The following analysis of the consolidated results of operations and financial condition of the Company should be read in conjunction with Selected Financial Data and Financial Statements and related footnotes included elsewhere herein.
Premium revenues reported for term life insurance products are recognized as revenues when due. Benefits relating to these products are associated with earned premiums. They are reported as benefit expenses by means of the change in the liabilities for future policy benefits so as to recognize profits over the premium-paying periods of the policies.
A significant source of revenue for ALLIED Life is investment income earned from the funds deposited to accounts by universal life and annuity policyholders, a portion of which is passed through to these policyholders in the form of interest credited.
Life insurance operations included in the following analysis should be read with reference to the table on page 23.
The face amount of new life insurance sold directly by agents in 1997 remained even at $1.9 billion. The face amount of new universal life insurance sold increased 40% to $574.9 million from $410.6 million. Universal life account balances increased 7.7% at year-end 1997 from year-end 1996. Fee income increased 7.6% in 1997 to $24.6 million from $22.9 million in 1996.
First-year annuity premiums increased 5.1% to $71.5 million from $68.1 million in 1996. Sales of fixed interest annuities were slowed in the fourth quarter by a flat interest yield curve, which allowed banks and other financial institutions to offer short-term certificates of deposit at more competitive interest rates. The total annuity account balance increased 10.1% to $514.9 million at year-end 1997 from $467.5 million at year-end 1996.
Adjusted insurance revenues increased 9.5% to $49.2 million in 1997 from $44.9 million in 1996. The increase was primarily attributable to increased investment spread, which grew 11% to $15.1 million from $13.6 million. Invested assets at cost increased 5.8% to $755.6 million at December 31, 1997 from $714.1 million at December 31, 1996; in 1997, investment income increased 8.3%. ALLIED Life's return on invested assets decreased to 7.3% in 1997 from 7.4% in 1996.
Annual average interest-credited rates on universal life contracts decreased to 5.3% from 5.4% and on annuities decreased to 5.4% from 5.6%. The ratio of investment spread to investment income increased to 28.9% from 28.2% despite the volatile interest rate environment during 1997. This ratio is evidence of ALLIED Life's ability to adjust interest credited to policyholder accounts to reflect trends in investment earnings.
Amortization of deferred policy acquisition costs (DPAC) decreased 10.7% in 1997 to $9.6 million from $10.7 million in 1996. Included in the 1996 amount was an adjustment of $2.8 million taken by the Company as the result of its annual DPAC study that suggested refinements in assumptions concerning future annuity policy persistency and interest rate spreads were necessary.
Operating income before taxes (which excludes realized investment gains and losses net of related amortization of deferred policy acquisition costs) for the year included an adjustment to deferred policy acquisition costs of $2.8 million reflecting changes in assumptions used to estimate future gross profits on certain blocks of annuity business. Including the adjustment of $2.8 million, operating income before taxes was $11.8 million compared with $14.9 million reported in 1995. Operating earnings per share including the adjustment of $0.40 per share were $1.35 compared with $1.85. Net income totaled $8.1 million ($1.39 per share) in 1996 and was $9.7 million ($1.75 per share) in 1995.
The face amount of new term life insurance sold directly by agents increased 20.6% to $1.5 billion in 1996 from $1.2 billion in 1995. Sales of term insurance with 10- and 20-year guaranteed rates were strong during 1996.
As an insurance holding company, ALFC relies on dividends from ALLIED Life to make dividend payments to its preferred and common stockholders. Retained earnings of ALLIED Life available for distribution as dividends to ALLIED Life Financial Corporation are limited by law. Under the Iowa Insurance Code, dividends may be paid by ALLIED Life only from statutory earned surplus, which as of December 31, 1997 was $21.3 million. In addition, ALLIED Life may not pay an extraordinary dividend with-out prior notice to and approval of the Iowa Insurance Commissioner. An extraordinary dividend is defined as any dividend or distribution of cash or other property whose fair market value together with that of other dividends or distributions made within the preceding twelve months exceeds the greater of
(ii)the statutory net gain from operations of the insurer for the twelve-month period ending December 31 of the preceding year.
During 1998, the maximum amount available for distribution to the Company from ALLIED Life is approximately $9 million. During 1997, the Company paid cash dividends of $1.2 million to common and preferred stockholders. ALLIED Life paid to the Company dividends of $1.8 million primarily to fund the Company's dividend requirement and its note payments on indebtedness to affiliates.
Life insurance companies generally produce a positive cash flow from operations. Its adequacy is measured by liquidity. There should be sufficient cash to meet benefit obligations to policyholders and normal operating expenses as they are incurred and sufficient excess to help meet future policy benefit payments and to write new business. ALLIED Life's liquidity position continued to be favorable in 1997, with cash inflows at levels sufficient to provide the funds necessary to meet obligations. The Company's cash inflows consist primarily of deposits to policyholder account balances; proceeds from sales, maturities and calls of investments; and repayments of investment principal. The Company's cash outflows primarily are related to policyholder account withdrawals, investment purchases, policy acquisition costs, policyholder benefits, and current operating expenses. These outflows are typically met from normal annual premium and net investment cash inflows.
Matching the investment portfolio maturities to the cash flow demands of the insurance coverages being provided is an important consideration. The Company continually monitors benefit and claims statistics to project future cash requirements.
Effective May 13, 1997, the Company transferred its remaining securities classified as held to maturity ($196 million) to available for sale. In accordance with Statement of Financial Accounting Standards (SFAS) 115, the Company now carries all of its securities at fair value; as a result, a $1.2 million increase to stockholders' equity was recognized. The Company now has more flexibility in selling securities from its investment portfolio. The Company has no intent to classify future purchases of securities as held to maturity.
In June 1996, the Company began interest rate hedging programs whereby certain derivative financial instruments including cash settle put swaptions (swaptions) and interest rate floors (floors) were purchased. Swaptions are being purchased to reduce the negative effect of increased withdrawal activity related to the Company's annuity liabilities that may result from extreme increases in interest rates. They entitle the Company to receive payments from the instruments' counterparties on future reset dates if the interest rate (which is directly tied to the 5-year constant maturity swap curve) on any expiration date is above a specified fixed rate (8.8% to 10.5% for instruments entered into as of December 31, 1997).
Premiums paid to purchase these instruments are capitalized and included in other invested assets. No swaptions or floors were purchased in 1997. For the year ended December 31, 1996, the Company paid $4.1 million in premiums. All such premiums are amortized into income over the term of the instruments on a straight-line basis. Gains and losses on these instruments and related assets are not recorded in income until realized. For more information on swaptions and floors see Note 3 of Notes to Consolidated Financial Statements.
The Company's equity indexed annuity products guarantee customers the return of principal. Interest credited is based on a percentage of the gain of the S&P 500 Index(R). A portion of the premium is used to purchase S&P 500 call options (call options) to hedge the growth in interest credited to the customer if there are advances in the S&P 500 Index(R).
The Company is exposed to the risk of extreme declines in the market value of its call options if there is a sharp and prolonged decrease in the stock market. The Company currently is purchasing puts to reduce the negative effect of such a decline. The put agreements allow the Company to receive payments on future exercise dates if the S&P 500 Index(R) is below specified levels.
The Financial Accounting Standards Board (FASB) is evaluating the accounting and disclosure requirements for hedging activities and derivative financial instruments. It is likely the resulting accounting standards will require that these instruments be carried at fair value. The impact of such standards on the Company is not expected to be material to its financial position or results of operations.
The Company is exposed to the risk of losses in the event of nonperformance of the counter-parties of the previously described swaptions, floors, and options. Losses recorded in the Company's financial statements in the event of nonperformance are limited to the unamortized premium paid to purchase the instruments. Economic losses will be measured by the net replacement cost of such instruments or by their fair value if the net fair value is in the Company's favor. The Company limits its exposure to such losses by diversification among reputable counterparties with appropriate credit ratings.
The Company believes the allegations relate to a claim that ALLIED Life collected a federal tax, known as the deferred acquisition cost tax (DAC tax), as well as other increased costs of doing business from its policyholders. The Company believes the amount of DAC tax and other costs claimed to have been collected from each policyholder is minimal, but the plaintiff in the case has asked the California court to treat the case as a class action representing all ALLIED Life policyholders from whom the claimed costs were collected. Similar class actions have been filed against other life insurance companies since the federal DAC tax law was enacted in 1990. The Company believes the action will raise the issue of whether the DAC tax may be included in the cost of insurance charged to policyholders under the terms of the universal life contracts. Management believes the increased costs charged to policyholders never violated the contracts.
The Company is aware of the problems associated with the programming code in existing computer systems as the millennium (year 2000) approaches. The year 2000 problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two-digit year value to 00. Computer systems must properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail.
The Company has assessed all computer systems as they relate to the year 2000 issue. The Company has formulated a plan to resolve the issue. Appropriate internal and external resources have been acquired and dedicated to implement the plan. The Company believes that testing of the systems will be finalized before the year 2000 and will not have a significant effect on the Company's ability to conduct business in a reasonable fashion. Anticipated expenditures for year 2000 compliance are not expected to be material to fiscal year 1998 and 1999 operations.
In 1997, the Company adopted SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This adoption had no impact on the Company's financial position, results of operations, or liquidity.
In June of 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income." This statement establishes new rules for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The new rules require that all items that are recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Earlier application of this statement is permitted. The Company will adopt SFAS 130 on January 1, 1998. This statement will require revised and additional disclosures but will have no effect on the results of operations or the financial position of the Company.
In June of 1997, the FASB issued SFAS 131, "Disclosure about Segments of an Enterprise and Related Information." Under this statement, public companies will report financial and descriptive information about their operating segments. SFAS 131 is effective for fiscal years beginning after December 15, 1997. Earlier application of this statement is permitted. The Company will adopt SFAS 131 on January 1, 1998. This statement will require revised and additional disclosures but will have no effect on the results of operations or the financial position of the Company.
In December of 1997, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments." This statement provides guidance on when an insurance or other enterprise should recognize a liability for guaranty fund and other assessments and on how to measure such liability. SOP 97-3 is effective for fiscal years beginning after December 15, 1998. Earlier application of this statement is permitted. The Company will adopt SOP 97-3 on January 1, 1999. Management expects that such adoption will not have a material impact on the financial position or results of operations of the Company since the majority of guaranty fund assessments are expected to be recovered through future premium tax offsets.
The Company maintains a system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and transactions are properly authorized and recorded. Management continually monitors these internal accounting controls, modifying and improving them as business conditions and operations change. An internal audit department also evaluates the adequacy and effectiveness of internal accounting controls and measures adherence to established policies and procedures. The management of ALLIED Life Financial Corporation believes that as of December 31, 1997 the Company's system of internal accounting controls was adequate to accomplish the objectives discussed herein.
The Company's financial statements for the years ended December 31, 1997, 1996, and 1995 have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The audits were conducted in accordance with generally accepted auditing standards and included a consideration of the system of internal accounting controls to the extent necessary to express an independent opinion on the financial statements.
The consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP), which differ in some respects from those followed in reports to insurance regulatory authorities. All significant intercompany balances and transactions have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Investments in fixed maturities that may be sold prior to maturity and are not bought and held principally for the purpose of selling in the near term are segregated into an available for sale portfolio and are carried at fair value. Unrealized appreciation and depreciation of available for sale securities are excluded from income and reported as a separate component of stockholders' equity net of a provision for related deferred policy acquisition costs and deferred income taxes.
Effective May 13, 1997, the Company transferred its remaining securities classified as held to maturity ($196 million) to available for sale and recorded an increase to stockholders' equity of $1.2 million in accordance with Statement of Financial Accounting Standards (SFAS) 115. The Company now carries all of its securities at fair value and has more flexibility in managing its investment portfolio. The Company has no intent to classify future purchases of securities as held to maturity.
Equity securities are carried at fair value with their unrealized appreciation or depreciation, net of taxes, reported in a separate component of stockholders' equity. Mortgage loans on real estate and policy loans are recorded at the unpaid principal balance of such loans, which approximated fair value as of December 31, 1997 and 1996. A majority of the Company's mortgage loans are on residential real estate located in Iowa. All short-term investments are recorded at cost, which approximates fair value.
Cash settle put swaptions (swaptions), interest rate floors (floors), call options, and puts the Company uses for hedging purposes are carried at cost that is amortized over the term of the instruments on a straight-line basis (see note 3 for a discussion of hedging activities). Swaptions and floors are included in other invested assets; call options and puts are included in other assets. The amortization of the swaptions and floors is included as a reduction of investment income; the amortization of the call options and puts is included with annuity interest credited. Gains and losses on these instruments and related assets and liabilities will not be recorded as income until realized. The Financial Accounting Standards Board (FASB) is evaluating the accounting and disclosure requirements for these instruments, and, as a result, this accounting treatment will change in the future. It is likely the resulting accounting standards will require that these instruments be carried at fair value. The impact of such standards on the Company is not expected to be material to its financial position or results of operation.
The costs of acquiring new business (principally commissions), certain costs of issuing policies (such as medical examinations and inspection reports), and certain other selling expenses, all of which vary with and are primarily related to the production of new business, have been deferred. These costs for universal life and annuity contracts are amortized in relation to the present value of expected gross profits using the assumed crediting rate. This amortization is adjusted retrospectively when the Company revises its estimates of current or future gross profits to be realized from a group of policies. These costs for term life insurance policies are amortized over the premium-paying periods in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Anticipated premium revenues are estimated using the same assumptions employed for computing liabilities for future policy benefits.
Term life insurance premium revenues are recognized over the premium-paying period. Benefits and expenses, which take into account the provisions for liabilities for future policy benefits and the amortization of deferred policy acquisition costs, are associated with earned premiums that result in the recognition of profits over the life of the policy contracts.
The Company reports reinsurance activity on a gross basis. Amounts paid or deemed to have been paid that are recoverable under reinsurance contracts are recorded as reinsurance ceded receivables. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies.
The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board (APB) Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations. Under these provisions, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. On January 1, 1996, the Company adopted SFAS 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 allows entities to continue applying the provisions of APB Opinion 25 and to provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value method defined in SFAS 123 had been applied. The Company elected to continue applying the provisions of APB Opinion 25 and to comply with the pro forma disclosure provisions of SFAS 123.
The Company computes deferred income taxes under the asset and liability method, which requires deferred tax liabilities and assets at the end of each reporting period be determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Accordingly, income tax expense provisions increase or decrease in the same period in which a change in tax rates is enacted. Deferred income taxes reflect the impact of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities for tax reporting.
In 1997, the Company adopted SFAS 128, "Earnings Per Share." SFAS 128 supersedes APB Opinion 15, "Earnings Per Share," and specifies the computation, presentation, and disclosure requirements for earnings per common share (EPS). It replaces the presentation of primary EPS and fully diluted EPS with basic EPS and diluted EPS, respectively. Basic EPS includes the weighted average number of common shares outstanding and excludes all dilutive securities. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stocks were exercised or converted into common stock. Diluted EPS is computed similarly to fully diluted EPS under APB 15. All prior periods have been restated to conform to the new standard.
The following is a schedule of amortized cost and estimated fair value of investments in fixed maturities and equity securities as of December 31, 1997 and 1996. The estimated fair value of fixed maturities and equity securities is based on quoted market prices where available or on values obtained from independent pricing services.
For the years ended December 31, 1997, 1996, and 1995, the Company realized gross gains of $1.7 million, $237,000, and $2.1 million and gross losses of $971,000, $454,000, and $2.8 million, respectively, from the call, prepayment, or sale of investments from the available for sale portfolio. There were no sales from the held to maturity portfolio in 1997, 1996, and 1995.
As required by law, fixed maturities and short-term investments were on deposit with or on behalf of various insurance regulatory authorities at December 31, 1997 and 1996, with carrying values of $754.5 million and $681.1 million, respectively. As of December 31, 1997 and 1996, bonds with a carrying value of $29.1 million and $30.2 million, respectively, were pledged as collateral for the Company's line of credit with the Federal Home Loan Bank.
In 1996, the Company began interest rate hedging programs whereby certain derivative financial instruments including swaptions and floors were purchased. The Company also began to purchase S&P 500 Index(R) call options and S&P 500 Index(R) puts as a result of the sale of equity indexed annuity products.
Swaptions are being purchased to reduce the negative effect on the Company's fixed maturity investments and annuity liabilities of increased withdrawal activity that may result from extreme rises in interest rates. As of December 31, 1997, the Company was party to 44 agreements that expire quarterly from June 1999 through March 2006. The agreements entitle the Company to receive payments from the instruments' counterparties on future reset dates if the interest rate (which is tied directly to the 5-year constant maturity swap curve) on any expiration date is above a specified fixed rate (8.8% to 10.5% for instruments entered into as of December 31, 1997). As of December 31, 1997, the notional amounts range from $3 million to $9 million (total of $244 million) and the swaptions were carried at an amortized cost of $2.1 million. Amortized cost was $2.6 million at December 31, 1996.
Floors are being purchased to reduce the negative effect that may result from extreme decreases in interest rates to a level below the guaranteed interest rates provided for in the Company's universal life insurance contracts. The 28 agreements for the floors outstanding as of December 31, 1997 expire quarterly from June 1999 through March 2006. The agreements entitle the Company to receive payments from the instruments' counterparties on future reset dates if the interest rate (which is tied directly to the 10-year constant maturity treasury curve) on the expiration date is below a specified fixed rate (5.0% for instruments entered into as of December 31, 1997). As of December 31, 1997, the notional amounts for each quarter ranged from $140 million to $270 million and the floors were carried at an amortized cost of $945,000. Amortized cost was $1.1 million at December 31, 1996.
The Company, ALLIED Life, and other affiliated companies are parties to the Management Information Services Agreement (the Services Agreement) with AMCO Insurance Company (AMCO), a subsidiary of ALLIED Group, Inc. Under the terms of the Services Agreement, AMCO provides certain computer services, printing, equipment leasing, and mail and communication services to ALLIED Life on a fee basis. The annual fee is subject to renegotiation throughout the term of the Services Agreement. The Services Agreement terminates on December 31, 2004 and has an extension provision similar to the Intercompany Operating Agreement's. Effective March 1, 1996, the Services Agreement was amended and certain personnel previously providing computer-related services to the Company and its subsidiaries were employed by ALLIED Life. As a result, fees paid for services provided by such employees prior to the amendment date are now paid directly by ALLIED Life. Expenses incurred under the Services Agreement were approximately $645,000, $863,000, and $1.4 million for the years ended December 31, 1997, 1996, and 1995, respectively.
ALLIED Life, ALLIED Mutual, and the property-casualty subsidiaries of ALLIED Group, Inc. are parties to the ALLIED Group Joint Marketing Agreement (JMA). The JMA requires ALLIED Mutual and the property-casualty affiliates to promote to their customers and agents the sale of the products of ALLIED Life. The JMA provides for payment by ALLIED Life of an annual access fee of $100,000 plus an annual new-production incentive fee. The JMA also provides for joint systems development, including joint databases of customers and agents, multiple-account billing systems, marketing plans and promotions. Development costs are to be allocated on a mutually agreeable basis reflecting projected and actual utilization of the systems. The JMA continues to the year 2008 and continues thereafter subject to termination on two years' notice given by any party. The JMA contains noncompete provisions applicable during its term and for a period of ten years thereafter. Fees and expenses incurred under this agreement for the years ended December 31, 1997, 1996, and 1995 were approximately $100,000, $165,000, and $121,000, respectively.
ALLIED Life received premium income from ALLIED Group, Inc. for term life insurance on its employee group in the amounts of approximately $468,000, $452,000, and $418,000 for the years ended December 31, 1997, 1996, and 1995, respectively.
The Company invests excess cash in a short-term investment fund with other affiliated companies. AID Finance Services, Inc., a wholly owned subsidiary of ALLIED Mutual, is the administrator of the fund. The fund was established to concentrate short-term cash in a single account to maximize yield. At December 31, 1997 and 1996, the Company had approximately $3.5 million and $795,000, respectively, invested in the fund, which is carried as a short-term investment. Interest earned from the fund during 1997, 1996, and 1995 was approximately $78,000, $74,000, and $77,000, respectively.
The Company and its subsidiaries have from time to time borrowed funds from affiliates as needed on an arms length basis. The Company has various notes-payable agreements with ALLIED Mutual. As of December 31, 1997 and 1996 the outstanding borrowings were approximately $3.6 million and $1.6 million, respectively. The Company incurred interest expense to affiliates of approximately $241,000, $61,000, and $51,000 in 1997, 1996, and 1995, respectively.
The fair values of certain fixed maturity investments, equity securities, cash settle put swaptions, interest rate floors, and call options are based on quoted market prices for those or similar investments. For unquoted securities, the reported value is estimated by the Company on the basis of financial and other information. Fair values of short-term investments approximate their carrying values due to their short maturity. Fair values of the Company's liabilities for annuity and universal life policyholder account balances are estimated using the cash surrender value of the contracts. Due to the variable interest rate and short-term nature of the note payable, the carrying value of the note payable approximates fair value. Fair value approximates carrying value for other financial instruments primarily due to their short-term nature.
The 6.75% Series Preferred Stock (6.75% Series) issued to ALLIED Mutual is perpetual, nonconvertible, voting, and cumulative with respect to dividends. The annual dividend rate is 6.75% of the liquidation preference of $10.85 ($0.7324 per share) and is payable quarterly. At its option, the Company may pay the dividend in additional shares of 6.75% Series for any quarter ending on or prior to September 30, 1998. The 6.75% Series has no preemptive rights and is not registered or traded. Upon any transfer by ALLIED Mutual, the 6.75% Series becomes nonvoting and is callable under certain conditions.
During 1997, 1996, and 1995 the Company sold 19,143, 14,787, and 14,650 shares of Series A ESOP Convertible Preferred Stock (ESOP Series) to the ESOP Trust for $17.50, $18.13, and $15.00 per share, respectively. At December 31, 1997, a commercial bank, acting on behalf of the ESOP participants as the trustee for the ESOP, was the holder of 100,732 shares of the ESOP Series. The ESOP Trust purchased an additional 13,163 shares on January 2, 1998 for $21.88 per share funded by a $183,000 employer contribution from ALLIED Life and ESOP Series dividends.
The ESOP Series ranks senior to the common stock as to the payment of dividends and has a cumulative annual dividend of $1.00 per share, payable each June 30 and December 31. In the event of a liquidation of the Company, the trustee as holder of the outstanding ESOP Series is entitled to receive $15 per share plus accrued dividends prior to any distribution to the holders of common stock.
The ESOP Series can be redeemed at the option of the Company, in whole or part, at any time after three years from the date the shares are issued or, under certain circumstances, in the third year or before. For redemptions in the year 2004 and beyond, the redemption price is $15 per share plus accrued and unpaid dividends; in years prior to 2004, there is a premium above the $15 per share price as set forth in the Certificate of Designations for the ESOP Series. The Company, at its option, may make payment of the redemption price in cash, in shares of common stock, or a combination thereof. Upon receipt of a redemption notice from the Company, the trustee, acting in its fiduciary capacity, may elect to convert the ESOP Series to common stock prior to redemption. If necessary to provide for distributions to participants or for other special circumstances, the trustee may request the Company redeem shares at $15 per share. In accordance with the foregoing, the Company redeemed 438 shares of the ESOP Series at $15 per share in 1995.
The dividend per common share for 1997, 1996, and 1995 was $0.25, $0.21, and $0.17, respectively.
Pro forma net income reflects only options granted since January 1, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to January 1, 1995 is not considered.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants: in 1997, 1996, and 1995, dividend yield of 1.25%, expected volatility of 45%, and expected life of 6 years and a risk- free interest rate of 6% for 1997 and 7% for 1996 and 1995.
A summary of the status of the Company's stock options as of December 31, 1997, 1996 and 1995 and changes during the years ending on those dates is presented below:
Statutory capital and surplus for ALLIED Life was $51.3 million and $46.5 million at December 31 1997 and 1996, respectively. Statutory net income for ALLIED Life was $9.7 million, $5.3 million, and $6.7 million for the years ended December 31, 1997, 1996, and 1995, respectively.
The Company believes that the increased costs complained of relate to universal life policies issued during and prior to 1991 and that ALLIED Life charged the increased costs to universal life policyholders primarily during the 1992 through 1995 accounting periods. The Company, ALLIED Life, and ALLIED Mutual do not expect the lawsuit to materially affect their claims-paying ratings or daily business operations. The Company, ALLIED Life, and ALLIED Mutual disagree with the allegations, believe the claims presented in this case are without merit, and believe the resolution of this matter will not materially affect the Company's financial position.