(B) Retroactively reflects the pro forma effect of the issuance of 18.16 million shares of Class A Common Stock and 5.0 million shares of Class B Common Stock at the beginning of the respective periods and gives retroactive effect to the Capital Contribution.
(C) For purposes of computing the ratio of earnings to fixed charges, "earnings" consists of income from operations before federal income taxes and fixed charges. "Fixed charges" consist of interest expense on debt and amortization of debt expense.
(D) Amounts reported prior to December 31, 1996 reflect policyowners' equity. From December 31, 1993, results reflect the impact of SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities."
(E) Effective May 1996, substantially all new sales of individual deferred annuities are made through the Ameritas Joint Venture.
In accordance with 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 income earned from the funds deposited into account balances by universal life and annuity policyowners, the majority of which is passed through to such policyowners in the form of interest credited.
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 capitalized and amortized as an expense in proportion to expected profits or margins. 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.
Universal life product charges have increased slightly in each of the past two years primarily due to increased cost of insurance charges as a result of the normal aging of that block of business.
Other revenues were relatively level in 1994 and 1996 with a modest increase to $5.4 million in 1995. The increased other revenues in 1995 were primarily due to a gain of $3.1 million which resulted from the curtailment of the Company's defined benefit pension plans effective December 31, 1995. Effective January 1, 1996, such defined benefit pension plans were replaced with a defined contribution savings and retirement plan.
Total policyowner benefits were $365.8 million in 1996 compared to $374.6 million in 1995 and $369.9 million in 1994. Traditional life insurance benefits increased by $7.3 million in 1996 compared to a $5.6 million increase in 1995. Such increases in 1996 and 1995 were primarily due to the growth in the amount of such business in force. Universal life insurance benefits increased by $2.5 million in 1996 and by $3.1 million in 1995. The increased benefits in 1996 were due to increased mortality costs and increased interest credited to policyowner account balances, with the increase in 1995 primarily due to increased interest credited to policyowner account balances. While the weighted average crediting rate for the Company's universal life liabilities decreased 19 basis points to 6.27% in 1996 from 6.46% in 1995, the Company's average liabilities increased $39.8 million from 1995 to 1996, resulting in the increased credited amounts in 1996. The weighted average crediting rate increased two basis points from 6.44% in 1994 to 6.46% in 1995, and the Company's average liabilities increased $41.9 million from 1994 to 1995, resulting in the increased interest credited amounts in 1995.
While annuity benefits were relatively level in 1995 and 1994, such benefits decreased $13.1 million in 1996 to $100.6 million. Such benefits decreased in 1996 primarily due to reduced interest credited to policyowner account balances. The weighted average crediting rate for the Company's individual deferred annuity liabilities decreased 80 basis points to 5.36% in 1996 compared to 6.16% in 1995 and the Company's average deferred annuity liabilities decreased $71.0 million from 1995 to 1996, also contributing to the lower interest credited amounts in 1996. The weighted average crediting rate decreased 25 basis points from 6.41% in 1994 to the 6.16% in 1995 while the Company's average liabilities increased $32.1 million from 1994 to 1995, resulting in the slightly increased interest credited amounts in 1995.
Commission expense, net of deferrals, decreased $2.5 million to $7.9 million in 1996 compared to $10.4 million in 1995, and $9.4 million in 1994. The reduction in 1996 was primarily due to a decrease in gross commission expense as a result of lower life insurance sales in 1996 and the transfer of new annuity sales to the Ameritas Joint Venture in May 1996. The increase in such expenses in 1995 of $1.0 million was primarily the result of the integration of the product lines of Central Life and American Mutual Life following the merger at the end of 1994, and an increase in gross commissions of $3.0 million in 1995 as a result of increased sales. Other underwriting, acquisition and insurance expenses, net of deferrals, increased by $6.8 million, or 14.1%, to $55.0 million in 1996. The increase in expenses during 1996 was due to increased costs related to the Reorganization of $0.1 million, the formation of the Ameritas Joint Venture of $0.4 million, and expenses related to changing the name of the life company to AmerUs Life of $0.7 million; higher premium taxes of $1.1 million due to a one-time adjustment to the amortization of the guaranty association asset and an increased accrual for estimated future assessments; and increased settlements and associated legal fees of $4.7 million. 1996 settlements and legal fees included the establishment of a $5.0 million reserve in connection with certain pending class action litigation.
The amortization of deferred policy acquisition costs increased by $8.3 million in 1996 and $7.5 million in 1995. Since deferred policy acquisition costs are primarily amortized in proportion to gross margins, the increases in amortization in 1996 and 1995 are primarily due to higher gross margins including increasing realized capital gains over the past two years.
Dividends to policyowners increased by $6.1 million, or 12.3%, to $55.5 million in 1996 compared to $49.4 million in 1995, and $45.0 million in 1994. The increase in dividends over each of the past two years was primarily the result of the growth and aging of in force business. Traditional life reserves grew 8.4% from the end of 1994 to the end of 1995 and an additional 7.6% to the end of 1996, or to $1.21 billion. The weighted average dividend rate credited to these policies was 7.17% in 1996 compared to 7.14% in both 1995 and 1994.
insurance company was subject to the equity add-on tax which resulted in an additional $9.6 million of income tax expense. The effective income tax rate for 1994, adjusted to remove the equity add-on tax, would have been 37.8%. The 1995 equity add-on tax was zero.
The Company intends to rely primarily on dividends and interest income from AmerUs Life to make any dividend payments to its shareholders. The payment of dividends by AmerUs Life to the Company is regulated under Iowa law. Under Iowa law, AmerUs Life may pay dividends only from the earned surplus arising from its business and must receive the prior approval of the Iowa Commissioner to pay a dividend, if such dividend would exceed certain statutory limitations. The current statutory limitation is the greater of (i) 10% of AmerUs Life's capital and 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. During 1997, the maximum amount that would have been legally available for distribution to the Company, absent the dividends paid as a part of the Reorganization, without further regulatory approval would have been approximately $34 million. However, as a result of the Distribution, AmerUs Life will not be able to pay dividends to the Company in 1997 without the prior consent of the Iowa Commissioner. It is the Company's intention to seek regulatory approval to pay dividends from AmerUs Life during 1997. However, at December 31, 1996, the Company also had the ability to borrow up to approximately $119 million from AmerUs Life without prior regulatory approval. The Company would utilize this borrowing capacity, if necessary, to meet its liquidity needs including the payment of dividends to its shareholders. Any such borrowings from AmerUs Life would be repaid from future available dividends from AmerUs Life. Management believes that the Company's access to capital through borrowings from AmerUs Life, public equity and debt markets and its $75 million revolving credit facility provide the Company with sufficient liquidity and capital resources during 1997, irrespective of whether regulatory approval for the payment of dividends by AmerUs Life is obtained.
In connection with the Bank Credit Facility, the Company pledged approximately 49.9% of the common stock of AmerUs Life owned by the Company and a $50 million 9% surplus note payable to the Company by AmerUs Life.
At December 31, 1996, AmerUs Life had substantial excess statutory capital as its adjusted statutory capital was $355.7 million resulting in an RBC ratio in excess of 700% of the authorized control level RBC.
AmerUs Life's cash inflows 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, income taxes and current operating expenses. Life insurance companies generally produce a positive cash flow from operations, as measured by the amount by which cash inflows 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 its 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 AmerUs Life's anticipated short-term cash obligations.
(A) Includes $301 million of statutory liabilities with a contractual surrender charge of less than five percent of the account balance.
In the future, in addition to cash flows from operations and AmerUs Life's borrowing capacity, AmerUs Life would anticipate obtaining its required capital from the Company as the Company will have access to the public markets.
The Company's asset/liability management approach utilizes separate investment portfolios for specific product lines, such as traditional life, universal life and annuities. Investment policies and strategies have been established based on the specific characteristics of each product line. The portfolio investment policies and strategies establish asset duration, quality and other guidelines.
The Company utilizes analytical systems to establish an optimal asset mix for each line of business. The Company seeks to manage the asset/liability mismatch and the associated interest rate risk through active management of the investment portfolio. Financial, actuarial, investment, product development and product marketing professionals work together throughout the product development, introduction and management phases to jointly develop and implement product features, initial and renewal crediting strategies, and investment strategies based on extensive modeling of a variety of factors under a number of interest rate scenarios.
The Company in recent years has also reduced its exposure to higher risk fixed maturity securities and common stock. The Company's percentage of higher risk fixed maturity assets (defined as assets categorized in NAIC designations 3-6) was approximately 5.3% of total invested assets as of December 31, 1996, as compared to 5.3% as of December 31, 1995 and 6.9% as of December 31, 1994. In addition, the Company decreased its common stock holdings to .9% of total invested assets as of December 31, 1996, down from 2.1% as of December 31, 1995 and 3.7% as of December 31, 1994.
The following table summarizes fixed maturity securities by remaining maturity as of December 31, 1996:
As of December 31, 1996, 78.1% 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, 1996:
MBS comprise a core position within the Company's fixed maturity securities investments. MBS investments include residential, commercial MBS, home equity loans (including home equity loans purchased from one of the Company's affiliates), manufactured housing, FHA Title I and CMBS. Residential mortgage pass-throughs and CMOs total $904.9 million or 22.8% of total invested assets. As of December 31, 1996, MBS were $1,231.6 million or 31.0%, of total invested assets of which $681.9 million, or 55.4% of MBS were guaranteed by the United States government or an agency of the United States government. Other MBS were $549.7 million, or 44.6%, of MBS as of December 31, 1996. Management believes that the quality of assets in the MBS portfolio is generally high, with 85.9% of such assets representing agency backed or "AAA" rated securities.
As of December 31, 1996, only one loan for $2.0 million, or .9%, of the Company's loan portfolio (principal balance) was classified as delinquent or in foreclosure. As of the same date, only $6.3 million, or 2.6%, of the company's loan portfolio (as measured by principal balance) was classified as restructured. For the year 1996, the Company's foreclosures were approximately $6.2 million (as measured by principal balance).
The Company held $130.4 million of other invested assets (including short-term investments) on December 31, 1996. Other invested assets consist primarily of various joint venture investments and financial instruments.
The Company manages its investment portfolio in part to reduce its exposure to interest rate fluctuations. In general, the market value of the Company's fixed maturity portfolio increases or decreases in an inverse relationship with fluctuations in interest rates, and the Company's net investment income increases or decreases in a direct relationship with interest rate changes.
Although all of its assets support all of its liabilities, the Company has developed an asset/liability management approach with separate investment portfolios for major product lines such as traditional life, universal life and annuities. Investment policies and strategies have been established based on the specific characteristics of each product line. The portfolio investment policies and strategies establish asset duration, quality and other guidelines. The Company utilizes analytical systems to establish an optimal asset mix for each line of business. The Company seeks to manage the asset/liability mismatch and the associated interest rate risk through active management of the investment portfolio. Financial, actuarial, investment, product development and product marketing professionals work together throughout the product development, introduction and management phases to jointly develop and implement product features, initial and renewal crediting strategies, and investment strategies based on extensive modeling of a variety of factors under a number of interest rate scenarios.
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 does invest in collateralized mortgage obligations 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.
Until 1997, the Company and its subsidiaries filed as part of a consolidated United States federal income tax return with AMHC and its subsidiaries. Beginning in 1997, the Company and its subsidiaries will not file as part of a consolidated United States federal income tax return with AMHC. Further, the Company and its subsidiary AmerUs Life will not be eligible to file a consolidated United States federal income tax return until December 31, 2002.
The NAIC currently is in the process of codifying statutory accounting practices, the result of which is expected to constitute the only source of "prescribed" statutory accounting practices. Accordingly, that project, which is not expected to be completed before the end of 1997, will likely change certain statutory accounting practices. The codification may result in changes to the permitted or prescribed accounting practices that the Company's insurance subsidiaries use to prepare their statutory-basis financial statements.