The Company leases approximately 64,000 square feet at 699 Walnut Street, Des Moines, Iowa from AmerUs Properties, Inc., an affiliate. 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 48,000 square feet from third parties for special technology projects, such as Y2K and administration system conversions, and for records and supply storage.
The following table sets forth certain financial and operating data of the Company. The selected consolidated financial data below for each of the five years ending December 31, 1998 are derived from the Consolidated Financial Statements of the Company, which financial statements have been audited by KPMG Peat Marwick LLP, independent auditors. During 1997, the Company acquired Delta and AmVestors in transactions that were accounted for using the purchase method of accounting. As a result, the Consolidated Income Statement Data includes the results of Delta and AmVestors from their respective acquisition dates and the Consolidated Balance Sheet Data includes year-end data for Delta and AmVestors.
(B) The Company formed the Closed Block on June 30, 1996. Invested assets allocated to the Closed Block are classified as Closed Block assets. Revenues and expenses associated with the Closed Block are shown net as a single line item. Accordingly, the individual income statement components for 1998 and 1997 are not fully comparable with those of 1996, 1995 and 1994 due to the establishment of the Closed Block on June 30, 1996.
(C) The merger of the two predecessor entities of the Company, which was consummated in 1994, has been accounted for as a pooling of interests transaction.
(D) Retroactively reflects the pro-forma effect of the issuance of 23.16 million shares of the common stock at the beginning of 1995. The 1998, 1997 and 1996 calculations reflect 33.46 million, 23.54 million and 23.16 million of weighted average common shares outstanding, respectively.
(E) Retroactively reflects the pro forma effect of the issuance of 23.16 million shares of common stock at the beginning of 1995. The 1998, 1997 and 1996 calculations reflect 33.70 million, 23.57 million and 23.16 million of weighted average common shares outstanding, respectively.
(H) Adjusted 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 operating income shown does not constitute net income computed in accordance with GAAP.
(I) Basic adjusted operating income per common share is calculated using the number of shares reflected in (D) above.
(J) Diluted adjusted operating income per common share is calculated using the number of shares reflected in (E) above.
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 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.
In accordance with Generally Accepted Accounting Principals (GAAP), universal life insurance premiums and annuity deposits received are reflected as increases in liabilities for policyowner account balances and not as revenues. Revenues reported for universal life and annuity products consist of policy charges for the cost of insurance, administration charges and surrender charges assessed against policyowner account balances. Surrender benefits paid relating to universal life insurance policies and annuity products are reflected as decreases in liabilities for policyowner account balances and not as expenses. Amounts for interest credited to universal life and annuity policyowner account balances and benefit claims in excess of policyowner account balances are reported as expenses in the financial statements. The Company receives investment 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.
policy by means of a provision for future policy benefits and amortization of deferred policy acquisition costs.
(A) Represents realized gains or losses on investments adjusted for income taxes on such amounts. Realized gains or losses may vary widely between periods. Such amounts are determined by management's timing of individual transactions and do not necessarily correspond to the underlying operating trends.
(B) Represents gains on the convertible preferred stock and bond portfolio, net of income taxes.
(D) 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.
(E) Represents costs directly related to the reorganization consisting primarily of printing, postage, legal and consulting costs. These costs were not of a continuing nature and were not expected to have any effect on future operations.
Immediate annuity and supplementary contract premiums increased by $12.4 million in 1998 to $29.6 million compared to $17.2 million in 1997 and $16.1 million in 1996. The increase in contract premiums in 1998 was primarily due to the acquisitions of Delta and AmVestors. Without these acquisitions, immediate annuity and supplementary contract premiums increased by $2.5 million in 1998 due to increased immediate annuity sales.
Annuity product charges increased by $23.2 million in 1998 to $24.9 million compared to $1.7 million in 1997 and $0.8 million in 1996. Annuity product charges for 1998 and 1997 included $23.5 million and $0.7 million, respectively, from Delta and AmVestors.
Life insurance net investment income decreased by $0.6 million in 1998 to $72.8 million compared to $73.4 million in 1997, and $108.2 million in 1996. The decrease in 1998 in net investment income was primarily attributable to lower effective yields on average invested assets. Average invested assets (excluding market value adjustments) in 1998 increased by $61.2 million from 1997 and the effective yield on average invested assets (excluding market value adjustments) in 1998 was 8.64% compared to 9.39% in 1997. The decrease in effective yields primarily resulted from reduced limited partnership income and
Closed Block insurance premiums decreased by $7.9 million in 1998 to $198.2 million compared to $206.1 million in 1997. The 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.
Net investment income for the Closed Block increased by $2.0 million in 1998 to $115.8 million primarily due to an increase in average invested assets (excluding market value adjustments).
Realized gains on investments of the Closed Block were $9.6 million higher in 1998 compared to 1997. The level of realized gains is subject to fluctuation from period to period depending on the prevailing interest rate and economic environment and the timing of the sale of investments.
Closed Block policyowner benefits decreased by $5.8 million in 1998 to $200.8 million primarily due to the reduction of life reserves which is consistent with the reduction of the Closed Block's life insurance in force that is expected over the life of the Block.
The amortization of deferred policy acquisition costs for the Closed Block decreased by $5.2 million in 1998 to $26.3 million. Deferred policy acquisition costs are generally amortized in proportion to gross margins. The decrease in the amortization of deferred policy acquisition costs in 1998 primarily resulted from changes in assumptions in the estimated future margins on the Closed Block reflected during 1998.
Closed Block revenues and benefits and expenses increased in 1997 compared to 1996 primarily due to the formation of the Closed Block in June 1996, thereby reflecting twelve months of activity in 1997 compared to six months of activity in 1996.
Total life insurance benefits increased by $13.2 million in 1998 and decreased by $83.5 million in 1997. The increase in life insurance benefits in 1998 was primarily due to the increase in the change in liability for future policy benefits and other policy benefits (reserves) in the traditional life insurance line of business as a result of the growth and aging of the business. The average interest crediting rate on policyowner account balances in 1998 was 6.08% compared to 6.23% in 1997 and 6.27% in 1996. Spreads between investment rates and crediting rates are managed on a statutory basis. Crediting rates are adjusted to maintain targeted spreads on a statutory basis. The decrease in 1997 in life insurance benefits is primarily due to
the formation of the Closed Block. Life insurance benefits on policies included in the Closed Block are reported as part of the Contribution from the Closed Block.
Other benefits were $0.5 million in 1998 compared to $0.6 million in 1997 and $2.8 million in 1996. The decrease was primarily due to the Company's exit from group life business in 1996.
Total annuity expenses increased by $59.6 million in 1998 to $73.4 million compared to $13.8 million in 1997 and $16.0 million in 1996. The increase in annuity expenses in 1998 was primarily attributable to the acquisitions of Delta and AmVestors. Total annuity expenses decreased by $2.2 million in 1997 primarily due to lower amortization of deferred policy acquisition costs. Effective May 1996, substantially all new sales of individual deferred annuities (excluding Delta and AmVestors distribution systems) were made through the AMAL Corp. As a result, gross margins including realized capital gains or losses on policies for which deferred acquisition costs are amortized declined, resulting in the decreased amortization. Partially offsetting the decrease in amortization of deferred policy acquisition costs and VOBA was an increase in underwriting, acquisition and insurance expenses due to the inclusion of one quarter of operating expenses related to the acquisitions of Delta and AmVestors of $1.0 million.
Other expenses decreased by $1.7 million in 1998 and by $1.3 million in 1997. 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 1996 other expenses included non-reoccurring costs related to the Company's name change and restructuring into a mutual insurance holding company.
Income from Life Insurance operations decreased by $15.5 million in 1998 to $41.2 million compared to $56.7 million in 1997. The decrease in 1998 was primarily due to lower realized gains on investments and increased costs related to the Year 2000 Compliance Project and costs associated with the Company's development of alternative distribution systems. Income from Life Insurance operations decreased by $18.9 million in 1997. The decrease in 1997 was primarily due to lower realized gains on investments.
The Company may from time to time review potential acquisition opportunities. The Company anticipates that funding for any such acquisition may be provided from available cash resources, from debt or equity financing or stock-for-stock acquisitions. In the future, the Company anticipates that its liquidity and capital needs will be met through interest and dividends from its life insurance subsidiaries, accessing the public equity and debt markets depending upon market conditions, or alternatively from bank financing.
On February 15, 1999, the Company's controlling shareholder, American Mutual Holding Company (American Mutual), a mutual insurance holding company, announced that its board of directors had authorized management to review the potential benefits of a demutualization of American Mutual. American Mutual is owned by its members who are also policyowners of AmerUs Life. American Mutual expects to complete the study and make a final decision in the second quarter of 1999.
and its insurance products, will be adequate to meet the anticipated short-term cash obligations of the Company's life insurance subsidiaries.
Through its membership in the Federal Home Loan Bank (FHLB) of Des Moines, AmerUs Life is eligible to borrow on a line of credit available to provide it additional liquidity. Interest is payable at a current rate at the time of any advance. As of December 31, 1998, AmerUs Life had a $25.0 million open secured line of credit against which there were no borrowings. In addition to the line of credit, AmerUs Life has long-term advances from the FHLB outstanding of $16.1 million at December 31, 1998.
At December 31, 1998, the statutory surplus of the Company's subsidiaries was approximately $472.9 million. The Company believes that this level of statutory capital is more than adequate as each life insurance subsidiary's risk-based capital is significantly in excess of required levels.
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 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 maintains a diversified portfolio of investments, including public and private fixed maturity securities, commercial mortgage loans and equity real estate. The Company's objective is to maintain a high-quality, diversified fixed maturity securities portfolio that produces a yield and total return that supports the various product line liabilities and the Company's earnings goals.
Below-investment grade fixed maturity securities as of December 31, 1998, included the securities of 111 issuers representing 5.9% of total invested assets, with the largest being a $19.2 million investment.
As of December 31, 1998, mortgage loans in the Company's investment portfolio were $566.4 million, or 6.3% of the aggregate carrying value of invested assets, including the Closed Block. As of December 31, 1998, commercial mortgage loans and residential mortgage loans comprised 66.8% and 33.2%, respectively, of the mortgage loans in the Company's investment portfolio.
As of December 31, 1998, only one loan aggregating $2.3 million, or 0.4%, of the Company's loan portfolio (as measured by principal balance) was classified as delinquent or in foreclosure. As of the same date, only one loan aggregating $1.7 million, or 0.3%, of the Company's loan portfolio (as measured by principal balance) was
In recent years the Company has significantly reduced its equity real estate portfolio. As of December 31, 1998, the carrying value of investment real estate, including the Closed Block, was $0.6 million.
The Company held $292.7 million of policy loans on individual insurance products as of December 31, 1998. Policy loans are permitted to the extent of a policy's contractual limits and are fully collateralized by policy cash values.
As of December 31, 1998, the Company held equity securities of $68.5 million. The largest holding of equity securities, Federal Home Loan Bank, had a carrying value of $12.3 million as of December 31, 1998.
and sells annuities and life insurance policies that permit flexibility to make interest rate changes as part of its management of interest spreads. However, the profitability of the Company's products is based upon persistency, mortality and expenses, as well as interest rate spreads.
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 invests in CMOs as part of its basic portfolio strategy, but uses other types of derivatives only as a hedge against the effects of interest rate fluctuations or to synthetically alter the investment characteristics of specific assets. For a further discussion and disclosure of the nature and
extent of the Company's use of derivatives, see Note 14 to the Consolidated Financial Statements.
In December 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; however, its adoption will not have a material impact on the financial position or results of operations as the Company currently estimates assessment liabilities when a determination of an insolvency has occurred.
The Company formed a Year 2000 working group to address potential problems posed by this development to assure that the Company is prepared for the year 2000. The Company's overall Year 2000 compliance initiatives include the following components: (i) assessment of all business critical systems (business critical systems include computer and embedded systems); processes and external interfaces and dependencies; (ii) remediation or upgrading of business critical systems; (iii) testing of both modified and updated systems as well as integrated systems testing; (iv) implementation of modified and updated systems; and (v) contingency planning.
these embedded systems began in 1998; this project is more than 70% complete. The scheduled completion date is the second quarter of 1999.
Despite efforts to address all Year 2000 needs in a timely and effective manner, there are risks that the time frames set forth above may not be met and that some Year 2000 effects may cause operational difficulties for the Company. Some causes of these risks are the potential for unanticipated complications in making Year 2000 modifications, the possibility of oversights in the remediation process, and the difficulty of hiring and retaining IT personnel in the current business environment. While the Company does not expect any such operational difficulties to be material, the potential for these occurrences cannot be fully assessed at this time. For these reasons, the Company is in the process of developing contingency plans to cover the risk of non-compliance due to Year 2000 failures in Company systems or those of its business partners. Contingency Planning will include an identification of critical business processes and development of alternative methods of carrying them out in the event of any system failure. This effort is scheduled for completion in the third quarter of 1999.
During the second quarter of 1998 the Company engaged an independent IT consulting firm to review its Year 2000 Project plans, priorities and processes. This review considered the Company's efforts as compared to industry "best practices." This review verified the appropriateness of the Company's Year 2000 Project and provided additional direction for its continuation. In December of 1998 the Company hired an independent consulting firm to conduct a quality assurance review of this project. Recommendations were evaluated and implemented as appropriate.
Total estimated costs associated with Year 2000 modifications and conversions are approximately $9 million. These estimated costs have
increased primarily due to higher than originally estimated outside consulting costs. These costs are expensed as incurred. For the year ended December 31, 1998, the Company has incurred $3.9 million in Year 2000 expenses, and $4.2 million since the beginning of the Year 2000 Project.