- --------------- (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
(E) Adjusted net operating income reflects net income adjusted to eliminate certain items (net of applicable income taxes and minority interest) 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.
(F) Basic and diluted adjusted net operating income per common share is calculated using the weighted average number of shares as shown in the table and discussed in (C) above.
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 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 policy 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.
(B) Represents amortization of deferred policy acquisition costs on the non-core realized gains or losses that are included in product margins, adjusted for income taxes and minority interest on such amounts.
(C) Represents costs directly related to the Company's reorganization and merger with ALHI, adjusted for minority interest on such amounts. These costs consist primarily of legal, actuarial and consulting expenses.
Adjusted net operating income for 2000 included the following items: $7.3 million of after-tax earnings on the cash balances which were distributed to the former Members in connection with the demutualization of the Company, non-recurring costs of $1.5 million, after-tax, related to the former mutual holding company and a $1.6 million reduction due to the Company's equity investment in the downstream holding company of ILICO (ILICO Investment). The loss on this equity investment occurred in the third quarter of 2000, and was one of the factors in the Company's reduction in the number of shares that will be issued in connection with the ILICO combination discussed previously.
In the fourth quarter of 2000, the ILICO investment performed at a level similar to the other investments in the Company's investment portfolio. This level of performance is expected to continue into the future. However, future adjusted net operating income will no longer contain the investment earnings on the cash distribution the Company made to its Members in late October in connection with the Company's demutualization. Adjusting for these factors and the non-recurring costs would have had the effect of reducing 2000 adjusted net operating income to $58.1 million, or $2.76 per diluted share, as shown in the following table:
together and shown as a separate item titled "Closed Block Assets". Likewise, all liabilities attributable to the Closed Block are combined and disclosed as the "Closed Block Liabilities".
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 and 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 holding company revenues and expenses and the operations of the companies' real estate management subsidiary. The Company assesses the performance of its operating segments before interest expense, income taxes, and minority interest. Income from operations and operating segment information do not include discontinued operations which are comprised of the former banking, residential real estate brokerage, residential land development, and mortgage banking activities of the Company.
Traditional life insurance premiums were $66.8 million in 2000 compared to $64.3 million in 1999 and $51.3 million in 1998. The increases in traditional life insurance premiums in 2000 and 1999 were primarily the result of increased first year and renewal premium, partially offset by increased ceded premium in 2000. First year and renewal premium increased approximately $13.8 million in 2000 and $13.0 million in 1999 primarily due to continued favorable persistency and the continued growth of the block of business. The increase in ceded premium in 2000 was due to the reinsurance agreements the Company entered into effective January 1, 2000 which effectively reduced the Company's retention limit to $100,000 for the majority of new business. Approximately $11.1 million of additional premiums were ceded to reinsurers in 2000 as compared to 1999, offsetting the increased renewal premiums in that year.
Immediate annuity and supplementary contract premiums decreased by $3.3 million to $21.8 million in 2000 compared to $25.1 million in 1999 and $29.6 million in 1998. A decrease in immediate annuity premiums was anticipated as a result of pricing adjustments made on these products.
Annuity product charges were $34.8 million in 2000 compared to $27.8 million in 1999 and $26.8 million in 1998. The increases in product charges each year were primarily due to increased surrender and expense charges resulting from the larger annuity block of business in force and increased surrender charges associated with an increase in withdrawals. Annuity withdrawal rates averaged 16.8% for 2000 compared to 14.7% for 1999 and 14.6% for 1998. Approximately three-fourths of the increase in withdrawal rates in 2000 was due to internal replacements as some of the surrendered policies were converted to other Company products. Based on the current environment, withdrawal rates for the near term are expected to run at levels comparable to those experienced in 2000.
Total net investment income was $586.6 million in 2000 compared to $557.3 million in 1999 and $514.1 million in 1998. The increases in 2000 and 1999 net investment income were primarily attributable to higher average invested assets (excluding market value adjustments) and higher effective yields as compared to prior years. Average invested assets (excluding market value adjustments) increased approximately $427.1 million in 2000 compared to 1999 and approximately $363.4 million in 1999 compared to 1998. The increases were primarily due to the growth of the Company's life insurance and annuity businesses, increased holding company cash equivalents and the addition of a structured asset-backed commercial paper vehicle. The cash equivalents were generated primarily from the sale of the Company's discontinued operations in mid-1998. These funds were invested as the Company awaited distribution of the funds to its former Members in connection with its reorganization discussed previously. In late October 2000, the Company distributed approximately $340 million of cash to its former Members. The earnings on the cash on hand distributed totaled approximately $11.3 million and $11.9 million in 2000 and 1999, respectively. As a result of this distribution, future earnings of the Company will no longer contain the net investment income from this source.
The effective yield of the entire portfolio in 2000 was 6.92% compared to 6.91% in 1999 and 6.69% in 1998. The 2000 yield was depressed due to a loss on the Company's equity investment in the downstream holding company of ILICO in the third quarter. This loss reduced net investment income by approximately $3.3 million from normal levels. Adjusting the portfolio yields for this loss, the 2000 yield would have been 6.95%. As stated earlier, the loss on this equity investment was one of the factors in the Company's reduction in the number of shares to be issued in the ILICO combination. Approximately 42% of the book value of the assets of ALHI were adjusted to market value at the end of the third quarter of 2000 in connection with the Company's reorganization, as discussed previously. The market value adjustment improved investment yields approximately 20 basis points for the fourth quarter and 6 basis points for the year. 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 on the deferred annuity portfolio increased 30 basis points to 6.98% for 2000 as compared to 6.68% for 1999.
Other income primarily consists of real estate operating income, property management fees, structured finance fees from affordable housing programs, Corporate Owned Life Insurance (COLI) income, and third party annuity commissions received by wholly-owned IMOs. Other income increased approximately $14.3 million in 2000 to $34.6 million as compared to $20.3 million in 1999 and $15.5 million in 1998. Approximately $14.2 million of the 2000 increase in annuity other income was due to the acquisition of another IMO in February, 2000 and the remainder reflects two months of income on a $100 million COLI investment the Company made in the fourth quarter of 2000. COLI is classified as an other asset and accordingly the income from this asset appears in other income instead of net investment income. The increase in 1999 annuity other income is primarily due to the acquisition of an IMO in mid-1998 whereby 1999 reflects a full 12 months of income from this IMO compared to only five months of IMO income in 1998.
The Contribution from the Closed Block was $24.5 million in 2000 compared to $25.2 million in 1999 and $31.5 million in 1998. The following table sets forth the operating results of the Closed Block for the periods indicated:
Closed Block insurance premiums were $185.4 million in 2000 compared to $189.4 million in 1999 and $198.2 million in 1998. A decrease in insurance premiums 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, a decrease in product charges on universal life policies included in the Closed Block is expected as in force business declines due to deaths and surrenders, although product charges remained relatively level between 2000 and 1999 primarily due to unusually low surrender activity in 2000. The distribution the Company completed in October 2000 in connection with its demutualization impacted surrender decisions as policies had to be in effect to be eligible to receive a distribution.
Net investment income for the Closed Block was $112.9 million in 2000 compared to $108.1 million and $115.8 million in 1999 and 1998, respectively. The increase in 2000 as compared to 1999 was primarily due to increased average invested assets and higher effective yields, while the decrease in 1999 as compared to 1998 was primarily the result of lower effective yields, partially offset by higher average invested assets.
Total life insurance expenses were $70.7 million in 2000 compared to $70.6 million in 1999 and $64.7 million in 1998. Underwriting, acquisition and insurance expenses were higher in 1999 as compared to 2000 and 1998 primarily due to technology costs related to the Year 2000 Compliance Project and costs
Other expenses decreased by $6.4 million in 2000 to $19.4 million compared to $25.8 million in 1999 and $21.2 million in 1998. Other expenses primarily consist of expenses related to the real estate management company and the holding company and tend to fluctuate from period to period depending on the properties under management each quarter. Beginning in 1999, the Company began decreasing the number of properties under management and, accordingly, other expenses are also declining. In addition, 1998 expenses 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, incentive compensation and corporate development programs.
The reorganization costs consist primarily of legal, actuarial and consulting expenses associated with the reorganization of the Company discussed previously. As these costs are not of a continuing nature, they have been excluded from the Operating Segment amounts.
All other adjusted pre-tax operating income was $12.0 million in 2000 compared to $7.6 million in 1999 and $0.9 million in 1998. The increase in 2000 compared to 1999 was primarily due to lower expenses. The increase in 1999 compared to 1998 was primarily due to increased investment income on the cash equivalents generated from the sale of the Company's discontinued operations in mid-1998.
Interest expense increased $0.7 million in 2000 to $29.7 million compared to $29.0 million in 1999 and $27.9 million in 1998. The increased interest expense in 2000 was primarily due to higher average outstanding borrowings during 2000 as compared to 1999. The additional borrowings were primarily used to support insurance company operations, affordable housing investments, fund the acquisition of the new IMO, and fund a portion of the initial investment in the downstream holding company of ILICO. The increased interest expense in 1999 as compared to 1998 was primarily due to higher interest rates on the senior notes and adjustable conversion-rate equity security units outstanding during 1999 as compared to the revolving credit agreement borrowings outstanding during 1998.
Minority interest represents the minority stockholders ownership percentage share of net income of ALHI prior to the Company's acquisition of this Minority Interest. The minority shareholder ownership percentage was approximately 42% for the nine months ended September 30, 2000 and the years ended December 31, 1999 and 1998. As a result of the Company's acquisition of the Minority Interest, from the fourth quarter of 2000 forward, there will no longer be net income applicable to the Minority Interest.
Net income was $51.8 million in 2000 compared to $38.4 million in 1999 and $103.5 million in 1998. The Company sold the majority of its residential real estate operating segment and its entire bank operating segment in 1998. The Company recorded an after tax gain of $74.9 million on the sales which resulted in the higher 1998 net income.
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. Generally, under the various state statutes, the Company's life insurance subsidiaries dividends may be paid only from the earned surplus arising from their respective businesses and must receive the prior approval of the respective state regulator to pay any dividend that would exceed certain statutory limitations. The current statutes generally limit 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. Generally, the various state laws give the state regulators broad discretion to approve or disapprove requests for dividends in excess of these limits. Based on these limitations and 1999 results, the Company's subsidiaries could pay an estimated $61.1 million in dividends in 2000 without obtaining regulatory approval. Of this amount, the Company's subsidiaries paid the Company $42.0 million in dividends during 2000. Based on 2000 results, the Company's subsidiaries could pay an estimated $92.7 million in dividends in 2001 without obtaining regulatory approval.
The Company and its subsidiaries generated cash flows from operating activities of $440.8 million, $739.9 million and $405.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. Operating cash flows were primarily used to increase the Company's investment portfolio.
The Company has a $150 million revolving credit facility with a syndicate of lenders (the "Bank Credit Facility"). As of December 31, 2000, there was a $75 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 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, (b) cannot have an interest coverage ratio less than 2.25:1.0 through June 30, 2001, 2.50:1.0 thereafter, (c) 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 (d) must cause certain of its subsidiaries, including AmerUs and Delta, to maintain certain ratings from A.M. Best and certain levels of risk-based capital.
The Company has previously announced a stock repurchase plan for up to $50.0 million. As of December 31, 2000, the Company has $48.5 million of remaining capacity under the plan. The Company would expect some greater repurchase activity after December 31, 2000 if the market conditions are favorable. The funds for the repurchase program would come from a combination of internal sources from its life insurance subsidiaries and utilization of its revolving credit facility.
The cash flows of the Company's life insurance subsidiaries 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, payment of debt, 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 flows 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 the anticipated short-term cash obligations of the Company's life insurance subsidiaries.
AmerUs and its joint venture partner are contingently liable in the event the joint venture, AVLIC, cannot meet its obligations. At December 31, 2000, AVLIC had statutory assets of $2,453.3 million, liabilities of $2,389.6 million and surplus of $63.7 million.
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 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.
The Company's portfolio of investment grade fixed maturity securities is diversified by number and type of issuer. As of December 31, 2000, investment grade fixed maturity securities included the securities of over 637 issuers, with 2,157 different issues of securities. No non-government/agency issuer represents more than 0.6% of investment grade fixed maturity securities.
Below-investment grade fixed maturity securities as of December 31, 2000, included the securities of 100 issuers representing 5.3% of total invested assets, with the largest being a $17.8 million investment.
As of December 31, 2000, 80.7% 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, 2000:
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 $1,301.6 million or 13.5% of total invested assets. Asset-backed residential mortgages total $312.6 million or 3.3% of total invested assets. As of December 31, 2000, MBS were $1,534.4 million or 16.0%, of total invested assets of which $1,139.2 million or 74.2% of MBS were from government sponsored enterprises. Other MBS were
Commercial mortgage loans consist primarily of fixed-rate mortgage loans. As of December 31, 2000, the Company held 395 individual commercial mortgage loans with an average balance of $1.3 million.
As of December 31, 2000, one loan in the Company's loan portfolio with a principal balance of $1.8 million was classified as delinquent and no loans were in foreclosure. As of the same date, only one loan aggregating $0.9 million, or 0.2%, of the Company's loan portfolio (as measured by principal balance) was classified as restructured. During 2000, the Company had no foreclosures.
In recent years the Company has significantly reduced its equity real estate portfolio. As of December 31, 2000, the carrying value of investment real estate, including the Closed Block, was $3.2 million.
The Company manages its investment portfolio in part to reduce its exposure to interest rate fluctuations. In general, the market value of its fixed maturity portfolio increases or decreases in an inverse relationship with fluctuations in interest rates, and net investment income increases or decreases in a direct relationship with interest rate changes.
fair value of assets, liabilities or firm commitments, hedges of 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 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. In June 2000, the FASB issued SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133." SFAS No. 138 addresses a limited number of Statement 133 implementation issues, including expanding normal purchase and normal sale exceptions, redefining specific risks that can be identified as hedged risks and defining certain other provisions related to foreign-currency and intercompany derivatives. SFAS No. 138 is effective for fiscal years beginning after June 15, 2000. The Company has determined that the transition adjustments resulting from the adoption of this statement will be approximately a $7 million reduction in net income and a $3 million increase in accumulated other comprehensive income.
In December 2000, the Accounting Standards Executive Committee issued Statement of Position 00-3 (SOP 00-3) "Accounting by Insurance Enterprises for Demutualizations and Formations of Mutual Holding Companies and for Certain Long-Duration Participating Contracts," which has been cleared by the FASB. SOP 00-3 provides guidance on accounting by insurance enterprises for demutualizations and the formation of mutual insurance holding companies. It specifies the financial statement presentation of a closed block, the accounting for participating contracts, the accounting for expenses related to a demutualization and formation of a mutual insurance holding company, the accounting for retained earnings and other comprehensive income at the date of demutualization and the formation of a mutual insurance holding company, and the accounting for a distribution from a mutual insurance holding company to its members. SOP 00-3 is effective no later than the end of the fiscal year that begins after December 15, 2000. The Company has evaluated SOP 00-3 and has adopted the guidance on accounting for demutualization expenses as of December 31, 2000. The remainder of the provisions of the SOP will require the Company to modify its presentation of the Closed Block in its Consolidated Financial Statements to no longer show the operations of the Closed Block and the assets and liabilities of the Closed Block as single line items. In addition, the SOP will require the Company to report unrealized gains and losses on Closed Block investments as a component of the Closed Block policyholder dividend obligation rather than accumulated other comprehensive income. At December 31, 2000, this change would have resulted in a $6.0 million reduction in accumulated other comprehensive income.
The NAIC has codified statutory accounting practices, which are expected to constitute the only source of prescribed statutory accounting practices and are effective January 1, 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 states of Iowa and Kansas have adopted the