The following table sets forth certain financial and operating data of the Company. The selected consolidated financial data below for each of the five years ending December 31, 1999 are derived from the Consolidated Financial Statements of the Company, which financial statements have been audited by KPMG LLP, independent auditors.
- --------------- (A) Consolidated Income Statement Data for 1997 includes the results for Delta, subsequent to the acquisition date of October 23, 1997 and the results for AmVestors, subsequent to the acquisition date of December 19, 1997, and Consolidated Balance Sheet Data includes year-end data for Delta and AmVestors.
(D) Retroactively reflects the pro forma effect of the issuance of 23.16 million shares of common stock at the beginning of 1995. The 1999, 1998, 1997 and 1996 calculations reflect 30.31 million, 33.70 million, 23.57 million and 23.16 million of weighted average diluted common shares outstanding, respectively.
(E) Amounts reported prior to June 30, 1996 reflect policyowners' equity.
(G) Basic adjusted net operating income per common share is calculated using the number of shares reflected in (C) above.
(H) Diluted adjusted net operating income per common share is calculated using the number of shares reflected in (D) above.
- --------------- (A) Represents total realized gains or losses (core and non-core) on investments adjusted for income taxes on such amounts. Realized gains or losses may vary widely between periods. Such amounts are determined by management's timing of individual transactions and do not necessarily correspond to the underlying operating trends.
(B) Represents gains on the convertible preferred stock and bond portfolio, net of income taxes. Such amounts are included in the total realized gains or losses adjustment in footnote (A). As these gains or losses are reflective of the Company's operating activities, they are added back to net income.
(F) Basic adjusted operating income per common share for 1999, 1998 and 1997 is calculated using 30.23 million, 33.46 million and 23.54 million shares, respectively. Basic adjusted operating income per common share for 1996 and 1995 is calculated using 23.16 million shares.
The Closed Block was established on June 30, 1996. Insurance policies which had a dividend scale in effect as of June 30, 1996, were included in the Closed Block. The Closed Block was designed to provide reasonable assurance to owners of insurance policies included therein that, after the reorganization of AmerUs Life, assets would be available to maintain the dividend scales and interest credits in effect prior to the Reorganization if the experience underlying such scales and credits continues.
Traditional life insurance premiums increased by $13.0 million to $64.3 million in 1999 compared to $51.3 million in 1998 and $30.7 million in 1997. The increase in traditional life insurance premiums was primarily the result of the growth of the business since the formation of the Closed Block in June, 1996 and continued favorable persistency.
Universal life product charges increased by $0.6 million in 1999 to $46.8 million compared to $46.2 million in 1998 and $45.6 million in 1997. The increase in product charges each year was primarily due to increased cost of insurance charges as a result of the normal aging of the block of business, partially offset by higher reinsurance costs.
and AmVestors. Annuity product charges for 1998 and 1997 included $23.5 million and $0.7 million, respectively, from Delta and AmVestors.
Total net investment income was $540.1 million in 1999 compared to $503.4 million in 1998 and $224.4 in 1997. The increase in 1999 net investment income was primarily attributable to higher average invested assets (excluding market value adjustments) and a higher effective yield compared to 1998. Average invested assets (excluding market value adjustments) increased approximately $343.7 million in 1999 compared to 1998 primarily due to the Company's increased investment funds from two structured asset-backed commercial paper vehicles. See further discussion of these vehicles in the Liquidity and Capital Resources section. The increase in 1998 net investment income was primarily due to the acquisitions of Delta and AmVestors. Net investment income in 1998 and 1997 included $322.0 million and $30.2 million, respectively, from Delta and AmVestors. The effective yield of the entire portfolio in 1999 was 7.15% compared to 6.98% in 1998 and 7.49% in 1997. Yields in 1998 were impacted by a decline in value on hedge funds and long-term private partnership investments resulting in lower net investment income in both the life insurance and annuity segments in that year. The effective yield of the annuity portion of the portfolio decreased 10 basis points to 6.68% in 1999 compared to 6.78% in 1998 and 7.24% in 1997. The decrease in the 1999 effective yield primarily resulted from lower reinvestment rates throughout 1998 and the majority of 1999 compared to the portfolio rate at the beginning of the prior year period.
The Contribution from the Closed Block was $25.2 million in 1999 compared to $31.5 million in 1998 and $31.0 million in 1997. The following table sets forth the operating results of the Closed Block for the years ended December 31, 1999, 1998 and 1997:
Closed Block insurance premiums decreased by $8.8 million in 1999 to $189.4 million compared to $198.2 million in 1998 and $206.1 million in 1997. The decrease in insurance premiums each year is consistent with the reduction of the Closed Block's life insurance in force that is expected to continue over the life of the Block. Similarly, the 1999 decrease in product charges or universal life policies included in the Closed Block is primarily the result of the reduction of such business in force.
Net investment income for the Closed Block decreased by $7.7 million in 1999 to $108.1 million compared to $115.8 million in 1998 and $113.8 million in 1997. The decrease in 1999 was primarily attributable to lower effective yields, partially offset by higher average invested assets (excluding market value adjustments) while the increase in 1998 was primarily attributable to the growth in average invested assets (excluding market value adjustments) resulting from the reinvestment of investment earnings.
Closed Block policyowner benefits decreased by $7.3 million in 1999 to $193.5 million compared to $200.8 million in 1998 and $206.6 million in 1997. The decrease in policyowner benefits each year is primarily due to lower death benefits and to the reduction of life reserves which is consistent with the reduction of the Closed Block's life insurance in force that is expected over the life of the Block.
Total life insurance benefits increased by $12.8 million in 1999 to $104.2 million compared to $91.4 million in 1998 and $77.8 million in 1997. An increase in life insurance benefits is expected as the traditional block of business continues to grow and as the universal block of business ages. However, in the last half of 1999 the Company experienced higher than expected death benefits. The Company does not believe
that this is an indication of a change in long-term mortality trends but more of a fluctuation which is not unusual from time to time. Partially offsetting the increases in death benefits and higher policy reserves in 1999 was a reduction in interest credited. Interest credited on universal policyowner account balances decreased $3.9 million in 1999 to $30.4 million compared to $34.3 million in 1998 primarily due to a reduction in crediting rates. The weighted average interest crediting rate on policyowner account balances for 1999 was 5.67% compared to 6.08% for 1998. Interest credited on universal policyowner account balances in 1998 was $1.5 higher than 1997. The increase was primarily due to higher account values, partially offset by lower interest crediting rates. The weighted average interest crediting rate decreased 15 basis points to 6.08% for 1998 compared to 6.23% for 1997.
business acquired (VOBA) decreased $4.1 million in 1999 and increased $5.0 million in 1998. Deferred policy acquisition costs are generally amortized in proportion to gross margins. In 1999, modifications were made to the dividend scale of traditional products to coincide with the decline in investment yields, resulting in increased estimated future gross margins. These modifications primarily contributed to the decreased amortization in 1999. Lower death benefits in 1998 on those policies for which deferred costs are amortized contributed to higher gross margins in 1998, resulting in the increased amortization that year.
Adjusted pre-tax operating income from Annuity operations increased by $4.6 million in 1999 to $88.7 million compared to $84.1 million in 1998 and $35.2 million in 1997. The increase in 1999 was primarily due to increased spreads while the increase in 1998 was primarily due to the acquisitions of Delta and AmVestors.
The equity in earnings of unconsolidated subsidiary represents 34% of the net income of AMAL Corporation, net of goodwill amortization. AMAL Corporation is the joint venture partner through which the Company markets variable life and variable annuity products and selected fixed annuity products.
The Company's cash flows from operations consist of dividends from subsidiaries, if declared and paid, interest income on loans and advances to its subsidiaries (including a surplus note issued to the Company by AmerUs Life), investment income on assets held by the Company and fees which the Company charges its subsidiaries and certain other of its affiliates for services, offset by the expenses incurred for debt service, salaries and other expenses.
The Company intends to rely primarily on dividends and interest income from its life insurance subsidiaries in order to make dividend payments to its shareholders. The payment of dividends by its life insurance subsidiaries is regulated under various state laws. Under Iowa law, AmerUs Life and Delta Life may pay dividends only from the earned surplus arising from their respective businesses and must receive the prior approval of the Iowa Insurance Commissioner to pay any dividend that would exceed certain statutory limitations. The current statute limits any dividend, together with dividends paid out within the preceding 12 months, to the greater of (i) 10% of the respective company's policyowners' surplus as of the preceding year end or (ii) the net gain from operations for the previous calendar year. Iowa law gives the Iowa Commissioner broad discretion to disapprove requests for dividends in excess of these limits. The payment of dividends by AmVestors' subsidiaries, American and FBL is regulated under Kansas law, which has statutory limitations similar to those in place in Iowa. Based on these limitations and 1998 results, the Company's subsidiaries could have paid an estimated $60.7 million in dividends in 1999 without obtaining regulatory
The Company and its subsidiaries generated cash flows from operating activities of $632.3 million, $479.4 million and $224.4 million for the years ended December 31, 1999, 1998 and 1997, respectively. Excess operating cash flows were primarily used to increase the Company's investment portfolio, fund policyowner account withdrawals and purchase common stock for the treasury.
The Company has a $150 million revolving credit facility with a syndicate of lenders (the "Bank Credit Facility"). As of December 31, 1999, there was a $32 million outstanding loan balance under the facility. The Bank Credit Facility provides for typical events of default and covenants with respect to the conduct of the business of the Company and its subsidiaries and requires the maintenance of various financial levels and ratios. Among other covenants, the Company (a) cannot have a leverage ratio greater than 0.35:1.0 or an interest coverage ratio less than 2.5:1.0, (b) is prohibited from paying cash dividends on its common stock in excess of an amount equal to 3% of its consolidated net worth as of the last day of the preceding fiscal year, and (c) must cause certain of its subsidiaries, including AmerUs Life and Delta Life, to maintain certain ratings from A.M. Best and certain levels of adjusted capital and surplus and risk-based capital.
During 1999 and 1998, the Company purchased 385,200 shares and 4,325,019 shares of common stock for the treasury at a total cost of $8.9 million and $102.1 million, respectively.
fixed maturity investments and principal payments on mortgage-backed securities, are believed adequate to meet anticipated short-term and long-term benefit and expense payment obligations. There can be no assurance that future experience regarding benefits and surrenders will be similar to historic experience since withdrawal and surrender levels are influenced by such factors as the interest rate environment and the claims-paying and financial strength ratings of the Company's life insurance subsidiaries.
The Company takes into account asset/liability management considerations in the product development and design process. Contract terms for the Company's interest-sensitive products include surrender and withdrawal provisions which mitigate the risk of losses due to early withdrawals. These provisions generally do one or more of the following: limit the amount of penalty-free withdrawals, limit the circumstances under which withdrawals are permitted, or assess a surrender charge or market value adjustment relating to the underlying assets. The following table summarizes liabilities for interest-sensitive life products and annuities by their contractual withdrawal provisions at December 31, 1999 (including liabilities in both the Closed Block and the general account):
(A) Includes $1,216.3 million of statutory liabilities with a contractual surrender charges of less than five percent of the account balance.
AmerUs Life and its joint venture partner are contingently liable in the event the joint venture, AVLIC, cannot meet its policyholder obligations. At December 31, 1999, AVLIC had statutory assets of $2,559.1 million, liabilities of $2,517.5 million, and surplus of $41.6 million.
Through its membership in the Federal Home Loan Bank (FHLB) of Des Moines, AmerUs Life is eligible to borrow on a line of credit available to provide it additional liquidity. Interest is payable at a current rate at the time of any advance. As of December 31, 1999, AmerUs Life had a $25 million open secured line of credit against which there were no borrowings. In addition to the line of credit, AmerUs Life has long-term advances from the FHLB outstanding of $16.1 million at December 31, 1999.
At December 31, 1999, the statutory surplus of the Company's subsidiaries was approximately $425.0 million. The Company believes that this level of statutory capital is more than adequate as each life insurance subsidiary's risk-based capital is significantly in excess of required levels.
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/liability management techniques in order to achieve competitive yields, while maintaining risk at acceptable levels. The asset
The Closed Block was formed to give certain policyowners additional assurances as to the dividend policies of the Company. As a result of establishing the Closed Block on June 30, 1996, the Company allocated certain assets from its investment portfolio to the Closed Block (see Note 1 to the Consolidated Financial Statements for further discussion). The following table summarizes consolidated invested assets by asset category as of December 31, 1999 and 1998, and sets forth the allocation of such assets between the Closed Block and the general account. The remaining information relating to the Company's investment portfolio presents information about the investment portfolio on a combined basis (including invested assets in both the Closed Block and the general account).
The fixed maturity securities portfolio consists primarily of investment grade corporate fixed maturity securities, high-quality MBS and United States government and agency obligations. As of December 31, 1999 fixed maturity securities were $7,768.4 million, or 86.6% of the carrying value of invested assets with public and private fixed maturity securities constituting $6,955.5 million, or 89.5%, and $812.9 million, or 10.5%, of total fixed maturity securities, respectively.
The following table summarizes the composition of the fixed maturity securities by category as of December 31, 1999 and 1998:
The following table summarizes fixed maturity securities by remaining maturity as of December 31, 1999:
The Company's portfolio of investment grade fixed maturity securities is diversified by number and type of issuer. As of December 31, 1999, investment grade fixed maturity securities included the securities of over 627 issuers, with 2,213 different issues of securities. No non-government/agency issuer represents more than 0.5% of investment grade fixed maturity securities.
Below-investment grade fixed maturity securities as of December 31, 1999, included the securities of 113 issuers representing 6.1% of total invested assets, with the largest being a $16.9 million investment.
MBS investments are mortgage-related securities including commercial mortgage-backed securities (CMBS), collateralized mortgage obligations (CMOs), and pass-through mortgage securities. Asset-backed securities are both residential and non-residential including exposure to home equity loans, home improvement loans, manufactured housing loans as well as securities backed by loans on automobiles, credit cards, and other collateral or collateral bond obligations. Residential mortgage pass-through and CMOs total $1,630.5 million or 18.2% of total invested assets. Asset-backed residential mortgages total $361.3 million or 4.0% of total invested assets. As of December 31, 1999, MBS were $1,774.1 million or 19.8%, of total invested
As of December 31, 1999, mortgage loans in the Company's investment portfolio were $615.2 million, or 6.9% of the aggregate carrying value of invested assets, including the Closed Block. As of December 31, 1999, commercial mortgage loans and residential mortgage loans comprised 73.2% and 26.8%, respectively, of the mortgage loans in the Company's investment portfolio.
In recent years the Company has significantly reduced its equity real estate portfolio. As of December 31, 1999, the carrying value of investment real estate, including the Closed Block, was $1.5 million.
As of December 31, 1999, the Company held equity securities of $14.6 million. The largest holding of equity securities, Federal Home Loan Bank, had a carrying value of $12.3 million as of December 31, 1999.
In force reserves and the assets allocated to each segment are modeled on a regular basis to analyze projected cash flows under a variety of economic scenarios. The result of this modeling is used to modify asset allocation, investment portfolio duration and convexity and renewal crediting strategies. The Company invests in CMOs as part of its basic portfolio strategy, but uses other types of derivatives only as a hedge against the effects of interest rate fluctuations or to synthetically alter the investment characteristics of specific assets. For a further discussion and disclosure of the nature and extent of the Company's use of derivatives, see Note 14 to the Consolidated Financial Statements.
The Company and its non-life subsidiaries file a consolidated federal income tax return. The life insurance subsidiaries file separate federal income tax returns. The separate return method is used to compute the Company's provision for federal income taxes. Deferred income tax assets and liabilities are determined based on differences among the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 defines derivative instruments and provides comprehensive accounting and reporting standards for the recognition and measurement of derivative and hedging activities (including certain instruments embedded in other contracts). It requires derivatives to be recorded in the consolidated balance sheet at fair value and establishes criteria for hedges of changes in the fair value of assets, liabilities or firm commitments, hedges or variable cash flows or forecasted transactions, and hedges of foreign currency exposures of net investments in foreign operations. Changes in the fair value of derivatives not meeting specific hedge accounting criteria would be recognized in the consolidated statement of operations. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of
On January 1, 1999, the Company adopted the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments." This statement provides guidance on when an insurance or other enterprise should recognize a liability for guaranty fund and other assessments and on how to measure such liability. The adoption of SOP 97-3 had no material impact on the financial position or results of operations as the Company currently estimates assessment liabilities when a determination of an insolvency has occurred.
On January 1, 1999, the Company adopted AICPA SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This SOP provides guidance for determining whether costs of software developed or obtained for internal use should be capitalized or expensed as incurred. In the past, the Company has expensed such costs as they were incurred. The adoption of SOP 98-1 had no material impact on the financial position or results of operations of the Company.
The Company formed a Year 2000 working group to address potential problems posed by this development to assure that the Company was prepared for the year 2000. The Company's overall Year 2000 compliance initiatives included the following components: (i) assessment of all business critical systems (business critical systems include computer and embedded systems); processes and external interfaces and dependencies; (ii) remediation or upgrading of business critical systems; (iii) testing of both modified and updated systems as well as integrated systems testing; (iv) implementation of modified and updated systems; and (v) contingency planning.
The Company completed the Year 2000 modifications, conversions and testing and, to date, has not experienced any significant operational difficulties in 2000.