net increase (decrease) in cash......................... 30,679 (256,384) 190,681
Cash at beginning of period............................. 11,529 267,913 77,232
-------- --------- --------
Cash at end of period................................... $ 42,208 $ 11,529 $267,913
======== ========= ========
See accompanying notes to condensed financial statements.
S-8
AMERUS GROUP CO.
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
AmerUs Group Co. (the Company) is the parent company of its primary
subsidiaries, AmerUs Life Insurance Company (ALIC), AmerUs Annuity Group Co.
(AAG, formerly AmVestors Financial Corporation (AmVestors)) and AmerUs Capital
Management Group, Inc. (ACM). The Company and ALIC together own all of ILICO
Holdings, Inc., (ILICO), the holding company of Indianapolis Life Insurance
Company (ILIC). ALIC's 7.8 percent ownership in ILICO is recorded as Minority
Interest. The Company's investment in its subsidiaries is stated at cost plus
equity in undistributed earnings of the subsidiaries. The Company's share of net
income of its unconsolidated subsidiaries is included in income using the equity
method. These financial statements should be read in conjunction with AmerUs
Group Co.'s consolidated financial statements.
(2) DEBT AND CAPITAL SECURITIES
Debt and capital securities consist of the following ($ in thousands):
2001 2000
-------- --------
Revolving Credit Agreement (A).............................. $150,000 $ 75,000
ESOP Note (B)............................................... 225 683
Senior notes bearing interest at 6.95% due June 2005........ 125,000 125,000
Bank note bearing interest at 7.24% due March 2004.......... 1,205 --
Junior Subordinated debentures bearing interest at 8.85%
(C)....................................................... 71,560 71,560
Junior Subordinated debentures bearing interest at 7.00%
(D)....................................................... 4,637 133,274
-------- --------
$352,627 $405,517
======== ========
---------------
(A) The revolving credit agreement provides for a maximum borrowing of $175
million with the balance maturing in December 2004. This agreement replaced
the $150 million credit agreement in 2001. The interest rate is variable,
however, the Company may elect to fix the rate for periods from 30 days to
six months. The loan agreement contains various financial and operating
covenants which, among other things, limit future indebtedness and restrict
the amount of future dividend payments.
(B) In connection with the acquisition of AmVestors, the Company has a
leveraged Employee Stock Ownership Plan (ESOP) which was sponsored by
AmVestors for all AmVestors full-time employees with one year of service.
The ESOP acquired AmVestors stock, which was subsequently exchanged for
Company stock, through the proceeds of a note payable to American Investors
Life Insurance Company, a subsidiary of AmVestors. The note bears interest
at 7.0% and is payable in annual installments through December 31, 2002.
(C) The Company issued $88.66 million of junior subordinated debentures to a
wholly-owned subsidiary trust in connection with capital securities issued
by the trust. The debentures bear interest at the rate of 8.85% and mature
February 1, 2027.
(D) The Company issued $149.4 million of junior subordinated debentures to a
wholly-owned subsidiary trust in connection with adjustable conversion-rate
equity security units (ACES) issued by the trust. In connection with the
maturity of the forward stock purchase component of the Company's ACES
units on July 27, 2001, $144.7 million of the junior subordinated
debentures were liquidated. The debentures bear interest at the rate of
7.00% and mature July 27, 2003.
S-9
AMERUS GROUP CO.
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of long-term debt and capital securities are as follows for each
of the five years ending December 31:
(IN THOUSANDS)
Year ending December 31:
2002................................................... $ 225
2003................................................... 4,637
2004................................................... 151,205
2005................................................... 125,000
2006................................................... --
Thereafter................................................ 71,560
--------
$352,627
========
(3) DEMUTUALIZATION
The Company was formerly known as American Mutual Holding Company (AMHC)
and was a mutual insurance holding company whose principal asset was a 58%
interest in AmerUs Life Holdings, Inc. (ALHI). Public stockholders owned the
remaining 42% interest in ALHI (Minority Interest). ALHI was a holding company
which directly or indirectly owned three principal life insurance subsidiaries:
ALIC, American Investors Life Insurance Company (American) and Delta Life and
Annuity Company (Delta). On September 20, 2000, AMHC converted to stock form,
changed its name to AmerUs Group Co. and acquired the Minority Interest of ALHI
by issuing AmerUs Group Co. common stock in exchange for the outstanding shares
of ALHI held by the public. The value of the stock exchange was approximately
$298 million and ALHI merged into the Company simultaneously with the stock
exchange.
Prior to the conversion of the Company to a stock form, the Company was
owned by individuals and entities who held insurance policies or annuity
contracts issued by ALIC (Members). In the conversion, which is referred to as a
demutualization, the Company distributed cash, policy credits and its newly
issued common stock to its Members in exchange for their membership interests.
The value of the distribution totaled approximately $792 million. Reorganization
costs of $8.3 million and $5.3 million are included in the Company's expenses
for the years ended December 31, 2000 and 1999 respectively. These costs consist
primarily of legal, actuarial and consulting expenses associated with the
Company's demutualization.
The acquisition of the ALHI minority interest by the Company was accounted
for as a purchase and accordingly 42% of the book value of the assets and
liabilities of ALHI were adjusted to market value as of the acquisition date.
Approximately 42% of the ALHI earnings for the reporting periods up to the
acquisition date are reduced from the Company's results of operations on the
line titled minority interest on the Company's consolidated statements of
income. From the acquisition date forward, the Company's results of operations
include 100% of these earnings.
S-10
AMERUS GROUP CO.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
($ IN THOUSANDS)
FUTURE POLICY AMORTIZATION
DEFERRED BENEFITS, OTHER BENEFITS, OF DEFERRED
POLICY LOSSES, POLICY CLAIMS, POLICY
ACQUISITION CLAIMS & CLAIMS & NET LOSSES & ACQUISITION
COSTS LOSS UNEARNED BENEFITS PREMIUM INVESTMENT SETTLEMENT COSTS &
SEGMENT & VOBA EXPENSES(1) PREMIUMS PAYABLE(2) REVENUE INCOME EXPENSES VOBA
------- ----------- ---------------- -------- ------------ -------- ---------- ---------- ------------
LIFE INSURANCE
12/31/2001........... $ 613,945 $ 4,752,903 $ -- $29,152 $300,690 $283,330 $482,362 $ 59,693
12/31/2000........... $ 365,820 $ 2,750,669 $ -- $11,890 $252,157 $212,100 $382,515 $ 36,054
12/31/1999........... $ 388,093 $ 2,579,642 $ -- $16,891 $253,707 $202,517 $372,071 $ 37,887
ANNUITIES
12/31/2001........... $ 612,564 $10,925,389 $ -- $ 3,505 $ 12,828 $577,913 $374,872 $ 73,206
12/31/2000........... $ 539,922 $ 7,207,576 $ -- $ -- $ 21,820 $468,404 $323,560 $ 56,696
12/31/1999........... $ 469,253 $ 6,823,004 $ -- $ -- $ 25,122 $443,359 $339,056 $ 50,230
OTHER
12/31/2001........... $ -- $ 77,874 $ -- $ 490 $ 132 $ 11,931 $ 2,459 $ --
12/31/2000........... $ -- $ 17,372 $ -- $ -- $ 230 $ 19,021 $ 676 $ --
12/31/1999........... $ -- $ -- $ -- $ -- $ 136 $ 19,521 $ 291 $ --
TOTAL
12/31/2001........... $1,226,509 $15,756,166 $ -- $33,147 $313,650 $873,174 $859,693 $132,899
12/31/2000........... $ 905,742 $ 9,975,617 $ -- $11,890 $274,207 $699,525 $706,751 $ 92,750
12/31/1999........... $ 857,346 $ 9,402,646 $ -- $16,891 $278,965 $665,397 $711,418 $ 88,117
OTHER
OPERATING PREMIUMS
SEGMENT EXPENSES WRITTEN
------- --------- --------
LIFE INSURANCE
12/31/2001........... $ 69,035 n/a
12/31/2000........... $ 51,532 n/a
12/31/1999........... $ 57,784 n/a
ANNUITIES
12/31/2001........... $ 60,911 n/a
12/31/2000........... $ 52,554 n/a
12/31/1999........... $ 37,204 n/a
OTHER
12/31/2001........... $ 20,060 n/a
12/31/2000........... $ 30,646 n/a
12/31/1999........... $ 32,849 n/a
TOTAL
12/31/2001........... $150,006 n/a
12/31/2000........... $134,732 n/a
12/31/1999........... $127,837 n/a
---------------
(1) Policy reserves, policyowner funds and dividends payable to policyowners
(2) Policy and contract claims
S-11
AMERUS GROUP CO.
SCHEDULE IV
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
OTHER FROM OTHER NET ASSUMED
GROSS AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------------ ----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2001
Life insurance in force........ $66,268,038 $49,453,962 $4,206,218 $21,020,294 20.01%
=========== =========== ========== =========== ======
Premiums
Life insurance............... $ 366,666 $ 92,327 $ 26,351 $ 300,690 8.76%
Annuities.................... 12,967 139 -- 12,828 --%
Other........................ 1,533 1,401 -- 132 --%
----------- ----------- ---------- ----------- ------
Total premiums................. $ 381,166 $ 93,867 $ 26,351 $ 313,650 8.40%
=========== =========== ========== =========== ======
YEAR ENDED DECEMBER 31, 2000
Life insurance in force........ $35,503,699 $25,208,439 $ 697,800 $10,993,060 6.35%
=========== =========== ========== =========== ======
Premiums
Life insurance............... $ 280,948 $ 30,172 $ 1,381 $ 252,157 0.55%
Annuities.................... 21,820 -- -- 21,820 --%
Other........................ 1,557 1,331 4 230 1.74%
----------- ----------- ---------- ----------- ------
Total premiums................. $ 304,325 $ 31,503 $ 1,385 $ 274,207 0.51%
=========== =========== ========== =========== ======
YEAR ENDED DECEMBER 31, 1999
Life insurance in force........ $33,046,944 $ 5,616,065 $ 655,021 $28,085,900 2.33%
=========== =========== ========== =========== ======
Premiums
Life insurance............... $ 270,146 $ 18,189 $ 1,750 $ 253,707 0.69%
Annuities.................... 25,122 -- -- 25,122 --%
Other........................ 1,622 1,486 -- 136 --%
----------- ----------- ---------- ----------- ------
Total premiums................. $ 296,890 $ 19,675 $ 1,750 $ 278,965 0.63%
=========== =========== ========== =========== ======
S-12