UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
----------------------------------------
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
COMMISSION FILE NUMBER 000-30898
AMERUS GROUP CO.
(Exact name of Registrant as specified in its charter)
699 WALNUT STREET
DES MOINES, IOWA 50309-3948
(Address of principal executive offices)
IOWA 42-1458424
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Registrant's telephone number, including area code (515) 362-3600
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /x/ No / /
The number of shares outstanding of each of the Registrant's classes of common
stock on May 3, 2002 was as follows:
Common Stock 40,442,743 shares
Exhibit index - Page 46
Page 1 of 52
1
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION................................................................... 4
Item 1. Financial Statements............................................................... 4
Consolidated Balance Sheets
March 31, 2002 (Unaudited) and December 31, 2001................................... 4
Consolidated Statements of Income (Unaudited)
For the Three Months Ended March 31, 2002 and 2001................................. 6
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
For the Three Months Ended March 31, 2002 and 2001................................. 7
Consolidated Statements of Stockholders' Equity
For the Three Months Ended March 31, 2002 (Unaudited) and
the Year Ended December 31, 2001................................................... 8
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2002 and 2001................................. 9
Notes to Consolidated Financial Statements
(Unaudited) ....................................................................... 11
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition ............................................................... 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 41
PART II - OTHER INFORMATION...................................................................... 43
Item 1. Legal Proceedings.................................................................. 43
Item 2. Changes in Securities and Use of Proceeds.......................................... 43
Item 6. Exhibits and Reports on Form 8-K................................................... 44
Signatures....................................................................................... 45
Index to Exhibits................................................................................ 46
2
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
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.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERUS GROUP CO.
CONSOLIDATED BALANCE SHEETS
($ in thousands)
March 31, December, 31
2002 2001
---------------------------
(unaudited)
ASSETS
Investments:
Securities available-for-sale at fair value:
Fixed maturity securities $11,448,608 $11,037,425
Equity securities 18,057 11,362
Short-term investments 17,332 14,881
Securities held for trading purposes:
Fixed maturity securities 2,066,719 2,175,106
Equity securities 17,073 12,013
Short-term investments 4,200 4,212
Mortgage loans 927,930 944,532
Real estate 1,287 1,405
Policy loans 501,037 506,318
Other investments 311,052 345,179
-------------------------
Total investments 15,313,295 15,052,433
Cash and cash equivalents 109,214 179,376
Accrued investment income 184,337 174,238
Premiums, fees and other receivables 7,733 9,920
Reinsurance receivables 760,591 732,030
Deferred policy acquisition costs 740,110 642,680
Value of business acquired 597,190 583,829
Goodwill 204,014 195,484
Property and equipment 82,267 83,221
Deferred income taxes 12,000 12,140
Other assets 430,029 270,888
Separate account assets 325,380 328,385
Assets of discontinued operations 31,401 34,528
-------------------------
Total assets $18,797,561 $18,299,152
=========================
See accompanying notes to consolidated financial statements.
4
AMERUS GROUP CO.
CONSOLIDATED BALANCE SHEETS
($ in thousands)
March 31, December, 31
2002 2001
------------------------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy reserves and policyowner funds:
Future life and annuity policy benefits $ 15,404,118 $ 15,102,001
Policyowner funds 722,014 432,941
------------------------------
16,126,132 15,534,942
Accrued expenses and other liabilities 476,431 488,949
Dividends payable to policyowners 187,021 221,224
Policy and contract claims 39,773 33,147
Income taxes payable 17,444 45,809
Notes payable 380,576 315,574
Separate account liabilities 325,380 328,385
Liabilities of discontinued operations 18,974 23,551
------------------------------
Total liabilities 17,571,731 16,991,581
Company-obligated mandatorily redeemable preferred
capital securities of subsidiary trusts holding solely
junior subordinated debentures of the Company 48,249 69,054
Stockholders' equity:
Preferred Stock, no par value, 20,000,000 shares
authorized, none issued - -
Common Stock, no par value, 230,000,000 shares
authorized; 40,407,968 shares issued and outstanding in 2002 (net of
3,213,542 treasury shares) and 41,759,450 shares issued and
outstanding
in 2001 (net of 1,746,548 treasury shares) 40,408 41,759
Paid-in capital 1,074,600 1,122,853
Accumulated other comprehensive income (loss) (23,614) 12,669
Unearned compensation (690) (727)
Unallocated ESOP shares (224) (224)
Retained earnings 87,101 62,187
------------------------------
Total stockholders' equity 1,177,581 1,238,517
------------------------------
Total liabilities and stockholders' equity $ 18,797,561 $ 18,299,152
==============================
See accompanying notes to consolidated financial statements.
5
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except share data)
For The Three Months Ended March 31,
2002 2001
-----------------------------------
(unaudited)
Revenues:
Insurance premiums $ 92,108 $ 57,167
Universal life and annuity product charges 42,871 24,266
Net investment income 239,770 181,128
Realized/unrealized losses on investments (24,712) (39,835)
Other income 12,012 10,332
------------------------------
362,049 233,058
------------------------------
Benefits and expenses:
Policyowner benefits 213,556 120,484
Underwriting, acquisition and other expenses 36,251 31,334
Demutualization costs 285 -
Restructuring costs 1,795 -
Amortization of deferred policy acquisition costs
and value of business acquired 39,842 25,271
Dividends to policyowners 28,403 19,158
------------------------------
320,132 196,247
------------------------------
Income from continuing operations 41,917 36,811
Interest expense 6,027 7,332
------------------------------
Income before income tax expense 35,890 29,479
Income tax expense 11,432 10,021
------------------------------
Net income from continuing operations 24,458 19,458
Discontinued operations (net of tax):
Income from discontinued operations 456 414
------------------------------
Net income before cumulative effect of change in
accounting for derivatives 24,914 19,872
Cumulative effect of change in accounting for
derivatives, net of tax - (8,236)
------------------------------
Net income $ 24,914 $ 11,636
==============================
Net income from continuing operations per common share:
Basic $ 0.59 $ 0.65
==============================
Diluted $ 0.58 $ 0.64
==============================
Net income from discontinued operations per common share:
Basic $ 0.01 $ 0.01
==============================
Diluted $ 0.01 $ 0.01
==============================
Net income per common share:
Basic $ 0.60 $ 0.39
==============================
Diluted $ 0.59 $ 0.38
==============================
Weighted average common shares outstanding:
Basic 41,349,785 29,973,039
==============================
Diluted 41,968,570 30,365,387
==============================
See accompanying notes to consolidated financial statements.
6
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
For The Three Months Ended March 31,
2002 2001
------------------------------------
(unaudited)
Net income $ 24,914 $ 11,636
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 (59,584) 45,240
Less: Reclassification adjustment for (losses)
included in net income (3,764) (6,977)
-------------------------------
Other comprehensive income (loss), before tax (55,820) 51,555
Income tax (expense) benefit related to items of other
comprehensive income 19,537 (18,044)
-------------------------------
(36,283) 33,511
Amounts attributable to:
Change in accounting for derivatives - 2,661
-------------------------------
Other comprehensive income (loss), net of taxes (36,283) 36,172
-------------------------------
Comprehensive income (loss) $(11,369) $ 47,808
==============================
See accompanying notes to consolidated financial statements.
7
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
March 31, 2002
($ in thousands)
Accumulated
Additional Other Unallocated Total
Paid-In Comprehensive Unearned ESOP Retained Stockholders'
Common Stock Capital Income (Loss) Compensation Shares Earnings Equity
------------ ---------- ------------- ------------ -------- -------- -------------
Balance at December 31, 2000 30,011 809,894 (17,188) (146) (683) 6,067 827,955
2001:
Net income - - - - - 72,907 72,907
Change in accounting for derivatives - - 2,661 - - - 2,661
Transfer related to unrealized gain on
available-for-sale securities reclassified
to trading - - (430) - - - (430)
Net unrealized gain (loss) on securities - - 35,891 - - - 35,891
Net unrealized gain (loss) on derivatives
designated as cash flow hedges - - (5,933) - - - (5,933)
Stock issued under various incentive
plans, net of forfeitures 338 8,921 - (581) - - 8,678
Dividends declared on common stock - - - - - (16,787) (16,787)
Purchase of treasury stock (1,406) (43,579) - - - - (44,985)
Acquisition of IL Holdings 9,047 223,358 - - - - 232,405
Conversion of company-obligated
mandatorily redeemable preferred
capital securities 3,769 123,779 - - - - 127,548
Allocation of shares in leveraged
ESOP - 480 - - 459 - 939
Minimum pension liability adjustment - - (2,332) - - - (2,332)
-------- ----------- -------- -------- -------- -------- -----------
Balance at December 31, 2001 $ 41,759 $ 1,122,853 $ 12,669 $ (727) $ (224) $ 62,187 $ 1,238,517
2002 (unaudited):
Net income - - - - - 24,914 24,914
Net unrealized gain (loss) on securities - - (37,896) - - - (37,896)
Net unrealized gain (loss) on derivatives
designated as cash flow hedges - - 1,613 - - - 1,613
Stock issued under various incentive
plans, net of forfeitures 350 9,372 - 37 - - 9,759
Purchase of treasury stock (1,701) (57,625) - - - - (59,326)
-------- ----------- -------- -------- -------- -------- -----------
Balance at March 31, 2002 $ 40,408 $ 1,074,600 $(23,614) $ (690) $ (224) $ 87,101 $ 1,177,581
======== =========== ======== ======== ======== ======== ===========
See accompanying notes to consolidated financial statements.
8
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
For The Three Months Ended March 31,
2002 2001
------------------------------------
(unaudited)
Cash flows from operating activities
Net income $ 24,914 $ 11,636
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 (37,148) (17,448)
Interest credited to policyowner account
balances 110,617 84,075
Change in option value of equity-indexed products
and market value adjustments on total
return strategy annuities (15,131) (34,969)
Realized/unrealized (gains) losses on investments 24,712 39,835
Goodwill amortization - 1,943
DAC amortization 18,008 6,779
VOBA amortization 21,834 18,492
Change in:
Accrued investment income (10,099) (9,322)
Reinsurance receivables (28,561) 15,483
Securities held for trading purposes:
Fixed maturities 97,218 (10,049)
Equity securities (4,633) -
Short-term investments 10 -
Deferred policy acquisition costs (89,473) (52,071)
Liabilities for future policy benefits 148,373 5,055
Accrued expenses and other liabilities (20,465) (19,650)
Policy and contract claims and other
policyowner funds 17,853 (307)
Income taxes:
Current (28,366) (11,812)
Deferred 35,100 15,364
Other, net (31,041) (30,667)
-----------------------------
Net cash provided by operating activities 233,722 20,603
-----------------------------
Cash flows from investing activities:
Purchase of fixed maturities available-for-sale (1,542,411) (860,573)
Proceeds from sale of fixed maturities available-for-sale 912,604 547,092
Maturities, calls and principal reductions of
fixed maturities available-for-sale 195,649 108,216
Purchase of equity securities (1,003) (145)
Change in short-term investments, net (2,447) 7,241
Purchase of mortgage loans (12,411) (21,443)
9
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
For The Three Months Ended March 31,
2002 2001
-----------------------------------
(unaudited)
Proceeds from repayment and sale of mortgage loans 28,214 14,212
Purchase of real estate and other invested assets (17,020) (27,276)
Proceeds from sale of real estate and other
invested assets 64,749 13,695
Change in policy loans, net 5,221 1,539
Other assets, net (3,506) (4,433)
---------------------------
Net cash (used in) investing activities (372,361) (221,875)
---------------------------
Cash flows from financing activities:
Deposits to policyowner account balances 487,999 548,022
Withdrawals from policyowner account balances (409,046) (351,814)
Change in debt, net (119,998) (16,120)
Stock issued under various incentive plans, net of
forfeitures 9,759 515
Purchase of treasury stock (59,326) (299)
Proceeds from issuance of OCEANs 179,239 -
Retirement of company-obligated mandatorily
redeemable capital securities (20,150) -
---------------------------
Net cash provided by financing activities 68,477 180,304
---------------------------
Net (decrease) in cash (70,162) (20,968)
Cash and cash equivalents at beginning of period 179,376 65,485
---------------------------
Cash and cash equivalents at end of period $ 109,214 $ 44,517
===========================
Supplemental disclosure of cash activities:
Interest paid $ 4,664 $ 7,833
===========================
Income taxes paid $ 16,905 $ 3,495
===========================
10
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States (GAAP) for interim financial information and the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by GAAP for annual financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. All adjustments were of a normal
recurring nature, unless otherwise noted in Management's Discussion and Analysis
and the Notes to Consolidated Financial Statements. Operating results for the
three months ended March 31, 2002 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2002 (see further
discussion in Management's Discussion and Analysis). For further information and
for capitalized terms not defined in this Form 10-Q, refer to the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2001.
The accompanying consolidated financial statements include the accounts and
operations of the Company and its wholly-owned subsidiaries, principally AmerUs
Life Insurance Company (ALIC), AmerUs Annuity Group Co. (AAG), AmerUs Capital
Management Group, Inc. (ACM), and ILICO Holdings, Inc. (ILICO), holding company
of Indianapolis Life Insurance Company (ILIC) and its subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Effective on March 29, 2002, Western Security Life Insurance Company, a
subsidiary of ILIC, was sold. The insurance business of Western Security Life
Insurance Company was transferred to ILIC prior to the sale. The sale of the
corporate organization and insurance licenses resulted in a gain of
approximately $1.9 million which is included in realized gains.
Certain amounts in the 2001 financial statements have been reclassified to
conform to the 2002 financial statement presentation.
(2) EARNINGS PER SHARE
Basic earnings per share of common stock are computed by dividing net
income by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share assumes the issuance of common shares
applicable to stock options and warrants calculated using the treasury stock
method. In addition, diluted earnings per share applicable to the Company's
Optionally Convertible Equity-linked Accreting Notes (OCEANs(SM)) are determined
using the if-converted method for the number of days in the period in which the
common stock price conversion condition is met. No undistributed net income has
been allocated to the convertible securities holders since their participation
in dividends with common stockholders is established at the amount of the annual
regular dividend. See further discussion of the OCEANs in note 5.
(3) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 133 "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138, which requires
that all derivative instruments, including certain derivative instruments
embedded in other contracts, be reported on the balance sheet at fair value.
Accounting for gains and losses resulting from changes in the values of
derivatives is dependent upon the use of the
11
derivative and its qualification for special hedge accounting. In accordance
with the provisions of SFAS No. 133, the Company recorded a transition
adjustment as of January 1, 2001 upon adoption of the standard to recognize its
derivative instruments at fair value resulting in a pre-tax reduction to income
of $12.4 million ($8.2 million after-tax) and an increase to Accumulated Other
Comprehensive Income (AOCI) of $2.7 million. The reduction to income , which is
classified as a "cumulative effect of change in accounting for derivatives, net
of tax" in the Consolidated Statements of Income, is attributable to losses on
basis swaps that were natural hedges and losses on interest rate swaps
reclassified from AOCI that have been redesignated as cash flow hedges of
floating rate funding agreement liability effective January 1, 2001. In
addition, the reduction to income includes adjustments to fair value for options
being used to hedge embedded options contained within equity-indexed annuity
products. The increase in AOCI, which is classified as "change in accounting for
derivatives" in the Consolidated Statements of Comprehensive Income, is
attributable to the reclassification of the interest rate swap's fair value
adjustment from AOCI to the Consolidated Statements of Income.
During the first quarter of 2002 and 2001, realized/unrealized gains
(losses) on investments included an unrealized loss of $6.8 million and $33.3
million, respectively, from the change in fair value on call options used as a
natural hedge of embedded options within equity-indexed annuities. Additionally,
the first quarter of 2002 included a $12.6 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 of $15.1 million
and $35.0 million for the first quarter of 2002 and 2001, respectively. In
addition, basis swaps were terminated during the first quarter of 2001 and an
increase in fair value of $1.8 million on those swaps was included in net
investment income. AOCI included an unrealized gain of $1.6 million and loss of
$2.8 million from the fair value change in interest rate swaps used to hedge the
floating rate funding agreement liability during the first quarter of 2002 and
2001, respectively. The Company estimates that $0.2 million of derivative losses
included in AOCI will be reclassified into earnings within the next twelve
months. The ineffectiveness of the interest rate swap cash flow hedge was not
considered significant for the first quarter of 2002 and 2001.
The following table summarizes the income (loss) impact of the market value
adjustment on trading securities and derivatives for the three months ended
March 31, 2002 and 2001 (in thousands):
For The Three Months Ended March 31,
2002 2001
-----------------------------------
Fixed maturity securities held for trading $(12,638) $ -
Options on equity-indexed annuities (6,820) (33,290)
Equity-indexed and total return strategy fixed
annuity liabilities 15,131 34,969
Deferred policy acquisition cost amortization
impact of net annuity adjustments (3,861) (773)
--------------------------
Pre-tax total (8,188) 906
Income taxes 2,866 (317)
--------------------------
After-tax total $ (5,322) $ 589
==========================
12
(4) CLOSED BLOCK
The Company has established two closed blocks, which we refer to as the
Closed Block. The first was established on June 30, 1996 in connection with the
reorganization of ALIC to a stock form. The second was established as of March
31, 2000 in connection with the reorganization of ILIC to a stock form. The
operations of ILIC have been included in the consolidated financial statements
of the Company since May 18, 2001. Insurance policies which had a dividend scale
in effect as of each Closed Block establishment date, were included in the
Closed Block. The Closed Block was designed to provide reasonable assurance to
owners of insurance policies included therein that, after the reorganization of
ALIC and 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 credits continues.
Summarized financial information of the Closed Block as of March 31, 2002
and December 31, 2001 and for the three months ended March 31, 2002 and 2001 are
as follows:
March 31, December 31,
2002 2001
---------------------------------
($ in thousands) (unaudited)
LIABILITIES:
Future life and annuity policy benefits $ 2,819,368 $ 2,835,423
Policyowner funds 4,883 4,656
Accrued expenses and other liabilities 70,146 69,678
Dividends payable to policyowners 154,648 154,139
Policy and contract claims 11,499 8,843
Policyowner dividend obligation 26,667 61,486
---------------------------------
Total Liabilities 3,087,211 3,134,225
---------------------------------
ASSETS:
Securities available-for-sale at fair value:
Fixed maturity securities 1,843,481 1,829,060
Mortgage loans 104,163 105,901
Policy loans 359,838 363,981
Other investments 53 4,653
Cash and cash equivalents 5,777 18,382
Accrued investment income 32,587 32,396
Premiums and fees receivable 17,200 22,414
Other assets 43,770 41,827
---------------------------------
Total Assets 2,406,869 2,418,614
---------------------------------
Maximum future earnings to be recognized from assets and
liabilities of the Closed Block $ 680,342 $ 715,611
=================================
For The Three Months Ended March 31,
2002 2001
---------------------------------
($ in thousands) (unaudited)
OPERATIONS:
Insurance premiums $ 65,788 $ 44,848
Universal life and annuity product charges 2,897 3,314
Net investment income 38,043 25,279
Realized gains (losses) on investments 4,624 244
Policyowner benefits (72,115) (48,823)
Underwriting, acquisition and other expenses (1,254) (766)
Dividends to policyowners (26,335) (17,627)
---------------------------------
Contribution from the Closed Block before income taxes $ 11,648 $ 6,469
=================================
13
(5) DEBT AND CAPITAL SECURITIES
Debt and capital securities consist of the following:
March 31, December 31,
2002 2001
--------- -----------
(unaudited)
($ in thousands)
Federal Home Loan Bank community investment
long-term advances with a weighted average
interest rate of 5.90% at March 31, 2002 (A) $ 14,247 $ 14,369
Optionally Convertible Equity-linked Accreting Notes
due on March 6, 2032 (B) 185,124 -
Senior notes bearing interest at 6.95%
due June, 2005 125,000 125,000
Revolving credit agreement 30,000 150,000
Surplus note bearing interest at 8.66% due on
April 11, 2011 25,000 25,000
Note payable to a bank bearing interest at 7.24%
due March, 2004 1,205 1,205
-------- --------
$380,576 $315,574
======== ========
AmerUs Capital I 8.85% Capital
Securities Series A due
February 1, 2007 (C) $ 48,095 $ 68,900
AmerUs Capital II 7.00% Adjustable
Conversion-rate Equity Security
Units are due July 27, 2003 154 154
-------- --------
$ 48,249 $ 69,054
======== ========
(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 March 31, 2001. These borrowings are secured
and interest is payable at the current rate at the time of each advance.
(B) On March 6, 2002, the Company issued and sold in a private placement $185
million aggregate original principal amount of OCEANs. The OCEANs were issued
and sold in an original principal amount of $1,000 per OCEAN, with a principal
amount at maturity of $1,270 per OCEAN. The maturity date of the OCEANs is March
6, 2032. The OCEANs will have aggregate principal amount at maturity of
$234,950,000. The notes are convertible into shares of the Company's common
stock at an initial conversion price (subject to adjustment) of $37.60 per share
only if the sale price of the common stock
14
exceeds $47.85 per share for at least 20 trading days in a 30-day trading period
or in certain other limited circumstances.
The yield on the OCEANs, without taking into account any contingent
interest, as described below, will be approximately 3.83% per annum compounded
semiannually from March 6, 2002 through March 6, 2007, and approximately 2.28 %
per annum compounded semiannually from March 6, 2007 through maturity. We will
pay a portion of the yield in cash which is referred to as stated interest, on
semiannual interest payment dates. Since only a portion of the yield on the
OCEANs will be paid as stated interest, the principal amount of each OCEAN will
accrete over time such that the principal amount of each OCEAN will be $1,270.00
at maturity.
Prior to March 6, 2007, each OCEAN may be converted into a number of shares
of our common stock equal to the accreted principal amount of the OCEANs at the
time of conversion divided by the initial conversion price of $37.598 per share,
subject to adjustment. On and after March 6, 2007, each OCEAN may be converted
into a number of shares of our common stock equal to $1,100.00 divided by the
then effective conversion price. The conversion price (and therefore the
conversion rate) will be adjusted under some circumstances.
Additionally, if a special conversion event has occurred, holders may
convert their OCEANs for a specified period into a number of shares of our
common stock per OCEAN equal to 90% of the quotient of $1,100.00 divided by the
conversion price then in effect. A "special conversion event" will have occurred
if a holder requests for quotes for such holder's OCEANs during a three-day
period, and a firm quote cannot be obtained for the OCEANs during such period
equal to at least 90% of the closing stock price of our common stock on any such
day multiplied by the quotient of $1,100.00 divided be the conversion price in
effect on such day.
We will also pay contingent interest semiannually in cash through March 6,
2004 in an amount equal to $11.70 per annum per OCEAN. After March 6, 2004,
contingent interest will be payable quarterly in cash in an amount equal to the
regular cash dividends, if any, paid by us on our common stock in the
immediately preceding three months.
Proceeds from the OCEANs were used to repay borrowings on the Company's
revolving credit facility and to purchase approximately 1.7 million shares
amounting to $59 million of the Company's common stock. The OCEANs 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.
(C) On March 26, 2002, $20.8 million of the AmerUs Capital I 8.85% Capital
Securities were repurchased which did not result in a material gain.
For an additional discussion of the terms of the above indebtedness refer
to the Company's consolidated financial statements as of December 31, 2001.
(6) FEDERAL INCOME TAXES
The effective income tax rate for the three-month periods ending March 31,
2002 and 2001, respectively, varied from the prevailing corporate rate primarily
as a result of non-deductible demutualization costs, low income housing and
rehabilitation credits, and tax exempt income in 2002 and 2001 and goodwill
amortization in 2001.
(7) 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
15
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. As a result of purchase price
allocation studies that are still in process, the final purchase price
allocations may differ from the amounts reflected as of March 31, 2002. Although
the final allocations may differ, the consolidated financial statements as of
March 31, 2002 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 was amortized over thirty years through
December 31, 2001. In accordance with SAS 142, "Goodwill and Other Intangible
Assets," effective January 1, 2002, goodwill is no longer amortized but instead
tested for impairment (see note 9). The operations of ILICO have been included
in the consolidated financial statements of the Company since May 18, 2001. 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 405.4
Value of business acquired 215.4
Goodwill 27.3
Separate account assets 345.6
Policyowner reserves and funds (4,801.3)
Other liabilities (151.1)
Debt (25.0)
Separate account liabilities (345.6)
---------
Total investment in ILICO $ 326.4
=========
(8) RESTRUCTURING CHARGES
During the third quarter of 2001, the Company began consolidating various
functions in connection with a restructuring of its protection products and
accumulation products operations. The objective of the restructuring plan is to
eliminate duplicative functions for all business units. The elimination of
duplicative functions is intended to reduce on-going operating costs for the
Company. General administrative functions will be transitioned so they are
performed primarily in Des Moines, Iowa. Protection products processes will be
transitioned so they are performed primarily in Des Moines and Indianapolis,
Indiana and accumulation products functions will be transitioned to Topeka,
Kansas.
Restructuring charges have been included in operating expenses in the
consolidated statement of income for the quarter ended March 31, 2002. The
restructuring charges for the quarter ended March 31, 2002 include pre-tax
severance and termination benefits of $0.4 million related to the elimination of
approximately ten positions and other pre-tax costs of $1.4 million primarily
related to systems conversion and relocation of employees. An accrual for
severance and termination benefits not yet paid amounted to $0.5 million at
March 31, 2002.
The Company has not finalized all restructuring activities as of March 31,
2002. Additional activities will primarily involve relocation or severance
benefits for affected employees and various administrative, financial, and
actuarial system conversion costs. Expenditures for all restructuring activities
are expected to be completed by the fourth quarter of 2003.
16
(9) ADOPTION OF SFAS 142
SFAS 142, "Goodwill and Other Intangible Assets," changes the accounting
for goodwill and other intangible assets and generally became effective January
1, 2002. SFAS 142 adopts a nonamortization, impairment-only model for the
Company's goodwill and indefinite-lived intangible assets. This includes a more
stringent impairment test methodology for measuring and recognizing impairment
losses. The Company accordingly discontinued amortization of goodwill on January
1, 2002. As of March 31, 2002, goodwill of $27.3 million is in the protection
products segment and $176.8 million is in the accumulation products segment. The
only intangible asset other than goodwill, is VOBA which is being amortized and
amounted to a gross carrying amount of $817.8 million and $220.6 million of
accumulated amortization at March 31, 2002. Goodwill changed from $195.5 million
at December 31, 2001 to $204.0 million at March 31, 2002 primarily due to the
adjustment of the ILICO purchase price allocation.
A reconciliation of net income and basic and diluted earnings per share
reported for the quarter ended March 31, 2001 to exclude amortization expense of
goodwill is as follows (in thousands except per share amounts):
For the Three Months
Ended March 31,
2002 2001
----------------------
Net income as reported $24,914 $11,636
Goodwill amortization expense - 1,943
----------------------
Adjusted net income $24,914 $13,579
======================
Basic earnings per share as reported $ 0.60 $ 0.39
Goodwill amortization expense - 0.06
----------------------
Adjusted basic earnings per share $ 0.60 $ 0.45
======================
Diluted earnings per share as reported $ 0.59 $ 0.38
Goodwill amortization expense - 0.07
----------------------
Adjusted diluted earnings per share $ 0.59 $ 0.45
======================
The Company is currently evaluating the transitional impairment loss, if
any, which will be reflected as a cumulative effect of a change in accounting
principle as of January 1, 2002. The measurement of any impairment loss must be
completed by December 31, 2002. The Company does not anticipate a material
impact to the consolidated financial statements as a result of adopting SFAS
142.
(10) COMMITMENTS AND CONTINGENCIES
In recent years, the life insurance industry, including the Company and its
subsidiaries, have been subject to an increase in litigation pursued on behalf
of purported classes of insurance purchasers, questioning the conduct of
insurers in the marketing of their products. The Company is involved in
litigation, including class actions, reinsurance claims and regulatory
proceedings, arising in the ordinary course of its business. Some of these
claims and legal actions are in jurisdictions where juries are given substantial
latitude in assessing damages, including punitive damages. Although no
assurances can be given and no determinations can be made at this time, the
Company believes that the ultimate liability, if any, with respect to these
other claims and legal actions, would have no material effect on our results of
operations and financial position.
17
(11) OPERATING SEGMENTS
The Company has two operating segments: Protection Products and
Accumulation Products. Products generally distinguish a segment. A brief
description of each segment follows:
PROTECTION PRODUCTS
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 (PPGA)
distribution system and Independent Marketing Organizations (IMOs).
ACCUMULATION PRODUCTS
The primary product offerings consist of individual fixed annuities
marketed on a national basis primarily through independent brokers and IMOs and
insurance contracts issued through separate account funding agreements.
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 the Closed Block 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
the 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 segment are
grouped together in the All Other category. These items primarily consist of
holding company revenues and expenses and the operations of the Company's real
estate management subsidiary.
Assets are segmented based on policy liabilities directly attributable to
each segment. There are no significant intersegment transactions. Depreciation
and amortization, excluding amortization of deferred policy acquisition costs
and VOBA as previously discussed, are not significant. There have been no
material changes in segment assets since December 31, 2001.
18
Operating segment income is as follows:
Operating Segment Income
($ in thousands)
For The Three Months Ended March 31, 2002
-------------------------------------------------------------------
Protection Accumulation Total
Products Products All Other Consolidated
-------------------------------------------------------------------
Revenues:
Insurance premiums $ 88,535 $ 2,952 $ 621 $ 92,108
Universal life and annuity product charges 32,856 10,015 - 42,871
Net investment income 80,425 158,343 1,002 239,770
Core realized gains on investments 4,624 - - 4,624
Other income 953 10,545 514 12,012
-------------------------------------------------------------------
207,393 181,855 2,137 391,385
Benefits and expenses:
Policyowner benefits 109,551 118,340 796 228,687
Underwriting, acquisition, and other expenses 19,642 12,997 3,612 36,251
Amortization of deferred policy acquisition costs
and value of business acquired, net of
non-core adjustment of $1,556 14,333 23,953 - 38,286
Dividends to policyowners 28,403 - - 28,403
-------------------------------------------------------------------
171,929 155,290 4,408 331,627
-------------------------------------------------------------------
Adjusted pre-tax operating income $ 35,464 $ 26,565 $ (2,271) 59,758
=================================================
Non-core realized/unrealized (losses) on investments (29,336)
Change in option value of equity-indexed
annuity products and market value
adjustments on total return strategy annuities 15,131
Amortization of deferred policy acquisition costs and
VOBA due to non-core realized gains or losses (1,556)
Demutualization costs (285)
Restructuring costs (1,795)
-----------
Income from continuing operations 41,917
Interest (expense) (6,027)
Income tax (expense) (11,432)
Income from discontinued operations, net of tax 456
-----------
Net income $ 24,914
===========
19
Operating Segment Income
($ in thousands)
For The Three Months Ended March 31, 2001
-------------------------------------------------------------
Protection Accumulation Total
Products Products All Other Consolidated
-------------------------------------------------------------
Revenues:
Insurance premiums $ 52,526 $ 4,613 $ 28 $ 57,167
Universal life and annuity product charges 17,134 7,132 - 24,266
Net investment income 53,031 127,188 909 181,128
Core realized/unrealized gains on investments 244 652 - 896
Other income - 8,057 2,275 10,332
-------------------------------------------------------------
122,935 147,642 3,212 273,789
Benefits and expenses:
Policyowner benefits 65,107 90,357 (11) 155,453
Underwriting, acquisition, and other expenses 14,140 14,517 2,677 31,334
Amortization of deferred policy acquisition costs
and value of business acquired, net of
non-core adjustment of ($638) 9,609 16,300 - 25,909
Dividends to policyowners 19,158 - - 19,158
-------------------------------------------------------------
108,014 121,174 2,666 231,854
-------------------------------------------------------------
Adjusted pre-tax operating income $ 14,921 $ 26,468 $ 546 41,935
===========================================
Non-core realized/unrealized (losses) on investments (40,731)
Change in option value of equity-indexed
annuity products and market value
adjustments on total return strategy annuities 34,969
Amortization of deferred policy acquisition costs and
VOBA due to non-core realized gains or losses 638
----------
Income from continuing operations 36,811
Interest (expense) (7,332)
Income tax (expense) (10,021)
Income from discontinued operations, net of tax 414
Cumulative effect of change in accounting for derivatives, net of tax (8,236)
----------
Net income $ 11,636
==========
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following analysis of the consolidated results of operations and
financial condition of AmerUs Group Co. should be read in conjunction with the
Consolidated Financial Statements and related notes.
NATURE OF OPERATIONS
We are a holding company whose subsidiaries are primarily engaged in the
business of marketing, underwriting and distributing a broad range of individual
life, annuity and insurance deposit products to individuals and businesses in 50
states, the District of Columbia and the U.S. Virgin Islands. We have two
reportable operating segments: protection products and accumulation products.
The protection products segment was formerly known as the life insurance segment
and the accumulation products segment was formerly known as the annuity segment.
The protection products segment primary offerings consist of whole life,
interest-sensitive whole life, equity-indexed life, universal life and term life
insurance policies. The primary offerings of the accumulation products segment
are individual fixed annuities and separate account funding agreements.
ADJUSTED NET OPERATING INCOME
The following table reflects net income adjusted to eliminate certain items
(net of applicable income taxes) which our management believes do not
necessarily indicate overall operating trends. For example, net realized capital
gains or losses on investments, excluding gains or losses on the closed block
which are considered core earnings, are eliminated. Net realized capital gains
or losses on investments may be realized at the sole discretion of management
and are often realized in accordance with tax planning strategies. Therefore,
our management believes that our net realized capital gains or losses on
investments do not reflect the Company's ongoing 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 net income computed in accordance with
accounting principles generally accepted in the United States, or GAAP.
21
For the Three Months Ended March 31,
2002 2001
-----------------------------------
($ in thousands, except per share data)
Net Income $ 24,914 $ 11,636
Net non-core realized (gains) losses (A) 6,420 4,817
Net amortization of deferred policy
acquisition costs due to non-core
realized gains or losses (B) (1,498) (1,506)
Net effect of accounting differences
from the adoption of SFAS 133 (C) 5,322 -
Demutualization costs (D) 285 -
Restructuring costs (E) 1,116 -
Discontinued operations (F) (456) (414)
Cumulative effect of change in
accounting for derivatives (G) - 8,236
-----------------------------------
Adjusted Net Operating Income $ 36,103 $ 22,769
===================================
Adjusted Net Operating Income
per common share:
Basic $ 0.87 $ 0.76
===================================
Diluted $ 0.86 $ 0.75
===================================
Weighted average common shares outstanding:
Basic 41,349,785 29,973,039
===================================
Diluted 41,968,570 30,365,387
===================================
(A) Represents total realized gains or losses on investments less core realized
gains or losses (defined as gains or losses from the closed block) adjusted
for income taxes. Non-core realized gains or losses may vary widely between
periods. Such amounts are determined by management's timing of individual
transactions and do not necessarily correspond to the underlying operating
trends.
(B) Represents amortization of deferred policy acquisition costs and value of
business acquired on the non-core realized gains or losses that are
included in our product margins, adjusted for income taxes on such amounts.
(C) Represents the net effect of SFAS 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
22
associated change in amortization of deferred acquisition costs and value
of business acquired resulting from such adjustments.
(D) Represents costs directly related to ILIC's demutualization. The costs
consist primarily of legal, actuarial and consulting expenses.
(E) Represents costs of restructuring our operations to eliminate duplicative
functions, adjusted for income taxes. The costs consist primarily of
systems conversion, relocation of employees, and severance and termination
benefits.
(F) Represents the net income 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.
Adjusted net operating income increased $13.3 million to $36.1 million, or
$0.86 per diluted share, for the first quarter of 2002 compared to $22.8
million, or $0.75 per diluted share, for the first quarter of 2001. The increase
in adjusted net operating income in 2002 was primarily attributable to the
acquisition of ILICO which operations have been included in our consolidated
financial statements since May 18, 2001. This change is analyzed further in the
operating segment discussion.
SALES
PROTECTION PRODUCTS
The following table sets forth information regarding our protection
products segment sales activity by life insurance product:
Sales Activity by Product
For the Three Months Ended March 31,
2002 2001
-----------------------
($ in thousands)
Traditional life insurance:
Whole life $ 1,120 $ 2,012
Interest-sensitive whole life 10,204 -
Term life 2,548 1,403
Universal life 8,326 1,649
Equity-indexed life 8,665 5,269
-----------------------
Direct first year annualized premiums 30,863 10,333
Private label term life premiums 3,596 -
-----------------------
Total $ 34,459 $ 10,333
=======================
Direct life insurance sales as measured by annualized premiums were $30.9
million in the first quarter of 2002 compared to $10.3 million in the first
quarter of 2001. Approximately $18.2 million of the increase was due to sales
from ILICO which was acquired during the second quarter of 2001.
23
Excluding the sales from ILICO which amounted to $18.2 million, life insurance
sales increased 23% as compared to 2001. The increase excluding ILICO was
primarily from the equity-indexed universal life products which allow the
policyowner to elect an earnings strategy for a portion of the account value
whereby earnings are credited based on increases in the S&P 500 Index, excluding
dividends. The earnings credit is subject to a participation rate and an annual
cap. In the first quarter of 2002, sales of these products were $8.7 million as
compared to $5.3 million for the same period a year ago.
We also distribute term products of ILICO through strategic alliances with
private label partners. Under private label arrangements, ILICO designs and
issues products that are distributed through the field forces of other life
insurance companies, our private label partners, and ILICO reinsures a portion
of the risks on those products, which we refer to as our private label sales. We
have two private label partners that are actively writing new business. During
the second quarter of 2002, we decided to cease recruiting new private label
partners and the impact of this decision on future sales is not yet
determinable.
The following table sets forth the protection products segment life
insurance collected premiums, including collected premiums associated with the
closed block, for the periods indicated:
Collected Premiums by Product
For the Three Months Ended March 31,
2002 2001
------------------------------------
($ in thousands)
Individual life premiums collected:
Traditional life:
First year and single $ 42,563 $ 20,064
Renewal 94,903 49,200
------------------------------------
Total 137,466 69,264
Universal life:
First year and single 19,658 4,365
Renewal 30,476 18,768
------------------------------------
Total 50,134 23,133
------------------------------------
Equity-indexed life:
First year and single 11,881 6,990
Renewal 6,050 1,053
------------------------------------
Total 17,931 8,043
------------------------------------
Total individual life 205,531 100,440
Reinsurance assumed 12,605 509
Reinsurance ceded (79,719) (9,350)
------------------------------------
Total individual life, net of reinsurance $ 138,417 $ 91,599
====================================
Traditional life insurance premiums collected were $137.5 million for the
first quarter of 2002 compared to $69.3 million for the first quarter of 2001.
The increase in 2002 was primarily due to the additional premiums from ILICO
amounting to $67.1 million. Excluding the ILICO premiums, first year
24
and single premiums increased $2.0 million in the first quarter of 2002 as
compared to the first quarter of 2001 due to increased closed block whole life
premiums. Renewal collected premium, excluding ILICO premiums, was $0.9 million
lower in the first quarter of 2002 as compared to the first quarter of 2001
primarily due to continued run-off of the closed block which was partially
offset by continued favorable persistency of the open block.
Universal life insurance premiums collected were $50.1 million for the
first quarter of 2002 compared to $23.1 million for the first quarter of 2001.
Approximately $27.4 million of universal life insurance premiums for the first
quarter of 2002 were from ILICO. The remaining decrease in 2002 compared to 2001
of $0.4 million was primarily due to the shift in sales from universal life
products to equity-indexed life products.
Equity-indexed life premiums collected were $17.9 million for the first
quarter of 2002 compared to $8.0 for the first quarter of 2001. The increase in
2002 as compared to 2001 was a result of customer interest in this product
following its introduction in 2000. ILICO did not have any equity-indexed life
sales.
Reinsurance assumed increased approximately $12.1 million in the first
quarter of 2002 as compared to 2001. The entire amount of the increase is
attributable to ILICO. 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.
Reinsurance ceded was $79.7 million in the first quarter of 2002 compared
to $9.4 million in the first quarter of 2001. ALIC entered into additional
reinsurance arrangements in 2000 and in the fourth quarter of 2001. ALIC has
reinsurance arrangements that reduce retention to 10% of the net amount of
mortality 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,
ALIC has a reinsurance agreement covering its closed block policies. Under this
agreement, ALIC has reinsured approximately 90% of the closed block mortality
net amount at risk not previously reinsured. As a result of the new
arrangements, ceded reinsurance premium, excluding ILICO, was $59.5 million in
the first quarter of 2002 compared to $9.4 million in the first quarter of 2001.
The remainder of the increase in ceded premium amounting to $20.2 million was
from the ILICO acquisition. ILICO's reinsurance agreements effectively reduce
ILICO's retention of mortality risk to $500,000.
25
The following table sets forth information regarding our protection
products segment life insurance in force for each date presented:
Individual Life Insurance in Force
As of March 31,
2002 2001
-------------------------------------
($ in thousands)
Traditional life
Number of policies 400,179 243,008
GAAP life reserves $ 3,127,600 $ 1,756,249
Face amounts $ 52,128,000 $ 23,612,000
Universal life
Number of policies 152,663 108,881
GAAP life reserves $ 1,406,493 $ 943,107
Face amounts $ 19,141,000 $ 12,096,000
Equity-indexed life
Number of policies 12,560 4,476
GAAP life reserves $ 63,553 $ 18,882
Face amounts $ 2,417,000 $ 790,000
Total life insurance
Number of policies 565,402 356,365
GAAP life reserves $ 4,597,646 $ 2,718,238
Face amounts $ 73,686,000 $ 36,498,000
The acquisition of ILICO in the second quarter of 2001 increased the number
of policies in force by 260,000, GAAP life reserves by $1.8 billion and face
amounts by $35.9 billion as of March 31, 2002.
26
ACCUMULATION PRODUCTS
The following table sets forth our accumulation products segment collected
deposits for the periods indicated:
Deposits by Product
For the Three Months Ended March 31,
2002 2001
------------------------------------
($ in thousands)
Annuities:
Fixed annuities:
Deferred fixed annuities $ 224,455 $ 437,038
Multi-choice annuities 134,649 50,544
Equity-indexed annuities 34,857 33,809
Variable annuities 2,663 -
Funding agreements 275,000 -
----------------------------------
Total 671,624 521,391
Reinsurance assumed - -
Reinsurance ceded (1,477) (48,589)
----------------------------------
Total deposits, net of reinsurance $ 670,147 $ 472,802
==================================
Fixed Annuity Products. Deferred fixed annuity collected premiums,
excluding ILICO, decreased $216.8 million in the first quarter of 2002 compared
to the first quarter of 2001 primarily attributable to the continued low
interest rate environment. Multi-choice annuity products have continued to grow
in popularity with consumers and agents since its introduction in December 1999
and as a result, premiums increased $84.1 million in the first quarter of 2002
as compared to the first quarter of 2001. Equity-indexed annuity sales increased
$1.1 million in the first quarter of 2002 as compared to the first quarter of
2001. The modest growth was primarily due to lower returns on the S&P 500 Index
in the first quarter of 2002. The ILICO acquisition did not impact multi-choice
or equity-indexed sales as ILICO did not offer these products.
During 2001, we had a reinsurance agreement which ceded 35% of certain
fixed annuity production on a modified coinsurance basis. Fixed annuity
production ceded under this agreement totaled approximately $48.6 million in the
first quarter of 2001. In the fourth quarter of 2001, the agreement was
cancelled and the previously ceded premiums were recaptured. In addition, ILICO
reinsures approximately 75% of its fixed annuities on a modified coinsurance
basis which amounted to approximately $1.5 million of ceded premium in the first
quarter of 2002.
Variable Annuities. ILICO had a variable annuity product line. In the first
quarter of 2002, ILICO ceased new sales of these products, except for new
policies issued as part of existing employer-sponsored qualified plan contracts.
The sales of $2.7 million for the first quarter of 2002 primarily reflect
additions to existing contracts and renewal premiums. Our agents will be
encouraged to make new sales of variable annuities through our Ameritas Joint
Venture. Future direct sales of variable annuities will be reduced significantly
as a result of this change. As these sales will be through our joint venture,
they will not
27
appear in our direct sales numbers. The assets and liabilities related to the
direct variable annuities are shown on the consolidated balance sheets as
"separate account assets" and "separate account liabilities."
Funding Agreements. We have placed fixed rate separate account funding
agreements totaling $275 million in the first quarter of 2002. Funding
agreements are insurance contracts for which we receive deposit funds and for
which we agree to repay the deposit and a contractual return for the duration of
the contract. The funding agreements are secured by assets in a separate account
and are guaranteed by general account assets. The assets are legally segregated
and are not subject to claims that arise from our other business. Total funding
agreements as of March 31, 2002 totaled $525 million. We currently anticipate
placing additional funding agreements during the remainder of the year as
conditions warrant.
The following table sets forth information regarding fixed annuities in
force for each date presented:
Fixed Annuities in Force
As of March 31,
2002 2001
------------------------------
($ in thousands)
Deferred fixed and immediate annuities
Number of policies 176,773 162,527
GAAP annuity reserves $ 7,109,206 $ 6,147,066
Multi-choice annuities
Number of policies 55,617 3,494
GAAP annuity reserves $ 2,947,183 $ 154,647
Equity-indexed annuities
Number of policies 17,869 15,834
GAAP annuity reserves $ 753,124 $ 686,373
Total fixed annuities
Number of policies 250,259 181,855
GAAP annuity reserves $10,809,513 $ 6,988,086
The acquisition of ILICO in the second quarter of 2001 increased the total
number of annuity policies by 54,000 and GAAP annuity reserves by $2.8 billion
as of March 31, 2002.
28
RESULTS OF OPERATIONS
PROTECTION PRODUCTS
A summary of our protection products segment operations follows:
For the Three Months Ended March 31,
2002 2001
------------------------------------
Revenues:
Insurance premiums $ 88,535 $ 52,526
Universal life product charges 32,856 17,134
Net investment income 80,425 53,031
Core realized gains (losses) on investments 4,624 244
Other income 953 -
----------------------------------
Total revenues 207,393 122,935
----------------------------------
Benefits and expenses:
Policyowner benefits:
Traditional:
Death benefits 8,783 523
Change in liability for future policy benefits and
other policy benefits 69,553 45,545
Universal:
Death benefits in excess of cash value 5,394 8,216
Interest credited on policyowner account balances 19,002 10,491
Other 6,819 332
----------------------------------
Total policyowner benefits 109,551 65,107
Underwriting, acquisition and other expenses 19,642 14,140
Amortization of deferred policy acquisition costs and
value of business acquired (VOBA), net of non-core
adjustment of $200 and $174 for the three months ended
March 31, 2002 and 2001, respectively 14,333 9,609
Dividends to policyowners 28,403 19,158
----------------------------------
Total benefits and expenses 171,929 108,014
----------------------------------
Adjusted pre-tax operating income - Protection Products segment $ 35,464 $ 14,921
==================================
Traditional life insurance premiums were $88.5 million in the first quarter
of 2002 compared to $52.5 million in the first quarter of 2001. The acquisition
of ILICO added traditional life insurance premiums of $38.0 million in the first
quarter of 2002. Excluding these ILICO premiums, traditional life insurance
premiums declined in the first quarter of 2002 primarily as a result of
additional ceded premium on reinsurance agreements. In addition, premiums
decreased in the first quarter of 2002 due to the shift in
29
sales focus from traditional life products to equity-indexed 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 $0.4 million in the first quarter
of 2002 primarily due to the maturing of this block. Closed block renewal
premium for ALIC increased approximately $0.5 million in the first quarter of
2001 due to a decrease in lapses. Our life insurance lapse rate, exclusive of
ILICO, was 6.0% for the first quarter of 2002 and 8.0% for the first quarter of
2001. Lapses increased in the first quarter of 2001 following the completion of
our demutualization in the third quarter of 2000. The total life insurance lapse
rate including ILICO was 8.3% for the first quarter of 2002. This higher lapse
rate was expected due to the completion of ILICO's demutualization in May 2001.
Universal life product charges were $32.9 million in the first quarter of
2002 compared to $17.1 million in the first quarter of 2001. Approximately $20.1
million of the universal life product charges for the first quarter of 2002 were
attributable to the acquisition of ILICO. Excluding ILICO, universal life
product charges decreased $4.3 million primarily due to a new reinsurance
agreement effective December 31, 2001 covering pre-July 1, 1996 universal life
policies. Product charges decreased $6.3 million as a result of premiums paid to
reinsurers. Partially offsetting the reinsured premiums was the increased sales
of universal life products and increased cost of insurance charges of
approximately $2.0 million corresponding with the normal aging and growth of the
block of business.
Net investment income was $80.4 million in the first quarter of 2002
compared to $53.0 million in the first quarter of 2001. Approximately $27.3
million of net investment income for 2002 was attributable to the acquisition of
ILICO. Excluding ILICO, net investment income increased $0.1 million primarily
due to higher average invested assets (excluding market value adjustments)
offset by lower effective yields as compared to the first quarter of 2001.
Average invested assets (excluding market value adjustments), exclusive of the
ILICO acquisition, increased approximately $138.1 million in the first quarter
of 2002 compared to the first quarter of 2001. The increase was primarily due to
the growth of our protection products business. The effective yield on the
investment portfolio was 7.03% in the first quarter of 2002 compared to 7.81% in
the first quarter of 2001. Excluding ILICO, yields in the first quarter of 2002
decreased to 7.39%. The decrease in yields in the first quarter of 2002
primarily resulted from the lower interest rate market.
Core realized gains and losses on investments were a net gain of $4.6
million in the first quarter of 2002 compared to a net gain of $0.2 million in
the first quarter of 2001. Core realized gains and losses consist of gains and
losses on our closed block investment transactions. These gains and losses are
included in operating income as they are a component of the total contribution
from the closed block that represents our operating income on this business. 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. See note 4 to the consolidated financial statements for
further discussion of the closed block operations.
Other income primarily consists of Corporate Owned Life Insurance (or COLI)
income. COLI is life insurance policies on the lives of corporate employees held
for the benefit of the corporation. Income on COLI is not subject to income
taxes. Other income totaled $1.0 million in the first quarter of 2002 and was
all provided by ILICO. COLI is classified as an other asset so the income from
this asset appears in other income instead of net investment income.
Total policyowner benefits were $109.6 million in the first quarter of 2002
compared to $65.1 million in the first quarter of 2001. The acquisition of ILICO
increased life insurance benefits $49.2 million in the first quarter of 2002.
Excluding the impact of the ILICO acquisition, total policyowner benefits
decreased $4.7 million in the first quarter of 2002 as compared to the first
quarter of 2001. Traditional life insurance benefits increased $0.6 million in
the first quarter of 2002, exclusive of the
30
impact of ILICO. Universal life benefits, excluding ILICO, decreased
approximately $5.4 million in the first quarter of 2002 compared to the first
quarter of 2001 due primarily to consistent mortality with increased reinsurance
recoveries of benefits as more claims were subject to reinsurance agreements
entered into in 2000 and 2001. Such reinsurance recoveries increased
approximately $8.1 million in 2002. The increased reinsurance recoveries were
partially offset by increased interest credited due to more policies in-force.
The weighted average crediting rate on universal life policyowner account
balances was 5.41% for the first quarter of 2002 (5.28% excluding ILICO)
compared to 5.63% for the first quarter of 2001.
Underwriting, acquisition and other expenses were $19.6 million in the
first quarter of 2002 compared to $14.1 million in the first quarter of 2001.
The acquisition of ILICO increased expenses approximately $7.4 million in the
first quarter of 2002. Excluding the impact of the ILICO acquisition,
underwriting, acquisition and other expenses decreased $1.9 million in the first
quarter of 2002 as compared to the first quarter of 2001. The decrease in
expenses in the first quarter of 2002, exclusive of the impact of ILICO, was
primarily due to increased reimbursement from reinsurance commission and expense
allowances and reduced general compensation expenses in 2002.
The amortization of deferred policy acquisition costs and value of business
acquired amounted to $14.3 million in the first quarter of 2002 compared to $9.6
million in the first quarter of 2001. Amortization of deferred policy
acquisition costs and value of business acquired (VOBA), exclusive of ILICO,
increased $0.3 million in the first quarter of 2002 as compared to 2001.
Deferred policy acquisition costs and VOBA are generally amortized in proportion
to gross margins.
Dividends to policyowners were $28.4 million in the first quarter of 2002
compared to $19.2 million in the first quarter of 2001. Dividends to
policyowners, exclusive of ILICO, increased $3.0 million in the first quarter of
2002 primarily due to maturing of the closed block. The dividends to
policyowners line item also includes increases or decreases to the policyholder
dividend obligation liability carried on the consolidated balance sheet. To the
extent cumulative actual earnings of the closed block exceed the cumulative
expected earnings based on the actuarial calculation at the time of the
formation of the closed block (which we refer to as the closed block glide
path), a policyholder dividend obligation liability is recorded. Higher realized
gains in the first quarter of 2002 increased closed block earnings, which in
turn were added to the policyholders dividend obligation liability through a
charge to this line item. As a result of this accounting treatment, operating
earnings only include the predetermined closed block glide path. See note 4 of
the consolidated financial statements for further discussion of the closed block
operations.
Adjusted pre-tax operating income from our protection products operations
was $35.5 million in the first quarter of 2002 compared to $14.9 million in the
first quarter of 2001. The acquisition of ILICO contributed $18.7 million of
adjusted pre-tax operating income to our protection products segment in the
first quarter of 2002. Exclusive of the impact of the ILICO acquisition, our
protection products operating income increased $1.9 million in the first quarter
of 2002 compared to the first quarter of 2001. Gross margins in our protection
products segment remained level in the first quarter of 2002 with the
fluctuations in expenses primarily impacting the overall results.
31
ACCUMULATION PRODUCTS
A summary of our accumulation products segment operations follows:
For the Three Months Ended March 31,
2002 2001
------------------------------------
Revenues:
Immediate annuity and supplementary contract premiums $ 2,952 $ 4,613
Annuity product charges 10,015 7,132
Net investment income 158,343 127,188
Core realized gains (losses) on investments - 652
Other income:
Income from IMOs 7,698 5,830
Other 2,847 2,227
------------------------------------
Total revenues 181,855 147,642
------------------------------------
Benefits and expenses:
Policyowner benefits:
Interest credited on policyowner account balances 91,615 73,584
Other benefits 26,725 16,773
------------------------------------
Total policyowner benefits 118,340 90,357
Underwriting, acquisition and other expenses:
Expenses from IMOs 5,444 4,717
Other 7,553 9,800
Amortization of deferred policy acquisition costs and
value of business acquired (VOBA), net of non-core
adjustment of $1,356 and ($812) for the three months ended
March 31, 2002 and 2001, respectively 23,953 16,300
------------------------------------
Total benefits and expenses 155,290 121,174
------------------------------------
Adjusted pre-tax operating income - Accumulation Products segment $ 26,565 $ 26,468
====================================
Immediate annuity and supplementary contract premiums were $3.0 million in
the first quarter of 2002, including $0.3 million for ILICO, compared to $4.6
million in the first quarter of 2001. Annuity product charges were $10.0 million
in the first quarter of 2002 compared to $7.1 million in the first quarter of
2001. Annuity product charges from the acquisition of ILICO totaled $3.8 million
for the first quarter of 2002. Excluding ILICO, annuity product charges declined
$0.9 million in the first quarter of 2002 as compared to the first quarter of
2001. The decrease in product charges in the first quarter of 2002, exclusive of
ILICO, was primarily due to decreased surrenders of annuity policies with
surrender charges. Surrenders, exclusive of ILICO, totaled approximately $210.7
million for the first quarter of 2002 compared to $338.8 million for the first
quarter of 2001. Annuity withdrawal rates, exclusive of ILICO, averaged 8.9% in
the first quarter of 2002 compared to 16.1% in the first quarter of 2001.
Excluding ILICO and internal replacements, withdrawal rates decreased to 8.0%
for the first quarter of 2002 compared to 13.1% for the first quarter of 2001.
Annuity withdrawal rates, including ILICO from
32
the acquisition date forward, averaged 11.7% for the first quarter of 2002.
Surrenders at ILICO for the first quarter of 2002 were approximately $177.1
million.
Net investment income was $158.3 million for the first quarter of 2002
compared to $127.2 million for the first quarter of 2001. Approximately $26.7
million of net investment income for the first quarter of 2002 was attributable
to the acquisition of ILICO. Excluding ILICO, net investment increased $4.4
million primarily due to higher average invested assets (excluding market value
adjustments) offset by lower effective yields as compared to the prior year.
Average invested assets (excluding market value adjustments) exclusive of the
ILICO acquisition increased approximately $922.7 million in the first quarter of
2002 compared to the first quarter of 2001. The increase was primarily due to
the growth of our accumulation products business. The effective yield on the
investment portfolio was 5.98% in the first quarter of 2002 compared to 7.20% in
the first quarter of 2001. Excluding ILICO, yields in the first quarter of 2002
decreased to 6.59%. The overall yield including ILICO is lower 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 6.68% in the first quarter of 2002 compared to 7.19% in
the first quarter of 2001.
Other income primarily consists of third party annuity commissions received
by wholly-owned IMOs and COLI income. Other income totaled $10.5 million for the
first quarter of 2002 compared to $8.1 million for the first quarter of 2001.
The increase in other income was due to increased operations of independent
marketing organizations purchased in the first quarter of 2001 and income on
COLI investments. COLI is classified as an other asset so the income from this
asset appears in other income instead of net investment income.
Policyowner benefits were $118.3 million in the first quarter of 2002
compared to $90.4 million in the first quarter of 2001. Approximately $23.0 of
the increase in policyowner benefits in the first quarter of 2002 was due to the
acquisition of ILICO. Policyowner benefits increased approximately $4.9 million
in the first quarter of 2002, exclusive of the impact of the ILICO acquisition.
Excluding ILICO, interest credited to deferred annuity account balances
increased $12.5 million in the first quarter of 2002 compared to the first
quarter of 2001 primarily due to higher average balances, partially offset by a
decline in crediting rates. In the first quarter of 2002, average deferred fixed
annuity account balances, excluding ILICO, increased approximately $567.2
million and the weighted average crediting rate on deferred fixed annuity
account balances decreased 34 basis points to 4.73%. Crediting rates were
lowered in the fourth quarter of 2001 and in the first quarter of 2002 to
correspond with the decline in the investment yields of the deferred fixed
annuity portfolio. Overall, spreads on deferred fixed annuities declined 17
basis points to 195 basis points in the first quarter of 2002 as compared to the
first quarter of 2001. Other benefits declined approximately $7.5 million,
exclusive of ILICO, in the first quarter of 2002 which corresponds with the
decline in immediate annuity and supplementary contract premiums. ILICO added
approximately $17.5 million of other benefits to the first quarter of 2002
primarily due to payments made under modified coinsurance agreements.
Underwriting, acquisition and other expenses totaled $13.0 million in the
first quarter of 2002 compared to $14.5 million in the first quarter of 2001.
Approximately $1.3 million of such expenses were due to the ILICO acquisition.
Excluding these ILICO expenses, underwriting, acquisition and insurance expenses
decreased approximately $2.8 million in the first quarter of 2002 compared to
the first quarter of 2001. The decrease between the reporting periods reflects
the reduction of goodwill amortization of approximately $1.9 million which was
included in the first quarter of 2001. Effective January 1, 2002, with the
adoption of SFAS 142, goodwill is no longer amortized. The remaining decrease
was primarily due to expense reductions from the restructuring activities that
have taken place.
33
Amortization of deferred policy acquisition costs and value of business
acquired amounted to $24.0 million in the first quarter of 2002 compared to
$16.3 million in the first quarter of 2001. Exclusive of the impact of ILICO,
amortization of deferred policy acquisition costs and VOBA increased $6.1
million in the first quarter of 2002 as compared to the first quarter of 2001.
The increase in amortization was primarily due to the general growth in the
deferred policy acquisition cost asset associated with the growth in annuity
sales throughout fiscal year 2001 which is being amortized in proportion to
product margins.
Adjusted pre-tax operating income from our accumulation products operations
was $26.6 million in the first quarter 2002 compared to $26.5 million in the
first quarter 2001. The acquisition of ILICO contributed $4.9 million in the
first quarter 2002. Excluding this contribution from ILICO, our accumulation
products operating income decreased $4.8 million in the first quarter 2002
compared to the first quarter 2001. The decrease in the first quarter 2002 was
primarily due to decreased spreads, partially offset by the discontinuation of
goodwill amortization and lower expenses.
OTHER OPERATIONS
A summary of our other operations follows:
For the Three Months Ended March 31,
2002 2001
-----------------------------------
Revenues:
Insurance premiums $ 621 $ 28
Net investment income 1,002 909
Other income 514 2,275
-----------------------------------
Total revenues 2,137 3,212
-----------------------------------
Benefits and expenses:
Other policyowner benefits 796 (11)
Underwriting, acquisition and other expenses 3,612 2,677
-----------------------------------
Total benefits and expenses 4,408 2,666
-----------------------------------
Adjusted pre-tax operating income - Other operations $(2,271) $ 546
=================================
Adjusted pre-tax operating loss from our other operations was $2.3 million
in the first quarter of 2002 compared to income of $0.5 million in the first
quarter of 2001. Other operations primarily consist of holding company revenues
and expenses and operations of our real estate management subsidiary. In 2001,
other income included approximately $2.2 million of investment fee income for
asset management services provided to ILICO prior to the acquisition. After the
acquisition of ILICO, such fees are eliminated with expenses in consolidation
which is the primarily cause of the difference in results between periods.
34
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 Three Months Ended March 31,
2002 2001
------------------------------------
Adjusted pre-tax operating income:
Protection Products $ 35,464 $ 14,921
Accumulation Products 26,565 26,468
Other operations (2,271) 546
------------------------------------
Total adjusted pre-tax
operating income 59,758 41,935
Non-operating increases (decreases)
to income:
Non-core realized/unrealized gains
(losses) on investments (29,336) (40,731)
Fair value change in option value of
equity-indexed annuity products and
market value adjustments on
total return strategy annuities 15,131 34,969
Amortization of DAC & VOBA due to
non-core realized gains or losses (1,556) 638
Demutualization costs (285) -
Restructuring costs (1,795) -
------------------------------------
Income from continuing operations 41,917 36,811
Interest expense (6,027) (7,332)
Income tax expense (11,432) (10,021)
------------------------------------
Net income from continuing operations 24,458 19,458
Income from discontinued operations 456 414
Cumulative effect of change in
accounting for derivatives, net of tax - (8,236)
------------------------------------
Net income $ 24,914 $ 11,636
====================================
Total adjusted pre-tax operating income was $59.8 million in the first
quarter of 2002 compared to $41.9 million in the first quarter of 2001. The
acquisition of ILICO contributed $24.3 million to 2002 adjusted pre-tax
operating income. Exclusive of ILICO, the protection products segment operations
increased approximately $1.3 million, offset by declines in the accumulation
products segment and other operations as previously discussed.
Non-core realized/unrealized gains (losses) on investments were losses
amounting to $29.3 million in the first quarter of 2002 compared to losses of
$40.7 million in the first quarter of 2001. In accordance with SFAS 133, we
adjusted our options to market value, which, due to the economic environment,
resulted in an unrealized loss of $6.8 million in the first quarter of 2002 and
$33.3 million in the first quarter of 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 $12.6 million in the
first quarter of 2002. Most of the unrealized gains and losses on the options
and trading securities are offset by similar adjustments to
35
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. Additionally, in the first quarter of 2002
the sale of Western Security Life Insurance Company, a subsidiary of ILIC,
resulted in a gain of approximately $1.9 million. The remainder of the realized
losses amounting to $8.0 million in the first quarter of 2002 and $7.4 million
in the first quarter of 2001 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 $15.1 million decrease in reserve balances in the first quarter
of 2002 and $ 35.0 million decrease in the first quarter of 2001. 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 (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 of $1.6 million in the first quarter of
2002 on net gains compared to an expense reduction of $0.6 million in the first
quarter of 2001 on net losses. The amortization fluctuates from period to period
depending on the related non-core realized/unrealized gains and losses.
The 2002 demutualization costs consist primarily of legal, actuarial and
consulting expenses associated with the demutualization of ILIC. 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 protection products and accumulation
products operations, which began in the third quarter of 2001. The objective of
the restructuring plan is to eliminate duplicative functions for all business
units. The elimination of duplicative functions is intended to reduce on-going
operating costs. General administrative functions will be transitioned so they
are performed primarily in Des Moines. Protection products processes will be
transitioned so they are performed primarily in Des Moines and Indianapolis and
accumulation products functions will be transitioned to Topeka. The
restructuring charges expensed in the first quarter of 2002 included pre-tax
severance and termination benefits of $0.4 million related to the elimination of
approximately ten positions and other pre-tax costs of $1.4 million primarily
related to systems conversion and relocation of employees. An accrual for
severance and termination benefits not yet paid amounted to $0.5 million at
March 31, 2002. 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 $6.0 million in the first quarter of 2002 compared to
$7.3 million in the first quarter of 2001. The decreased interest expense in the
first quarter of 2002 was primarily due to lower borrowing rates in the first
quarter of 2002 as compared to the first quarter of 2001. In addition, the
amount of debt outstanding changed between periods with $185 million of OCEANs
securities issued during the month of March in 2002 compared to $129 million of
adjustable conversion-rate equity security units which were outstanding for the
entire first quarter of 2001, prior to their maturity in July 2001. The first
quarter of 2002 interest expense also included approximately $0.5 million of
interest expense from ILIC. ILIC has a $25 million, 8.66% surplus note, due on
April 1, 2011.
Income tax expense was $11.4 million in the first quarter of 2002 compared
to $10.0 million in the first quarter of 2001. The effective tax rate was 31.9%
for the first quarter of 2002 and 34.0% for the first quarter of 2001. The
decrease in the effective tax rate in the first quarter of 2002 reflected the
36
decline in nondeductible expenses associated with the demutualization of ILICO,
increased tax exempt income from the COLI investment, and the elimination of
nondeductible goodwill amortization expense.
Net income from continuing operations was $24.5 million in the first
quarter of 2002 compared to $19.5 million in the first quarter of 2001.
Approximately $9.5 million of the increase in the first quarter of 2002 was from
the ILICO acquisition. The offsetting decrease of $4.5 million was primarily due
to the results of our accumulation products and other operations as previously
discussed.
We adopted SFAS 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 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 $24.9 million in the first quarter of 2002 compared to $11.6
million in the first quarter of 2001. The acquisition of ILICO increased net
income approximately $9.5 million in the first quarter of 2002. The adoption of
SFAS 133 in the first quarter of 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 and interest 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 of this amount.
We have a $175 million revolving credit facility with a syndicate of
lenders (which we refer to as the Revolving Credit Agreement), which replaced a
similar $150 million revolving credit facility in December 2001. As of March 31,
2002, there was a $30 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.
37
On March 6, 2002, the Company issued and sold in a private placement $185
million aggregate original principal amount of OCEANs. The OCEANs were issued
and sold in an original principal amount of $1,000 per OCEAN, with a principal
amount at maturity of $1,270 per OCEAN. The maturity date of the OCEANs is March
6, 2032. The OCEANs will have aggregate principal amount at maturity of
$234,950,000. The notes are convertible into shares of the Company's common
stock at an initial conversion price (subject to adjustment) of $37.60 per share
only if the sale price of the common stock exceeds $47.85 per share for at least
20 trading days in a 30-day trading period or in certain other limited
circumstances.
The yield on the OCEANs, without taking into account any contingent
interest, as described below, will be approximately 3.83% per annum compounded
semiannually from March 6, 2002 through March 6, 2007, and approximately 2.28 %
per annum compounded semiannually from March 6, 2007 through maturity. We will
pay a portion of the yield in cash which is referred to as stated interest, on
semiannual interest payment dates. Since only a portion of the yield on the
OCEANs will be paid as stated interest, the principal amount of each OCEAN will
accrete over time such that the principal amount of each OCEAN will be $1,270.00
at maturity.
Prior to March 6, 2007, each OCEAN may be converted into a number of shares
of our common stock equal to the accreted principal amount of the OCEANs at the
time of conversion divided by the initial conversion price of $37.598 per share,
subject to adjustment. On and after March 6, 2007, each OCEAN may be converted
into a number of shares of our common stock equal to $1,100.00 divided by the
then effective conversion price. The conversion price (and therefore the
conversion rate) will be adjusted under some circumstances.
Additionally, if a special conversion event has occurred, holders may
convert their OCEANs for a specified period into a number of shares of our
common stock per OCEAN equal to 90% of the quotient of $1,100.00 divided by the
conversion price then in effect. A "special conversion event" will have occurred
if a holder requests for quotes for such holder's OCEANs during a three-day
period, and a firm quote cannot be obtained for the OCEANs during such period
equal to at least 90% of the closing stock price of our common stock on any such
day multiplied by the quotient of $1,100.00 divided be the conversion price in
effect on such day.
We will also pay contingent interest semiannually in cash through March 6,
2004 in an amount equal to $11.70 per annum per OCEAN. After March 6, 2004,
contingent interest will be payable quarterly in cash in an amount equal to the
regular cash dividends, if any, paid by us on our common stock in the
immediately preceding three months.
Proceeds from the OCEANs were used to repay borrowings on the Company's
revolving credit facility and to purchase approximately 1.7 million shares
amounting to $59 million of the Company's common stock. The OCEANs 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.
We previously had warrants outstanding to purchase shares of common stock.
The warrants were exercisable at $24.42 and expired in April 2002. Proceeds from
the warrants amounted to $5.7 million and resulted in the issuance of
approximately 234,000 shares of common stock through March 31, 2002.
Our Board of Directors approved a stock purchase program effective February
8, 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. We have funded and plan to
continue to fund the purchase program from a combination of our internal
sources, life insurance subsidiaries, OCEANs offering and Revolving Credit
Agreement. During the first quarter of 2002, 1.7 million shares were repurchased
and were funded primarily by approximately $59 million from the OCEANs offering.
38
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 our
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 summarizes liabilities for interest-sensitive life products
and annuities by their contractual withdrawal provisions at March 31, 2002
(including liabilities in the closed blocks and the general account):
39
($ in millions)
--------------
Not subject to discretionary withdrawal $ 473.7
Subject to discretionary withdrawal with adjustments:
Specified surrender charges (A) 6,777.9
Market value adjustments 3,297.8
------------
Subtotal 10,075.7
------------
Subject to discretionary withdrawal without adjustments 1,933.3
------------
Total $ 12,482.7
============
(A) Includes $1,217.6 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 account funding agreement.
Under the agreement, a five-year floating rate insurance contract is issued to a
commercial paper conduit. At the end of the first quarter of 2002, ALIC placed
additional funding agreements totaling $275 million in six to ten year fixed
rate insurance contracts. The funding agreements are secured by segregated
assets and are 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 agreements may
not be cancelled unless there is a default under the agreement, but ALIC may
terminate the agreement at any time. Standard defaults include failure to make
required payments, misrepresentation, suspension of ratings and insolvency. We
placed additional fixed separate account funding agreements totaling $75 million
in April of 2002.
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 $325 million at March 31, 2002. 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 each advance. There were no borrowings under these arrangements
outstanding at March 31, 2002. In addition, ALIC has long-term fixed rate
advances from FHLB outstanding of $14.2 million at March 31, 2002.
The life insurance subsidiaries may also obtain liquidity through sales of
investments. The investment portfolio as of March 31, 2002 had a carrying value
of $15.3 billion, including closed block investments.
At March 31, 2002, the statutory surplus of the life insurance subsidiaries
was approximately $678 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 obtain their required capital
from AmerUs Group Co.
40
ITEM 3. 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 and asset/liability 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
surrenders and 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
March 31, 2002. The table presents cash flows of principal amounts and related
weighted average interest rates by expected maturity dates. The cash flows are
based on the earlier of the call date or the maturity date or, for
mortgage-backed securities, expected payment patterns. Actual cash flows could
differ from the expected amounts.
41
March 31, 2002
--------------
Expected Cash Flows
9 months
Amortized 2002 2003 2004 2005 2006 2007 Thereafter Cost Fair Value
--------- -------------------------------------------------------------------------------------------
($ in millions)
Fixed maturity securities
available-for-sale $ 533 $1,265 $1,181 $1,453 $1,246 $ 899 $4,882 $11,459 $11,449
Average interest rate 8.1% 6.8% 6.3% 6.7% 6.5% 6.9% 7.1%
Fixed maturity securities
held for trading purposes $ 64 $ 169 $ 262 $ 321 $ 163 $ 146 $ 942 $ 2,067 $ 2,067
Average interest rate 3.9% 4.8% 3.8% 3.1% 4.3% 3.5% 5.2%
Mortgage loans $ 47 $ 57 $ 68 $ 67 $ 65 $ 63 $ 561 $ 928 $ 946
Average interest rate 8.2% 8.2% 8.2% 8.1% 8.1% 8.0% 7.9%
Total $ 644 1,491 $1,511 $1,841 $1,474 $1,108 $6,385 $14,454 $14,462
===========================================================================================
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. Less than 8.0%
of the bond portfolio is below investment grade. Fixed maturity securities have
an average maturity of approximately 6.81 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.
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 are 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.
42
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In recent years, the life insurance industry, including the Company and its
subsidiaries, have been subject to an increase in litigation pursued on behalf
of purported classes of insurance purchasers, questioning the conduct of
insurers in the marketing of their products. The Company is involved in
litigation, including class actions, reinsurance claims and regulatory
proceedings, arising in the ordinary course of its business. Some of these
claims and legal actions are in jurisdictions where juries are given substantial
latitude in assessing damages, including punitive damages. Although no
assurances can be given and no determinations can be made at this time, the
Company believes that the ultimate liability, if any, with respect to these
other claims and legal actions, would have no material effect on our results of
operations and financial position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On March 6, 2002, we issued and sold in a private placement $185,000,000
aggregate original principal amount of OCEANs. The OCEANs were issued and sold
in an original principal amount of $1,000 per OCEAN, with a principal amount at
maturity of $1,270 per OCEAN. The maturity date of the OCEANs is March 6, 2032.
The OCEANs will have an aggregate principal amount at maturity of $234,950,000.
Neither the OCEANs nor the common stock issuable upon conversion of the OCEANs
was registered under the Securities Act. The OCEANs were sold by Credit Suisse
First Boston Corporation, the initial purchaser, to qualified institutional
buyers in reliance on Rule 144A under the Securities Act. We paid an
underwriting discount of $5,550,000 in connection with the private placement of
the OCEANs.
Holders may convert their OCEANs into shares of our common stock only if
one or more of the following conversion conditions is satisfied and only for the
periods set forth below:
- if the sale price of our common stock for at least 20 trading days in
any 30 trading-day period exceeds $47.85, subject to adjustment;
- during any period in which an event of default has occurred and is
continuing;
- if we have called the OCEANs for redemption, during the period ending
two business days prior to the specified redemption date;
- during the five trading days after a notice that a special conversion
event (as described below) has occurred;
- during any period in which we defer payment of cash interest;
- during any period in which our senior long-term unsecured credit
rating is downgraded by Standard & Poor's to BB+ or lower and by
Moody's to Ba2 or lower, or if our senior long-term unsecured credit
rating is suspended or withdrawn by both rating agencies, or if
neither rating agency continues to provide ratings services or
coverage to us; or
- during specified periods upon the occurrence of specified corporate
transactions, including a change of control.
43
A "special conversion event" will be deemed to have occurred if a holder
requests that the bid solicitation agent obtain bids for such holder's OCEANs
during a three trading-day measurement period, and a firm bid for such OCEANs
cannot be obtained from specified securities dealers on any day during such
period that is at least equal to 90% of the closing sale price of our common
stock on any such day multiplied by the quotient of $1,100.00 divided by the
conversion price then in effect.
The use of proceeds of the OCEANs is detailed above under "Liquidity and
Capital Resources--AmerUs Group Co."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits included as part of this report is set forth in the
Exhibit Index which immediately precedes such exhibits and is hereby
incorporated by reference herein.
(b) The following report on Form 8-K was filed during the quarter ended
March 31, 2002:
Form 8-K dated February 5, 2002 announcing the release of fourth
quarter 2001 earnings. Supplemental financial information of AmerUs
Group Co. was attached.
Form 8-K dated February 20, 2002 announcing our interim issue of $150
million of private placement convertible notes due in 2032.
Form 8-K dated February 28, 2002 announcing our agreement to issue
$150 million of OCEANs in a private placement under Rule 144A.
Form 8-K dated February 28, 2002 was amended by filing Form 8-K/A on
March 19, 2002 which included the Indenture Agreement dated Match 6,
2002 and the Registration Rights Agreement dated March 6, 2002 in
connection with the issuance of $185 million of private placement
convertible notes.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
DATED: May 14, 2002 AMERUS GROUP CO.
By /s/ Melinda S. Urion
-----------------------------------------
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By /s/ Brenda J. Cushing
-----------------------------------------
Senior Vice President and Controller
(Principal Accounting Officer)
45
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.
46
3.1 Amended and Restated Articles of Incorporation of the Registrant
filed as Exhibit 3.1 on Form 10-Q, dated November 14, 2000 is
hereby incorporated by reference.
3.2 Amended and Restated Bylaws of the Registrant, filed as Exhibit 3.2
on Form 10-K, dated March 15, 2002, is hereby incorporated by
reference.
4.1 Amended and Restated Trust Agreement dated as of February 3, 1997
among AmerUs Life Holdings, Inc., Wilmington Trust Company, as
property trustee, and the administrative trustees named therein
(AmerUs Capital I business trust), filed as Exhibit 3.6 to the
registration statement of AmerUs Life Holdings, Inc. and AmerUs
Capital I on Form S-1, Registration Number 333-13713, is hereby
incorporated by reference.
4.2 Indenture dated as of February 3, 1997 between AmerUs Life Holdings,
Inc. and Wilmington Trust Company relating to the Company's 8.85%
Junior Subordinated Debentures, Series A, filed as Exhibit 4.1 to
the registration statement of AmerUs Life Holdings, Inc. and AmerUs
Capital I on Form S-1, Registration Number, 333-13713, is hereby
incorporated by reference.
4.3 Guaranty Agreement dated as of February 3, 1997 between AmerUs Life
Holdings, Inc., as guarantor, and Wilmington Trust Company, as
trustee, relating to the 8.85% Capital Securities, Series A, issued
by AmerUs Capital I, filed as Exhibit 4.4 to the registration
statement on Form S-1, Registration Number, 333-13713, is hereby
incorporated by reference.
4.4 Common Stock Purchase Warrant, filed as Exhibit (10)(v) to Form 10-Q
of AmVestors Financial Corporation dated May 13, 1992, is hereby
incorporated by reference.
4.5 Amended and Restated Declaration of Trust of AmerUs Capital II, dated
as of July 27, 1998, among AmerUs Life Holdings, Inc., First Union
Trust Company and the administrative trustees named therein, relating
to AmerUs Life Holdings, Inc.'s 7.0% ACES Units, filed as Exhibit 4.5
on Form 10-Q, dated August 13, 1998, is hereby incorporated by
reference.
4.6 Certificate of Trust of AmerUs Capital III filed as Exhibit 4.7 to
the registration statement of AmerUs Life Holdings, Inc., AmerUs
Capital II and AmerUs Capital III, on Form S-3 (No. 333-50249), is
hereby incorporated by reference.
4.7 Common Trust Securities Guarantee Agreement, dated as of July 27,
1998, by AmerUs Life Holdings, Inc., relating to AmerUs Life
Holdings, Inc.'s 7.0% ACES Units, filed as Exhibit 4.7 on Form 10-Q,
dated August 13, 1998, is hereby incorporated by reference.
4.8 QUIPS Guarantee Agreement, dated as of July 27, 1998, by AmerUs Life
Holdings, Inc., relating to AmerUs Life Holdings, Inc.'s 7.0% ACES
Units, filed as Exhibit 4.8 on Form 10-Q, dated August 13, 1998, is
hereby incorporated by reference.
4.9 Master Unit Agreement, dated as of July 27, 1998, between AmerUs Life
Holdings, Inc. and First Union National Bank relating to AmerUs Life
Holdings, Inc.'s 7.0% ACES Units, filed as Exhibit 4.9 on Form 10-Q,
dated August 13, 1998, is hereby incorporated by reference.
4.10 Call Option Agreement, dated as of July 27, 1998, between Goldman,
Sachs & Co. and First Union National Bank relating to AmerUs Life
Holdings, Inc.'s 7.0% ACES Units, filed as Exhibit 4.10 on Form 10-Q,
dated August 13, 1998, is hereby incorporated by reference.
4.11 Pledge Agreement, dated as of July 27, 1998, among AmerUs Life
Holdings, Inc., Goldman, Sachs & Co. and First Union National Bank
relating to AmerUs Life Holdings, Inc.'s 7.0% ACES Units, filed as
Exhibit 4.11 on Form 10-Q, dated August 13, 1998, is hereby
incorporated by reference.
4.12 Senior Indenture, dated as of June 16, 1998, by and between AmerUs
Life Holdings, Inc. and First Union National Bank, as Indenture
Trustee, relating to the AmerUs Life Holdings, Inc.'s 6.95% Senior
Notes, filed as Exhibit 4.14 on Form 10-Q, dated August 13, 1998, is
hereby incorporated by reference.
4.13 Subordinated Indenture, dated as of July 27, 1998, by and between
AmerUs Life Holdings, Inc. and First Union National Bank, as
Indenture Trustee, relating to AmerUs Life Holdings, Inc.'s 6.86%
Junior Subordinated Deferrable Interest Debentures, filed as Exhibit
4.15 on Form 10-Q, dated August 13, 1998, is hereby incorporated by
reference.
47
4.14 First Supplement to Indenture dated February 3, 1997 among American
Mutual Holding Company, AmerUs Life Holdings, Inc. and Wilmington
Trust Company as Trustee, relating to the Company's 8.85% Junior
Subordinated Debentures, Series A, dated September 20, 2000, filed as
Exhibit 4.14 on Form 10-Q dated November 14, 2000, is hereby
incorporated by reference.
4.15 Assignment and Assumption Agreement to Amended and Restated Trust
Agreement, dated February 3, 1997 between American Mutual Holding
Company and AmerUs Life Holdings, Inc., dated September 20, 2000,
filed as Exhibit 4.15 on Form 10-Q dated November 14, 2000, is hereby
incorporated by reference.
4.16 Assignment and Assumption to Guaranty Agreement, dated February 3,
1997 between American Mutual Holding Company and AmerUs Life
Holdings, Inc., dated September 20, 2000, filed as Exhibit 4.16 on
Form 10-Q, dated November 14, 2000, is hereby incorporated by
reference.
4.17 First Supplement to Subordinated Indenture, dated July 27, 1998,
relating to AmerUs Life Holdings, Inc.'s 6.86% Junior Subordinated
Deferrable Interest Debentures, among American Mutual Holding
Company, AmerUs Life Holdings, Inc. and First Union National Bank,
as Indenture Trustee, dated September 20, 2000, filed as Exhibit
4.17 on Form 10-Q, dated November 14, 2000, is hereby incorporated
by reference.
4.18 First Supplement to Master Unit Agreement dated July 27, 1998,
relating to AmerUs Life Holdings, Inc.'s 7.0% ACES units, between
American Mutual Holding Company and First Union National Bank, as
Unit Agent, dated September 20, 2000, filed as Exhibit 4.18 on Form
10-Q, dated November 14, 2000, is hereby incorporated by reference.
4.19 Assignment and Assumption Agreement to the QUIPS Guarantee Agreement
dated July 27, 1998, relating to AmerUs Life Holdings, Inc.'s 7.0%
ACES units, between American Mutual Holding Company and AmerUs Life
Holdings, Inc., dated September 20, 2000, filed as Exhibit 4.19 on
Form 10-Q, dated November 14, 2000, is hereby incorporated by
reference.
4.20 Assignment and Assumption Agreement to the Common Trust Securities
Guarantee Agreement dated July 27, 1998, relating to AmerUs Life
Holdings, Inc.'s 7.0% ACES units, between American Mutual Holding
Company and AmerUs Life Holdings, Inc., dated September 20, 2000,
filed as Exhibit 4.20 on Form 10-Q, dated November 14, 2000, is
hereby incorporated by reference.
4.21 First Supplement to Purchase Contracts between American Mutual
Holding Company and Holders, as specified, dated September 20, 2000,
filed as Exhibit 4.21on Form 10-Q, dated November 14, 2000, is
hereby incorporated by reference.
4.22 First Supplement to the Pledge Agreement dated July 27, 1998,
relating to AmerUs Life Holdings, Inc.'s 7.0% ACES units, among
American Mutual Holding Company, Goldman Sachs & Co., as Call Option
Holder, the Chase Manhattan Bank, as Collateral Agent and First
Union National Bank, as Unit Agent, dated September 20, 2000, filed
as Exhibit 4.22 on Form 10-Q, dated November 14, 2000, is hereby
incorporated by reference.
4.23 First Supplement to Senior Indenture dated June 16, 1998, relating
to AmerUs Life Holdings, Inc.'s 6.95% Senior Notes, among American
Mutual Holding Company, AmerUs Life Holdings, Inc. and First Union
National Bank, as Trustee, dated September 20, 2000, filed as
Exhibit 4.23 on Form 10-Q, dated November 14, 2000, is hereby
incorporated by reference.
4.24 Indenture dated as of March 6, 2002 between AmerUs Group Co. and BNY
Midwest Trust Company, as Trustee, filed as Exhibit 4.1 on form
8-K/A, dated February 28, 2002, is hereby incorporated by reference.
4.25 Registration Rights Agreement dated as of March 6, 2002 between
AmerUs Group Co. and Credit Suisse First Boston Corporation, filed
as Exhibit 4.2 on Form 8-K/A, dated February 28, 2002, 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.
48
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.
10.3 AmerUs Life Holdings, Inc. Executive Stock Purchase Plan, dated
November 13, 1998, filed as Exhibit 4.11 to the registration
statement of AmerUs Life Holdings, Inc. on Form S-8, Registration
Number 333-72237, is hereby incorporated by reference.
10.4 AlloAmerUs Supplemental Executive Retirement Plan, effective January
1, 1996, filed as Exhibit 10.6 to the registration statement of
AmerUs Life Holdings, Inc. on Form S-1, Registration Number
333-12239, is hereby incorporated by reference.
10.5 Management Incentive Plan, filed as Exhibit 10.9 to the registration
statement of AmerUs Life Holdings, Inc. on Form S-1, Registration
Number 333-12239, is hereby incorporated by reference.
10.6 AmerUs Life Insurance Company Performance Share Plan, filed as
Exhibit 10.10 to the registration statement of AmerUs Life Holdings,
Inc. on Form S-1, Registration Number 333-12239, is hereby
incorporated by reference.
10.7 AmerUs Life Stock Incentive Plan, filed as Exhibit 10.11 to the
registration statement of AmerUs Life Holdings, Inc. on Form S-1,
Registration Number 333-12239, is hereby incorporated by reference.
10.8 AmerUs Life Non-Employee Director Stock Plan, filed as Exhibit 10.13
to the registration statement of AmerUs Life Holdings, Inc. on Form
S-1, Registration Number 333-12239, is hereby incorporated by
reference.
10.9 Form of Indemnification Agreement executed with directors and certain
officers, filed as Exhibit 10.33 to the registration statement of
AmerUs Life Holdings, Inc. on Form S-1, Registration Number
333-12239, is hereby incorporated by reference.
10.10 Tax Allocation Agreement dated as of November 4, 1996, filed as
Exhibit 10.68 to the registration statement of AmerUs Life Holdings,
Inc. on Form S-1, Registration Number 333-12239, is hereby
incorporated by reference.
10.11 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 filed as Exhibit 10.12 on Form 10-K dated March 15,
2002, is hereby incorporated by reference.
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.
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10.19 Amendment No. 3 to Facility Agreement dated December 12, 2001,
among the First National Bank of Chicago and the Registrant filed
as Exhibit 10.19 on Form 10-K dated March 15, 2002, is hereby
incorporated by reference.
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 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.
10.33 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.
10.34 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
50
Co-Arrangers and J P Morgan Chase Bank as Administrative Agent and
Co-Arranger filed as Exhibit 10.35 on Form 10-K dated March 15, 2002,
is hereby incorporated by reference.
10.35* First Amendment to Credit Agreement dated as of February 22, 2002,
among AmerUs Group Co., the lending institutions party hereto, The
Bank of New York, Mellon Bank N.A. and fleet National Bank as
Co-Arrangers and JPMorgan Chase Bank as Administrative Agent and
Co-Arranger.
10.36* Consent dated as of March 15, 2002, among AmerUs Group Co., the
lending institutions party hereto, The Bank of New York, Mellon
Bank N.A. and fleet National Bank as Co-arrangers and JPMorgan
Chase Bank as Administrative Agent and Co-Arranger.
11* Statement Re: Computation of Earnings Per Share.
99.1 Retirement Agreement, dated March 14, 2000, by and between Victor
N. Daley and AmerUs Life Holdings, Inc., filed as Exhibit 99.8 on
Form 10-Q, dated May 15, 2000, is hereby incorporated by reference.
99.2 First Amendment to Employment Agreement, dated as of April 15,
1999, to the Employment Agreement dated as of September 19, 1997,
among Mark V. Heitz, AmVestors Financial Corporation, American
Investors Life Insurance Company, Inc., AmVestors Investment Group,
Inc., American Investors Sales Group, Inc., and AmerUs Life
Holdings, Inc., filed as Exhibit 99.4 on Form 10-Q dated August 13,
1999, is hereby incorporated by reference.
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
51