In connection with the Reorganization, the Closed Block was established. Insurance policies which had a dividend scale in effect as of June 30, 1996 were included in the Closed Block. The Closed Block was designed to provide reasonable assurance to owners of insurance policies included therein that, after the Reorganization, assets would be available to maintain the dividend scales and interest credits in effect for 1995 if the experience underlying such scales and credits continues.
Through its membership in the Federal Home Loan Bank of Des Moines, AmerUs Life is eligible to borrow on a line of credit available to provide it additional liquidity. The line of credit, the amount of which is re-set annually, is based on the amount of capital stock of the Federal Home Loan Bank of Des Moines owned by AmerUs Life, which supported a borrowing capacity of $36.6 million as of December 31, 1996. Interest is payable at a current rate at the time of any advance. As of December 31, 1996, AmerUs Life had a $25 million open secured line of credit with no amount outstanding.
The Company maintains a diversified portfolio of investments which is supervised by an experienced in-house staff of investment professionals. The Company employs sophisticated asset management techniques in order to achieve competitive yields, while maintaining risk at acceptable levels. The asset portfolio is segmented by liability type, with tailored investment strategies for specific product lines. Investment policies and significant individual investments are subject to approval by the Investment Committee of the Board of Directors of AmerUs Life. Management regularly monitors individual assets and asset groups, in addition to monitoring the overall asset mix. In addition, the Investment Committee reviews investment guidelines and monitors internal controls.
As of December 31, 1996, mortgage loans in the investment portfolio were $225.8 million, or 5.7% of the aggregate carrying value of invested assets. Of the December 31, 1996 amount, commercial mortgage loans were 98.5%, and residential mortgage loans were 1.5%.
As of December 31, 1996, the Company held equity securities of $64.0 million (primarily preferred stock). The largest holding of equity securities had a carrying value of $34.0 million as of December 31, 1996.
Interest rate changes may have temporary effects on the sale and profitability of the annuities and life insurance products offered by the Company. For example, if interest rates rise, competing investments (such as annuities or life insurance products offered by the Company's competitors, certificates of deposit, mutual funds, and similar instruments) may become more attractive to potential purchasers of the Company's products until the Company increases the interest rate credited to owners of its annuities and life insurance products. In contrast, as interest rates fall, the Company attempts to adjust its credited rates to compensate for the corresponding decline in reinvestment rates. The Company monitors interest rates and sells annuities and life insurance policies that permit flexible responses to interest rate changes as part of the Company's management of interest spreads. However, the profitability of the Company's products is not based solely upon interest rate spreads but also on persistency, mortality and expenses.