The Company leases approximately 69,000 square feet at 699 Walnut Street, Des Moines, Iowa from an unaffiliated party. The Company's executive offices and corporate operations, including legal, tax, finance, human resources, investments, communications and technology, are at this location.
The Company also leases approximately 103,000 square feet at 611 Fifth Avenue, Des Moines, Iowa from an unaffiliated party. The life insurance segment and the annuity segment occupy approximately 70,000 square feet and 10,000 square feet, respectively, of this space. The remaining space is primarily utilized for technology and cafeteria facilities.
(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 1999, 1998 and 1997 are not fully comparable with those of 1996 and 1995 due to the establishment of the Closed Block on June 30, 1996.
(C) 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 30.23 million, 33.46 million, 23.54 million and 23.16 million of weighted average common shares outstanding, respectively.
(F) Adjusted net operating income reflects net income adjusted to eliminate certain items (net of applicable income taxes) which management believes are not necessarily indicative of overall operating trends, including net realized gains or losses on investments. Different items are likely to occur in each period presented and others may have different opinions as to which items may warrant adjustment. The adjusted net operating income shown does not constitute net income computed in accordance with GAAP.
The Company is a holding company engaged through its subsidiaries in the business of marketing, underwriting and distributing a broad range of individual life insurance and annuity products to individuals and businesses in 49 states, the District of Columbia and the U.S. Virgin Islands. The Company has two reportable operating segments: Life Insurance and Annuities. The Life Insurance segment's primary product offerings consist of whole life, universal life and term life insurance policies. The primary product offerings of the Annuity segment are fixed annuities.
The costs related to acquiring new business, including certain costs of issuing policies and certain other variable selling expenses (principally commissions), defined as deferred policy acquisition costs, are deferred. The method of amortizing deferred policy acquisition costs for life insurance products varies, dependent upon whether the contract is participating or non-participating. Participating contracts are those which are expected to pay dividends to policyowners in proportion to their relative contribution to the Company's statutory surplus. Non-participating life insurance deferred policy acquisition costs are amortized over the premium-paying period of the related policies in proportion to the ratio of annual premium revenues to total anticipated premium revenues using assumptions consistent with those used in computing policy benefit reserves. Deferred acquisition costs for participating policies are amortized as an expense primarily in proportion to expected profits or margins from such policies. This amortization is adjusted when current or estimated future gross profits or margins on the underlying policies vary from previous estimates. For example, the amortization of deferred policy acquisition costs is accelerated when policy terminations are higher than originally estimated or when investments supporting the policies are sold at a gain prior to their anticipated maturity. Death and other policyowner benefits reflect exposure to mortality risk and fluctuate from period to period based on the level of claims incurred within insurance retention limits. The profitability of the Company is primarily affected by expense levels, interest spread results (i.e., the excess of investment earnings over the interest credited to policyowners) and fluctuations in mortality, persistency and other policyowner benefits. The Company has the ability to mitigate adverse experience through adjustments to credited interest rates, policyowner dividends or cost of insurance charges.
The following table reflects net income adjusted to eliminate certain items (net of applicable income taxes) 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 debt 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 overall performance. Adjusted net operating income as described here may not be comparable to similarly titled measures reported by other companies. The adjusted operating income shown below does not constitute net income computed in accordance with GAAP.
(D) Represents costs in 1999 directly related to the Company's proposed merger with its controlling shareholder, AMHC, following the proposed demutualization of AMHC. These costs consist primarily of legal and consulting expenses. See further discussion of the proposed reorganization plans in Item 1. The 1996 and 1995 costs were directly related to the conversion of AmerUs Life into a stock company and consisted primarily of printing, postage, legal and consulting costs. These costs each year were not of a continuing nature and were not expected to have any effect on future operations.
(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 Life's conversion into a stock company.
(G) Diluted adjusted operating income per common share for 1999, 1998 and 1997 is calculated using 30.31 million, 33.70 million and 23.57 million shares, respectively. Diluted adjusted operating income per common share for 1996 and 1995 is calculated using 23.16 million shares.
The Company acquired all of the outstanding stock of Delta on October 23, 1997, for approximately $165 million in cash. The transaction was accounted for as a purchase and accordingly, the Company's results of operations include Delta from the date of purchase. The Company acquired all of the outstanding stock of AmVestors on December 19, 1997, in a stock exchange valued at approximately $350 million. This transaction was also accounted for as a purchase and the Company's results of operations include AmVestors from the date of purchase. (See Note 15 of the Consolidated Financial Statements for the discussion of the Company's acquisitions.)
The Company has two reportable operating segments: Life Insurance and Annuities. Products generally distinguish a segment. The Company uses the same accounting policies and procedures to measure operating segment income as it uses to measure its consolidated income from operations with the exception of the elimination of certain items which management believes are not necessarily indicative of overall operating trends. These items are explained further in the Adjusted Net Operating Income section of Management's Discussion and Analysis of Results of Operations and Financial Condition. Revenues and benefits and expenses are primarily attributed directly to each operating segment. Net investment income and core realized gains (losses) on investments are allocated based on the directly-related asset portfolios. Other revenues and expenses which are deemed not to be associated with any specific reportable segment are grouped together in the All Other category. These items primarily consist of discontinued product lines such as group and health and holding company revenues and expenses. The Company assesses the performance of its operating
segments before interest expense, income taxes, and equity in earnings of its unconsolidated subsidiary, AMAL.
Realized gains on investments were $3.2 million in 1999 compared to realized losses of $0.1 million and realized gains of $13.8 million in 1998 and 1997, respectively. 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.
Realized losses on investments of the Closed Block were $0.4 million in 1999 compared to realized gains of $10.3 million in 1998 and $0.7 million in 1997. 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.
The amortization of deferred policy acquisition costs for the Closed Block decreased by $6.0 million in 1999 to $20.3 million compared to $26.3 million in 1998 and $31.5 million in 1997. The decrease in the amortization of deferred policy acquisition costs each year is consistent with the projected reduction in the gross margins of the Closed Block as the life insurance in force declines.
Closed Block dividends to policyowners decreased by $8.1 million to $66.3 million in 1999 compared to $74.4 million in 1998 and $59.6 million in 1997. The decrease in 1999 was primarily due to the decrease in deferred dividends resulting from lower realized gains while the increase in 1998 primarily resulted from increased deferred dividends associated with the higher realized gains that year.
Annuity benefits were $338.0 million in 1999 compared to $339.3 million in 1998 and $117.6 million in 1997. The decrease in 1999 was primarily attributable to a lower weighted average crediting rate on annuity balances in 1999 compared to 1998, partially offset by higher average liabilities. The weighted average crediting rate on deferred annuity account balances was decreased 24 basis points to 4.95% for 1999 compared to 5.19% for 1998 and 5.25% for 1997. Crediting rates were decreased in response to the decrease in effective yields on the annuity investment portfolio resulting in GAAP spreads widening 14 basis points in 1999 as compared to 1998. Other annuity benefits increased in 1999 as compared to 1998. Other annuity benefits in 1999 included approximately $13.1 million of interest expense on two insurance contracts issued to two commercial paper conduits during the year. See further discussion of these conduits in the Liquidity and Capital Resources section. Partially offsetting this increased expense was a decrease in immediate annuity reserves and benefit payments on immediate annuities, which corresponds with the reduction in immediate annuity sales. The increase in annuity benefits in 1998 was primarily due to the acquisitions of Delta and AmVestors.
Total life insurance expenses were $70.6 million in 1999 compared to $64.7 million in 1998 and $54.9 million in 1997. Underwriting, acquisition and insurance expenses increased each year, primarily due to costs related to the Year 2000 Compliance Project and costs associated with the Company's enhancement of its administration and distribution systems. Amortization of deferred policy acquisition costs and value of
All other expenses increased by $5.4 million in 1999 and decreased by $1.7 million in 1998. Expenses in 1998 were reduced by certain one-time benefits and 1999 expenses included the amortization of the debt issuance costs on the capital securities and senior notes issued in mid-1998 and additional holding company expenses primarily related to air transportation, conferences, incentive compensation and corporate development programs. The 1997 other expenses included a $1.3 million write-off of expenses related to a former bank credit facility which was replaced by a new agreement in 1997.
The 1999 reorganization costs consist of legal and consulting expenses associated with the Company's proposed merger with its controlling shareholder, AMHC, following the proposed demutualization of AMHC. See further discussion of these proposed reorganization plans in Item 1. As these costs are not of a continuing nature, they have been excluded from the operating segment amounts.
A summary of the Company's adjusted pre-tax operating income by operating segment follows:
Adjusted pre-tax operating income from Life Insurance operations increased by $9.1 million in 1999 to $50.3 million compared to $41.2 million in 1998 and $46.5 million in 1997. The increase in 1999 compared to 1998 was primarily due to increased investment income and decreased deferred policy acquisition cost amortization which was partially offset by a decreased contribution from the Closed Block and increased costs related to the Year 2000 Compliance Project and enhancement of the Company's administration and distribution systems. The decrease in 1998 was primarily due to lower net investment income and increased costs related to the Year 2000 Compliance Project and costs associated with the Company's development of alternative distribution systems.
Interest expense increased by $1.2 million in 1999 to $28.3 million compared to $27.1 million in 1998 and $15.0 million in 1997. The increased interest expense in 1999 was primarily due to higher interest rates on the senior notes and adjusted conversion-rate equity security units outstanding during 1999 as compared to the revolving credit agreement borrowings outstanding during 1998. The increased interest expense in 1998 was primarily due to increased debt levels from the 1997 fourth quarter acquisitions of Delta and AmVestors.
Income tax expense increased by $3.7 million in 1999 to $32.1 million compared to $28.4 million in 1998 and $22.0 million in 1997. The effective tax rate in 1999 was 32.5% compared to 31.2% in 1998 and 27.5% in 1997. The increase in the effective rate in 1999 was primarily due to a $0.3 million decrease in tax credits generated by affordable housing and historic rehabilitation investments and the capitalization of $1.8 million of demutualization costs for income tax purposes. The increase in the effective tax rate in 1998 was primarily due to a $2.4 million increase in goodwill amortization and a $0.8 million decrease in tax credits generated by affordable housing and historic rehabilitation investments. Tax credits generated from these investments totaled $5.2 million in 1999 compared to $5.5 million in 1998 and $6.3 million in 1997.
approval. Of this amount, the Company's subsidiaries paid the Company $48 million in dividends in 1999. Based on 1999 results, the Company's subsidiaries could pay an estimated $61.1 million in dividends in 2000 without obtaining regulatory approval.
During 1999, the Company entered into two $250 million separate account funding agreements, of which one remained outstanding as of December 31, 1999. 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 the Company's separate account and is further backed by the general account assets. The separate account assets are legally segregated and are not subject to the claims that arise out of any other business of the Company. 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 the Company may terminate at any time.
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. The Company continuously monitors benefits and surrenders to provide projections of future cash requirements. As part of this monitoring process, the Company performs cash flow testing of its assets and liabilities under various scenarios to evaluate the adequacy of reserves. In developing its investment strategy, the Company establishes a level of cash and securities which, combined with expected net cash inflows from operations, maturities of
The Company's life insurance subsidiaries may also obtain liquidity through sales of investments. The Company's investment portfolio as of December 31, 1999 had a carrying value of $9 billion, including Closed Block investments.
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 each of the life insurance companies and are overseen by the Investment Committee of the Board of Directors of the Company. Management regularly monitors individual assets and asset groups, in addition to monitoring the overall asset mix. In addition, the insurance company boards and the Investment Committee review investment guidelines and monitor internal controls.
As of December 31, 1999, 80.5% of total invested assets were investment grade fixed maturity securities. The following table sets forth the credit quality, by NAIC designation and Standard & Poor's rating equivalents, of fixed maturity securities as of December 31, 1999:
assets of which $1,420.6 million or 80.0% of MBS were from government sponsored enterprises. Other MBS were $353.5 million or 20.0%, of MBS as of December 31, 1999. Management believes that the quality of assets in the MBS portfolio is generally high, with 94% of such assets representing agency backed or "AAA" rated securities.
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, 1999, amounted to $640.9 million. The swaps had no carrying value at December 31, 1999 and a fair value which amounted to a net receivable position of $3.3 million at December 31, 1999. The carrying value and fair value of options amounted to $91.9 million and $121.7 million, respectively. The interest rate caps and options are reflected as "other investments" on the Company's consolidated financial statements as of December 31, 1999. The net amount payable or receivable from interest rate swaps and caps are accrued as an adjustment to interest income.
Commercial mortgage loans consist primarily of fixed-rate mortgage loans. As of December 31, 1999, the Company held 380 individual commercial mortgage loans with an average balance of $1.2 million.
As of December 31, 1999, no loans in the Company's loan portfolio (as measured by principal balance) were classified as delinquent or in foreclosure. As of the same date, only two loans aggregating $2.5 million, or 0.4%, of the Company's loan portfolio (as measured by principal balance) were classified as restructured. During 1999, the Company had no foreclosures.
The Company held $297.9 million of policy loans on individual insurance products as of December 31, 1999. Policy loans are permitted to the extent of a policy's contractual limits and are fully collateralized by policy cash values.
the Effective Date of FASB Statement No. 133." SFAS No. 137 delays the effective date of SFAS No. 133 for all fiscal quarters until fiscal years beginning after June 15, 2000. The Company is evaluating SFAS No. 133 and has not determined its effect on the consolidated financial statements.
The NAIC has codified statutory accounting practices, which are expected to constitute the only source of prescribed statutory accounting practices and are effective in 2001. Codification will change prescribed statutory accounting practices and may result in changes to the accounting practices that insurance enterprises use to prepare their statutory financial statements. The changes of codification will not have a material impact on statutory surplus.
In connection with the year 2000, an important business issue emerged regarding how existing application software programs and operating systems could accommodate the date value "2000". Many existing application software products were designed to accommodate only a two-digit date position which represents the year (i.e., the number "95" is stored on the system and represents the year 1995). As a result, the year 1999 (i.e., "99") is the maximum date value many information technology systems will be able to process accurately.
Total costs associated with Year 2000 modifications and conversions were approximately $8.5 million, with approximately $4.3 million incurred for the year ended December 31, 1999. These costs were expensed as incurred.