UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
----------------------------------------
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 6, 2002 was as follows:
Common Stock 39,723,659 shares
Exhibit index - Page 51
Page 1 of 56
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION................................................................... 4
Item 1. Financial Statements............................................................... 4
Consolidated Balance Sheets
June 30, 2002 (Unaudited) and December 31, 2001.................................... 4
Consolidated Statements of Income (Unaudited)
For the Three and Six Months Ended June 30, 2002 and 2001.......................... 6
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
For the Three and Six Months Ended June 30, 2002 and 2001.......................... 7
Consolidated Statements of Stockholders' Equity
For the Six Months Ended June 30, 2002 (Unaudited) and
the Year Ended December 31, 2001................................................... 8
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2002 and 2001.................................... 9
Notes to Consolidated Financial Statements
(Unaudited) ....................................................................... 12
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition ............................................................... 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 46
PART II - OTHER INFORMATION...................................................................... 48
Item 1. Legal Proceedings.................................................................. 48
Item 4. Submission of Matters to a Vote of Security Holders................................ 48
Item 6. Exhibits and Reports on Form 8-K................................................... 49
Signatures....................................................................................... 50
Index to Exhibits................................................................................ 51
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)
June 30, December 31,
2002 2001
-----------------------------------
(unaudited)
Assets
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities $11,850,297 $11,037,425
Equity securities 45,562 11,362
Short-term investments 15,149 14,881
Securities held for trading purposes, at fair value:
Fixed maturity securities 1,941,177 2,175,106
Equity securities -- 12,013
Short-term investments 7,985 4,212
Mortgage loans 926,903 944,532
Real estate 1,287 1,405
Policy loans 500,273 506,318
Other investments 307,495 345,179
-----------------------------------
Total investments 15,596,128 15,052,433
Cash and cash equivalents 102,272 179,376
Accrued investment income 182,467 174,238
Premiums, fees and other receivables 7,502 9,920
Reinsurance receivables 805,130 732,030
Deferred policy acquisition costs 788,190 642,680
Value of business acquired 546,131 583,829
Goodwill 217,632 195,484
Property and equipment 77,900 83,221
Deferred income taxes -- 12,140
Other assets 293,023 270,888
Separate account assets 283,975 328,385
Assets of discontinued operations 30,152 34,528
-----------------------------------
Total assets $18,930,502 $18,299,152
===================================
See accompanying notes to consolidated financial statements.
4
AMERUS GROUP CO.
CONSOLIDATED BALANCE SHEETS
($ in thousands)
June 30, December 31,
2002 2001
----------------------------
(unaudited)
Liabilities and Stockholders' Equity
Liabilities:
Policy reserves and policyowner funds:
Future life and annuity policy benefits $ 15,581,845 $ 15,102,001
Policyowner funds 785,759 432,941
----------------------------
16,367,604 15,534,942
Accrued expenses and other liabilities 281,146 488,949
Dividends payable to policyowners 246,615 221,224
Policy and contract claims 42,994 33,147
Income taxes payable 12,534 45,809
Deferred income taxes 10,044 --
Notes payable 419,617 315,574
Separate account liabilities 283,975 328,385
Liabilities of discontinued operations 19,484 23,551
----------------------------
Total liabilities 17,684,013 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; 39,721,666 shares issued and
outstanding in 2002 (net of 3,916,622 treasury
shares) and 41,759,450 shares issued and outstanding
in 2001 (net of 1,746,548 treasury shares) 39,722 41,759
Additional paid-in capital 1,048,979 1,122,853
Accumulated other comprehensive income 18,910 12,669
Unearned compensation (510) (727)
Unallocated ESOP shares (224) (224)
Retained earnings 91,363 62,187
----------------------------
Total stockholders' equity 1,198,240 1,238,517
----------------------------
Total liabilities and stockholders' equity $ 18,930,502 $ 18,299,152
============================
See accompanying notes to consolidated financial statements.
5
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
For The Three Months Ended June 30, For The Six Months Ended June 30,
2002 2001 2002 2001
---------------------------------- ----------------------------------
(unaudited)
Revenues:
Insurance premiums $ 93,247 $ 71,712 $ 185,355 $ 128,879
Universal life and annuity product charges 39,314 34,847 82,185 59,113
Net investment income 251,897 207,093 491,667 388,221
Realized/unrealized (losses) on investments (75,911) (11,825) (100,623) (51,660)
Other income 19,925 11,952 31,937 22,284
---------------------------- ----------------------------
328,472 313,779 690,521 546,837
---------------------------- ----------------------------
Benefits and expenses:
Policyowner benefits 220,376 189,363 433,932 309,847
Underwriting, acquisition and other expenses 43,201 35,121 79,454 66,455
Demutualization costs 179 202 464 202
Restructuring costs 6,416 -- 8,211 --
Amortization of deferred policy acquisition costs
and value of business acquired 28,324 29,971 68,164 55,242
Dividends to policyowners 19,221 23,067 47,624 42,225
---------------------------- ----------------------------
317,717 277,724 637,849 473,971
---------------------------- ----------------------------
Income from continuing operations 10,755 36,055 52,672 72,866
Interest expense 6,337 7,410 12,364 14,742
---------------------------- ----------------------------
Income before income tax expense 4,418 28,645 40,308 58,124
Income tax expense 696 8,950 12,128 18,971
---------------------------- ----------------------------
Net income from continuing operations 3,722 19,695 28,180 39,153
Discontinued operations (net of tax):
Income from discontinued operations 540 532 996 946
---------------------------- ----------------------------
Net income before cumulative effect of change in
accounting for derivatives 4,262 20,227 29,176 40,099
Cumulative effect of change in accounting for
derivatives, net of tax -- -- -- (8,236)
---------------------------- ----------------------------
Net income $ 4,262 $ 20,227 $ 29,176 $ 31,863
============================ ============================
Net income from continuing operations per common share:
Basic $ 0.09 $ 0.57 $ 0.69 $ 1.22
============================ ============================
Diluted $ 0.09 $ 0.57 $ 0.68 $ 1.21
============================ ============================
Net income from discontinued operations per common share:
Basic $ 0.01 $ 0.02 $ 0.02 $ 0.03
============================ ============================
Diluted $ 0.01 $ 0.02 $ 0.02 $ 0.03
============================ ============================
Net income per common share:
Basic $ 0.11 $ 0.59 $ 0.72 $ 0.99
============================ ============================
Diluted $ 0.10 $ 0.59 $ 0.71 $ 0.99
============================ ============================
Weighted average common shares outstanding:
Basic 40,155,276 34,364,932 40,749,054 32,181,646
============================ ============================
Diluted 40,661,337 34,528,541 41,311,695 32,325,847
============================ ============================
See accompanying notes to consolidated financial statements.
6
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
For The Three Months Ended June 30, For The Six Months Ended June 30,
2002 2001 2002 2001
----------------------------------- ---------------------------------
(unaudited)
Net income $ 4,262 $ 20,227 $ 29,176 $ 31,863
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 27,724 (38,083) (31,860) (2,110)
Less: Reclassification adjustment for (losses)
included in net income (37,697) (7,247) (41,461) (14,223)
----------------------------------- ---------------------------------
Other comprehensive income (loss), before tax 65,421 (30,836) 9,601 11,451
Income tax (expense) benefit related to items of other
comprehensive income (22,897) 10,792 (3,360) (4,008)
----------------------------------- ---------------------------------
42,524 (20,044) 6,241 7,443
Amounts attributable to:
Change in accounting for derivatives -- -- -- 2,661
----------------------------------- ---------------------------------
Other comprehensive income (loss), net of taxes 42,524 (20,044) 6,241 10,104
Comprehensive income (loss) $ 46,786 $ 183 $ 35,417 $ 41,967
=================================== =================================
See accompanying notes to consolidated financial statements.
7
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($ in thousands)
Accumulated
Other
Additional Comprehensive Unallocated Total
Common Paid-In Income Unearned ESOP Retained Stockholders'
Stock Capital (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 -- -- -- -- -- 29,176 29,176
Net unrealized gain on securities -- -- 5,955 -- -- -- 5,955
Net unrealized gain on derivatives
designated as cash flow hedges -- -- 286 -- -- -- 286
Stock issued under various incentive
plans, net of forfeitures 477 12,864 -- 217 -- -- 13,558
Purchase of treasury stock (2,514) (86,738) -- -- -- -- (89,252)
------- ----------- -------- ------- ----- ------- -----------
Balance at June 30, 2002 $39,722 $ 1,048,979 $ 18,910 $ (510) $(224) $ 91,363 $1,198,240
======= =========== ======== ======= ===== ======== ==========
See accompanying notes to consolidated financial statements.
8
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
For The Six Months Ended June 30,
2002 2001
---------------------------------
(unaudited)
Cash flows from operating activities
Net income $ 29,176 $ 31,863
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 (70,159) (46,255)
Interest credited to policyowner account
balances 222,872 181,081
Change in option value of equity-indexed products
and market value adjustments on total
return strategy annuities (35,867) (32,510)
Realized/unrealized (gains) losses on investments 100,623 51,660
Goodwill amortization -- 3,898
DAC amortization 32,682 18,185
VOBA amortization 35,482 37,057
Change in:
Accrued investment income (8,229) (8,046)
Reinsurance receivables (73,100) 16,677
Securities held for trading purposes:
Fixed maturities 215,125 (48,891)
Equity securities 12,471 (1,648)
Short-term investments (3,780) --
Deferred policy acquisition costs (201,575) (107,687)
Liabilities for future policy benefits 434,465 (3,283)
Accrued expenses and other liabilities (29,499) (59,110)
Policy and contract claims and other
policyowner funds 28,122 (1,720)
Income taxes:
Current (33,277) (12,292)
Deferred 25,637 20,690
Other, net (41,007) (17,890)
---------------------------
Net cash provided by operating activities 640,162 30,015
---------------------------
Cash flows from investing activities:
Purchase of fixed maturities available-for-sale (3,033,669) (1,603,208)
Proceeds from sale of fixed maturities available-for-sale 1,686,139 909,026
Maturities, calls and principal reductions of
fixed maturities available-for-sale 507,723 257,064
Purchase of equity securities (35,945) (52,541)
Proceeds from sale of equity securities 3,604 54,749
Change in short-term investments, net (334) 9,473
Purchase of mortgage loans (36,558) (81,967)
9
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
For The Six Months Ended June 30,
2002 2001
---------------------------------
(unaudited)
Proceeds from repayment and sale of mortgage loans 53,520 50,752
Purchase of real estate and other invested assets (29,551) (49,002)
Proceeds from sale of real estate and other
invested assets 30,230 57,603
Change in policy loans, net 6,045 1,459
Other assets, net (8,977) (51,991)
Acquisitions, net of cash acquired -- 156,959
--------------------------
Net cash (used in) investing activities (857,773) (341,624)
--------------------------
Cash flows from financing activities:
Deposits to policyowner account balances 998,428 1,010,247
Withdrawals from policyowner account balances (859,614) (639,913)
Change in debt, net (80,957) (11,471)
Stock issued under various incentive plans, net of
forfeitures 13,558 1,495
Purchase of treasury stock (89,252) (857)
Proceeds from issuance of OCEANs 178,494 --
Retirement of company-obligated mandatorily
redeemable capital securities (20,150) --
--------------------------
Net cash provided by financing activities 140,507 359,501
--------------------------
Net (decrease) in cash (77,104) 47,892
Cash and cash equivalents at beginning of period 179,376 65,485
--------------------------
Cash and cash equivalents at end of period $ 102,272 $ 113,377
==========================
Supplemental disclosure of cash activities:
Interest paid $ 11,402 $ 14,392
==========================
Income taxes paid $ 26,921 $ 9,829
==========================
10
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
For The Six Months Ended June 30,
2002 2001
---------------------------------
(unaudited)
Details of acquisitions:
Fair value of assets acquired $ -- $5,671,628
Liabilities assumed -- 5,345,186
----------=---------------
Carrying value of acquisitions -- 326,442
Common stock issued -- (232,318)
Accrual of cash payout component of purchase price -- (9,121)
Preliminary investment in ILGC -- (77,200)
Acquisition costs previously paid -- (2,857)
--------------------------
Cash paid -- 4,946
Less: Cash acquired -- 161,905
--------------------------
Net cash (received in) acquisitions $ -- $ (156,959)
==========================
11
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States (GAAP) for interim financial information and the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by GAAP for annual financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. All adjustments were of a normal
recurring nature, unless otherwise noted in Management's Discussion and Analysis
and the Notes to Consolidated Financial Statements. Operating results for the
six months ended June 30, 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., holding company of
Indianapolis Life Insurance Company (ILIC) and its subsidiaries (ILICO). 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 137 and SFAS 138, which requires that
all derivative instruments, including certain derivative instruments embedded in
other contracts, be reported on the balance sheet at fair value. Accounting for
gains and losses resulting from changes in the values of derivatives is
dependent upon the use of the derivative and its qualification for special hedge
accounting. In accordance with the provisions of SFAS
12
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 six months of 2002 and 2001, realized/unrealized gains
(losses) on investments included an unrealized loss of $34.8 million and $34.1
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 six months of 2002 and 2001 included an unrealized loss of $19.5
million and $3.5 million, respectively, from the change in fair value on the
trading securities backing the total return strategy products. Policyowner
benefits included an offsetting adjustment to reduce contract liabilities for
fair value changes in options embedded within the equity-indexed products and
fair value changes on total return strategy products of $35.9 million and $32.5
million for the first six months 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 $0.3 million and loss of $2.1 million from
the fair value change in interest rate swaps used to hedge the floating rate
funding agreement liability during the first six months of 2002 and 2001,
respectively. The Company undesignated a cash flow hedge and is now amortizing
the amount in AOCI to earnings over the remaining life of the basis swap, which
amounted to $0.7 million expense in the second quarter of 2002. The Company
estimates that $4.0 million of derivative losses included in AOCI will be
reclassified into earnings within the next twelve months.
The following table summarizes the income (loss) impact of the market value
adjustments on trading securities and derivatives and the cash flow hedge
amortization for the first six months ended June 30, 2002 and 2001 (in
thousands):
For The Six Months Ended June 30,
2002 2001
---------------------------------
($ in thousands)
Fixed maturity securities held for trading $ (19,450) $ (3,519)
Options on equity-indexed annuities (34,786) (34,096)
Equity-indexed and total return strategy fixed
annuity liabilities 35,867 32,510
Cash flow hedge amortization (697) -
Deferred policy acquisition cost amortization
impact of net annuity adjustments (2,662) 2,102
---------------------------------
Pre-tax total (21,728) (3,003)
Income taxes 7,605 1,051
---------------------------------
After-tax total $ (14,123) $ (1,952)
===============================
13
(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 June 30, 2002
and December 31, 2001 and for the three months and six months ended June 30,
2002 and 2001 are as follows:
June 30, December 31,
2002 2001
----------------------------
($ in thousands)
(unaudited)
LIABILITIES
Future life and annuity policy benefits $ 2,821,245 $ 2,835,423
Policyowner funds 4,745 4,656
Accrued expenses and other liabilities 72,964 69,678
Dividends payable to policyowners 154,966 154,139
Policy and contract claims 11,865 8,843
Policyowner dividend obligation 54,542 61,486
-------------------------
Total Liabilities 3,120,327 3,134,225
-------------------------
ASSETS
Fixed maturity securities available-for-sale 1,869,819 1,829,060
Mortgage loans 100,872 105,901
Policy loans 357,964 363,981
Other investments 31,350 4,653
Cash and cash equivalents 3,612 18,382
Accrued investment income 31,258 32,396
Premiums and fees receivable 14,778 22,414
Other assets 45,726 41,827
-------------------------
Total Assets 2,455,379 2,418,614
-------------------------
Maximum future earnings to be recognized from assets and
liabilities of the Closed Block $ 664,948 $ 715,611
=========================
14
For The Three
Months Ended June 30,
2002 2001
-------------------------
($ in thousands)
(unaudited)
OPERATIONS:
Insurance premiums $ 68,323 $ 59,714
Universal life and annuity product charges 544 3,015
Net investment income 38,934 29,530
Realized gains (losses) on investments (5,378) 69
Policyowner benefits (72,634) (62,075)
Underwriting, acquisition and other expenses (1,481) (922)
Dividends to policyowners (16,970) (21,195)
----------------------
Contribution from the Closed Block before
income taxes $ 11,338 $ 8,136
======================
For The Six
Months Ended June 30,
2002 2001
-------------------------
($ in thousands)
(unaudited)
OPERATIONS:
Insurance premiums $ 134,111 $ 104,562
Universal life and annuity product charges 3,441 6,329
Net investment income 76,977 54,809
Realized gains (losses) on investments (754) 313
Policyowner benefits (144,749) (110,898)
Underwriting, acquisition and other expenses (2,736) (1,687)
Dividends to policyowners (43,304) (38,823)
----------------------
Contribution from the Closed Block before
income taxes $ 22,986 $ 14,605
======================
15
(5) NOTES PAYABLE AND CAPITAL SECURITIES
Notes payable and capital securities consist of the following:
June 30, December 31,
2002 2001
----------------------
($ in thousands)
(unaudited)
Federal Home Loan Bank community investment
long-term advances with a weighted average
interest rate of 5.80% at June 30, 2002 (A) $ 14,124 $ 14,369
Optionally Convertible Equity-linked Accreting Notes
due on March 6, 2032 (B) 185,493 --
Senior notes bearing interest at 6.95%
due June, 2005 125,000 125,000
Revolving credit agreement 70,000 150,000
Surplus notes 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
-------- --------
$419,617 $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 June 30, 2002. 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 are senior
subordinated debt and 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
16
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.
Proceeds from the OCEANs were used to repay borrowings on the Company's
revolving credit agreement 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-months and six months ending
June 30, 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 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. Goodwill was amortized over thirty years through December
31, 2001. In accordance with SFAS 142, "Goodwill and Other Intangible Assets,"
effective January 1, 2002, goodwill is no longer amortized but instead tested
for impairment on an annual basis (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 402.1
Value of business acquired 215.4
Goodwill 34.9
Separate account assets 345.6
Policyowner reserves and funds (4,801.3)
Other liabilities (155.4)
Debt (25.0)
Separate account liabilities (345.6)
-------
Total investment in ILICO $ 326.4
=======
17
In June 2002, the Company acquired an independent marketing organization
for cash of $7.5 million. The total purchase price was allocated to the assets
and liabilities based on the relative fair values 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. Goodwill amounting to $7.2 million
was established in connection with the acquisition.
(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 and investment activities. 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, Iowa and Indianapolis, Indiana and accumulation products functions will
be transitioned to Topeka, Kansas. Investment activities have been restructured
to eliminate real estate management services which will be outsourced in the
future.
Restructuring charges have been included in the consolidated statement of
income for the three months and six months ended June 30, 2002. The
restructuring charges for the six months ended June 30, 2002 include pre-tax
severance and termination benefits of $5.3 million related to the elimination of
approximately 80 positions and other pre-tax costs of $2.9 million primarily
related to systems conversion and relocation of employees. An accrual for
severance and termination benefits not yet paid amounted to $2.6 million at June
30, 2002.
The Company has not finalized all restructuring activities as of June 30,
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.
(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 June 30, 2002, goodwill of $34.2 million is in the protection
products segment and $183.4 million is in the accumulation products segment. The
only intangible asset other than goodwill, is value of business acquired (VOBA)
which is being amortized and amounted to a gross carrying amount of $819.2
million and accumulated amortization of $273.1 million of at June 30, 2002.
Goodwill changed from $195.5 million at December 31, 2001 to $217.6 million at
June 30, 2002 primarily due to the adjustment of the ILICO purchase price
allocation which increased goodwill approximately $14.0 million and goodwill
attributable to the acquisition of independent marketing organizations of
approximately $8.1 million. The Company has evaluated the transitional
impairment analysis for goodwill and other intangible assets and determined such
assets are not impaired as of January 1, 2002.
18
A reconciliation of net income and basic and diluted earnings per share
reported for the three months and six months ended June 30, 2001 to exclude
amortization expense of goodwill is as follows:
For The Three Months Ended June 30, For The Six Months Ended June 30,
2002 2001 2002 2001
----------------------------------- ---------------------------------
($ in thousands, except per share amounts)
Net income as reported $ 4,262 $ 20,227 $ 29,176 $ 31,863
Goodwill amortization expense - 1,955 - 3,898
------------------------ -------------------------
Adjusted net income $ 4,262 $ 22,182 $ 29,176 $ 35,761
======================== =========================
Basic earnings per share as reported $ 0.11 $ 0.59 $ 0.72 $ 0.99
Goodwill amortization expense - 0.06 - 0.12
------------------------ -------------------------
Adjusted basic earnings per share $ 0.11 $ 0.65 $ 0.72 $ 1.11
======================== =========================
Diluted earnings per share as reported $ 0.10 $ 0.59 $ 0.71 $ 0.99
Goodwill amortization expense - 0.05 - 0.12
------------------------ -------------------------
Adjusted diluted earnings per share $ 0.10 $ 0.64 $ 0.71 $ 1.11
======================== =========================
(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.
(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. These items are shown between adjusted pre-tax
operating income and income from continuing operations on the following
operating segment tables and are as follows:
19
1) Realized gains and losses on open block investments.
2) Market value changes and amortization of assets and liabilities
associated with the application of SFAS 133, such as:
- Unrealized gains and losses on securities held for trading.
- Change in option value of equity-indexed annuity products and market
value adjustments on total return strategy annuities.
- Cash flow hedge amortization.
3) Amortization of deferred policy acquisition costs and VOBA related to
the realized gains and losses on the open block investments and the SFAS
133 adjustments.
4) Demutualization costs.
5) Restructuring costs.
These items will either fluctuate from period to period depending on the
prevailing interest rate and economic environment or are not continuing in
nature, so management believes they do not reflect the Company's ongoing
earnings capacity of its operating segments.
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 closed block 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.
20
Operating segment income is as follows:
Operating Segment Income
($ in thousands)
For The Three Months Ended June 30, 2002
-----------------------------------------------------
Protection Accumulation Total
Products Products All Other Consolidated
-----------------------------------------------------
Revenues:
Insurance premiums $ 89,808 $ 3,228 $ 211 $ 93,247
Universal life and annuity product charges 28,590 10,724 -- 39,314
Net investment income 83,418 166,544 1,935 251,897
Realized gains (losses) on closed block investments (5,378) -- -- (5,378)
Other income 992 17,897 1,036 19,925
---------------------------------------------------
197,430 198,393 3,182 399,005
Benefits and expenses:
Policyowner benefits 112,598 127,423 394 240,415
Underwriting, acquisition, and other expenses 21,301 18,390 3,510 43,201
Amortization of deferred policy acquisition costs
and value of business acquired, net of
open block loss adjustment of ($6,840) 14,506 20,658 -- 35,164
Dividends to policyowners 19,221 -- -- 19,221
---------------------------------------------------
167,626 166,471 3,904 338,001
---------------------------------------------------
Adjusted pre-tax operating income $ 29,804 $ 31,922 $ (722) 61,004
==================================
Realized (losses) on open block investments (35,755)
Unrealized (losses) on open block trading investments (34,778)
Change in option value of equity-indexed
annuity products and market value
adjustments on total return strategy annuities 20,736
Cash flow hedge amortization (697)
Amortization of deferred policy acquisition costs and
VOBA due to open block gains or losses 6,840
Demutualization costs (179)
Restructuring costs (6,416)
-------
Income from continuing operations 10,755
Interest (expense) (6,337)
Income tax (expense) (696)
Income from discontinued operations, net of tax 540
-------
Net income $ 4,262
=======
21
Operating Segment Income
($ in thousands)
For The Three Months Ended June 30, 2001
---------------------------------------------------------
Protection Accumulation Total
Products Products All Other Consolidated
---------------------------------------------------------
Revenues:
Insurance premiums $ 68,906 $ 2,581 $ 225 $ 71,712
Universal life and annuity product charges 25,821 9,026 -- 34,847
Net investment income 65,294 138,684 3,115 207,093
Realized gains (losses) on closed block investments 69 (305) -- (236)
Other income -- 9,732 2,220 11,952
---------------------------------------------------
160,090 159,718 5,560 325,368
Benefits and expenses:
Policyowner benefits 82,431 103,877 596 186,904
Underwriting, acquisition, and other expenses 17,911 13,565 3,645 35,121
Amortization of deferred policy acquisition costs
and value of business acquired, net of
open block loss adjustment of ($4,899) 12,123 22,747 -- 34,870
Dividends to policyowners 23,067 -- -- 23,067
---------------------------------------------------
135,532 140,189 4,241 279,962
---------------------------------------------------
Adjusted pre-tax operating income $ 24,558 $ 19,529 $ 1,319 45,406
======================================
Realized (losses) on open block investments (7,223)
Unrealized (losses) on open block trading investments (4,366)
Change in option value of equity-indexed
annuity products and market value
adjustments on total return strategy annuities (2,459)
Amortization of deferred policy acquisition costs and
VOBA due to open block gains or losses 4,899
Demutualization costs (202)
--------
Income from continuing operations 36,055
Interest (expense) (7,410)
Income tax (expense) (8,950)
Income from discontinued operations, net of tax 532
--------
Net income $ 20,227
========
22
Operating Segment Income
($ in thousands)
For The Six Months Ended June 30, 2002
----------------------------------------------------
Protection Accumulation Total
Products Products All Other Consolidated
----------------------------------------------------
Revenues:
Insurance premiums $ 178,343 $ 6,180 $ 832 $ 185,355
Universal life and annuity product charges 61,446 20,739 -- 82,185
Net investment income 163,843 324,887 2,937 491,667
Realized gains (losses) on closed block investments (754) -- -- (754)
Other income 1,945 28,442 1,550 31,937
-----------------------------------------------
404,823 380,248 5,319 790,390
Benefits and expenses:
Policyowner benefits 222,149 245,763 1,190 469,102
Underwriting, acquisition, and other expenses 40,942 31,388 7,122 79,452
Amortization of deferred policy acquisition costs
and value of business acquired, net of
open block loss adjustment of ($5,286) 28,841 44,611 -- 73,452
Dividends to policyowners 47,624 -- -- 47,624
------------------------------------------------
339,556 321,762 8,312 669,630
------------------------------------------------
Adjusted pre-tax operating income $ 65,267 $ 58,486 $ (2,993) 120,760
==================================
Realized (losses) on open block investments (45,633)
Unrealized (losses) on open block trading investments (54,236)
Change in option value of equity-indexed
annuity products and market value
adjustments on total return strategy annuities 35,867
Cash flow hedge amortization (697)
Amortization of deferred policy acquisition costs and
VOBA due to open block gains or losses 5,286
Demutualization costs (464)
Restructuring costs (8,211)
--------
Income from continuing operations 52,672
Interest (expense) (12,364)
Income tax (expense) (12,128)
Income from discontinued operations, net of tax 996
--------
Net income $ 29,176
========
23
Operating Segment Income
($ in thousands)
For The Six Months Ended June 30, 2001
------------------------------------------------------
Protection Accumulation Total
Products Products All Other Consolidated
-------------------------------------------------------
Revenues:
Insurance premiums $ 121,432 $ 7,194 $ 253 $ 128,879
Universal life and annuity product charges 42,955 16,158 -- 59,113
Net investment income 118,325 265,872 4,024 388,221
Realized gains (losses) on closed block investments 313 347 -- 660
Other income -- 17,789 4,495 22,284
-----------------------------------------------------
283,025 307,360 8,772 599,157
Benefits and expenses:
Policyowner benefits 147,537 194,235 585 342,357
Underwriting, acquisition, and other expenses 32,051 28,082 6,322 66,455
Amortization of deferred policy acquisition costs
and value of business acquired, net of
open block loss adjustment of ($5,537) 21,733 39,046 -- 60,779
Dividends to policyowners 42,225 -- -- 42,225
-----------------------------------------------------
243,546 261,363 6,907 511,816
-----------------------------------------------------
Adjusted pre-tax operating income $ 39,479 $ 45,997 $ 1,865 87,341
======================================
Realized (losses) on open block investments (14,664)
Unrealized (losses) on open block trading investments (37,656)
Change in option value of equity-indexed
annuity products and market value
adjustments on total return strategy annuities 32,510
Amortization of deferred policy acquisition costs and
VOBA due to open block gains or losses 5,537
Demutualization costs (202)
---------
Income from continuing operations 72,866
Interest (expense) (14,742)
Income tax (expense) (18,971)
Income from discontinued operations, net of tax 946
Cumulative effect of change in accounting for derivatives, net of tax (8,236)
---------
Net income $ 31,863
=========
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following analysis of the consolidated results of operations and
financial condition of 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, term life, universal life and
equity-indexed life insurance policies. The primary offerings of the
accumulation products segment are individual fixed annuities and 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. Adjusted net operating income,
which is referred to herein as 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.
25
For The Three Months Ended June 30, For The Six Months Ended June 30,
2002 2001 2002 2001
------------------------------------ ---------------------------------
($ in thousands, except per share data)
Net income $ 4,262 $ 20,227 $ 29,176 $ 31,863
Realized losses on open block investments (A) 23,155 4,677 29,575 9,494
Net amortization of deferred policy
acquisition costs due to open block
gains or losses (B) (3,668) (1,317) (5,166) (2,823)
Net effect of accounting differences
from the adoption of SFAS 133 (C) 8,801 2,541 14,123 2,541
Demutualization costs (D) 179 202 464 202
Restructuring costs (E) 3,937 -- 5,054 --
Discontinued operations (F) (540) (532) (996) (946)
Cumulative effect of change in
accounting for derivatives (G) -- -- -- 8,236
---------------------------- ----------------------------
Adjusted Net Operating Income $ 36,126 $ 25,798 $ 72,230 $ 48,567
============================ ============================
Adjusted Net Operating Income
per common share:
Basic $ 0.90 $ 0.75 $ 1.77 $ 1.51
============================ ============================
Diluted $ 0.89 $ 0.75 $ 1.75 $ 1.50
============================ ============================
Weighted average common
shares outstanding:
Basic 40,155,276 34,364,932 40,749,054 32,181,646
============================ ============================
Diluted 40,661,337 34,528,541 41,311,695 32,325,847
============================ ============================
(A) Represents total open block realized gains or losses on investments
adjusted for income taxes. Open block realized gains or losses may vary
widely between periods. Such amounts are determined by management's
timing of individual transactions or current market conditions and do
not necessarily correspond to the underlying operating trends.
(B) Represents amortization of deferred policy acquisition costs and VOBA
on the open block 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 cash flow
hedge amortization, market value adjustments on trading securities,
derivatives, certain annuity contracts, and the associated change in
amortization of deferred acquisition costs and VOBA resulting from such
adjustments.
26
(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 severance and termination benefits, relocation of
employees and systems conversion.
(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 $10.3 million to $36.1 million,
or $0.89 per diluted share, for the second quarter of 2002 compared to $25.8
million, or $0.75 per diluted share, for the second quarter of 2001. For the six
months ended June 30, adjusted net operating income was $72.2 million in 2002
compared to $48.6 million in 2001. The increase in adjusted net operating income
in 2002 was primarily attributable to the acquisition of ILICO which operations
have been included in our consolidated financial statements since May 18, 2001.
This change is analyzed further in the operating segment discussion.
SALES
PROTECTION PRODUCTS
The following table sets forth annualized premium information regarding
our protection products segment sales activity by life insurance product:
Sales Activity by Product
For The Three Months Ended June 30, For The Six Months Ended June 30,
2002 2001 2002 2001
----------------------------------- ---------------------------------
($ in thousands)
Traditional life insurance:
Whole life $ 1,140 $ 1,506 $ 2,260 $ 3,518
Interest-sensitive whole life 11,282 2,425 21,486 2,425
Term life 5,967 1,891 8,515 3,294
Universal life 6,399 4,053 14,725 5,702
Equity-indexed life 12,095 5,455 20,760 10,724
---------------------- ------------------------
Direct first year annualized premiums 36,883 15,330 67,746 25,663
Private label term life premiums 1,048 733 4,644 733
---------------------- ------------------------
Total $37,931 $16,063 $72,390 $26,396
====================== ========================
Direct life insurance sales as measured by annualized premiums were
$36.9 million in the second quarter of 2002 compared to $15.3 million in the
second quarter of 2001. Year-to-date, direct life insurance sales increased
$42.0 million to $67.7 million in 2002 compared to $25.7 million in 2001.
Approximately $16.7 million and $35.0 million of the increase for the quarter
and year-to-date periods, respectively, was due to sales from ILICO which was
acquired during the second quarter of 2001. Excluding the sales from ILICO, life
insurance sales increased 47% and 34% for the quarter and year-to-date periods,
respectively, as compared to 2001. The increase, excluding ILICO, was primarily
from the equity-indexed 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 six months
27
of 2002, sales of these products were $20.8 million as compared to $10.7 million
for the same period a year ago.
We also distribute term products of ILICO through strategic alliances
with private label partners. Under private label arrangements, ILICO designs and
issues products that are distributed through the field forces of other life
insurance companies, our private label partners. ILICO reinsures a portion of
the risks on those products which we refer to as our private label sales. We
have two private label partners that are actively writing new business. During
the second quarter of 2002, we decided to cease recruiting new private label
partners and the impact of this decision on future sales is not yet
determinable.
The following table sets forth the protection products segment life
insurance collected premiums, including collected premiums associated with the
closed block, for the periods indicated:
Collected Premiums by Product
For The Three Months Ended June 30, For The Six Months Ended June 30,
2002 2001 2002 2001
----------------------------------- ---------------------------------
($ in thousands)
Individual life premiums collected:
Traditional life:
First year and single $ 38,210 $ 26,027 $ 80,773 $ 46,091
Renewal 80,690 65,022 175,593 114,222
---------------------- ----------------------
Total 118,900 91,049 256,366 160,313
---------------------- ----------------------
Universal life:
First year and single 13,889 5,290 33,547 9,655
Renewal 33,441 23,494 63,917 42,262
---------------------- ----------------------
Total 47,330 28,784 97,464 51,917
---------------------- ----------------------
Equity-indexed life:
First year and single 19,729 7,474 31,610 14,464
Renewal 1,506 1,053 7,556 2,106
---------------------- ----------------------
Total 21,235 8,527 39,166 16,570
---------------------- ----------------------
Total individual life 187,465 128,360 392,996 228,800
Reinsurance assumed 12,309 5,517 24,914 6,026
Reinsurance ceded (38,467) (15,802) (118,186) (25,152)
---------------------- ----------------------
Total individual life, net of reinsurance $ 161,307 $ 118,075 $ 299,724 $ 209,674
====================== ======================
Traditional life insurance premiums collected were $118.9 million for
the second quarter of 2002 compared to $91.0 million for the second quarter of
2001. Year-to-date, traditional life insurance premiums increased $96.1 million
to $256.4 million in 2002 compared to $160.3 million in 2001. The increase in
2002 was primarily due to the additional premiums from ILICO which increased
$30.4 million and $97.5 million for the quarter and year-to-date periods,
respectively. Excluding the ILICO premiums, first year and single premiums
remained relatively consistent between periods with such premiums decreasing
$0.3 million in the second quarter of 2002 and increasing $1.7 million
year-to-date as compared to the respective 2001 periods, as more of our life
premium growth has shifted to the equity-indexed products. Renewal collected
premium, excluding ILICO premiums, decreased $2.3 million in the second quarter
of 2002 and decreased $3.2 million year-to-date as compared to 2001 primarily
due to continued run-off of the closed block.
Universal life insurance premiums collected were $47.3 million for the
second quarter of 2002 compared to $28.8 million for the second quarter of 2001
and $97.5 million for the first six months of 2002 compared to $51.9 million for
the first six months of 2001. Approximately $18.6 million and $46.0 million of
the increase in universal life insurance premiums for the quarter and
year-to-date periods of
28
2002 were from ILICO. Excluding ILICO, universal life premiums decreased $0.1
million and $0.4 million for the quarter and year-to-date periods, respectively,
as a result of our shift in product focus from universal life to equity-indexed
life.
Equity-indexed life premiums collected were $21.2 million for the
second quarter of 2002 compared to $8.5 million for the second quarter of 2001
and $39.2 million for the first six months of 2002 compared to $16.6 million for
the first six months of 2001. The increase in 2002 reporting periods as compared
to 2001 was a result of our shift in product focus from universal life to
equity-indexed life and continued customer interest in this product following
its introduction in 2000.
Reinsurance assumed increased approximately $6.8 million and $18.9
million in the second quarter and year-to-date periods, respectively, of 2002 as
compared to 2001. The increase is attributable to the acquisition of ILICO which
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 $38.5 million in the second quarter of 2002
compared to $15.8 million in the second quarter of 2001 and $118.2 million for
the first six months of 2002 compared to $25.2 million for the first six months
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 ALIC's closed block mortality net amount at risk not
previously reinsured. As a result of the new arrangements, ceded reinsurance
premium, excluding ILICO, was $19.7 million in the second quarter of 2002
compared to $9.3 million in the second quarter of 2001 and was $79.2 million for
the first six months of 2002 compared to $18.6 million for the first six months
of 2001. The remainder of the increase in ceded premium amounting to $12.3
million for the second quarter of 2002 and $32.5 million for the first six
months of 2002 was from the ILICO acquisition. ILICO's reinsurance agreements
effectively reduce ILICO's retention of mortality risk to $500,000.
29
The following table sets forth information regarding our protection
products segment life insurance in force for each date presented:
Individual Life Insurance in Force
As of June 30,
2002 2001
----------------------------------
($ in thousands)
Traditional life
Number of policies 444,292 403,718
GAAP life reserves $ 3,178,715 $ 3,058,196
Face amounts $53,381,000 $45,153,000
Universal life
Number of policies 151,609 157,701
GAAP life reserves $ 1,402,581 $ 1,415,319
Face amounts $19,184,000 $20,150,000
Equity-indexed life
Number of policies 15,784 6,226
GAAP life reserves $ 76,345 $ 25,380
Face amounts $ 3,045,000 $ 1,099,000
Total life insurance
Number of policies 611,685 567,645
GAAP life reserves $ 4,657,641 $ 4,498,895
Face amounts $75,610,000 $66,402,000
ACCUMULATION PRODUCTS
The following table sets forth our accumulation products segment
collected deposits for the periods indicated:
Deposits by Product
For The Three Months Ended June 30, For The Six Months Ended June 30,
2002 2001 2002 2001
----------------------------------- ---------------------------------
($ in thousands)
Annuities
Fixed annuities:
Deferred fixed annuities $ 245,936 $ 293,953 $ 470,391 $ 730,991
Equity-indexed annuities 157,137 139,643 326,643 223,996
Variable annuities 1,818 4,197 4,481 4,197
Funding agreements 75,000 - 350,000 -
-------------------------- ------------------------------
Total 479,891 437,793 1,151,515 959,184
Reinsurance assumed - - - -
Reinsurance ceded (2,905) (56,144) (4,382) (104,733)
-------------------------- ------------------------------
Total deposits, net of reinsurance $ 476,986 $ 381,649 $ 1,147,133 $ 854,451
========================== ==============================
30
Fixed Annuity Products. Deferred fixed annuity collected premiums were
$245.9 million in the second quarter of 2002 compared to $294.0 million in the
second quarter of 2001. Year-to-date, deferred fixed annuity collected premiums
were $470.4 million in 2002 compared to $731.0 million in 2001. The decrease in
deferred fixed annuity collected premiums in 2002 as compared to 2001 was
primarily attributable to the decision to manage the growth of the business.
Equity-indexed annuity products have continued to grow in popularity with
consumers and agents and as a result, premiums increased $17.5 million and
$102.6 million in the second quarter and first six months of 2002, respectively,
as compared to the respective 2001 periods. Partially offsetting the second
quarter growth in equity-indexed annuity premiums was a decline of approximately
$19 million in premiums due to the discontinuation of a relationship with a
former marketing partner of ILICO. The discontinuation of this relationship is
not expected to have a significant impact on future period premiums as other
producers have replaced this source.
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 $52.0 million and
$100.7 million in the second quarter and first six months of 2001, respectively.
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 for which ceded premium
decreased approximately $2.9 million in the second quarter of 2002 and $1.5
million in the first six months 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 $1.8 million and $4.5 million for the second quarter and first six
months of 2002, respectively, 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 appear in our
direct sales amounts. 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 funding agreements
totaling $75 million and $350 million in the second quarter and first six months
of 2002, respectively. 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 assets backing the
funding agreements are legally segregated and are not subject to claims that
arise from our other business. The funding agreements are further backed by
general account assets. Total funding agreements as of June 30, 2002 amounted to
$600 million. We currently anticipate placing additional funding agreements
during the remainder of the year as conditions warrant. The funding agreements
may not be cancelled unless there is a default under the agreement, but ALIC may
terminate the agreement at any time.
31
The following table sets forth information regarding fixed annuities in
force for each date presented:
Fixed Annuities in Force
As of June 30,
2002 2001
--------------------------------
($ in thousands)
Deferred fixed and immediate annuities
Number of policies 176,393 172,774
GAAP annuity reserves $ 7,250,509 $ 6,546,124
Equity-indexed annuities
Number of policies 74,491 70,488
GAAP annuity reserves $ 3,636,287 $ 3,683,940
Total fixed annuities
Number of policies 250,884 243,262
GAAP annuity reserves $ 10,886,796 $ 10,230,064
32
RESULTS OF OPERATIONS
PROTECTION PRODUCTS
A summary of our protection products segment operations follows:
For The Three Months Ended June 30, For The Six Months Ended June 30,
2002 2001 2002 2001
----------------------------------- ---------------------------------
($ in thousands)
Revenues:
Insurance premiums $ 89,808 $ 68,906 $ 178,343 $ 121,432
Universal life product charges 28,590 25,821 61,446 42,955
Net investment income 83,418 65,294 163,843 118,325
Realized gains (losses) on closed block investments (5,378) 69 (754) 313
Other income 992 -- 1,945 --
-------------------------------- ----------------------------
Total revenues 197,430 160,090 404,823 283,025
-------------------------------- ----------------------------
Benefits and expenses:
Policyowner benefits:
Traditional:
Death benefits 19,971 5,700 28,754 6,224
Change in liability for future policy benefits
and other policy benefits 64,967 51,827 134,520 97,371
Universal:
Death benefits in excess of cash value 2,976 7,877 8,370 16,094
Interest credited on policyowner account balances 18,004 15,763 37,006 26,253
Other 6,680 1,264 13,499 1,595
-------------------------------- ----------------------------
Total policyowner benefits 112,598 82,431 222,149 147,537
Underwriting, acquisition and other expenses 21,301 17,911 40,944 32,051
Amortization of deferred policy acquisition costs
and value of business acquired (VOBA), net of
open block gain/loss adjustment of ($89) and $411
for the three months ended June 30, 2002 and 2001,
respectively, and $110 and $584 for the six months
ended June 30, 2002 and 2001, respectively 14,506 12,123 28,839 21,733
Dividends to policyowners 19,221 23,067 47,624 42,225
-------------------------------- ----------------------------
Total benefits and expenses 167,626 135,532 339,556 243,546
-------------------------------- ----------------------------
Adjusted pre-tax operating income -
Protection Products segment $ 29,804 $ 24,558 $ 65,267 $ 39,479
=============================== ===========================
Traditional life insurance premiums were $89.8 million in the second
quarter of 2002 compared to $68.9 million in the second quarter of 2001.
Year-to-date, traditional life insurance premiums increased $56.9 million to
$178.3 million in 2002 compared to $121.4 million in 2001. Approximately $16.0
million and $54.0 million of the increase for the quarter and year-to-date
periods, respectively, was attributable to ILICO. Excluding these ILICO
premiums, traditional life insurance premiums increased $4.9 million and $2.9
million for the quarter and year-to-date periods, respectively, primarily as a
result of increased ALIC open block sales in prior years which are in renewal
status. Our life insurance lapse rate, exclusive of ILICO, was 6.8% for the
first six months of 2002 and 7.6% for the first six months of 2001. Lapses
decreased compared to the first six months of 2001 as 2001 lapses had been
higher following the completion of American Mutual Holding Company's
demutualization in the third quarter of 2000. The total life insurance lapse
rate including ILICO was 7.7% for the first six months of 2002 and 7.2% for the
first six months of 2001. This higher lapse rate was expected due to the
completion of ILICO's demutualization in May 2001.
33
Universal life product charges were $28.6 million in the second quarter
of 2002 compared to $25.8 million in the second quarter of 2001. Year-to-date,
universal life product charges increased $18.4 million to $61.4 million in 2002
compared to $43.0 million in 2001. Approximately $9.9 million and $30.1 million
of the increased universal life product charges for the second quarter and
year-to-date periods, respectively, was attributable to the acquisition of
ILICO. Excluding ILICO, universal life product charges decreased $7.1 million
and $11.7 million for the quarter and year-to-date periods, respectively,
primarily due to a new reinsurance agreement effective December 31, 2001
covering pre-July 1, 1996 universal life policies. Partially offsetting the
reinsured premiums were the increased sales of equity-indexed life products and
increased cost of insurance charges of approximately $1.4 million and $3.6
million for the quarter and year-to-date periods, respectively, corresponding
with the normal aging and growth of the block of business.
Net investment income was $83.4 million in the second quarter of 2002
compared to $65.3 million in the second quarter of 2001. Year-to-date, net
investment income increased $45.5 million to $163.8 million in 2002 compared to
$118.3 million in 2001. Approximately $17.5 million and $45.1 million of the
increase for the quarter and year-to-date periods, respectively, was
attributable to ILICO. Excluding ILICO, net investment income increased $0.6
million and $0.4 million for the quarter and year-to-date periods, respectively,
primarily due to higher average invested assets (excluding market value
adjustments) offset by lower effective yields as compared to 2001. Average
invested assets (excluding market value adjustments) increased $949.8 million
and $1,407.1 million for the quarter and year-to-date periods primarily due to
the acquisition of ILICO in the second quarter of 2001. Average invested assets
(excluding market value adjustments), exclusive of the ILICO acquisition,
increased $136.6 million and $140.8 million for the quarter and year-to-date
periods, respectively, primarily due to the growth of our protection products
business. The effective yield on the investment portfolio was 7.28% in the
second quarter of 2002 compared to 7.22% in the second quarter of 2001 and 7.16%
for the first six months of 2002 compared to 7.47% for the first six months of
2001. Excluding ILICO, 2002 yields for the second quarter and year-to-date were
7.26% and 7.33%, respectively, compared to 2001 yields for the second quarter
and year-to-date of 7.58% and 7.69%, respectively. The decrease in yields in
2002 primarily resulted from the lower interest rate market.
Closed block realized gains and losses on investments were a net loss
of $5.4 million in the second quarter of 2002 compared to a net gain of $0.1
million in the second quarter of 2001. Year-to-date, closed block realized gains
and losses on investments decreased $1.1 million to a net loss of $0.8 million
in 2002 compared to a net gain of $0.3 million in 2001. 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 and $1.9 million in the
second quarter and first six months of 2002, respectively. The COLI investment
was purchased at the end of the second quarter of 2001. 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 $112.6 million in the second quarter of
2002 compared to $82.4 million in the second quarter of 2001. Year-to-date,
total policyowner benefits increased $74.6 million to $222.1 million in 2002
compared to $147.5 million in 2001. The increase in policyowners benefits was
primarily due to the acquisition of ILICO. Excluding ILICO, total policyowner
benefits decreased $28.7
34
million and $77.9 million for the quarter and year-to-date periods,
respectively, as compared to 2001, primarily due to increased reinsurance
recoveries. Although unfavorable mortality was experienced with ALIC's
traditional closed block policies and universal life open and closed block
policies, more claims were subject to reinsurance agreements in comparison to
prior periods, which primarily contributed to the decline in benefit expenses.
The weighted average crediting rate on universal life policyowner account
balances was 5.40% for the first six months of 2002 compared to 5.48% for the
first six months of 2001 while the average fund value grew to approximately
$1,316 million.
Underwriting, acquisition and other expenses were $21.3 million in the
second quarter of 2002 compared to $17.9 million in the second quarter of 2001.
Year-to-date, underwriting, acquisition and other expenses increased $8.8
million to $40.9 million in 2002 compared to $32.1 million in 2001.
Approximately $7.6 million and $15.0 million of the increased expenses for the
second quarter and year-to-date periods, respectively, was attributable to
ILICO. Excluding ILICO, underwriting, acquisition and other expenses decreased
$4.2 million and $6.2 million for the quarter and year-to-date periods,
respectively, primarily due to increased reimbursement from reinsurance
commission and expense allowances as more policies are subject to reinsurance
and expense structure changes resulting from the integration with ILICO.
Amortization of deferred policy acquisition costs and VOBA amounted to
$14.5 million in the second quarter of 2002 compared to $12.1 million in the
second quarter of 2001. Year-to-date, amortization of deferred policy
acquisition costs and VOBA increased $7.1 million to $28.8 million in 2002
compared to $21.7 million in 2001. Approximately $0.7 million and $5.1 million
of the increased amortization expense for the second quarter and year-to-date
periods, respectively, was attributable to ILICO. Amortization expense,
exclusive of ILICO, increased $1.7 million and $2.0 million for the quarter and
year-to-date periods, respectively, as deferred policy acquisition costs and
VOBA are generally amortized in proportion to gross margins, which increased
between periods.
Dividends to policyowners were $19.2 million in the second quarter of
2002 compared to $23.1 million in the second quarter of 2001. Year-to-date,
dividends to policyowners increased $5.4 million to $47.6 million in 2002
compared to $42.2 million in 2001. Approximately $3.8 million and $10.0 million
of the increased dividends to policyowners for the second quarter and
year-to-date periods, respectively, was attributable to ILICO. Dividends to
policyowners, exclusive of ILICO, decreased $7.7 million and $4.6 million for
the quarter and year-to-date periods, respectively, primarily due to a $8.4
million reduction in the policyholder dividend obligation liability associated
with the ALIC closed block in the second quarter of 2002 compared to an increase
in the liability of $0.3 million in the second quarter of 2001. Dividends to
policyowners 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), an increase in
the policyholder dividend obligation liability is recorded. Increased realized
losses in the second quarter and first six months of 2002 decreased closed block
earnings which reduced the policyholder dividend obligation liability through a
reduction of dividend expense. 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 $29.8 million in the second quarter of 2002 compared to $24.6
million in the second quarter of 2001 and $65.3 million in the first six months
of 2002 compared to $39.5 million in the first six months of 2001. Approximately
$4.0 million and $22.4 million of the increase for the second quarter and
year-to-date periods, respectively, was attributable to ILICO. Excluding ILICO,
our protection products operating income increased $1.2 million and $3.4 million
for the quarter and year-to-date periods, respectively, primarily due to a
slight growth in margins and a decline in operating expenses.
35
ACCUMULATION PRODUCTS
A summary of our accumulation products segment operations follows:
For The Three Months Ended June 30, For The Six Months Ended June 30,
2002 2001 2002 2001
----------------------------------- ---------------------------------
($ in thousands)
Revenues:
Immediate annuity and supplementary contract premiums $ 3,228 $ 2,581 $ 6,180 $ 7,194
Annuity product charges 10,724 9,026 20,739 16,158
Net investment income 166,544 138,684 324,887 265,872
Realized gains (losses) on closed block investments -- (305) -- 347
Other income:
Income from IMOs 14,941 7,077 22,639 12,907
Other 2,956 2,655 5,803 4,882
--------------------------- --------------------------
Total revenues 198,393 159,718 380,248 307,360
--------------------------- --------------------------
Benefits and expenses:
Policyowner benefits:
Interest credited on policyowner account balances 94,251 81,243 185,866 154,828
Other benefits 33,172 22,634 59,897 39,407
--------------------------- --------------------------
Total policyowner benefits 127,423 103,877 245,763 194,235
Underwriting, acquisition and other expenses:
Expenses from IMOs 10,512 4,810 15,956 9,527
Other 7,878 8,755 15,432 18,555
Amortization of deferred policy acquisition costs and
value of business acquired (VOBA), net of open block
gain/loss adjustment of ($6,751) and ($5,310) for the
three months ended June 30, 2002 and 2001, respectively,
and ($5,396) and ($6,121) for the six months ended
June 30, 2002 and 2001, respectively 20,658 22,747 44,611 39,046
--------------------------- --------------------------
Total benefits and expenses 166,471 140,189 321,762 261,363
--------------------------- --------------------------
Adjusted pre-tax operating income -
Accumulation Products segment $ 31,922 $ 19,529 $ 58,486 $ 45,997
=========================== ==========================
Immediate annuity and supplementary contract premiums were $3.2 million
in the second quarter of 2002, compared to $2.6 million in the second quarter of
2001. Year-to-date, immediate annuity and supplementary contract premiums
decreased $1.0 million to $6.2 million in 2002 compared to $7.2 million in 2001.
These premiums are expected to remain relatively level between periods as these
products are not a high growth product line.
Annuity product charges were $10.7 million in the second quarter of
2002 compared to $9.0 million in the second quarter of 2001. Year-to-date,
annuity product charges increased $4.5 million to $20.7 million in 2002 compared
to $16.2 million in 2001. Approximately $1.4 million and $5.3 million of the
increased annuity product charges for the second quarter and year-to-date
periods, respectively, was attributable to ILICO. Excluding ILICO, annuity
product charges increased $0.3 million and declined $0.8 million for the quarter
and year-to-date periods, respectively, primarily due to slightly higher
surrenders of annuity policies with surrender charges in the second quarter.
Year-to-date, surrenders, exclusive of ILICO, totaled approximately $435.9
million for the six months of 2002 compared to $510.2 million for the first six
months of 2001. Annuity withdrawal rates, exclusive of ILICO, averaged 8.1% in
the first six months of 2002 compared to 14.6% in the first six months of 2001.
Excluding ILICO and internal replacements, withdrawal rates decreased to 7.3%
for the first six months of 2002 compared to
36
11.8% for the first six months of 2001. Annuity withdrawal rates, including
ILICO from the acquisition date forward, averaged 11.5% for the first six months
of 2002 compared to 15.6% for the first six months of 2001. Surrenders at ILICO
were $376.6 million for the first six months of 2002 compared to $77.6 million
from the acquisition date through June 30, 2001.
Net investment income was $166.5 million for the second quarter of 2002
compared to $138.7 million for the second quarter of 2001. Year-to-date, net
investment income increased $59.0 million to $324.9 million in 2002 compared to
$265.9 million in 2001. Approximately $12.3 million and $39.6 million of the
increased net investment income for the second quarter and year-to-date periods,
respectively, was attributable to ILICO. Excluding ILICO, net investment income
increased $15.5 million and $19.4 million for the quarter and year-to-date
periods, respectively, primarily due to higher average invested assets
(excluding market value adjustments) offset by lower effective yields as
compared to 2001. Average invested assets (excluding market value adjustments)
increased approximately $2,176.0 million and $2,869.2 million for the quarter
and year-to-date periods, respectively, primarily due to the acquisition of
ILICO in the second quarter of 2001. Average invested assets (excluding market
value adjustments) exclusive of the ILICO acquisition increased approximately
$1,110.0 million and $1,014.0 million for the quarter and year-to-date periods,
respectively, primarily due to the growth of our accumulation products business.
The effective yield on the investment portfolio was 6.16% in the second quarter
of 2002 compared to 6.43% in the second quarter of 2001 and 6.07% for the first
six months of 2002 compared to 6.77% for the first six months of 2001. Excluding
ILICO, 2002 yields for second quarter and year-to-date which were 6.79% and
6.69%, respectively, compared to 2001 yields for the second quarter and
year-to-date which were 6.99% and 7.10%, respectively. The decrease in yields in
2002 primarily resulted from the lower interest rate market. 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 6.77% in the second
quarter of 2002 compared to 7.09% in the second quarter of 2001 and 6.72% in the
first six months of 2002 compared to 7.14% in the first six months of 2001.
Other income primarily consists of third party annuity commissions
received by wholly-owned IMOs and COLI income. Other income totaled $17.9
million for the second quarter of 2002 compared to $9.7 million for the second
quarter of 2001. Year-to-date, other income increased $10.6 million to $28.4
million in 2002 compared to $17.8 million in 2001. The increase in other income
was primarily due to operations of an IMO purchased in the second quarter of
2002. COLI income is classified as an other asset so the income from this asset
appears in other income instead of net investment income.
Policyowner benefits were $127.4 million in the second quarter of 2002
compared to $103.9 million in the second quarter of 2001. Year-to-date,
policyowner benefits increased $51.6 million to $245.8 million in 2002 compared
to $194.2 million in 2001. Approximately $7.1 and $30.1 million of the increased
policyowner benefits for the second quarter and year-to-date periods,
respectively, was attributable to ILICO. Excluding ILICO, policyowner benefits
increased approximately $16.4 million and $21.5 million for the quarter and
year-to-date periods, respectively. Excluding ILICO, interest credited to
deferred annuity account balances increased $11.8 million and $24.4 million for
the quarter and year-to-date periods, respectively, primarily due to higher
average balances, partially offset by a decline in crediting rates. For the
first six months of 2002, average deferred fixed annuity account balances
increased $759.7 million while the weighted average crediting rate on deferred
fixed annuity account balances decreased 35 basis points to 4.73% as compared to
the same period in 2001. Crediting rates were lowered in the fourth quarter of
2001 and in the first and second quarters of 2002 to correspond with the decline
in the investment yields of the deferred fixed annuity portfolio. Overall,
spreads on deferred fixed annuities declined 8 basis points to 199 basis points
in the first six months of 2002 as compared to the first six months of 2001.
Other benefits exclusive of ILICO declined approximately $4.6 million in the
second quarter of 2002 and $2.9 million in the first six months of 2002
primarily due to a
37
decline in immediate annuity and supplementary contract benefits. The decrease
in other benefits was partially offset by funding agreement benefits which
increased $4.6 million and $4.3 million for the second quarter and year-to-date
periods, respectively, as new funding agreements were entered into at the end of
the first quarter and early second quarter of 2002. ILICO added approximately
$6.0 million and $23.5 million of other benefits to the second quarter and
year-to-date periods, respectively, primarily due to payments made under
modified coinsurance agreements.
Underwriting, acquisition and other expenses totaled $18.4 million in
the second quarter of 2002 compared to $13.6 million in the second quarter of
2001. Year-to-date, underwriting, acquisition and other expenses increased $3.3
million to $31.4 million in 2002 compared to $28.1 million in 2001.
Approximately $0.6 million and $1.9 million of such increased expenses for the
second quarter and year-to-date periods, respectively, were due to ILICO.
Excluding these ILICO expenses, underwriting, acquisition and insurance expenses
increased $4.2 million and $1.4 million for the quarter and year-to-date
periods, respectively. The increase was primarily due to IMO operating expenses
associated with the IMO which was acquired in the second quarter of 2002. The
increase in IMO expense was partially offset by the reduction of goodwill
amortization of approximately $1.9 million and $3.9 million which was included
in the second quarter and the first six months of 2001 respectively. Effective
January 1, 2002, with the adoption of SFAS 142, goodwill is no longer amortized.
Amortization of deferred policy acquisition costs and VOBA amounted to
$20.7 million in the second quarter of 2002 compared to $22.7 million in the
second quarter of 2001. Year-to-date, amortization of deferred policy
acquisition costs and VOBA increased $5.6 million to $44.6 million in 2002
compared to $39.0 million in 2001. Approximately $0.5 million and $2.1 million
of the increased amortization expense for the second quarter and year-to-date
periods, respectively, was attributable to ILICO. Excluding ILICO, amortization
expense decreased $2.5 million and increased $3.5 million for the quarter and
year-to-date periods, respectively, as deferred policy acquisition costs and
VOBA are generally amortized in proportion to gross margins. Gross margins
remained relatively level in the current periods with future margins widening
due to favorable business retention which resulted in decreased amortization
expense in the second quarter of 2002.
Adjusted pre-tax operating income from our accumulation products
operations was $31.9 million in the second quarter 2002 compared to $19.5
million in the second quarter 2001 and $58.5 million in the first six months of
2002 compared to $46.0 million in the first six months of 2001. Approximately
$5.6 million and $10.8 million of the increase for the second quarter and
year-to-date periods, respectively, was attributable to ILICO. Excluding ILICO,
our accumulation products operating income increased $6.8 million and $1.7
million for the quarter and year-to-date periods, respectively, primarily due to
increased net IMO operations and the discontinuation of goodwill amortization.
38
OTHER OPERATIONS
A summary of our other operations follows:
For The Three Months Ended June 30, For The Six Months Ended June 30,
2002 2001 2002 2001
----------------------------------- ---------------------------------
($ in thousands)
Revenues:
Insurance premiums $ 211 $ 225 $ 832 $ 253
Net investment income 1,935 3,115 2,937 4,024
Other income 1,036 2,220 1,550 4,495
------------------------ ------------------------
Total revenues 3,182 5,560 5,319 8,772
------------------------ ------------------------
Benefits and expenses:
Other policyowner benefits 394 596 1,190 585
Underwriting, acquisition and other expenses 3,510 3,645 7,122 6,322
------------------------ ------------------------
Total benefits and expenses 3,904 4,241 8,312 6,907
------------------------ ------------------------
Adjusted pre-tax operating income - Other operations $ (722) $ 1,319 $ (2,993) $ 1,865
======================== =========================
Adjusted pre-tax operating loss from our other operations was $0.7
million in the second quarter of 2002 compared to income of $1.3 million in the
second quarter of 2001 and a loss of $3.0 million in the first six months of
2002 compared to income of $1.9 million in the first six months 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 investment fee income for asset management services provided to ILICO
prior to the acquisition amounting to $1.2 million in the second quarter of 2001
and $2.8 million in the first six months of 2001. After the acquisition of
ILICO, such fees are eliminated with expenses in consolidation. The remainder of
the increased loss is primarily due to decreased real estate investment and
management fee income.
39
A summary of our adjusted pre-tax operating income by segment and the
remaining line items of our consolidated statements of income follows:
For The Three Months Ended June 30, For The Six Months Ended June 30,
2002 2001 2002 2001
----------------------------------- ---------------------------------
($ in thousands)
Adjusted pre-tax operating income:
Protection Products $ 29,804 $ 24,558 $ 65,267 $ 39,479
Accumulation Products 31,922 19,529 58,486 45,997
Other operations (722) 1,319 (2,993) 1,865
---------------------- ----------------------
Total adjusted pre-tax operating income 61,004 45,406 120,760 87,341
Non-operating increases (decreases) to income:
Realized gains on open block investments (35,755) (7,223) (45,633) (14,664)
Unrealized losses on open block investments (34,778) (4,366) (54,236) (37,656)
Fair value change in option value of equity-indexed
annuity products and market value adjustments on
total return strategy annuities 20,736 (2,459) 35,867 32,510
Cash flow hedge amortization (697) -- (697) --
Amortization of DAC & VOBA due to open block losses 6,840 4,899 5,286 5,537
Demutualization costs (179) (202) (464) (202)
Restructuring costs (6,416) -- (8,211) --
---------------------- ----------------------
Income from continuing operations 10,755 36,055 52,672 72,866
Interest expense (6,337) (7,410) (12,364) (14,742)
Income tax expense (696) (8,950) (12,128) (18,971)
---------------------- ----------------------
Net income from continuing operations 3,722 19,695 28,180 39,153
Income from discontinued operations 540 532 996 946
Cumulative effect of change in accounting for derivatives,
net of tax -- -- -- (8,236)
---------------------- ----------------------
Net income $ 4,262 $ 20,227 $ 29,176 $ 31,863
====================== ======================
Total adjusted pre-tax operating income was $61.0 million in the second
quarter of 2002 compared to $45.4 million in the second quarter of 2001.
Year-to-date, total adjusted pre-tax operating income increased $33.5 million to
$120.8 million in 2002 compared to $87.3 million in 2001. Approximately $10.2
million and $34.5 million of the increase for the second quarter and
year-to-date periods, respectively, was attributable to ILICO. Excluding ILICO,
the protection products and accumulation products segment operations increased
approximately $8.0 million and $5.1 million for the quarter and year-to-date
periods, respectively, which were offset by declines in the other operations as
previously discussed.
Realized losses on open block investments amounted to $35.8 million in
the second quarter of 2002 compared to $7.2 million in the second quarter of
2001. Year-to-date, realized losses on open block investments amounted to $45.6
million in 2002 compared to $14.7 million in 2001. The losses in the second
quarter of 2002 consisted primarily of realized losses and writedowns on
investments primarily related to WorldCom, Inc. and its related entities.
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 level of realized gains and losses will fluctuate from period
to period depending on the prevailing interest rate and economic environment and
the timing of investment sales.
Unrealized losses on open block investments amounted to $34.8 million
in the second quarter of 2002 compared to $4.4 million in the second quarter of
2001. Year-to-date, unrealized losses on open
40
block investments amounted to $54.2 million in 2002 compared to $37.7 million in
2001. The unrealized losses are generated from our options and trading
securities. We use options to hedge our equity-indexed annuity products. In
accordance with SFAS 133, we adjusted our options to market value, which, due to
the economic environment and deteriorating stock market conditions, resulted in
an unrealized loss of $28.0 million and $34.8 million in the second quarter and
first six months of 2002, respectively, and $0.8 million and $34.1 million in
the second quarter and first six months of 2001, respectively. 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 $6.8 million and $19.4 million in the second quarter and first six
months of 2002, respectively, and a loss of $3.6 million for both the second
quarter and first six months of 2001, respectively. Most of the unrealized gains
and losses on the options and trading securities are offset by similar
adjustments to the option portion of the equity-indexed annuity reserves and to
the total return strategy annuity reserves. The reserve adjustments are
reflected in policyowner benefits expense in the consolidated statements of
income and are explained in the following paragraph.
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 $20.7 million decrease and $35.9 million decrease in reserve
balances in the second quarter and first six months of 2002, respectively, and
$2.5 million increase and $32.5 million decrease in the second quarter and first
six months of 2001, respectively. 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 to
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. The reduction in such annuity
contract expense is less than the decline in investment income primarily due to
minimum guaranteed interest rates.
During the second quarter of 2002, we undesignated a cash flow hedge
which is now being amortized over the related swap's remaining life and amounted
to amortization expense of $0.7 million.
Amortization of deferred policy acquisition costs and VOBA due to
realized and unrealized losses on open block investments amounted to an expense
reduction on net losses of $6.8 million and $5.3 million in the second quarter
and first six months of 2002, respectively, compared to an expense reduction on
net losses of $4.9 million and $5.5 million in the second quarter and first six
months of 2001, respectively. The amortization fluctuates from period to period
depending on the related open block 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 and investment activities 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, Iowa.
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. Investment activities have been restructured to
eliminate real estate management services which will be outsourced in the
future. The restructuring charges expensed in the second quarter of 2002
included pre-tax severance and termination benefits of $4.9 million related to
the elimination of approximately 70 positions and other pre-tax costs of $1.5
million primarily related to systems conversion and relocation of employees. For
the first six months of 2002, restructuring charges included pre-tax
41
severance and termination benefits of $5.3 related to the elimination of
approximately 80 positions and other pre-tax costs of $2.9 million. An accrual
for severance and termination benefits not yet paid amounted to $2.6 million at
June 30, 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 $6.3 million in the second quarter of 2002
compared to $7.4 million in the second quarter of 2001. Year-to-date, interest
expense decreased $2.3 million to $12.4 million in 2002 compared to $14.7
million in 2001. The decreased interest expense in the second quarter and first
six months of 2002 was primarily due to lower borrowing rates in 2002. 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 six months of 2001, prior to their maturity in
July 2001. Interest expense for ILIC in the second quarter and the first six
months of 2002 amounted to $0.5 million and $1.1 million, respectively. ILIC has
a $25 million, 8.66% surplus note, due on April 1, 2011.
Income tax expense was $12.1 million in the first six months of 2002
compared to $19.0 million in the first six months of 2001. The effective tax
rate was 30.1% for the first six months of 2002 and 32.6% for the first six
months of 2001. The decrease in the effective tax rate in the first six months
of 2002 reflected the increased tax exempt income from the COLI investment and
the elimination of nondeductible goodwill amortization expense.
Net income from continuing operations was $3.7 million in the second
quarter of 2002 compared to $19.7 million in the second quarter of 2001.
Year-to-date, net income from continuing operations decreased $11.0 million to
$28.2 million in 2002 compared to $39.2 million in 2001. Net income from
continuing operations of ILICO decreased $0.4 million in the second quarter of
2002 compared to the second quarter of 2001. Year-to-date, ILICO contributed an
additional $9.1 million of income from continuing operations as compared to the
same period a year ago. Exclusive of ILICO, net income from continuing
operations decreased $15.6 million and $20.1 million in the second quarter and
year-to-date periods, respectively, primarily due to the realized and unrealized
losses on open block investments partially offset by the fair value changes in
options within our equity-indexed products and our total return strategy fixed
annuity contracts. These non-operating results offset the growth in earnings
from our protection products and accumulation products segments 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 $4.3 million in the second quarter of 2002 compared to
$20.2 million in the second quarter of 2001. Year-to-date, net income decreased
$2.7 million to $29.2 million in 2002 compared to $31.9 million in 2001. Net
income from ILICO decreased $0.4 million in the second quarter of 2002 compared
to the second quarter of 2001 and increased $9.1 million in the year-to-date
period of 2002 as compared to the same period in 2001. 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. Exclusive of ILICO and the SFAS 133 impact, net income
decreased $15.5 million and $20.0 million in the second quarter and year-to-date
periods, respectively, primarily due to the realized and unrealized losses on
open block investments
42
partially offset by the fair value changes in options within our equity-indexed
products and our total return strategy fixed annuity contracts. Those
non-operating results offset the growth in earnings from our protection products
and accumulation products segments.
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
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. Our subsidiaries paid us $10 million in
the first six months of 2002.
We have a $175 million revolving credit facility with a syndicate of
lenders (which we refer to as the Revolving Credit Agreement). As of June 30,
2002, there was a $70.0 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.
On March 6, 2002, the Company issued and sold in a private placement
$185 million aggregate original principal amount of OCEANs. The OCEANs are
senior subordinated debt and 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.
Proceeds from the OCEANs were used to repay borrowings on the Company's
Revolving Credit Agreement 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.
43
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 $2.7 million and resulted in the issuance
of approximately 110,000 shares of common stock in April 2002.
Our Board of Directors approved a stock purchase program effective
August 9, 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 plan to fund the purchase
program from a combination of our internal sources, dividends from insurance
subsidiaries and Revolving Credit Agreement. We have repurchased shares in the
first six months of 2002 under prior purchase programs. During the first quarter
of 2002, 1.7 million shares were repurchased and were primarily funded by
approximately $59 million from the OCEANs offering. During the second quarter of
2002, approximately 0.8 million shares were repurchased and were primarily
funded by approximately $30 million from the Revolving Credit Agreement.
INSURANCE SUBSIDIARIES
The cash flows of our 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. 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
44
underlying assets. The following table summarizes liabilities for
interest-sensitive life products and annuities by their contractual withdrawal
provisions at June 30, 2002 (including liabilities in the closed blocks and the
general account):
($ in millions)
---------------
Not subject to discretionary withdrawal $ 478.1
Subject to discretionary withdrawal with adjustments:
Specified surrender charges (A) 6,677.5
Market value adjustments 3,121.7
----------
Subtotal 9,799.2
----------
Subject to discretionary withdrawal without adjustments 1,975.5
----------
Total $ 12,252.8
==========
(A) Includes $1,263.7 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 rate funding agreement. Under
the agreement, a five-year floating rate insurance contract is issued to a
commercial paper conduit. During the first six months of 2002, ALIC placed
additional funding agreements totaling $350 million in six to ten year fixed
rate insurance contracts. The assets backing the funding agreements are legally
segregated and are not subject to claims that arise out of any other business of
ALIC. The funding agreements are further backed by the general account assets 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.
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 $284 million at June 30, 2002. Separate account contractholders have no claim
against the assets 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 Investors Life Insurance
Company, Inc. 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 June 30, 2002. In
addition, ALIC has long-term fixed rate advances from FHLB outstanding of $14.1
million at June 30, 2002.
The insurance subsidiaries may also obtain liquidity through sales of
investments. The investment portfolio as of June 30, 2002 had a carrying value
of $15.6 billion, including closed block investments.
45
The level of capital in the insurance companies is regulated by
risk-based capital formulas and is monitored by rating agencies. In order to
maintain appropriate capital levels, it may be necessary from time to time for
AmerUs Group Co. to provide additional capital to the insurance companies.
At June 30, 2002, the statutory surplus of the insurance subsidiaries
was approximately $610 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 insurance subsidiaries would obtain their required capital from
AmerUs Group Co.
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) the cost of underlying call options purchased to
match the returns owed to contract holders and (2) the 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.
46
The table below provides information about our fixed maturity
investments and mortgage loans for both our trading and other than trading
portfolios at June 30, 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.
June 30, 2002
Expected Cash Flows
6 months
Amortized 2002 2003 2004 2005 2006 2007 Thereafter Cost Fair Value
--------- ----------------------------------------------------------------------------------------------
($ in millions)
Fixed maturity securities
available-for-sale $ 399 $ 1,174 $1,154 $1,372 $1,215 $ 917 $ 5,441 $11,672 $ 11,850
Average interest rate 7.7% 6.7% 6.4% 6.8% 6.6% 7.7% 7.0%
Fixed maturity securities
held for trading purposes $ 61 $ 131 $ 224 $ 286 $ 158 $ 125 $ 956 $ 1,941 $ 1,941
Average interest rate 1.6% 4.6% 4.3% 2.7% 3.7% 3.4% 5.2%
Mortgage loans $ 24 $ 54 $ 69 $ 68 $ 67 $ 65 $ 580 $ 927 $ 1,167
Average interest rate 6.8% 8.1% 8.1% 8.0% 8.0% 8.0% 7.8%
Total $ 484 $ 1,359 $1,447 $1,726 $1,440 $1,107 $ 6,977 $14,540 $ 14,958
============================================================================================
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% of
the bond portfolio is below investment grade. Fixed maturity securities have an
average maturity of approximately 7.03 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.
47
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of the Company's shareholders on May 9, 2002, a
majority of the Company's shareholders approved (1) the reelection of John R.
Albers, Alecia A. DeCoudreaux, Thomas F. Gaffney, Andrew J. Paine, Jr. and Jack
C. Pester and (2) the ratification of the appointment by the Board of Directors
of the Company of Ernst & Young LLP as the Company's independent auditors. The
result of the vote is as follows:
Election of John R. Albers
--------------------------------------
For: 24,105,183
Withheld: 283,057
Election of Alecia A. DeCoudreaux
--------------------------------------
For: 24,093,434
Withheld: 294,806
Election of Thomas F. Gaffney
--------------------------------------
For: 24,111,759
Withheld: 276,481
Election of Andrew J. Paine, Jr.
--------------------------------------
For: 24,098,592
Withheld: 289,648
Election of Jack C. Pester
--------------------------------------
For: 24,097,757
Withheld: 290,483
48
Ratification of Ernst & Young LLP
--------------------------------------
For: 23,640,343
Against: 568,363
Abstaining: 179,534
The term of the following other directors of the Company continued after
the meeting: Roger K. Brooks; Malcolm Candlish; Ralph W. Laster, Jr.;
John W. Norris, Jr.; John A. Wing; and F.A.Wittern, Jr.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits included as part of this report is set forth in the
Exhibit Index which immediately precedes such exhibits and is hereby
incorporated by reference herein.
(b) The following report on Form 8-K was filed during the quarter
ended June 30, 2002:
Form 8-K dated May 7, 2002 announcing the release of first
quarter 2002 earnings. Supplemental financial information of
AmerUs Group Co. was attached.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
DATED: August 12, 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)
50
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.
2.13* Stock Purchase Agreement, dated January 1, 2002, by and among AmerUs
Annuity Group Co., and the Stockholders of Family First Advanced
estate Planning and Family First Insurance Services.
51
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.
52
4.14 First Supplement to Indenture dated February 3, 1997 among American
Mutual Holding Company, AmerUs Life Holdings, Inc. and Wilmington
Trust Company as Trustee, relating to the Company's 8.85% Junior
Subordinated Debentures, Series A, dated September 20, 2000, filed as
Exhibit 4.14 on Form 10-Q dated November 14, 2000, is hereby
incorporated by reference.
4.15 Assignment and Assumption Agreement to Amended and Restated Trust
Agreement, dated February 3, 1997 between American Mutual Holding
Company and AmerUs Life Holdings, Inc., dated September 20, 2000,
filed as Exhibit 4.15 on Form 10-Q dated November 14, 2000, is hereby
incorporated by reference.
4.16 Assignment and Assumption to Guaranty Agreement, dated February 3,
1997 between American Mutual Holding Company and AmerUs Life
Holdings, Inc., dated September 20, 2000, filed as Exhibit 4.16 on
Form 10-Q, dated November 14, 2000, is hereby incorporated by
reference.
4.17 First Supplement to Subordinated Indenture, dated July 27, 1998,
relating to AmerUs Life Holdings, Inc.'s 6.86% Junior Subordinated
Deferrable Interest Debentures, among American Mutual Holding
Company, AmerUs Life Holdings, Inc. and First Union National Bank,
as Indenture Trustee, dated September 20, 2000, filed as Exhibit
4.17 on Form 10-Q, dated November 14, 2000, is hereby incorporated
by reference.
4.18 First Supplement to Master Unit Agreement dated July 27, 1998,
relating to AmerUs Life Holdings, Inc.'s 7.0% ACES units, between
American Mutual Holding Company and First Union National Bank, as
Unit Agent, dated September 20, 2000, filed as Exhibit 4.18 on Form
10-Q, dated November 14, 2000, is hereby incorporated by reference.
4.19 Assignment and Assumption Agreement to the QUIPS Guarantee Agreement
dated July 27, 1998, relating to AmerUs Life Holdings, Inc.'s 7.0%
ACES units, between American Mutual Holding Company and AmerUs Life
Holdings, Inc., dated September 20, 2000, filed as Exhibit 4.19 on
Form 10-Q, dated November 14, 2000, is hereby incorporated by
reference.
4.20 Assignment and Assumption Agreement to the Common Trust Securities
Guarantee Agreement dated July 27, 1998, relating to AmerUs Life
Holdings, Inc.'s 7.0% ACES units, between American Mutual Holding
Company and AmerUs Life Holdings, Inc., dated September 20, 2000,
filed as Exhibit 4.20 on Form 10-Q, dated November 14, 2000, is
hereby incorporated by reference.
4.21 First Supplement to Purchase Contracts between American Mutual
Holding Company and Holders, as specified, dated September 20, 2000,
filed as Exhibit 4.21 on Form 10-Q, dated November 14, 2000, is
hereby incorporated by reference.
4.22 First Supplement to the Pledge Agreement dated July 27, 1998,
relating to AmerUs Life Holdings, Inc.'s 7.0% ACES units, among
American Mutual Holding Company, Goldman Sachs & Co., as Call Option
Holder, the Chase Manhattan Bank, as Collateral Agent and First
Union National Bank, as Unit Agent, dated September 20, 2000, filed
as Exhibit 4.22 on Form 10-Q, dated November 14, 2000, is hereby
incorporated by reference.
4.23 First Supplement to Senior Indenture dated June 16, 1998, relating to
AmerUs Life Holdings, Inc.'s 6.95% Senior Notes, among American
Mutual Holding Company, AmerUs Life Holdings, Inc. and First Union
National Bank, as Trustee, dated September 20, 2000, filed as Exhibit
4.23 on Form 10-Q, dated November 14, 2000, is hereby incorporated by
reference.
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.
53
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 All*AmerUs 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.
54
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.
55
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 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, filed as Exhibit 10.35 on Form 10-Q dated May 14, 2002,
is hereby incorporated by reference.
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, filed as Exhibit 10.36 on
Form 10-Q dated May 14, 2002, is hereby incorporated by reference.
10.37* Amendment No. 1 to Joint Venture Agreement, dated April 1, 2002, by
and between Ameritas Life Insurance Corp. and AmerUs Life Insurance
Company.
10.38* Distribution Commitment Agreement for Variable Business, dated April
1, 2002, by and between AmerUs Group Co. and Ameritas Variable Life
Insurance Company.
10.39* Amendment No. 4 to Facility Agreement dated February 12, 1999 by and
among AmerUs Group Co. and Bank One, NA (f/k/a The First National
Bank of Chicago), dated June 30, 2002.
11* Statement Re: Computation of Earnings Per Share.
12* Computation of Ratios of Earnings to Fixed Charges.
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 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
56