<PAGE>
4,663,190 SHARES
AMERUS LIFE HOLDINGS, INC.
CLASS A COMMON STOCK
(NO PAR VALUE)
--------------
Of the 4,663,190 shares of Class A Common Stock of AmerUs Life Holdings,
Inc., an Iowa corporation (the "Shares"), offered hereby, 2,706,595 Shares are
being offered by the Company and 1,956,595 Shares are being offered by the
Company's parent corporation, AmerUs Group Co., an Iowa Corporation ("AmerUs
Group" or the "Selling Shareholder"). See "Ownership of Common Stock."
Additional shares of Class A Common Stock were offered in a subscription
offering that expired on January 8, 1997 (the "Subscription Offering," and
together with the Public Offering, the "Offerings"). In connection with the
Subscription Offering, the Company and the Selling Shareholder received and
accepted subscriptions at the price of $19.00 per share (the "Subscription
Price"), subject to adjustment as described herein, for 1,086,810 shares of
Class A Common Stock (the "Subscription Shares"). The Subscription Shares were
offered in accordance with the priority subscription rights provided under the
Plan (as defined therein) to eligible policyowners of the Company's principal
subsidiary, AmerUs Life Insurance Company, an Iowa stock life insurance company
("AmerUs Life"), as of June 30, 1996. See "The Subscription Offering." The
Company will not receive any of the proceeds from the sale of Shares being
offered by the Selling Shareholder.
The Company has two classes of authorized common stock, no par value (the
"Common Stock"), consisting of (i) the Class A Common Stock, which has one vote
per share, and (ii) the Class B Common Stock, the holder of which shall at all
times have a majority of the voting power of the Common Stock. Under Iowa law,
the Class B Common Stock must be held, directly or indirectly, by American
Mutual Holding Company, an Iowa mutual insurance holding company ("AMHC"), and
is automatically convertible into Class A Common Stock in the event of the
demutualization of AMHC. Following the Offerings, AMHC will own, directly or
indirectly, approximately 68% of the Company's Class A Common Stock (assuming no
exercise of the Underwriters' over-allotment option) and 100% of the Class B
Common Stock, which together will represent approximately 75% of the voting
power of the Common Stock and approximately 75% of the economic value of the
Company. See "Risk Factors--Control by AMHC; Anti-Takeover Effects of Iowa Law
and the Company's Articles of Incorporation and Bylaws" and "Description of the
Capital Stock."
Concurrent with the Offerings, the Company is offering capital securities to
the public in an aggregate amount of $86 million pursuant to a separate
prospectus (the "Preferred Offering").
Prior to the Offerings, there has been no public market for the Class A
Common Stock of the Company. For factors considered in determining the initial
public offering price, see "Underwriting."
The Class A Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "AMRS."
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN
CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE CLASS A COMMON STOCK.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) SHAREHOLDER(2)
---------------- ---------------- ---------------- ----------------------
<S> <C> <C> <C> <C>
Per Share................................ $ 16.50 $ 1.15 $ 15.35 $ 15.35
Total(3)................................. $76,942,635.00 $ 5,362,668.50 $41,546,233.25 $30,033,733.25
</TABLE>
- ------------------
(1) The Company, the Selling Shareholder and AmerUs Life have agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933.
(2) Before deducting expenses of $1,172,826 payable by the Company and $902,174
payable by the Selling Shareholder.
(3) The Company and the Selling Shareholder have granted the Underwriters an
option for 30 days to purchase in the aggregate up to an additional 699,478
shares at the initial public offering price per share, less the underwriting
discount, solely to cover over-allotments. If such option is exercised in
full, the total initial public offering price, underwriting discount,
proceeds to Company, and proceeds to Selling Shareholder will be
$88,484,022.00, $6,167,068.20, $47,778,164.40 and $34,538,789.40,
respectively. See "Underwriting."
------------------
The Shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the Shares will be ready for delivery in New York, New York, on or about
February 3, 1997, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
ABN AMRO CHICAGO CORPORATION
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SALOMON BROTHERS INC
---------
The date of this Prospectus is January 28, 1997.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 (including all amendments
thereto, the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act") with respect to the Class A Common Stock offered
hereby. As permitted by the rules and regulations of the Commission, this
Prospectus omits certain information contained in the Registration Statement.
For further information with respect to the Company and the Class A Common Stock
offered hereby, reference is hereby made to the Registration Statement and to
the exhibits and schedules filed therewith. Statements contained in this
Prospectus regarding the contents of any agreement or other document filed as an
exhibit to the Registration Statement are not necessarily complete, and in each
instance reference is made to the copy of such agreement filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. The Registration Statement, including the exhibits and
schedules thereto, may be inspected at the public reference facilities
maintained by the Commission at Room 204, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, DC 20549; Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661; and Seven World Trade Center, New York, New York 10048; and
copies of all or any part thereof may be obtained from such office upon payment
of the prescribed fees. The Commission maintains a Web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants who file electronically with the Commission.
As a result of the Offerings, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). So long as the Company is subject to the periodic
reporting requirements of the Exchange Act, it will continue to furnish the
reports and other information required thereby to the Commission. The Company
intends to furnish holders of the Class A Common Stock with annual reports
containing, among other information, audited consolidated financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited condensed consolidated financial information for the first
three quarters of each fiscal year. The Company also intends to furnish such
other reports as it may determine or as may be required by law.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE IOWA
COMMISSIONER OF INSURANCE NOR HAS THE IOWA COMMISSIONER OF INSURANCE RULED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
--------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
--------------
THE PLAN OF REORGANIZATION OF AMERICAN MUTUAL LIFE INSURANCE COMPANY AND
IOWA LAW REQUIRE AMHC AT ALL TIMES TO OWN DIRECTLY, OR INDIRECTLY THROUGH ONE OR
MORE INTERMEDIATE HOLDING COMPANY SUBSIDIARIES, SHARES OF CAPITAL STOCK WHICH
CARRY THE RIGHT TO CAST A MAJORITY OF THE VOTES ENTITLED TO BE CAST BY ALL OF
THE OUTSTANDING SHARES OF THE CAPITAL STOCK AT A SHAREHOLDERS' MEETING OF THE
COMPANY. ANY ATTEMPT TO EFFECT ANY TRANSACTION PURSUANT TO WHICH AMHC WOULD NO
LONGER HAVE SUCH VOTING MAJORITY WOULD BE NULL AND VOID AND INEFFECTUAL TO
TRANSFER SUCH VOTING RIGHTS.
--------------
THE IOWA INSURANCE HOLDING COMPANY SYSTEMS STATUTE APPLICABLE TO THE COMPANY
PROVIDES THAT NO PERSON MAY SEEK TO ACQUIRE CONTROL OF THE COMPANY, AND THUS
INDIRECT CONTROL OF AMERUS LIFE, WITHOUT THE PRIOR APPROVAL OF THE IOWA
COMMISSIONER OF INSURANCE. GENERALLY, ANY PERSON WHO DIRECTLY OR INDIRECTLY
OWNS, CONTROLS, HOLDS WITH POWER TO VOTE OR HOLDS PROXIES REPRESENTING 10% OR
MORE OF THE COMPANY'S VOTING SECURITIES (CONSISTING OF THE COMBINED OUTSTANDING
SHARES OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK) WOULD BE PRESUMED TO
HAVE ACQUIRED SUCH CONTROL, UNLESS SUCH PRESUMPTION IS REBUTTED BY A SHOWING
THAT SUCH CONTROL DOES NOT EXIST IN FACT.
--------------
FOR NORTH CAROLINA INVESTORS: THE COMMISSIONER OF INSURANCE OF THE STATE OF
NORTH CAROLINA HAS NOT APPROVED OR DISAPPROVED THIS OFFERING NOR HAS SUCH
COMMISSIONER RULED UPON THE ACCURACY OR THE ADEQUACY OF THE PROSPECTUS.
--------------
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION, CONSOLIDATED FINANCIAL STATEMENTS AND PRO FORMA FINANCIAL
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. CERTAIN INSURANCE TERMS AND
OTHER CAPITALIZED TERMS USED IN THIS PROSPECTUS ARE DEFINED IN THE "GLOSSARY OF
CERTAIN INSURANCE AND OTHER DEFINED TERMS" HEREIN AND ARE PRINTED IN BOLD THE
FIRST TIME THEY APPEAR IN TEXT BELOW. FOR PURPOSES OF THIS PROSPECTUS, THE TERM
"COMPANY" REFERS TO AMERUS LIFE HOLDINGS, INC. AND ITS SUBSIDIARIES,
COLLECTIVELY, UNLESS THE CONTEXT OTHERWISE REQUIRES. THE TERM "AMERUS LIFE"
REFERS AT ALL TIMES TO AMERUS LIFE INSURANCE COMPANY AND ITS SUBSIDIARIES. THE
TERM "AMERICAN MUTUAL LIFE" REFERS TO AMERICAN MUTUAL LIFE INSURANCE COMPANY
PRIOR TO ITS CONVERSION INTO A STOCK LIFE COMPANY AND NAME CHANGE TO AMERUS LIFE
INSURANCE COMPANY ON JUNE 30, 1996, EXCLUDING AMERUS PROPERTIES, INC. ("API"),
AMERUS BANK, AND IOWA REALTY CO., INC., AND EACH OF THEIR RESPECTIVE
SUBSIDIARIES (THE "NON-LIFE INSURANCE SUBSIDIARIES"). THE TERM "PLAN" REFERS TO
THE PLAN OF REORGANIZATION OF AMERICAN MUTUAL LIFE DATED OCTOBER 27, 1995, THE
EFFECTIVE DATE OF WHICH WAS JUNE 30, 1996.
THE INFORMATION CONTAINED IN THIS PROSPECTUS GIVES EFFECT TO (I) THE
REORGANIZATION (AS DEFINED HEREIN) OF AMERICAN MUTUAL LIFE AND (II) THE
DISTRIBUTION BY AMERUS LIFE OF ITS NON-LIFE INSURANCE SUBSIDIARIES (THE
"DISTRIBUTION") TO AMERUS GROUP CO. ("AMERUS GROUP" OR THE "SELLING
SHAREHOLDER"), THE COMPANY'S IMMEDIATE PARENT CORPORATION, AS IF BOTH HAD BEEN
COMPLETED AT THE BEGINNING OF THE PERIODS IDENTIFIED HEREIN AND ASSUMES THAT,
DURING THE PERIODS PRESENTED, THE COMPANY OWNED AND OPERATED THE ASSETS IT WILL
OWN AS A RESULT OF SUCH REORGANIZATION AND DISTRIBUTION. THE INFORMATION
CONTAINED HEREIN, UNLESS OTHERWISE INDICATED, DOES NOT GIVE EFFECT TO A CAPITAL
CONTRIBUTION ( THE "CAPITAL CONTRIBUTION") BY AMERUS LIFE TO OR FOR THE BENEFIT
OF CERTAIN OF THE NON-LIFE INSURANCE SUBSIDIARIES OF CASH AND OTHER PROPERTY
HAVING AN APPROXIMATE NET CARRYING VALUE OF $79 MILLION. UNLESS OTHERWISE
SPECIFIED, THE INFORMATION CONTAINED HEREIN ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IN THE PUBLIC OFFERING.
ALL FINANCIAL INFORMATION IN THIS PROSPECTUS IS PRESENTED IN ACCORDANCE WITH
UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR LIFE INSURANCE
COMPANIES ("GAAP") UNLESS OTHERWISE SPECIFIED. STATUTORY DATA INCLUDED HEREIN
HAVE BEEN DERIVED FROM THE ANNUAL AND QUARTERLY STATEMENTS OF AMERICAN MUTUAL
LIFE AS FILED WITH INSURANCE REGULATORY AUTHORITIES AND PREPARED IN ACCORDANCE
WITH STATUTORY ACCOUNTING PRACTICES.
THE COMPANY
The Company is engaged in the business of marketing, UNDERWRITING and
distributing a broad range of individual life insurance and ANNUITY products to
individuals and businesses in 45 states and the District of Columbia. The
Company's primary product offerings consist of WHOLE LIFE, UNIVERSAL LIFE and
TERM LIFE INSURANCE policies and FIXED ANNUITIES. In addition, on April 1, 1996
the Company acquired a 34% interest in a variable life insurance and annuity
company through a joint venture arrangement (the "Ameritas Joint Venture") with
Ameritas Life Insurance Corp. ("Ameritas"). The Company's distribution systems
now market fixed annuities issued by Ameritas Variable Life Insurance Company
("AVLIC") and have begun to sell AVLIC's variable life insurance and VARIABLE
ANNUITY products. Based on published comparisons and rankings of life insurance
and annuity products, the Company believes that its products have a long history
of being competitive within the industry.
The Company's subsidiary, AmerUs Life, was originally incorporated in 1896
as a mutual insurance company under the name Central Life Assurance Society of
the United States. Its name was changed to American Mutual Life Insurance
Company in 1994 following the merger of American Mutual Life Insurance Company
("Old AML") into Central Life Assurance Company ("Central Life"). On June 30,
1996, American Mutual Life was converted into a stock life insurance company
pursuant to the Plan and its name was changed to AmerUs Life. As of September
30, 1996, AmerUs Life had approximately 418,000 life insurance POLICIES and
annuity contracts outstanding and individual life insurance IN FORCE, net of
REINSURANCE, of approximately $26.1 billion. As of September 30, 1996, the
Company had total assets of $4.3 billion and total shareholder's equity of $433
million (prior to the Offerings, after giving effect to the Capital
Contribution).
4
<PAGE>
The Company's target markets are individuals in the middle and upper income
brackets and small businesses. Its geographic focus is national in scope (except
for Connecticut, Maine, New Hampshire, New York and Vermont, in which the
Company is not licensed to do business), and it primarily serves suburban and
rural areas. The Company distributes its products primarily through a
combination of CAREER GENERAL AGENCY and PERSONAL PRODUCING GENERAL AGENCY
("PPGA") distribution systems, as well as a network of independent brokers. The
career general agency system consists of a network of 33 career general
agencies, with approximately 550 CAREER GENERAL AGENTS. The PPGA system is
comprised of approximately 425 PPGAS, with approximately 950 agents. Career
agents and agents in the PPGA system do not contract exclusively with the
Company. Variable life insurance products and the fixed and variable annuities
offered by the Ameritas Joint Venture are marketed through the Company's
distribution systems and the distribution systems of Ameritas and AVLIC, which
consist of approximately 250 agents and 450 independent broker-dealers (with
approximately 7,500 registered representatives), respectively.
AmerUs Life's claims-paying ability is rated "AA-" (Very high) by DUFF &
PHELPS and "A" (Good) by STANDARD & POOR'S. AmerUs Life is rated "A" (Excellent)
by A.M. BEST and "A2" (Good) by MOODY'S. See "Risk Factors--Importance of
Ratings" and "Glossary of Certain Insurance and Other Defined Terms" under the
captions Duff & Phelps, Standard & Poor's, A.M. Best and Moody's.
BUSINESS STRATEGY
The Company's business strategy to achieve earnings growth and increase
shareholder value is focused on managing certain operating fundamentals that
historically have compared favorably to the industry. The Company intends to
utilize these operating strengths to differentiate its products by maintaining
its position and reputation as a low-cost producer that provides high-value
products to its life insurance and annuity customers, while also providing
superior service to both agents and customers. The Company believes it is well
positioned to compete effectively based upon a number of strengths including its
strong operating performance, customer-driven product offerings, productive and
diversified distribution systems, sophisticated asset/liability management
capabilities and a customer service orientation. In addition, the Company
intends to continue to seek new business opportunities through mergers,
acquisitions and strategic alliances.
The Company believes that its operating performance is significantly
impacted by four basic elements: (i) MORTALITY, (ii) PERSISTENCY, (iii)
operating expenses, and (iv) investment yield. The Company believes that its
results for each of these basic elements for the last several years have been
strong. In addition to realizing efficiencies from reduced personnel and data
processing costs from the merger of Old AML into Central Life in 1994, the
Company has benefited from its efficient use of technology, its advanced
customer service systems, its variable-cost based distribution system, and its
sophisticated asset/liability management system.
The Company has other strengths which enable it to compete effectively in
the industry. Based on published comparisons and rankings of life insurance and
annuity products, the Company believes that its products have a long history of
being competitive within the industry. See "Business--Products." The Company
also has a productive and diversified distribution system, with a non-exclusive
distribution network comprised of a career general agency system, a PPGA system,
distribution channels available to it through the Ameritas Joint Venture and a
sales network of certain of the Company's AFFILIATES. In response to competition
among insurance companies for agents with demonstrated ability, the Company
provides agents in both its career general agency and the PPGA systems with
financial incentives based on their volume of sales of the Company's products.
See "Risk Factors--Competitive Environment" for additional discussion of
competitive factors in the insurance industry.
Management believes that mergers, acquisitions and strategic alliances will
be necessary to more fully utilize the Company's distribution and administrative
capacity and to obtain improved economies of scale and a lower cost structure.
The Company's access to the capital markets provides it with the financial
flexibility to selectively pursue acquisitions. The Company has historically
sought mergers,
5
<PAGE>
acquisitions and strategic alliances with the goal of improving its position in
existing market segments or entering desirable new market segments. Based on the
Company's success in identifying and effectively implementing mergers,
acquisitions and strategic alliances, management intends to actively and
selectively participate in such transactions in the future as a means to further
enhance shareholder value. Notable recent activities include the combination by
merger of Old AML into Central Life in 1994, and the Ameritas Joint Venture
which was completed in April 1996.
CONTROLLING SHAREHOLDER
Following the Offerings, AMHC will continue to be the indirect controlling
shareholder of the Company through its ownership of AmerUs Group. After the
Offerings, AmerUs Group will own all five million of the outstanding shares of
Class B Common Stock and 12 million of the outstanding shares of Class A Common
Stock, representing approximately 75% of the combined voting power of the Class
A Common Stock and Class B Common Stock. AMHC acquired its ownership interest in
the Company as a result of the Reorganization, pursuant to which American Mutual
Life formed AMHC as a mutual insurance holding company and American Mutual Life
was converted into a stock life insurance company as a wholly owned subsidiary
of AMHC. See "The Reorganization and Distribution of the Non-Life Insurance
Subsidiaries."
6
<PAGE>
ORGANIZATIONAL STRUCTURE
The following chart illustrates the general organization of AMHC and its
subsidiaries, including the Company, after the Offerings:
[GRAPH]
* Assuming no exercise of the Underwriters' over-allotment option in the
Public Offering.
** The Non-Life Insurance Subsidiaries consist of API, AmerUs Bank, and Iowa
Realty Co., Inc., and each of their respective subsidiaries.
*** AmerUs Life participates in the Ameritas Joint Venture through its ownership
interest in AMAL Corporation, a Nebraska corporation ("AMAL"). See
"Business--Ameritas Joint Venture."
7
<PAGE>
THE REORGANIZATION AND DISTRIBUTION OF THE NON-LIFE INSURANCE SUBSIDIARIES
On October 27, 1995, the Board of Directors of American Mutual Life adopted
the Plan, which authorized American Mutual Life to reorganize into a mutual
insurance holding company structure (the "Reorganization"). The Iowa
Commissioner of Insurance (the "Iowa Commissioner") held a public hearing on the
Reorganization on November 21, 1995. The Plan was approved by American Mutual
Life's policyowners on November 28, 1995, and the Iowa Commissioner approved the
Plan on December 13, 1995. The Reorganization became effective on June 30, 1996
(the "Effective Date"). American Mutual Life was the first company to obtain
approval under the Iowa mutual insurance holding company statute to form a
mutual insurance holding company.
Pursuant to the Reorganization, American Mutual Life formed AMHC as a mutual
insurance holding company and American Mutual Life was converted into a stock
life insurance company and its name was changed to AmerUs Life Insurance
Company. As part of the Reorganization, the policyowners' contract rights in
their insurance policies and annuities remained with AmerUs Life and the
policyowners automatically became MEMBERS of AMHC, and thereby became entitled
to vote for directors of AMHC. Purchasers of insurance policies and annuities
from AmerUs Life after the Reorganization automatically become members of AMHC
(subject to certain exceptions and conditions set forth in the Plan). AMHC may,
among other things, elect all of the directors of the Company and approve
matters submitted for shareholder approval. Conflicts of interest between the
Company and AMHC may arise. See "Risk Factors--Relationship with AMHC; Potential
Conflicts of Interest" and "Certain Transactions and Relationships."
As part of the Reorganization, all of the shares of capital stock of AmerUs
Life were issued to AMHC. Subsequent to the Reorganization, on August 1, 1996,
AMHC contributed all of its shares of capital stock of AmerUs Life to AmerUs
Group. The Company was formed on August 1, 1996, as of which date all of its
shares of capital stock were issued to AmerUs Group.
Prior to the Distribution, AmerUs Life made the Capital Contribution to or
for the benefit of certain of the Non-Life Insurance Subsidiaries. The net
assets contributed in the Capital Contribution had an aggregate carrying value
of approximately $79 million. Following the Capital Contribution, a series of
transactions was undertaken by the Company and its affiliates. AmerUs Life
effected the Distribution, pursuant to which it distributed the Non-Life
Insurance Subsidiaries to AmerUs Group. Immediately after the Distribution,
AmerUs Group contributed all of its shares of common stock in AmerUs Life to the
Company. Under this structure, the Company is an intermediate holding company,
with AmerUs Group as its direct parent company and AmerUs Life as its
wholly-owned subsidiary. Under Iowa law, AMHC is required to retain direct or
indirect ownership and control of shares representing a majority of the vote of
the outstanding capital stock of the Company. Immediately following the
Distribution, the Company entered into a bank credit facility pursuant to which
it borrowed $100 million in term debt and $75 million under a revolving line of
credit (the "Bank Credit Facility"). The Company used the proceeds from such
borrowings to make a $125 million capital contribution to AmerUs Life and to
purchase a $50 million surplus note from AmerUs Life. The Company will use
certain proceeds of the Offerings and the Preferred Offering (as defined below)
to repay such borrowings.
The Distribution effectively separated AMHC's non-life insurance businesses
from the life insurance businesses owned by the Company, such that the companies
engaged in non-life insurance businesses are no longer subsidiaries of the
Company. See "The Reorganization and Distribution of the Non-Life Insurance
Subsidiaries."
8
<PAGE>
THE OFFERINGS
Prior to this Public Offering, the Company and the Selling Shareholder
offered up to five million shares of Class A Common Stock (the "Shares") in the
Subscription Offering that expired on January 8, 1997. The Company and the
Selling Shareholder have received and accepted subscriptions at a per share
price of $19.00 (the "Subscription Price"), subject to certain adjustments to
reflect an initial public offering price that is less than the Subscription
Price, for 1,086,810 Shares (the "Subscription Shares"). Accordingly,
subscribing policyowners will receive a refund equal to the amount of the
difference between the initial public offering price and the Subscription Price
multiplied by the number of Shares subscribed for by each such policyowner. The
Subscription Shares were offered in accordance with the priority subscription
rights provided under the Plan to eligible policyowners of AmerUs Life as of
June 30, 1996 (the effective date of the Reorganization). The Shares which were
not subscribed for in the Subscription Offering are being offered to the public
in this Public Offering by the Company and the Selling Shareholder, in equal
proportion. The Company is offering an additional 750,000 shares of Class A
Common Stock in this public offering.
<TABLE>
<S> <C>
Class A Common Stock Offered by the
Company Pursuant to the Public Of-
fering (1)......................... 2,706,595 shares
Class A Common Stock Offered by the
Selling Shareholder Pursuant to the
Public Offering (1)................ 1,956,595 shares
Class A Common Stock Subscribed for
in the Subscription Offering....... 1,086,810 shares
Total Class A Common Stock to be
Sold in the Offerings (1).......... 5,750,000 shares
Class A Common Stock to be Out-
standing Immediately After the
Offerings (1)...................... 17,750,000 shares
Class B Common Stock to be Out-
standing Immediately After the
Offerings.......................... 5,000,000 shares
Nasdaq Symbol....................... AMRS
Voting Rights....................... The Class A Common Stock has one vote per share. The
voting rights of the Class B Common Stock provide the
holder of the Class B Common Stock with a majority of
the voting power of the Class A Common Stock and the
Class B Common Stock combined. Both classes generally
vote together as a single class on all matters,
except that the holders of Class A Common Stock and
the holders of Class B Common Stock will vote
separately as a class with respect to certain matters
for which class voting is required under Iowa law.
See "Description of the Capital Stock."
</TABLE>
- --------------
(1) Excludes an aggregate of 699,478 shares subject to the Underwriters'
over-allotment option.
9
<PAGE>
<TABLE>
<S> <C>
Use of Proceeds..................... All net proceeds to the Company from the Offerings
will be used by the Company to repay debt outstanding
under the Bank Credit Facility. The Company will not
receive any proceeds from the sale of Class A Common
Stock by the Selling Shareholder. See "Use of
Proceeds."
Dividend Policy..................... Subject to the Company's financial results,
applicable regulatory constraints and declaration by
the Board of Directors of the Company, the Company
currently intends to pay a quarterly dividend of
$0.10 per share of Common Stock commencing with the
quarter ending on March 31, 1997. However, there can
be no assurance that the Company will declare and pay
any dividends. See "Risk Factors--Holding Company
Structure; Limitation on Dividends" and "Dividend
Policy."
</TABLE>
10
<PAGE>
THE PREFERRED OFFERING
Concurrent with the Offerings, the Company is offering through AmerUs
Capital I (the "Trust"), a statutory business trust formed under the laws of the
State of Delaware and a wholly-owned subsidiary of the Company, capital
securities to the public in an aggregate amount of $86 million pursuant to a
separate prospectus (the "Preferred Offering"). The Trust would invest the net
proceeds of the Preferred Offering, which are expected to be $84.6 million after
giving effect to the underwriting discount and estimated offering expenses, in
deferrable interest subordinated debentures (the "Junior Subordinated Debt
Securities") of the Company. It is expected that the Company would use the
proceeds received in the Preferred Offering to repay amounts outstanding under
the Bank Credit Facility. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition--Liquidity and Capital Resources."
The consummation of the Offerings is not conditioned upon completion of the
Preferred Offering, and there can be no assurance that the Preferred Offering
will be completed.
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary consolidated financial data below for the nine months ended
September 30, 1996 and each of the three years ending December 31, 1995 are
derived from the Consolidated Financial Statements of the Company, which
financial statements have been audited by KPMG Peat Marwick LLP, independent
auditors. The summary consolidated financial data provided below for the nine
months ended September 30, 1995 and for each of the two years ending December
31, 1992 are derived from the unaudited consolidated financial statements of the
Company. In the opinion of management, the unaudited financial data for the two
years ended December 31, 1992 presents fairly the consolidated financial
statements for such periods in conformity with GAAP.
The foregoing give effect to the Reorganization and the Distribution as if
both had been completed prior to the periods presented, but do not give effect
to the Capital Contribution. In the opinion of management, the financial
information presented for all interim periods reflects all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such data. Results for the nine-month periods ended September
30, 1996 and 1995 are not necessarily indicative of results that may be expected
for any other interim period or the year as a whole. This data should be read in
conjunction with (i) "Management's Discussion and Analysis of Results of
Operations and Financial Condition," (ii) the audited Consolidated Financial
Statements of the Company as of September 30, 1996 and December 31, 1995 and
1994, and for the nine months ended September 30, 1996 and each of the years in
the three-year period ended December 31, 1995, which financial statements have
been audited by KPMG Peat Marwick LLP, independent auditors, together with the
related notes and the report thereon, (iii) the unaudited consolidated financial
statements of the Company as of September 30, 1995 and for the nine-months ended
September 30, 1995 and (iv) other financial data included elsewhere in this
Prospectus.
11
<PAGE>
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS ENDED AS OF OR FOR THE YEAR ENDED DECEMBER 31,(A)
SEPTEMBER 30,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT DATA:
Revenues:
Insurance premiums.............................. $ 133.7 $ 183.9 $ 244.1 $ 237.9 $ 226.4 $ 192.9 $ 186.9
Product charges................................. 39.1 42.5 57.3 56.3 57.4 57.2 50.8
Net investment income........................... 189.3 210.5 285.2 275.7 269.9 273.1 268.6
Realized gains (losses) on investments.......... 62.5 41.6 51.4 (19.9) 15.5 10.1 15.7
Other income.................................... 2.3 2.3 5.4 2.4 2.4 0.9 3.6
Contribution from the Closed Block.............. 2.7 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total revenues.................................... 429.6 480.8 643.4 552.4 571.6 534.2 525.6
Benefits and expenses:
Total policyowner benefits...................... 222.9 279.7 374.6 369.9 364.3 334.8 327.8
Total expenses.................................. 78.8 80.9 108.9 111.4 106.0 100.0 87.6
Dividends to policyowners....................... 26.3 36.3 49.4 45.0 45.5 42.1 40.9
--------- --------- --------- --------- --------- --------- ---------
Total benefits and expenses....................... 328.0 396.9 532.9 526.3 515.8 476.9 456.3
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes........................ 101.6 83.9 110.5 26.1 55.8 57.3 69.3
Income tax expense................................ 38.7 29.9 41.2 19.4 21.4 18.6 24.5
--------- --------- --------- --------- --------- --------- ---------
Income before cumulative effect of a change in
accounting principles............................ 62.9 54.0 69.3 6.7 34.4 38.7 44.8
Cumulative effect of a change in accounting
principles, net of tax........................... 0.0 0.0 0.0 0.0 (3.2) 0.0 0.0
--------- --------- --------- --------- --------- --------- ---------
Net income........................................ $ 62.9 $ 54.0 $ 69.3 $ 6.7 $ 31.2 $ 38.7 $ 44.8
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings per share (C)............................ $ 2.76 -- $ 3.05 -- -- -- --
CONSOLIDATED BALANCE SHEET DATA:
Total invested assets............................. $ 2,810.2 $ 3,839.7 $ 3,965.0 $ 3,491.7 $ 3,639.3 $ 3,274.8 $ 3,155.8
Total assets...................................... 4,291.8 4,248.8 4,371.9 4,036.9 4,030.7 3,707.6 3,572.5
Total liabilities................................. 3,779.4 3,760.5 3,832.0 3,618.6 3,524.8 3,286.4 3,195.6
Total shareholder's equity (B)(D)................. 512.4 488.3 539.9 418.3 505.9 421.2 376.9
OTHER OPERATING DATA:
Cash flows from operating activities.............. $ 85.3 $ 128.4 $ 202.0 $ 172.4 $ 173.6 $ 101.5 $ 155.7
Cash flows from investing activities.............. 5.8 (95.0) (148.3) (134.9) (192.1) (99.6) (175.2)
Cash flows from financing activities.............. (95.8) (56.5) (72.5) (24.8) 14.5 9.2 19.1
Individual life insurance in force, net of
reinsurance...................................... $ 26,082 $ 25,865 $ 25,984 $ 25,282 $ 24,698 $ 23,947 $ 23,181
Number of employees............................... 407 406 406 457 489 505 526
STATUTORY DATA:
Statutory premiums and deposits:
Individual life................................. $ 236.0 $ 233.0 $ 307.1 $ 296.4 $ 286.3 $ 270.2 $ 261.7
Annuities (E)................................... 73.4 145.6 197.1 187.8 90.4 65.2 108.5
</TABLE>
- ------------------
(A) The merger of Old AML into Central Life, which was consummated in 1994, has
been accounted for as a pooling of interests transaction.
(B) The Capital Contribution would have the effect of reducing total
shareholder's equity as of September 30, 1996 and the year ended December
31, 1995 by $79 million.
(C) Retroactively reflects the pro forma effect of the issuance of 17.75 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.
(D) Amounts reported prior to September 30, 1996 reflect policyowners' equity.
From December 31, 1993, results reflect the impact of SFAS 115, "Accounting
for Certain Investments in Debt and Equity Securities." See Note 2 to
Consolidated Financial Statements.
(E) Effective May 1996, substantially all new sales of individual deferred
annuities are made through the Ameritas Joint Venture. See
"Business--Ameritas Joint Venture."
12
<PAGE>
RISK FACTORS
POTENTIAL INVESTORS SHOULD CAREFULLY CONSIDER THE "RISK FACTORS" AND OTHER
INFORMATION IN THIS PROSPECTUS PRIOR TO MAKING AN INVESTMENT DECISION REGARDING
THE CLASS A COMMON STOCK.
HOLDING COMPANY STRUCTURE; LIMITATIONS ON DIVIDENDS
The Company is an insurance holding company whose assets consist primarily
of all of the outstanding shares of common stock of AmerUs Life. The Company's
ongoing ability to pay dividends to its shareholders and meet its other
obligations, including operating expenses and any debt, is primarily dependent
upon the receipt of sufficient funds from AmerUs Life in the form of dividends,
interest payments or loans. 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 statutory
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. Based
on this limitation and 1995 statutory results, and absent the Distribution,
AmerUs Life would have been able to pay approximately $40 million in dividends
to the Company in 1996 without obtaining the Iowa Commissioner's approval.
However, as a result of the Distribution, AmerUs Life will not be able to pay
any additional dividends in the 12-month period following the Distribution
without the prior approval of the Iowa Commissioner. AmerUs Life has the ability
to loan funds to the Company subject to certain regulatory restrictions. At
September 30, 1996, AmerUs Life could loan up to $120 million without prior
regulatory approval. AmerUs Life's inability to pay dividends or advance loans
to the Company in the future in an amount sufficient for the Company to pay
dividends to its shareholders and meet its other obligations could have a
material adverse effect on the Company and the market value of the Class A
Common Stock. See "Dividend Policy," "Supervision and Regulation" and
"Description of the Capital Stock--Common Stock."
Under the Bank Credit Facility, the Company is prohibited from paying
dividends on its Common Stock in excess of an amount equal to 4% of the
Company's consolidated net worth as of the last day of the preceeding fiscal
year, and has also pledged to the lenders thereunder 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. See "Certain Transactions and
Relationships--Security Arrangements for Bank Credit Facility."
In connection with the Preferred Offering, the Company will agree not to
declare or pay any dividends on the Company's capital stock (including the Class
A Common Stock) during any period of time in which dividends on the preferred
securities issued in connection with the Preferred Offering are suspended (an
"Extension Period"), except for stock dividends paid by the Company where the
dividend stock is the same stock as that on which the dividend is being paid.
Dividends on the Company's capital stock cannot be paid until all accrued
dividends on the capital securities have been paid.
CONTROL BY AMHC; ANTI-TAKEOVER EFFECTS OF IOWA LAW AND THE COMPANY'S ARTICLES OF
INCORPORATION AND BYLAWS
AMHC indirectly owns 100% of the Class B Common Stock of the Company and,
following completion of the Offerings, will indirectly hold approximately 75% of
the combined voting power of the Class A Common Stock and Class B Common Stock
(assuming that the Underwriters in the Public Offering do not exercise their
over-allotment option). Moreover, under Iowa law, AMHC is required to own,
directly or indirectly through one or more intermediate holding companies,
shares of capital stock of the Company which carry the right to cast a majority
of the votes entitled to be cast by all of the outstanding shares of the capital
stock at a shareholders' meeting of the Company. Consequently, AMHC may, without
the approval of the other shareholders of the Company, prevent a potential
takeover or merger proposal (even if advantageous to the other shareholders). In
addition, AMHC may, without the approval of the other shareholders of the
Company, elect all of the directors of the Company, approve matters submitted
for shareholder approval and effect a possible transaction to go private. In the
event that AMHC adopts a plan
13
<PAGE>
of conversion to stock company form and demutualizes pursuant to Iowa law, each
share of Class B Common Stock would automatically be converted to become a share
of Class A Common Stock. See "Description of the Capital Stock--Common Stock"
and "Supervision and Regulation--Regulation of the Company and AMHC."
In addition to the requirement under Iowa law that AMHC directly or
indirectly own shares of capital stock of the Company giving it a majority of
the votes entitled to be cast by all of the outstanding shares of capital stock,
certain provisions included in the Company's Articles of Incorporation and its
Bylaws (the "Bylaws") may also have anti-takeover effects and may delay, defer
or prevent a takeover attempt that a shareholder might consider in his or her
best interests. These provisions include provisions relating to the Class B
Common Stock, so-called "blank check" preferred stock and a classified board of
directors. Such provisions may adversely affect the prevailing market price of
the Class A Common Stock. See "Certain Provisions of the Articles of
Incorporation and Bylaws of the Company" for a description of these provisions.
RELATIONSHIP WITH AMHC; POTENTIAL CONFLICTS OF INTEREST
AMHC is a mutual insurance holding company which is operated for the benefit
of its members. The members of AMHC are policyowners of AmerUs Life. AMHC
(through certain of its wholly-owned subsidiaries) has entered or will enter
into agreements with the Company and/or AmerUs Life whereby the Company and/or
AmerUs Life will provide to such subsidiaries certain management, data
processing, legal and other services, or whereby such subsidiaries will provide
services to the Company and/or AmerUs Life. Although management believes the
terms of such agreements are fair and reasonable, none of these contracts were
the result of arms' length negotiations between independent parties. These
agreements may be modified in the future and additional agreements or
transactions may be entered into between AMHC or subsidiaries of AMHC and the
Company and its subsidiaries. See "Certain Transactions and Relationships."
As a result of these arrangements, there may be a number of potential
conflicts of interest between the Company and AMHC. In an effort to address such
potential conflicts, and consistent with proposed regulations recently
promulgated by the Iowa Commissioner, at least three of the Company's outside
directors will not be directors of AMHC or any of AMHC's subsidiaries. Following
the completion of the Offerings, it is the Company's intent that at least two of
the Company's outside directors will have had no previous affiliation with the
Company. Outside directors of the Company will review any intercompany
transactions involving potential conflicting interests. However, there can be no
assurance that decisions made by AMHC will not adversely affect the Company. See
"Certain Transactions and Relationships" and "Management--Board of Directors of
the Company."
COMPETITIVE ENVIRONMENT
The Company competes with a large number of other insurers and non-insurance
financial service companies, such as banks, broker-dealers and mutual funds,
many of whom have greater financial resources, offer alternative products and,
with respect to other insurers, have higher claims-paying ability and financial
strength ratings than the Company. Competition exists for individual consumers
and agents and other distributors of life insurance and annuity products.
National banks, with their pre-existing customer bases for financial services
products, may pose increasing competition in the future to insurers who sell
life insurance and annuity products, including the Company. Recent United States
Supreme Court decisions, as well as rules adopted by the Office of the
Comptroller of the Currency, have significantly expanded the authority of
national banks to engage in the insurance business, including the sale of life
insurance products and annuities.
In addition, several proposals to repeal or modify the Glass-Steagall Act of
1933, as amended, and the Bank Holding Company Act of 1956, as amended, have
been made by members of Congress and the Clinton administration. Currently, the
Bank Holding Company Act restricts banks from being affiliated with insurance
companies. Certain of the proposals would repeal or modify these restrictions
and permit banks to become affiliated with insurance companies. None of these
proposals has yet been enacted, and it is not possible to predict whether any of
these proposals will be enacted or, if enacted, their potential effect on the
Company.
14
<PAGE>
The Company must attract and retain productive agents to sell its life
insurance and annuity products. Strong competition exists among insurance
companies for agents with demonstrated ability. Competition among insurance
companies for such agents is based on, among other things, the services provided
to, and relationships developed with, these agents in addition to compensation
and product structure.
IMPORTANCE OF RATINGS
Ratings with respect to claims-paying ability and financial strength have
become an increasingly important factor in establishing the competitive position
of insurance companies. Each of the rating agencies reviews its ratings
periodically and there can be no assurance that current ratings will be
maintained in the future. Claims-paying and financial strength ratings are based
upon factors relevant to policyowners and are not directed toward protection of
shareholders. AmerUs Life's claims-paying ability is currently rated "AA-" (Very
high) by Duff & Phelps and "A" (Good) by Standard & Poor's. AmerUs Life is rated
"A" (Excellent) by A.M. Best and "A2" (Good) by Moody's. While not changing
AmerUs Life's financial strength rating, Moody's recently stated that AmerUs
Life's rating outlook had become negative because the Company had increased its
financial leverage in connection with the Reorganization, although the effect
thereof should be offset somewhat by the Offerings. A downgrade in AmerUs Life's
ratings could significantly affect sales of life insurance and annuity products
and could have a material adverse effect on the results of operations of the
Company. See "Management's Discussion and Analysis of Results of Operations and
Financial Condition."
INTEREST RATE FLUCTUATIONS; RISK OF IMPACT OF FORCED LIQUIDATION OF INVESTMENT
PORTFOLIO
Severe interest rate fluctuations could adversely affect AmerUs Life's
ability to pay policyowner benefits with operating and investment cash flows,
cash on hand and other cash sources. In the unanticipated event that such
sources would prove inadequate, management believes the Company could meet
shortfalls with funds available to the Company as a result of its membership in
the Federal Home Loan Bank of Des Moines, as well as other borrowing sources.
See "Management's Discussion and Analysis of Results of Operations and Financial
Condition--Liquidity and Capital Resources."
Interest rate fluctuations may also have an impact on policyowner behavior.
To the extent that the Company does not maintain competitive interest rates with
those credited in the marketplace, increased policyowner lapses may be
experienced. While such lapses would generate surrender charges during the
current period, they would reduce the Company's future income.
The Company's actual cash flows from investments may differ from those
anticipated at the time of investment. Some of the Company's corporate bonds
have call features which could cause the Company to reinvest these proceeds at
lower interest rates if such bonds were called prior to their stated maturities.
As of September 30, 1996, approximately $319 million, or 16.0% of the bond
portfolio (excluding mortgage and other asset-backed securities), was subject to
call. The Company's collateralized mortgage obligations ("CMOs") and other
asset-backed securities are purchased based on assumptions regarding rates of
prepayments. To the extent that actual prepayments are earlier or later than
anticipated at the time of purchase, the Company may not receive cash flows when
expected or needed. These prepayment rates are influenced by interest rates
available for new mortgages as well as general economic conditions.
FUTURE POLICY BENEFITS EXPOSURE
The liability established by the Company for future life insurance and
annuity policy benefits is based upon assumptions concerning a number of
factors, including interest rates, mortality, persistency and expenses. Actual
experience will likely differ from assumed experience. Should the Company's
provision for future policy benefits prove inadequate, future earnings will be
adversely affected.
REGULATORY AND RELATED RISKS
AmerUs Life is subject to regulation by state regulators under the insurance
laws of states in which it conducts business. The Company, AmerUs Life and AMHC
are also subject to regulation by the Insurance Division of the Iowa Department
of Commerce. The purpose of such regulation is primarily to provide safeguards
for policyowners rather than to protect the interests of shareholders. The
insurance
15
<PAGE>
laws of the various states establish regulatory agencies with broad
administrative powers including, among others, the authority to grant or revoke
operating licenses and to regulate sales practices, investments, deposits of
securities, the form and content of financial statements and insurance policies,
accounting practices and the maintenance of specified RESERVES and capital. See
"Supervision and Regulation."
The insurance regulatory framework has been subject to increasing scrutiny
by the National Association of Insurance Commissioners ("NAIC"), state
legislatures, regulators and Congress. The NAIC and state regulators have from
time to time re-examined laws and regulations, with an emphasis on insurance
company investment and solvency issues. State legislatures have considered or
enacted legislative proposals that alter, and in many cases increase, state
regulation of insurance companies. In recent years, various legislative
proposals have been introduced in Congress that called for the federal
government to assume some role in the regulation of the insurance industry. To
date, none of the Congressional proposals had been enacted and it cannot be
predicted what form any such future proposals might take or what effect, if any,
such proposals might have on AmerUs Life if enacted into law.
Insurance regulators have also given greater emphasis in recent years to the
investigation of allegations of improper sales practices by insurance agents,
including churning and misleading sales presentations. The NAIC has adopted a
model law and regulation which would standardize the form and content of any
illustrations provided to prospective purchasers of individual life insurance
products. The model law has been enacted, to be effective January 1, 1997, in at
least two states, and is currently under consideration in a number of other
states. Management expects that similar legislation will eventually be enacted
in additional states in which AmerUs Life sells individual life insurance
products. There can be no assurance as to whether this reform will have a
material adverse impact on sales of such products by the industry as a whole or
by AmerUs Life.
State guaranty associations assess insurance companies to pay contractual
benefits owed by impaired, insolvent or failed insurance companies. AmerUs Life
was assessed, net of amounts estimated to be recoverable from future state
PREMIUM taxes, approximately $0.4 million during the nine months ended September
30, 1996 and $0.4 million, $1.2 million and $3.3 million for the years ended
December 31, 1995, 1994, and 1993, respectively. AmerUs Life cannot predict the
amount of any future assessments. See "Supervision and Regulation."
In addition, the Iowa Commissioner has proposed rules that would regulate
the issuance of stock by the Company in the Offerings and in subsequent
offerings. See "Supervision and Regulation--Regulation of the Company and AMHC."
RISKS OF CLASS ACTION LITIGATION
In recent years, life insurance companies, including AmerUs Life, have been
named defendants in class action lawsuits relating to life insurance pricing and
sales practices. Although AmerUs Life has denied all allegations against it and
has vigorously defended against such litigation, there can be no assurance that
this or future litigation will not have a material adverse effect on the life
insurance industry generally or on the Company. AmerUs Life is currently in the
process of negotiating a potential class settlement with respect to certain of
such actions, and has taken a charge to income for the first nine months of 1996
in connection therewith. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition--Nine Months Ended September 30, 1996
Compared to Nine Months Ended September 30, 1995" and "Business--Legal
Proceedings."
POTENTIAL ADVERSE TAX LEGISLATION
Congress has from time to time considered possible legislation that would
reduce or eliminate the benefits to policyowners of the deferral of taxation on
the accretion of value within certain annuities and life insurance products or
otherwise affect the taxation of annuities and life insurance products and
insurance companies. Other possible legislation, including a simplified "flat
tax" income tax structure with an exemption from taxation for investment income,
could also adversely affect purchases of annuities and life insurance products
if such legislation were to be enacted. There can be no assurance as to what, if
any, future legislation might be enacted or, if enacted, whether any such
legislation would contain provisions with possible adverse effects on the
Company's life insurance and annuity products.
16
<PAGE>
RISKS RELATING TO THE CLOSED BLOCK
Under the Plan, AmerUs Life established and will operate a CLOSED BLOCK for
the benefit of the CLOSED BLOCK BUSINESS. The Closed Block is based on a concept
included in demutualization plans of other mutual life insurance companies and
is designed to give reasonable assurance to policyowners included therein that,
after the Reorganization, assets will be available to maintain DIVIDEND SCALES
and interest credits in effect prior to the Reorganization if the experience
underlying such scales and credits continues. In accordance with the Plan,
certain of AmerUs Life's invested assets, as well as cash and short-term
investments, were allocated by AmerUs Life to the Closed Block as of June 30,
1996. Non-investment grade bonds, mortgage loans, preferred stock, real estate
and certain other invested assets were not included in this allocation to the
Closed Block. The amount of assets allocated to the Closed Block is expected to
produce cash flows which, together with future revenues from the Closed Block
Business, are expected to be sufficient to support the Closed Block Business,
including provisions for payment of claims, taxes and certain other expenses and
for the continuation of policyowner dividend scales and interest credits in
effect prior to the Reorganization, if the experience underlying such dividend
scales continues. The assets, including the revenue therefrom, allocated to the
Closed Block Business will accrue solely to the benefit of owners of the
policies included in the Closed Block Business until such time as the Closed
Block is no longer in effect; accordingly, such assets and the revenue therefrom
will not be available for the benefit of AmerUs Life or the Company.
To the extent that over time cash flows from the assets allocated to the
Closed Block and other experience relating to the Closed Block are, in the
aggregate, more or less favorable than assumed in establishing the Closed Block,
total dividends paid to Closed Block policyowners in the future would be greater
than or less than the total dividends that would have been paid to these
policyowners if the dividend scales in effect prior to the Reorganization had
been continued. Any excess of cumulative favorable deviations for Closed Block
policies over unfavorable deviations will be available for distribution over
time to Closed Block policyowners and will not be available to AmerUs Life or
the Company. Unless the Iowa Commissioner consents to an earlier termination,
the Closed Block will continue to be in effect until the date on which none of
the policies in the Closed Block remains in force.
The Company will continue to pay guaranteed benefits under all policies,
including the policies included in the Closed Block in accordance with their
terms. If the assets allocated to the Closed Block, the investment cash flows
from those assets and the revenues from the policies included in the Closed
Block including investment income thereon prove to be insufficient to pay the
benefits guaranteed under the policies included in the Closed Block, the Company
will be required to make such payments from its general funds. The Company bears
the costs of operating and managing the Closed Block and, accordingly, such
costs were not funded as part of the assets allocated to the Closed Block. Any
increase in such costs in the future would be borne by the Company. See "The
Reorganization and Distribution of the Non-Life Insurance
Subsidiaries--Establishment and Operation of the Closed Block."
CLASS A COMMON STOCK ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Class A Common Stock (including shares of
Class B Common Stock converted into Class A Common Stock), or the perception
that such sales could occur, could have an adverse effect on the price of the
Class A Common Stock. The Company believes that none of the shares of Class A
Common Stock or Class B Common Stock which are held by AmerUs Group will be
eligible for sale under Rule 144 promulgated under the Act for two years.
Thereafter, such shares will be subject to the volume and timing requirements of
Rule 144. However, the Company and AmerUs Group are parties to an agreement
which provides AmerUs Group with certain registration rights with respect to
such shares. See "Certain Transactions and Relationships--Intercompany
Agreement" and "Shares Eligible for Future Sale."
NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF COMMON STOCK PRICE
Prior to the Offerings there has been no public market for shares of either
class of the Company's Common Stock. The Class A Common Stock has been approved
for quotation on the Nasdaq National Market. There can be no assurance, however,
that an active trading market for the Class A Common Stock will develop, or, if
developed, will continue.
17
<PAGE>
THE COMPANY
AmerUs Life Holdings, Inc. is an Iowa business corporation which was formed
in August of 1996 primarily for the purpose of owning all of the stock of AmerUs
Life following the Reorganization. See "The Reorganization and Distribution of
the Non-Life Insurance Subsidiaries." AmerUs Life, the Company's principal asset
and wholly-owned subsidiary, is an Iowa stock life insurance company.
AmerUs Life was originally incorporated in 1896 as a mutual insurance
company under the name Central Life Assurance Society of the United States. In
1994, Old AML merged into Central Life and the resulting entity changed its name
to American Mutual Life. On June 30, 1996, pursuant to the Plan, American Mutual
Life formed AMHC as a mutual insurance holding company and American Mutual Life
was converted into a stock life insurance company and its name was changed to
AmerUs Life Insurance Company.
The Company offers a broad line of individual life insurance and annuity
products through a nationwide distribution system. It presently conducts
business in 45 states and the District of Columbia. As of September 30, 1996,
the Company had approximately 418,000 life insurance policies and annuity
contracts outstanding and individual life insurance in force, net of
reinsurance, of approximately $26.1 billion. As of September 30, 1996, the
Company had total assets of $4.3 billion and total shareholder's equity of $433
million (prior to the Offerings, after giving effect to the Capital
Contribution).
The Company's executive offices are located at 418 Sixth Avenue, Des Moines,
Iowa 50309-2407, and its telephone number is (515) 280-1331.
THE REORGANIZATION AND DISTRIBUTION OF THE
NON-LIFE INSURANCE SUBSIDIARIES
DESCRIPTION OF THE REORGANIZATION
On October 27, 1995, the Board of Directors of American Mutual Life adopted
the Plan, which authorized American Mutual Life to effect the Reorganization.
Pursuant to the Reorganization, American Mutual Life formed AMHC as a mutual
insurance holding company and American Mutual Life was converted into a stock
life insurance company and its name was changed to AmerUs Life Insurance
Company. The Iowa Commissioner held a public hearing on the Reorganization on
November 21, 1995. The Plan was approved by American Mutual Life's policyowners
on November 28, 1995. The Iowa Commissioner approved the Plan on December 13,
1995, and the Plan became effective on June 30, 1996 (the "Effective Date").
As part of the Reorganization, all of the shares of capital stock of AmerUs
Life were issued to AMHC. Subsequent to the Reorganization, on August 1, 1996,
AMHC contributed all of its shares of capital stock of AmerUs Life to AmerUs
Group. The Company was formed on August 1, 1996, as of which date all of its
shares of capital stock were issued to AmerUs Group. Immediately after the
Distribution, AmerUs Group contributed all of its shares of common stock in
AmerUs Life to the Company. Under this structure, the Company is an intermediate
holding company, with AmerUs Group as its direct parent company and AmerUs Life
as its wholly-owned subsidiary. Under Iowa law, AMHC is required to retain
direct or indirect ownership and control of shares representing a majority of
the vote of the outstanding capital stock of the Company.
Immediately following the Reorganization, the policyowners' contract rights
in their life insurance policies and annuities remained with AmerUs Life and the
policyowners automatically became members of AMHC, and thereby became entitled
to vote for directors of AMHC and on certain other matters as set forth in
AMHC's Articles of Incorporation. Purchasers of life insurance policies and
annuities from AmerUs Life after the Reorganization automatically become members
of AMHC (subject to certain exceptions and conditions set forth in the Plan).
American Mutual Life was the first company to obtain approval under the Iowa
mutual holding company statute to form a mutual insurance holding company. The
Company understands that at least
18
<PAGE>
six other states, including California, Minnesota, Missouri, Pennsylvania, Rhode
Island and Vermont, and the District of Columbia, have recently adopted laws
authorizing the formation of mutual insurance holding companies.
DISTRIBUTION OF THE NON-LIFE INSURANCE SUBSIDIARIES AND RELATED TRANSACTIONS
Prior to the Distribution, AmerUs Life made the Capital Contribution to or
for the benefit of certain of the Non-Life Insurance Subsidiaries. The net
assets contributed in the Capital Contribution had an aggregate carrying value
of approximately $79 million. Following the Capital Contribution, a series of
transactions were undertaken by the Company and its affiliates. AmerUs Life
effected the Distribution, pursuant to which it distributed the Non-Life
Insurance Subsidiaries to AmerUs Group. Immediately following the Distribution,
the Company borrowed $100 million in term debt and $75 million under a revolving
line of credit pursuant to the Bank Credit Facility. The Company used the
proceeds from such borrowings to make a $125 million capital contribution to
AmerUs Life and to purchase a $50 million surplus note from AmerUs Life. The
Consolidated Financial Statements and other financial information presented
herein give effect to the Reorganization and the Distribution as if both had
been completed prior to the periods presented (including giving effect to the
establishment of the Closed Block from June 30, 1996 forward), but do not give
effect to the Capital Contribution.
The Distribution effectively separated AMHC's non-life insurance businesses
from the life insurance businesses owned by the Company, such that the companies
engaged in non-life insurance businesses are no longer subsidiaries of the
Company.
BACKGROUND AND REASONS FOR THE REORGANIZATION AND DISTRIBUTION
Recognizing the capital-raising difficulties faced by mutual insurers and
the present competitive state of the insurance industry, the Iowa legislature in
1995 amended Iowa's insurance law to permit mutual insurance companies
incorporated in Iowa to reorganize into a mutual insurance holding company
structure.
As a mutual life insurance company, American Mutual Life had no ability to
issue shares of capital stock and consequently had no access to market sources
of equity capital and limited ability to increase its surplus and fund future
growth while maintaining the financial strength necessary to assure policyowners
that their obligations will be met. The Reorganization will position the Company
to obtain access to equity capital through the Offerings and will enable the
Company to effect future equity offerings as necessary and appropriate to
satisfy its capital requirements.
The Reorganization is also intended to facilitate potential mergers,
acquisitions and strategic alliances by creating a more flexible corporate
structure. Among other things, the Reorganization will facilitate the issuance
of stock by the Company to consummate acquisitions.
The Iowa legislation would permit AMHC subsequently to demutualize, a
process which would cause AMHC to convert from mutual to stock form and become
publicly owned by shareholders. Pursuant to the Company's Articles of
Incorporation, upon a demutualization all of the Company's shares of outstanding
Class B Common Stock will automatically convert into shares of Class A Common
Stock. See "Description of the Capital Stock." AMHC has no present plans to
demutualize.
The Capital Contribution and the Distribution were important preliminary
transactions that were necessary to complete the Offerings and the Preferred
Offering successfully.
REGULATION OF AMHC AFTER THE REORGANIZATION
AMHC, as a mutual insurance holding company incorporated in Iowa, is subject
to regulation at a level substantially equal to that of an Iowa domestic
insurance company. The Iowa Commissioner retains jurisdiction at all times over
a mutual insurance holding company and any intermediate insurance holding
company to assure that policyowners' interests are protected. See "Supervision
and Regulation."
Under Iowa law, shares of capital stock of AmerUs Life which carry the right
to cast a majority of the votes entitled to be cast by all of the outstanding
shares of the capital stock (which are required at all times to be owned,
directly or indirectly, by AMHC) may not be conveyed, transferred, assigned,
19
<PAGE>
pledged, subjected to a security interest or lien, encumbered, or otherwise
hypothecated or alienated by AMHC or any intermediate holding company, including
the Company. Any conveyance, transfer, assignment, pledge, security interest,
lien, encumbrance, hypothecation or alienation by AMHC or any intermediate
holding company, in or on such shares of AmerUs Life having a voting majority
shall be deemed void in inverse chronological order from the date of such
transaction to the extent necessary to give AMHC unencumbered direct or indirect
ownership of such shares having a voting majority.
ESTABLISHMENT AND OPERATION OF THE CLOSED BLOCK
In connection with the Reorganization, the Closed Block was established.
Insurance policies which had a dividend scale in effect as of June 30, 1996 were
included in the Closed Block. The Closed Block was designed to provide
reasonable assurance to policyowners included therein that, after the
Reorganization, assets will be available to maintain the dividend scales and
interest credits in effect prior to the Reorganization if the experience
underlying such scales and credits continues. The establishment of the Closed
Block did not alter, diminish, reduce or in any other way adversely affect these
policyowners' contractual rights.
The Closed Block was established on June 30, 1996. Pursuant to the Plan,
assets were allocated to the Closed Block at June 30, 1996 in an amount which
the Company expects to produce cash flows which, together with anticipated
revenues from the Closed Block Business, are expected to be sufficient to
support the Closed Block Business, including provision for payment of claims,
taxes and certain other expenses and for the continuation of dividend scales and
interest credits in effect prior to the Reorganization if the experience
underlying such scales and credits continues or for appropriate adjustments in
such scales and credits if the experience changes. The assets, including the
revenue therefrom, allocated to the Closed Block will accrue solely to the
benefit of policyowners included in the Closed Block Business until such time as
the Closed Block is no longer in effect. To the extent that over time cash flows
from the assets allocated to the Closed Block and other experience relating to
the Closed Block are, in the aggregate, more or less favorable than assumed in
establishing the Closed Block, total dividends and interest credits paid to
Closed Block policyowners in the future may be greater than or less than the
total dividends and interest credits that would have been paid to these
policyowners if the dividend scales and interest credits in effect prior to the
Reorganization had been continued. Dividends and interest credits on policies
included in the Closed Block, as in the past, will be declared at the discretion
of AmerUs Life's Board of Directors and may vary from time to time (reflecting
changes in investment, mortality, persistency and other experience factors).
AmerUs Life will not be required to support the payment of dividends and
interest credits on Closed Block policies from its general funds above certain
guaranteed levels, although it could choose to provide such support if it were
deemed to be in the best interests of AmerUs Life's shareholders.
AmerUs Life will continue to pay guaranteed benefits under all policies,
including the policies included in the Closed Block, in accordance with their
terms. If the assets allocated to the Closed Block, the investment cash flows
from those assets and the revenues from the policies included in the Closed
Block including investment income thereon prove to be insufficient to pay the
benefits guaranteed under the policies included in the Closed Block, AmerUs Life
will be required to make such payments from its general funds. AmerUs Life bears
the costs of operating and managing the Closed Block and, accordingly, such
costs were not funded as part of the assets allocated to the Closed Block. Any
increase in such costs in the future would be borne by AmerUs Life. Since the
Closed Block has been funded to provide for payment of guaranteed benefits as
well as future dividends, it should not be necessary to use other general funds
to pay guaranteed benefits unless the Closed Block Business experiences
substantial adverse deviations in investment, mortality, persistency or other
experience factors. While AmerUs Life will use its best efforts to support the
policies included in the Closed Block with the assets allocated to the Closed
Block, these assets will be subject to the same liabilities (with the same
priority in liquidation) as assets outside the Closed Block.
The Closed Block Business will consist of the policies within the classes
specified in the Plan, but only to the extent such policies were in force on
June 30, 1996. A policy may be within a class for which there is a dividend
scale currently in effect, even if it does not receive a current dividend, and,
therefore, the policy would be included in the Closed Block.
20
<PAGE>
Premiums received and policy benefits paid by AmerUs Life on the policies
included in the Closed Block and investment cash flows from the assets allocated
to the Closed Block and from the investment of net cash flow will be added to or
withdrawn from the Closed Block as provided in the Plan. The Closed Block will
be allocated its share of state, local and federal taxes paid on the Closed
Block Business in accordance with tax sharing procedures set forth in the Plan.
However, commissions and other expenses (including investment management
expenses) of operating and administering the Closed Block will not be charged to
the Closed Block except to the limited extent provided in the Plan. If expenses
of operating and administering the Closed Block were to increase after June 30,
1996, such increases would be paid by AmerUs Life. Future estimated cash
outflows were considered in determining the amount of assets allocated to the
Closed Block.
Dividends and interest credits on the Closed Block policies will be set
periodically by AmerUs Life's Board of Directors in accordance with applicable
law and with the objective that all of the assets will be distributed to owners
of Closed Block policies. Such dividends and interest credits will also be
allocated among the policies included in the Closed Block so as to reflect the
underlying experience of the Closed Block and the degree to which the various
classes of Closed Block policies contributed to such experience. An income
statement, balance sheet and schedule of investments for the Closed Block will
be prepared and submitted to the Iowa Commissioner and AmerUs Life's Board of
Directors annually. AmerUs Life will retain an independent consulting actuary to
review the operation of the Closed Block and dividend and interest credit
determinations and to report his or her findings to the Iowa Commissioner and
AmerUs Life's Board of Directors at least every three years, with the first
review to be made as of December 31, 1998.
The Closed Block will continue in effect until either (i) the last policy in
the Closed Block is no longer in force or (ii) the Closed Block is dissolved.
The Plan provides that the Closed Block may not be dissolved without the
approval of the Iowa Commissioner, which approval could only be obtained if
dissolution were demonstrated not to be adverse to the interests of the
policyowners whose policies make up the Closed Block. If the Closed Block is
dissolved, the assets associated with the Closed Block will become part of
AmerUs Life's general funds. If the Closed Block is not dissolved, the expected
life of the Closed Block is in excess of 75 years.
CLOSED BLOCK ASSETS AND LIABILITIES
In accordance with the Plan, certain of AmerUs Life's invested assets, as
well as cash and short-term investments, were allocated to the Closed Block at
June 30, 1996. Non-investment grade bonds, commercial mortgage loans, common and
preferred stock and real estate owned were not included in this allocation to
the Closed Block.
The bonds allocated to the Closed Block include assets of similar asset type
and maturity that were part of the investment segment for AmerUs Life's
TRADITIONAL LIFE INSURANCE policies. In addition, AmerUs Life included in the
Closed Block cash and short-term investments in order to meet the short-term
liquidity requirements of the Closed Block. For GAAP purposes, Closed Block
assets include deferred ACQUISITION COSTS relating to policies in the Closed
Block.
The composition of assets in the Closed Block will change over time as a
result of new investments, prepayments, calls, maturities and sales. New
investments for the Closed Block acquired with Closed Block cash flows shall be
allocated to the Closed Block upon acquisition and shall consist only of
investments permitted by the investment policy for the Closed Block. In the
event of liquidation, the assets allocated to the Closed Block will be subject
to the same liabilities (with the same priority) as assets outside the Closed
Block.
The Company retained Tillinghast, a Towers Perrin Company ("Tillinghast"),
an actuarial consulting firm, to advise it in connection with actuarial matters
involved in the establishment and operation of the Closed Block. The opinion of
Tillinghast, dated October 26, 1995, states (in reliance upon the matters and
subject to the limitations described in such opinion) that the establishment and
operation of the Closed Block as contemplated by the Plan make adequate
provision for allocating to the Closed Block assets which will be reasonably
sufficient to enable the Closed Block to provide for the guaranteed benefits,
taxes and certain other expenses associated with Closed Block policies, and to
provide for the
21
<PAGE>
continuation of the current dividend scales and interest credits in effect prior
to the Reorganization if the experience underlying those scales and credits
continues. The Closed Block was funded on a preliminary basis at June 30, 1996.
At September 30, 1996, the Closed Block had assets of $1,237.1 million and
liabilities of $1,501.3 million. Final funding adjustments of the Closed Block
will be made, if necessary, prior to the completion of the Offerings.
The excess of Closed Block Liabilities over Closed Block Assets represents
the expected future after-tax contributions (before certain other expense
charges, which were not funded in the Closed Block) from the Closed Block which
may be recognized in income over the period the policies in the Closed Block
remain in force.
If the actual contribution from the Closed Block in any given period equals
or exceeds the expected contribution for such period as determined at the
establishment of the Closed Block, only the expected contribution would be
recognized in income from continuing operations for that period. Any excess of
the actual contribution over the expected contribution would also be recognized
in income from continuing operations to the extent that the aggregate expected
contribution for all prior periods exceeded the aggregate actual contribution.
Any remaining excess of actual contribution over expected contributions would be
accrued in the Closed Block as a liability for future policyowners' dividends.
This accrual for future dividends effectively limits the actual Closed Block
contribution recognized in income from continuing operations to the Closed Block
contribution expected to emerge from operation of the Closed Block as determined
as of the date of establishment of the Closed Block.
If the actual contribution from the Closed Block in any given period is less
than the expected contribution for that period, because changes in dividends
scales are inadequate to offset the negative performance in relation to the
expected performance, the contribution inuring to shareholders of AmerUs Life
will be reduced. If a liability for policyowners' dividends had been previously
established in the Closed Block because the actual contribution to the relevant
date had exceeded the expected contribution to such date, such liability would
be reduced (but not below zero) in any periods in which the actual contribution
for that period is less than the expected contribution for such period.
22
<PAGE>
THE SUBSCRIPTION OFFERING
Prior to this Public Offering, the Company and the Selling Shareholder
offered up to five million shares of Class A Common Stock (the "Shares") in the
Subscription Offering that expired on January 8, 1997. The Company and the
Selling Shareholder have received and accepted subscriptions at a per share
price of $19.00 (the "Subscription Price"), subject to certain adjustments
described below, for 1,086,810 Shares (the "Subscription Shares"). The
Subscription Shares were offered in accordance with the priority subscription
rights provided under the Plan to eligible policyowners of AmerUs Life as of
June 30, 1996 (the effective date of the Reorganization). The shares which were
not subscribed for in the Subscription Offering are being offered by the Company
and the Selling Shareholder, in equal proportion, to the public in this Public
Offering. The Company is offering an additional 750,000 shares of Class A Common
Stock in this Public Offering. The Company and the Selling Shareholder intend to
close the Subscription Offering contemporaneously with the closing of this
Public Offering. However, the Company may, in its sole discretion, at any time
prior to the closing of the Subscription Offering, elect to cancel or rescind
the Subscription Offering.
The issuance of Shares in the Subscription Offering is contingent upon the
sale by the Company and the Selling Shareholder of shares in the Offerings in an
aggregate amount of at least $50 million.
Since the initial public offering price is less than the Subscription Price,
the Company and the Selling Shareholder will issue refunds to subscribing
policyowners in the form of a check equal to the amount of such difference
multiplied by the number of Shares subscribed for by each such policyowner.
On the closing date(s) of the Subscription Offering and this Public Offering
or as soon thereafter as reasonably practicable (but no more than 10 business
days after the closing date), the Company and the Selling Shareholder will issue
or deliver Shares sold pursuant to the Subscription Offering and issue refunds
for the excess of the Subscription Price over the initial public offering price.
USE OF PROCEEDS
The net proceeds to the Company from the Offerings are expected to be
approximately $49.3 million after deducting the Company's share of the estimated
expenses of the Offerings. All such estimated proceeds will be used by the
Company to repay a portion of the term debt under the Bank Credit Facility. The
term debt will be due during the next five years and bears interest at a
variable rate, which rate was approximately 6.25% as of the date of this
Prospectus. The term debt to be repaid was incurred in December, 1996 and the
proceeds of such debt were advanced to AmerUs Life in the form of a capital
contribution to replace capital which was distributed by AmerUs Life pursuant to
the Distribution. The Company will not receive any proceeds from the sale of
Class A Common Stock by the Selling Shareholder.
The Company currently estimates the net proceeds it would receive from the
Preferred Offering, if completed, to be $84.6 million after giving effect to the
underwriting discount and estimated offering expenses of the Company. It is
expected that the Company would use such proceeds to repay a portion of the
revolving debt under the Bank Credit Facility. The revolving line of credit
matures in November 2001 and will bear interest at a variable rate, which rate
was approximately 6.25% as of the date of this Prospectus. See "The Preferred
Offering" and "Management's Discussion and Analysis of Results of Operations and
Financial Condition--Liquidity and Capital Resources."
23
<PAGE>
MARKET FOR COMMON STOCK
Prior to the Offerings, there has been no public market for shares of either
class of the Company's Common Stock. The Class A Common Stock has been approved
for quotation on the Nasdaq National Market under the symbol "AMRS." There can
be no assurance, however, that an active market for the Class A Common Stock
will develop or, if developed, will continue. See "Risk Factors--No Prior Market
for Common Stock; Possible Volatility of Common Stock Price."
DIVIDEND POLICY
The Company's Board of Directors currently intends to pay a quarterly
dividend of $0.10 per share of Common Stock, commencing with the quarter ending
on March 31, 1997. The declaration and payment of dividends in the future is
subject to the discretion of the Company's Board of Directors and will be
dependent upon the Company's financial condition, results of operations, cash
requirements, future prospects, regulatory restrictions on the payment of
dividends by AmerUs Life and other factors deemed relevant by the Company's
Board of Directors. There is no requirement or assurance that the Company will
declare and pay any dividends. For a discussion of the Company's cash sources
and needs, see "Management's Discussion and Analysis of Results of Operations
and Financial Condition-- Liquidity and Capital Resources--The Company."
The Company is an insurance holding company whose principal asset will
consist of all of the outstanding shares of the common stock of AmerUs Life. The
Company's ongoing ability to pay dividends to its shareholders and meet its
other obligations, including operating expenses and any debt service, primarily
depends upon the receipt of sufficient funds from AmerUs Life in the form of
dividends, interest payments or loans. In connection with the Distribution, the
Company has agreed with the Iowa Commissioner not to cause AmerUs Life to pay
any additional shareholder dividends for 1996. In addition, as a result of the
Distribution, AmerUs Life will not be able to pay dividends to the Company in
the 12 month period following the Distribution without the prior approval of the
Iowa Commissioner. It is the Company's intention to seek regulatory approval to
pay dividends from Amerus Life during this 12-month period. However, AmerUs Life
has the ability to loan funds to the Company subject to certain regulatory
restrictions. At September 30, 1996, AmerUs Life could advance up to $120
million to the Company without prior approval by the Iowa Commissioner. See
"Risk Factors--Holding Company Structure; Limitations on Dividends,"
"Supervision and Regulation" and "Description of the Capital Stock--Common
Stock."
Under the Bank Credit Facility, the Company is prohibited from paying
dividends on its Common Stock in excess of an amount equal to 4% of the
Company's consolidated net worth as of the last day of the preceding fiscal
year, and has also pledged to the lenders thereunder 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.
In connection with the Preferred Offering, the Company will agree not to
declare or pay any dividends on the Company's capital stock (including the Class
A Common Stock) during any Extension Period, except for stock dividends paid by
the Company where the dividend stock is the same stock as that on which the
dividend is being paid. Dividends on the Company's capital stock cannot be paid
until all accrued dividends on the Preferred Securities have been paid. See "The
Preferred Offering."
24
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Company at September 30, 1996 on an actual basis and on a pro forma basis as
adjusted to reflect (i) the Capital Contribution, (ii) the sale of 3.25 million
shares of Class A Common Stock in the Offerings at a per share price of $16.50,
as if such sales had occurred as of September 30, 1996 (after deducting the
underwriting discount and estimated offering expenses payable by the Company),
(iii) the issuance of the Junior Subordinated Debt Securities in connection with
the Preferred Offering and (iv) the establishment of the Bank Credit Facility,
as if such Capital Contribution, sale, issuance and establishment had occurred
as of September 30, 1996. See "Use of Proceeds," "The Subscription Offering" and
"The Preferred Offering." This table should be read in conjunction with the
Consolidated Financial Statements, including the related notes and report
thereon and the Unaudited Pro Forma Condensed Consolidated Financial Statements
of the Company appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
--------------------------------------------------------------------------------------------------
PRO FORMA FOR
PRO FORMA THE CAPITAL
ADJUSTMENTS FOR PRO FORMA FOR CONTRIBUTION,
THE CAPITAL THE CAPITAL PRO FORMA AS ADJUSTED FOR PRO FORMA
CONTRIBUTION, AND CONTRIBUTION ADJUSTMENTS FOR THE OFFERINGS ADJUSTMENTS FOR
THE BANK CREDIT AND THE BANK THE AND THE BANK THE PREFERRED
HISTORICAL FACILITY(A) CREDIT FACILITY OFFERINGS(B) CREDIT FACILITY OFFERING(C)
----------- ----------------- --------------- --------------- --------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Long Term Debt................ $ 45.1 $ 166.3 $ 211.4 $ (49.3) $ 162.1 $ (84.6)
----------- ------- ------- ------ ------- ------
Company-obligated
mandatorily-redeemable
Capital Securities of
subsidiary trust holding
solely Junior Subordinated
Debentures of the
Company(C)................... -- -- -- -- -- 86.0
------
Equity:(D)
Preferred Stock, no par
value, 25,000,000 shares
authorized; no shares
issued and outstanding..... -- -- -- -- -- --
Class A Common Stock, no par
value, 75,000,000 shares
authorized; 14,500,000
shares issued and
outstanding historical and
17,750,000 shares
pro forma.................. 14.5 -- 14.5 3.3 17.8 --
Class B Common Stock, no par
value, 50,000,000 shares
authorized; 5,000,000
shares issued and
outstanding................ 5.0 -- 5.0 -- 5.0 --
Additional paid-in
capital.................... -- -- -- 46.0 46.0 --
Retained earnings........... 470.2 (79.0) 391.2 -- 391.2 --
Unrealized appreciation of
invested assets, net....... 22.7 -- 22.7 -- 22.7 --
----------- ------- ------- ------ ------- ------
Total equity.............. 512.4 (79.0) 433.4 49.3 482.7 --
----------- ------- ------- ------ ------- ------
Total capitalization.......... $ 557.5 $ 87.3 $ 644.8 -- $ 644.8 $ 1.4
----------- ------- ------- ------ ------- ------
----------- ------- ------- ------ ------- ------
<CAPTION>
PRO FORMA FOR
THE CAPITAL
CONTRIBUTION,
AS ADJUSTED FOR
THE OFFERINGS,
THE BANK CREDIT
FACILITY AND
THE PREFERRED
OFFERING
---------------
<S> <C>
Long Term Debt................ $ 77.5
-------
Company-obligated
mandatorily-redeemable
Capital Securities of
subsidiary trust holding
solely Junior Subordinated
Debentures of the
Company(C)................... 86.0
-------
Equity:(D)
Preferred Stock, no par
value, 25,000,000 shares
authorized; no shares
issued and outstanding..... --
Class A Common Stock, no par
value, 75,000,000 shares
authorized; 14,500,000
shares issued and
outstanding historical and
17,750,000 shares
pro forma.................. 17.8
Class B Common Stock, no par
value, 50,000,000 shares
authorized; 5,000,000
shares issued and
outstanding................ 5.0
Additional paid-in
capital.................... 46.0
Retained earnings........... 391.2
Unrealized appreciation of
invested assets, net....... 22.7
-------
Total equity.............. 482.7
-------
Total capitalization.......... $ 646.2
-------
-------
</TABLE>
- ------------------
(A) Represents AmerUs Life's Capital Contribution to or for the benefit of the
Non-Life Insurance Subsidiaries of certain net assets having an aggregate
net carrying value of approximately $79 million. Also represents the
establishment of the Bank Credit Facility, consisting of $100 million in
term debt and a $75 million revolving credit facility.
(B) Represents the issuance of Class A Common Stock (net of related issuance
costs).
(C) Represents the issuance of the Capital Securities by the Trust (net of
related issuance costs). One hundred percent of the assets of the Trust will
consist of approximately $88.7 million in principal amount of the Junior
Subordinated Debt Securities of the Company. The financial statements of the
Trust will be reflected in the Company's consolidated financial statements
with the Capital Securities shown as Company-obligated
mandatorily-redeemable Capital Securities of subsidiary trust holding solely
Junior Subordinated Debentures of the Company.
(D) Retroactively restated to give effect to the issuance of Class A Common
Stock and Class B Common Stock to AmerUs Group.
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth certain financial and operating data of the
Company. The selected consolidated financial data below for the nine months
ended September 30, 1996 and each of the three years ending December 31, 1995
are derived from the Consolidated Financial Statements of the Company, which
financial statements have been audited by KPMG Peat Marwick LLP, independent
auditors. The selected consolidated financial data provided below for the nine
months ending September 30, 1995 and for each of the two years ending December
31, 1992 are derived from the unaudited consolidated financial statements of the
Company. In the opinion of management, the unaudited financial data for the two
years ended December 31, 1992 presents fairly the consolidated financial
statements for such periods in conformity with GAAP.
The foregoing give effect to the Reorganization and the Distribution as if
both had been completed prior to the periods presented, but do not give effect
to the Capital Contribution. In the opinion of management, the financial
information presented for all interim periods reflects all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such data. Results for the nine-month periods ending September
30, 1996 and 1995 are not necessarily indicative of results that may be expected
for any other interim period or the year as a whole. This data should be read in
conjunction with (i) "Management's Discussion and Analysis of Results of
Operations and Financial Condition," (ii) the audited Consolidated Financial
Statements of the Company as of September 30, 1996 and December 31, 1995 and
1994, and for the nine months ended September 30, 1996 and each of the years in
the three-year period ended December 31, 1995, which financial statements have
been audited by KPMG Peat Marwick LLP, independent auditors, together with the
related notes and the report thereon, (iii) the unaudited consolidated financial
statements of the Company as of September 30, 1995 and for the nine months ended
September 30, 1995, and (iv) other financial data included elsewhere in this
Prospectus.
26
<PAGE>
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS ENDED AS OF OR FOR THE YEAR ENDED DECEMBER 31,(A)
SEPTEMBER 30,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT DATA:
Revenues:
Insurance premiums.............................. $ 133.7 $ 183.9 $ 244.1 $ 237.9 $ 226.4 $ 192.9 $ 186.9
Product charges................................. 39.1 42.5 57.3 56.3 57.4 57.2 50.8
Net investment income........................... 189.3 210.5 285.2 275.7 269.9 273.1 268.6
Realized gains (losses) on investments.......... 62.5 41.6 51.4 (19.9) 15.5 10.1 15.7
Other income.................................... 2.3 2.3 5.4 2.4 2.4 0.9 3.6
Contribution from the Closed Block.............. 2.7 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total revenues.................................... 429.6 480.8 643.4 552.4 571.6 534.2 525.6
Benefits and expenses:
Total policyowner benefits...................... 222.9 279.7 374.6 369.9 364.3 334.8 327.8
Total expenses.................................. 78.8 80.9 108.9 111.4 106.0 100.0 87.6
Dividends to policyowners....................... 26.3 36.3 49.4 45.0 45.5 42.1 40.9
--------- --------- --------- --------- --------- --------- ---------
Total benefits and expenses....................... 328.0 396.9 532.9 526.3 515.8 476.9 456.3
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes........................ 101.6 83.9 110.5 26.1 55.8 57.3 69.3
Income tax expense................................ 38.7 29.9 41.2 19.4 21.4 18.6 24.5
--------- --------- --------- --------- --------- --------- ---------
Income before cumulative effect of a change in
accounting principles............................ 62.9 54.0 69.3 6.7 34.4 38.7 44.8
Cumulative effect of a change in accounting
principles, net of tax........................... 0.0 0.0 0.0 0.0 (3.2) 0.0 0.0
--------- --------- --------- --------- --------- --------- ---------
Net income........................................ $ 62.9 $ 54.0 $ 69.3 $ 6.7 $ 31.2 $ 38.7 $ 44.8
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings per share (C)............................ $ 2.76 -- $ 3.05 -- -- -- --
CONSOLIDATED BALANCE SHEET DATA:
Total invested assets............................. $ 2,810.2 $ 3,839.7 $ 3,965.0 $ 3,491.7 $ 3,639.3 $ 3,274.8 $ 3,155.8
Total assets...................................... 4,291.8 4,248.8 4,371.9 4,036.9 4,030.7 3,707.6 3,572.5
Total liabilities................................. 3,779.4 3,760.5 3,832.0 3,618.6 3,524.8 3,286.4 3,195.6
Total shareholder's equity (B)(D)................. 512.4 488.3 539.9 418.3 505.9 421.2 376.9
OTHER OPERATING DATA:
Cash flows from operating activities.............. $ 85.3 $ 128.4 $ 202.0 $ 172.4 $ 173.6 $ 101.5 $ 155.7
Cash flows from investing activities.............. 5.8 (95.0) (148.3) (134.9) (192.1) (99.6) (175.2)
Cash flows from financing activities.............. (95.8) (56.5) (72.5) (24.8) 14.5 9.2 19.1
Individual life insurance in force, net of
reinsurance...................................... $ 26,082 $ 25,865 $ 25,984 $ 25,282 $ 24,698 $ 23,947 $ 23,181
Number of employees............................... 407 406 406 457 489 505 526
STATUTORY DATA:
Statutory premiums and deposits:
Individual life................................. $ 236.0 $ 233.0 $ 307.1 $ 296.4 $ 286.3 $ 270.2 $ 261.7
Annuities (E)................................... 73.4 145.6 197.1 187.8 90.4 65.2 108.5
</TABLE>
- ------------------
(A) The merger of Old AML into Central Life, which was consummated in 1994, has
been accounted for as a pooling of interests transaction.
(B) The Capital Contribution would have the effect of reducing total
shareholder's equity as of September 30, 1996 and the year ended December
31, 1995 by $79 million.
(C) Retroactively reflects the pro forma effect of the issuance of 17.75 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.
(D) Amounts reported prior to September 30, 1996 reflect policyowners' equity.
From December 31, 1993, results reflect the impact of SFAS 115, "Accounting
for Certain Investments in Debt and Equity Securities." See Note 2 to
Consolidated Financial Statements.
(E) Effective May 1996, substantially all new sales of individual deferred
annuities are made through the Ameritas Joint Venture. See
"Business--Ameritas Joint Venture."
27
<PAGE>
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements give effect to (i) the establishment of the Closed Block, (ii) the
Capital Contribution, (iii) the sale of 3.25 million shares of Class A Common
Stock in the Offerings at a per share price of $16.50 (after deducting the
underwriting discount and estimated offering expenses payable by the Company and
assuming no exercise of the underwriters' over-allotment option), (iv) the
Preferred Offering, and (v) the establishment of the Bank Credit Facility, as if
the establishment of the Closed Block, the Capital Contribution, the Offerings,
the Preferred Offering and the Bank Credit Facility had occurred as of September
30, 1996, for the purposes of the unaudited pro forma condensed consolidated
balance sheet and as of the beginning of the respective periods for the purposes
of the unaudited pro forma condensed consolidated statements of income for the
nine months ended September 30, 1996 and the year ended December 31, 1995.
The unaudited pro forma information reflects estimated net proceeds from the
Offerings of $49.3 million and estimated net proceeds from the Preferred
Offering of $84.6 million (in each case after deducting the underwriting
discount and estimated offering expenses payable by the Company). The $49.3
million estimated net proceeds from the Offerings will be used by the Company to
retire debt under the Bank Credit Facility. The estimated net proceeds from the
Preferred Offering will be used to repay debt under the Bank Credit Facility. At
the time of the Distribution, $100 million was borrowed by the Company as term
debt and $75 million under the revolving loan component of the Bank Credit
Facility. The Company intends to use the proceeds from such borrowings to make a
$125 million capital contribution to AmerUs Life and to purchase a $50 million
surplus note issued by AmerUs Life. See "Use of Proceeds" and "The Subscription
Offering."
The unaudited pro forma condensed consolidated financial statements are
based on available information and on assumptions management believes are
reasonable and that reflect the effects of the transactions described above.
Such unaudited pro forma condensed consolidated financial statements are
provided for informational purposes only and should not be construed to be
indicative of the Company's consolidated financial position or results of
operations had these transactions been consummated on the dates assumed and do
not in any way represent a projection or forecast of the Company's consolidated
financial position or results of operations for any future date or period. The
unaudited pro forma condensed consolidated financial statements should be read
in conjunction with the notes thereto, the audited Consolidated Financial
Statements of the Company, together with the related notes and report thereon,
the unaudited consolidated financial statements of the Company included
elsewhere in this Prospectus and with the information set forth under
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and "Business."
28
<PAGE>
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------------------------------------------------------------
OFFERINGS AND PRO FORMA PRO FORMA
REORGANIZATION ASSUMING ASSUMING NO
RELATED PREFERRED PREFERRED PREFERRED
HISTORICAL (A) ADJUSTMENTS OFFERING (E) OFFERING (F) OFFERING (G)
------------- ------------------ --------------- ----------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Invested assets
Fixed maturities....................... $ 2,297.6 $ 171.5 (B)(D $ 2,469.1 $ 2,469.1
Equity securities...................... 74.6 (0.7)(B) 73.9 73.9
Short-term investments................. 12.0 12.0 12.0
Mortgage loans......................... 260.2 (9.7)(B) 250.5 250.5
Real estate............................ 40.0 (29.6)(B) 10.4 10.4
Policy loans........................... 64.0 64.0 64.0
Other investments...................... 61.8 61.8 61.8
------------- ------- ----------- -------------
Total investments...................... 2,810.2 131.5 2,941.7 2,941.7
Accrued investment income................ 42.1 42.1 42.1
Deferred policy acquisition costs........ 123.5 123.5 123.5
Property and equipment, net.............. 13.3 (8.7)(B) 4.6 4.6
Deferred income taxes.................... 4.4 4.4 4.4
Other assets............................. 61.1 1.4 62.5 61.1
Closed Block............................. 1,237.2 1,237.2 1,237.2
------------- ------- ------ ----------- -------------
Total assets......................... $ 4,291.8 $ 122.8 $ 1.4 $ 4,416.0 $ 4,414.6
------------- ------- ------ ----------- -------------
------------- ------- ------ ----------- -------------
LIABILITIES:
Policyowner reserves and policyowner
funds................................... $ 2,113.2 $ 2,113.2 $ 2,113.2
Other liabilities........................ 119.8 35.5(B) -- 155.3 155.3
Long-term debt........................... 45.1 117.0 (B)(C)(D (84.6) 77.5 162.1
Closed Block liabilities................. 1,501.3 1,501.3 1,501.3
------------- ------- ------ ----------- -------------
Total liabilities.................... 3,779.4 152.5 (84.6) 3,847.3 3,931.9
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely Junior Subordinated
Debentures of the Company............... -- 86.0 86.0 0.0
SHAREHOLDER'S EQUITY:
Preferred stock, no par value, 20,000,000
shares authorized, no shares issued and
outstanding............................. --
Common stock, Class A, no par value,
75,000,000 shares authorized; 14,500,000
shares issued and outstanding
historical; 17,750,000 shares pro
forma................................... 14.5 3.3(C) 17.8 17.8
Common stock, Class B, no par value,
50,000,000 shares authorized; 5,000,000
shares issued and outstanding........... 5.0 5.0 5.0
Additional paid-in capital............... 46.0(C) 46.0 46.0
Retained earnings........................ 470.2 (79.0)(B) 391.2 391.2
Unrealized appreciation of available for
sale securities......................... 22.7 22.7 22.7
------------- ------- ------ ----------- -------------
Total shareholder's equity........... 512.4 (29.7) -- 482.7 482.7
------------- ------- ------ ----------- -------------
Total liabilities and shareholder's
equity.............................. $ 4,291.8 $ 122.8 $ 1.4 $ 4,416.0 $ 4,414.6
------------- ------- ------ ----------- -------------
------------- ------- ------ ----------- -------------
</TABLE>
(The Accompanying Notes are an integral part of this Unaudited
Pro Forma Condensed Consolidated Balance Sheet)
29
<PAGE>
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
------------------------------------------------------------------------------
PRO FORMA PRO FORMA
OFFERINGS AND ASSUMING ASSUMING NO
REORGANIZATION PREFERRED PREFERRED PREFERRED
HISTORICAL (A) RELATED ADJUSTMENTS OFFERING (E) OFFERING (F) OFFERING (G)
------------- --------------------- ------------ ----------- -------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
REVENUES:
Insurance premiums................. $ 133.7 $ (95.8)(H) $ 37.9 $ 37.9
Product charges.................... 39.1 (9.1)(H) 30.0 30.0
Net investment income.............. 189.3 (50.6)(B)(H) 138.7 138.7
Realized gains on investments...... 62.5 1.4(H) 63.9 63.9
Other.............................. 2.3 1.5(I) 3.8 3.8
Contribution from the Closed
Block............................. 2.7 (2.6)(H) 0.1 0.1
------------- ------- ------------ ----------- -------------
Total revenues..................... 429.6 (155.2) -- 274.4 274.4
------------- ------- ------------ ----------- -------------
BENEFITS AND EXPENSES:
Total policyowner benefits......... 222.9 (110.7)(H) 112.2 112.2
Total expenses..................... 78.8 (14.1)(H)(K)(M)(N) 1.8(L) 66.5 64.7
Dividends to policyowners.......... 26.3 (26.3)(H)
------------- ------- ------------ ----------- -------------
Total benefits and expenses........ 328.0 (151.1) 1.8 178.7 176.9
------------- ------- ------------ ----------- -------------
Income before income taxes........... 101.6 (4.1) (1.8) 95.7 97.5
Income tax expense................... 38.7 (5.8)(J)(O) (0.6)(O) 32.3 32.9
------------- ------- ------------ ----------- -------------
Net income........................... $ 62.9 $ 1.7 $ (1.2) $ 63.4 $ 64.6
------------- ------- ------------ ----------- -------------
------------- ------- ------------ ----------- -------------
Net income per share................. $ 2.76 $ 2.79 $ 2.84
Shares used in the calculation of net
income per share.................... 22.75 22.75 22.75
</TABLE>
(The Accompanying Notes are an integral part of this
Unaudited Pro Forma Condensed Consolidated Statement of Income)
30
<PAGE>
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------------------------------
PRO FORMA PRO FORMA
OFFERINGS AND ASSUMING ASSUMING NO
REORGANIZATION PREFERRED PREFERRED PREFERRED
HISTORICAL (A) RELATED ADJUSTMENTS OFFERING (E) OFFERING (F) OFFERING (G)
------------- --------------------- ------------ ----------- -------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
REVENUES:
Insurance premiums................. $ 244.1 $ (182.2)(H) $ 61.9 $ 61.9
Product charges.................... 57.3 (16.9)(H) 40.4 40.4
Net investment income.............. 285.2 (99.5)(B)(H) 185.7 185.7
Realized gains on investments...... 51.4 (0.9)(H) 50.5 50.5
Other.............................. 5.4 2.0(I) 7.4 7.4
Contribution from the Closed
Block............................. 7.6(H) 7.6 7.6
------------- ------- ------------ ----------- -------------
Total revenues..................... 643.4 (289.9) 0.0 353.5 353.5
------------- ------- ------------ ----------- -------------
BENEFITS AND EXPENSES:
Total policyowner benefits......... 374.6 (200.3)(H) 174.3 174.3
Total expenses..................... 108.9 (34.9)(H)(K)(M)(N) 2.4(L) 76.4 74.0
Dividends to policyowners.......... 49.4 (49.4)(H)
------------- ------- ------------ ----------- -------------
Total benefits and expenses........ 532.9 (284.6) 2.4 250.7 248.3
------------- ------- ------------ ----------- -------------
Income before income taxes........... 110.5 (5.3) (2.4) 102.8 105.2
Income tax expense................... 41.2 (1.9)(O) (0.8)(O) 38.5 39.3
------------- ------- ------------ ----------- -------------
Net income........................... $ 69.3 $ (3.4) $ (1.6) $ 64.3 $ 65.9
------------- ------- ------------ ----------- -------------
------------- ------- ------------ ----------- -------------
Net income per share................. $ 3.05 $ 2.83 $ 2.90
Shares used in the calculation of net
income per share.................... 22.75 22.75 22.75
</TABLE>
(The Accompanying Notes are an integral part of this
Unaudited Pro Forma Condensed Consolidated Statement of Income)
31
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) As a result of the Distribution which caused its Non-Life Insurance
Subsidiaries to be distributed to AmerUs Group, the Consolidated Financial
Statements include only the accounts and operations, after eliminations, of the
Company and its wholly-owned life insurance subsidiaries, principally, AmerUs
Life and American Vanguard Life Insurance Company.
(B) The Capital Contribution consisted of a contribution of net assets as
follows:
<TABLE>
<CAPTION>
BOOK VALUE
SEPTEMBER 30, 1996
---------------------
(IN MILLIONS)
<S> <C>
Fixed maturity securities............................................... $ 3.5
Equity securities....................................................... 0.7
Mortgage loans.......................................................... 9.7
Real estate............................................................. 29.6
Property and equipment, net............................................. 8.7
Cash.................................................................... 35.5
Long-term debt assumed.................................................. (8.7)
-----
$ 79.0
-----
-----
</TABLE>
Net investment income has been increased by $0.1 million and $0.2 million
for the nine months ended September 30, 1996 and the year ended December 31,
1995, respectively, which represents the actual net investment loss of the
assets distributed for such periods.
(C) Represents estimated net proceeds to the Company of $49.3 million from
the issuance of 3,250,000 shares of Class A Common Stock in the Offerings and
the use of the proceeds to retire long-term debt.
(D) Represents $175 million of proceeds from the Bank Credit Facility and
the investment of such proceeds in fixed maturity securities. No adjustment has
been included to reflect the investment earnings that would have resulted from
the investment of the proceeds. If such proceeds would have been invested at the
average rate of return on the Company's investment portfolio for each respective
period, $10.3 million and $13.7 million would have been earned in the nine
months ended September 30, 1996 and the year ended December 31, 1995.
(E) Represents estimated net proceeds of $84.6 million from the Preferred
Offering and the use of such proceeds to repay long-term debt.
(F) Giving effect to the establishment of the Closed Block, management fee
income, the Capital Contribution, the Offerings, the Bank Credit Facility, and
the Preferred Offering.
(G) Giving effect to the establishment of the Closed Block, management fee
income, the Capital Contribution, the Offerings and the Bank Credit Facility,
but not the Preferred Offering.
(H) The unaudited pro forma condensed consolidated statements of income
reflect an allocation of revenues and expenses to the Closed Block based on
certain estimates and assumptions that management believes are reasonable. The
contribution from the Closed Block reflected in the unaudited pro forma
condensed consolidated statements of income is not necessarily indicative of the
Closed Block's contribution had the Closed Block been established as of January
1, 1995 or of the expected contribution for any future period.
The Closed Block, which was established on June 30, 1996, will include only
those revenues, benefits, expenses and dividends considered in funding the
Closed Block. See "The Reorganization and Distribution of the Non-Life Insurance
Subsidiaries--Establishment and Operation of the Closed Block." The pre-tax
contribution from the Closed Block is reported as a single line item of total
revenues from continuing operations. Many expenses related to the Closed Block
operations are charged to operations
32
<PAGE>
outside the Closed Block, accordingly, the contribution from the Closed Block
does not represent the actual profitability of the Closed Block operations.
Operating costs and expenses outside of the Closed Block are, therefore,
disproportionate to the business outside the Closed Block. Income tax expense
applicable to the Closed Block, which will be funded in the Closed Block, is
reflected as a component of income tax expense.
The excess of Closed Block liabilities over Closed Block assets as of
September 30, 1996 represents the total estimated future contribution from the
Closed Block expected to emerge from operations in the Closed Block after income
taxes. If the actual contribution from the Closed Block in any given period
equals or exceeds the expected contribution for such period as determined at the
establishment of the Closed Block, the expected contribution would be recognized
in income from continuing operations for that period. Any excess of the actual
contribution over the expected contribution would also be recognized in income
from continuing operations to the extent that the aggregate expected
contribution for all prior periods exceeded the aggregate actual contribution.
Any remaining excess of actual contribution over expected contributions would be
accrued in the Closed Block as a liability for future policyowners' dividends.
This accrual for the future dividends effectively limits the actual Closed Block
contribution recognized in income from continuing operations to the Closed Block
contribution expected to emerge from operation of the Closed Block as determined
as of the date of establishment of the Closed Block.
The following is a summary of Closed Block pro forma income statement
adjustments for the respective periods:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
-------------------- -------------------
(IN MILLIONS)
<S> <C> <C>
CLOSED BLOCK REVENUES
Insurance premiums..................................................... $ 95.8 $ 182.2
Product charges........................................................ 9.1 16.9
Net investment income.................................................. 50.7 99.7
Realized gains (losses) on investments................................. (1.4) 0.9
------- -------
$ 154.2 $ 299.7
CLOSED BLOCK EXPENSES
Total policyowner benefits............................................. 110.7 200.3
Total expenses......................................................... 19.8 42.4
Dividends to policyowners.............................................. 26.3 49.4
------- -------
$ 156.8 $ 292.1
------- -------
------- -------
Contributions from the Closed Block.................................... $ (2.6) $ 7.6
------- -------
------- -------
</TABLE>
If over the period the policies and contracts in the Closed Block remain in
force the actual contribution from the Closed Block is less than the expected
contribution from the Closed Block, only such actual contribution would be
recognized in income from continuing operations. If the actual contribution from
the Closed Block in any given period is less than the expected contribution for
that period and changes in dividend scales are inadequate to offset the negative
performance in relation to the expected performance, the contribution inuring to
shareholders of the Company will be reduced. If a liability for policyowners'
dividends had been previously established in the Closed Block because the actual
contribution to the relevant date had exceeded the expected contribution to such
date, such liability would be reduced (but not below zero) in any periods in
which the actual contribution for that period is less than the expected
contribution for such period. See "The Reorganization and Distribution of the
Non-Life Insurance Subsidiaries" and "Management's Discussion of Results of
Operations and Financial Condition."
33
<PAGE>
(I) Represents fixed fee for management services and assistance to be
received under an Intercompany Agreement between AmerUs Group and the Company as
compensation for services rendered by Company employees. See "Certain
Transactions and Relationships--Intercompany Agreement--Management Services."
(J) Represents the elimination of $4.5 million of the mutual company equity
add-on tax for the six months ended June 30, 1996, which is applicable only to
mutual life insurance companies. This adjustment can vary significantly from
year to year, based on rates published by the IRS. The Company believes that
this tax will not be applicable to the Company after the Reorganization due to
AmerUs Life's conversion into a stock corporation.
(K) Total expenses have been reduced by $0.9 million and $1.1 million for
the nine months ended September 30, 1996 and the year ended December 31, 1995,
respectively, as a result of the termination of a certain employment contract by
AmerUs Life.
(L) Represents dividends of $5.7 million and $7.6 million for the nine
months ended September 30, 1996 and the year ended December 31, 1995,
respectively, on the shares issued in conjunction with the Preferred Offering
which are payable at 8.85% per annum, net of the reduction in interest expense
resulting from the retirement of long-term debt from the proceeds from the
Preferred Offering of $3.9 million and $5.2 million for the nine months ended
September 30, 1996 and the year ended December 31, 1995, respectively.
(M) Represents interest expense under the Bank Credit Facility based upon a
rate of 6.25% per annum, and amortization of debt expense. The resulting
adjustment was $8.9 million and $11.7 million for the nine months ended
September 30, 1996 and the year ended December 31, 1995, respectively.
(N) Represents the reduction in interest expense under the Bank Credit
Facility resulting from the application of the proceeds from the Offerings to
retire long-term debt. The adjustment was $2.3 million and $3.1 million for the
nine months ended September 30, 1996 and the year ended December 31, 1995,
respectively.
(O) Represents the income tax effect on the net pro forma adjustments.
34
<PAGE>
ORGANIZATIONAL STRUCTURE
The following chart illustrates the general organization of AMHC and its
subsidiaries, including the Company, after the Offerings:
[GRAPH]
* Assuming no exercise of the Underwriters' over-allotment option in the
Public Offering.
** The Non-Life Insurance Subsidiaries consist of API, AmerUs Bank, and Iowa
Realty Co., Inc., and each of their respective subsidiaries.
*** AmerUs Life participates in the Ameritas Joint Venture through its ownership
interest in AMAL Corporation, a Nebraska corporation ("AMAL"). See
"Business--Ameritas Joint Venture."
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THE FOLLOWING ANALYSIS OF THE CONSOLIDATED RESULTS OF OPERATIONS AND
FINANCIAL CONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA AND CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS.
BACKGROUND
THE REORGANIZATION, THE CAPITAL CONTRIBUTION AND THE DISTRIBUTION
The Company is an insurance holding company formed on August 1, 1996, in
connection with the Reorganization of American Mutual Life on June 30, 1996. As
part of the Reorganization, all of the shares of capital stock of AmerUs Life
were issued to AMHC. Subsequent to the Reorganization, on August 1, 1996, AMHC
contributed all of its shares of capital stock of AmerUs Life to AmerUs Group.
On August 1, 1996, all of the shares of the Company's capital stock were issued
to AmerUs Group. See "The Reorganization and Distribution of the Non-Life
Insurance Subsidiaries."
Prior to the Distribution, AmerUs Life made the Capital Contribution to or
for the benefit of the Non-Life Insurance Subsidiaries. The Capital Contribution
consisted of cash and other property having a net carrying value of
approximately $79 million. Following the Capital Contribution, a series of
transactions were undertaken by the Company and its affiliates. AmerUs Life
effected the Distribution pursuant to which it distributed the Non-Life
Insurance Subsidiaries to AmerUs Group. Immediately after the Distribution,
AmerUs Group contributed all of its shares of common stock in AmerUs Life to the
Company. Under this structure, the Company is an intermediate holding company,
with AmerUs Group as its direct parent company and AmerUs Life as its
wholly-owned subsidiary. Under Iowa law, AMHC is required to retain direct or
indirect ownership and control of shares representing a majority of the vote of
the outstanding capital stock of the Company. Immediately following the
Distribution, the Company entered into the Bank Credit Facility, pursuant to
which it borrowed $100 million in term debt and $75 million through a revolving
line of credit. The Company used the proceeds from such borrowings to make a
$125 million capital contribution to AmerUs Life and to purchase a $50 million
surplus note from AmerUs Life. The Company will use the proceeds of the
Offerings and the Preferred Offering to repay such borrowings.
The Distribution effectively separated AMHC's non-life insurance businesses
from the life insurance businesses owned by the Company, such that the companies
engaged in non-life insurance businesses will no longer be subsidiaries of the
Company. See "The Reorganization and Distribution of the Non-Life Insurance
Subsidiaries."
ACCOUNTING TREATMENT
The Selected Consolidated Financial and Operating Data, the Consolidated
Financial Statements and other financial data of the Company presented herein
give effect to the Reorganization and the Distribution as if both had been
completed prior to the periods presented (including giving effect to the
establishment of the Closed Block as of June 30, 1996), but do not give effect
to the Capital Contribution.
AMERITAS JOINT VENTURE
Under the Ameritas Joint Venture, the Company will no longer offer DEFERRED
FIXED ANNUITIES for sale to new customers except through the Ameritas Joint
Venture, although the Company will continue to issue renewal and replacement
annuity contracts with respect to annuity contracts issued by it prior to the
formation of the Ameritas Joint Venture. Consequently, future sales of fixed
annuities by the Company will be substantially reduced, which will have an
effect on future investment income and product charges of the Company.
Management believes that any reductions in net income resulting from the
curtailment of direct annuity sales by the Company will be more than offset by
management fees and by the Company's increased equity interest in the net income
of the Ameritas Joint Venture.
OVERVIEW
The Company is engaged in the business of underwriting, marketing and
distributing a broad range of individual life insurance and annuity products to
individuals and businesses in 45 states and the
36
<PAGE>
District of Columbia. The Company's primary product offerings consist of whole
life, universal life and term life insurance policies and fixed annuities. Since
April 1, 1996 the Company has been a party to the Ameritas Joint Venture with
Ameritas Life Insurance Corp., through which it now markets fixed annuities and
has begun to sell variable annuities and variable life insurance products. See
"Business--Products" and "Business--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.
Premium revenues reported for traditional life insurance products are
recognized as revenues when due. Future policy benefits and policy acquisition
costs are recognized as expenses over the life of the policy by means of a
provision for future policy benefits and amortization of deferred policy
acquisition costs.
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 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.
ADJUSTED OPERATING INCOME
The following table 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
37
<PAGE>
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 below does not
constitute net income computed in accordance with GAAP.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income........................................ $ 62,944 $ 54,008 $ 69,348 $ 6,667 $ 31,209 $ 38,753 $ 44,847
Net realized (gains) losses on investments (A).... (40,006) (25,912) (32,244) 11,223 (10,187) (6,646) (8,547)
Equity add-on tax (B)............................. 4,480 9,585
Reorganization costs (C).......................... 726 115 1,426
Adoption of SFAS 106 (D).......................... 3,214
--------- --------- --------- --------- --------- --------- ---------
Adjusted operating income......................... $ 28,144 $ 28,211 $ 38,530 $ 27,475 $ 24,236 $ 32,107 $ 36,300
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Adjusted operating income per share............... $ 1.24 $ -- $ 1.69 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------
(A) Represents realized gains or losses on investments less that portion of the
amortization of deferred policy acquisition costs adjusted for income taxes
on such amounts. Realized gains 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 the mutual life insurance company EQUITY ADD-ON TAX, which is
applicable only to mutual life insurance companies and which the Company
believes will not be applicable to the Company after June 30, 1996 due to
AmerUs Life's conversion into a stock company.
(C) Represents costs directly related to the Reorganization consisting primarily
of printing, postage, legal and consulting costs. All of the 1995 costs were
incurred in the second half of 1995. These costs were not of a continuing
nature and were not expected to have any effect on future operations.
(D) As of January 1, 1993, the Company adopted SFAS 106, pursuant to which the
cost of certain post-retirement benefits must be recognized on an accrual
basis as employees perform services to earn such benefits. The Company's
transition obligation as of January 1, 1993 amounted to approximately $3.2
million, net of income tax benefits, and was recorded as a cumulative effect
adjustment to net income.
THE CLOSED BLOCK
In connection with the Reorganization, the Closed Block was established.
Insurance policies which had a dividend scale in effect as of June 30, 1996 were
included in the Closed Block. The Closed Block is designed to provide reasonable
assurance to owners of insurance policies included therein that, after the
Reorganization, assets will be available to maintain the dividend scales and
interest credits in effect for 1995 if the experience underlying such scales and
credits continues. See "Risk Factors--The Closed Block" and "The Reorganization
and Distribution of the Non-Life Insurance Subsidiaries--Establishment and
Operation of the Closed Block."
The contribution to the operating income of the Company from the Closed
Block is reported as a single line item in the income statement. Accordingly,
premiums, product charges, investment income, realized gains (losses) on
investments, policyowner benefits and dividends attributable to the Closed
Block, less certain minor expenses including amortization of deferred policy
acquisition costs, are shown as a net number under the caption the "Contribution
from the Closed Block." This results in material reductions in the respective
line items in the income statement while having no effect on net income. Also,
all assets allocated to the Closed Block are grouped together and shown as a
separate item entitled "Closed Block assets." Likewise, all liabilities
attributable to the Closed Block are combined and disclosed as the "Closed Block
liabilities." See "Unaudited Pro Forma Condensed Consolidated Financial
Statements."
38
<PAGE>
COMBINED RESULTS OF OPERATIONS
Since the operating results from the Closed Block for the three months ended
September 30, 1996 are reported on one line of the income statement,
"Contribution from the Closed Block," the individual income statement components
for the first nine months of 1996 are not fully comparable with those for the
first nine months of 1995, prior to the establishment of the Closed Block.
Management believes that the presentation of the results of operations for the
nine months ended September 30, 1996 on a combined basis as if the Closed Block
had not been formed facilitates comparability with the results of operations for
the nine months ended September 30, 1995. Accordingly, the combined presentation
set forth below includes certain revenues and expenses associated with the
policies included in the Closed Block. Such presentation does not, however,
affect the Company's reported net income.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1996
-----------------------------------
CLOSED
AS REPORTED BLOCK COMBINED
----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Insurance premiums........................................................ $ 133,704 $ 48,747 $ 182,451
Product charges........................................................... 39,135 4,657 43,792
Net investment income..................................................... 189,293 26,826 216,119
Realized gains (losses) on investments.................................... 62,555 70 62,625
Other income.............................................................. 2,280 0 2,280
Contribution from the Closed Block........................................ 2,659 (2,659) 0
----------- --------- -----------
Total revenues............................................................ 429,626 77,641 507,267
Benefits and expenses:
Policyowner benefits...................................................... 222,929 51,028 273,957
Underwriting, acquisition and insurance expenses.......................... 46,892 1,038 47,930
Amortization of deferred policy acquisition costs......................... 31,865 11,244 43,109
Dividends to policyowners................................................. 26,343 14,331 40,674
----------- --------- -----------
328,029 77,641 405,670
Income before income taxes.................................................. 101,597 0 101,597
Income tax expenses......................................................... 38,653 0 38,653
----------- --------- -----------
Net income.................................................................. $ 62,944 $ 0 $ 62,944
----------- --------- -----------
----------- --------- -----------
</TABLE>
39
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
A summary of the Company's combined revenues, including revenues associated
with the Closed Block, follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Insurance premiums
Traditional life insurance premiums......................................... $ 169,435 $ 163,857
Immediate annuity and supplementary contract premiums....................... 11,366 14,594
Other premiums.............................................................. 1,650 5,413
----------- -----------
Total insurance premiums.................................................. 182,451 183,864
Universal life product charges.............................................. 43,138 42,144
Annuity product charges..................................................... 654 417
----------- -----------
Total product charges..................................................... 43,792 42,561
Net investment income....................................................... 216,119 210,491
Realized gains (losses) on investments...................................... 62,625 41,564
Other revenues.............................................................. 2,280 2,285
----------- -----------
Total revenues............................................................ $ 507,267 $ 480,765
----------- -----------
----------- -----------
</TABLE>
Insurance premiums decreased $1.4 million to $182.5 million in the nine
months ended September 30, 1996 compared to $183.9 million in the nine months
ended September 30, 1995. Traditional life insurance premiums increased $5.6
million due to continued growth in renewal premiums. Immediate annuity deposits
and SUPPLEMENTARY CONTRACT premiums were $3.2 million lower in the nine months
ended September 30, 1996 compared to the nine months ended September 30, 1995
due to decreased immediate annuity sales. Other premiums were $3.8 million lower
in the nine months ended September 30, 1996 than in the nine months ended
September 30, 1995 primarily due to the Company's exit from several group life
and long-term disability reinsurance pools in the second half of 1995 and the
sale of the Company's remaining group life operation in the third quarter of
1996, as part of management's continuing review of insurance products'
profitability.
Universal life product charges were $1.0 million higher in the nine months
ended September 30, 1996 compared to the same period in 1995 primarily due to
increased COST OF INSURANCE charges as a result of the normal aging of that
block of business.
Net investment income increased by $5.6 million, or 2.7%, to $216.1 million
in the nine months ended September 30, 1996 as compared to $210.5 million in the
nine months ended September 30, 1995. The increase was attributable to an
increase in average invested assets. Average invested assets increased by $234.6
million to $3,900.3 million, including Closed Block investments, during the nine
months ended September 30, 1996. The effective yield on average invested assets
was 7.85% in the nine months ended September 30, 1996, compared to 7.87% in the
same period of 1995. The decrease in effective yield is due to lower bond yields
in the first nine months of 1996 compared to the same period in 1995.
Realized gains on investments were $62.6 million in the nine months ended
September 30, 1996, compared to gains of $41.6 million in the nine months ended
September 30, 1995. The increase of $21.0
40
<PAGE>
million resulted primarily from increased sales of common stock, reflecting the
Company's decision to reduce its exposure to equity securities. Proceeds from
these sales were invested primarily in fixed maturity securities.
A summary of the Company's combined policyowner benefits, including policyowner
benefits associated with the Closed Block, follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Traditional life insurance
Death benefits.................................................... $ 25,656 $ 24,356
Change in liability for future policy benefits and other policy
benefits......................................................... 117,849 112,935
----------- -----------
Total traditional life insurance benefits....................... 143,505 137,291
Universal life insurance
Death benefits in excess of cash value............................ 13,324 12,668
Interest credited to policyowner account balances................. 35,457 33,366
Other policy benefits............................................. 3,883 4,493
----------- -----------
Total universal life insurance benefits......................... 52,664 50,527
Annuities
Interest credited to deferred annuity account balances............ 52,142 59,123
Other annuity benefits............................................ 23,988 27,195
----------- -----------
Total annuity benefits.......................................... 76,130 86,318
Miscellaneous benefits.............................................. 1,658 5,546
----------- -----------
Total policyowner benefits...................................... $ 273,957 $ 279,682
----------- -----------
----------- -----------
</TABLE>
Total policyowner benefits decreased $5.7 million to $274.0 million in the
nine months ended September 30, 1996 as compared to the nine months ended
September 30, 1995. Traditional life benefits increased $6.2 million primarily
due to the growth in the amount of such business in force. Universal life
benefits increased by $2.1 million primarily due to increased interest credited
to policyowner account balances. While the weighted average crediting rate for
the Company's universal life liabilities decreased 16 basis points from 6.47% in
the nine months ended September 30, 1995 to 6.31% in the nine months ended
September 30, 1996, the Company's average liabilities increased $40.8 million
from the first nine months of 1995 to the first nine months of 1996, resulting
in the increased credited amounts in the 1996 period.
Annuity benefits decreased $10.2 million in the nine month period ended
September 30, 1996 to $76.1 million compared to $86.3 million in the nine months
ended September 30, 1995. Such benefits decreased due to reduced interest
credited to policyowner account balances and decreased other annuity benefits.
The weighted average crediting rate for the Company's individual deferred
annuity liabilities decreased 88 basis points to 5.39% in the nine months ended
September 30, 1996 compared to 6.27% in the nine months ended September 30,
1995. The Company's average deferred annuity
41
<PAGE>
liabilities decreased $60.6 million from the first nine months of 1995 compared
to the same period in 1996, also contributing to the decrease in interest
credited amounts in the 1996 period. The decrease in other annuity benefits was
the result of reduced immediate annuity sales in 1996.
The decrease in miscellaneous benefits of $3.9 million to $1.6 million in
the nine months ended September 30, 1996 compared to $5.5 million in the nine
months ended September 30, 1995 was primarily the result of the Company's exit
from several group life and long-term disability reinsurance pools in the second
half of 1995 and the sale of the Company's remaining group life operation in the
third quarter of 1996.
A summary of the Company's combined expenses, including expenses associated
with the Closed Block, follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Commission expense, net of deferrals............................................. $ 6,843 $ 7,600
Other underwriting, acquisition and insurance expenses, net of deferrals......... 41,087 32,239
Amortization of deferred policy acquisition costs................................ 43,109 41,096
--------- ---------
Total expenses............................................................... $ 91,039 $ 80,935
--------- ---------
--------- ---------
</TABLE>
Commission expense, net of deferrals, decreased $0.8 million to $6.8 million
in the first nine months of 1996 compared to $7.6 million in the same period of
1995, primarily due to a decrease in gross commission expense as a result of
lower sales levels and the conversion of new annuity sales to the Ameritas Joint
Venture in May 1996. Other underwriting, acquisition and insurance expenses, net
of deferrals, increased by $8.9 million, or 27.4%, to $41.1 million in the nine
months ended September 30, 1996. The increase in expenses during the 1996 period
was primarily due to increased costs related to the Reorganization of $0.9
million, the Ameritas Joint Venture of $0.8 million, settlements and associated
legal fees of $5.5 million, and higher premium taxes of $0.7 million due to a
one-time adjustment to the amortization of the guaranty association asset.
Settlements and legal fees included the establishment of a $5.0 million reserve
in connection with certain pending class action litigation. See "Business--Legal
Proceedings."
The amortization of deferred policy acquisition costs increased by $2.0
million to $43.1 million in the nine months ended September 30, 1996 compared to
$41.1 million in the nine months ended September 30, 1995. Since deferred policy
acquisition costs are generally amortized in proportion to gross margins, the
increase in amortization in the 1996 period is primarily due to higher gross
margins resulting partially from higher realized capital gains in the first nine
months of 1996 compared to the same period in 1995.
Dividends to policyowners increased by $4.4 million, or 12.1%, to $40.7
million in the first nine months of 1996 compared to $36.3 million in the first
nine months of 1995. The growth in dividends was primarily the result of the
growth and aging of the in-force policies. Traditional life reserves grew 7.9%
from September 30, 1995 to $1.18 billion at September 30, 1996. The weighted
average dividend rate credited to these policies was 7.16% for the nine months
ended September 30, 1996 compared to 7.14% for the same period in 1995.
Income before income taxes increased by $17.7 million in 1996, or 21.1%, to
$101.6 million in the nine months ended September 30, 1996 compared to $83.9
million in the nine months ended September 30, 1995. The increase resulted
primarily from the increase of $21.0 million in realized gains on investments.
42
<PAGE>
Income tax expense increased by $8.8 million in the nine months ended
September 30, 1996 to $38.7 million compared to $29.9 million in the nine months
ended September 30, 1995. The increased income taxes for the nine month period
ended September 30, 1996 were the result of the higher pre-tax income due
primarily to the increased realized gains on investments and a $4.5 million
provision for the equity add-on tax in the first half of 1996 partially offset
by $1.7 million of tax credits. The effective income tax rate for the first nine
months of 1996 was 38.1% compared to 35.6% for the first nine months of 1995.
Net income increased by $8.9 million in the nine months ended September 30,
1996 to $62.9 million from $54.0 million in the nine months ended September 30,
1995. The increased net income resulted from higher pre-tax income due primarily
to the increased realized gains on investments.
1995 COMPARED TO 1994
A summary of the Company's revenues follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Insurance premiums
Traditional life insurance premiums......................................... $ 219,732 $ 209,447
Immediate annuity and supplementary contract premiums....................... 17,659 16,680
Other premiums.............................................................. 6,696 11,785
----------- -----------
Total insurance premiums.................................................. 244,087 237,912
Universal life product charges.............................................. 56,763 55,815
Annuity product charges..................................................... 607 547
----------- -----------
Total product charges..................................................... 57,370 56,362
Net investment income....................................................... 285,244 275,691
Realized gains (losses) on investments...................................... 51,387 (19,930)
Other revenues.............................................................. 5,390 2,391
----------- -----------
Total revenues............................................................ $ 643,478 $ 552,426
----------- -----------
----------- -----------
</TABLE>
Insurance premiums increased $6.2 million to $244.1 million in 1995 compared
to $237.9 million in 1994. Traditional life insurance premiums increased $10.3
million as a result of continued growth in renewal premiums. Immediate annuity
deposits and supplementary contract premiums were $1.0 million greater in 1995
than 1994 due to increased immediate annuity sales. Other premiums were $5.1
million lower in 1995 than in 1994 primarily due to the Company's exit from
several group life and long-term disability reinsurance pools in 1995, as part
of management's continuing review of insurance products' profitability.
Universal life product charges were $0.9 million higher in 1995 compared to
1994 primarily due to increased cost of insurance charges as a result of the
normal aging of that block of business.
Net investment income increased by $9.5 million, or 3.5%, to $285.2 million
in 1995 as compared to $275.7 million in 1994. The increase was attributable to
an increase in average invested assets partially offset by a decline in the
effective yield on average invested assets. Average invested assets increased by
$162.9 million to $3,728.4 million during 1995. The effective yield on average
invested assets decreased from 7.90% in 1994 to 7.84% in 1995 reflecting a
reduction in interest income on both bonds and commercial mortgages as a result
of lower market interest rates on new investments.
43
<PAGE>
Realized gains on investments were $51.4 million in 1995 compared to
realized losses of $19.9 million in 1994. The increase of $71.3 million in 1995
resulted primarily from the combination of increased gains of $32.5 million over
1994 amounts from the sale of common stock and a gain of $9.4 million in 1995
compared to a loss of $25.5 million in 1994 from sales of fixed maturity
securities. Of the losses incurred in 1994, $21.1 million were incurred in
connection with sales of fixed maturity securities which resulted from a planned
investment strategy that maximized the after-tax proceeds from the sale of
selected fixed maturity securities. The sales of common stock in 1995 were a
direct result of the Company's decision to reduce the level of equity securities
as a percentage of its investment portfolio on a long-term basis.
Other revenues increased in 1995 by $3.0 million from 1994 levels, 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. See Note 7
to the Consolidated Financial Statements.
A summary of the Company's policyowner benefits follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Traditional life insurance
Death benefits.............................................................. $ 32,196 $ 30,044
Change in liability for future policy benefits and other policy benefits.... 152,742 149,283
----------- -----------
Total traditional life insurance benefits................................. 184,938 179,327
Universal life insurance
Death benefits in excess of cash value...................................... 17,098 15,165
Interest credited to policyowner account balances........................... 45,240 42,095
Other policy benefits....................................................... 5,214 7,237
----------- -----------
Total universal life insurance benefits................................... 67,552 64,497
Annuities
Interest credited to deferred annuity account balances...................... 78,120 77,980
Other annuity benefits...................................................... 35,582 34,918
----------- -----------
Total annuity benefits.................................................... 113,702 112,898
Miscellaneous benefits........................................................ 8,428 13,174
----------- -----------
Total policyowner benefits................................................ $ 374,620 $ 369,896
----------- -----------
----------- -----------
</TABLE>
Total policyowner benefits increased $4.7 million from 1994 to $374.6
million in 1995. Traditional life benefits increased $5.6 million due primarily
to increased mortality costs and increased liabilities for future policy
benefits, in each case associated with the growth in the amount of such business
in force. Universal life benefits increased $3.1 million primarily due to
increased interest credited to policyowner account balances. The weighted
average crediting rate for the Company's universal life liabilities increased 23
basis points from 6.44% in 1994 to 6.67% in 1995, and the Company's average
liabilities increased $41.9 million, or 5.8%, from 1994 to 1995, resulting in
the increased credited amounts in 1995.
Annuity benefits increased $0.8 million in 1995 to $113.7 million compared
to $112.9 million in 1994. Such benefits increased due to increased interest
credited to policyowner account balances and
44
<PAGE>
increased other annuity benefits. While the weighted average crediting rate for
the Company's individual deferred annuity liabilities decreased 25 basis points
to 6.16% in 1995 compared to 6.41% in 1994, the Company's average liabilities
increased $32.1 million, or 2.5%, from 1994 to 1995, resulting in the increased
interest credited amounts in 1995. The increased other annuity benefits were the
result of continued growth in the immediate annuity and supplementary contract
business in force.
The decrease in miscellaneous benefits of $4.8 million to $8.4 million in
1995 compared to $13.2 million in 1994 was primarily the result of the Company's
exit from several group life and long-term disability reinsurance pools in 1995.
A summary of the Company's expenses follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Commission expense, net of deferrals.......................................... $ 10,448 $ 9,451
Other underwriting, acquisition and insurance expenses, net of deferrals...... 48,207 59,153
Amortization of deferred policy acquisition costs............................. 50,239 42,756
----------- -----------
Total expenses............................................................ $ 108,894 $ 111,360
----------- -----------
----------- -----------
</TABLE>
Commission expense, net of deferrals, increased $1.0 million, or 10.5%, in
1995 to $10.4 million, primarily as a result of the integration of the product
lines of Central Life and Old AML and an increase in gross commissions of $3.0
million as a result of increased annuity sales in 1995. Other underwriting,
acquisition and insurance expenses, net of deferrals, decreased in 1995 by $10.9
million, or 18.5%, to $48.2 million. 1995 was the first year of the consolidated
operations of Central Life and Old AML. As a result of the combination,
approximately $7.8 million of cost reductions were realized in 1995 from 1994
combined levels, excluding the merger-related expenses described below. These
reductions in 1995 were partially offset by increased legal and settlement costs
of $1.1 million, higher incentive compensation of $1.0 million and $2.2 million
of expenses related to the investigation and review of alternative capital
structures, including implementing the Reorganization. Included in 1994 expenses
were approximately $10.0 million of expenses related to the merger of the two
companies compared to $2.2 million of merger-related costs in 1995.
The amortization of deferred policy acquisition costs increased by $7.4
million to $50.2 million in 1995 compared to $42.8 million in 1994. The increase
in amortization in 1995 was primarily due to higher realized gains and gross
profits in 1995 than in 1994.
Dividends to policyowners increased by $4.4 million, or 9.8%, to $49.4
million in 1995 compared to $45.0 million in 1994. The growth in dividends was
primarily the result of the growth and aging of the in-force policies.
Traditional life reserves grew 8.4% from 1994 to $1.12 billion in 1995. The
weighted average dividend rate credited to these policies was 7.14% for 1995 and
1994.
Income before income taxes increased by $84.5 million, or 323%, to $110.6
million in 1995 compared to $26.1 million in 1994. The increase resulted
primarily from the $9.5 million increase in net investment income, net realized
gains on investments of $51.4 million in 1995 as compared to net realized losses
on investments of $19.9 million in 1994, and reduced expenses, partially offset
by higher dividends to policyowners.
Income tax expense increased by $21.7 million to $41.2 million in 1995 as
compared to $19.5 million in 1994. The increased 1995 income taxes were the
result of the higher pre-tax income discussed above. The effective income tax
rate for 1995 was 37.3% and for 1994 was 74.5%. In 1994, American Mutual Life
was subject to the equity add-on tax which resulted in an additional $9.6
million of current income tax expense.
45
<PAGE>
Net income increased by $62.6 million in 1995 to $69.3 million from $6.7
million in 1994. This increase resulted from the increases in pre-tax income
discussed above.
1994 COMPARED TO 1993
A summary of the Company's revenues follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1993
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Insurance premiums
Traditional life insurance premiums......................................... $ 209,447 $ 198,079
Immediate annuity and supplementary contract premiums....................... 16,680 16,737
Other premiums.............................................................. 11,785 11,544
----------- -----------
Total insurance premiums.................................................. 237,912 226,360
Universal life product charges.............................................. 55,815 56,928
Annuity product charges..................................................... 547 545
----------- -----------
Total product charges..................................................... 56,362 57,473
Net investment income....................................................... 275,691 269,854
Realized gains (losses) on investments...................................... (19,930) 15,460
Other revenues.............................................................. 2,391 2,498
----------- -----------
Total revenues............................................................ $ 552,426 $ 571,645
----------- -----------
----------- -----------
</TABLE>
Insurance premiums increased $11.5 million to $237.9 million in 1994
compared to $226.4 million in 1993. Traditional life insurance premiums
increased $11.4 million primarily as a result of continued growth in renewal
premiums.
Universal life product charges were $1.1 million lower in 1994 than in 1993
primarily due to a decrease in cost of insurance charges by the Company in its
universal life product line in 1994.
Net investment income increased by $5.8 million, or 2.2%, to $275.7 million
in 1994 as compared to $269.9 million in 1993. The increase was attributable to
an increase in average invested assets partially offset by a decline in the
effective yield on average invested assets. Average invested assets increased by
$108.5 million to $3,565.5 million during 1994. The effective yield on average
invested assets decreased from 8.08% in 1993 to 7.90% in 1994, primarily
reflecting lower reinvestment rates in late 1993 and throughout 1994.
Realized losses on investments were $19.9 million in 1994 compared to gains
of $15.5 million in 1993. The realized losses in 1994 resulted in part from a
planned investment strategy to increase after-tax investment yields in future
periods by disposing of selected fixed maturity securities that generated losses
of $21.1 million in 1994.
46
<PAGE>
A summary of the Company's policyowner benefits follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1993
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Traditional life insurance
Death benefits.............................................................. $ 30,044 $ 28,516
Change in liability for future policy benefits and other policy benefits.... 149,283 143,659
----------- -----------
Total traditional life insurance benefits................................. 179,327 172,175
Universal life insurance
Death benefits in excess of cash value...................................... 15,165 13,270
Interest credited to policyowner account balances........................... 42,095 40,060
Other policy benefits....................................................... 7,237 7,007
----------- -----------
Total universal life insurance benefits................................... 64,497 60,337
Annuities
Interest credited to deferred annuity account balances...................... 77,980 82,314
Other annuity benefits...................................................... 34,918 38,001
----------- -----------
Total annuity benefits.................................................... 112,898 120,315
Miscellaneous benefits........................................................ 13,174 11,446
----------- -----------
Total policyowner benefits................................................ $ 369,896 $ 364,273
----------- -----------
----------- -----------
</TABLE>
Total policyowner benefits increased by $5.6 million from 1993 to $369.9
million in 1994. Traditional life benefits increased $7.2 million primarily due
to increased mortality costs and increased liabilities for future policy
benefits, in each case associated with the growth in the amount of such business
in force. Universal life benefits increased $4.2 million due to increased
mortality costs and increased interest credited to policyowner account balances
resulting from the growth in the amount of such business in force. While the
weighted average crediting rate for the Company's universal life liabilities
decreased 15 basis points from 6.59% in 1993 to 6.44% in 1994, the Company's
average liabilities increased $43.8 million, or 6.5%, from 1993 to 1994,
resulting in the increased credited amounts in 1994.
Annuity benefits decreased $7.4 million in 1994 to $112.9 million compared
to $120.3 million in 1993. Such benefits decreased due to reduced interest
credited to policyowner account balances and decreased other annuity benefits.
While the Company's average annuity liabilities increased $88.2 million or 7.4%
for these products from 1993 to 1994, this was more than offset by the reduction
in the weighted average crediting rate on these products of 54 basis points from
6.95% in 1993 to 6.41% in 1994, resulting in the decreased interest credited
amounts in 1994. The decrease in other annuity benefits was the result of a
change in valuation basis on structured settlement contracts which increased
reserves in 1993, partially offset by the growth of immediate annuity and
supplementary contract business in force in 1994.
The increase in miscellaneous benefits of $1.7 million was primarily due to
a reduction of reserves in the Company's group accident and health business in
1993.
47
<PAGE>
A summary of the Company's expenses follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1993
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Commission expense, net of deferrals.......................................... $ 9,451 $ 9,239
Other underwriting, acquisition and insurance expenses, net of deferrals...... 59,153 49,398
Amortization of deferred policy acquisition costs............................. 42,756 47,441
----------- -----------
Total expenses............................................................ $ 111,360 $ 106,078
----------- -----------
----------- -----------
</TABLE>
Commission expense, net of deferrals, increased $0.2 million to $9.4 million
in 1994 as compared to $9.2 million in 1993. Other underwriting, acquisition and
insurance expenses, net of deferrals, increased in 1994 by $9.8 million, or
19.7%, to $59.2 million, primarily due to approximately $10.0 million of merger-
related expenses incurred in 1994 in connection with the merger of Central Life
and Old AML.
The amortization of deferred policy acquisition costs decreased by $4.6
million in 1994 to $42.8 million compared to $47.4 million in 1993. The change
in amortization was primarily the result of the combination of decreased
amortization due to realized losses in 1994 and higher amortization in 1993 due
to changes in assumptions as to future profitability resulting from an expected
decrease in cost of insurance charges in the universal life product line, net of
an expected improvement in mortality experience.
Dividends to policyowners decreased by $0.5 million, or 1.1% to $45.0
million in 1994 compared to $45.5 million in 1993. The decrease in dividends was
primarily the result of a dividend scale reduction in 1994. The weighted average
dividend rate credited to these policies was 7.14% in 1994 compared to 7.34% in
1993. Traditional life reserves grew 9.3% from 1993 to $1.03 billion in 1994.
Income before income taxes and before the cumulative effect of a change in
accounting principles decreased by $29.7 million, or 53.1%, to $26.1 million in
1994 compared to $55.8 million in 1993. The decrease resulted primarily from net
realized losses on investments of $19.9 million in 1994 as compared to $15.5
million in net realized gains on investments in 1993 and an increase of $9.8
million in underwriting, acquisition and insurance expenses, net of deferrals,
partially offset by higher net investment income, lower amortization of deferred
policy acquisition costs and lower crediting rates on all product lines.
Income tax expense decreased by $1.9 million from 1993 to 1994. The
decreased 1994 income taxes were the result of the lower pre-tax income
discussed above, partially offset by the equity add-on tax in 1994. The
effective income tax rate for 1994, adjusted for the equity add-on tax, was
identical to the 1993 rate of 38%. In 1994, American Mutual Life was subject to
the equity add-on tax which resulted in an additional $9.6 million of current
income tax expense. The 1993 equity add-on tax was zero.
As of January 1, 1993, the Company adopted SFAS 106, pursuant to which the
cost of certain post-retirement benefits must be recognized on an accrual basis
as employees perform services to earn such benefits. The Company's transition
obligation as of January 1, 1993 amounted to approximately $3.2 million, net of
income tax benefits, and was recorded as a cumulative effect adjustment to net
income.
Net income decreased by $24.5 million in 1994 to $6.7 million compared to
$31.2 million in 1993. The primary reasons for the decrease were investment
losses, merger-related costs and the equity add-on tax in 1994.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
The Company's cash flow from operations will consist of dividends from
subsidiaries, if declared and paid, interest income on loans and advances to its
subsidiaries (including a surplus note issued to
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the Company by AmerUs Life), investment income on assets held by the Company and
fees which the Company will charge AmerUs Group, AmerUs Life and certain other
of its affiliates for management services, offset by the expenses incurred for
debt service, salaries and other expenses.
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 1996, the maximum amount that would have been legally available for
distribution to the Company, absent the Distribution, without further regulatory
approval would have been approximately $40 million. However, as a result of the
Distribution, AmerUs Life will not be able to pay dividends to the Company in
the 12-month period following the Distribution without the prior consent of the
Iowa Commissioner. See "Supervision and Regulation." It is the Company's
intention to seek regulatory approval to pay dividends from AmerUs Life during
this 12-month period. However, at September 30, 1996, the Company also had the
ability to borrow up to approximately $120 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 the Bank Credit Facility provide the Company with sufficient
liquidity and capital resources during the 12-month period following the
Distribution, irrespective of whether regulatory approval for the payment of
dividends by AmerUs Life is obtained.
In December, 1996, the Company established the Bank Credit Facility, which
is comprised of $100 million in term debt and $75 million under a revolving line
of credit. Immediately after establishing the Bank Credit Facility the Company
borrowed $100 million under the term debt component of the facility and $75
million under the revolving line of credit. The Company contributed $125 million
of the borrowings under the Bank Credit Facility to AmerUs Life and used $50
million to purchase a 9% surplus note, due December 1, 2006, from AmerUs Life.
Proceeds of the Offerings and the Preferred Offering will be used to repay
borrowings outstanding under the Bank Credit Facility. Following such repayment,
the Company would have significant borrowing capacity under its revolving line
of credit.
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. See
"Certain Transactions and Relationships--Security Arrangements For Bank Credit
Facility."
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 or from debt or equity financing. As
of September 30, 1996 the Company had no material commitments for capital
expenditures. In the future the Company anticipates that its liquidity and
capital needs will be met through interest and dividends from AmerUs Life,
accessing the public equity and debt markets depending upon market conditions,
or alternatively from bank financing.
AMERUS LIFE
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
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<PAGE>
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.
AmerUs Life generated cash flows from operating activities of $85.3 million,
$202.0 million, $172.4 million and $173.6 million, for the nine months ended
September 30, 1996 and for the years ended December 31, 1995, 1994 and 1993,
respectively. Excess operating cash flows were primarily used to increase AmerUs
Life's fixed maturity investment portfolio consistent with the long-term
investment objective of the Company to reduce the level of equity investments
and mortgages as a percentage of its investment portfolio.
In November 1994, the Company securitized and sold a pool of commercial
mortgage loans with an approximate aggregate principal balance of $158 million.
The Company converted the loans to cash and reinvested the proceeds in fixed
maturity investments which afforded the Company more liquidity and higher
overall credit quality, and reduced its exposure to mortgages in accordance with
its long-term investment objectives.
Matching the investment portfolio maturities to the cash flow demands of the
type of insurance being provided is an important consideration for each type of
life insurance product and annuity. AmerUs Life continuously monitors benefits
and surrenders to provide projections of future cash requirements. As part of
this monitoring process, AmerUs Life performs cash flow testing of its assets
and liabilities under various scenarios to evaluate the adequacy of reserves. In
developing its investment strategy, AmerUs Life establishes a level of cash and
securities which, combined with expected net cash inflows from operations,
maturities of fixed maturity investments and principal payments on mortgage-
backed securities, are believed adequate to meet anticipated short-term and
long-term benefit and expense payment obligations. There can be no assurance
that future experience regarding benefits and surrenders will be similar to
historic experience since withdrawal and surrender levels are influenced by such
factors as the interest rate environment and AmerUs Life's claims-paying and
financial strength ratings. See "Risk Factors--Future Policy Benefits Exposure"
and "--Interest Rate Fluctuations; Risk of Impact on Forced Liquidation of
Investment Portfolio."
AmerUs Life takes into account asset-liability management considerations.
Contract terms for AmerUs Life's INTEREST-SENSITIVE PRODUCTS include SURRENDER
AND WITHDRAWAL provisions which mitigate the risk of losses due to early
withdrawals. These provisions generally do one or more of the following: limit
the amount of penalty-free withdrawals, limit the circumstances under which
withdrawals are permitted, or assess a surrender charge or market value
adjustment relating to the underlying assets. The following table summarizes
statutory liabilities for interest-sensitive life products and annuities by
their contractual withdrawal provisions at December 31, 1995 (dollars in
millions):
<TABLE>
<S> <C> <C>
Not subject to discretionary withdrawal..................... $ 231
Subject to discretionary withdrawal with adjustments:
Specified surrender charges (A)........................... 867
Market value adjustments.................................. 413
---------
Subtotal................................................ 1,280
Subject to discretionary withdrawal without adjustments..... 716
---------
Total................................................... $ 2,227
---------
---------
</TABLE>
- --------------
(A) Includes $255 million of statutory liabilities with a contractual surrender
charge of less than five percent of the account balance.
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Through its membership in the Federal Home Loan Bank of Des Moines, AmerUs
Life is eligible to borrow on a line of credit available to provide it
additional liquidity. The line of credit, the amount of which is re-set
annually, is based on the amount of capital stock of the Federal Home Loan Bank
of Des Moines owned by AmerUs Life, which supported a borrowing capacity of $70
million as of December 31, 1995. Interest is payable at a current rate at the
time of any advance. As of September 30, 1996, AmerUs Life had a $25 million
open secured line of credit against which $24.7 million had been borrowed.
AmerUs Life may also obtain liquidity through sales of investments or
borrowings collateralized by its investment portfolio. AmerUs Life's investment
portfolio as of September 30, 1996 had a carrying value of $3.8 billion,
including Closed Block investments. As of September 30, 1996, fixed maturity
securities were $3.1 billion, or 81.9%, of invested assets, with public and
private fixed maturity securities constituting $2.8 billion, or 88.1%, and
$373.8 million, or 11.9%, of total fixed maturity securities, respectively. See
"Business--Investment Portfolio."
The statutory surplus of AmerUs Life will be impacted by the Distribution,
the Capital Contribution and the Company's simultaneous capital contribution to
AmerUs Life and purchase of a surplus note issued by AmerUs Life. At September
30, 1996, the pro forma statutory surplus of AmerUs Life was approximately $259
million after giving effect to the above transactions compared to the actual
statutory surplus of $289 at September 30, 1996. The Company believes that this
level of statutory capital is more than adequate as the Company's risk-based
capital is significantly in excess of required levels. See "Supervision and
Regulation--Regulation of AmerUs Life." In contrast, the pro forma GAAP
shareholder's equity of AmerUs Life at September 30, 1996 was approximately $433
million. The major difference between statutory and GAAP accounting relates to
the accounting for policy acquisition costs. For statutory purposes, these costs
are expensed when incurred, while for GAAP these costs are capitalized and
amortized in the future to better match revenues and expenses. At September 30,
1996, deferred policy acquisition costs were $320 million which accounted for
approximately $208 million of the after-tax difference between statutory and
GAAP equity.
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.
EFFECTS OF INFLATION AND INTEREST RATE CHANGES
The Company does not believe that inflation has had a material effect on its
consolidated results of operations.
Interest rate changes may have temporary effects on the sale and
profitability of the annuities and life insurance products offered by the
Company. For example, if interest rates rise, competing investments (such as
annuities or life insurance products offered by the Company's competitors,
certificates of deposit, mutual funds, and similar instruments) may become more
attractive to potential purchasers of the Company's products until the Company
increases the interest rate credited to owners of its annuities and life
insurance products. In contrast, as interest rates fall, the Company attempts to
adjust its credited rates to compensate for the corresponding decline in
reinvestment rates. The Company monitors interest rates and sells annuities and
life insurance policies that permit flexible responses to interest rate changes
as part of the Company's management of interest spreads. However, the
profitability of the Company's products is not based solely upon interest rate
spreads but also on persistency, mortality and expenses.
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
51
<PAGE>
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.
FEDERAL INCOME TAX MATTERS
For periods prior to the Offerings, the Company and its subsidiaries filed
as part of a consolidated United States federal income tax return with AMHC and
its subsidiaries. For periods after the Offerings, 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 for five years.
EMERGING ACCOUNTING MATTERS
SFAS NO. 125
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
125 provides consistent accounting standards for securitizations and other
transfers of financial assets, determines when financial assets (liabilities)
should be considered sold (settled) and removed from the balance sheet, and
determines when related revenues and expenses should be recognized. FASB
Statement No. 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996. This
statement will be applicable to the Company, however, management believes that
it will have no material effect on the Company's consolidated financial
statements.
STATUTORY ACCOUNTING CODIFICATION
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.
52
<PAGE>
BUSINESS
GENERAL
The Company is engaged in the business of marketing, underwriting and
distributing a broad range of individual life insurance and annuity products to
individuals and businesses in 45 states and the District of Columbia. The
Company's primary product offerings consist of whole life, universal life and
term life insurance policies and fixed annuities. In addition, on April 1, 1996
the Company acquired a 34% interest in a variable life insurance and annuity
company through a joint venture arrangement (the "Ameritas Joint Venture") with
Ameritas Life Insurance Corp. ("Ameritas"). The Company's distribution systems
now market fixed annuities issued by AVLIC and have begun to sell AVLIC's
variable life insurance and variable annuity products. Based on published
comparisions and rankings of life insurance and annuity products, the Company
believes that its products have a history of being competitive within the
industry.
The Company's subsidiary, AmerUs Life, was originally incorporated in 1896
as a mutual insurance company under the name Central Life Assurance Society of
the United States. Its name was changed to American Mutual Life Insurance
Company in 1994 following the merger of Old AML into Central Life. On June 30,
1996, American Mutual Life was converted into a stock life insurance company
pursuant to the Plan and its name was changed to AmerUs Life. As of September
30, 1996, AmerUs Life had approximately 418,000 life insurance policies and
annuity contracts outstanding and individual life insurance in force, net of
reinsurance, of approximately $26.1 billion. As of September 30, 1996, the
Company had total assets of $4.3 billion and total shareholder's equity of $433
million (prior to the Offerings, after giving effect to the Capital
Contribution).
The Company's target markets are individuals in the middle and upper income
brackets and small businesses. Its geographic focus is national in scope (except
for Connecticut, Maine, New Hampshire, New York and Vermont, in which the
Company is not licensed to do business), and it primarily serves suburban and
rural areas. The Company distributes its products primarily through a
combination of career general agency and personal producing general agency
("PPGA") distribution systems, as well as a network of independent brokers. The
career general agency system consists of a network of 33 career general
agencies, with approximately 550 career agents. The PPGA system is comprised of
approximately 425 PPGAs, with approximately 950 agents. Variable life insurance
products and the fixed and variable annuities offered by the Ameritas Joint
Venture are marketed through the Company's distribution systems and the
distribution systems of Ameritas and AVLIC, which consist of approximately 250
agents and 450 independent broker-dealers (with approximately 7,500 registered
representatives), respectively.
The pricing of the Company's products is generally determined by reference
to actuarial calculations and statistical assumptions principally relating to
mortality, persistency, investment yield assumptions, estimates of expenses and
management's judgment as to market and competitive conditions. The premiums and
deposits received, together with assumed investment earnings, are designed to
cover policy benefits, expenses and policyowner dividends plus return a profit
to the Company. These profits arise from the margin between mortality charges
and insurance benefits paid, the margin between actual investment results and
the investment income credited to policies (either directly or through dividends
to policyowners) and the margin between expense charges and actual expenses. The
level of profits also depends on persistency because business acquisition costs,
particularly agent commissions, are recovered over the life of the policy.
Dividends and interest credited on policies (including policies included in the
Closed Block) may vary from time to time reflecting changes in investment,
mortality, persistency, expenses and other factors. Interest rate fluctuations
have an effect on investment income and may have an impact on policyowner
behavior. Increased lapses in policies may be experienced if the Company does
not maintain interest rates and dividend scales that are competitive with other
products in the marketplace.
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<PAGE>
AmerUs Life's claims-paying ability is rated "AA-" (Very high) by Duff &
Phelps and "A" (Good) by Standard & Poor's. AmerUs Life is rated "A" (Excellent)
by A.M. Best and "A2" (Good) by Moody's. See "Risk Factors--Importance of
Ratings."
BUSINESS STRATEGY
The Company's business strategy to achieve earnings growth and increase
shareholder value is focused on managing certain operating fundamentals where
the Company's results have historically compared favorably to the industry. The
Company intends to utilize these operating strengths to differentiate its
products by maintaining its position and reputation as a low-cost producer that
provides high-value products to its life insurance and annuity customers, while
also providing superior service to both agents and customers. The Company
believes it is well positioned to compete effectively based upon a number of
strengths including its strong operating performance, customer-driven product
offerings, productive and diversified distribution systems, sophisticated
asset/liability management capabilities and a customer service orientation. In
addition, the Company intends to continue to seek new business opportunities
through mergers, acquisitions and strategic alliances.
FACTORS AFFECTING OPERATING PERFORMANCE
The Company believes that its operating performance is significantly
impacted by four basic elements: (i) mortality, (ii) persistency, (iii)
operating expenses, and (iv) investment yield. The Company believes that its
results for each of these four basic elements for the last several years have
been strong.
The Company believes its conservative risk selection practices, its
disciplined field underwriting and its focus on maintaining a suburban and rural
customer base have resulted in the Company realizing favorable mortality
experience for the last several years. See "--Insurance Underwriting." The
Company fully underwrites each application and has no group underwriting or
guaranteed issue business.
The Company has consistently achieved favorable persistency on its life
insurance products (i.e., lower lapse rates). See "--Products." This has
resulted in a high level of renewal premiums and, as a result, a larger revenue
base over which to amortize acquisition costs. This high persistency has been
achieved by providing incentives to agents by, among other things, grading
production bonuses by actual persistency, paying persistency bonuses, awarding
recognition for both career agency and career agent persistency achievements,
and monitoring agency persistency on a monthly basis. Also, the Company believes
that its favorable career agent retention rate has contributed to the high
persistency rates it has achieved.
The Company has aggressively managed its cost structure, reducing general
insurance expenses by $7.8 million, or 16.6%, in 1995 compared to 1994
(excluding certain non-recurring expenses). This reduction reflects, among other
things, efficiencies realized from reduced personnel and data processing costs
as a result of the merger of Old AML into Central Life at the beginning of 1995.
Additional cost reductions are expected to be realized as product lines of the
two companies are further integrated and the technology applications of Central
Life are applied to all of the Old AML business. Other factors contributing to
the Company's lower cost structure include: (i) a flat organizational structure
which allows the Company to be responsive to changing business conditions; (ii)
the location of the Company in a geographic area which provides lower cost
operations than found in many other areas of the country; (iii) a well-trained,
experienced workforce; and (iv) efficient use of technology.
The Company's distribution systems are compensated almost entirely on a
variable-cost basis, which provides flexibility in managing distribution costs
and has allowed the Company to maintain acquisition costs which management
believes are satisfactory. The Company also focuses on reducing acquisition
costs. For example, the Company reduced life insurance acquisition costs in its
career general agency system by approximately 9% from 1992 through 1995.
The Company has maintained competitive portfolio yields, while at the same
time substantially reducing exposure to higher risk assets such as mortgages and
real estate over the last several years. As of September 30, 1996, mortgages
were 6.8% of invested assets and real estate acquired in foreclosure was 0.5%.
At the same time, overall credit quality of invested assets has been
substantially improved.
54
<PAGE>
These results have been achieved in part by a more systematic and sophisticated
investment strategy, recruitment and development of experienced investment
professionals, enhanced systems technology and reduced investment expenses.
Attractive risk-adjusted yields on its investments have enabled the Company to
offer competitive pricing on its products and to attract and retain business,
while maintaining the Company's profitability.
COMPETITIVE PRODUCT OFFERINGS WHICH MEET DEMANDS OF CUSTOMERS
The Company's business strategy emphasizes the development of products which
meet the demands of its customers. Based on published comparisons and rankings
of life insurance and annuity products, the Company believes that its products
have a long history of being very competitive within the industry. The Company's
participating whole life insurance products have consistently ranked among the
top ten based on 10 and 20 year interest adjusted surrender cost indices, and
its universal life insurance products have consistently ranked among the top
quartile based on 5 and 10 year cash values. The Company's fixed annuity
products are also highly competitive in the industry, having ranked among the
top ten in surveys measuring account and cash values of single premium deferred
annuity products. See "--Products."
The Company continuously monitors the marketplace to identify and develop
new products and improve existing products. For example, in 1989, the Company
introduced a life insurance product which combined permanent whole life
insurance, increasing paid-up additions and decreasing term life insurance.
These flexible life insurance products can be tailored to meet the life
insurance needs of the customer at a premium level which is attractive to the
customer. These products were substantially enhanced with additional features in
1994, and generated over 20% of total new annualized life premiums in 1995.
Recent product development activity has been done on an integrated basis,
using a team approach involving the Company's distribution, investment and
asset/liability management units. In 1993, the Company used this approach, which
takes into account acceptable risk levels, to develop a new series of deferred
annuities with more attractive features and pricing. These new products were
substantially responsible for an increase in annuity sales from $57.2 million in
1992 to $191.5 million in 1995. In 1996, the Company's distribution systems
began offering, through the Ameritas Joint Venture, variable life insurance and
variable annuities issued by AVLIC. These products enable the policyowner to
share in the investment experience of a SEPARATE ACCOUNT. These additional
products expand the product portfolio available to producers in the career
general agency and PPGA systems and provide the Company with immediate access to
one of the fastest-growing business segments within the life insurance and
annuity business.
The Company also continuously reviews its product lines to eliminate low
volume products and augment its existing products to increase sales of such
products. In addition, the Company regularly reviews the pricing of its
products. Where the Company has decided not to manufacture a line of products it
has made arrangements in selected cases to sell products of other companies.
This practice provides producers with a broader line of competitive products
while enabling the Company to focus on its core lines of business.
PRODUCTIVE AND DIVERSIFIED DISTRIBUTION SYSTEMS
One of the Company's strategies for growth is to make its distribution
systems more productive and diversified. Prior to the merger of Old AML into
Central Life, the Company's distribution system consisted primarily of its
career general agency system. With the merger, the Company added the PPGA
distribution system of Old AML. The Company successfully rationalized the
overlapping career general agency distribution system and the PPGA distribution
system, leaving existing agencies and agents in place in their existing systems
and dividing the country along geographic lines for new recruiting of career
general agencies and PPGAs. The Ameritas Joint Venture provides access to a
network of approximately 450 independent broker/dealers (with approximately
7,500 registered representatives) and the Ameritas agency distribution systems.
Agents in the Company's distribution systems may sell competitors' products.
However, agents in both the career general agency and the PPGA system are given
financial incentives based on the volume of their sales of the Company's
products.
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<PAGE>
The Company has recently added two additional regional vice presidents to
strengthen its distribution systems management and increase recruiting of new
general agents and agents. The Company believes it will be able to recruit both
inexperienced and experienced producers by providing a broad range of
competitive products, including the newly added variable life insurance and
variable annuity products, and by offering strong marketing and administrative
support services and competitive compensation. The Company's variable cost-based
compensation systems, which include bonus opportunities based on production and
persistency, are designed to attract and reward producers who sell increasing
amounts of persisting business.
SOPHISTICATED ASSET/LIABILITY MANAGEMENT
The Company has developed a sophisticated approach to asset/liability
management. The investment unit and the asset/liability management unit work
together closely to identify investments which provide maximum returns
consistent with acceptable risk levels and liability durations. The asset
portfolio is segmented by liability type, with tailored investment strategies
for specific product lines. The Company has the ability to continuously model
the actual results of its investment portfolio against expected results in order
to identify changing market conditions early and, where appropriate, exit
existing investments and shift to new investments which better meet the
Company's investment objectives.
CUSTOMER SERVICE ORIENTATION
As part of a strategy to provide better service to agents and customers, the
Company continues to invest in advanced customer service systems and technology
to support these functions. In addition to improving the level of service, these
investments have also reduced administration costs. The Company developed and
installed an imaging system in its new business processing unit in 1991 and is
currently developing and installing a second generation imaging system in both
the new business and in force business units. During the past five years,
numerous enhancements have been added to the original imaging system to
facilitate more efficient and accurate processing of new business. The new
imaging system will incorporate all of these and additional enhancements
developed from the experience gained in using the original system. The immediate
on-line availability to any service representative of policy-related
correspondence and documents enables the Company to provide fast, comprehensive
service to inquiries by policyowners and agents. Along with easy access to data,
work flow and other management tools provided by the system have resulted in
improved productivity.
MERGERS, ACQUISITIONS AND STRATEGIC ALLIANCES
Consistent with increased merger and acquisition activity in the life
insurance industry, management believes that mergers, acquisitions and strategic
alliances will be necessary to more fully utilize the Company's distribution and
administrative capacity and to obtain improved economies of scale and a lower
cost structure.
The mutual holding company structure provides the Company with access to the
capital markets, thereby enhancing the Company's ability to pursue acquisitions.
Based on the Company's success in identifying and effectively implementing
mergers, acquisitions and strategic alliances, management intends to actively
and selectively participate in such transactions in the future as a means to
further enhance shareholder value.
The Company has historically pursued mergers, acquisitions and strategic
alliances with the goals of improving its position in existing market segments
or entering desirable new market segments. Notable recent activities include the
combination by merger of Old AML into Central Life in 1994, and the Ameritas
Joint Venture which was completed in April, 1996. As part of the merger of Old
AML into Central Life in December, 1994, management was able to: (i)
substantially integrate the administrative operations of the two companies
within a four-month period in late 1994 and achieve a $7.8 million, or 16.6%,
expense reduction (excluding certain non-recurring expenses) in 1995 with
minimal disruption to policyowners and agents and without a reduction in the
quality or quantity of services offered; (ii) successfully rationalize the
different distribution systems existing after the merger with no loss of
production; and
56
<PAGE>
(iii) consolidate the product lines of Old AML and Central Life into one
integrated line of products by selecting the best products from each portfolio
and making them available through both the career general agency and PPGA
systems.
The Ameritas Joint Venture is an important part of the Company's overall
strategic plan to continue to identify profitable insurance products and to
achieve growth. The strategic alliance with Ameritas benefited the Company by
providing it with immediate access to a line of existing variable life insurance
and variable annuity products and a share in an already-established business,
thereby avoiding the time and cost associated with developing a new product
line.
AMERITAS JOINT VENTURE
The Company's partner in the Ameritas Joint Venture is Ameritas Life
Insurance Corp., a Nebraska mutual life insurance company which has been in
existence for more than 100 years. Ameritas is licensed to conduct business in
all states except New York and the District of Columbia, and had approximately
250 agents as of December 31, 1995. On a statutory basis, Ameritas had $1.8
billion in assets, $7.8 billion of insurance in force and $248.0 million in
policyowners' surplus as of September 30, 1996. Ameritas currently is rated "AA"
(Excellent) by Standard & Poor's and "A+" (Superior) by A.M. Best.
The Company participates in the Ameritas Joint Venture through AmerUs Life's
34% ownership interest in AMAL Corporation, a Nebraska corporation ("AMAL").
AMAL's operations are conducted through AVLIC and Ameritas Investment Corp., a
registered broker-dealer ("AIC"), its two wholly-owned subsidiaries, which have
been in business since 1983. AVLIC is licensed to conduct business in 46 states
and the District of Columbia and currently markets its products and those of AIC
through approximately 450 independent broker-dealers (with approximately 7,500
registered representatives) and the Ameritas distribution system. AIC is a
registered broker/dealer which is licensed to do business in 49 states. As of
September 30, 1996, AMAL had total consolidated assets of $1,025.6 million and
total consolidated shareholder's equity of $54.2 million on a GAAP basis. AVLIC
had $2.9 billion of insurance in force and $40.2 million in surplus as of
September 30, 1996, on a statutory basis.
AmerUs Life contributed $20.4 million in cash and substantially all of its
new fixed annuity production, as well as other consideration, for its interest
in AMAL. Under the terms of the Joint Venture Agreement, AmerUs Life has an
option to purchase an additional 5% to 15% of AMAL (the "Option") if certain
premium growth targets are met. The Option is exercisable in three portions,
each of which would permit AmerUs Life to acquire the number of newly-authorized
shares that would increase its equity ownership by 5%. Each portion of the
Option is exercisable at specified exercise prices set forth in the Joint
Venture Agreement.
Management of the Ameritas Joint Venture is shared between AmerUs Life and
Ameritas. Each has equal membership on the board of directors of AMAL, AVLIC and
AIC.
The Joint Venture Agreement provides that certain conditions may trigger
buy-sell provisions of the Joint Venture Agreement in the event of certain
disputes between the parties. For example, if at any time during the
continuation of the Ameritas Joint Venture a dispute arises between the parties,
the Joint Venture Agreement sets forth a mechanism for the resolution of the
dispute by informal means, including mediation. In certain specified
circumstances, in the event a major dispute remains unresolved, certain buy-sell
provisions of the Joint Venture Agreement can be triggered. Further, each party
may make and/ or enter into acquisitions, divestitures, mergers, consolidations,
reorganizations or other transactions affecting its corporate structure.
However, if any such transaction involves or constitutes a "change of control"
with respect to Ameritas or AmerUs Life, then the other party shall have the
right to trigger the buy-sell provisions of the Joint Venture Agreement. A
"change of control" is deemed to have occurred if a majority of the board of
directors of an entity or an ultimate parent shall consist of individuals who
were not directors of such entity prior to such transaction or who were not
nominated for board membership by such directors.
57
<PAGE>
The Company and Ameritas each have guaranteed the obligations of AVLIC. The
guarantee of each party is joint and several, and will remain in effect until
certain financial conditions are met.
PRODUCTS
The Company offers a diverse line of individual life insurance products
which are tailored to its markets and distributed primarily through its career
general agency and PPGA distribution systems. In addition, the Company is a
party to the Ameritas Joint Venture, which offers fixed and variable annuity and
variable life insurance products. As a result of superior operating
fundamentals, including mortality, persistency, operating expenses and
investment yield, the Company has had a long history of providing high-value,
low-cost products to its customers, while operating profitably. Moreover, the
Company continuously reviews and updates its product portfolio in order to
continue offering a broad range of products at competitive performance levels.
INDIVIDUAL LIFE INSURANCE AND FIXED ANNUITY PRODUCTS
The Company offers a broad line of individual traditional life and universal
life insurance products. Traditional life insurance has accounted for
approximately 60% to 75% of the Company's total individual life insurance
premiums for the last five years and universal life insurance has accounted for
approximately 25% to 40% of its total individual life insurance premiums for the
same time period. In addition, the Company has historically offered a broad line
of fixed annuity products.
The following table sets forth information regarding the Company's sales
activity by product:
SALES ACTIVITY BY PRODUCT
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
ENDED SEPTEMBER 30,
FOR THE YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Individual life insurance:
Participating whole life............. $ 13,801 $ 16,109 $ 20,857 $ 21,319 $ 22,547 $ 19,796 $ 17,791
Universal life....................... 5,876 6,301 8,047 5,698 6,037 8,629 13,418
Term life............................ 1,923 1,995 2,717 3,154 2,820 3,068 3,218
--------- --------- --------- --------- --------- --------- ---------
Total life insurance (A)........... $ 21,600 $ 24,405 $ 31,621 $ 30,171 $ 31,404 $ 31,493 $ 34,427
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Individual annuities (B)(C)............ $ 63,098 $ 137,122 $ 191,474 $ 180,459 $ 80,934 $ 57,240 $ 101,496
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------
(A) Direct FIRST YEAR ANNUALIZED PREMIUMS.
(B) Direct first year and single collected premiums.
(C) Effective May 1996, substantially all new sales of individual deferred
annuities are made through the Ameritas Joint Venture. See "--Ameritas Joint
Venture."
TRADITIONAL LIFE INSURANCE PRODUCTS. The Company's traditional life
insurance products have a long history of being highly competitive within the
industry. The Company is the only participant in the industry to have had its
participating whole life insurance products ranked among the top ten in annual
surveys prepared by A.M. Best for each of the years 1976 through 1995. (Source:
Best's Review, Rankings of 10- and 20-year Interest Adjusted Surrender Cost
Index, 1976-1995). Management believes that such surveys provide a gauge for
measuring product performance based upon operating fundamentals, including
mortality, persistency, operating expenses and investment yield, and that the
consistent high rankings of the Company's traditional life insurance products in
such surveys reflect the Company's status within the industry as a provider of
high-value products to its customers.
The Company's traditional life insurance products include participating
whole life and term life insurance products. PARTICIPATING WHOLE LIFE INSURANCE
is designed to provide benefits for the life of the insured. This product
generally provides for level premiums and a level death benefit and requires
payments in excess of the mortality cost in earlier years to offset increasing
mortality costs in later years.
58
<PAGE>
The Company also offers a SECOND TO DIE WHOLE LIFE INSURANCE product which
insures two lives and provides benefits upon the death of the second insured.
The Company targets its second to die products primarily to potential customers
seeking to achieve estate planning goals.
The Company also offers a portfolio of term life insurance policies that
provide life insurance protection for a specific time period (which generally
can be renewed at an increased premium). Such policies are mortality-based and
offer no cash accumulation feature.
Since 1989, the Company has offered a flexible life insurance product, which
is a combination of permanent participating whole life insurance, increasing
paid-up additions and decreasing term insurance coverage. In 1994, the Company
began offering an enhanced version of this product. These products give
policyowners additional flexibility in designing an appropriate combination of
permanent and term life insurance coverages to meet their specific needs at
varying premium levels.
For the year ended December 31, 1995, sales of participating whole life and
term life insurance products represented 66% and 9% of first year ANNUALIZED
PREMIUMS, respectively, for all individual life insurance products.
UNIVERSAL LIFE INSURANCE PRODUCTS. The Company offers universal life
insurance products, pursuant to which an insurance account is maintained for
each insurance policy. Premiums, net of specified expenses, are credited to the
account, as is interest, generally at a rate determined from time to time by the
Company. Specific charges are made against the account for the cost of insurance
protection and for the Company's expenses. The universal life form allows for
flexibility as to the amount and timing of premium payments and for the level of
death benefits provided.
The Company has maintained consistently competitive universal life products.
Based on annual surveys by A.M. Best measuring account and cash values of
universal life products, the Company's products have consistently ranked in the
top half of all companies included in the survey with respect to account values
and has ranked in the top quarter of all companies included in the survey with
respect to cash values. (Source: Best's Review, Rankings of 5-year Account and
Cash Values, 1991-1995; Rankings of 10-year Account and Cash Values, 1993-1995,
with 1993 the initial year of the survey of 10-year values).
The Company's universal life insurance products provide benefits for the
life of the insured. Within limits established by the Company and state
regulations, policyowners may vary the premiums and the amount of the policy's
death benefit as long as there are sufficient policy funds available to cover
all policy charges for the coming period. Interest is credited to the policy at
a rate determined from time to time by the Company. The weighted average
CREDITING RATE for the Company's universal life insurance liabilities was 6.67%
for the year 1995 and 6.31% for the nine months ended September 30, 1996.
For the year ended December 31, 1995, sales of universal life insurance
products represented 25% of first year annualized premiums for all individual
life insurance products.
FIXED ANNUITY PRODUCTS. Historically, the Company has offered a broad
portfolio of fixed annuity products. Annuities provide for the payment of
periodic benefits for a specified time period. Benefits may commence immediately
or may be deferred to a future date. Fixed annuities generally are backed by a
general investment account and credited with a rate of return that is
periodically reset.
The Company's fixed annuity products are also highly competitive within the
industry. The Company's single premium deferred annuity products were ranked
among the industry leaders in annual surveys by A.M. Best for 1991 through 1995
measuring account and cash values of single premium deferred annuity products of
participants in the industry. (Source: Best's Review, Rankings of 5- and 10-year
Account Values and 5- and 10-year Cash Values, 1991-1995).
From September 1993 until the commencement of the Ameritas Joint Venture,
the majority of the Company's fixed annuity sales consisted of its Advantage
Series of deferred annuities. The Advantage Series consists of three products
comprised of two book value annuities, which are fixed annuities, and one market
value adjusted annuity, which is a fixed annuity with a market adjustment
feature. Both book
59
<PAGE>
value annuities have a first year interest rate guarantee. One of the book value
annuities also provides a bonus interest rate for the first year. The market
value adjusted annuity has a first year interest rate guarantee and also
provides a bonus interest rate for the first year. In 1995, the Advantage Series
accounted for over $163 million in premiums, which represented approximately 85%
of the Company's total fixed annuity production for the year.
AMERITAS JOINT VENTURE PRODUCTS
On April 1, 1996, the Company commenced the Ameritas Joint Venture with
Ameritas, through which the Company's distribution systems now offer AVLIC's
fixed annuity products and have begun to offer AVLIC's variable life insurance
and annuity products. The fixed annuities currently offered by the Ameritas
Joint Venture are substantially similar to the Company's Advantage Series
products. The Company's investment in the Ameritas Joint Venture affords the
Company access to a line of existing variable life insurance and variable
annuity products while providing a lower-cost entry into an established
business, thereby eliminating significant start-up costs and allowing for
immediate potential earnings. See "--Ameritas Joint Venture."
The Ameritas Joint Venture offers, through AVLIC, flexible premium and
single premium variable universal life insurance products and variable
annuities. Variable products provide for allocation of funds to a GENERAL
ACCOUNT or to one or more separate accounts under which the owner bears the
investment risk. Through AVLIC's fund managers, which include Fidelity
Management and Research Company, Fred Alger Management, Inc. and Massachusetts
Financial Services Company, owners of variable annuities and life insurance
policies are able to choose from a range of investment funds offered by each
manager. In the future, AVLIC may also sell low load life insurance products,
which have a lower commission rate, and may acquire other companies or business
lines in appropriate circumstances.
Under the terms of the Joint Venture Agreement governing the Ameritas Joint
Venture, the Company and Ameritas will write a substantial portion of their new
single and flexible premium deferred fixed annuities and variable annuities and
variable life insurance through the Ameritas Joint Venture (provided that the
Company has retained the right to continue to issue business to its fixed
annuity customers in existence prior to the effective date of the Joint Venture
Agreement). In connection with executing the Joint Venture Agreement, the
parties also entered into a Management and Administrative Service Agreement
which was effective as of April 1, 1996 (the "Service Agreement"), pursuant to
which the parties agreed that all product development, administration and
investment management services relating to the fixed annuity products offered by
the Ameritas Joint Venture will be performed by the Company, and all such
functions relating to the variable life insurance and variable annuity products
offered by the Ameritas Joint Venture will be performed by Ameritas. Ameritas
also provides certain other administrative services to the Ameritas Joint
Venture under the Service Agreement.
The variable life insurance products and the fixed and variable annuities
offered by the Ameritas Joint Venture are distributed through the Company's
career general agency and PPGA distribution systems, as well as through the
distribution systems of Ameritas and AVLIC. See "--Ameritas Joint Venture" and
"Certain Transactions and Relationships."
In response to customer demand, the Company has developed an equity index
annuity which it began offering through the Ameritas Joint Venture in the fourth
quarter of 1996. An equity index annuity provides a baseline fixed rate of
return in addition to the possibility of sharing in a portion of the
appreciation realized from an investment in an indexed investment fund, such as
the S&P 500 stock index.
SPONSORED PRODUCTS
The Company also derives fee income from the sale of various sponsored
products through its career general agency and PPGA distribution systems under
co-marketing arrangements with leading insurance providers for such products.
Such sponsored products include individual long-term disability
60
<PAGE>
and group life, health and dental insurance products. In addition, the Company's
career general agency and PPGA distribution systems sell certificates of deposit
issued by AmerUs Bank, from which the Company obtains additional fee income.
The following table sets forth the Company's collected premiums for the
periods indicated:
COLLECTED PREMIUMS BY PRODUCT
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
ENDED SEPTEMBER 30,
FOR THE YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Direct individual life premiums collected:
Traditional life:
First year & single...................... $ 51,890 $ 53,668 $ 70,786 $ 71,830 $ 71,267 $ 61,720 $ 58,512
Renewal.................................. 120,625 114,751 153,299 143,048 130,223 119,108 108,698
--------- --------- --------- --------- --------- --------- ---------
Total................................ $ 172,515 $ 168,419 $ 224,085 $ 214,878 $ 201,490 $ 180,828 $ 167,210
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Universal Life:
First year & single...................... $ 10,972 $ 10,773 $ 15,451 $ 10,224 $ 10,939 $ 17,235 $ 26,369
Renewal.................................. 57,199 58,687 77,151 80,338 83,372 84,405 80,114
--------- --------- --------- --------- --------- --------- ---------
Total................................ $ 68,171 $ 69,460 $ 92,602 $ 90,562 $ 94,311 $ 101,640 $ 106,483
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Total direct life...................... $ 240,686 $ 237,879 $ 316,687 $ 305,440 $ 295,801 $ 282,468 $ 273,693
Reinsurance assumed........................ 1,098 1,030 1,337 1,114 1,154 988 1,178
Reinsurance ceded.......................... (10,269) (10,453) (13,795) (13,477) (15,020) (14,903) (14,776)
--------- --------- --------- --------- --------- --------- ---------
Total individual life, net of
reinsurance............................... $ 231,515 $ 228,456 $ 304,229 $ 293,077 $ 281,935 $ 268,553 $ 260,095
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Direct annuity premiums collected:
Individual (A)........................... $ 70,191 $ 142,359 $ 197,959 $ 189,097 $ 91,745 $ 66,750 $ 110,080
Group.................................... 50 (724) (665) 2,580 1,726 766 867
--------- --------- --------- --------- --------- --------- ---------
Total annuities........................ 70,241 141,635 197,294 191,677 93,471 67,516 110,947
Reinsurance ceded.......................... (424) (774) (853) (1,123) (1,147) (1,393) (1,467)
--------- --------- --------- --------- --------- --------- ---------
Total annuities, net of reinsurance........ $ 69,817 $ 140,861 $ 196,441 $ 190,554 $ 92,324 $ 66,123 $ 109,480
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Total group life, net of reinsurance (B)... $ 2,171 $ 1,984 $ 6,634 $ 10,436 $ 9,669 $ 8,367 $ 8,287
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Total accident & health, net of reinsurance
(C)....................................... $ 151 $ 184 $ 264 $ 387 $ 459 $ 607 $ 4,410
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Total collected premiums, net of
reinsurance............................... $ 303,654 $ 371,485 $ 507,568 $ 494,454 $ 384,387 $ 343,650 $ 382,272
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------
(A) Effective May 1996, substantially all new sales of individual deferred
annuities are made through the Ameritas Joint Venture. See "--Ameritas Joint
Venture."
(B) The Company sold substantially all of its group life business as of July 1,
1996 and is no longer actively marketing this line of business.
(C) The Company sold substantially all of its accident and health business in
1991 and is no longer actively marketing this line of business.
61
<PAGE>
The following table sets forth information regarding life insurance and
annuities in force for each date presented:
LIFE INSURANCE AND ANNUITIES IN FORCE
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
SEPTEMBER 30, ---------------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Individual life insurance:
Traditional
Number of policies............ 248,627 253,656 259,229 262,243 264,683 274,090
GAAP life reserves............ $ 1,184,259 $ 1,120,799 $ 1,033,909 $ 945,763 $ 846,661 $ 779,594
Face amounts.................. $ 16,557,000 $16,600,000 $15,871,000 $15,201,000 $14,094,000 $13,813,000
Universal life
Number of policies............ 119,615 121,619 124,225 127,658 131,196 129,429
GAAP life reserves............ $ 812,173 $ 784,363 $ 740,638 $ 700,556 $ 653,038 $ 596,721
Face amounts.................. $ 12,073,000 $12,211,000 $12,631,000 $12,744,000 $13,244,000 $12,607,000
Total individual life
Number of policies............ 368,242 375,275 383,454 389,901 395,879 403,519
GAAP life reserves............ $ 1,996,432 $ 1,905,162 $ 1,774,547 $ 1,646,319 $ 1,499,699 $ 1,376,315
Face amounts.................. $ 28,630,000 $28,811,000 $28,502,000 $27,945,000 $27,338,000 $26,420,000
Annuities (A):
Number of policies............ 49,128 56,054 52,616 50,322 44,177 42,372
GAAP reserves................. $ 1,227,023 $ 1,327,176 $ 1,337,395 $ 1,260,775 $ 1,157,313 $ 1,105,157
Group life insurance (B):
Number of lives............... 33,857 32,724 29,592 27,013 28,238 31,481
Face amounts.................. $ 894,000 $ 829,000 $ 741,000 $ 834,000 $ 846,000 $ 1,467,000
</TABLE>
- ------------------
(A) Effective May 1996, substantially all new sales of individual deferred
annuities are made through the Ameritas Joint Venture. See "--Ameritas Joint
Venture."
(B) The Company sold substantially all of its group life business as of July 1,
1996 and is no longer actively marketing this line of business.
The reductions in life insurance and annuities in force are attributable to
policy surrenders, policy terminations or expirations, and consolidations of one
or more outstanding policies into new policies. Many of the policies which have
terminated were of a lower face amount than the average for all policies in
force.
The Company has experienced higher persistency for its life insurance
products (i.e., lower lapse rates) than industry averages. Persistency is
measured in terms of renewal premiums. While the Company has experienced a
decrease in the number of policies outstanding, the size of policies outstanding
has increased and the amount of premiums collected has increased. Such increased
premium levels are in large part due to the Company's favorable persistency. The
ability to achieve higher persistency also results in lower unit costs. The
following table illustrates lapse rates on individual life insurance products
for the Company and for stock and mutual life insurance companies for the years
ended December 31, 1991 through 1995:
INDIVIDUAL LIFE INSURANCE LAPSE RATIOS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1994 1993 1992
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Mutual life companies (A)............................................. 7.4% 7.4% 9.8% 8.5%
Stock life companies (A).............................................. 9.3 8.8 9.9 9.9
Total life insurance industry (A)................................... 8.6 8.3 9.8 9.4
Company............................................................... 7.2 7.1 6.9 6.9
<CAPTION>
1991
-----------
<S> <C>
Mutual life companies (A)............................................. 8.8%
Stock life companies (A).............................................. 10.7
Total life insurance industry (A)................................... 10.1
Company............................................................... 6.9
</TABLE>
- --------------
(A) Source: A.M. Best individual life lapse ratios (median values) as measured
by face amount of life insurance.
62
<PAGE>
DISTRIBUTION
The Company markets its insurance products on a national basis primarily
through a career general agency system, a PPGA system, independent insurance
brokers and certain of the Company's affiliates. The Company employs ten
Regional Vice Presidents who are responsible for supervising the career general
agencies and/or PPGA agents within their assigned geographic regions.
The following table illustrates sales activity of the Company's three
principal distribution sources for the nine months ended September 30, 1996 and
the year ended December 31, 1995:
SALES ACTIVITY BY DISTRIBUTION SOURCE
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
--------------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Career General Agency System:
Traditional life insurance (A)................................ $ 10,454 $ 14,754
Universal life insurance...................................... 4,469 6,742
Individual annuity (B)........................................ 41,505 152,190
-------- ----------
Subtotal.................................................... $ 56,428 $ 173,686
-------- ----------
-------- ----------
PPGA System:
Traditional life insurance (A)................................ 5,242 8,761
Universal life insurance...................................... 1,343 1,121
Individual annuity (B)........................................ 15,017 26,615
-------- ----------
Subtotal.................................................... $ 21,602 $ 36,497
-------- ----------
-------- ----------
Sales through Affiliates:
Traditional life insurance (A)................................ 28 59
Universal life insurance...................................... 64 184
Individual annuity (B)........................................ 6,576 12,669
-------- ----------
Subtotal.................................................... $ 6,668 $ 12,912
-------- ----------
-------- ----------
Total Sales:
Traditional life insurance (A)................................ 15,724 23,574
Universal life insurance...................................... 5,876 8,047
Individual annuity (B)........................................ 63,098 191,474
-------- ----------
Total (A)(B)................................................ $ 84,698 $ 223,095
-------- ----------
-------- ----------
</TABLE>
- --------------
(A) Amounts for traditional and universal life insurance reflect direct first
year annualized premiums. Amounts for annuities reflect direct first year
and single collected premiums.
(B) Effective May 1996, substantially all new sales of individual deferred
annuities are made through the Ameritas Joint Venture. See "--Ameritas Joint
Venture."
CAREER GENERAL AGENCY SYSTEM AND BROKERS
Under the career general agency system, the Company enters into a
contractual arrangement with the career general agent for the sale of insurance
products by the career agents and brokers assigned to the career general agent's
agency. The career general agents are primarily compensated by receiving a
percentage of the first year commissions paid to career agents and brokers in
the career general agent's agency and by renewal commissions on premiums
subsequently collected on that business.
The career general agents are independent contractors and are generally
responsible for the expenses of operating their agencies, including office and
overhead expenses and the recruiting, selection, contracting, training and
development of career agents and brokers in their agency. Currently, the Company
has 33 career general agencies in 20 states, through which approximately 550
career
63
<PAGE>
agents sell the Company's products. While career agents in the career general
agency system are non-exclusive, the Company believes most agents use the
Company's products for a majority of their new business of the type of products
offered by the Company. No single career general agency accounts for more than
10% of the total first year commissions paid by the Company.
Career agents are also independent contractors and are primarily compensated
by commissions on first year and renewal premiums collected on business written
by them. In addition, career agents can earn bonus commissions, graded by
production and persistency on their business.
The Company believes the quality of the agents in its career general agency
system is competitive with that of other life insurance companies. The Company's
retention of its career general agency sales force has historically been above
the average retention rates of other companies in the industry. The Company
attributes its success in attracting and retaining qualified agents to the high
quality of its products, its marketing support and administrative services and
its competitive compensation structure. The Company also provides career general
agents with various screening tools which enable the general agents to screen
career agent applicants to eliminate those who may not be qualified.
The Company also sells its products through a network of approximately 1,700
insurance brokers in all jurisdictions in which the Company is licensed to sell
insurance. Brokers are independent contractors who sell a variety of insurance
products issued by various companies. Brokers operate through the career general
agency system but are compensated under a commission structure which is separate
from those used for career agents and in the PPGA system.
PERSONAL PRODUCING GENERAL AGENCY SYSTEM
Under the PPGA system, the Company contracts primarily with individuals who
are experienced individual agents or head a small group of experienced
individual agents. These individuals are independent contractors and are
responsible for all of their own expenses. These individuals often sell products
for other insurance companies, and may offer selected products of the Company
rather than the Company's full line of insurance products.
PPGAs are compensated by commissions on first year and renewal premiums
collected on business written by themselves and the agents in their units. In
addition to a base commission, PPGAs may earn bonus commissions on their
business, graded by production and persistency.
DISTRIBUTIONS THROUGH AFFILIATES
The Company also sells its products through certain of its affiliated
companies. The Company has arrangements with AmerUs Investments, Inc. ("AmerUs
Investments"), a wholly-owned subsidiary of AmerUs Bank, to market products of
the Company. The Company has entered into an agreement with AmerUs Investments
pursuant to which the Company and AVLIC pay AmerUs Investments fees in the form
of commissions in exchange for generating sales of such products. Persons
selling the Company's products under this arrangement are employees of AmerUs
Investments and are paid a regular salary in addition to being eligible for
commissions under a commission structure (which is distinct from the structure
used under the Company's career general agency and PPGA systems). See "Certain
Transactions and Relationships--Sale of Insurance Policies."
AVLIC has a separate arrangement with AmerUs Investments pursuant to which
AmerUs Investments sells variable and fixed annuities and variable life
insurance products.
MARKETING SUPPORT SERVICES
The Company also supports its distribution systems with a trained staff of
marketing and other professionals who provide the career general agency and PPGA
systems with a wide range of services in support of the sale of the Company's
products. In addition to providing information about the products offered by the
Company, these professionals are able to offer detailed advice on business
insurance, financial and estate planning and other advanced underwriting
services.
The Company also provides its agents in both the career general agency and
PPGA systems with insurance industry information support services and computer
technology. For example, an advanced
64
<PAGE>
illustration and sales presentation computer software package is provided to
agents to assist them in their selling efforts. In addition, the Company's
agents use computer technology to individualize marketing and product use
information at the point of sale to better service policyowners and potential
policyowners. The Company supports these systems with in-house computer
professionals to assist agents with software and systems questions relating to
its computer-assisted marketing tools.
The Company conducts an intensive annual educational conference as part of
its continuing efforts to educate and train agents and to market the Company's
products. The conference is generally well-attended by the Company's agents and
other interested persons who are not affiliated with the Company.
INSURANCE UNDERWRITING
The Company follows detailed, uniform underwriting practices and procedures
in its insurance business which are designed to assess risks before issuing
coverage to qualified applicants. The Company has professional underwriters who
evaluate policy applications on the basis of information provided by applicants
and others. As demonstrated by the following table, the Company's underwriting
standards produced mortality results which are generally more favorable than the
assumptions used in its product pricing, which are based upon industry
guidelines:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Ratio of actual mortality to pricing mortality (A)(B)............ 81.2% 90.5% 86.4% 88.8% 94.7%
</TABLE>
- --------------
(A) Results illustrated for 1991-1993 are for Central Life only. The 1991-1993
results for Old AML are unavailable. Management believes that the 1991-1993
mortality experience for Old AML would not materially change the statistics
reported for 1991-1993.
(B) Pricing mortality is established at a level below the 1975-1980 Basic Table,
an experience mortality table widely used in the industry as a basis of
mortality.
Management also believes that its actual mortality results compare favorably
to those of others in the industry. The Company believes that its favorable
mortality results are attributable to, among other things, the geographic
location of its customer base in rural and suburban areas (as opposed to urban
areas), the higher-income profile of its customer base and its consistent
application of appropriate underwriting criteria to the processing of new
customer applications.
RESERVES
In accordance with applicable insurance regulations, the Company records as
liabilities in its statutory financial statements actuarially determined
reserves that are calculated to meet future obligations of the Company's in
force life insurance and annuity contracts. The reserves are based on
actuarially recognized methods using prescribed MORBIDITY and mortality tables
and interest rates. Reserves include UNEARNED PREMIUMS, premium deposits, claims
that have been reported but are not yet paid, claims that have been incurred but
have not been reported, and claims in the process of settlement. The Company's
reserves comply with state insurance department statutory requirements.
The liability for future policy benefits reflected in the Consolidated
Financial Statements for traditional life insurance is computed using a NET
LEVEL METHOD, utilizing the guaranteed interest and mortality rates used in
calculating cash surrender values as described in the contracts. Benefit
reserves for traditional limited-payment life insurance policies include the
deferred portion of the premiums received during the premium-paying period.
Deferred premiums are recognized as income over the life of the policies. Policy
benefit claims are charged to expense in the period that the claims are
incurred. All insurance-related benefits, losses and expenses are reported net
of reinsurance.
65
<PAGE>
Future policy benefit reserves for universal life insurance and investment
products are computed under a retrospective deposit method and represent policy
account balances before applicable surrender charges. Policy benefits and claims
that are charged to expense include benefit claims incurred in the period in
excess of related policy account balances.
REINSURANCE
In accordance with industry practices, the Company reinsures portions of its
life insurance and disability income exposure, generally with unaffiliated
insurance companies under traditional indemnity reinsurance agreements.
Reinsurance arrangements entered into with unaffiliated insurance companies are
in accordance with standard reinsurance practices within the industry. As of
December 31, 1995, the Company had reinsurance arrangements in place for life
insurance having a face amount of approximately $2.9 billion with 20
unaffiliated reinsurers. All of the companies with which the Company had life
reinsurance arrangements as of such date were rated "A-" or better by A.M. Best.
The Company's largest life reinsurance relationship as of December 31, 1995 was
with RGA Reinsurance Company with life reinsurance in the face amount of
approximately $1 billion. As of December 31, 1995, the Company's top five
reinsurers (by face amount reinsured) constituted approximately 80% of the total
face amount reinsured by the Company as of such date. Of the top five
reinsurers, four were rated "A+" and the other was rated "A" by A.M. Best as of
December 31, 1995.
The Company enters into indemnity reinsurance arrangements to assist in
diversifying its risks and to limit the maximum loss on risks that exceed the
Company's policy retention limits. The Company's present maximum retention limit
for life insurance policies is $1,000,000 per life insured. Indemnity
reinsurance does not fully discharge the Company's obligation to pay claims on
the reinsured business. The Company as the CEDING insurer remains responsible
for policy claims to the extent the reinsurer fails to pay such claims. The
Company annually monitors the creditworthiness of its primary reinsurers, and
has experienced no material reinsurance recoverability problems in recent years.
INVESTMENT PORTFOLIO
GENERAL
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 AmerUs Life. Management regularly monitors individual assets and
asset groups, in addition to monitoring the overall asset mix. In addition, the
Investment Committee reviews investment guidelines and monitors internal
controls.
INVESTMENT STRATEGY
The Company's investment philosophy is to employ an integrated
asset/liability management approach with separate investment portfolios for
specific product lines, such as traditional life, universal life and annuities,
to generate attractive risk-adjusted returns on capital. Essential to this
philosophy is coordinating investments in the investment portfolio with product
strategies, focusing on risk-adjusted returns and identifying and evaluating
associated business risks.
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.
66
<PAGE>
In force reserves and the assets allocated to each segment are modeled 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
collateralized mortgage obligations ("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. Currently, the Company utilizes derivatives
to support three specific targeted strategies. The first strategy involves the
conversion of floating rate assets to synthetic fixed rate assets to achieve a
greater risk-adjusted return. Secondly, the Company uses derivatives to help
protect the Company against disintermediation risk in the event of a general
rise in interest rates. Finally, the Company uses derivative products to assist
in the management of duration mismatch of the Company's assets and liabilities.
The Company seeks to manage the relationship between risk and expected
return to maintain a prudent balance between the two. Like others in the
industry, the Company is exposed to various potential sources of investment risk
including: credit risk relating to the uncertainty attached to the timing and
amount of principal and interest payments, interest rate risk relating to the
economic effects of changing interest rates, real estate risk relating to
changes in property value due to local economic and demographic conditions, and
liquidity risk relating to holding assets for which there is no active secondary
market. The Company manages credit risk principally by careful analysis of the
creditworthiness of each issuer, diversification of its holdings and prudent
asset allocation. It manages interest rate risk through sophisticated
asset/liability management techniques, including the selective use of derivative
instruments. It manages real estate risk principally by geographic and
demographic diversification, careful periodic monitoring of local economic and
other conditions and by limiting loan to value rates to acceptable levels. The
Company manages liquidity risk principally by asset allocation and by
maintaining various credit facilities and a portfolio of public, investment
grade securities in an amount not less than 50% of the total invested assets.
The objective of the Company's mortgage backed securities ("MBS")
investments is to provide incremental return, while maintaining reasonable
liquidity and cash flow stability. Each MBS is evaluated to determine its
interest rate sensitivity and average life variability. In general, the Company
seeks investments which provide improved cash flow stability through either
implicit or explicit prepayment protection. Investments with implicit prepayment
protection can take the form of pass-throughs or CMOs backed by seasoned pools
of loans which have already had ample opportunity to refinance but have failed
to do so. Explicit prepayment protection can take the form of prepayment
lockouts, yield maintenance provisions or prepayment penalties, which are common
features of multifamily MBS, commercial MBS and FHA-insured project loans. At
September 30, 1996, the Company's MBS investment portfolio composition was
approximately 14% fixed rate pass-throughs backed by seasoned loan pools, 19%
floating rate pass-throughs and 67% CMOs with some form of explicit prepayment
protection. The Company has established specific investment guidelines for the
management of MBS. As a general policy, the Company does not invest in
interest-only and principal-only or other similar leveraged derivative mortgage
instruments.
The Company has improved the quality of its investment portfolio in recent
years in a number of respects. The Company has reduced real estate-related
assets (defined as real estate loans and real estate equity investments) as a
percentage of total invested assets from previous levels. Real estate related
assets, which totaled 19.2% of invested assets as of December 31, 1993, were
reduced to 14.5% of invested assets as of December 31, 1994, to 10.2% of total
invested assets as of December 31, 1995 and to 7.8% (6.6% after giving effect to
the Capital Contribution and application of proceeds from the Bank Credit
Facility) of invested assets as of September 30, 1996. The Company's problem
loan ratio (defined as aggregate delinquent, in process of foreclosure and
restructured mortgage loans) also decreased from 21.3% as of December 31, 1994
to 9.4% as of December 31, 1995, and to 6.2% (4.3% after giving effect to the
Capital Contribution) as of September 30, 1996.
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
67
<PAGE>
categorized in NAIC designations 3-6) was approximately 5.1% of total invested
assets as of September 30, 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 0.4% of total invested assets as of September 30, 1996, down
from 2.1% as of December 31, 1995 and 3.7% as of December 31, 1994.
INVESTMENT MONITORING AND VALUATION
As part of the Company's investment management process, it regularly
monitors its invested assets. Fixed maturity securities are reviewed upon
receipt of the obligor's financial statements, generally on a quarterly basis,
for financial performance and historical compliance with financial covenants.
Generally, the Company reviews its commercial mortgage loan and equity real
estate portfolios on a monthly basis and identifies all commercial mortgage
loans and equity real estate which cause management to conclude that such loans
or investments require increased management attention due to payment
delinquencies. Detailed property analyses and property valuations are performed
annually for each commercial mortgage loan. The Company generally requires
borrowers to submit their financial statements for annual review.
The Company has policies and procedures which management believes value
invested assets fairly and consistently. As a result of the implementation of
SFAS 115 as of December 31, 1993, certain fixed maturity securities are
classified as available-for-sale, and therefore are carried at fair value in the
Company's Consolidated Financial Statements. Public and private fixed maturity
securities are carried principally at fair value, which is based on quoted
market prices or dealer quotes. If a quoted market price is unavailable, fair
value is estimated using values obtained from independent pricing services. In
the case of private placements, if quotes are unavailable the price is estimated
by discounting expected future cash flows using a current market rate applicable
to the yield, credit quality and maturity of the investments.
Equity securities are carried principally at fair value, based on quoted
market prices. To value performing fixed interest rate mortgage loans, the
estimated net cash flows to maturity are discounted to derive an estimated
market value. The discount rate used is based on the individual loan's remaining
weighted average life and a basis point spread over the United States Treasury
yield curve at the date of valuation. Performing variable rate commercial loans
and residential loans are valued at par. Restructured, foreclosed or delinquent
loans, as well as loans to affiliates, are valued primarily at the lower of the
estimated net cash flows to maturity discounted at a market rate of interest, or
the current outstanding principal balance. Equity real estate is carried at
depreciated cost, or amortized cost for capital leases, less valuation
allowances. Equity real estate acquired in satisfaction of debt is valued at the
lower of cost or estimated fair value at the date of acquisition and is
periodically revalued. Valuation allowances for other than temporary impairments
in value are netted against the asset categories to which they apply, and
additions to valuation allowances are included in total investment results.
INVESTED ASSETS
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.
As a result of establishing the Closed Block on June 30, 1996, the Company
allocated certain assets from its investment portfolio to the Closed Block. See
"The Reorganization and Distribution of the Non-Life Insurance
Subsidiaries--Establishment and Operation of the Closed Block." The following
table summarizes consolidated invested assets by asset category as of September
30, 1996 and as of December 31, 1995, 1994 and 1993, and sets forth the
allocation of such assets between the Closed Block and the general account. The
remaining information in this Prospectus relating to the Company's investment
portfolio presents information about the investment portfolio on a combined
basis (including invested assets in both the Closed Block and the general
account).
68
<PAGE>
CONSOLIDATED INVESTED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, 1996 ------------------------------------------------
-------------------------------------------------
CARRYING CARRYING 1995 1994
VALUE-- VALUE-- COMBINED ----------------------- -----------------------
CLOSED GENERAL CARRYING CARRYING CARRYING
BLOCK ACCOUNT VALUE % OF TOTAL VALUE % OF TOTAL VALUE % OF TOTAL
----------- ----------- ----------- ---------- ----------- ---------- ----------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed maturity
securities:
Public.............. $ 667.6 $ 2,100.0 $ 2,767.6 72.2% $ 2,717.7 68.5% $ 2,056.4 58.9%
Private............. 176.2 197.6 373.8 9.7 424.4 10.7 510.3 14.6
----------- ----------- ----------- ----- ----------- ----- ----------- -----
Subtotal 843.8 2,297.6 3,141.4 81.9 3,142.1 79.2 2,566.7 73.5
Equity securities..... 15.5 74.6 90.1 2.4 109.7 2.8 178.8 5.1
Mortgage loans........ -- 260.2 260.2 6.8 353.6 8.9 447.7 12.8
Policy loans.......... 165.3 64.0 229.3 6.0 220.0 5.6 209.5 6.0
Real estate:
Investments......... -- 18.8 18.8 0.5 20.2 0.5 29.4 0.9
Foreclosures........ -- 21.2 21.2 0.5 31.9 0.8 28.8 0.8
----------- ----------- ----------- ----- ----------- ----- ----------- -----
Subtotal.......... -- 40.0 40.0 1.0 52.1 1.3 58.2 1.7
Other invested
assets............... -- 61.8 61.8 1.6 48.1 1.2 22.3 0.6
Short-term
investments.......... 0.7 12.0 12.7 0.3 39.4 1.0 8.5 0.3
----------- ----------- ----------- ----- ----------- ----- ----------- -----
Total invested
assets............... $ 1,025.3 $ 2,810.2 $ 3,835.5 100.0 % $ 3,965.0 100.0 % $ 3,491.7 100.0%
----------- ----------- ----------- ----- ----------- ----- ----------- -----
----------- ----------- ----------- ----- ----------- ----- ----------- -----
<CAPTION>
1993
-----------------------
CARRYING
VALUE % OF TOTAL
----------- ----------
<S> <C> <C>
Fixed maturity
securities:
Public.............. $ 2,015.8 55.4%
Private............. 516.6 14.2
----------- -----
Subtotal 2,532.4 69.6
Equity securities..... 174.4 4.8
Mortgage loans........ 652.2 17.9
Policy loans.......... 197.1 5.4
Real estate:
Investments......... 14.2 0.4
Foreclosures........ 32.6 0.9
----------- -----
Subtotal.......... 46.8 1.3
Other invested
assets............... 14.5 0.4
Short-term
investments.......... 22.4 0.6
----------- -----
Total invested
assets............... $ 3,639.8 100.0 %
----------- -----
----------- -----
</TABLE>
FIXED MATURITY SECURITIES. The fixed maturity securities portfolio consists
primarily of investment grade corporate fixed maturity securities, high-quality
MBS and United States government and agency obligations. As of September 30,
1996, fixed maturity securities were $3,141.4 million, or 81.9% of the carrying
value of invested assets with public and private fixed maturity securities
constituting $2,767.6 million, or 88.1%, and $373.8 million, or 11.9%, of total
fixed maturity securities, respectively.
The following table summarizes the composition of the fixed maturity
securities by category as of September 30, 1996 and December 31, 1995:
COMPOSITION OF FIXED MATURITY SECURITIES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------------ ------------------------
CARRYING CARRYING
VALUE % OF TOTAL VALUE % OF TOTAL
---------- ------------ ---------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. government/agencies........................................ $ 57.0 1.8% $ 67.2 2.1%
State and political subdivisions................................ -- -- 1.7 0.1
Foreign governments............................................. 26.2 0.8 22.4 0.7
Corporate....................................................... 1,920.6 61.2 2,131.8 67.8
MBS:
U.S. government/agencies.................................... 673.4 21.4 686.8 21.9
Non-government/agencies..................................... 464.2 14.8 232.2 7.4
---------- ----- ---------- -----
Subtotal-MBS................................................ 1,137.6 36.2 919.0 29.3
---------- ----- ---------- -----
Total........................................................... $ 3,141.4 100.0% $ 3,142.1 100.0%
---------- ----- ---------- -----
---------- ----- ---------- -----
</TABLE>
69
<PAGE>
The following table summarizes corporate fixed maturity securities by
industry of the issuers:
COMPOSITION OF CORPORATE
FIXED MATURITY SECURITIES BY INDUSTRY
<TABLE>
<CAPTION>
% OF CORPORATE
SEPTEMBER 30, 1996 FIXED MATURITY
CLASSIFICATION CARRYING VALUE SECURITIES
- --------------------------------------------------------------------------- -------------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Utilities.................................................................. $ 332.3 17.3%
Nondepository credit institutions.......................................... 210.0 10.9
Depository institutions.................................................... 194.7 10.1
Petroleum refining and related industries.................................. 101.8 5.3
Chemicals and related products............................................. 94.2 4.9
Air transportation......................................................... 89.3 4.6
Electrical and other electrical equipment (excluding computers)............ 76.2 4.0
Industrial, commercial machinery and computer equipment.................... 64.5 3.4
Oil and gas................................................................ 59.5 3.1
General merchandise stores................................................. 50.8 2.7
Other...................................................................... 647.3 33.7
-------- -----
Total.................................................................. $ 1,920.6 100.0%
-------- -----
-------- -----
</TABLE>
The following table summarizes fixed maturity securities by remaining
maturity as of September 30, 1996:
REMAINING MATURITY OF FIXED MATURITY SECURITIES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------
CARRYING
VALUE % OF TOTAL
---------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Due:
In one year or less (1996)...................................... $ 11.3 0.4%
One to five years (1997-2001)................................... 475.2 15.1
Five to 10 years (2002-2006).................................... 961.9 30.6
10 to 20 years (2007-2016)...................................... 415.3 13.2
Over 20 years (2017 and after).................................. 140.1 4.5
---------- -----
Subtotal...................................................... 2,003.8 63.8
MBS............................................................. 1,137.6 36.2
---------- -----
Total....................................................... $ 3,141.4 100.0%
---------- -----
---------- -----
</TABLE>
The Company's portfolio of investment grade fixed maturity securities is
diversified by number and type of issuer. As of September 30, 1996, investment
grade fixed maturity securities included the securities of over 658 issuers,
with 1,039 different issues of securities. No issuer represents more than 1.8%
of investment grade fixed maturity securities.
Below-investment grade fixed maturity securities as of September 30, 1996
included the securities of 48 issuers representing 5.1% of total invested
assets, with the largest being a $9.9 million investment.
70
<PAGE>
As of September 30, 1996, 76.8% 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 September 30, 1996:
FIXED MATURITY SECURITIES BY NAIC DESIGNATION
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------------------------------------------------------
PUBLIC PRIVATE TOTAL
----------------------- ------------------------ -----------------------
NAIC STANDARD & POOR'S CARRYING CARRYING CARRYING
DESIGNATION EQUIVALENT DESIGNATION VALUE % OF TOTAL VALUE % OF TOTAL VALUE % OF TOTAL
- ------------ ------------------------------ ---------- ----------- ----------- ----------- ---------- -----------
(DOLLARS IN MILLIONS)
<C> <S> <C> <C> <C> <C> <C> <C>
1 A- or Higher.................. $ 1,853.2 67.0% $ 84.8 22.7% $ 1,938.0 61.7%
2 BBB- to BBB+.................. 758.9 27.4 248.2 66.4 1,007.1 32.1
---------- ----- ----------- ----- ---------- -----
Total investment grade........ 2,612.1 94.4 333.0 89.1 2,945.1 93.8
---------- ----- ----------- ----- ---------- -----
3 BB to BB+..................... 113.0 4.1 26.2 7.0 139.2 4.4
4 B............................. 42.5 1.5 13.0 3.5 55.5 1.8
5 CCC or lower.................. -- -- 0.1 -- 0.1 --
6 In or near default............ -- -- 1.5 0.4 1.5 --
---------- ----- ----------- ----- ---------- -----
Total below investment
grade........................ 155.5 5.6 40.8 10.9 196.3 6.2
---------- ----- ----------- ----- ---------- -----
Total......................... $ 2,767.6 100.0% $ 373.8 100.0% $ 3,141.4 100.0%
---------- ----- ----------- ----- ---------- -----
---------- ----- ----------- ----- ---------- -----
</TABLE>
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, see "Certain Transactions and Relationships--Purchase of Loans and
Securitization"), manufactured housing, FHA Title I and CMBS. Residential
mortgage pass-throughs and CMOs total $888.9 million or 23.2% of total invested
assets. As of September 30, 1996, MBS were $1,137.6 million or 29.7%, of total
invested assets of which $673.4 million, or 59.2% of MBS were guaranteed by the
United States government or an agency of the United States government. Other MBS
were $464.2 million, or 40.8%, of MBS as of September 30, 1996. Management
believes that the quality of assets in the MBS portfolio is generally high, with
87.1% of such assets representing agency backed or "AAA" rated securities.
The Company uses interest rate swaps and caps to reduce its exposure to
changes in interest rates and to manage duration mismatches. Although the
Company is subject to the risk that counterparties will fail to perform, credit
standings of counterparties are monitored regularly. The Company's policy is to
contract only with counterparties that are rated "AA" or higher; accordingly, it
is expected that counterparties will be able to satisfy their obligations under
such contracts. The Company is also subject to the risk associated with changes
in the value of contracts. However, such adverse changes in value generally are
offset by changes in the value of the items being hedged. The notional principal
amounts of the swaps and caps, which represent the extent of the Company's
involvement in such contracts but not the risk of loss, at September 30, 1996
amounted to $980.0 million. The swaps had a carrying value and a fair value
which amounted to a net receivable position of $6.0 million at September 30,
1996. The carrying value and fair value of interest rate caps and swaptions
amounted to $9.9 million and $10.0 million, respectively, and are reflected as
"other investments" on the Company's consolidated financial statements as of
September 30, 1996. The net amount payable or receivable from interest rate
swaps and caps is accrued as an adjustment to interest income.
MORTGAGE LOANS. As of September 30, 1996, mortgage loans in the investment
portfolio were $260.2 million, or 6.8% of the aggregate carrying value of
invested assets ($250.5 million, or 6.4%, after giving effect to the Capital
Contribution and application of proceeds from the Bank Credit Facility). Of the
September 30, 1996 amount, commercial mortgage loans were 98.8%, and residential
mortgage loans were 1.2%.
71
<PAGE>
In the last two years, the Company has significantly reduced its mortgage
loan investments as a percentage of its invested assets through sales of certain
mortgage loan assets, decreased originations of new loans and write-downs of
delinquent loans. As of December 31, 1993, mortgage loans totaled $652.2
million, or 17.9% of invested assets. By December 31, 1995, such investments
totaled $353.6 million, or 8.9% of invested assets and by September 30, 1996
such investments totaled $260.2 million, or 6.8% of invested assets. Commercial
mortgage loans consist primarily of fixed-rate mortgage loans on complete
properties. As of September 30, 1996, the Company held 156 individual commercial
mortgage loans having an average interest rate, maturity and balance of 9.1%, 73
months and $1.7 million, respectively.
The following table sets forth additions, reductions from payments and other
charges, foreclosures and miscellaneous adjustments to the mortgage loan
portfolio based on unpaid principal balances for the nine-month periods ended
September 30, 1996 and 1995 and for the years ended December 31, 1995, 1994 and
1993:
MORTGAGE LOAN ASSET FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------ -------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Commercial mortgage loans:
Beginning balance................................ $ 379.4 $ 504.0 $ 504.0 $ 723.6 $ 733.3
Plus: Additions.................................. 19.6 24.8 39.9 75.3 73.1
Less: Payments and other credits................. 75.1 93.0 134.9 123.3 73.1
Foreclosed properties....................... 6.2 24.8 18.0 14.0 9.7
Sales....................................... 47.2 -- 11.6 157.6 --
----------- ----------- ----------- ----------- -----------
Ending balance................................... 270.5 411.0 379.4 504.0 723.6
Residential mortgage loans......................... 3.3 5.0 4.3 9.2 8.8
----------- ----------- ----------- ----------- -----------
273.8 416.0 383.7 513.2 732.4
Valuation allowance for mortgage loan losses....... 13.6 41.1 30.1 65.5 80.2
----------- ----------- ----------- ----------- -----------
Total mortgage loans on real estate................ $ 260.2 $ 374.9 $ 353.6 $ 447.7 $ 652.2
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Valuation allowance as percentage of mortgage
loans............................................. 5.0% 9.9% 7.8% 12.8% 11.0%
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
Substantially all of the new commercial mortgage loans were originated by
the Company through mortgage loan correspondents with whom the Company had an
ongoing relationship at the time such mortgage loans were originated. The
Company is not originating new commercial mortgage loans although it is renewing
existing loans in its portfolio in selected cases. The Company annually
estimates the current loan-to-value ratios of its commercial mortgage loans
based on an analysis of the operating statements of each mortgaged property.
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The following table sets forth the maturity and principal repayment schedule
for the commercial mortgage loan portfolio as of September 30, 1996:
COMMERCIAL MORTGAGE LOAN SCHEDULED
PRINCIPAL REPAYMENTS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------------------------------
MATURITY PAYMENTS ALL OTHER LOAN ANNUAL
YEAR ON BALLOON LOANS PAYMENTS TOTAL % OF TOTAL
- ------------------------------------------- ------------------- ----------------- --------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
1996....................................... $ 20.4 $ 1.3 $ 21.7 8.0%
1997....................................... 60.8 7.7 68.5 25.3
1998....................................... 5.5 7.3 12.8 4.7
1999....................................... 14.9 7.1 22.0 8.2
2000-2015.................................. 105.0 40.5 145.5 53.8
------- ----- --------- -----
Total...................................... $ 206.6 $ 63.9 $ 270.5 100.0%
------- ----- --------- -----
------- ----- --------- -----
</TABLE>
As of September 30, 1996, only $5.2 million, or 1.9% ($2.4 million, or 0.9%,
after giving effect to the Capital Contribution), of the Company's loan
portfolio (as measured by principal balance) was classified as delinquent or in
foreclosure. As of the same date, only $11.8 million, or 4.5% ($8.9 million, or
3.6%, after giving effect to the Capital Contribution), of the Company's loan
portfolio (as measured by principal balance) was classified as restructured. For
the first nine months of 1996, the Company's foreclosures were approximately
$6.2 million (as measured by principal balance).
In November 1994, in a transaction approved by the Iowa Commissioner, the
Company securitized a pool of 89 fixed rate commercial/multifamily mortgage
loans with a then outstanding aggregate principal balance of approximately $158
million. The Company sold these mortgage loans to a trust. Several classes of
Commercial/Multifamily Mortgage Pass-Through Certificates, Series 1994-1 (the
"Certificates") representing undivided beneficial ownership interests in the
trust were then issued and sold in a private placement. The Company retained a
residual interest in the trust which had a carrying value as of September 30,
1996 of $3.7 million. The primary purpose of this securitization was to convert
the mortgage loans into cash, which could then be reinvested, and fixed maturity
securities so as to enhance the Company's liquidity, overall investment quality
and long-term economic value.
EQUITY REAL ESTATE. In recent years the Company has significantly reduced
its equity real estate portfolio. As of September 30, 1996, investment real
estate consisted of 22 properties located in eight states. The carrying value of
investment real estate as of September 30, 1996 was $18.8 million ($4.6 million
after giving effect to the Capital Contribution). As of September 30, 1996, the
Company's rental properties were 89% occupied by third parties or by the
Company.
OTHER. The Company held $229.2 million of policy loans on individual
insurance products as of September 30, 1996. Of these policy loans, 69.6% were
on traditional life policies and 30.4% were on universal life policies and
annuities. Policy loans are permitted to the extent of a policy's contractual
limits and are fully collateralized by policy cash values. Loan rates are fixed
in the contracts and range from 5.0% to 9.0%.
As of September 30, 1996, the Company held equity securities of $90.1
million (primarily preferred stock). The largest holding of equity securities
had a carrying value of $12.2 million as of September 30, 1996.
The Company held $74.6 million of other invested assets (including
short-term investments) on September 30, 1996. Other invested assets included
various joint venture investments, financial instruments and goodwill booked in
connection with the Company's investment in the Ameritas Joint Venture. See Note
13 to Consolidated Financial Statements.
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<PAGE>
COMPETITION
The Company operates in a highly competitive industry. Numerous life
insurance companies and other entities, including banks and other financial
institutions, compete with the Company, many of which have greater financial and
other resources as compared to the Company. The Company believes that the
principal competitive factors in the sale of insurance products are product
features, price, commission structure, perceived stability of the insurer,
claims-paying ratings, value-added service and name recognition. Many other
companies are capable of competing for sales in the Company's target markets
(including companies that do not presently compete in such markets). The
Company's ability to compete for sales is dependent upon its ability to address
the competitive factors described above.
In addition to competing for sales, the Company competes for qualified
agents and brokers to distribute its products. Strong competition exists among
insurance companies for agents and brokers with demonstrated ability. Management
believes that the bases of competition for the services of such agents and
brokers are commission structure, support services, prior relationships and the
strength of an insurer's products. Although the Company believes that it has
good relationships with its agents and brokers, its ability to compete will
depend on its continued ability to attract and retain qualified persons.
FEDERAL INCOME TAX CONSIDERATIONS
Certain of the life insurance products and annuities marketed and issued by
AmerUs Life and the Ameritas Joint Venture enjoy income tax advantages as
compared to other savings investments, such as certificates of deposit and
taxable bonds. One important tax advantage is the deferral of income taxation on
any increases in the contract values during the accumulation phase of the life
insurance and annuities in contrast to the current taxation of all earnings on
many other savings and investment products. In the event that the federal income
tax laws are changed so that accumulated earnings on these life insurance
policies and annuities do not enjoy the tax deferral described above, or so that
additional savings and investment products achieve similar tax deferral status,
or so that tax rates are significantly lower so that the policyowner's or
annuitant's ability to defer income tax on policy or annuity earnings is no
longer a significant factor for the policyowner, consumer demand for the
affected products could decline materially. From time to time, Congress has
considered proposals to revise or eliminate this tax deferral. There is no such
proposal currently pending in Congress, nor has the current administration
announced any consideration of any such proposal. If legislation were enacted to
eliminate the tax advantages of life insurance policies and annuities, such a
change could have an adverse effect on the ability of the Company to sell those
products.
EMPLOYEES
As of September 30, 1996, the Company had 407 full-time employees. None of
the Company's employees are covered by a collective bargaining agreement and the
Company believes that its relations with employees are satisfactory.
Certain employees of the Company also provide services to other affiliated
entities, including affiliates not directly owned by the Company. See "Certain
Transactions and Relationships."
SUBSIDIARIES
The Company was formed in August, 1996 in connection with the
Reorganization. See "The Reorganization and Distribution of the Non-Life
Insurance Subsidiaries." AmerUs Life has three wholly-owned subsidiaries: CLA
Assurance Company, an Iowa life insurance company, Centralife Annuity Services,
Inc., an Arizona corporation, and American Vanguard Life Insurance Company, an
Iowa life insurance company. In addition, AmerUs Life currently owns a 34%
interest in AMAL Corporation, through whose wholly-owned subsidiaries the
Ameritas Joint Venture operates. See "--Ameritas Joint Venture."
LEGAL PROCEEDINGS
AmerUs Life is a defendant in a class action lawsuit which was brought on
August 31, 1995 in the District Court for Travis County, Texas. The complaint,
which seeks unspecified damages, was filed by former policyowners on behalf of
themselves and all similarly situated persons who purchased certain
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<PAGE>
individual life insurance policies which were underwritten and sold by AmerUs
Life within Texas from and after 1980. The complaint alleges that sales
presentations and policy illustrations misrepresented that premiums would
"vanish" after a stated number of years, without adequate disclosure of the
effect of changes in the policy dividends. AmerUs Life has denied the
allegations contained in such complaint and denies any wrongdoing in connection
with such allegations. The parties have engaged in discovery, but a hearing on
certification of the class has not yet been held.
The parties are engaged in a court-initiated mediation process in the Texas
litigation and, in light of the uncertainties, hazards and expenses of
litigation, have discussed a number of different settlement approaches,
including a nationwide class settlement of certain market conduct issues for a
substantial block of the Company's traditional whole life policies. Progress in
negotiating such a class settlement appears to have been made, but substantial
unresolved issues remain and no agreement has been reached. Even if such an
agreement were reached, the court would have to approve its terms. Should a
settlement satisfactory to the Company not be reached or not be approved, the
Company would continue to vigorously defend against the claims asserted,
including the existence of a legitimate class.
Due to the potential that a settlement may be reached in this case, the
Company has incurred a significant charge to income for the first nine months of
1996. Based upon its current estimates of the range of loss at between five and
eight million dollars, the Company has established a reserve of five million
dollars. The eventual costs of any settlement cannot be precisely determined at
this time, and may be more or less than the amount of the range.
A class action lawsuit was also filed in June 1996 in the United States
District Court for the Northern District of California. The complaint alleges
that AmerUs Life breached the terms of certain life and annuity policies, and
breached certain other duties owed to policyowners, when it allegedly passed an
increase in its corporate income taxes (known as the deferred acquisition cost,
or DAC, tax) through to owners of those policies. The plaintiff, an insured
under a universal life policy issued by Central Life, seeks unspecified actual
and punitive damages and injunctive relief on behalf of himself and all
policyowners of AmerUs Life with universal life, term and "blended" life
insurance policies and annuities. AmerUs Life has denied the allegations
contained in such complaint, including the existence of a legitimate class. The
litigation is in the early discovery stage and a hearing on certification of the
class has not yet been scheduled. The litigation is being vigorously defended by
AmerUs Life.
Despite the Company's vigorous defense of these class action lawsuits and
its denial of any wrongdoing, there can be no assurance that the outcome of such
lawsuits will not have a material adverse effect on the life insurance industry
generally or on the Company. See "Risk Factors -- Risks of Class Action
Litigation."
In the ordinary course of business, the Company and its subsidiaries are
also engaged in certain other litigation, none of which management believes is
material.
PROPERTIES
The Company's principal business operations are conducted from two
locations. The Company's executive offices consist of approximately 20,000
square feet located at 418 Sixth Avenue, Des Moines, Iowa. AmerUs Life's
executive offices consist of approximately 125,000 square feet located at 611
Fifth Avenue, Des Moines, Iowa. The Company and AmerUs Life will both lease
their executive offices from API, as both properties were part of the Capital
Contribution. See "Certain Transactions and Relationships."
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<PAGE>
SUPERVISION AND REGULATION
REGULATION OF THE COMPANY AND AMHC
A mutual insurance holding company is subject to regulation at a level
substantially equal to that of an Iowa domestic insurance company, and is
governed by statutory and regulatory requirements which are identical to, or
which parallel, the regulatory requirements imposed upon Iowa domestic insurance
companies. The Iowa Commissioner has jurisdiction over an intermediate holding
company, such as the Company, as if it were a mutual insurance holding company.
AMHC and the Company are each subject to the Iowa Insurer Supervision,
Rehabilitation and Liquidation Act, Iowa Code Chapter 507C. In addition, AMHC
and the Company are subject to the provisions of the Iowa Insurance Holding
Company Systems Act in the same manner and to the same extent as domestic
insurance companies. In addition, the assets of AMHC and the Company are
available to satisfy claims of policyowners, in the same manner as a domestic
insurance company in the event the Iowa Commissioner initiates a proceeding
under Chapter 507C.
AMHC and the Company may not merge with, be acquired by or acquire another
entity without approval of the Iowa Commissioner. In addition, in the case of a
merger or consolidation, separate approval by the Iowa Attorney General is
required. The statutory provisions applicable to the demutualization of a
domestic mutual life insurance company are applicable to the demutualization of
a mutual insurance holding company. In addition, no person may acquire or make
an offer to acquire voting stock in the Company if such acquisition would result
in such person's obtaining control over the Company. Generally, any person who,
directly or indirectly, owns, controls, holds with the power to vote, or holds
proxies representing 10% or more of the Company's voting securities (consisting
of both Class A Common Stock and Class B Common Stock) is deemed to have
control.
Under rules adopted by the Iowa Commissioner, AMHC is required to provide to
the Iowa Division of Insurance an annual report containing historical and
prospective information, including financial statements, an investment plan
covering all assets, any intention it has of borrowing money and information
regarding any "closed block" formed as part of a reorganization.
In addition to rules establishing the terms and conditions pursuant to which
the Iowa Commissioner will approve the sale of stock of an intermediate
insurance holding company or a subsidiary stock insurance company resulting from
a reorganization pursuant to Iowa law, the Iowa Commissioner has adopted rules
that also limit the activities and affiliations that are permissible for mutual
insurance holding companies. Under such rules, among other things, (i) at least
50 percent of the GAAP net worth of the mutual insurance holding company must be
invested in insurance company subsidiaries; (ii) a mutual insurance holding
company may not pay any policy credit, dividend or other distribution to any
policyowner member unless such payment has been approved by the Iowa
Commissioner; and (iii) a mutual insurance holding company must obtain the
approval of the Iowa Commissioner for any merger or acquisition (if at any time
it acquires or plans to acquire more than 50 percent of a stock insurance
company, a mutual insurance holding company must submit to the Iowa Commissioner
a plan describing any membership interests of policyowners).
The Iowa Commissioner also has issued rules which require prior approval by
the Iowa Commissioner of the issuance of stock by the Company. Pursuant to such
rules, the Company has filed an application with the Iowa Commissioner seeking
approval for the Offerings, which approval has been obtained. Under the rules,
the Company will be required to give notice to the Iowa Commissioner prior to
any subsequent public or private common stock offering.
Shares of the capital stock of the Company which carry the right to cast a
majority of the votes entitled to be cast by all of the outstanding shares of
the Company are required by Iowa law to at all times be owned, directly or
indirectly, by AMHC and may not be conveyed, transferred, assigned, pledged,
subjected to a security interest or lien, encumbered, or otherwise hypothecated
or alienated by AMHC or any intermediate holding company. Any conveyance,
transfer, assignment, pledge, security interest, lien, encumbrance or
hypothecation or alienation by AMHC, or any intermediate holding company, in or
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<PAGE>
on such shares shall be deemed void in inverse chronological order of the date
of such transaction to the extent necessary to give the mutual insurance holding
company unencumbered direct or indirect ownership of shares representing a
majority of the votes entitled to be cast by all of the outstanding shares of
the Company.
REGULATION OF AMERUS LIFE
The Company will rely primarily on dividends and interest income from AmerUs
Life to make any dividend payments to its shareholders. The ability of AmerUs
Life to pay dividends to the Company is limited by law to earned profits
(statutory unassigned surplus) as of the date the dividend is paid, as
determined in accordance with accounting practices prescribed or permitted by
the insurance regulatory authorities of the State of Iowa. In addition, under
the Iowa Insurance Holding Company Systems Act, AmerUs Life may not pay an
"extraordinary" dividend without prior notice to and approval by the Iowa
Commissioner. An "extraordinary" dividend is defined under the Iowa Holding
Company Systems Act 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 12 months exceeds the greater of (i) 10% of
policyowners' surplus (total statutory capital stock and STATUTORY SURPLUS) as
of December 31 of the preceding year, or (ii) the statutory net gain from
operations of the insurer for the 12 month period ending the December 31 of the
preceding year. Iowa law gives the Iowa Commissioner broad discretion to
disapprove requests for dividends in excess of these limits. Based on this
limitation and 1995 statutory results, AmerUs Life would be able to pay
approximately $40 million in dividends to the Company in 1996 without obtaining
the Iowa Commissioner's approval. However, as a result of the Distribution,
AmerUs Life will not be able to pay any additional dividends to the Company in
the 12-month period following the Distribution without the prior consent of the
Iowa Commissioner.
AmerUs Life and its subsidiaries are subject to regulation and supervision
by the states in which they transact business. State insurance laws generally
establish supervisory agencies with broad administrative and supervisory powers
related to granting and revoking licenses, transacting business, establishing
guaranty fund associations, licensing agents, approving policy forms, regulating
premium rates for some lines of business, establishing reserve requirements,
prescribing the form and content of required financial statements and reports,
determining the reasonableness and adequacy of statutory capital and surplus,
and regulating the type and amount of investments permitted.
Every state in which AmerUs Life is licensed administers a guaranty fund,
which provides for assessments of licensed insurers for the protection of
policyowners of insolvent insurance companies. There has been an increase in the
number of insurance companies that are under supervision which has resulted in
an increase in the amount of assessments to cover losses to policyowners of such
companies. Assessments can be partially recovered through a reduction in future
premium taxes in some states. In these situations, the assessments are generally
capitalized and amortized against future reductions in premium taxes. Net
assessment expenses for AmerUs Life amounted to $0.4 million for the first nine
months of 1996, $0.4 million in 1995, $1.2 million in 1994 and $3.3 million in
1993. Management cannot reasonably predict the amount of future assessments, if
any.
Ethical sales practices and compliance with applicable laws and regulations
relevant to the life insurance industry have been a continuing focus of the
Company's support efforts. The Company has a continuing education program
focusing on ethical practices which is being provided to all agents. A program
is currently being implemented to further formalize the Company's current
practices and standards in the compliance and market conduct areas.
Recently, the insurance regulatory framework has been placed under increased
scrutiny by various states, the federal government and the NAIC. Various states
have considered or enacted legislation which changes, and in many cases
increases, the state's authority to regulate insurance companies. Although
legislation has been under consideration for several years in Congress which, if
enacted, would result in the federal government assuming some role in the
regulation of insurance companies, management does not expect the current
Congress to enact federal insurance regulation. The NAIC, in conjunction with
state regulators, has been reviewing existing insurance laws and regulations.
The NAIC
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recently approved and recommended to the states for adoption and implementation
several regulatory initiatives designed to reduce the risk of insurance company
insolvencies. Through the NAIC accreditation program, these recommendations for
state legislation have taken on an increased significance. Two such initiatives
which have been adopted by the NAIC are risk-based capital standards ("RBC") and
a model investment law.
The RBC standards for life insurance companies were adopted by the NAIC in
1992 and require insurance companies to calculate and report for statutory basis
financial statements information under a risk-based capital formula. The formula
is embodied in the NAIC Model Act, which has been adopted by many states,
including Iowa. RBC requirements are intended to allow insurance regulators to
identify at an early stage inadequately capitalized insurance companies based
upon the types and mixtures of risks inherent in such companies' operations. The
formula includes components for asset risk, liability risk, interest rate
exposure and other factors.
The RBC requirements are intended to be used by insurance regulators as an
early warning tool to identify deteriorating or weakly capitalized companies for
the purpose of initiating regulatory actions. They are not designed as a ranking
mechanism for adequately capitalized companies. In addition, the formula defines
a new minimum capital standard which supplements the low, fixed minimum capital
and surplus requirements previously implemented on a state-by-state basis.
The Iowa RBC requirements categorize insurance companies according to the
extent to which they meet or exceed certain RBC thresholds. The law requires
increasing degrees of regulatory oversight and intervention based on the level
of an insurance company's authorized control level RBC as its RBC declines.
These degrees of regulatory action are triggered by the RBC level of an
insurance company as follows: (i) a "Company Action Level Event" (requiring the
insurance company to inform and obtain approval from the Director of a
comprehensive financial plan for increasing its RBC), which would occur if,
among other things, an insurance company's RBC falls below 200% of its
authorized control level RBC, or if an insurance company's RBC falls below 250%
of its authorized control level RBC and has a negative trend; (ii) a "Regulatory
Action Level Event" (resulting in, in addition to the requirement of a financial
plan, regulatory actions including examination of an insurance company's assets,
liabilities and operations followed by an order specifying such corrective
actions as the Director determines to be appropriate), which would occur if,
among other things, an insurance company's RBC falls below 150% of its
authorized control level RBC; (iii) an "Authorized Control Level Event"
(resulting in, in addition to the regulatory actions above, such actions as are
necessary to cause an insurance company to be placed under regulatory control in
a rehabilitation or liquidation proceeding if deemed to be in the best interests
of policyowners, creditors and the public), which would occur if, among other
things, an insurance company's RBC falls below 100% of its authorized control
level RBC; and (iv) a "Mandatory Control Level Event" (resulting in, on a
mandatory basis, such actions as are necessary to cause an insurance company to
be placed under regulatory control in a rehabilitation or liquidation
proceeding), which would occur if, among other things, an insurance company's
RBC falls below 70% of its authorized control level RBC.
As of September 30, 1996, AmerUs Life's RBC levels were significantly in
excess of RBC thresholds. Management believes that the RBC levels will be
significantly in excess of RBC thresholds as of the closing of the Offerings. As
a result, the RBC requirements are not expected to have an impact upon AmerUs
Life's operations, financial condition or operating results.
Approximately once every three to five years, as part of their routine
regulatory oversight process, state insurance departments conduct detailed
examinations of the books, records and accounts of insurance companies domiciled
in their states. Such examinations are generally conducted in cooperation with
the departments of two or three other states, under guidelines promulgated by
the NAIC. AmerUs Life was last examined by the Iowa Commissioner as of December
31, 1993. No material issues were raised by the Iowa Commissioner in such
examination.
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The NAIC has recently adopted model legislation to govern insurance company
investments. In addition, draft alternative model legislation is also under
discussion at the NAIC level. However, implementation of any investment model
law into state law is not anticipated in the foreseeable future. Management
believes that if the recently adopted model law or the current alternative
discussion draft were adopted without modification it would not have a material
impact on the Company.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the current
directors and executive officers of the Company and AmerUs Life.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY AND AMERUS LIFE
- ------------------------------ --- ---------------------------------------------------------------------------
<S> <C> <C>
John R. Albers 65 Director of the Company and AmerUs Life
Roger K. Brooks 59 Director of the Company and AmerUs Life; Chairman, President and Chief
Executive Officer of the Company and Chairman of AmerUs Life
Malcolm Candlish 61 Director of the Company and AmerUs Life
D T Doan 64 Director of the Company and AmerUs Life; Vice Chairman of the Company and
President of AmerUs Life
Thomas F. Gaffney 51 Director of the Company and AmerUs Life
Sam C. Kalainov 66 Director of the Company and AmerUs Life
John W. Norris, Jr. 60 Director of the Company and AmerUs Life
Jack C. Pester 61 Director of the Company and AmerUs Life
John A. Wing 61 Director of the Company and AmerUs Life
Thomas C. Godlasky 41 Executive Vice President and Chief Investment Officer of the Company and
AmerUs Life
Michael E. Sproule 49 Executive Vice President and Chief Financial Officer of the Company and
AmerUs Life
Victor N. Daley 53 Senior Vice President and Chief Human Resources Officer of the Company and
AmerUs Life
Michael G. Fraizer 46 Senior Vice President and Controller/Treasurer of the Company and AmerUs
Life
</TABLE>
Set forth below with respect to each of the directors and executive officers
of the Company and AmerUs Life is a description of such individual's business
experience, principal occupation and employment during at least the last five
years:
John R. Albers served as a director of American Mutual Life from November
1983 to June 1996. Since April 1996 Mr. Albers has served as a director of AMAL.
Mr. Albers is President and Chief Executive Officer of Fairfield Enterprises,
Inc., Dallas, Texas. From August 1988 to April 1995, Mr. Albers was the
Chairman, Chief Executive Officer and President of Dr. Pepper/Seven-Up
Companies, Dallas, Texas. From July 1995 to the present, Mr. Albers has served
as a director of First Alert, Inc., Aurora, Illinois. Mr. Albers also serves as
a director of AMHC.
Roger K. Brooks served as a director of American Mutual Life from February
1971 to June 1996. Mr. Brooks was the Chief Executive Officer of American Mutual
Life from December 1994 to June 1996, and prior thereto was the Chairman and
Chief Executive Officer of American Mutual Life. Since April 1996 Mr. Brooks has
served as a director of AMAL. Mr. Brooks also serves as a director of AMHC.
Malcolm Candlish served as a director of American Mutual Life from February
1987 to June 1996. From December 1992 to October 1996 Mr. Candlish was Chairman
and Chief Executive Officer of First
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Alert, Inc., Aurora, Illinois. Since December 1992 Mr. Candlish has been the
Chairman and, from May 1996 to October 1996, Mr. Candlish served as the
President of First Alert, Inc. From 1989 to 1992, Mr. Candlish was the Chairman
and Chief Executive Officer of Sealy, Inc., Cleveland, Ohio. Since 1991 Mr.
Candlish has served as a director of Black & Decker Corporation, Towson,
Maryland. Mr. Candlish also serves as a director of AMHC.
D T Doan served as a director and Vice Chairman of American Mutual Life from
December 1994 to June 1996. From October 1995 until June 1996, Mr. Doan was
President--Insurance Operations of American Mutual Life. Mr. Doan held the same
position from August 1992 to January 1995. From August 1987 to August 1992, Mr.
Doan was Executive Vice President--Corporate of American Mutual Life. Since
April 1996 Mr. Doan has served as a director of AMAL, AVLIC and AIC. Since April
1996, Mr. Doan has served as Executive Vice President of AMAL and AVLIC and
Senior Vice President of AIC. Mr. Doan also serves as a director of AMHC.
Thomas F. Gaffney served as a director of American Mutual Life from November
1983 to June 1996. Mr. Gaffney is a private investor who lives in Tierra Verde,
Florida. From 1987 to 1990, Mr. Gaffney was the Chairman of Oxford Investment
Group, Bloomfield Hills, Michigan. Mr. Gaffney also serves as a director of
AMHC.
Sam C. Kalainov served as a director of American Mutual Life from December
1994 to June 1996. Mr. Kalainov was the Chairman of American Mutual Life from
December 1994 until June 1996 and Chairman of AmerUs Life from July 1996 until
September 1996. From 1972 to 1983, Mr. Kalainov was a director of Old AML. From
1983 to December 1994, Mr. Kalainov was the Chairman and Chief Executive Officer
of Old AML. Mr. Kalainov also serves as a director of AMHC.
John W. Norris, Jr. served as a director of American Mutual Life from
November 1974 to June 1996. Mr. Norris is Chairman and Chief Executive Officer
of Lennox International, Inc., Dallas, Texas. Mr. Norris has also served as a
director of Atmos Energy Corporation, Dallas, Texas since August 1987. Mr.
Norris also serves as a director of AMHC.
Jack C. Pester served as a director of American Mutual Life from December
1994 to June 1996. From May 1981 to December 1994, Mr. Pester was a director of
Old AML. Mr. Pester is a Senior Vice President of The Coastal Corporation,
Houston, Texas. Since August 1994 Mr. Pester has also served as a director of
KFX, Inc., Denver, Colorado. Mr. Pester also serves as a director of AMHC.
John A. Wing served as a director of American Mutual Life from May 1991 to
June 1996. Mr. Wing is Chairman and Chief Executive Officer of ABN AMRO Chicago
Corporation, Chicago, Illinois.
Thomas C. Godlasky was Executive Vice President and Chief Investment Officer
of American Mutual Life from January 1995 to June 1996. From February 1988 to
January 1995, he was Manager of the Fixed Income and Derivatives Department of
Providian Corporation, Louisville, Kentucky. Since April 1996, Mr. Godlasky has
served as a director of AVLIC and AIC.
Michael E. Sproule was Executive Vice President and Chief Financial Officer
of American Mutual Life from August 1992 to June 1996. From January 1991 through
July 1992, he was Executive Vice President and Chief Financial Officer of ICH
Corporation, Louisville, Kentucky and from January 1988 to December 1990, he was
a Consultant with Tillinghast, New York, New York. Since April 1996, Mr. Sproule
has served as a director of AVLIC and AIC.
Victor N. Daley was Senior Vice President and Chief Human Resources Officer
of American Mutual Life from September 1995 to June 1996. From April 1989 to
September 1995 Mr. Daley was Senior Vice President and Chief Administrative
Officer of Royal Insurance, Charlotte, North Carolina.
Michael G. Fraizer was Senior Vice President and Controller/Treasurer of
American Mutual Life from January 1993 to June 1996. From April 1991 to January
1993, Mr. Fraizer was Senior Vice President and Chief Financial Officer of Iowa
Realty Co., Inc. and from April 1977 to April 1991, he was a Partner with
McGladrey & Pullen, Des Moines, Iowa.
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BOARD OF DIRECTORS OF THE COMPANY
The business of the Company is managed under the direction of the Company's
Board of Directors. The Board of Directors is presently composed of nine
directors and the Company intends to add two additional outside directors after
completion of the Offerings. The Board is divided into three classes. Messrs.
Candlish, Kalainov and Norris are in Class I, which class will stand for
election at the annual meeting of shareholders to be held in 1997. Messrs.
Albers, Doan and Gaffney are in Class II, which class will stand for election at
the annual meeting of shareholders to be held in 1998. Messrs. Brooks, Pester
and Wing are in Class III, which class will stand for election at the annual
meeting of shareholders to be held in 1999.
Consistent with proposed regulations recently promulgated by the Iowa
Commissioner, at least three of the Company's outside directors (including Mr.
Wing) will not be directors of AMHC or any of AMHC's subsidiaries. In addition,
at least two of the Company's outside directors, who have not yet been selected,
will have had no previous affiliation with the Company. The Company's
independent directors will review any intercompany transactions involving
potential conflicts of interest between the Company and AMHC and its
subsidiaries. At present, all of the members of the Company's Board of Directors
are outside directors except Messrs. Brooks, Doan and Kalainov.
The Company's Board of Directors has also established an Executive Committee
which will consist of between three and five members of the Board and will be
chaired by Mr. Brooks. The Executive Committee exercises the power and authority
of the Directors in all matters that do not require action by the entire Board
of Directors. The members of the Executive Committee will be appointed
contemporaneous with the Offerings.
The Company's Board of Directors has also established an Audit Committee and
a Human Resources Committee. The Audit Committee recommends the firm to be
appointed as independent accountants to audit financial statements and to
perform services related to the audit, reviews the scope and results of the
audit with the independent accountants, reviews with management and the
independent accountants the Company's year-end operating results and considers
the adequacy of the Company's internal accounting procedures. The Audit
Committee consists of Messrs. Wing, Gaffney and Pester. The Human Resources
Committee reviews and recommends the compensation arrangements for all executive
officers, approves such arrangements for other senior level employees, and takes
such actions as may be required in connection with certain compensation and
incentive plans of the Company. The Human Resources Committee consists of
Messrs. Albers, Candlish and Norris, each of whom qualifies as a Non-Employee
Director, as such term is used in Rule 16b-3 promulgated under the Securities
Exchange Act of 1934 (the "Exchange Act").
BOARD OF DIRECTORS OF AMERUS LIFE
The Board of Directors of AmerUs Life is presently composed of the same nine
directors as the Company's Board of Directors.
COMPENSATION OF DIRECTORS
It is currently contemplated that all non-employee directors will receive an
annual retainer of $15,000 plus a $2,000 fee for special meetings of the Board
of Directors or a committee thereof. Directors who are officers or employees of
the Company or any affiliate of the Company receive no compensation for serving
as directors. All directors are reimbursed for out-of-pocket expenses incurred
in connection with attendance at any meeting of the Board of Directors or
committee of the Board of Directors of the Company or AmerUs Life.
Directors are also eligible to participate in the Company's Non-Employee
Director Stock Plan, which the Company's Board of Directors approved on
September 15, 1996. See "Management Compensation--Compensation Pursuant to Stock
Plans of the Company."
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<PAGE>
MANAGEMENT COMPENSATION
EXECUTIVE OFFICER COMPENSATION
Since the formation of the Company, none of the executive officers has
received any compensation from the Company. All compensation received, earned or
accrued by such executive officers has been from AmerUs Life.
The following summary compensation table sets forth certain information
concerning compensation for services rendered in all capacities awarded or paid
by the Company (including compensation paid by AmerUs Life) to its Chief
Executive Officer and the other named executive officers (the "Named Executive
Officers") during the year ended December 31, 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------- LTIP ALL OTHER
SALARY BONUS(A) PAYOUTS(B) COMPENSATION(C)
NAME AND PRINCIPAL POSITION FISCAL YEAR $ $ $ $
- ------------------------------------------------- ----------- --------- ----------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
Roger K. Brooks
Chairman, President and Chief Executive Officer
of the Company and Chairman of AmerUs Life 1995 440,000 300,000 352,000
D T Doan
Vice Chairman of the Company and President of
AmerUs Life 1995 275,000 132,500 137,600
Thomas C. Godlasky
Executive Vice President and Chief Investment
Officer of the Company and AmerUs Life 1995 239,600 125,000 204,000(D)
Michael E. Sproule
Executive Vice President and Chief Financial
Officer of the Company and AmerUs Life 1995 250,000 200,000 125,000
Sam C. Kalainov
Former Chairman (E) 1995 440,000 300,000 352,000
</TABLE>
- ------------------
(A) Pursuant to the Management Incentive Plan.
(B) Long term incentive compensation pursuant to the Performance Share Plan (the
"LTIP"). LTIP payouts indicated were earned in 1995 and are payable in 1996.
(C) De minimus benefits and perquisites are not included as they are in the
aggregate not significant.
(D) The amount shown reflects payment of a $204,000 sign-on bonus of which a
pro-rata portion is repayable in the event of termination during the initial
36 months of employment.
(E) Mr. Kalainov served as Chairman of AmerUs Life until September 1996. In
August 1996, Mr. Kalainov became Chairman of AMHC and AmerUs Group. Mr.
Kalainov is no longer an officer of the Company.
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<PAGE>
COMPENSATION PURSUANT TO STOCK PLANS OF THE COMPANY
STOCK INCENTIVE PLAN
On September 15, 1996, the Company's Board of Directors adopted the AmerUs
Life Holdings, Inc. Stock Incentive Plan (the "Stock Plan" or the "Plan"). The
purpose of the Stock Plan is to enable the Company to attract and retain
employees who will contribute to the Company's long-term success by enabling
such employees to participate in the long-term success and growth of the Company
through an equity interest in the Company.
The Stock Plan provides for the grant of options (including incentive stock
options and non-qualified stock options), stock appreciation rights and
restricted stock awards. To date, no options or other awards have been granted
under the Stock Plan. In addition, consistent with rules recently promulgated by
the Iowa Commissioner, no options or awards will be granted by the Company
during the six-month period following the closing of the Offerings.
The summary of the Stock Plan which appears below is qualified in its
entirety by reference to the full text of such Plan.
TYPES OF AWARDS. The Stock Plan provides for the grant of any or all of the
following types of awards: (1) stock options, including incentive stock options
and non-qualified stock options; (2) stock appreciation rights; and (3)
restricted stock. Awards may be granted in combination as determined by the
Human Resources Committees of the Board of Directors (the "Committee"). The
initial grant will be in the form of Non-Qualified Stock Options.
TERM. The Company anticipates that the Stock Plan will be approved by the
Company's sole shareholder and become effective prior to the closing of the
Offerings. The Stock Plan will terminate ten years after its effective date (the
"Termination Date"). No awards shall be granted pursuant to the Plan after the
Termination Date, but awards granted prior thereto may extend beyond such time.
The Board of Directors may terminate the Plan prior to the Termination Date;
however, termination of the Plan will not affect awards made prior to
termination.
ELIGIBILITY. Officers and other key and high potential employees of the
Company, its affiliates and its subsidiaries (but excluding members of the
Committee and any person who serves only as a director) who are responsible for
or contribute to the management, growth and/or profitability of the business of
the Company are eligible to be granted stock options, stock appreciation rights,
or restricted stock awards. The options and participants under the Plan will be
selected from time to time by the Committee, in its sole discretion, from among
those eligible, and the Committee shall determine, in its sole discretion, the
number of shares covered by each award or grant.
SHARES SUBJECT TO THE STOCK PLAN. The total number of shares of Class A
Common Stock reserved and available for distribution under the Stock Plan shall
be 1.4 million. Such shares may consist, in whole or in part, of authorized and
unissued shares or treasury shares. If any shares of Class A Common Stock that
have been optioned cease to be subject to option, or if any shares subject to
Restricted Stock Award granted thereunder are forfeited or such awards otherwise
terminate, such shares shall again be available for distribution in connection
with future awards under the Plan. The maximum total number of shares subject to
awards which may be granted under the Plan in any one year is 700,000, and the
maximum number of shares subject to awards which may be granted under the Plan
to any individual in any one year is 230,000 (in both cases, subject to
appropriate adjustments to reflect changes in the capitalization of the
Company).
STOCK OPTIONS. The Committee is authorized to determine the terms and
conditions of all option grants, subject to the limitations that the option
price per share may not be less than the fair market value of a share of the
Company's common stock on the date of grant and the term of an option may not be
longer than ten (10) years. Payment of the option price may be made in any
manner specified by the Committee (which may include cash or common stock of the
Company, or by "cashless exercise").
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<PAGE>
STOCK APPRECIATION RIGHTS ("SARS"). The Committee is authorized to grant
SARs in tandem with options under the Stock Plan. A SAR can be exercised only to
the extent the option with respect to which it is granted is not exercised, and
is subject to the same terms and conditions as the option to which it relates.
Upon exercise of a SAR, the holder will be entitled to receive, for each share
with respect to which the SAR is exercised, an amount (the "appreciation") equal
to the difference between the option price of the related option and the fair
market value of a share of common stock of the Company on the date of exercise
of the SAR. The appreciation will be payable in cash or Class A Common Stock, at
the discretion of the Committee.
RESTRICTED STOCK. The Committee is authorized to award restricted stock
under the Stock Plan subject to the terms and conditions as the Committee may
determine. The Committee has the authority to determine the number of shares of
restricted stock to be awarded, the price, if any, to be paid by the recipient
of the restricted stock, and the date or dates on which the restricted stock
will vest. The vesting of restricted stock may be conditioned upon the
completion of a specific period of service with the Company, upon the attainment
of specified performance goals, or upon such other criteria as the Committee may
determine. The Stock Plan gives the Committee discretion to make loans to the
recipients for the purchase price of restricted stock and to accelerate the
vesting of restricted stock on a case by case basis at any time.
FEDERAL INCOME TAX ASPECTS. The following is a brief summary of the federal
income tax consequences of awards made under the Stock Plan. This summary does
not describe state, local or foreign tax consequences. The information contained
in this section is based on present law and regulations, which are subject to be
changed prospectively or retroactively.
The optionee will recognize no taxable income upon the grant or exercise of
an Incentive Stock Option (as defined under the Plan), and the Company will not
be entitled to any deduction. Upon a disposition of the shares after the later
of two years from the date of grant and one year from the date of exercise, the
participant will recognize long-term capital gain or loss equal to the
difference, if any, between the amount realized and the exercise price. The
excess, if any, of the fair market value of the shares of Class A Common Stock
on the date of exercise of the Incentive Stock Option over the exercise price
may be subject to alternative minimum tax. In such circumstances, no deduction
will be allowed to the Company for federal income tax purposes.
If Class A Common Stock acquired upon the exercise of an Incentive Stock
Option is disposed of prior to the expiration of the holding periods described
above, (i) the optionee will recognize ordinary compensation income in the
taxable year of disposition in an amount equal to the excess, if any, of the
lesser of the fair market value of the shares on the date of exercise and the
amount realized on the disposition of the shares, over the exercise price paid
for such shares; and (ii) the Company will be entitled to a corresponding
deduction.
With respect to Non-Qualified Options (as defined under the Plan) (i) upon
grant of the option, the optionee will recognize no income; and (ii) upon
exercise of the option, the optionee will recognize ordinary compensation income
in an amount equal to the excess, if any, of the fair market value of the shares
on the date of exercise over the exercise price, and the Company will be
entitled to a corresponding deduction. On the disposition of the shares, the
optionee will recognize gain or loss equal to the amount realized and the sum of
the exercise price and the ordinary compensation income realized. Such gain or
loss will be treated as either short-term or long-term capital gain or loss,
depending upon the length of time that the optionee has held the shares.
An optionee recognizes no taxable income upon the grant of a SAR, and the
Company is not entitled to a deduction. An optionee will recognize ordinary
income, and the Company will be entitled to a deduction, at the time of exercise
equal to the cash or fair market value of common stock payable upon such
exercise.
The grant of Restricted Stock (as defined under the Plan) under the Stock
Plan will not result in income for the grantee or in a deduction for the
Company, assuming the shares transferred are subject
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<PAGE>
to a "substantial risk of forfeiture" as intended by the Company. If there are
no such restrictions, the grantee would recognize ordinary income upon receipt
of shares. Dividends paid to the grantee while the stock remains subject to
restriction will be treated as compensation for federal income tax purposes. At
the time the restrictions lapse, the grantee will recognize ordinary income, and
the Company will be entitled to a deduction measured by the fair market value of
the shares at the time of lapse. However, an optionee may elect to recognize
income measured by the fair market value of the shares at the time of grant and
the Company will be entitled to a corresponding deduction.
Awards paid to certain executive officers may be subject to the limitations
under Section 162(m) of the Internal Revenue Code that prohibit the deduction of
certain compensation paid in excess of $1,000,000 in any taxable year. The
application of such section to awards made under plans adopted and approved
prior to the time at which a company's stock becomes publicly traded is not
clear. The Company believes that compensation payable pursuant to options
granted under the Stock Plan should not be limited as to deductibility by reason
of Section 162(m) and that compensation payable in respect of other awards may
fail to be deductible for federal income tax purposes unless such awards qualify
for certain exemptive relief that may be available for grants made prior to the
first meeting of shareholders of the Company at which directors are elected in
1999.
NON-EMPLOYEE DIRECTOR STOCK PLAN
On September 15, 1996, the Company's Board of Directors adopted the AmerUs
Life Non-Employee Director Stock Plan (the "Director Plan"). The Company
anticipates the Director Plan will be approved by the Company's sole shareholder
and become effective prior to the closing of the Offerings. The purpose of the
Director Plan is to provide stock-based compensation to eligible Directors of
the Company in order to encourage a high level of Director performance and to
provide Directors with a proprietary interest in the Company's success.
The Director Plan provides for grants of restricted shares of the Company's
Class A Common Stock ("Restricted Shares") and for the grant of options to
purchase shares of Class A Common Stock. To date, no Restricted Shares or
options have been granted. In addition, consistent with rules recently
promulgated by the Iowa Commissioner, no Restricted Shares or options will be
granted under the Director Plan during the six-month period following the
closing of the Offerings.
The Director Plan is administered by the Committee. The total number of
shares of Class A Common Stock reserved and available for distribution under the
Director Plan is 150,000. Such shares may consist, in whole or in part, of
authorized and unissued shares or treasury shares.
Each Non-Employee Director of the Company is eligible to participate in the
Director Plan. A "Non-Employee Director" for this purpose means Directors who
are not officers for purposes of Section 16 of the Exchange Act or otherwise
employed, or a consultant to, the Company or any of its affiliates, and who is
an outside director under Section 1.162-27(e)(3) of the regulations promulgated
under the Code.
STOCK OPTIONS. Beginning January 1, 1998, options for 2,500 shares of Class
A Common Stock of the Company will be granted to each Non-Employee Director
automatically on the first day of each calendar year in which the Class A Common
Stock is publicly traded on the Nasdaq National Market. Options granted under
the Director Plan shall be evidenced by a written agreement in such form as the
Committee shall from time to time approve. The option price per share of Class A
Common Stock purchasable under an option shall be 100% of the fair market value
of the Class A Common Stock on the date of the grant of the option. Each option
shall be exercisable for a term of ten (10) years from the date such option is
granted. Options will not become exercisable until the expiration of twelve (12)
months from the date of the grant of the option.
RESTRICTED STOCK AWARDS. Each Non-Employee Director may elect, pursuant to
a written irrevocable election, to receive Restricted Stock in lieu of part or
all of such Non-Employee Director's director fees. The number of shares of
Restricted Stock granted to a Non-Employee Director pursuant to such
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<PAGE>
election shall be equal to the dollar amount of director fees which the
Non-Employee Director has elected not to receive, divided by seventy-five
percent (75%) of the fair market value of the Class A Common Stock as of the
date of payment.
Generally, a Non-Employee Director will not be permitted to sell, transfer,
pledge or assign shares of Restricted Stock awarded under the Director Plan for
a period of two (2) years following the effective date of the Restricted Stock
Agreement pursuant to which such shares of Restricted Stock are awarded.
FEDERAL INCOME TAX ASPECTS. Federal income tax consequences of options and
Restricted Stock granted under the Director Plan are the same as those described
with respect to Non-Qualified Options and Restricted Stock under the Stock Plan.
COMPENSATION PURSUANT TO AMERUS LIFE PLANS
MANAGEMENT INCENTIVE PLAN
AmerUs Life sponsors a Management Incentive Plan ("MIP") for officers and
key management employees of the Company and its subsidiaries. On an annual
basis, AmerUs Life establishes various and distinct goals for its executives and
key managers. Goals generally relate to objectives such as increased revenue,
expense levels and earnings. Attainment of individual and AmerUs Life goals can
generate payment of cash bonuses ranging from 15% to 70% of an executive's base
salary. Payment of these annual incentives is approved by the Board of Directors
and made in a separate lump-sum on or before the end of February of the ensuing
year.
LONG-TERM INCENTIVE COMPENSATION PLAN
AmerUs Life established a long-term incentive compensation Performance Share
Plan effective January 1, 1995 (the "LTIP"). Under the LTIP, the Human Resources
Committee of the Company's Board of Directors has the authority to grant
Performance Shares to eligible employees on such dates as the Human Resources
Committee shall determine. The LTIP will be integrated with the Stock Plan such
that long term compensation earned in connection with services provided to the
Company will be paid through the Stock Plan.
The Human Resources Committee determines the terms and conditions of the
Performance Share awards consistent with the LTIP. Each Performance Share has a
notional value of $100 and a maximum value of $200 at the end of the three-year
performance cycle to which the Performance Share relates (the "Performance
Cycle"). Performance goals are measured by the cumulative growth in AmerUs
Life's consolidated adjusted GAAP net worth ("Adjusted GAAP Value"), as
determined annually by the Human Resources Committee, and are set at a range of
levels for a given Performance Cycle. Goals are set to establish the level of
increase in Adjusted GAAP Value in the Performance Cycle that is required in
order for the value of the Performance Shares to reach its maximum level of $200
at the end of such Performance Cycle. Threshold levels are also set to establish
the level of increase in Adjusted GAAP Value in the Performance Cycle that is
required in order for the Performance Shares to maintain a value of $50 at the
end of such cycle. If threshold levels are not met, the Performance Shares will
have no value at the end of the Performance Cycle. Performance goals for a given
Performance Cycle under the LTIP are established at the time Performance Shares
are granted.
The first Performance Shares were awarded under the LTIP on January 1, 1995.
On such date, Performance Shares relating to three Performance Cycles were
awarded, one relating to the first full three-year Performance Cycle ending on
December 31, 1997, and the other two relating to two transitional one- and
two-year Performance Cycles ending on December 31, 1995 and December 31, 1996,
respectively. Performance Shares were also awarded on January 1, 1996 for the
three-year Performance Cycle ending on December 31, 1998.
The various performance goals set for the Performance Shares awarded on
January 1, 1995 and January 1, 1996 ranged from a minimum of 8% Adjusted GAAP
Value to 16% Adjusted GAAP Value. The
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<PAGE>
increases in Adjusted GAAP Value necessary for the Performance Shares to reach
their maximum value for the Performance Cycles ending December 31, 1996, 1997
and 1998 are 15%, 16% and 16%, respectively.
LONG-TERM INCENTIVE PLANS - AWARDS
FOR FISCAL YEAR 1995
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
NUMBER OF NON-STOCK
SHARES, PERFORMANCE OR PRICE-BASED PLANS
UNITS OR OTHER PERIOD -----------------------------------
OTHER RIGHTS UNTIL MATURATION THRESHOLD TARGET MAXIMUM
(#) OR PAYOUT ($) ($) ($)
------------- ---------------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Roger K. Brooks 1,760 1/95 - 12/95 88,000 176,000 352,000
2,640 1/95 - 12/96 132,000 264,000 528,000
3,520 1/95 - 12/97 176,000 352,000 704,000
D T Doan 688 1/95 - 12/95 34,400 68,800 137,600
1,031 1/95 - 12/96 51,550 103,100 206,200
1,375 1/95 - 12/97 68,750 137,500 275,000
Thomas C. Godlasky 625 1/95 - 12/95 31,250 62,500 125,000
938 1/95 - 12/96 46,900 93,800 187,600
1,250 1/95 - 12/97 62,500 125,000 250,000
Michael E. Sproule 625 1/95 - 12/95 31,250 62,500 125,000
938 1/95 - 12/96 46,900 93,800 187,600
1,250 1/95 - 12/97 62,500 125,000 250,000
Sam C. Kalainov 1,760 1/95 - 12/95 88,000 176,000 352,000
2,640 1/95 - 12/96 132,000 264,000 528,000
3,520 1/95 - 12/97 176,000 352,000 704,000
</TABLE>
SAVINGS AND PROFIT SHARING PLANS
Each of the Named Executive Officers participates in the All*AmerUs Savings
& Retirement Plan for Employees of American Mutual Life (the "Savings &
Retirement Plan"), a profit sharing plan containing a qualified cash or deferred
arrangement and the All*AmerUs Supplemental Executive Retirement Plan (the
"Supplemental Plan"). Each of the Named Executive Officers also has a frozen
benefit under either the American Mutual Life Insurance Company Employees'
Pension Plan (the "AML Employees' Frozen Pension Plan") or the American Mutual
Life Insurance (formerly Central Life Assurance) Company Pension Plan (the "AML
(formerly Central Life) Frozen Pension Plan") (the AML Employees' Frozen Pension
Plan and the AML (formerly Central Life) Frozen Pension Plan are hereinafter
sometimes collectively referred to as the "Frozen Pension Plans"). Certain of
the Named Executive Officers additionally have a frozen benefit under the
American Mutual Life Insurance Company Supplemental Executive Retirement Plan
(the "AML Frozen SERP").
SAVINGS & RETIREMENT PLAN
Prior to December 31, 1995, the Company maintained three separate defined
contribution plans for eligible employees (collectively the "AmerUs Life Former
Savings Plans"). Contributions under the AmerUs Life Former Savings Plans ceased
as of December 31, 1995 and, effective January 1, 1996, the AmerUs Life Former
Savings Plans were merged into the Savings & Retirement Plan. The Company's and
API's aggregate contributions to the AmerUs Life Former Savings Plans were
approximately $568,943 in 1995.
The Savings & Retirement Plan is intended to be qualified under Sections
401(a) and 501(a) of the Code and is administered by the AmerUs Life Benefit and
Pension Committee (the "Benefits Committee"), whose members are appointed by the
Board of Directors of AmerUs Life. The Benefits Committee is responsible for
interpreting the Savings & Retirement Plan, making certain amendments thereto
and adopting rules and regulations reasonably necessary or advisable to
implement and administer the
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<PAGE>
plan. The Savings & Retirement Plan allows for elective employee before-tax
contributions, a set level of basic and matching contributions to be made by
AmerUs Life and API, a discretionary level of profit-sharing contributions and
an individually-determined supplemental contribution, if applicable.
Employee contributions are governed by Code Section 401(k). Participants may
elect to make before-tax contributions to the Savings & Retirement Plan that are
at least 1% and not more than 15% of the participant's compensation. The
Benefits Committee may reduce, suspend or refund the contribution of a "highly
compensated member" (as defined in the Savings & Retirement Plan) in order to
ensure compliance with the nondiscrimination tests set forth in the Savings &
Retirement Plan.
AmerUs Life will contribute 4% of each eligible participating employee's
compensation as of the end of a plan year in accordance with the provisions of
the Savings & Retirement Plan ("Basic Contributions"). In addition, AmerUs Life
will make a matching contribution of 125% of an employee's before-tax
contribution, up to a maximum of 4% of an employee's compensation ("Matching
Contributions").
AmerUs Life may also contribute, on behalf of each participating employee
who was, as of December 31, 1995, an active participant in either Frozen Pension
Plan, a certain percentage of such employee's compensation ("Interim Benefit
Supplement"), in order to make up any shortfall between the amount to which such
employee would have been entitled under either of the Frozen Pension Plans as
compared to such employee's projected benefits under the Savings & Retirement
Plan. The amount of the Interim Benefit Supplement made on behalf of any
eligible employee is reduced by any profit sharing contribution allocated to
such employee under the Savings & Retirement Plan.
The Savings & Retirement Plan is generally available to all full-time
employees of AmerUs Life. An employee's compensation, for purposes of
contributions based thereon, consists of an employee's W-2 compensation with
certain adjustments. All contributions made by AmerUs Life are made to the
participants' individual accounts and the Basic Contributions, Matching
Contributions, profit-sharing contributions and the Interim Benefit Supplement
are subject to forfeiture until fully vested under the Savings & Retirement
Plan's vesting schedule. The amount of before-tax contributions made by a
participant and contributions made by AmerUs Life are limited by the Code. In
the event the Benefits Committee determines that such limits are exceeded, it
shall cause any such excess contributions to be distributed, forfeited or placed
in the non-qualified Supplemental Plan in accordance with the terms of the
Savings & Retirement Plan and the Supplemental Plan. A distribution from the
vested portion of an employee's account is generally payable upon retirement at
or after normal retirement age (age 65) or upon other termination of employment.
AmerUs Life may terminate or amend the Savings & Retirement Plan, the
Supplemental Plan, or completely discontinue contributions, at any time it may
deem advisable.
SUPPLEMENTAL PLAN
AmerUs Life has adopted, effective January 1, 1996, the Supplemental Plan.
Certain employees whose benefits under the Savings & Retirement Plan are limited
by the provisions of Section 401(a)(17) of the Code and for whom compensation is
deferred, are eligible to participate in such plan. The Supplemental Plan is not
intended to meet the qualification requirements of Section 401 of the Code, and
no cash or funds shall be set aside or otherwise segregated for the payment of
benefits under such plan until such time as benefits are actually paid.
FROZEN PENSION PLANS
Prior to January 1, 1996, American Mutual Life maintained the Frozen Pension
Plans, which were qualified under Section 401(a) of the Code. The benefits under
both such plans were curtailed as of December 31, 1995 and the Frozen Pension
Plans were merged into the surviving American Mutual Life Insurance Company
Pension Plan (the "Surviving AML Pension Plan"). Retirement benefits under the
predecessor AML Employees' Frozen Pension Plan were based primarily on an
employee's years of service and compensation during the highest five consecutive
plan years of employment or the last 60 months, if greater, as of December 31,
1995; retirement benefits under the predecessor AML (formerly Central Life)
Frozen Pension Plan were based primarily on an employee's years of service and
career compensation as of December 31, 1995. All employees' frozen accrued
benefits as of December 31, 1995 are fully vested.
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<PAGE>
Prior to January 1, 1996, American Mutual Life also maintained the AML
Frozen SERP and the Central Life Frozen SERP, which were similar in operation to
the Supplemental Plan currently in effect. The benefits under these plans were
also curtailed as of December 31, 1995.
The following table sets forth the frozen accrued monthly benefits payable
as a straight life annuity to each of the Named Executive Officers under the
Surviving AML Pension Plan, including the AML Frozen SERP, assuming retirement
at age 65 (current normal retirement age):
<TABLE>
<CAPTION>
PENSION TABLE
FROZEN ACCRUED BENEFITS UNDER THE
SURVIVING AML PENSION PLAN INCLUDING THE FROZEN SERP
- ----------------------------------------------------------------------------------------------
NAME MONTHLY BENEFITS
- --------------------------------------------------------------------------- -----------------
<S> <C>
Roger K. Brooks............................................................ $ 27,550
D T Doan................................................................... 15,640
Thomas C. Godlasky......................................................... 321
Michael E. Sproule......................................................... 1,360
Sam C. Kalainov............................................................ 34,261(1)
</TABLE>
- --------------
(1) Included in this amount is $9,148 in monthly benefits due under the terms of
an Employment Agreement, dated February 1, 1995, between American Mutual
Life and Sam C. Kalainov. See
"--Employment Agreement."
EMPLOYMENT AGREEMENT
AmerUs Life entered into an employment agreement (the "Employment
Agreement") with Mr. Kalainov, dated February 1, 1995, under which he served as
the Chairman of the Board of Directors of AmerUs Life and Chairman of AmerUs
Life's Charitable Foundation. The term of the Employment Agreement was to
continue until May 15, 2000, but could expire earlier if Mr. Brooks ceased to
perform the duties of Chief Executive Officer of AmerUs Life. If Mr. Kalainov's
service as Chairman was terminated prior to May 15, 2000, AmerUs Life was
required to execute a consulting contract with him pursuant to which, among
other things, AmerUs Life was obligated to pay the difference between the
benefits Mr. Kalainov received under AmerUs Life's pension plans and the sum of
his base salary plus incentive compensation for the preceding 12 months. The
Employment Agreement provided that Mr. Kalainov would serve as Chairman of the
Foundation until May 15, 2000.
Pursuant to the Employment Agreement, Mr. Kalainov received the annual
salary and incentive compensation described in the Summary Compensation Table.
Mr. Kalainov participated in AmerUs Life's employee benefit plans and was also
entitled to certain perquisites and other incidental expenses. Mr. Kalainov was
also entitled to certain retirement benefits and health insurance coverage upon
his retirement. In December 1996, prior to the consummation of the Offerings,
Mr. Kalainov's employment agreement was terminated by mutual agreement and Mr.
Kalainov entered into an employment agreement with AmerUs Group.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation provide that the Company shall
indemnify its directors to the fullest extent possible under the IBCA. The
Company's Bylaws extend the same indemnity to its officers. The Articles of
Incorporation provide that no director shall be liable to the Company or its
shareholders for monetary damages for breach of the individual's fiduciary duty
as a director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its shareholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for any transaction in which the director derived an improper
personal benefit, or (iv) under the IBCA provisions relating to improper
distributions. The Company has also entered into indemnification agreements with
its directors and executive officers with respect to liabilities arising out of
certain matters, including matters arising under the Securities Act.
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CERTAIN TRANSACTIONS AND RELATIONSHIPS
THE FOLLOWING SUMMARIES OF THE INTERCOMPANY AGREEMENT AND OTHER AGREEMENTS
IDENTIFIED DO NOT PURPORT TO BE COMPLETE AND ARE QUALIFIED IN THEIR ENTIRETY BY
REFERENCE TO SUCH AGREEMENTS. A COPY OF THE INTERCOMPANY AGREEMENT AND THE OTHER
AGREEMENTS IDENTIFIED BELOW HAVE BEEN FILED AS EXHIBITS TO THE REGISTRATION
STATEMENT OF WHICH THIS PROSPECTUS IS A PART. AS USED HEREIN, "AMERUS AFFILIATED
GROUP" MEANS AMHC AND ITS DIRECT AND INDIRECT SUBSIDIARIES NOW OR HEREAFTER
EXISTING, OTHER THAN THE COMPANY AND ITS SUBSIDIARIES, AND "AMERUS CONTROL
GROUP" MEANS, COLLECTIVELY, AMHC AND AMERUS GROUP. CAPITALIZED TERMS USED BUT
NOT DEFINED HEREIN HAVE THE MEANINGS GIVEN TO THEM IN SUCH AGREEMENTS.
AmerUs Life is a wholly-owned direct subsidiary of the Company. The Company
is a direct subsidiary of AmerUs Group, which in turn is a wholly-owned direct
subsidiary of AMHC. As a result of such ownership, AMHC, AmerUs Group, the other
subsidiaries of AmerUs Group and the Company and its subsidiaries, including
AmerUs Life, have a variety of relationships, certain of which are summarized
below. Management believes that the terms of the agreements described herein are
on a basis no less favorable than could be obtained from unaffiliated third
parties.
OWNERSHIP OF VOTING INTERESTS OF THE COMPANY
As a result of the Reorganization of the Company and its affiliates into a
mutual insurance holding company structure, AMHC is required by Iowa law to own,
directly or indirectly through one or more intermediate holding companies,
shares of capital stock of the Company which carry the right to cast a majority
of the votes entitled to be cast by all of the outstanding shares of the capital
stock at a shareholders' meeting of the Company. See "Supervision and
Regulation--Regulation of the Company and AMHC." In compliance with this
requirement, all of the issued and outstanding shares of the Company's Class B
Common Stock are owned by AmerUs Group, a wholly-owned subsidiary of AMHC and
the Company's immediate parent. Such ownership will continue after the closing
of this Offering. Additionally, the Company's Articles of Incorporation provide
that no shares of its Class B Common Stock may be owned by any person other than
AMHC, a subsidiary of AMHC or another mutual insurance holding company or
intermediate holding company as expressly authorized by Iowa law or by the Iowa
Commissioner. See "Ownership of Common Stock--Ownership of Class B Common
Stock." Any proposed amendments to such provisions of the Company's Articles of
Incorporation are subject to approval by the Iowa Commissioner and the Iowa
Attorney General.
AMHC'S POLICY WITH RESPECT TO CORPORATE OPPORTUNITIES
The Company has been advised that AMHC has adopted a general policy with
respect to certain corporate opportunities presented to AMHC. The implementation
of such policy in any situation is expressly subject to any applicable
regulatory, tax, contractual or legal restrictions as well as issues as to
feasibility. Pursuant to such policy, so long as AMHC directly or indirectly
owns at least 50.1% of the voting power of the outstanding common stock of the
Company (the "Voting Control Period"), AMHC intends to first offer to the
Company any corporate opportunity relating to the acquisition of any stock life
insurance company or any company (other than a mutual insurance holding company)
primarily engaged in owning a stock life insurance company. During the Voting
Control Period, AMHC also intends to first offer to the Company any corporate
opportunity primarily relating to a joint venture, partnership, or similar
affiliation in the life insurance or annuity industry. During the Voting Control
Period, in the event that AMHC merges with a mutual insurance holding company
owning a stock life insurance company or a mutual insurance company is
reorganized pursuant to Chapter 521A of the Iowa Code into a stock life
insurance company subsidiary of AMHC, AMHC intends, if the other party to the
transaction agrees, to offer the Company the corporate opportunity to combine
such acquired company with the Company or a subsidiary thereof in exchange for
appropriate consideration.
Any combination would be on terms which are approved by a majority of the
independent directors of AMHC and the Company and set forth in a written
agreement between the parties. However, neither AMHC nor the Company is
obligated to take any action which is not consistent with their respective
fiduciary duties or applicable contractual, regulatory, tax or legal
requirements. Moreover, the results of negotiations with parties interested in a
potential transaction or other factors, such as feasibility or a
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desire to maintain the separate identities and assets of two insurers, may
result in AMHC not presenting a potential transaction to the Company or a
company acquired by AMHC not being combined with the Company or a subsidiary
thereof.
Under AMHC's policy, a corporate opportunity is considered to be a business
opportunity in the life insurance and annuity business known to AMHC which the
Company is legally and financially able to undertake, is of practical advantage
to the Company and is one in which the Company has an interest or a reasonable
expectancy. If the Company does not choose to pursue a corporate opportunity
within a reasonable period after such opportunity is first presented to it, AMHC
would not intend to afford the Company any further opportunity with respect to
such potential transaction.
INTERCOMPANY AGREEMENT
AMHC, AmerUs Group and the Company have entered into an Amended and Restated
Intercompany Agreement dated as of December 1, 1996 (the "Intercompany
Agreement"), certain provisions of which are summarized below.
LICENSE TO USE THE AMERUS NAME AND CERTAIN TRADEMARKS
Pursuant to the Intercompany Agreement, AmerUs Group and certain members of
the AmerUs Affiliated Group have granted to the Company and certain of its
subsidiaries, a non-exclusive, revocable license to use the AmerUs name and
certain trademarks (collectively, the "Trademarks") solely in connection with
the Company's life insurance business and activities related to such life
insurance business. The Intercompany Agreement provides, among other things,
that subject to AmerUs Group's ability to revoke the license in the
circumstances described below and subject to regulatory approval, within a
specified time from the date on which the AmerUs Control Group ceases to control
more than 50% of the combined voting power of the outstanding Common Stock (the
"License Trigger Date"), if the Company's name or any of its subsidiaries' names
at such time includes the "AmerUs" name, the Company and such subsidiaries will
be required to change their names and will be required to discontinue the use of
certain related marks. Following the License Trigger Date, the Company and its
subsidiaries will continue to have the right to use the AmerUs name in
connection with the identification of insurance products for an initial
five-year period with an option to renew for an additional five years, for which
the Company will pay a nominal annual fee to AmerUs Group until such time as the
Company and its subsidiaries completely discontinue use of the "AmerUs" name. In
addition, the Intercompany Agreement provides that the Company and its
subsidiaries will not, without the prior written consent of AmerUs Group, take
any action with respect to (i) any litigation or proceeding involving the
Trademarks, (ii) any change in the Company names, logos and other
identifications that might reasonably be expected to affect the Trademarks or
(iii) any advertising campaigns or strategies that use the Trademarks or that
refer to any member of the AmerUs Affiliated Group. AmerUs Group has the right
to revoke the license under certain circumstances relating to advertising,
promotion or use of the Trademarks in a manner contrary to AmerUs Group
guidelines. In addition, AmerUs Group can revoke any of the Company's
subsidiaries' use of the license if there is a change of control of any such
subsidiary of the Company that is licensed to use the Trademarks. A revocation
by AmerUs Group of the license to use the Trademarks could have a material
adverse effect on the Company's ability to conduct its business.
INDEMNIFICATION
The Intercompany Agreement provides that the Company will indemnify each
member of the AmerUs Affiliated Group and each of their respective officers,
directors, employees and agents (collectively, the "Indemnitees") against losses
based on, arising out of or resulting from (i) the use of the Trademarks by the
Company or its subsidiaries, (ii) the ownership or the operation of the assets
or properties, and the operation or conduct of the business, of the Company or
its subsidiaries, (iii) any other activities of the Company or its subsidiaries,
(iv) any other acts or omissions by the Company or its subsidiaries arising out
of performance of the Intercompany Agreement and certain other agreements, (v)
any guaranty, keep well, net worth or financial condition maintenance agreement
of or by any member of the AmerUs Affiliated Group provided to any parties with
respect to any actual or contingent obligation of the Company or its
subsidiaries, (vi) any breach by the Company of the Intercompany
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Agreement, and (vii) certain other matters. In addition, the Company has agreed
to indemnify the Indemnitees against certain civil liabilities, including
liabilities under the Securities Act, relating to misstatements in or omissions
from the Registration Statement of which this Prospectus forms a part and any
other registration statement that the Company files under the Securities Act
(other than misstatements or omissions made in reliance on information relating
to and furnished by any member of the AmerUs Affiliated Group for use in the
preparation thereof, against which AMHC has agreed to indemnify the Company).
AMHC has also agreed to indemnify the Company and its subsidiaries and each of
their respective officers, directors, employees and agents against losses based
on, arising out of or resulting from (i) any breach by the AmerUs Affiliated
Group of the Intercompany Agreement, (ii) the ownership or the operation of the
assets or properties, and the operation or conduct of the business of any member
of the AmerUs Affiliated Group, (iii) certain third party claims relating to the
Trademarks and (iv) certain other specifically identified matters.
AMHC CONSENT TO CERTAIN EVENTS
The Intercompany Agreement provides that until the date on which the members
of the AmerUs Control Group cease to control at least 50.1% of the combined
voting power of the outstanding Common Stock of the Company (the "Trigger
Date"), the prior written consent of AMHC will be required for: (i) any
consolidation or merger of the Company or any of its subsidiaries with any
person (other than certain transactions involving wholly owned subsidiaries);
(ii) any sale, lease, exchange or other disposition or any acquisition by the
Company or any of its subsidiaries (other than transactions to which the Company
and its wholly owned subsidiaries are the only parties), or any series of
related dispositions or acquisitions, involving consideration in excess of $20
million; (iii) any change in the authorized capital stock of the Company or the
creation of any class or series of capital stock of the Company, (iv) any
issuance by the Company or any subsidiary of the Company of any equity
securities or equity derivative securities, except (a) up to three million
shares of Common Stock pursuant to employee and director stock option, profit
sharing and other benefit plans of the Company and its subsidiaries, (b) the
issuance of Preferred Stock which is not convertible or exchangeable into Common
Stock and which only has voting rights required by law, (c) the issuance of
shares of capital stock of a wholly owned subsidiary of the Company and (d)
pursuant to the Transactions (defined as the Offerings and any corporate
reorganization or transaction undertaken in connection with the Offerings to
which the Company or any of its subsidiaries is a party); (v) the dissolution of
the Company; (vi) transactions or a series of related transactions with
affiliates of the Company (other than members of the AmerUs Affiliated Group)
involving consideration in excess of $10 million, other than (a) the
Transactions, (b) transactions on terms substantially the same as or more
favorable to the Company than those that would be available from an unaffiliated
third party and (c) transactions between or among any of the Company and its
wholly owned subsidiaries; and (vii) any corporate action by the Company which
would cause the Company or AmerUs Life to violate the requirements of Section
521A.14 of the Iowa Insurance Code (relating to mutual insurance holding
companies).
REGISTRATION RIGHTS
The Company has granted to the AmerUs Control Group certain demand and
"piggyback" registration rights with respect to shares of Common Stock owned by
it. The AmerUs Control Group has the right to request up to two demand
registrations in each calendar year. The AmerUs Control Group also has the
right, which it may exercise at any time and from time to time, to include the
shares of Common Stock held by it in certain other registrations of common
equity securities of the Company initiated by the Company on its own behalf or
on behalf of any shareholder of the Company. Such registration rights are
transferable by the AmerUs Control Group provided that such transferee is (i) a
member of the AmerUs Control Group or (ii) in the case of Class A Common Stock
only, an institutional accredited investor (as defined under Rule 501(a)
promulgated under the Securities Act) permitted to acquire such registrable
shares under applicable law. The Company has agreed to pay all costs and
expenses in connection with each such registration, except underwriting
discounts, commissions and legal fees of the AmerUs Control Group applicable to
the shares of Common Stock sold by the AmerUs Control Group. The
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Intercompany Agreement contains customary terms and provisions with respect to,
among other things, registration procedures and certain rights to
indemnification granted by parties thereunder in connection with the
registration of Common Stock on behalf of the AmerUs Control Group.
REIMBURSEMENT AGREEMENTS
The Company has agreed to pay all costs and expenses incurred in connection
with the Company's formation, the Transactions and all related transactions,
except as otherwise described in this Prospectus.
EQUITY PURCHASE RIGHTS
The Company has agreed that, to the extent permitted by Nasdaq National
Market, Inc. so long as the Company is listed on the Nasdaq National Market, and
so long as the AmerUs Control Group controls at least 50.1% of the combined
voting power of the outstanding Common Stock of the Company, the AmerUs Control
Group may purchase its pro rata share (based on its then current percentage
equity interest in the Company) of any voting equity security issued by the
Company (excluding any such securities offered in connection with employee and
director stock option or other benefit plans, dividend reinvestment plans and
other offerings other than for cash).
CERTAIN BUSINESS RELATIONSHIPS
The Company has agreed that all distribution arrangements in effect as of
September 15, 1996 pursuant to which members of the AmerUs Affiliated Group
distribute insurance products of the Company or its subsidiaries shall continue
until the Trigger Date.
MANAGEMENT SERVICES
Until the Trigger Date, the Company has agreed to provide to the AmerUs
Affiliated Group certain management and administrative services, including: (i)
general management services and (ii) assistance in matters relating to
operations, strategy and business planning and (iii) as requested, furnish
reports to the board of directors of AMHC or AmerUs Group with respect to
aspects of the business and affairs of the AmerUs Affiliated Group. In
connection with such services the Company will be subject to the exclusive
authority of the board of directors of AMHC or the AmerUs Affiliated Group
member for which such services are performed. AmerUs Group will pay the Company
$2.0 million per year in consideration for such services, commencing after the
Distribution.
TAX ALLOCATION AGREEMENT
The Company and AMHC have entered into an agreement relating to the
allocation of federal and state income tax liabilities attributable to periods
before and after the Offerings (the "Tax Allocation Agreement"). Under the Tax
Allocation Agreement, the Company will be responsible for all income tax
liabilities that are attributable to the net income of the Company and its
subsidiaries under applicable federal and state tax laws. The Company will have
no responsibility for income tax liabilities attributable to AMHC and its
wholly-owned subsidiaries under such laws, including any liabilities that may
have arisen while such subsidiaries were wholly-owned subsidiaries of AmerUs
Life. If and to the extent that losses of AMHC and its wholly-owned subsidiaries
are applied to reduce the federal or state income taxes attributable to the net
income of the Company, the Company will be required to make a payment to AMHC
equal to such tax reduction. Conversely, if and to the extent that losses of the
Company are applied to reduce the federal or state income tax liability
attributable to the net income of AMHC and its wholly-owned subsidiaries for any
year, AMHC will be required to make a payment to the Company equal to such tax
reduction. It is not anticipated that the federal or state income tax liability
of the Company or its subsidiaries will be determined on a consolidated or
combined basis with that of AMHC or any of its wholly-owned subsidiaries for any
period after the Offerings.
AGREEMENTS INVOLVING REAL ESTATE
AmerUs Life has entered into asset and property management contracts with
API. Pursuant to such agreements, API provides asset and property management
services to AmerUs Life with respect to
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certain real estate owned by AmerUs Life. The total expenses incurred by AmerUs
Life pursuant to such agreements equaled approximately $1,422,000 and $839,000
for the year ended December 31, 1995 and the nine months ended September 30,
1996, respectively.
AmerUs Life, as lessor, entered into leases of business property with
various members of the AmerUs Affiliated Group. These leases have varying terms
which call for combined monthly rentals of $36,000. These leases were assigned
to API at the time the Capital Contribution was made, as the properties to which
they relate were included in the properties which were distributed as part of
the Capital Contribution.
Total rental income earned by the Company under all agreements with members
of the AmerUs Affiliated Group was approximately $32,000 and $349,000 for the
year ended December 31, 1995 and the nine months ended September 30, 1996,
respectively.
The Company entered into lease agreements with API at the time of the
Capital Contribution because the facilities occupied by the Company as its
executive and home offices were transferred to API as part of the Capital
Contribution. The lease agreements require monthly payments of $143,000 on a net
basis for a period of 5 years. API has acquired real estate which is intended to
be the combined executive and home office locations of the Company. It is the
Company's intention to relocate to such facilities in the near future and enter
into lease agreements with API with respect to such facilities which will
replace the Company's existing leases with API.
During 1995, AmerUs Life paid rentals to AmerUs Bank of $48,000 and $24,000
for the year ended December 31, 1995 and the nine months ended September 30,
1996, respectively, under the terms of a lease agreement which expired in 1996.
AmerUs Life has entered into various limited partnership and joint venture
agreements in which API or an affiliate serves as general partner. AmerUs Life
contributed portions of its joint venture interests to API and sold several of
these partnership interests to newly formed partnerships in which API has an
interest. Total proceeds from these sales were $10,956,600 and $1,638,000 in the
year ended December 31, 1995 and in the nine months ended September 30, 1996,
respectively. After such sales, AmerUs Life purchased a 9.75% limited
partnership interest in one of the newly formed partnerships for $2,160,000, of
which $1,026,000 had been contributed as of September 30, 1996. In addition,
AmerUs Life agreed to make loans to the newly formed partnerships in the
aggregate amount of up to $20,000,000, of which $19,600,000 was outstanding as
of September 30, 1996.
AmerUs Life has also entered into agreements with various partnerships in
which API has an interest pursuant to which AmerUs Life is obligated to make
future capital contributions to such partnerships in an amount not to exceed
$5,830,000.
As of September 30, 1996, AmerUs Life had a total investment of $16,420,000
in various partnerships and joint ventures in which API had an interest.
AmerUs Life sold certain limited partnership interests to API at their
carrying value of $1,697,000 in 1995.
LOAN SERVICING AGREEMENTS
AmerUs Life has entered into various loan servicing agreements with various
members of the AmerUs Affiliated Group. The total expenses incurred by AmerUs
Life for such services was approximately $1,533,000 and $1,189,000 for the year
ended December 31, 1995 and the nine months ended September 30, 1996,
respectively.
AmerUs Life has also entered into various loan servicing agreements with
AmerUs Bank. Pursuant to such agreements, AmerUs Life services certain
nonresidential mortgage loans on behalf of AmerUs Bank. The total revenues
earned by AmerUs Life for such services were approximately $30,000 and $21,000
for the year ended December 31, 1995 and the nine months ended September 30,
1996, respectively.
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OTHER SERVICE AGREEMENTS
AmerUs Life has entered into various miscellaneous services agreements with
members of the AmerUs Affiliated Group. Pursuant to such agreements, AmerUs Life
provides certain communications, tax, law department, accounting department,
internal audit, administrative and data processing services to such other
parties to the agreements, as requested. The aggregate revenues earned for
services performed by AmerUs Life in accordance with such agreements were
approximately $6,604,000 and $4,385,000 for the year ended December 31, 1995 and
the nine months ended September 30, 1996, respectively.
PURCHASE OF LOANS AND SECURITIZATION
AmerUs Life has entered into a purchase agreement with AmerUs Bank, dated as
of June 28, 1996, pursuant to which AmerUs Life acquired an HEL Asset-Backed
Class A Note (the "Note") and Class R Certificate Series 1996-1 (the
"Certificate"). The Note had a face amount of $43,715,845 and pays interest at
the rate of 8.35% per annum. The Certificate has a face amount of $3,039,069 and
pays interest at the rate of 16.81% per annum. The Note and Certificate are
backed by the assets of the AB Home Equity Loan Trust (the "AB Trust"), which
consist of approximately $47 million of second mortgage loans. Pursuant to a
Pooling and Servicing Agreement, dated as of June 28, 1996 (the "Pooling and
Servicing Agreement"), between AmerUs Bank and Boatmen's Trust Company
("Boatmen's"), and a Transfer Agreement, dated as of June 28, 1996, between
AmerUs Bank and Boatmen's, as trustee of the AB Trust, the AB Trust acquired
such loans from AmerUs Bank, and paid a purchase price of $46,754,914, the par
value of the loans. Under the Pooling and Servicing Agreement AmerUs Bank acts
as the servicer of the loans and receives a servicing fee equivalent to the
amount of all interest collected on the loans in excess of 8.9%.
SALE OF INSURANCE POLICIES
AmerUs Life has entered into an agreement, dated January 1, 1995, with
AmerUs Investments, Inc. ("AmerUs Investments"), a wholly-owned subsidiary of
AmerUs Bank, to market products of AmerUs Life. Pursuant to this agreement,
AmerUs Life pays AmerUs Investments fees in the form of commissions in exchange
for generating sales of such products. Total commissions paid to AmerUs
Investments were $1,259,000 and $321,000 for the year ended December 31, 1995
and nine months ended September 30, 1996, respectively.
The Company has also entered into certain Affiliated Agent Contracts with
employees of AmerUs Investments (the "Affiliated Agents") to solicit, sell and
service AmerUs Life insurance products and has also entered into a Servicing
Agreement, dated March 1, 1992, with AmerUs Investments pursuant to which AmerUs
Investments agreed to service the business sold by any Affiliated Agent and
otherwise supervise its employees who are Affiliated Agents.
CAPITAL CONTRIBUTION
Prior to the Distribution, AmerUs Life made the Capital Contribution to or
for the benefit of its Non-Life Insurance Subsidiaries. The Capital Contribution
consisted of cash and other property having an approximate net carrying value of
$79 million. Following the Capital Contribution, AmerUs Life caused its Non-Life
Insurance Subsidiaries to be distributed to AmerUs Group pursuant to the
Distribution. The Distribution effectively separated AMHC's non-life insurance
businesses from the life insurance businesses owned by the Company, such that
the companies engaged in non-life insurance businesses will no longer be
subsidiaries of the Company. See "The Reorganization and Distribution of the
Non-Life Insurance Subsidiaries."
From time to time AmerUs Life has made capital contributions to Lartnec
Investment Co. ("Lartnec"). Lartnec had previously been a subsidiary of AmerUs
Life and AmerUs Financial Services, Inc. ("AFS") had previously been a
subsidiary of Lartnec. Prior to the Distribution, AFS was merged into Lartnec
and Lartnec was then merged upstream into AmerUs Life, and pursuant to the
Distribution the
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Non-Life Insurance Subsidiaries were distributed to AmerUs Group, thereby
becoming sister corporations to the Company. In 1995, AmerUs Life made capital
contributions to Lartnec in the approximate aggregate amount of $41,156,000. In
1996, prior to the Distribution, AmerUs Life made additional capital
contributions to Lartnec in the approximate total amount of $4,463,000.
LOANS AND CREDIT SUPPORT TO THE AMERUS AFFILIATED GROUP
AmerUs Life has provided financing to members of the AmerUs Affiliated Group
or their affiliates for various purposes. The outstanding balance of all such
financings was $64.0 million and $75.4 million as of December 31, 1995 and
September 30, 1996, respectively. AmerUs Life recorded interest income of $6.0
million and $4.7 million for the year ended December 31, 1995 and the nine
months ended September 30, 1996, respectively. After giving effect to the
Capital Contribution, the amounts for such periods would have been $48.9 million
and $70.1 million, respectively.
AmerUs Life has previously pledged investment securities as collateral for
indebtedness of the AmerUs Affiliated Group. AmerUs Life was released from this
collateral agreement under the terms of the new Bank Credit Facility. The value
of the collateral pledged was $112.4 million and $141.7 million as of December
31, 1995 and September 30, 1996, respectively. The pledges were released upon
the effectiveness of the Bank Credit Facility.
In addition, AmerUs Life guaranteed various borrowings of members of the
AmerUs Affiliated Group with outstanding balances of approximately $7.3 million
and $7.2 million at December 31, 1995 and September 30, 1996, respectively.
AmerUs Life has outstanding loan commitments to various partnerships in
which API has an interest. At September 30, 1996, the outstanding loan
commitments were approximately $16,000,000.
SECURITY ARRANGEMENTS FOR BANK CREDIT FACILITY
In connection with the Bank Credit Facility, the Company has pledged to the
lenders 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.
AmerUs Group has also pledged shares of the Company's Class A Common Stock owned
by AmerUs Group in an amount which is limited by Iowa Law and which, together
with the voting shares owned by shareholders other than AmerUs Group, shall be
less than 50% of the total voting shares of the Company. The Company is
prohibited by Iowa law from pledging a majority of the shares necessary to elect
the board of directors of the Company. AMHC and AmerUs Group have also
guaranteed the indebtedness of the Company under the Bank Credit Agreement.
OWNERSHIP OF COMMON STOCK
OWNERSHIP OF CLASS A COMMON STOCK
Immediately prior to the Offerings there will be 14.5 million issued and
outstanding shares of Class A Common Stock, all of which will be beneficially
owned by AmerUs Group. Other than such shares, as of the date of this Prospectus
no shares of Class A Common Stock were beneficially owned by any person,
including any director or officer of the Company or AmerUs Life.
OWNERSHIP OF CLASS B COMMON STOCK
Immediately prior to the Offerings, there will be five million issued and
outstanding shares of Class B Common Stock, all of which will be owned by AmerUs
Group. Pursuant to the Company's Articles of Incorporation, no shares of Class B
Common Stock may be owned by any person other than AMHC or another mutual
insurance holding company or intermediate holding company as authorized by
applicable law.
CLASS A COMMON STOCK SUBSCRIPTIONS BY MANAGEMENT
Directors and officers of the Company have subscribed for Shares in the
Subscription Offering in their capacities as Subscription Policyowners. The
terms pursuant to which directors and officers of the Company may obtain Shares
in the Subscription Offering are identical to the terms for other Subscription
Policyowners. Directors and executive officers of the Company, as a group,
subscribed for 30,000 Shares in the Subscription Offering.
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DESCRIPTION OF THE CAPITAL STOCK
The following description does not purport to be complete and is qualified
in its entirety by reference to the Company's Amended and Restated Articles of
Incorporation, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
GENERAL
The Company is authorized to issue 75 million shares of Class A Common
Stock, no par value, and 50 million shares of Class B Common Stock, no par
value. As of the date hereof, there were 14.5 million shares of Class A Common
Stock outstanding and five million shares of Class B Common Stock outstanding,
all of which were held by the Selling Shareholder. In addition, 1.4 million and
150,000 shares of Class A Common Stock are reserved for issuance under options
granted or available for grant under the Stock Plan and Director Plan,
respectively, subject to the completion of the Offerings, and five million
shares of Class A Common Stock are reserved for issuance upon conversion of
Class B Common Stock. The Company is also authorized to issue shares of
preferred stock on such terms as determined by the Company Board of Directors
(the "Preferred Stock"). See "--Preferred Stock."
The Class B Common Stock (or any interest therein) may only be owned by AMHC
or a mutual insurance holding company or intermediate holding company which is
expressly authorized by applicable law to own or have a beneficial interest in
the Class B Common Stock (a "Permitted Class B Holder"). Under current Iowa law,
a Permitted Class B Holder must at all times possess the right to cast at least
a majority of the votes of the outstanding shares of the capital stock of the
Company.
The Articles of Incorporation provide that the number of outstanding shares
of Class A Common Stock (excluding shares of Class A Common Stock owned by AMHC
or another Permitted Class B Holder) shall exceed the number of outstanding
shares of Class B Common Stock plus the shares of Class A Common Stock owned by
AMHC or another Permitted Class B Holder only as authorized by law and never by
a ratio of more than three to one.
Following the closing of the Offerings, assuming that the Underwriters in
the Public Offering do not exercise their over-allotment option, there will be
17.75 million shares of Class A Common Stock outstanding. At such time, AmerUs
Group will own 12 million shares of the Class A Common Stock (approximately 68%
of the outstanding shares of Class A Common Stock) and five million shares of
Class B Common Stock (100% of the outstanding shares of Class B Common Stock).
AmerUs Group's ownership of Class A Common Stock and Class B Common Stock will
provide it with approximately 75% of the voting power of the Common Stock and
approximately 75% of the economic value of the Company (assuming that the
Underwriters in the Public Offering do not exercise their over-allotment
option).
COMMON STOCK
Each share of Class A Common Stock will entitle its holder to one vote per
share on all matters upon which shareholders are entitled to vote (including
election of directors, mergers, sales of assets, dissolution and amendments to
the Articles of Incorporation). Each share of Class B Common Stock will entitle
its holder to one vote per share on all such matters except that, if on the
record date for determining shares eligible to vote, the number of outstanding
shares of Class A Common Stock (excluding shares of Class A Common Stock owned
by a Permitted Class B Holder) and any outstanding shares of Preferred Stock
having voting rights, if any (excluding shares of Preferred Stock owned by a
Permitted Class B Holder), equals or exceeds the number of outstanding shares of
Class B Common Stock plus the number of outstanding shares of Class A Common
Stock owned by a Permitted Class B Holder, the voting rights for each share of
Class B Common Stock shall be equal to the aggregate number of shares of Class A
Common Stock (excluding shares of Class A Common Stock owned by a Permitted
Class B Holder) and Preferred Stock having voting rights, if any, then
outstanding (excluding shares of Preferred Stock owned by a Permitted Class B
Holder) plus one divided by the number of outstanding shares of Class B Common
Stock. Accordingly, even if the number of outstanding shares of
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Class A Common Stock (excluding shares of Class A Common Stock owned by a
Permitted Class B Holder) exceeds the number of outstanding shares of Class B
Stock, the Permitted Class B Holder will always have a majority of the votes.
Both classes of Common Stock will generally vote together as a single class
on all matters; however, the holders of Class A Common Stock and the holders of
Class B Common Stock will vote separately as a class with respect to certain
matters for which class voting is required under Iowa law, including (i)
approval of proposed amendments to the Company's Articles of Incorporation that,
among other things, would alter the designation, rights, preferences or
limitations of all or part of the shares of their respective class, increase or
decrease the aggregate number of authorized shares of such class, effect an
exchange or reclassification or create a right of exchange of all or part of the
shares of one class into shares of another class, create a new class of shares
or increase the rights, preferences, or number of authorized shares of any
existing class so that it would have rights or preferences with respect to
distribution or to dissolution that are prior, superior, or substantially equal
to, the shares of such class, provided that the Class A Common Stock and Class B
Common Stock are not affected by such amendment in the same or a substantially
similar way; (ii) approval of a proposed plan of merger or consolidation if such
plan contains any provisions which, if contained in a proposed amendment to the
Articles of Incorporation, would entitle such class of shares to vote as a class
(with certain limited exceptions for shareholders of the surviving corporation);
and (iii) approval of a plan of share exchange (to be voted upon by each class
included in the exchange).
There is no provision in the Company's Articles of Incorporation permitting
cumulative voting in the election of directors.
No cash dividends may be declared in any fiscal year on the Class B Common
Stock until and unless a cash dividend has been declared on the Class A Common
Stock. Any cash dividends will be declared and paid equally on both classes of
Common Stock.
The classes of Common Stock will rank equally and have equal rights with
respect to distributions and all other rights, including distributions upon
liquidation of the Company. However, in the case of dividends or other
distributions payable on the Common Stock in shares of such stock, including
distributions pursuant to stock splits or stock dividends, only Class A Common
Stock will be distributed with respect to Class A Common Stock and only Class B
Common Stock will be distributed with respect to Class B Common Stock. In no
event will either class of Common Stock be split, divided or combined unless the
other is split, divided or combined equally.
So long as the number of outstanding shares of Class A Common Stock
(excluding shares of Class A Common Stock owned by a Permitted Class B Holder)
shall exceed the number of outstanding shares of Class B Common Stock plus the
outstanding shares of Class A Common Stock owned by AMHC or another Permitted
Class B Holder only as authorized by law and never by a ratio of more than three
to one, the Class B Common Stock will be convertible at all times into Class A
Common Stock on a share-for-share basis by surrender of certificates to the
transfer agent for the Company. Such conversion will be without cost to the
shareholder, except for any transfer taxes which may be payable if certificates
for Class A Common Stock are issued in a name other than the one in which the
surrendered certificate is registered. Therefore, shareholders who subsequently
desire to sell some or all of their shares of Class B Common Stock may convert
those shares into an equal number of shares of Class A Common Stock and sell the
shares of Class A Common Stock in the public market. The Company will be
required to reserve shares of Class A Common Stock sufficient for issuance upon
conversion of Class B Common Stock. All shares of Class B Common Stock
surrendered upon conversion will have the status of authorized but unissued
shares of Class B Common Stock.
The Articles of Incorporation provide that a Permitted Class B Holder has
the preemptive right to purchase Common Stock to the extent necessary to
maintain the ratio of Class A Common Stock to Class B Common Stock set forth in
the preceding paragraph. The Intercompany Agreement also affords the AmerUs
Affiliated Group certain equity purchase rights. See "Certain Transactions and
Relationships--Intercompany Agreement."
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In the event that AMHC (or any successor mutual insurance holding company)
is demutualized and is converted into a stock company pursuant to Iowa law, then
immediately upon such conversion each share of the Class B Common Stock shall
automatically be converted into one share of Class A Common Stock. AMHC has no
present plans to demutualize.
A Permitted Class B Holder may pledge, subject to a security interest or
lien, encumber, or otherwise hypothecate shares of Class B Common Stock in
excess of the number of shares of Class B Common Stock which carry the right to
cast at least a majority of the votes of the outstanding shares of capital stock
of the Company having voting rights. However, except for a transfer to a
Permitted Class B Holder, a conversion of Class B Common Stock into Class A
Common Stock and except as described in the preceding sentence, no shares of
Class B Common Stock may be conveyed, pledged or otherwise transferred. Any
conveyance, transfer, assignment, pledge, security interest, lien, encumbrance
or hypothecation or alienation by AMHC or any intermediate holding company, in
or on the majority of the voting shares of AmerUs Life shall be deemed void in
inverse chronological order from the date of such transaction to the extent
necessary to give AMHC unencumbered direct or indirect ownership of a majority
of such voting shares.
PREFERRED STOCK
The Board of Directors of the Company is authorized, subject to any
limitations prescribed by law, from time to time to issue up to an aggregate of
20 million shares of Preferred Stock in one or more series, each of such series
to have such voting powers, full or limited, or no voting powers, and such
designations, preferences and relative, participating, optional or other special
rights, and such qualifications, limitations or restrictions thereof, as shall
be determined by the Board of Directors in a resolution or resolutions providing
for the issue of such Preferred Stock; provided, however, that no Preferred
Stock may have more than one vote per share. Thus, any series may, if so
determined by the Board of Directors, have full voting rights with the Class A
Common Stock or superior or limited voting rights, be convertible into Class A
Common Stock or another security of the Company, and have such other relative
rights, preferences and limitations as the Company's Board of Directors shall
determine; provided, however, that no Preferred Stock may have more than one
vote per share. As a result, any class or series of Preferred Stock could have
rights which would adversely affect the rights of the holders of the Class A
Common Stock. The shares of any class or series of Preferred Stock need not be
identical. The issuance of a new series of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions or other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or discouraging a third party from acquiring, a majority
of the outstanding voting stock of the Company.
CAPITAL SECURITIES OF AMERUS CAPITAL I
AmerUs Capital I, a Delaware business trust and a wholly-owned subsidiary of
the Company, currently intends to issue approximately $86 million of capital
securities (the "Capital Securities") as part of the Company's financing plan.
The assets of the Trust will be invested in Junior Subordinated Debentures of
the Company, which debt securities will have a stated maturity of thirty years.
If the Company redeems all or a portion of the Junior Subordinated Debentures,
the Trust must redeem a corresponding amount of the Capital Securities. The
dividend rate on the Capital Securities will be 8.85%.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Company's Articles of Incorporation provide that no director of the
Company shall be liable to the Company or its shareholders for monetary damages
for any breach of fiduciary duty as a director, except to the extent otherwise
required by the Iowa Business Corporation Act (the "IBCA"). This provision does
not prevent shareholders from obtaining injunctive or other equitable relief
against directors nor does it shield directors from liability under Federal or
state securities laws. In addition, the Articles of Incorporation provide that
the Company shall, to the maximum extent permitted by law, indemnify any person
who incurs any loss by reason of the fact that he is or was or has agreed to be
a director or officer of the Company or while a director or officer of the
Company is or was serving at the
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request of the Company as a director, officer, partner, trustee, employee or
agent of any corporation, partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, subject to such person
having met the standards of conduct required for such indemnification under Iowa
law.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Class A Common Stock is ChaseMellon
Shareholder Services, L.L.C.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
AND BYLAWS OF THE COMPANY
The following discussion is a summary of certain provisions of the Amended
and Restated Articles of Incorporation (the "Articles of Incorporation") and
Bylaws of the Company relating to shareholder voting rights, advance notice
requirements and other provisions which may be deemed to have an "anti-takeover"
effect. In addition to these provisions, regulatory restrictions on dispositions
of Common Stock by the Company's parent corporation as well as the inability of
the holders of the Class A Common Stock to elect a majority of the Company's
Board of Directors may also deter attempts to effect, or prevent the
consummation of, a change in control of the Company. See "Description of the
Capital Stock." These and other provisions affect shareholder rights and should
be given careful attention. The following description of certain of these
provisions is necessarily general and is qualified in its entirety by reference
to the Articles of Incorporation and Bylaws, copies of which are included as
exhibits to the Registration Statement of which this Prospectus is a part.
ISSUANCE OF CLASS A COMMON STOCK, PREFERRED STOCK AND OTHER RIGHTS
The Company believes that its ability to issue, by action of a majority of
the Company's entire Board of Directors, and without shareholder consent, the
authorized but unissued shares of Class A Common Stock, shares of Preferred
Stock and other rights will provide the Company with the flexibility necessary
to meet its future needs without experiencing the time delay of having to seek
shareholder approval. Unissued shares of Class A Common Stock and Preferred
Stock will be issuable from time to time for any corporate purpose, including,
without limitation, stock splits, stock dividends, employee benefit and
compensation plans, acquisition and public or private sales for cash as a means
of raising capital. It is possible that the Company's Board of Directors might
use its authority (subject to the restrictions referred to above) to issue Class
A Common Stock, Preferred Stock or other rights in a way that could deter or
impede the completion of a tender offer or other attempt to gain control of the
Company of which the Company's Board of Directors does not approve. The Company
does not have any predetermined plans or commitments to use its authority to
effect any such issuance, but reserves the right to take any action in the
future which the Company's Board of Directors deems to be in the best interests
of the shareholders and the Company under the circumstances.
It is not possible to state the actual effect of any issuance of Preferred
Stock upon the rights of holders of Class A Common Stock because the Company's
Board of Directors has not determined any issuance price or prices, terms or
rights relating to Preferred Stock. However, such effects might include (i)
restrictions on Class A Common Stock dividends if Preferred Stock dividends have
not been paid; (ii) dilution of the voting power and equity interest of existing
holders of Class A Common Stock to the extent that any Preferred Stock series
has voting rights or would acquire voting rights upon the occurrence of certain
events (such as the failure to pay dividends for a specified period) or that any
Preferred Stock series is convertible into Class A Common Stock; and (iii)
current holders of Class A Common Stock not being entitled to share in the
Company's assets upon liquidation, dissolution or winding-up until satisfaction
of any liquidation preferences granted to any series of Preferred Stock.
BOARD OF DIRECTORS
The Articles of Incorporation provide that the number of Company directors
will be determined pursuant to the Bylaws, but will not be less than seven or
more than 21 directors (subject to the rights of the holders of any series of
Preferred Stock). The Bylaws provide that the exact number of directors will
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be determined from time to time by the affirmative vote of a majority of the
Company's entire Board of Directors. At any meeting of the Company's Board of
Directors, a majority of the Company's entire Board of Directors will constitute
a quorum for the transaction of business, and subject to certain exceptions, at
any meeting at which a quorum is present the affirmative vote of a majority of
the directors present will constitute the act of the Company's Board of
Directors. The Company's Board of Directors will be divided into three classes,
designated Classes I, II and III, which will be as nearly equal in number as
possible. Directors of Class I will hold office for a term expiring at the
annual meeting of shareholders to be held in 1997, directors of Class II will
hold office for a term expiring at the annual meeting of shareholders to be held
in 1998 and directors of Class III will be elected to hold office for a term
expiring at the annual meeting of shareholders to be held in 1999. At each
annual meeting of shareholders following such initial classification and
election, the respective successors of each class shall be elected for
three-year terms, and each director will hold office until such annual meeting
and until his or her successor is elected and qualified, unless the director
dies, resigns, is disqualified or is removed from office. Thus, approximately
two-thirds of the members of the Board of Directors at any time will have had
prior board experience. With such a staggered Board of Directors, at least two
annual meetings will normally be required to effect a change in the composition
of a majority of the Board of Directors.
Under the IBCA and the Company's Articles of Incorporation, and subject to
the rights of the holders of any series of Preferred Stock, a majority of the
Board of Directors though less than a quorum, or the sole remaining director,
may fill vacancies on the Board of Directors or newly created directorships
resulting from any increase in the authorized number of directors. The Articles
of Incorporation provide that the election of directors need not be by written
ballot unless the Bylaws so provide. The Bylaws do not require the use of such a
written ballot. The Bylaws provide that the holders of a majority of shares then
entitled to vote if an election of directors were held may remove any director
or the entire Board of Directors, with or without cause.
LIMITATIONS ON CALLING SPECIAL MEETINGS OF SHAREHOLDERS
Under Iowa law, special meetings of shareholders may be called by the Board
of Directors or by such other persons as may be authorized by the articles of
incorporation or the bylaws. In the case of the Company, the Bylaws provide that
special meetings may be called by the Chairman, the President, the Company's
Board of Directors pursuant to a resolution adopted by not less than a majority
of the total number of directors or at the request of the holders of not less
than 25% of the combined voting power of the then outstanding stock of the
Company entitled to vote generally in the election of directors. The notice for
a special meeting must set forth the purpose or purposes of the meeting and,
except as otherwise required by law or the Articles of Incorporation, no
business will be transacted at any special meeting of shareholders other than
the items of business stated in the notice.
ADVANCE NOTICE REQUIREMENTS
The Bylaws establish advance notice procedures with regard to (i) the
nomination, other than by or at the direction of the Company's Board of
Directors, of candidates for election to the Company's Board of Directors (the
"Nomination Provision") and (ii) certain business to be brought before an annual
meeting of shareholders of the Company (the "Business Provision").
The Nomination Provision, by requiring advance notice of nominations by
shareholders, affords the Company's Board of Directors a meaningful opportunity
to consider the qualifications of the proposed nominees and, to the extent
deemed necessary or desirable by the Company's Board of Directors, to inform
shareholders about such qualifications.
The Business Provision, by requiring advance notice of business proposed to
be brought before an annual meeting, provides a more orderly procedure for
conducting annual meetings of shareholders and provides the Company's Board of
Directors with a meaningful opportunity prior to the meeting to inform
shareholders, to the extent deemed necessary or desirable by the Company's Board
of Directors, of any business proposed to be conducted at such meeting, together
with any recommendation of the Company's Board of Directors. The Business
Provision does not affect the right of shareholders to make
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shareholder proposals for inclusion in proxy statements for the Company's annual
meetings of shareholders pursuant to the rules of the Commission. In addition,
neither the Nomination Provision nor the Business Provision will prevent any
shareholder or shareholders holding at least 25% of the shares entitled to vote
on a particular matter from requesting a special meeting with respect to such
matter as described above in "--Limitations on Calling Special Meetings of
Shareholders."
Although these Bylaw provisions do not give the Company's Board of Directors
any power to approve or disapprove of shareholder nominations for the election
of directors or of any other business desired by shareholders to be conducted at
an annual meeting, they may make it difficult for a third party to conduct a
solicitation of proxies to elect its own slate of directors or otherwise attempt
to obtain control of the Company, even if such a solicitation or attempt might
be beneficial to the Company and its shareholders.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS
Except to the extent the Articles of Incorporation or Bylaws otherwise
provide, the Company's Board of Directors may, upon the affirmative vote of a
majority of the entire Board, amend or repeal any Bylaw. The Articles of
Incorporation may be amended with the affirmative vote of the holders of a
majority of the outstanding voting securities of the Company having the right to
vote generally in the election of directors; PROVIDED, that any proposed
amendment to the Articles of Incorporation which would alter the provision
relating to the ratio of outstanding shares of Class A Common Stock to
outstanding shares of Class B Common Stock would require the approval of a
majority of the outstanding shares of Class A Common Stock and Class B Common
Stock and a majority of the outstanding shares of Class A Common Stock
(excluding shares owned by the Permitted Class B Holders). Under Iowa law,
certain proposed amendments to the Articles of Incorporation which adversely
affect the rights of a particular class of stock must be approved by a majority
of such class.
STATE STATUTORY PROVISIONS
Any merger or acquisition of the Company by another entity or the
acquisition or attempted acquisition of more than 10% of the stock of the
Company is subject to regulatory approval by the Iowa Commissioner. See
"Supervision and Regulation--Regulation of the Company and AMHC."
Section 490.1108 of the IBCA provides that in considering acquisition
proposals, directors may consider, in addition to the consideration of the
effects of any action on shareholders, the effects on the company's employees,
suppliers, creditors, customers and the communities in which it operates, as
well as the long-term and short-term interests of the company. Consideration of
any or all community interest factors is not a violation of the business
judgment rule, even if the directors reasonably determine that effects on a
community or other factors outweigh the financial or other benefits to the
company or a shareholder or group of shareholders. Section 490.624A of the IBCA
also includes authorization of "poison pills" which include, without limitation,
terms and conditions of stock rights or options issued by a corporation that
preclude or limit the exercise, transfer or receipt of stock rights by persons
owning or offering to acquire a specified number or percentage of a
corporation's outstanding shares. Unlike most states, Iowa does not presently
have a "business combination" law prohibiting business combinations with a
shareholder who holds over a specified percentage of stock for less than a
specified period after crossing the threshold.
The foregoing provisions of state law could have the effect of delaying,
deferring or preventing a change in control of the Company if the Board of
Directors determines that a change of control is not in the best interests of
the Company, its shareholders and other constituencies. In addition, the
regulatory restrictions on the acquisition of securities of the Company may also
deter attempts to effect, or prevent the consummation of, a change in control of
the Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, the Company will have 17.75 million shares
of Class A Common Stock outstanding (assuming that the Underwriters do not
exercise their over-allotment option). All shares sold in the Offerings will be
freely tradeable without restriction or further registration under the
Securities Act. However, the shares of Class A Common Stock and Class B Common
Stock owned by AmerUs Group will constitute "restricted securities" within the
meaning of Rule 144 promulgated under the Securities Act. Such shares will not
be eligible for sale under Rule 144 until two years after the date of their
issuance. Thereafter, such shares will be subject to the volume and timing
requirements of Rule 144.
All officers and directors of the Company and its affiliates who purchase
shares of Class A Common Stock pursuant to the Subscription Offering are
required, pursuant to rules promulgated by the Iowa Commissioner, to refrain
from offering, selling, contracting to sell or otherwise disposing of such
shares for a period of 180 days following the date of purchase. In addition,
AmerUs Group and the Company have agreed with the Underwriters not to sell any
Common Stock for 180 days from the date of this Prospectus without the prior
written consent of Goldman, Sachs & Co.
Pursuant to the Intercompany Agreement, the Company has granted AmerUs Group
the right to require the Company to register shares of the Company's common
stock owned by it under the Securities Act. See "Certain Transactions and
Relationships--Intercompany Agreement."
VALIDITY OF SHARES
The validity of the shares of Class A Common Stock offered hereby will be
passed upon for the Company by James A. Smallenberger, Esq., Senior Vice
President and Secretary of the Company and Sidley & Austin, Chicago, Illinois,
and by Sullivan & Cromwell, New York, New York, for the Underwriters. Sidley &
Austin and Sullivan & Cromwell will rely as to matters governed by the laws of
the State of Iowa upon the opinion of James A. Smallenberger, Esq.
EXPERTS
The Consolidated Financial Statements and Schedules of the Company as of
September 30, 1996, December 31, 1995 and December 31, 1994 and for the nine
month period ended September 30, 1996 and each of the years in the three-year
period ended December 31, 1995, have been included herein and in the
Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent auditors, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
The Company retained Tillinghast, an actuarial consulting firm, to advise it
in connection with actuarial matters involved in the establishment and operation
of the Closed Block. The opinion of Tillinghast, dated October 26, 1995, states
(in reliance upon the matters and subject to the limitations described in such
opinion) that the establishment and operation of the Closed Block as
contemplated by the Plan make adequate provision for allocating to the Closed
Block assets which will be reasonably sufficient to enable the Closed Block to
provide for the guaranteed benefits, certain expenses and taxes associated with
the Closed Block policies, and to provide for the continuation of the current
dividend scales and interest credits in effect prior to the Reorganization if
the experience underlying those scales and credits continues.
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GLOSSARY OF CERTAIN INSURANCE AND
OTHER DEFINED TERMS
THE FOLLOWING GLOSSARY INCLUDES DEFINITIONS OF CERTAIN INSURANCE AND OTHER
DEFINED TERMS.
<TABLE>
<S> <C>
ACQUISITION COSTS............................ Costs including commissions, policy issue and
underwriting costs, and other costs incurred
to acquire or renew traditional life
insurance, universal life insurance and
annuity products.
AFFILIATE.................................... With respect to any person, any other Person
which directly or indirectly controls, is
controlled by or is under common control with
such Person.
A.M. BEST.................................... A.M. Best Company, Inc. A.M. Best financial
condition ratings are opinions of an
insurance company's financial strength,
operating performance and ability to meet its
obligations to policyowners. Such ratings are
based upon a comprehensive review of a
company's financial performance, which is
supplemented by certain data, including
responses to A.M. Best's questionnaires,
quarterly NAIC filings, state insurance
department examination reports, loss reserve
reports, annual reports and reports filed
with state insurance departments. A.M. Best
undertakes a quantitative evaluation based on
profitability, leverage and liquidity and a
qualitative evaluation based upon the
composition of a company's book of business
or spread of risk, the amount,
appropriateness and soundness of reinsurance,
the quality, diversification and estimated
market value of its assets, the adequacy of
its loss reserves and policyowners' surplus
and the experience and competence of its
management. A.M. Best Company, Inc. uses the
following rating scale:
</TABLE>
<TABLE>
<S> <C> <C>
A++ and A+ Superior
A and A- Excellent
B++ and B+ Very Good
B and B- Adequate
C++ and C+ Fair
C and C- Marginal
D Very Vulnerable
E Under State Supervision
F In Liquidation
</TABLE>
<TABLE>
<S> <C>
ANNUALIZED PREMIUM........................... The expected premium payment for a 12-month
period for each policy, excluding single
premium policies. Actual premium payments may
be higher or lower than annualized premiums.
ANNUITY...................................... A contract that pays a periodic income
benefit for the life of a person (the
annuitant), the lives of two or more persons
or a specific period of time.
</TABLE>
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<S> <C>
ASSET VALUATION RESERVE OR AVR............... The asset valuation reserve adopted by the
NAIC in December 1991 to replace the MSVR.
AVR appears as a liability on a life
insurer's statutory financial statements
beginning with the insurer's statutory
financial statements for 1992. AVR
establishes STATUTORY RESERVES for debt
securities, preferred stocks, common stock,
mortgage loans, equity real estate and joint
ventures and other invested assets. AVR
generally captures all realized and
unrealized gains and losses on such assets,
other than those resulting from changes in
interest rates. AVR has no effect on
financial statements prepared in conformity
with GAAP.
CAREER GENERAL AGENTS........................ Individuals who are in charge of an insurance
agency. They are independent contractors, who
are responsible for recruiting, training and
developing new agents in addition to
supervising experienced agents in their
agency; however, they may personally sell new
business. Career General Agents are paid
based on the business produced by their
agency and are also paid allowances to cover
their agency expenses and additional amounts
to compensate them for recruiting, training
and developing new agents.
CAREER GENERAL AGENCY SYSTEM................. The network of career general agencies
through which the Company distributes its
insurance and annuity products.
CEDING....................................... The reinsuring of all or a portion of an
insurer's risk with another insurer.
CLOSED BLOCK................................. The closed block of participating business to
be established, as of the Effective Date, by
AmerUs Life for the exclusive benefit of the
policies included therein.
CLOSED BLOCK BUSINESS........................ The policies within the classes specified in
the Plan (which policy classes constitute all
of the classes of individual traditional life
insurance policies and all universal life
insurance policies for which AmerUs Life had
a dividend scale in effect prior to the
Reorganization), but only to the extent such
policies are in force on the Effective Date.
CONVEXITY.................................... A measure of the shape of the price/yield
curve. Convexity explains the difference
between the prices estimated by standard
duration and the actual market prices of a
security resulting from a change in
market-required yield.
COST OF INSURANCE............................ The mortality charges assessed against
universal life insurance policies.
</TABLE>
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<TABLE>
<S> <C>
CREDITING RATES.............................. Interest rates applied to life insurance
policies and annuity contracts, whether
contractually guaranteed or currently
declared for a specified period.
DEFERRED FIXED ANNUITY....................... A fixed annuity that has a deferred or
accumulation period from the time of premium
payment(s) to the payout of a periodic income
benefit.
DIFFERENTIAL EARNINGS AMOUNT................. The amount of additional income which is
imputed to a mutual life insurance company
under Section 809 of the Internal Revenue
Code based on a comparison of the current
one-year average of mutual life insurance
company earnings rates with an adjusted
average of stock life insurance company
earnings rates for the previous three years.
The tax resulting from this additional income
is referred to as the "equity add-on tax."
DIVIDEND SCALE............................... The actuarial formula used by life insurance
companies to determine amounts payable as
dividends on participating policies based on
experience factors relating to, among other
things, investment results, mortality, lapse
rates, expenses and policy loan interest and
utilization rates.
DUFF & PHELPS................................ Duff & Phelps Credit Rating Co. Duff &
Phelp's claims-paying ability ratings are
opinions of an operating insurance company's
future ability to pay its policy and contract
obligations in a timely fashion. Duff &
Phelps claims-paying ability ratings are
based on certain qualitative and quantitative
factors including, among other factors, the
economic fundamentals of the company's
principal lines of business, the company's
competitive position and asset and liability
management practices. Duff & Phelps Credit
Rating Co. uses the following rating scale:
</TABLE>
<TABLE>
<S> <C> <C>
AAA Highest claims-paying
ability
AA+, AA and AA- Very high claims-paying
ability
A+, A and A- High claims-paying
ability
BBB+, BBB Adequate claims-paying
and BBB- ability
BB+, BB and BB- Uncertain claims-paying
ability
B+, B and B- Possessing risk that
policyowners and
contractholders will
not be paid when due
</TABLE>
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<S> <C> <C>
CCC+, CCC and Substantial risk that
CCC- policyowners and
contractholders will
not be paid when due
DD Company is under order
of liquidation
</TABLE>
<TABLE>
<S> <C>
EQUITY ADD-ON TAX (OR DIFFERENTIAL EARNINGS
TAX)........................................ The tax resulting from the DIFFERENTIAL
EARNINGS AMOUNT, which is the amount of
additional income imputed to a mutual life
insurance company under Section 809 of the
Internal Revenue Code based on a comparison
of the current one-year average of mutual
life insurance company earnings rates with an
adjusted average of stock life insurance
company earnings rates from the previous
three years.
FIRST YEAR ANNUALIZED PREMIUMS............... The expected premium payment for the first
policy year for each policy, excluding single
premium policies. Actual premium payments may
be higher or lower than first year annualized
premiums. This is a common insurance industry
measurement of sales achievement.
FIXED ANNUITY................................ Contract that guarantees that a specific sum
of money will be paid in the future, usually
as monthly income, to an annuitant. The
dollar amount paid to the annuitant will not
fluctuate regardless of adverse changes in
the insurance company's mortality experience,
investment return and expenses.
GAAP......................................... United States generally accepted accounting
principles for life insurance companies.
GENERAL ACCOUNT.............................. All investment accounts maintained by an
insurer, other than the separate accounts.
IMR.......................................... The interest maintenance reserve adopted by
the NAIC in December 1991. IMR appears as a
liability on a life insurer's statutory
financial statements beginning with the
insurer's statutory financial statements for
1992 and applies to all types of fixed income
investments (bonds, preferred stock,
mortgage-backed securities and mortgage
loans). IMR captures the net gains or losses
arising from changes in the overall level of
interest rates which are realized upon the
sale of such investments, and IMR amortizes
these net realized gains into income over the
remaining life of each investment sold. IMR
has no effect on financial statements
prepared in conformity with GAAP.
IN FORCE..................................... A life insurance policy or annuity contract
that has not expired.
</TABLE>
107
<PAGE>
<TABLE>
<S> <C>
INTEREST-SENSITIVE PRODUCTS.................. Insurance and annuity products for which
interest in excess of guaranteed levels is
credited to the policy.
MEMBER....................................... A person having rights or interests arising
under AMHC's articles of incorporation or
otherwise by law in respect of each insurance
policy or annuity contract of AmerUs Life,
including, but not limited to, any right to
vote.
MOODY'S...................................... Moody's Investors Service, Inc. Moody's
financial strength ratings are opinions of an
operating insurance company's ability to
discharge senior policyowner claims and
obligations pursuant to its insurance
policies. Moody's financial strength ratings
are based on information provided by the
company and federal and state regulators.
Moody's Investors Service, Inc. uses the
following rating scale:
</TABLE>
<TABLE>
<S> <C> <C>
Aaa Exceptional
Aa1, Aa2 and Aa3 Excellent
A1, A2 and A3 Good
Baa1, Baa2 and Adequate
Baa3
Ba1, Ba2 and Ba3 Questionable
B1, B2 and B3 Poor
Caa Very poor
Ca Extremely poor
C Lowest
</TABLE>
<TABLE>
<S> <C>
MORBIDITY.................................... The relative incidence of disability or
sickness due to disease or physical
impairment.
MORTALITY.................................... The relative incidence of death of life
insureds or annuitants.
MSVR......................................... Mandatory securities valuation reserve
required prior to 1992 statutory financial
statements by state insurance regulatory
authorities. MSVR was established as a
liability on a life insurer's statutory
financial statements and was intended to
absorb realized and unrealized gains and
losses sustained from time to time on a
portion of an insurer's general account debt
securities and preferred stock portfolios.
MSVR had no effect on financial statements
prepared in conformity with GAAP. The MSVR
was replaced by the AVR and IMR effective
with respect to an insurer's statutory
financial statements for 1992.
</TABLE>
<TABLE>
<S> <C>
NAIC......................................... The National Association of Insurance
Commissioners, an association of the chief
insurance supervisory officials of each
state, territory and insular possession of
the United States.
</TABLE>
108
<PAGE>
<TABLE>
<S> <C>
NET LEVEL METHOD............................. Reserve method used for traditional life
insurance. Such method defines the reserve as
the excess of the present value of future
guaranteed benefits over the present value of
future net premiums.
PARTICIPATING WHOLE LIFE POLICIES OR
PARTICIPATING WHOLE LIFE INSURANCE.......... Whole life policies or insurance under which
the owner thereof is eligible to share in the
earnings of the insurer through dividends.
PERSISTENCY.................................. The percentage of life insurance policies or
annuity contracts remaining in force from
period to period.
PERSONAL PRODUCING GENERAL AGENTS OR PPGAS... Independent agents who sell products directly
to the consumer and write business directly
with insurance companies and who are
compensated primarily for personal
production.
PPGA SYSTEM.................................. The network of PPGAs through which the
Company distributes its insurance and annuity
products.
PLAN......................................... The Plan of Reorganization of American Mutual
Life, including all schedules and exhibits
thereto, pursuant to which American Mutual
Life reorganized into a mutual insurance
holding company structure, as such Plan may
be amended from time to time.
POLICY....................................... Generally, a life insurance policy
(including, without limitation, a pure
endowment contract) or annuity contract
issued by the Company.
PREMIUM...................................... Payments and considerations received on
insurance policies and annuity contracts
issued or reinsured by an insurance company.
Under GAAP, premiums on universal life and
deferred annuity contracts are not accounted
for as revenues.
REINSURANCE.................................. The practice whereby one party, called the
reinsurer or assuming company, in
consideration of a premium paid to such
party, agrees to indemnify another party,
called the ceding company or primary insurer,
for risks underwritten by the ceding company.
Reinsurance provides a primary insurer with
three major benefits: it reduces net
liability on individual risks; it helps to
protect against catastrophic losses; and it
helps to maintain acceptable surplus and
reserve ratios. Reinsurance provides a
primary insurer with additional underwriting
capacity in that the primary insurer can
accept larger risks and can expand the volume
of business it writes without increasing its
capital base. The ceding company remains
liable on its obligations under the policies
reinsured if the reinsurer fails to pay
claims on a reinsured policy.
</TABLE>
109
<PAGE>
<TABLE>
<S> <C>
RESERVES..................................... Liabilities established by insurers to
reflect the estimated discounted present
value of costs of claims, payments or
contract liabilities and the related expenses
that the insurer will ultimately be required
to pay in respect of insurance or annuities
it has written.
RISK-BASED CAPITAL REQUIREMENTS OR RBC....... Regulatory and rating agency targeted surplus
based on the relationship of statutory
surplus, with certain adjustments, to the sum
of stated percentages of each element of a
specified list of company risk exposures.
SFAS......................................... Statement of Financial Accounting Standards.
SECOND TO DIE WHOLE LIFE INSURANCE........... A whole life policy in which two persons are
named as insureds. The death benefit is paid
upon the death of the second to die of the
two insureds.
SEPARATE ACCOUNTS............................ Investment accounts maintained by an insurer
to which funds have been allocated for
certain policies under provisions of relevant
state law. The investments in each separate
account are maintained separately from those
in other separate accounts and the general
account. The investment results of the
separate account assets are passed through
directly to the separate account
policyowners, so that an insurer derives
management and other fees from, but bears no
investment risk on, these assets, except the
risk on a small number of products that
returns on separate assets will not meet the
relatively low minimum rate guaranteed on
these products.
STANDARD & POOR'S............................ Standard & Poor's Ratings Group. Standard &
Poor's claims-paying ability ratings are
opinions of an operating insurance company's
financial ability to meet its obligations
under its insurance policies. Standard &
Poor's claims-paying ability ratings are
based on current information provided by the
subject insurance company and other reliable
sources. Standard & Poor's Rating Group uses
the following rating scale:
</TABLE>
<TABLE>
<S> <C> <C>
AAA Superior
AA+, AA and AA- Excellent financial
security
A+, A and A- Good financial security
BBB+, BBB Adequate
and BBB-
BB+, Bb and BB- Financial security may
be adequate
B+, B and B- Vulnerable
CCC Extremely vulnerable
R Regulatory actions
BBBq, Bbq and Bq Qualified solvency
ratings
</TABLE>
110
<PAGE>
<TABLE>
<S> <C>
STATUTORY ACCOUNTING PRACTICES............... Accounting practices prescribed or permitted
by the Iowa Department of Insurance.
STATUTORY RESERVES........................... Monetary amounts established by state
insurance law that an insurer must have
available to provide for future obligations
with respect to all policies. Statutory
reserves are liabilities on the balance sheet
of financial statements prepared in
conformity with Statutory Accounting
Practices.
STATUTORY SURPLUS............................ The excess of statutory admitted assets over
statutory liabilities as shown on an
insurer's statutory financial statements.
SUPPLEMENTARY CONTRACT....................... An agreement by an insurer to retain the lump
sum payable under an insurance policy and to
make payments in accordance with the
settlement option chosen.
SURRENDERS AND WITHDRAWALS................... Relinquishment of life insurance policies and
annuity contracts for their entire net cash
surrender values and withdrawals of a portion
of such values.
TERM LIFE INSURANCE.......................... Insurance protection during a certain number
of years but expiring without policy cash
value if the insured survives the stated
period.
TRADITIONAL LIFE INSURANCE................... Consists of whole life insurance and term
life insurance.
UNDERWRITING................................. The insurer's process of examining, accepting
or rejecting insurance risks, and classifying
those accepted, in order to charge the
appropriate premium for each accepted risk.
UNEARNED PREMIUM............................. The portion of an insurance premium paid
other than that which has paid for the
insurance protection already provided on a
policy.
UNIVERSAL LIFE INSURANCE..................... A form of life insurance where an insurance
account is maintained for each insurance
policy. Premiums, net of specified expenses,
are credited to the account, as is interest,
generally at a rate determined from time to
time by the insurer. Specific charges are
made against the account for the cost of
insurance protection and for the insurer's
expenses. The universal life form allows
considerable flexibility as to the amount and
timing of premium payments and for the level
of death benefits provided.
VARIABLE ANNUITY............................. Annuity in which premium payments are used to
purchase accumulation units. The value of a
unit fluctuates in accordance with the
investment experience of a separate account;
variable annuity contracts typically include
a general account guaranteed interest
investment option. At the time of the payment
of benefits to the annuitant, the
</TABLE>
111
<PAGE>
<TABLE>
<S> <C>
annuitant can generally elect from a number
of payment options which provide either fixed
or variable benefit payments.
WHOLE LIFE INSURANCE OR WHOLE LIFE Insurance that may be kept in force for a
POLICIES.................................... person's entire life by paying one or more
premiums. It is paid for in one of three
different ways: (i) ordinary life insurance
(premiums are payable as long as the insured
lives), (ii) limited payment life insurance
(premiums are payable over a specified number
of years), and (iii) single premium life
insurance (a lump sum amount paid at the
inception of the policy). The insurance
policy pays a benefit (contractual amount
adjusted for items such as policy loans and
dividends, if any) at the death of the
insured. Whole life insurance also builds up
cash values.
</TABLE>
112
<PAGE>
AMERUS LIFE HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995 and 1994........................ F-3
Consolidated Income Statements for the nine months ended September 30, 1996 and September 30, 1995
(unaudited) and the years ended December 31, 1995, 1994 and 1993.......................................... F-4
Consolidated Statements of Stockholder's Equity for the nine months ended September 30, 1996 and the years
ended December 31, 1995, 1994 and 1993.................................................................... F-5
Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and September 30, 1995
(unaudited) and the years ended December 31, 1995, 1994 and 1993.......................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
AmerUs Life Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of AmerUs Life
Holdings, Inc. and subsidiaries as of September 30, 1996, December 31, 1995 and
December 31, 1994, and the related consolidated statements of income,
stockholder's equity, and cash flows for the nine month period ended September
30, 1996, and each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AmerUs Life
Holdings, Inc. and subsidiaries as of September 30, 1996, December 31, 1995, and
December 31, 1994, and the results of their operations and their cash flows for
the nine month period ended September 30, 1996 and each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in note 1 to the consolidated financial statements, the Company
implemented the provisions of the Statement of Financial Accounting Standards
(SFAS) No. 120, "Accounting and Reporting by Mutual Life Insurance Enterprises
and by Insurance Enterprises for Certain Long-Duration Participating Contracts,"
and in 1993 the Company implemented the provisions of SFAS 106, "Employers
Accounting for Postretirement Benefits Other Than Pensions," and SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities. Also, as
discussed in note 1 to the consolidated financial statements, the Company has
restated its consolidated financial statements to reflect the spin-off of a
wholly owned subsidiary, which resulted in a change in the subsidiaries
comprising the consolidated financial statements.
KPMG Peat Marwick LLP
Des Moines, Iowa
December 2, 1996, except as to note 1,
which is as of December 11, 1996
F-2
<PAGE>
AMERUS LIFE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------------
1996 1995 1994
SEPTEMBER 30, -------------- ---------- ----------
1996
PRO FORMA
AS ADJUSTED
FOR THE
CAPITAL
CONTRIBUTION
(NOTE 15)
--------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Investments (notes 2 and 5):
Securities available-for-sale at fair value:
Fixed maturity securities.............................. $2,294,031 $2,297,571 $3,142,096 $2,566,768
Equity securities...................................... 73,897 74,575 109,675 178,770
Short-term investments................................. 12,002 12,002 39,353 8,529
Mortgage loans on real estate (notes 3 and 5)............ 250,484 260,233 353,597 447,663
Real estate.............................................. 10,481 40,012 52,199 58,164
Policy loans............................................. 63,986 63,986 220,044 209,512
Other investments........................................ 61,831 61,831 48,064 22,256
-------------- -------------- ---------- ----------
Total investments.................................... 2,766,712 2,810,210 3,965,028 3,491,662
Cash....................................................... -- -- 4,620 23,382
Accrued investment income.................................. 42,125 42,125 49,226 50,711
Premiums and fees receivable............................... 7,011 7,011 6,908 6,220
Reinsurance receivables.................................... 95 95 1,392 1,169
Deferred policy acquisition costs (note 4)................. 123,546 123,546 267,711 404,361
Deferred income taxes (note 6)............................. 4,369 4,369 -- --
Property and equipment (less accumulated depreciation
1996-- $22,416; 1995--$19,229; and 1994--$20,133)......... 4,600 13,324 13,502 13,979
Other assets............................................... 53,994 53,994 63,559 45,467
Closed block assets........................................ 1,237,139 1,237,139 -- --
-------------- -------------- ---------- ----------
Total assets......................................... $4,239,591 $4,291,813 $4,371,946 $4,036,951
-------------- -------------- ---------- ----------
-------------- -------------- ---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy reserves and policyowner funds:
Future life and annuity policy benefits................ $2,077,923 $2,077,923 $3,435,505 $3,309,529
Policyowner funds...................................... 35,240 35,240 56,474 51,464
-------------- -------------- ---------- ----------
2,113,163 2,113,163 3,491,979 3,360,993
Checks drawn in excess of bank balances.................. 43,811 8,311 -- --
Accrued expenses......................................... 11,802 11,802 11,100 15,677
Dividends payable to policyowners........................ 760 760 129,558 126,041
Policy and contract claims............................... 4,887 4,887 16,617 9,803
Income taxes payable..................................... 34,077 34,077 18,760 15,462
Deferred income taxes (note 6)........................... -- -- 48,623 1,482
Other liabilities........................................ 60,095 60,095 78,939 51,213
Debt (note 5)............................................ 36,333 45,055 36,461 37,957
Closed block liabilities................................. 1,501,269 1,501,269 -- --
-------------- -------------- ---------- ----------
Total liabilities.................................... 3,806,197 3,779,419 3,832,037 3,618,628
-------------- -------------- ---------- ----------
Stockholder's equity (note 11):
Preferred stock, no par value, 20,000,000 shares
authorized, none issued................................. -- -- -- --
Common stock, Class A, no par value, 75,000,000 shares
authorized; 14,500,000 shares issued and outstanding.... 14,500 14,500 -- --
Common stock, Class B, no par value, 50,000,000 shares
authorized; 5,000,000 shares issued and outstanding..... 5,000 5,000 -- --
Unrealized appreciation of available-for-sale securities
(note 2)................................................ 22,718 22,718 108,714 15,320
Retained earnings........................................ 391,176 470,176 431,195 403,003
-------------- -------------- ---------- ----------
Total stockholder's equity........................... 433,394 512,394 539,909 418,323
-------------- -------------- ---------- ----------
Commitments and contingencies (note 10)
Total liabilities and stockholder's equity........... $4,239,591 $4,291,813 $4,371,946 $4,036,951
-------------- -------------- ---------- ----------
-------------- -------------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AMERUS LIFE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30, YEARS ENDED DECEMBER 31,
--------------------------- ---------------------------------------
1996 1995 1994 1993
------------- 1995 ------------- ----------- -----------
------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Insurance premiums......................... $ 133,704 $ 183,864 $ 244,087 $ 237,912 $ 226,360
Universal life and annuity product
charges................................... 39,135 42,561 57,370 56,362 57,473
Net investment income (note 2)............. 189,293 210,491 285,244 275,691 269,854
Realized gains (losses) on investments
(note 2).................................. 62,555 41,564 51,387 (19,930) 15,460
Other...................................... 2,280 2,285 5,390 2,391 2,498
Contribution from the Closed Block......... 2,659 -- -- -- --
------------- ------------ ------------- ----------- -----------
429,626 480,765 643,478 552,426 571,645
------------- ------------ ------------- ----------- -----------
Benefits and expenses:
Policyowner benefits....................... 222,929 279,682 374,620 369,896 364,273
Underwriting, acquisition, and insurance
expenses.................................. 46,892 39,839 58,655 68,604 58,637
Amortization of deferred policy acquisition
costs (note 4)............................ 31,865 41,096 50,239 42,756 47,441
Dividends to policyowners.................. 26,343 36,274 49,414 45,039 45,519
------------- ------------ ------------- ----------- -----------
328,029 396,891 532,928 526,295 515,870
------------- ------------ ------------- ----------- -----------
Income before income taxes and
cumulative effect of change in
accounting principles................. 101,597 83,874 110,550 26,131 55,775
Income tax expense (note 6)................ 38,653 29,866 41,202 19,464 21,352
------------- ------------ ------------- ----------- -----------
Income before cumulative effect of change
in accounting principle................... 62,944 54,008 69,348 6,667 34,423
Cumulative effect of change in accounting
principle, net of tax (note 7)............ -- -- -- -- (3,214)
------------- ------------ ------------- ----------- -----------
Net income............................. $ 62,944 $ 54,008 $ 69,348 $ 6,667 $ 31,209
------------- ------------ ------------- ----------- -----------
------------- ------------ ------------- ----------- -----------
Pro forma net income per common share
(note 15)............................... $ 2.86 $ 3.15
------------- -------------
------------- -------------
Weighted average Common Shares
outstanding 22,000,000 22,000,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AMERUS LIFE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1996
AND YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION)
OF AVAILABLE-
COMMON STOCK FOR-SALE TOTAL
-------------------- SECURITIES RETAINED STOCKHOLDER'S
CLASS A CLASS B (NOTE 2) EARNINGS EQUITY
--------- --------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993.................... $ -- $ -- $ 50,768 $ 370,399 $ 421,167
Net income.................................... -- -- -- 31,209 31,209
Net unrealized appreciation................... -- -- 8,058 -- 8,058
Dividend to American Mutual Holding Company
(note 11).................................... -- -- -- (310) (310)
Cumulative effect of change in accounting for
investments (note 2)......................... -- -- 45,755 -- 45,755
--------- --------- -------------- -------------- --------------
Balance at December 31, 1993.................. -- -- 104,581 401,298 505,879
Net income.................................... -- -- -- 6,667 6,667
Net unrealized depreciation................... -- -- (89,261) -- (89,261)
Dividend to American Mutual Holding Company
(note 11).................................... -- -- -- (4,962) (4,962)
--------- --------- -------------- -------------- --------------
Balance at December 31, 1994.................. -- -- 15,320 403,003 418,323
Net income.................................... -- -- -- 69,348 69,348
Net unrealized appreciation................... -- -- 93,394 -- 93,394
Dividend to American Mutual Holding Company
(note 11).................................... -- -- -- (41,156) (41,156)
--------- --------- -------------- -------------- --------------
Balance at December 31, 1995.................. -- -- 108,714 431,195 539,909
Net income.................................... -- -- -- 62,944 62,944
Net unrealized depreciation................... -- -- (85,996) -- (85,996)
Dividend to American Mutual Holding Company
(note 11).................................... -- -- -- (4,463) (4,463)
Issuance of common stock...................... 14,500 5,000 -- (19,500) --
--------- --------- -------------- -------------- --------------
Balance at September 30, 1996................. $ 14,500 $ 5,000 $ 22,718 $ 470,176 $ 512,394
--------- --------- -------------- -------------- --------------
--------- --------- -------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AMERUS LIFE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------- -------------------------------
1996 1995 1994 1993
------------ 1995 --------- --------- ---------
------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 62,944 $ 54,008 $ 69,348 $ 6,667 $ 31,209
Adjustments to reconcile net income to net cash provided
by operating activities:
Policyowner assessments on universal life and annuity
products.............................................. (43,792) (42,561) (57,370) (56,362) (57,473)
Interest credited to policyowner account balances...... 87,599 92,489 123,360 120,075 122,375
Realized investment (gains) losses..................... (62,555) (41,564) (51,387) 19,930 (15,460)
Change in:
Accrued investment income............................ (1,256) (1,104) 1,485 (1,250) 1,004
Reinsurance ceded receivables........................ 1,297 934 (223) 666 (1,473)
Deferred policy acquisition costs.................... 5,686 (3,564) (7,491) (11,682) (1,259)
Liabilities for future policy benefits............... 49,924 56,321 94,856 94,862 111,619
Policy and contract claims and other policyowner
funds............................................... (6,679) 5,099 6,814 (2,828) 4,390
Income taxes:
Current............................................ 15,317 14,130 3,298 6,727 (14,619)
Deferred........................................... (6,747) (14,856) (3,105) 2,602 (10,034)
Other, net............................................. (16,412) 9,106 22,437 (7,057) 3,366
------------ ------------ --------- --------- ---------
Net cash provided by operating activities.............. 85,326 128,438 202,022 172,350 173,645
------------ ------------ --------- --------- ---------
Cash flows from investing activities:
Purchase of fixed maturities available for sale.......... (1,114,052) (1,212,474) (887,971) (886,236) (817,520)
Maturities, calls, and principal reductions of fixed
maturities available for sale........................... 1,012,272 1,005,946 582,980 591,965 650,108
Purchase of equity securities............................ (102,814) (77,402) (117,345) (69,813) (846,038)
Proceeds from sale of equity securities.................. 122,147 105,853 178,115 48,117 825,223
Proceeds from repayment and sale of mortgage loans....... 71,575 77,973 112,484 234,722 61,131
Purchase of mortgage loans............................... -- (24,622) (37,328) (78,830) (73,704)
Purchase of real estate and other invested assets........ (10,601) (7,126) (28,490) (31,515) (3,825)
Proceeds from sale of real estate and other invested
assets.................................................. 13,087 9,174 31,484 18,806 2,822
Change in policy loans, net.............................. (9,205) (8,283) (10,532) (12,364) (7,498)
Tax on capital gains..................................... 7 (155) (16,524) 5,136 (8,817)
Other assets, net........................................ 23,431 36,133 44,855 45,150 25,974
------------ ------------ --------- --------- ---------
Net cash provided by (used in) investing activities.... 5,847 (94,983) (148,272) (134,862) (192,144)
------------ ------------ --------- --------- ---------
Cash flows from financing activities:
Change in checks drawn in excess of bank balances........ 8,311 -- -- -- --
Deposits to policyowner account balances................. 126,688 196,846 272,431 260,172 169,118
Withdrawals from policyowner account balances............ (234,923) (207,670) (302,291) (208,313) (175,246)
Change in debt, net...................................... 8,594 (4,659) (1,496) (71,708) 20,974
Dividends to American Mutual Holding Company............. (4,463) (40,977) (41,156) (4,962) (310)
------------ ------------ --------- --------- ---------
Net cash (used in) provided by financing activities.... (95,793) (56,460) (72,512) (24,811) 14,536
------------ ------------ --------- --------- ---------
Net (decrease) increase in cash........................ (4,620) (23,005) (18,762) 12,677 (3,963)
Cash at beginning of period................................ 4,620 23,382 23,382 10,705 14,668
------------ ------------ --------- --------- ---------
Cash at end of period...................................... $ -- $ 377 $ 4,620 $ 23,382 $ 10,705
------------ ------------ --------- --------- ---------
------------ ------------ --------- --------- ---------
Supplemental disclosure of cash activities:
Interest paid............................................ $ 1,154 $ 1,576 $ 2,356 $ 5,394 $ 6,991
------------ ------------ --------- --------- ---------
------------ ------------ --------- --------- ---------
Income taxes paid........................................ $ 42,000 $ 37,800 $ 51,900 $ 14,630 $ 45,172
------------ ------------ --------- --------- ---------
------------ ------------ --------- --------- ---------
Supplemental disclosure of non-cash investing and financing
activities:
Issuance of Class A and Class B Common Stock related to
the Reorganization as a reclassification of retained
earnings................................................ $ 19,500 $ -- $ -- $ -- $ --
------------ ------------ --------- --------- ---------
------------ ------------ --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
AmerUs Life Holdings, Inc.'s (the Company) operations consist primarily of
marketing, underwriting, and distributing life insurance, annuities, and related
products to individuals throughout the United States. The Company's products are
sold through a career general agency system and a personal producing general
agency system. The life insurance and annuity operations are the Company's only
business segment.
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
The Company was formed on August 1, 1996 in conjunction with a plan of
reorganization (the Reorganization) of the former American Mutual Life Insurance
Company (American Mutual Life). Pursuant to the Reorganization which became
effective on June 30, 1996 (the Effective Date), American Mutual Life was
converted to a mutual insurance holding company structure whereby American
Mutual Holding Company (AMHC), a mutual insurance holding company, was formed.
Additionally, American Mutual Life was converted to a stock life insurance
company and renamed AmerUs Life Insurance Company (AmerUs Life). All of the
initial shares of capital stock of AmerUs Life were issued to AMHC.
On August 1, 1996, AMHC contributed all of its shares of capital stock of
AmerUs Life to AmerUs Group Co. (AmerUs Group). On the same date, the Company
was formed, and all of its shares of capital stock were issued to AmerUs Group.
American Mutual Life was previously known as Central Life Assurance Company.
American Mutual Life Insurance Company merged with and into Central Life
Assurance Company on December 31, 1994, with Central Life Assurance Company as
the surviving company existing under the name American Mutual Life Insurance
Company. The accompanying consolidated financial statements present the pooling
of interests of both companies.
Prior to the distribution (Distribution) by AmerUs Life of its Non-Life
Insurance Subsidiaries (as defined below), AmerUs Life made a capital
contribution of cash and other property (Capital Contribution) to or for the
benefit of AmerUs Properties, Inc., AmerUs Bank and Iowa Realty Co., Inc., and
each of their respective subsidiaries (Non-Life Insurance Subsidiaries). The net
assets contributed in the Capital Contribution had an aggregate carrying value
of approximately $79 million as of the date of contribution. Following the
Capital Contribution, a series of transactions was undertaken by the Company and
its affiliates. AmerUs Life effected the Distribution, pursuant to which it
distributed the Non-Life Insurance Subsidiaries to AmerUs Group. Immediately
after the Distribution, AmerUs Group contributed all of its shares of common
stock in AmerUs Life to the Company. Under this structure, the Company is an
intermediate holding company, with AmerUs Group as its direct parent company and
AmerUs Life as its wholly-owned subsidiary. Under Iowa law, AMHC is required to
retain direct or indirect ownership and control of shares representing a
majority of the vote of the outstanding capital stock of the Company.
Immediately following the Distribution, the Company entered into a bank credit
facility pursuant to which it borrowed $100 million in term debt and $75 million
under a revolving line of credit (Bank Credit Facility). The Company used the
proceeds from such borrowings to make a $125 million capital contribution to
AmerUs Life and to purchase a $50 million surplus note from AmerUs Life.
The effect of the Distribution was to decrease (increase) net income by the
net income (loss) of $1,781,000, $10,539,000, ($101,000), and $6,055,000 in the
nine months ended September 30, 1996 and the years ended December 31, 1995,
1994, and 1993, respectively, of Lartnec Investment Co., a former subsidiary of
AmerUs Life, and its subsidiaries (collectively, Lartnec).
As a result of the Reorganization, AMHC indirectly owns, through AmerUs
Group, 14,500,000 shares of Class A Common Stock and 5,000,000 shares of Class B
Common Stock of the Company. The Class B Common Stock must be held, directly or
indirectly, by AMHC, which must have a majority of the
F-7
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
outstanding Common Stock of both classes. The Class B Common Stock is generally
convertible on a share-for-share basis for Class A Common Stock. Each share of
Class A and Class B Common Stock entitles its holder to one vote per share;
however, the voting rights are adjusted if the number of Class A shares exceed
the number of Class B shares such that the holders of Class B shares will always
have a majority of the votes. In addition, as long as the members of AMHC own
directly or indirectly at least 50.1 percent of the voting power of the
outstanding voting stock, AMHC is entitled to equity purchase rights which
provide for the Company to notify AMHC in writing of a proposed sale of voting
stock or any options, warrants, or rights to acquire voting stock. AMHC has the
right to purchase the same proportionate number of shares being offered for sale
as AMHC owns of the total shares at the time of the registration.
The accompanying consolidated financial statements include only the accounts
and operations, after intercompany eliminations, of AmerUs Life Holdings, Inc.
and its wholly owned subsidiaries, principally, AmerUs Life Insurance Company
and American Vanguard Life Insurance Company (American Vanguard Life).
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles (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 consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CLOSED BLOCK
The Reorganization contained an arrangement, known as a closed block (the
Closed Block), to provide for dividends on policies that were in force on the
Effective Date and were within the classes of individual policies for which the
Company had a dividend scale in effect at the time of the Reorganization. The
Closed Block was designed to give reasonable assurance to owners of affected
policies that assets will be available to support such policies, including
maintaining dividend scales in effect at the time of the Reorganization, if the
experience underlying such scales continues. The assets, including revenue
therefrom, allocated to the Closed Block will accrue solely to the benefit of
the owners of policies included in the block until the block is no longer in
effect. The Company will not be required to support the payment of dividends on
Closed Block policies from its general funds.
F-8
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Summarized financial information of the Closed Block as of September 30,
1996, and from July 1, 1996 to September 30, 1996, is as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
CLOSED BLOCK
-------------
<S> <C>
ASSETS:
Fixed maturity securities, at fair value (amortized cost of $839,212).............................. $ 843,809
Equity securities, at fair value................................................................... 15,488
Short-term investments, at fair value.............................................................. 718
Mortgage loans on real estate...................................................................... --
Real estate........................................................................................ --
Policy loans....................................................................................... 165,263
Other investments.................................................................................. --
Accrued investment income.......................................................................... 8,357
Premiums and fees receivable....................................................................... --
Reinsurance receivables............................................................................
Deferred policy acquisition costs.................................................................. 196,146
Deferred income taxes.............................................................................. --
Property and equipment............................................................................. --
Other assets....................................................................................... 7,358
-------------
$ 1,237,139
-------------
-------------
LIABILITIES:
Future life and annuity policy benefits............................................................ $ 1,339,695
Policyowner funds.................................................................................. 24,617
Checks drawn in excess of bank balances............................................................ --
Accrued expenses................................................................................... --
Dividends payable to policyowners.................................................................. 131,906
Policy and contract claims......................................................................... 5,051
Income taxes payable............................................................................... --
Other liabilities.................................................................................. --
Debt............................................................................................... --
-------------
$ 1,501,269
-------------
-------------
REVENUES AND EXPENSES:
Insurance premiums................................................................................. $ 48,747
Universal life and annuity product charges......................................................... 4,657
Net investment income.............................................................................. 26,826
Realized gains on investments...................................................................... 70
Other revenues..................................................................................... --
Policyowner benefits............................................................................... (51,028)
Underwriting, acquisition, and insurance expenses.................................................. (1,038)
Amortization of deferred policy acquisition costs.................................................. (11,244)
Dividends to policyowners.......................................................................... (14,331)
-------------
Income before income taxes..................................................................... $ 2,659(1)
-------------
-------------
</TABLE>
- --------------
(1) Represents contribution from the Closed Block
F-9
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company and its
wholly owned subsidiaries have been prepared in conformity with GAAP which, as
to the insurance company subsidiaries, differ from statutory accounting
practices prescribed or permitted by regulatory authorities.
The insurance company subsidiaries have adopted SFAS 120, "Accounting and
Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for
Certain Long-Duration Participating Contracts." SFAS 120 permits stock life
insurance companies to apply the provisions of the American Institute of
Certified Public Accountant's Statement of Position 95-1, "Accounting for
Certain Insurance Activities of Mutual Life Insurance Enterprises," to
participating life insurance contracts that meet the conditions in SFAS 120. The
accompanying consolidated financial statements have been restated for the
effects of implementing SFAS 120.
INTERIM FINANCIAL INFORMATION
The consolidated financial statements for the nine-month period ended
September 30, 1995, and related disclosures in these notes have not been
audited. The interim consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals unless noted otherwise
herein) considered necessary for a fair presentation have been included.
INVESTMENTS
Investments in fixed maturity and equity securities that are to be held for
indefinite periods of time are reported as securities available for sale.
Securities available for sale are reported in the accompanying consolidated
financial statements at fair value. Any valuation changes resulting from changes
in the fair value of these securities are reflected as a component of
stockholder's equity. These unrealized gains or losses in stockholder's equity
are reported net of taxes and adjustments to deferred policy acquisition costs.
Premiums and discounts on fixed maturity securities are amortized or
accreted over the life of the related security as an adjustment to yield using
the effective interest method. Realized gains and losses are included in
earnings and are determined using the specific identification method. The
carrying value of investments is reduced to its estimated realizable value if a
decline in fair value is considered other than temporary with such reduction
charged to earnings.
Mortgage loans on real estate and other long-term investments are stated at
cost less amortized discounts and allowances for possible losses. Policy loans
are stated at their aggregate unpaid balances. Real estate acquired by
foreclosure is stated at the lower of cost or fair value less estimated costs to
sell.
Investments in real estate and mortgage loans on real estate are considered
impaired when the Company determines that collection of all amounts due under
the contractual terms is doubtful or the carrying values exceed the fair value
of underlying collateral. The Company adjusts real estate and mortgage loans on
real estate to their estimated net realizable value at the point at which it
determines an impairment is other than temporary. Interest income on impaired
mortgage loans is recognized when cash is received. In addition, the Company has
established a valuation allowance for mortgage loans on real estate and other
invested assets. Valuation allowances for other than temporary impairments in
value are netted against the asset categories to which they apply, and additions
to valuation allowances are included in total investment results.
F-10
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST RATE SWAPS, CAPS AND SWAPTIONS
The Company uses interest rate swaps, caps, and swaptions as part of its
overall interest rate risk management strategy for certain life insurance and
annuity products. The book values of the underlying hedged investments or
anticipated investment transactions are amortized over the remaining lives of
the hedged investments as adjustments to investment income. Certain agreements
hedge assets which are carried at fair value; accordingly, such underlying
hedged investments are also carried at fair value. Any unamortized gains or
losses are recognized when the underlying investments are sold.
Interest rate swap contracts are used to convert the interest rate
characteristics (fixed or variable) of certain investments to match those of the
related insurance liabilities that the investments are supporting. The net
interest effect of such swap transactions is reported as an adjustment of
interest income as incurred.
Interest rate caps are used to limit the effects of changing interest rates
on yields of variable rate or short-term assets or liabilities. The initial cost
of any such agreement is amortized to investment income over the life of the
agreement. Periodic payments that are receivable as a result of the agreements
are accrued as an adjustment of investment income.
Swaption agreements are used in conjunction with interest rate caps to
protect against rising rates. Swaption agreements involve the right to enter
into a swap transaction at a pre-specified price. The initial cost of a swaption
agreement is amortized to investment income over the life of the agreement.
POLICY ACQUISITION COSTS
Certain commissions, policy issue and underwriting costs, and other variable
costs incurred to acquire or renew traditional life insurance, universal life
insurance, and annuity products have been deferred. The amortization method of
deferred policy acquisition costs for traditional life insurance products is
different, 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 surplus. Deferred policy acquisition costs for participating
traditional life insurance are being amortized over the life of the policies
generally in proportion to the present value of estimated gross margins.
Non-participating traditional life insurance deferred policy acquisition costs
are being 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. For universal life insurance and annuity products, deferred
policy acquisition costs are being amortized generally in proportion to the
present value of estimated gross margins from surrender charges and investment,
mortality, and expense margins. The amortization for participating traditional
life, universal life, and annuity products is adjusted retrospectively when
current or estimated future gross profits or margins on the underlying policies
vary from previous estimates. Deferred policy acquisition costs are adjusted for
the impact on estimated gross profits of net unrealized gains and losses on
securities.
RECOGNITION OF REVENUES
Premiums for traditional life insurance products (including those products
with fixed and guaranteed premiums and benefits and which consist principally of
whole life insurance policies and certain annuities with life contingencies) are
recognized as revenues when due. For limited payment life insurance policies,
premiums are recorded as income when due with any excess profit deferred and
recognized over the expected lives of the contracts. Amounts received as
payments for universal life insurance policies and for annuity products
(including deferred annuities and annuities without life contingencies) are not
recorded as premium revenue. Revenues for such contracts consist of policy
F-11
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
charges for the cost of insurance, policy administration charges, and surrender
charges assessed against policyowner account balances during the period. All
insurance-related revenue is reported net of reinsurance ceded.
FUTURE POLICY BENEFITS
The liability for future policy benefits for traditional life insurance is
computed using a net level method, utilizing the guaranteed interest and
mortality rates used in calculating cash surrender values as described in the
contracts. Reserve interest assumptions range from 2.00 percent to 7.25 percent.
The weighted average assumed interest rate for all traditional life policy
reserves was 4.20 percent in 1996 and 1995, 4.10 percent in 1994, and 4.00
percent in 1993. Policy benefit claims are charged to expense in the period that
the claims are incurred. All insurance-related benefits, losses, and expenses
are reported net of reinsurance ceded.
Future policy benefit reserves for universal life insurance and annuity
products are computed under a retrospective deposit method and represent policy
account balances before applicable surrender charges. Policy benefits and claims
that are charged to expense include benefit claims incurred in the period in
excess of related policy account balances. The weighted average interest
crediting rate for universal life products was 6.31 percent in 1996, 6.67
percent in 1995, 6.44 percent in 1994, and 6.59 percent in 1993. The weighted
average interest crediting rate for annuity products was 5.39 percent in 1996,
6.16 percent in 1995, 6.41 percent in 1994, and 6.95 percent in 1993.
PARTICIPATING POLICIES
Participating policies entitle the policyowners to receive dividends based
on actual interest, mortality, morbidity, and expense experience for the related
policies. These dividends are distributed to the policyowners through an annual
dividend using current dividend scales which are approved by the board of
directors. Nearly 100 percent of traditional life policies are currently paying
dividends and traditional life policies represent 68 percent of the Company's
individual life policies in force.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and is depreciated principally
under the straight-line method.
GUARANTY FUND ASSESSMENTS
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyowners and claimants in the event of insolvency of
other life insurance companies. As of September 30, 1996, the Company has
accrued for the gross amount of guaranty fund assessments for known insolvencies
net of estimated recoveries of premium tax offsets.
BENEFIT PLAN COSTS
The Company recognizes pension costs for its defined benefit plans in
accordance with SFAS 87, "Employers' Accounting for Pensions." Pension costs are
funded according to regulations provided under the Internal Revenue Code.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Under SFAS 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," the cost of postretirement benefits must be recognized on an
accrual basis as employees perform services to earn the benefits. The Company
adopted SFAS 106 as of January 1, 1993. Prior to 1993, the cost of retiree
health care and life insurance benefits was recognized as an expense when paid.
F-12
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company and its subsidiaries, with the exception of American Vanguard
Life, file a consolidated federal income tax return with the Non-Life Insurance
Subsidiaries. The separate return method is used to compute the Company's
provision for federal income taxes. Deferred income tax assets and liabilities
are determined based on differences among the financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and laws.
EMERGING ACCOUNTING MATTER
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
125 provides consistent accounting standards for securitizations and other
transfers of financial assets, determines when financial assets (liabilities)
should be considered sold (settled) and removed from the balance sheet, and
determines when related revenues and expenses should be recognized. FASB
Statement No. 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996. This
statement will be applicable to the Company, however, management believes that
it will have no material effect on the Company's consolidated financial
statements.
BUSINESS RISKS
The Company operates in a business environment which is subject to various
risks and uncertainties. Such risks and uncertainties include interest rate
risk, legal and regulatory changes, and default risk.
Interest rate risk is the potential for interest rates to change, which can
cause fluctuations in the value of investments. To the extent that fluctuations
in interest rates cause the duration of assets and liabilities to differ, the
Company may have to sell assets prior to their maturity and realize losses.
Interest rate exposure for the investment portfolio is managed through
asset/liability management techniques which attempt to match the duration of the
assets with the estimated duration of the liabilities. The Company also utilizes
derivative investment contracts to manage interest rate risk.
The potential also exists for changes in the legal or regulatory environment
in which the Company operates, which can create additional costs and expenses
not anticipated by the Company in pricing its products. In other words,
regulatory initiatives or new legal theories may create costs for the Company
beyond those recorded in the financial statements. The Company mitigates this
risk by operating in a geographically diverse area, which reduces its exposure
to any single jurisdiction, closely monitoring the regulatory environment to
anticipate changes, and by using underwriting practices which identify and
minimize the potential adverse impact of this risk.
Default risk is the risk that issuers of securities owned by the Company may
default or that other parties, including reinsurers, may not be able to pay
amounts due the Company. The Company minimizes this risk by adhering to a
conservative investment strategy, maintaining sound reinsurance and credit and
collection policies, and providing allowances or reserves for any amounts deemed
uncollectible.
(2) INVESTMENTS
On December 31, 1993, the Company adopted SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities," which expands the use of fair value
accounting for those securities that a company does not have positive intent and
ability to hold to maturity. Implementation of SFAS 115 increased stockholder's
equity by $45.8 million, which reflected the unrealized appreciation of fixed
maturity securities available for sale, net of related deferred policy
acquisition costs and deferred taxes.
F-13
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) INVESTMENTS (CONTINUED)
The Company's investments are classified as available-for-sale securities
and are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-sale securities at
September 30, 1996:
Fixed maturity securities:
Corporate bonds.................. $ 1,378,609 $ 47,669 $ 10,852 $ 1,415,426
U.S. government bonds............ 51,861 597 244 52,214
Foreign government bonds......... 20,147 1,272 64 21,355
Mortgage-backed bonds............ 794,870 17,654 3,948 808,576
------------- ----------- ----------- -------------
$ 2,245,487 $ 67,192 $ 15,108 $ 2,297,571
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
Equity securities.................. $ 70,691 $ 4,800 $ 916 $ 74,575
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
Short-term investments............. $ 12,002 $ -- $ -- $ 12,002
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-sale securities at
December 31, 1995:
Fixed maturity securities:
Corporate bonds.................. $ 1,977,567 $ 160,486 $ 6,208 $ 2,131,845
U.S. government bonds............ 65,513 1,652 -- 67,165
Foreign government bonds......... 20,149 2,267 -- 22,416
Mortgage-backed bonds............ 886,470 33,837 1,323 918,984
State and municipal bonds........ 1,550 136 -- 1,686
------------- ----------- ----------- -------------
$ 2,951,249 $ 198,378 $ 7,531 $ 3,142,096
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
Equity securities.................. $ 52,869 $ 57,380 $ 574 $ 109,675
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
Short-term investments............. $ 39,276 $ 77 $ -- $ 39,353
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
F-14
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ----------- -------------
(IN THOUSANDS)
Available-for-sale securities at
December 31, 1994:
<S> <C> <C> <C> <C>
Fixed maturity securities:
Corporate bonds.................. $ 1,754,413 $ 19,003 $ 73,277 $ 1,700,139
U.S. government bonds............ 47,682 44 390 47,336
Foreign government bonds......... 12,147 80 226 12,001
Mortgage-backed bonds............ 847,390 4,945 47,272 805,063
State and municipal bonds........ 2,353 10 134 2,229
------------- ----------- ----------- -------------
$ 2,663,985 $ 24,082 $ 121,299 $ 2,566,768
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
Equity securities.................. $ 112,992 $ 70,578 $ 4,800 $ 178,770
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
Short-term investments............. $ 8,529 $ -- $ -- $ 8,529
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
The amortized cost and estimated fair value of investments in fixed maturity
securities at September 30, are summarized by stated maturity as follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
----------------------------
AMORTIZED
COST FAIR VALUE
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Maturity:
Due in 1996................................................... $ 10,775 $ 10,796
Due in 1997 - 2001............................................ 353,409 366,059
Due in 2002 - 2006............................................ 705,786 724,845
Due after 2006................................................ 380,647 387,295
Mortgage-backed securities...................................... 794,870 808,576
------------- -------------
$ 2,245,487 $ 2,297,571
------------- -------------
------------- -------------
</TABLE>
The foregoing data is based on the stated maturities of the securities.
Actual maturities will differ for some securities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
The ratings of the Company's fixed maturity securities at September 30,
1996, using Standard & Poor's rating service, are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Treasuries and AAA............................................. $ 824,245
<S> <C>
AA............................................................. 97,548
A.............................................................. 518,222
BBB............................................................ 654,848
BB............................................................. 155,344
Less than BB................................................... 47,364
----------
$2,297,571
----------
----------
</TABLE>
The Company's investment in non-income producing fixed maturity securities
and real estate was $7.8 million as of September 30, 1996.
F-15
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) INVESTMENTS (CONTINUED)
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------- ----------------------------------------
1996 1995 1994 1993
-------------- ----------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed maturity securities......... $ 162,038 $ 231,208 $ 206,346 $ 201,203
Equity securities................. 3,664 6,311 7,821 5,834
Mortgage loans on real estate..... 16,902 33,738 55,181 57,031
Real estate....................... 5,657 9,729 9,907 6,708
Policy loans...................... 7,639 14,043 12,745 12,572
Other............................. 3,056 5,211 2,329 722
-------------- ----------- ----------- --------------
Gross investment income....... 198,956 300,240 294,329 284,070
Investment expenses............... 9,663 14,996 18,638 14,216
-------------- ----------- ----------- --------------
Net investment income......... $ 189,293 $ 285,244 $ 275,691 $ 269,854
-------------- ----------- ----------- --------------
-------------- ----------- ----------- --------------
</TABLE>
Investment expenses include depreciation on real estate of $1.8 million,
$2.9 million, $2.0 million and $2.0 million in the nine months ended September
30, 1996, and the years ended December 31, 1995, 1994, and 1993, respectively.
Realized gains and losses on investments and provisions for losses are
summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------------
1996 1995 1994 1993
-------------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities available-for-sale:
Fixed maturity securities:
Gross realized gains................. $ 14,995 $ 18,652 $ 10,879 $ 18,679
Gross realized losses................ (11,182) (9,240) (36,423) (6,809)
Equity securities:
Gross realized gains................. 55,119 45,419 14,746 10,095
Gross realized losses................ (121) (3,634) (5,181) (2,887)
Other investments........................ 1,249 812 (2,744) (642)
Net provision for losses--mortgage loans
on real estate.......................... 2,495 (622) (1,207) (2,976)
-------------- --------- ---------- ---------
$ 62,555 $ 51,387 $ (19,930) $ 15,460
-------------- --------- ---------- ---------
-------------- --------- ---------- ---------
</TABLE>
The unrealized appreciation (depreciation) on invested assets available for
sale is reported as a separate component of stockholder's equity, reduced by
adjustments to deferred acquisition costs and a provision for deferred income
taxes.
F-16
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) INVESTMENTS (CONTINUED)
A summary of the components of the net unrealized appreciation
(depreciation) on invested assets carried at fair value (in thousands) is as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------- ------------------------------------
1996 1995 1994 1993
-------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Unrealized appreciation
(depreciation):
Fixed maturity securities........... $ 52,084 $ 190,847 $ (97,217) $ 153,744
Equity securities................... 3,884 56,806 65,778 87,247
Short-term investments.............. -- 77 -- --
Other investments................... 3,103 6,335 (2,277) 211
Closed Block investments............ 5,085 -- -- --
Deferred policy acquisition costs..... (30,371) (88,039) 56,102 (81,492)
Deferred income taxes................. (11,067) (57,312) (7,066) (55,129)
-------------- ----------- ---------- -----------
$ 22,718 $ 108,714 $ 15,320 $ 104,581
-------------- ----------- ---------- -----------
-------------- ----------- ---------- -----------
</TABLE>
The change in unrealized appreciation (depreciation) on fixed maturity
securities was ($139) million, $288 million, ($251) million, and $154 million in
the nine months ended September 30, 1996, and for the years ended December 31,
1995, 1994 and 1993, respectively; the corresponding amounts for equity
securities were ($53) million, ($9) million, ($21) million, and $11 million.
At September 30, 1996, December 31, 1995, and December 31, 1994, investments
in fixed maturity securities with a carrying amount of $2.4 million, $2.4
million and $2.3 million, respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
No investment in any person or its affiliates exceeded 10 percent of
stockholder's equity at September 30, 1996.
(3) MORTGAGE LOANS ON REAL ESTATE
Mortgage loans on real estate consist almost entirely of commercial mortgage
loan investments, substantially all of which are made on a full recourse basis
and consist primarily of fixed-rate first mortgages on completed properties. The
following table sets forth additions, reductions from payments, and other
charges and foreclosures related to the mortgage loan portfolio (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------- --------------------------
1996 1995 1994
-------------- ------------ ------------
<S> <C> <C> <C>
Commercial loans:
Beginning balance................................ $ 379,414 $ 504,034 $ 723,602
Additions........................................ 19,649 39,933 75,275
Payments and miscellaneous charges............... (75,090) (146,496) (280,871)
Sales............................................ (47,234) -- --
Foreclosed properties............................ (6,174) (18,057) (13,972)
-------------- ------------ ------------
Ending balance................................... 270,565 379,414 504,034
Residential and other mortgage loans............. 3,258 4,250 9,178
Valuation allowance.............................. (13,590) (30,067) (65,549)
-------------- ------------ ------------
Total mortgage loans......................... $ 260,233 $ 353,597 $ 447,663
-------------- ------------ ------------
-------------- ------------ ------------
</TABLE>
F-17
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) MORTGAGE LOANS ON REAL ESTATE (CONTINUED)
The Company manages its credit risk associated with these loans by
diversifying its mortgage portfolio by property type and geographic location and
by seeking favorable loan to value ratios on secured properties. The portfolio
credit risk for mortgage loans was concentrated in the following geographic
regions (dollar amounts in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1996 1995 DECEMBER 31, 1994
------------------------ ------------------------ ------------------------
--------------------------------------------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial:
California........... 22 $ 44,456 31 $ 69,946 42 $ 90,482
Florida.............. 4 15,429 6 21,964 9 28,677
Iowa................. 50 84,069 56 95,837 66 108,944
Kansas............... 11 21,211 14 29,249 16 39,643
Texas................ 7 21,651 9 28,053 14 59,233
Washington........... 4 10,762 8 15,172 10 28,949
Other................ 60 73,011 88 119,193 109 148,106
Residential............ 73 3,234 95 4,250 196 9,178
Valuation allowance.... -- (13,590) -- (30,067) -- (65,549)
--- ----------- --- ----------- --- -----------
231 260,233 307 $ 353,597 462 $ 447,663
--- ----------- --- ----------- --- -----------
--- ----------- --- ----------- --- -----------
</TABLE>
At September 30, 1996, the Company's investment in mortgage loans included
$33.1 million in loans that are considered to be impaired, for which the related
allowance for credit losses is $3.2 million. The average recorded investment in
impaired loans during the nine months ended September 30, 1996, was $55.3
million. For the nine months ended September 30, 1996, the Company collected
$3.9 million in interest income on those impaired loans.
No mortgage loan on any one individual property exceeded $14 million at
September 30, 1996.
Provisions for losses are summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------- ---------------------------------
1996 1995 1994 1993
-------------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period.......... $ 30,067 $ 65,549 $ 80,220 $ 81,040
-------------- ---------- ---------- ---------
Provisions for losses - mortgage
loans.................................. (2,495) 622 1,207 2,976
Provision on mortgages sold/ transferred
to real estate......................... (13,982) (36,104) (15,878) (3,796)
-------------- ---------- ---------- ---------
Net decrease for period............... (16,477) (35,482) (14,671) (820)
-------------- ---------- ---------- ---------
Balance at end of period................ $ 13,590 $ 30,067 $ 65,549 $ 80,220
-------------- ---------- ---------- ---------
-------------- ---------- ---------- ---------
</TABLE>
F-18
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) DEFERRED POLICY ACQUISITION COSTS
A summary of the policy acquisition costs deferred and amortized are as
follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------- YEARS ENDED DECEMBER 31,
NON-CLOSED CLOSED --------------------------------------
BLOCK BLOCK TOTAL 1995 1994 1993
------------ ----------- -------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period...................... $ 162,103 $ 193,647 $ 355,750 $ 348,259 $ 336,577 $ 335,318
Policy acquisition costs
deferred.................... 23,679 13,743 37,422 57,730 54,438 48,700
Policy acquisition costs
amortized................... (31,865) (11,244) (43,109) (50,239) (42,756) (47,441)
------------ ----------- -------------- ------------ ----------- -----------
153,917 196,146 350,063 355,750 348,259 336,577
Unrealized (gain) loss on
available-for-sale
securities.................. (30,371) -- (30,371) (88,039) 56,102 (81,492)
------------ ----------- -------------- ------------ ----------- -----------
Balance at end of period..... $ 123,546 $ 196,146 $ 319,692 $ 267,711 $ 404,361 $ 255,085
------------ ----------- -------------- ------------ ----------- -----------
------------ ----------- -------------- ------------ ----------- -----------
</TABLE>
The components of the deferred policy acquisition costs are as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------- DECEMBER 31,
NON-CLOSED CLOSED --------------------------------------
BLOCK BLOCK TOTAL 1995 1994 1993
------------ ----------- -------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Universal life insurance and
annuity products............ $ 150,989 $ 45,329 $ 196,318 $ 203,949 $ 197,256 $ 199,175
Participating traditional
life insurance.............. 2,276 131,235 133,511 131,602 131,500 119,487
Non-participating traditional
life insurance.............. 652 19,582 20,234 20,199 19,503 17,915
------------ ----------- -------------- ------------ ----------- -----------
$ 153,917 $ 196,146 $ 350,063 $ 355,750 $ 348,259 $ 336,577
Unrealized (gain) loss on
available-for-sale
securities.................. (30,371) -- (30,371) (88,039) 56,102 (81,492)
------------ ----------- -------------- ------------ ----------- -----------
$ 123,546 $ 196,146 $ 319,692 $ 267,711 $ 404,361 $ 255,085
------------ ----------- -------------- ------------ ----------- -----------
------------ ----------- -------------- ------------ ----------- -----------
</TABLE>
Commissions represent approximately 85 percent of policy acquisition costs
deferred.
F-19
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(5) DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
-------------- --------------------
1996 1995 1994
-------------- --------- ---------
<S> <C> <C> <C>
Line of credit with Federal Home Loan Bank -- interest is paid
at a rate of 6.29% at September 30, 1996. The agreement
provides for maximum borrowings of $25,000,000. The Company has
assigned all Federal Home Loan Bank stock and has assigned
other securities as collateral on the line of credit........... $ 24,700 $ -- $ 3,665
The Iowa Housing Finance Authority variable rate (3.85% at
September 30, 1996) demand Multi-Family Housing Bond Series
1985-A......................................................... 8,722 8,813 8,948
Federal Home Loan Bank community investment long-term advances
with a weighted average interest rate of 6.53% at September 30,
1996 maturing at various dates through July 2010............... 11,633 11,765 --
The Housing and Redevelopment Authority of the City of St. Paul,
Minnesota, demand rental housing development revenue bonds
Series 1985-A were repaid in 1995.............................. -- -- 3,884
Class A certificate holders of 1988-1 REMIC with a weighted
average interest rate of 9.00% at December 31, 1995............ -- 15,883 21,268
Other........................................................... -- -- 192
-------------- --------- ---------
$ 45,055 $ 36,461 $ 37,957
-------------- --------- ---------
-------------- --------- ---------
</TABLE>
Maturities of long-term debt are as follows for each of the five years
ending September 30:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Year ending September 30:
1997.......................................................................... $ 33,658
1998.......................................................................... 203
1999.......................................................................... 218
2000.......................................................................... 233
2001.......................................................................... 249
Thereafter.................................................................... 10,494
--------------
$ 45,055
--------------
--------------
</TABLE>
At September 30, 1996, the carrying value of the securities assigned to the
Federal Home Loan Bank as collateral on the line of credit and long-term
advances totaled $49.7 million. The bonds are collateralized by certain mortgage
loans held by the Company with a carrying value of $8.7 million at September 30,
1996.
Interest paid totaled $1.2 million, $2.4 million, $5.4 million and $7.0
million in the nine months ended September 30, 1996, and the years ended
December 31, 1995, 1994, and 1993, respectively.
F-20
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) FEDERAL INCOME TAXES
Comprehensive federal income tax expense is summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED DECEMBER 31
SEPTEMBER 30, --------------------------------
1996 1995 1994 1993
-------------- --------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Income tax expense on:
Operations....................................... $ 38,653 $ 41,202 $ 19,464 $ 21,352
Unrealized holding gains (losses) on
available-for-sale securities................... (46,245) 50,246 48,063 (28,975)
Accounting change for postretirement benefits.... -- -- -- (1,731)
-------------- --------- --------- ----------
$ (7,592) $ 91,448 $ 67,527 $ (9,354)
-------------- --------- --------- ----------
-------------- --------- --------- ----------
</TABLE>
The effective income tax rate on pre-tax income before cumulative effect of
changes in accounting principles is higher than the prevailing corporate federal
income tax rate and is summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------------------
1996 1995 1994 1993
--------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Corporate federal income tax rate..................... 35.00% 35.00% 35.00% 35.00%
Differential earnings amount.......................... 4.44 -- 36.68 --
Tax-exempt investment income.......................... (.14) (.24) (1.66) (.59)
Cumulative effect of tax rate change.................. -- -- -- 1.57
Merger expenses....................................... .42 .48 2.29 --
Other items, net...................................... (1.67) 2.03 2.18 2.30
----- ----- ----- -----
Effective tax rate................................ 38.05% 37.27% 74.49% 38.28%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
The differential earnings amount is an equity add-on tax which mutual life
insurance companies are required to pay. The amount is determined annually and
is calculated by comparing the earnings rate of mutual life insurance companies
and certain stock life insurance companies. In certain years, such as 1993 and
1995, the calculations have resulted in negative adjustments with no additional
tax amount to be paid.
The Company's federal income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------------
1996 1995 1994 1993
-------------- --------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current............................................ $ 45,401 $ 44,307 $ 16,862 $ 31,386
Deferred........................................... (6,748) (3,105) 2,602 (10,034)
-------------- --------- --------- ----------
Total federal income tax expense............... $ 38,653 $ 41,202 $ 19,464 $ 21,352
-------------- --------- --------- ----------
-------------- --------- --------- ----------
</TABLE>
F-21
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) FEDERAL INCOME TAXES (CONTINUED)
The significant components of net deferred income tax assets and liabilities
are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------------
1996 1995 1994
-------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred income tax assets:
Policy reserves and policyholder funds................... $ 99,401 $ 106,813 $ 101,509
Policy acquisition costs capitalized for tax............. 29,985 26,588 21,208
Net unrealized depreciation on available-for-sale
securities.............................................. -- -- 11,801
Deferred policy acquisition costs related to unrealized
appreciation............................................ 10,630 30,813 --
Deferred compensation.................................... 10,289 10,134 7,109
Other.................................................... 21,332 23,344 31,422
-------------- ------------ ------------
Total gross deferred income tax assets................. 171,637 197,692 173,049
-------------- ------------ ------------
Deferred income tax liabilities:
Deferred policy acquisition costs........................ (122,522) (124,513) (121,891)
Net unrealized appreciation on available-for-sale
securities.............................................. (22,455) (88,922) --
Deferred policy acquisition costs related to unrealized
depreciation............................................ -- -- (19,636)
Reinsurance receivable................................... (14,894) (23,403) (22,838)
Other.................................................... (7,397) (9,477) (10,166)
-------------- ------------ ------------
Total gross deferred tax liability..................... (167,268) (246,315) (174,531)
-------------- ------------ ------------
Net deferred income tax asset (liability).............. $ 4,369 $ (48,623) $ (1,482)
-------------- ------------ ------------
-------------- ------------ ------------
</TABLE>
The Company is required to establish a "valuation allowance" for any portion
of the deferred tax asset that management believes will not be realized. In the
opinion of management, it is more likely than not that it will realize the
benefit of the deferred tax assets, and, therefore, no such valuation allowance
has been established.
Federal income tax returns for the Company for years through 1987 are closed
to further assessment of taxes. Examinations of federal income tax returns for
1988 and 1989 have been made by the Internal Revenue Service. The Internal
Revenue Service is examining federal income tax returns of the Company for 1990
through 1992. Management believes adequate provisions have been made for any
additional taxes which may become due with respect to open years.
Income taxes paid by the Company totaled $42.0 million, $51.9 million, $14.6
million, and $45.2 million in the nine months ended September 30, 1996, and the
years ended December 31, 1995, 1994, and 1993, respectively.
(7) DEFINED BENEFIT PENSION PLANS
The Company has defined benefit pension plans which cover substantially all
of the Company's employees, as well as employees of certain companies directly
or indirectly owned by the Company. The plans provide for benefits based upon
years of service and the employee's compensation. Information for the Company's
portion of the plans' funded status is not available. The Company has frozen the
defined benefit pension plans effective December 31, 1995, and has recognized
its portion of a curtailment gain amounting to $6.2 million, or $3.1 million
after federal excise taxes, as other revenues in 1995.
F-22
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) DEFINED BENEFIT PENSION PLANS (CONTINUED)
Effective January 1, 1996, the defined benefit pension plans have been replaced
by a defined contribution savings and retirement plan which also replaces the
Company's defined contribution pension plans. The following information presents
the plans' funded status and pension cost as of September 30, 1996, December 31,
1995 (prior to revaluation for curtailment of the plans) and December 31, 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------------
1996 1995 1994
-------------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Actuarial present value of accumulated benefit obligation,
including vested benefits of $44,144; $44,144 and $32,141 in
1996, 1995 and 1994, respectively............................ $ (44,144) $ (45,505) $ (38,750)
-------------- ---------- ----------
-------------- ---------- ----------
Projected benefit obligation for service rendered to
date--includes effect of increase in compensation levels..... $ (44,144) $ (45,505) $ (45,697)
Plans' assets at fair value, primarily consisting of mutual
funds and certificates of deposit............................ 54,882 52,592 47,017
-------------- ---------- ----------
Plans' assets in excess of projected benefit obligations...... 10,738 7,087 1,320
Unrecognized (gain) loss from actual experience difference
from assumed and effects of changes in assumptions........... (4,024) (2,745) 376
Unrecognized prior service cost............................... (222) -- (1,473)
Net unrecognized transition asset............................. (965) -- 54
-------------- ---------- ----------
Prepaid pension cost.......................................... $ 5,527 $ 4,342 $ 277
-------------- ---------- ----------
-------------- ---------- ----------
Weighted average discount rate................................ 7.25% 7.25% 8.00%
-------------- ---------- ----------
-------------- ---------- ----------
Rate of increase in future compensation levels................ n/a 5.50% 5.00%
-------------- ---------- ----------
-------------- ---------- ----------
Expected long-term rate of return on assets................... 8.00% 8.00% 7.50%
-------------- ---------- ----------
-------------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS YEARS ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------------
1996 1995 1994 1993
-------------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Service cost--benefits earned during year............ $ -- $ 1,768 $ 2,325 $ 2,058
Interest cost on projected benefit obligation........ 3,101 3,609 3,282 3,155
Actual return on plan assets......................... (4,281) (3,729) (3,632) (3,769)
Net amortization and deferral........................ (90) (114) (37) 391
Special termination benefits due to early
retirement.......................................... -- -- 1,597 993
------- --------- --------- ---------
Defined benefit pension cost (benefit)........... $ (1,270) $ 1,534 $ 3,535 $ 2,828
------- --------- --------- ---------
------- --------- --------- ---------
Company's portion of net pension cost (benefit)...... $ (954) $ 696 $ 2,578 $ 1,267
------- --------- --------- ---------
------- --------- --------- ---------
</TABLE>
F-23
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) DEFINED BENEFIT PENSION PLANS (CONTINUED)
During 1993, the Company offered an early retirement plan to qualifying
employees based on age and years of service. The Company's portion of the loss
recognized for the years ending December 31, 1994 and 1993, from the curtailment
and special termination benefits for the plan was approximately $1.6 million and
$1.0 million, respectively.
DEFINED CONTRIBUTION PENSION PLANS
The Company has three defined contribution 401(k) plans which cover
substantially all employees. The Company's total contribution under the plans
amounted to $0.6 million, $0.4 million, $0.6 million, and $0.7 million in the
nine months ended September 30, 1996, and the years ended December 31, 1995,
1994, and 1993, respectively. Effective January 1, 1996, the defined
contribution 401(k) plans together with the defined benefit pension plans have
been replaced by a single defined contribution savings and retirement plan.
NONQUALIFIED PENSION PLAN
The Company also has a nonqualified pension plan covering substantially all
of its career and general agents. Accumulated benefits of the plan are unfunded
and have been included in other liabilities at September 30, 1996, December 31,
1995, and December 31, 1994, amounting to $15.4 million, $13.6 million, and
$10.9 million, respectively.
POSTRETIREMENT PLANS
The Company has postretirement benefit plans to provide certain eligible
participants and dependents with certain medical, dental, and life insurance
benefits. As discussed in note 1, the Company adopted SFAS 106 as of January 1,
1993, based on a separate actuarial valuation report. The Company's transition
obligation as of January 1, 1993, amounted to $3.2 million, net of income tax
benefits of $1.7 million, and was recorded as a cumulative effect adjustment to
income. The Company's plan for medical and life insurance benefits is combined
with that of the subsidiaries of AMHC. Information for the Company's individual
funded status for 1995 and 1994 is not available. The following information is
presented on a combined plan basis accompanied by the Company's portion of the
net periodic postretirement benefit expense and sets forth the combined
postretirement benefit plans' funded status:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------
1996 1995 1994
-------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Fully eligible active plan participants.......................... $ 763 $ 491 $ 425
Other active plan participants................................... 1,641 1,716 1,724
Retirees......................................................... 5,745 6,121 5,481
------- --------- ---------
Accumulated postretirement benefit obligation...................... 8,149 8,328 7,630
Unrecognized prior service cost.................................... (1,072) (27) --
Unrecognized (loss) gain........................................... 1,057 (167) 124
------- --------- ---------
Accrued postretirement benefit cost................................ $ 8,134 $ 8,134 $ 7,754
------- --------- ---------
------- --------- ---------
</TABLE>
F-24
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) DEFINED BENEFIT PENSION PLANS (CONTINUED)
Net periodic postretirement benefit expense included the following
components:
<TABLE>
<CAPTION>
NINE MONTHS YEARS ENDED DECEMBER 31,
ENDED
SEPTEMBER 30, -------------------------------
1996 1995 1994 1993
--------------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Service cost................................................ $ 409 $ 248 $ 268 $ 153
Interest cost............................................... 572 586 521 373
Net amortization and deferral............................... 57 5 19 --
Curtailment and special termination benefits................ -- -- -- 613
------- --------- --------- ---------
Net periodic postretirement benefit expense............. $ 1,038 $ 839 $ 808 $ 1,139
------- --------- --------- ---------
------- --------- --------- ---------
Company's portion of net periodic postretirement benefit
expense.................................................... $ 612 $ 639 $ 426 $ 727
------- --------- --------- ---------
------- --------- --------- ---------
</TABLE>
The weighted-average annual assumed rate of increase in the per capita cost
of covered benefits (i.e., health care cost trend rate) for the medical and
dental plan is approximately 9.00 percent, 9.50 percent, and 10.00 percent for
1995, 1994, and 1993, respectively, and is assumed to decrease gradually to 5.50
percent over nine years and remain at that level thereafter. The health care
cost trend rate assumption has a significant effect on the amounts reported. For
example, increasing the assumed health care cost trend rates by one percentage
point in each year would increase the accumulated postretirement benefit
obligation for the medical plan as of December 31, 1995 and 1994, by 7.70
percent and 4.50 percent, respectively, and the aggregate of the service and
interest cost components of net periodic postretirement benefit expense for
1995, 1994, and 1993 by $.06 million, $.02 million, and $.03 million,
respectively, on a combined basis. As of January 1, 1996, the plan was changed
to provide a fixed monthly benefit for medical benefits; accordingly,
information for the health care cost trend rate is not applicable for the nine
months ended September 30, 1996. The weighted-average discount rate used in
determining the accumulated postretirement benefit obligation was 7.25 percent,
7.25 percent, 8.00 percent, and 7.57 percent as of September 30, 1996, December
31, 1995, December 31, 1994, and December 31, 1993, respectively.
(8) RELATED PARTY TRANSACTIONS
The Company pledged bonds and securities with a carrying value of $131
million at September 30, 1996, as collateral for affiliates' indebtedness,
including the collateral pledged for the credit arrangements discussed in note
5.
F-25
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(8) RELATED PARTY TRANSACTIONS (CONTINUED)
The following summarizes transactions of the Company with Lartnec and its
subsidiaries:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------------
1996 1995 1994 1993
-------------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Capital contributions............................... $ 4,463 $ 41,157 $ 4,959 $ 310
Management, administrative, data processing, and
other services fees charged to certain subsidiaries
of Lartnec......................................... 7,508 9,164 8,162 7,500
Interest income from financings to partnerships in
which a subsidiary of Lartnec has an interest...... 4,700 6,000 4,890 4,813
Investments in bonds and accrued interest in Lartnec
and subsidiaries as of December 31................. 8,127 12,868 17,242 20,813
Contribution of joint venture interests and sale of
partnership interests to partnerships in which a
subsidiary of Lartnec has an interest.............. 1,638 10,957 -- --
Purchase of limited partnership interest in which a
subsidiary of Lartnec has an interest.............. 2,160 -- -- --
Investments in partnerships and joint ventures in
which a subsidiary of Lartnec has an interest...... 16,420 9,625 4,870 --
Purchase of investments backed by the assets of a
trust which acquired loans from a subsidiary of
Lartnec............................................ 46,755 -- -- --
Investments in mortgage loans from joint ventures in
which a subsidiary of Lartnec has a partnership
interest at December 31............................ 75,373 63,977 84,344 75,766
Payable to a subsidiary of Lartnec for purchase of
commercial mortgage loans at December 31........... -- 6,520 -- --
Transfer of partnership interests in certain joint
ventures to a subsidiary of Lartnec................ -- 1,697 -- --
Real estate management fees charged by a subsidiary
of Lartnec......................................... 2,026 2,555 1,301 1,811
</TABLE>
(9) REINSURANCE
At September 30, 1996, the Company's maximum retention limit for acceptance
of risk on life insurance was $1 million. The retention limit for certain
policies issued prior to July 1, 1985, was $125,000 and for certain policies
issued after June 30, 1985, and before December 1, 1994, was $250,000. There are
reinsurance agreements with various companies whereby insurance in excess of
these retention limits are reinsured. Insurance in-force ceded to nonaffiliated
companies under risk sharing arrangements at September 30, 1996, December 31,
1995, December 31, 1994, and December 31, 1993, totaled approximately $2,548
million, $2,916 million, $3,265 million, and $3,247 million, respectively.
F-26
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(9) REINSURANCE (CONTINUED)
Total life premiums ceded amounted to $11.3 million, $14.2 million, $13.7
million, and $15.3 million in September 30, 1996 and for the years ended
December 31, 1995, 1994, and 1993, respectively. Total life premiums assumed
amounted to $1.0 million, $4.9 million, $7.9 million, and $8.5 million,
respectively.
To the extent that reinsuring companies are unable to meet obligations under
these agreements, the Company remains liable. To limit the possibility of such
losses, the Company evaluates the financial condition of its reinsurers and
monitors concentration of credit risk.
(10) COMMITMENTS AND CONTINGENCIES
Lartnec had various credit lines and arrangements totaling $115 million at
September 30, 1996. Approximately $110 million was outstanding under these
agreements at September 30, 1996, which are collateralized by Company
investments of approximately $131 million.
The Company has agreed to make loans to newly formed partnerships, of which
$19,600,000 was outstanding as of September 30, 1996.
The Company guarantees the payment of 60 percent of a pool of mortgage loans
and the related interest, previously sold to an unrelated party. The outstanding
balance of such mortgage loans subject to this repayment guarantee at December
31, 1995, was approximately $11 million.
The Company is party to financial instruments in the normal course of
business to meet the financing needs of its customers having risk exposure not
reflected in the balance sheet. These financial instruments include commitments
to extend credit and standby letters of credit. Commitments to extend credit are
agreements to lend to customers. Commitments generally have fixed expiration
dates and may require payment of a fee. Since many commitments expire without
being drawn upon, the total amount of commitments does not necessarily represent
future cash requirements. At December 31, 1995, outstanding commitments to
extend credit totaled approximately $6 million.
AmerUs Life is a defendant in a class action lawsuit which was brought on
August 31, 1995 in the District Court for Travis County, Texas. The complaint,
which seeks unspecified damages, was filed by former policyowners on behalf of
themselves and all similarly situated persons who purchased certain individual
life insurance policies which were underwritten and sold by AmerUs Life within
Texas from and after 1980. The complaint alleges that sales presentations and
policy illustrations misrepresented that premiums would "vanish" after a stated
number of years, without adequate disclosure of the effect of changes in the
policy dividends. AmerUs Life has denied the allegations contained in such
complaint and denies any wrongdoing in connection with such allegations. The
parties have engaged in discovery, but a hearing on certification of the class
has not yet been held.
The parties are engaged in a court-initiated mediation process in the Texas
litigation, and, in light of the uncertainties, hazards and expenses of
litigation, have discussed a number of different settlement approaches,
including a nationwide class settlement of certain market conduct issues for a
substantial block of the Company's traditional whole life policies. Progress in
negotiating such a class settlement appears to have been made, but substantial
unresolved issues remain and no agreement has been reached. Even if such
agreement were reached, the court would have to approve its terms. Should a
settlement satisfactory to the Company not be reached or not be approved, the
Company would continue to vigorously defend against the claims asserted,
including the existence of a legitimate class.
Due to the potential that a settlement may be reached in this case, the
Company has incurred a significant charge to income for the first nine months of
1996. Based upon its current estimates of the
F-27
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) COMMITMENTS AND CONTINGENCIES (CONTINUED)
range of loss at between five and eight million dollars, the Company has
established a reserve of five million dollars. The eventual costs of any
settlement cannot be precisely determined at this time, and may be more or less
than the amount of the range.
A class action lawsuit was also filed in June 1996 in the United States
District Court for the Northern District of California. The complaint alleges
that AmerUs Life breached the terms of certain life and annuity policies, and
breached certain other duties owed to policyowners, when it allegedly passed an
increase in its corporate income taxes (known as the deferred acquisition cost,
or DAC, tax) through to owners of those policies. The plaintiff, an insured
under a universal life policy issued by Central Life, seeks unspecified actual
and punitive damages and injunctive relief on behalf of himself and all
policyowners of AmerUs Life with universal life, term and "blended" life
insurance policies and annuities. AmerUs Life has denied the allegations
contained in such complaint, including the existence of a legitimate class. The
litigation is in the early discovery stage and a hearing on certification of the
class has not yet been scheduled. The litigation is being vigorously defended by
AmerUs Life.
In the ordinary course of business, the Company and subsidiaries are also
engaged in certain other litigation, none of which management believes is
material.
(11) STOCKHOLDER'S EQUITY
Generally, the stockholder's equity of the Company's insurance subsidiaries
available for distribution to the Company are limited to the amounts that the
insurance subsidiaries' net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements; however,
payments of such amounts as dividends may be subject to approval by regulatory
authorities. In 1996, the Company's insurance subsidiaries could distribute
approximately $40 million in the form of dividends to the Company without prior
approval of such regulatory authorities. However, as a result of the spin off,
the Company will not be able to pay additional dividends in the 12-month period
following the Distribution of the Non-Life Insurance Subisidiaries without the
prior approval of the Iowa Commissioner.
The Company made additional contributions to the Non-Life Insurance
Subisidiaries amounting to $4.5 million, $41.2 million, $5.0 million, and $0.3
million in the nine months ended September 30, 1996 and the years ended December
31, 1995, 1994, and 1993, respectively, which have been considered dividends to
AMHC as a result of the Distribution.
(12) STATUTORY ACCOUNTING PRACTICES
The Company's statutory net income was $54.2 million, $49.3 million, $20.8
million and $28.2 million in the nine months ended September 30, 1996 and the
years ended December 31, 1995, 1994, and 1993, respectively.
The Company's statutory surplus and capital was $162.7 million, $155.1
million and $183.6 million at September 30, 1996, December 31, 1995, and
December 31, 1994, respectively.
The pro forma unaudited statutory surplus and capital as of September 30,
1996, after the Reorganization and assuming the Capital Contribution, is as
follows (in millions):
<TABLE>
<CAPTION>
(UNAUDITED)
-------------
<S> <C>
Statutory surplus and capital at September 30, 1996............................. $ 163
Capital Contribution............................................................ (79)
Capital contribution to AmerUs Life............................................. 175
------
Pro forma statutory surplus and capital at September 30, 1996................... $ 259
------
------
</TABLE>
F-28
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(12) STATUTORY ACCOUNTING PRACTICES (CONTINUED)
The Company's insurance subsidiaries are domiciled in Iowa and prepare their
statutory-basis financial statements in accordance with accounting practices
prescribed or permitted by the Iowa Department of Commerce (Iowa Department).
Prescribed statutory accounting practices include state laws, regulations, and
general administrative rules, as well as a variety of publications of the
National Association of Insurance Commissioners (NAIC). Permitted statutory
accounting practices encompass all accounting practices that are not prescribed;
such practices may differ from state to state, may differ from company to
company within a state, and may change in the future. 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 expected to be completed in 1997,
will likely change, to some extent, prescribed statutory accounting practices
and may result in changes to the accounting practices that insurance enterprises
use to prepare their statutory financial statements.
The Company does not utilize any permitted practices in the preparation of
its statutory-basis financial statements which would have a material impact on
statutory surplus.
The Iowa Department imposes minimum risk-based capital requirements on
insurance enterprises that were developed by the National Association of
Insurance Commissioners (NAIC). The formulas for determining the amount of
risk-based capital (RBC) specify various weighting factors that are applied to
financial balances or various levels of activity based on the perceived degree
of risk. Regulatory compliance is determined by a ratio (the Ratio) of the
enterprise's regulatory total adjusted capital, as defined by the NAIC, to its
authorized control level, RBC, as defined by the NAIC. Enterprises below
specific trigger points or ratios are classified within certain levels, each of
which requires specified corrective action.
Each of the Company's insurance subsidiaries has a Ratio that is at least
400 percent of the minimum RBC requirements; accordingly, the Company's
subsidiaries meet the RBC requirements.
(13) FINANCIAL INSTRUMENTS
The Company utilizes a variety of off-balance-sheet financial instruments as
part of its efforts to hedge and manage fluctuations in the market value of its
portfolio of available-for-sale securities, attributable to changes in general
interest rate levels, and to manage duration mismatch of assets and liabilities.
Those instruments include interest rate exchange agreements (swaps, caps and
swaptions) and involve elements of credit and market risks in excess of the
amounts recognized in the accompanying financial statements at a given point in
time. The contract or notional amounts of those instruments reflect the extent
of involvement in the various types of financial instruments.
The Company's exposure to credit risk is the risk of loss from a
counterparty failing to perform according to the terms of the contract. That
exposure includes settlement risk (i.e., the risk that the counterparty defaults
after the Company has delivered funds or securities under terms of the contract)
that would result in an accounting loss and replacement cost risk (i.e., the
cost to replace the contract at current market rates should the counterparty
default prior to settlement date). To limit exposure associated with
counterparty nonperformance on interest rate exchange agreements, the Company
enters into master netting agreements with its counterparties.
The credit risk on all financial instruments, whether on or off the balance
sheet, is controlled through an on-going credit review, approval, and monitoring
process. The Company determines, on an individual counterparty basis, the need
for collateral or other security to support financial instruments with credit
risk and establishes individual and aggregate counterparty exposure limits.
F-29
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) FINANCIAL INSTRUMENTS (CONTINUED)
The Company's outstanding derivative positions shown in notional or contract
amounts, along with their carrying value and estimated fair values, are
summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------
NOTIONAL CARRYING FAIR
AMOUNT VALUE VALUE
----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest rate caps................................................. $ 500,000 $ 4,498 $ 4,583
Swaptions.......................................................... 255,000 5,383 5,429
Receive fixed...................................................... 150,000 5,823 5,823
Pay fixed.......................................................... 75,000 187 187
----------- --------- ---------
$ 980,000 $ 15,891 $ 16,022
----------- --------- ---------
----------- --------- ---------
<CAPTION>
DECEMBER 31, 1995
---------------------------------
NOTIONAL CARRYING FAIR
AMOUNT VALUE VALUE
----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest rate caps................................................. $ 450,000 $ 4,112 $ 4,110
Received fixed..................................................... 150,000 11,887 11,887
Pay fixed.......................................................... 150,000 (3,392) (3,392)
----------- --------- ---------
$ 750,000 $ 12,607 $ 12,605
----------- --------- ---------
----------- --------- ---------
</TABLE>
There were no material derivative positions at December 31, 1994.
INTEREST RATE EXCHANGE AGREEMENTS
The Company enters into interest rate exchange agreements to reduce and
manage interest rate risk associated with individual assets and liabilities and
its overall aggregate portfolio. The interest rate swap agreements, which expire
between 1999 and 2001, generally involve the exchange of fixed and floating rate
interest payments, without an exchange of the underlying principal. The interest
rate cap agreements, which expire between 1997 and 2001, involve the payment of
a maximum fixed interest rate when an indexed rate exceeds that fixed rate.
Swaption agreements, which expire between 1999 and 2002, involve the right to
enter into a swap transaction at a pre-specified price. These agreements are
used in conjunction with interest rate caps to protect against rising rates. The
amounts to be received or paid pursuant to those agreements are accrued and
recognized in the accompanying consolidated statements of income through an
adjustment to investment income over the life of the agreements. The net effect
on income from amortization and interest paid or received was an increase of
$0.9 million in the nine months ended September 30, 1996 and $1.5 million for
1995. There were no material effects in 1994 and 1993. Gains or losses realized
on closed or terminated agreements accounted for as hedges are deferred and
amortized to investment income on a constant yield basis over the shorter of the
life of the agreements or the expected remaining life of the underlying assets
or liabilities. There was $0.5 million of deferred gains on interest rate
exchange agreements as of September 30, with no deferred gains as of December
31, 1995, 1994, and 1993.
F-30
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) FINANCIAL INSTRUMENTS (CONTINUED)
The following table shows unrealized gains and losses on derivative
positions.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------------------------------------
TOTAL NET
NOTIONAL UNREALIZED UNREALIZED UNREALIZED
VALUE GAINS LOSSES GAINS (LOSSES)
----------- ----------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Receive fixed................................... $ 150,000 $ 4,295 $ -- $ 4,295
Pay fixed....................................... 75,000 187 -- 187
Interest rate caps.............................. 500,000 -- 1,552 (1,552)
Swaptions....................................... 255,000 -- -- --
----------- ----------- ----------- --------------
$ 980,000 $ 4,482 $ 1,552 $ 2,930
----------- ----------- ----------- --------------
----------- ----------- ----------- --------------
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------
TOTAL NET
NOTIONAL UNREALIZED UNREALIZED UNREALIZED
VALUE GAINS LOSSES GAINS (LOSSES)
----------- ----------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Received fixed.................................. $ 150,000 $ 11,887 $ -- $ 11,887
Pay fixed....................................... 150,000 -- 3,392 (3,392)
Interest rate caps.............................. 450,000 183 2,518 (2,335)
----------- ----------- ----------- --------------
$ 750,000 $ 12,070 $ 5,910 $ 6,160
----------- ----------- ----------- --------------
----------- ----------- ----------- --------------
</TABLE>
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap and interest rate swap agreements. The
Company does not anticipate nonperformance by any of these counterparties. The
credit risk associated with such agreements is minimized by purchasing such
agreements from financial institutions with long-standing, superior performance
records. The amount of such exposure is essentially their replacement cost,
which is approximated by the unrealized gains in such contracts.
The Company has no current exposure to the counterparty when a contract
contains an unrealized loss.
F-31
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) FINANCIAL INSTRUMENTS (CONTINUED)
MATURITY SCHEDULE BY YEAR FOR DERIVATIVE PRODUCTS
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001 2002
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive fixed swaps:
Notional amount (in thousands)......... $ 150,000
Weighted average:
Receive rate........................... 7.86% 7.86% 7.86% 7.86%
Pay rate (A)........................... 5.63% 5.63% 5.63% 5.63%
Pay fixed swaps:
Notional amount (in thousands)......... $ 75,000
Weighted average:
Receive rate(A)........................ 5.63% 5.63% 5.63% 5.63% 5.63% 5.63%
Pay rate............................... 6.63% 6.63% 6.63% 6.63% 6.63% 6.63%
Total weighted average rates on swaps:
Receive rate........................... 7.11% 7.11% 7.11% 7.11% 5.63% 5.63%
Pay rate............................... 5.96% 5.96% 5.96% 5.96% 6.63% 6.63%
Interest rate caps
Notional amount (in thousands)......... $ 25,000 $ 125,000 $ 300,000 $ 50,000
Swaptions
Notional amount (in thousands)......... $ 50,000 $ 105,000 $ 100,000
Total notional value of swaps, caps and
swaptions (in thousands)................ $ 25,000 $ 325,000 $ 300,000 $ 230,000 $ 100,000
</TABLE>
- ------------------
(A) The actual variable rates in the agreements are based on three-month LIBOR,
and the table assumes that such rates will remain constant at September 30,
1996 levels. To the extent that actual rates change, the variable interest
rate information will change accordingly.
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Values of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether
recognized or not recognized in a company's balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using discounted cash flow or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rates and estimates of the amount and
timing of future cash flows. SFAS 107 excludes certain insurance liabilities and
other non-financial instruments from its disclosure requirements. The fair value
amounts presented herein do not include an amount for the value associated with
customer or agent relationships, the expected interest margin (interest earnings
over interest credited) to be earned in the future on investment-type products,
or other intangible items. Accordingly, the aggregate fair value amounts
presented herein do not necessarily represent the underlying value of the
Company; likewise, care should be exercised in deriving conclusions about the
Company's business or financial condition based on the fair value information
presented herein.
The Company closely monitors the level of its insurance liabilities, the
level of interest rates credited to its interest sensitive products, and the
assumed interest margin provided for within the pricing structure of its other
products. Those amounts are taken into consideration in the Company's overall
management of interest rate risk that attempts to minimize exposure to changing
interest rates through the matching of investment maturities with amounts
expected to be due under insurance contracts. As such, the Company believes that
it has reduced the volatility inherent in its fair value adjusted policyowners'
equity, although such volatility will not be reduced completely. The Company has
used discount rates in the determination of fair values for its liabilities that
are consistent with market yields for related assets. The use of the asset
market yield is consistent with management's opinion that the risks inherent in
the Company's asset and liability portfolios are similar, and the fact that fair
values for both assets and
F-32
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
liabilities generally will react in much the same manner during periods of
interest rate changes. However, that assumption might not result in fair values
that are consistent with values obtained through an actuarial appraisal of the
Company's business or values that might arise in a negotiated transaction.
The presentation on the following page reflects fair values for those
instruments specifically covered by SFAS 107, along with fair value amounts for
those traditional insurance liabilities for which disclosure is permitted but
not required; the fair values for all other assets and liabilities have been
reported at their carrying amounts.
VALUATION METHODS AND ASSUMPTIONS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash, short-term investments, policy loans, accrued investment income:
the carrying amounts for these instruments approximate their fair
values.
Fixed maturities and equity securities: fair values for bonds are based
on quoted market prices or dealer quotes. If a quoted market price is
not available, fair value is estimated using values obtained from
independent pricing services or, in the case of private placements, are
estimated by discounting expected future cash flows using a current
market rate applicable to the yield, credit quality, and maturity of the
investments. The fair values for preferred and common stocks are based
on quoted market prices.
Mortgage loans on real estate: for all performing fixed interest rate
loans, the estimated net cash flows to maturity were discounted to
derive an estimated market value. The discount rate used was based on
the individual loan's remaining weighted average life and a basis point
spread based on the market conditions for the type of loan and credit
quality. These spreads were over the September 30, 1996, United States
treasury yield curve. Performing variable rate commercial loans and
residential loans were valued at the current outstanding balance. Loans
which have been restructured, are in foreclosure, are significantly
delinquent, or are to affiliates were valued primarily at the lower of
the estimated net cash flows to maturity discounted at a market rate of
interest or the current outstanding principal balance.
Hedging instruments: fair values for derivative securities are based on
pricing models or formulas using current assumptions and are classified
as other assets or other liabilities.
Policy reserves: fair values of the Company's liabilities under
contracts not involving significant mortality or morbidity risks
(principally, annuities) are stated at the cost the Company would incur
to extinguish the liability; i.e., the cash surrender value.
Debt: fair values for debt are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rate for
similar types of borrowing arrangements.
The carrying amounts of other financial assets, dividends payable to
policyowners, and policy reserves including significant mortality or
morbidity risks approximate their fair values.
F-33
<PAGE>
AMERUS LIFE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's significant financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
SEPTEMBER 30, 1996 1995 1994
---------------------- ---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Financial assets:
Securities available-for-sale:
Fixed maturity................... $2,297,571 $2,297,571 $3,142,096 $3,142,096 $2,566,768 $2,566,768
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Equity securities................ $ 74,575 $ 74,575 $ 109,675 $ 109,675 $ 178,770 $ 178,770
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Short-term investments........... $ 12,002 $ 12,002 $ 39,353 $ 39,353 $ 8,529 $ 8,529
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Mortgage loans on real estate...... $ 260,233 $ 278,827 $ 353,597 $ 369,706 $ 447,663 $ 431,812
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Interest rate swaps:
Net receivable position.......... $ 5,823 $ 5,823 $ 11,887 $ 11,887 $ -- $ --
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Net payable position............. $ 187 $ 187 $ (3,392) $ (3,392) $ (1,819) $ (1,819)
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Interest rate caps................... $ 4,498 $ 4,583 $ 6,445 $ 4,110 $ 3,648 $ 3,626
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Swaptions............................ $ 5,383 $ 5,429 $ -- $ -- $ -- $ --
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Financial liabilities--policy
reserves for annuities.............. $1,433,003 $1,397,390 $1,524,801 $1,493,847 $1,575,131 $1,543,129
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Debt............................... $ 45,055 $ 45,055 $ 36,461 $ 36,461 $ 34,292 $ 34,292
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
(15) UNAUDITED PRO FORMA ADJUSTMENT FOR THE CAPITAL CONTRIBUTION
Prior to the Offerings, the Company made the Capital Contribution of certain
assets and liabilities having a net book value of $79.0 million as follows
(dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
PRO FORMA PRO FORMA ----------------
AS ADJUSTED ADJUSTMENT FOR
FOR THE THE CAPITAL
CAPITAL CONTRIBUTION
CONTRIBUTION --------------
-------------- (UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C>
Fixed maturity securities...................................... $ 2,294,031 $ (3,540) $ 2,297,571
-------------- -------------- ----------------
-------------- -------------- ----------------
Equity securities.............................................. $ 73,897 $ (678) $ 74,575
-------------- -------------- ----------------
-------------- -------------- ----------------
Mortgage loans on real estate.................................. $ 250,484 $ (9,749) $ 260,233
-------------- -------------- ----------------
-------------- -------------- ----------------
Real estate.................................................... $ 10,481 $ (29,531) $ 40,012
-------------- -------------- ----------------
-------------- -------------- ----------------
Property and Equipment......................................... $ 4,600 $ (8,724) $ 13,324
-------------- -------------- ----------------
-------------- -------------- ----------------
Checks drawn in excess of bank balances........................ $ 43,811 $ (35,500) $ 8,311
-------------- -------------- ----------------
-------------- -------------- ----------------
Debt........................................................... $ 36,333 $ 8,722 $ 45,055
-------------- -------------- ----------------
-------------- -------------- ----------------
Stockholder's Equity........................................... $ 433,394 $ (79,000) $ 512,394
-------------- -------------- ----------------
-------------- -------------- ----------------
</TABLE>
Earnings per share have been computed on a pro forma basis by giving
retroactive effect to the issuance of 17 million shares of Class A common stock
and 5 million shares of Class B common stock as if all such shares had been
issued at the beginning of the respective periods and by giving retroactive
effect to the Capital Contribution.
F-34
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Shareholder have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Goldman, Sachs
& Co., ABN AMRO Chicago Corporation, Donaldson, Lufkin & Jenrette Securities
Corporation and Salomon Brothers Inc are acting as representatives, has
severally agreed to purchase from the Company and the Selling Shareholder, the
respective number of shares of Class A Common Stock set forth opposite its name
below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
CLASS A
COMMON
UNDERWRITER STOCK
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
Goldman, Sachs & Co........................................................................ 805,549
ABN AMRO Chicago Corporation............................................................... 805,547
Donaldson, Lufkin & Jenrette Securities Corporation........................................ 805,547
Salomon Brothers Inc....................................................................... 805,547
Alex. Brown & Sons Incorporated............................................................ 154,000
Conning & Company.......................................................................... 75,000
Dain Bosworth Incorporated................................................................. 75,000
Dean Witter Reynolds Inc................................................................... 154,000
A.G. Edwards & Sons, Inc................................................................... 154,000
EVEREN Securities, Inc..................................................................... 154,000
Fahnestock & Co. Inc....................................................................... 75,000
Fox-Pitt, Kelton Inc....................................................................... 75,000
Janney Montgomery Scott Inc................................................................ 75,000
Edward D. Jones & Co., L.P................................................................. 75,000
Ladenburg, Thalmann & Co. Inc.............................................................. 75,000
Principal Financial Securities, Inc........................................................ 75,000
The Robinson-Humphrey Company, Inc......................................................... 75,000
Sandler O'Neill & Partners, L.P............................................................ 75,000
Stephens Inc............................................................................... 75,000
-----------
Total.................................................................................... 4,663,190
-----------
-----------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all the shares offered hereby, if
any are taken.
The Underwriters propose to offer the shares of Class A Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
initial public offering price less a concession of $0.69 per share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $0.10 per share to certain brokers and dealers. After the shares of Class A
Common Stock are released for sale to the public, the offering price and other
selling terms may from time to time be varied by the representatives.
The Company and the Selling Shareholder have granted the Underwriters an
option exercisable for 30 days after the date of this Prospectus to purchase up
to an aggregate of 699,478 additional shares of Class A Common Stock solely to
cover over-allotments, if any. If the Underwriters exercise their over-allotment
option, the Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage thereof that the number of shares
to be purchased by each of them, as shown in the foregoing table, bears to the
4,663,190 shares of Class A Common Stock offered hereby.
The Company and the Selling Shareholder have agreed that, during the period
beginning from the date of this Prospectus and continuing to and including the
date 180 days after the date of this Prospectus, they will not offer, sell,
contract to sell or otherwise dispose of any securities of the Company (other
than pursuant to employee stock option plans existing on the date of this
Prospectus) which are
U-1
<PAGE>
substantially similar to the shares of Class A Common Stock, including but not
limited to any securities that are convertible into or exchangeable for, or that
represent the right to receive, Class A Common Stock or any such substantially
similar securities, without the prior written consent of Goldman, Sachs & Co.,
except for the shares of Class A Common Stock offered in connection with this
Public Offering.
The representatives of the Underwriters have informed the Company and the
Selling Shareholder that they do not expect sales to accounts over which the
Underwriters exercise discretionary authority to exceed five percent of the
total number of shares of Class A Common Stock offered by them.
Goldman, Sachs & Co. and ABN AMRO Chicago Corporation have each from time to
time performed investment banking services for the Company and have received
fees in connection with such services. Goldman, Sachs & Co. are sole
underwriters of the Preferred Offering. Jack Wing, a director of the Company, is
Chairman of ABN AMRO Chicago Corporation.
Certain partners, managing directors, officers and other representatives of
the Underwriters who are policyowners may have been eligible to participate in
the Subscription Offering. See "The Subscription Offering."
Prior to the Offerings, there has been no public market for the shares of
Class A Common Stock. The initial public offering price was negotiated between
the Company and the Selling Shareholder and the representatives. Among the
factors considered in determining the initial public offering price of the Class
A Common Stock, in addition to prevailing market conditions, was AmerUs Life's
historical performance, estimates of the business potential and earnings
prospects of the Company, an assessment of the Company's management and the
consideration of these factors in relation to market valuations of companies in
related businesses.
The Class A Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "AMRS."
The Company, the Selling Shareholder and AmerUs Life have agreed to
indemnify the several Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
U-2
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO ITS DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Available Information.............................. 2
Prospectus Summary................................. 4
Risk Factors....................................... 13
The Company........................................ 18
The Reorganization and Distribution of the Non-Life
Insurance Subsidiaries............................ 18
The Subscription Offering.......................... 23
Use of Proceeds.................................... 23
Market for Common Stock............................ 24
Dividend Policy.................................... 24
Capitalization..................................... 25
Selected Consolidated Financial and Operating
Data.............................................. 26
Unaudited Pro Forma Condensed Consolidated
Financial Statements.............................. 28
Organizational Structure........................... 35
Management's Discussion and Analysis of Results of
Operations and Financial Condition................ 36
Business........................................... 53
Supervision and Regulation......................... 76
Management......................................... 79
Management Compensation............................ 82
Certain Transactions and Relationships............. 90
Ownership of Common Stock.......................... 96
Description of the Capital Stock................... 97
Certain Provisions of the Articles of Incorporation
and Bylaws of the Company......................... 100
Shares Eligible for Future Sale.................... 103
Validity of Shares................................. 103
Experts............................................ 103
Glossary of Certain Insurance and Other Defined
Terms............................................. 104
Index to Financial Statements...................... F-1
Underwriting....................................... U-1
</TABLE>
THROUGH AND INCLUDING FEBRUARY 22, 1997 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
4,663,190 SHARES
AMERUS LIFE HOLDINGS, INC.
CLASS A COMMON STOCK
(NO PAR VALUE)
---------------
PROSPECTUS
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GOLDMAN, SACHS & CO.
ABN AMRO CHICAGO CORPORATION
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SALOMON BROTHERS INC
REPRESENTATIVES OF THE UNDERWRITERS
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