The Company also leases approximately 48,000 square feet from unaffiliated parties for special technology projects, such as administration system conversions, and for records and supply storage.
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, 2000 are derived from the Consolidated Financial Statements of the Company, which financial statements have been audited by KPMG LLP, independent auditors.
December 19, 1997, and Consolidated Balance Sheet Data includes year-end data for Delta and AmVestors.
(B) The Company formed the Closed Block on June 30, 1996. Invested assets allocated to the Closed Block are classified as Closed Block assets. Revenues and expenses associated with the Closed Block are shown net as a single line item. Accordingly, the individual income statement components for 2000, 1999 and 1998 are not fully comparable with those of 1996 due to the establishment of the Closed Block on June 30, 1996.
(C) The Company was formed in 1996 as a mutual holding company and therefore, had no shares of common stock outstanding until its demutualization on September 20, 2000. At that time, the Company distributed 17.4 million shares of its common stock to its former members and exchanged its common stock for the 12.9 million shares of common stock held by the public in ALHI on a one-for-one basis. The Company's income primarily reflects the results of its former subsidiary, ALHI. Therefore, net income from continuing operations per share has been calculated based on the number of shares of stock the Company owned of ALHI from January 1, 1996 through September 20, 2000. Thereafter, net income from continuing operations per share has been calculated based on the 30.3 million shares actually outstanding.
(D) The Company did not have common stock until its demutualization on September 20, 2000, therefore, there were no dividends to declare on common stock for the years 1996 through 1999. ALHI, the predecessor to the Company, did declare dividends on its common stock of $0.40 per share, $0.40 per share, and $0.30 per share for the years ended December 31, 1999, 1998 and 1997, respectively.
In accordance with Generally Accepted Accounting Principals (GAAP), universal life insurance premiums and annuity deposits received are reflected as increases in liabilities for policyowner account balances and not as revenues. Revenues reported for universal life and annuity products consist of policy charges for the cost of insurance, administration charges and surrender charges assessed against policyowner account balances. Surrender benefits paid relating to universal life insurance policies and annuity products are reflected as decreases in liabilities for policyowner account balances and not as expenses. Amounts for interest credited to universal life and annuity policyowner account balances and benefit claims in excess of policyowner account balances are reported as expenses in the financial statements. The Company receives investment
The following table reflects net income adjusted to eliminate certain items (net of applicable income taxes and minority interest) which management believes do not necessarily indicate overall operating trends. For example, net realized capital gains or losses on investments, excluding gains or losses on convertible preferred stock and bonds which are considered core earnings, are eliminated. Net realized capital gains or losses on investments may be realized at the sole discretion of management and are often realized in accordance with tax planning strategies. Therefore, net realized capital gains or losses do not reflect the Company's ongoing earnings capacity. Different items are likely to occur in each period presented and others may have different opinions as to which items may warrant adjustment. Adjusted net operating income is the basis used by the Company in assessing its overall performance. Adjusted net operating income as described here may not be comparable to similarly titled measures reported by other companies. The adjusted net operating income shown below does not constitute net income computed in accordance with GAAP.
The adjusted net operating income for the Company is not comparable to the adjusted net operating income of ALHI, the Company's predecessor, which was the reporting Company in prior Securities and Exchange Commission filings. The principal difference is the reduction of the Company's adjusted net operating income due to the minority interests' equity in earnings through September 20, 2000. The minority interests' equity in earnings was $21.7 million, $28.1 million, $26.9 million, $16.2 million, and none for the years ended December 31, 2000 through December 31, 1996, respectively.
(E) Represents the mutual life insurance company equity add-on tax, which is applicable only to mutual life insurance companies and which is not applicable to the Company after June 30, 1996, due to AmerUs' conversion into a stock company.
(F) The Company was formed in 1996 as a mutual holding company and therefore, had no shares of common stock outstanding until its demutualization on September 20, 2000. At that time, the Company distributed 17.4 million shares of its common stock to its former members and exchanged its common stock for the 12.9 million shares of common stock held by the public in ALHI on a one-for-one basis. The Company's operating income primarily reflects the operating income of its former subsidiary, ALHI. Therefore, adjusted net operating income per share has been calculated based on the number of shares of stock the Company owned of ALHI from January 1, 1996 through September 20, 2000. Thereafter, adjusted net operating income per share has been calculated based on the 30.3 million shares actually outstanding.
The Closed Block was established on June 30, 1996 in connection with the reorganization of AmerUs to a stock form. 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, 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. The contribution to the operating income of the Company from the Closed Block is reported as a single line item in the income statement. Accordingly, premiums, product charges, investment income, realized gains and losses on investments, policyowner benefits and dividends attributable to the Closed Block, less certain minor expenses including amortization of deferred policy acquisition costs, are shown as a net number under the caption "Contribution from the Closed Block". This results in material reductions in the respective line items in the income statement while having no effect on net income. The expenses associated with the administration of the policies included in the Closed Block and the renewal commissions on these policies are not charged against the Contribution from the Closed Block, but rather are grouped with underwriting, acquisition and other expenses. Also, all assets allocated to the Closed Block are grouped
Universal life product charges were $52.6 million in 2000 compared to $50.5 million in 1999 and $47.2 million in 1998. The increase in product charges each year were primarily due to increased cost of insurance charges as a result of the normal aging and growth of the block of business, partially offset by higher reinsurance costs.
The deferred annuity portfolio yield in 2000 was also positively impacted by the market value adjustment and by higher reinvestment rates near the end of 1999 and continuing into the first part of 2000 as compared to the portfolio rates at the beginning of the prior year period. The effective yield of the deferred annuity portion of the portfolio decreased 10 basis points to 6.68% in 1999 as compared to 6.78% in 1998. 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.
Realized losses on investments were $8.6 million in 2000 and $2.1 million in 1999 compared to realized gains of $0.7 million in 1998. 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 the sale of investments.
Closed Block policyowner benefits were $200.9 million in 2000 as compared to $193.5 million in 1999 and $200.8 million in 1998. The increase in 2000 as compared to 1999 was due to higher death benefits and higher reserves related to the increased persistency as policyholders held their policies awaiting the Company's demutualization distribution. The decrease in 1999 as compared to 1998 was due to lower death benefits and lower reserves and interest credited related to the reduction in the life insurance in force between 1999 and 1998.
The amortization of deferred policy acquisition costs and VOBA for the Closed Block decreased by $5.3 million to $15.0 million in 2000 compared to $20.3 million in 1999 and $26.3 million in 1998. Deferred policy acquisition costs and VOBA are generally amortized in proportion to gross margins. The decrease in the amortization of deferred policy acquisition costs and VOBA in 2000 and 1999 as compared to each prior year was consistent with the projected reduction in the gross margins of the Closed Block as the life insurance in force declines. The VOBA for the Closed Block was established as part of Company's third quarter market value adjustment discussed previously.
Closed Block dividends to policyowners were $68.3 million in 2000 compared to $66.3 million in 1999 and $74.4 million in 1998. The increase in 2000 dividends to policyowners is primarily due to higher dividends related to the maturing of the Closed Block. The decrease in 1999 dividends to policyowners as compared to 1998 primarily reflects a decrease in the policyholder dividend obligation. 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, a policyholder dividend obligation liability is recorded. The lower realized gains in 1999 as compared to 1998 reduced the policyholder dividend obligation in 1999.
as compared to 1999 due to favorable mortality, as measured per amount in force, and higher reinsurance credits. Universal life insurance benefits increased in 2000 and 1999 as compared to each prior year. Death benefits increased each year as expected with the growth of the business in force. In addition, mortality rates were slightly higher in 2000 as compared to 1999, as measured per amount in force. Interest credited on universal policyowner account balances increased $3.1 million in 2000 and decreased $1.3 million in 1999 as compared to each prior year. The increase in 2000 was primarily due to higher average policyowner account balances while the decrease in 1999 was primarily due to decreased crediting rates. The weighted average interest crediting rate on policyowner account balances was 5.62%, 5.67% and 6.08% in 2000, 1999 and 1998, respectively.
Annuity benefits were $343.2 million in 2000 compared to $338.0 million in 1999 and $339.3 million in 1998. The increase in 2000 primarily related to other annuity benefits. In mid-1999, the Company issued two insurance contracts to two commercial paper conduits. One of the contracts was terminated in the fourth quarter of 1999. As a result, other annuity benefits for 2000 included approximately $16.9 million of interest expense on one insurance contract for an entire year compared to $13.1 million of interest expense on two insurance contracts for half of a year in 1999. Interest credited to deferred annuity account balances was $1.6 million higher in 2000 as compared to 1999, and $1.4 million lower in 1999 compared to 1998. Between 2000 and 1999, the weighted average crediting rate on deferred fixed annuity account balances remained constant and average deferred fixed annuity account balances decreased approximately $15.0 million. The weighted average crediting rate on deferred fixed annuity account balances was decreased 24 basis points to 4.95% in 1999 compared to 5.19% in 1998, and average fixed annuity account balances decreased approximately $10.0 million in 1999. Spreads on deferred fixed annuities widened 30 basis points in 2000 and 14 basis points in 1999. Offsetting the declines in deferred fixed annuity crediting rates and account balances were increased earnings on equity-index and multi-choice annuity account balances. Earnings credited to these products are included with interest credited.
associated with the Company's enhancement of its distribution systems. Amortization of deferred policy acquisition costs and value of business acquired (VOBA) increased $3.3 million in 2000 compared to 1999 and decreased $4.1 million in 1999 compared to 1998. Deferred policy acquisition costs are generally amortized in proportion to gross margins. The increase in amortization in 2000 as compared to 1999, primarily reflects the higher product margins experienced in 2000 as compared to 1999 combined with an increase in amortization of approximately $0.4 million associated with the Company's market value adjustment completed at the end of the third quarter. Additional VOBA was established as a result of the market value adjustment. The decrease in amortization between 1999 and 1998 resulted from modifications made to the dividend scale of traditional products to coincide with the decline in investment yields at that time, resulting in increased estimated future gross margins, and therefore lower current year amortization.
Income tax expense was $42.5 million in 2000 compared to $33.7 million in 1999 and $29.1 million in 1998. The effective tax rate was 36.9%, 34.4% and 31.5% for 2000, 1999 and 1998, respectively. The increase in the effective tax rate each year was primarily due to the nondeductible expenses associated with the
Net income from continuing operations increased $15.2 million to $51.1 million in 2000 compared to $35.9 million in 1999 and $36.4 million in 1998. The increase in 2000 as compared to 1999 was primarily due to the results of the Life Insurance operations discussed previously, the decreased holding company expenses, and the reduction in net income applicable to the Minority Interest. While pre-tax operating income from the Life Insurance and Annuity operations increased in 1999 as compared to 1998, net income from continuing operations actually decreased slightly due to the demutualization expenses and higher effective income tax rate.
The Company's cash flows from operations consist of dividends from subsidiaries, if declared and paid, interest from income on loans and advances to its subsidiaries (including a surplus note issued to the Company by AmerUs), 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.
As mentioned previously, the Company's demutualization became effective on September 20, 2000. The actual distribution of cash, policy credits and the Company's common stock to its former Members took place in late October, 2000. Of the total cash and policy credits distributed of $339.8 million, approximately $295.3 million came from cash balances on hand and $44.5 million was funded by borrowings under the Company's revolving credit facility. In addition, the Company distributed 17.4 million shares of its common stock to its former Members resulting in total shares of common stock outstanding of 30.0 million shares.
As previously reported, the Company has entered into a definitive agreement for the combination of the Company with ILICO. ILICO will demutualize and its members will receive cash, policy credits and the Company's common stock equivalent to the value of 9.3 million shares of the common stock of AmerUs Group. The transaction is expected to be completed in the first half of 2001. Under the terms of the agreement, the Company is committed at a minimum to distribute in cash the equivalent value of approximately 264,000 shares of its common stock. The actual amount of the cash consideration will vary dependent upon the price of the Company's common stock at or about the closing date and the number of shares within the range that the Company elects to distribute in the form of cash. The funding for the cash consideration is expected to primarily come from the Company's revolving credit facility.
In July 2001, the forward common stock purchase contract component of the Company's adjustable conversion-rate equity security units matures. Under the terms of the contract, the Company will issue 4,080,500 shares of its common stock at a price of $31.5625 per share for total consideration of $128.8 million. In lieu of paying cash to satisfy their purchase obligation, the unit holders may surrender the preferred security component of the adjustable conversion-rate equity security unit. The form of consideration will not be known until April 2001 at which time the election must be made. If the Company receives cash proceeds, the funds will probably be applied towards the Company's revolving credit facility. If the preferred securities are tendered, the Company intends to retire them. In either case, debt and capital securities outstanding will be reduced by $128.8 million.
AmerUs is a party to a $250 million separate account funding agreement. Under this agreement, a five-year floating rate insurance contract is issued to a commercial paper conduit. The funding agreement is secured by assets in a separate account and is further backed by the general account assets of AmerUs. The separate account assets are legally segregated and are not subject to claims that arise out of any other business of AmerUs. The separate account assets and liabilities are included with general account assets in the financial statements. The funding agreement may not be cancelled by the commercial paper conduit unless there is a default under the agreement, but AmerUs Life may terminate at any time.
Through their respective memberships in the Federal Home Loan Banks (FHLB) of Des Moines and Topeka, AmerUs and American are eligible to borrow under variable-rate short term fed funds arrangements to provide additional liquidity. These borrowings are secured and interest is payable at the current rate at the time of any advance. There were no borrowings under these arrangements outstanding at December 31, 2000. In addition, AmerUs has long-term advances from FHLB outstanding of $15.6 million at December 31, 2000.
The Company's life insurance subsidiaries may also obtain liquidity through sales of investments. The Company's investment portfolio as of December 31, 2000 had a carrying value of $10 billion, including Closed Block investments.
At December 31, 2000, the statutory surplus of the Company's subsidiaries was approximately $472.7 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.
In the future, in addition to their cash flows from operations and borrowing capacity, the life insurance subsidiaries would anticipate obtaining their required capital from the Company as the Company has access to the public debt and equity markets.
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, 2000 and 1999, 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, 2000 fixed maturity securities were $8,261.6 million, or 86.0% of the carrying value of invested assets with public and private fixed maturity securities constituting $7,199.0 million, or 87.1%, and $1,062.6 million, or 12.9%, of total fixed maturity securities, respectively.
The following table summarizes fixed maturity securities by remaining maturity as of December 31, 2000:
The Company uses interest rate swaps, caps, and options to reduce its exposure to changes in interest rates and to manage duration mismatches. The Company also uses call options to hedge equity-indexed annuities. Although the Company is subject to the risk that counterparties will fail to perform, credit standings of counterparties are monitored regularly. The Company only enters into transactions with highly rated counterparties. The Company is also subject to the risk associated with changes in the value of contracts. However, such adverse changes in value generally are offset by changes in the value of the items being hedged. The notional principal amounts of the swaps, caps, and options, which represent the extent of the Company's involvement in such contracts but not the risk of loss, at December 31, 2000, amounted to $957.7 million. The swaps had a carrying value of a net payable position of $4.7 million at December 31, 2000 and a fair value which amounted to a net payable position of $6.0 million at December 31, 2000. The carrying value and fair value of options amounted to $101.4 million and $97.3 million, respectively. The interest rate caps and options are reflected as "other investments" on the Company's consolidated financial statements as of December 31, 2000. The net amount payable or receivable from interest rate swaps and caps are accrued as an adjustment to interest income.
As of December 31, 2000, mortgage loans in the Company's investment portfolio were $534.9 million, or 5.6% of the aggregate carrying value of invested assets, including the Closed Block. As of December 31, 2000, commercial mortgage loans and residential mortgage loans comprised 94.0% and 6.0%, respectively, of the mortgage loans in the Company's investment portfolio.
The Company held $312.7 million of policy loans on individual insurance products as of December 31, 2000. Policy loans are permitted to the extent of a policy's contractual limits and are fully collateralized by policy cash values.
As of December 31, 2000, the Company held equity securities of $152.9 million. The largest holding of equity securities, Indianapolis Life Group of Companies, had a carrying value of $103.7 million as of December 31, 2000. This holding is part of the Company's proposed combination transaction with ILICO discussed previously.
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 13 to the Consolidated Financial Statements.
In June 1998, the Financial Accounting Standards Board (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
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140 replaces SFAS No. 125 with the same title. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001 and for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The Company has evaluated SFAS No. 140 and determined there to be no material impact on the Consolidated Financial Statements.
NAIC's codification without exception. The Company has determined the impact of adopting the NAIC codification on its statutory financial statements will be an increase to statutory surplus of approximately $25 million.