<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
Annual Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998 Commission File Number: 0-21459
AMERUS LIFE HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
699 Walnut Street
Des Moines, Iowa 50309-3948
(Address of principal executive offices, including zip code)
IOWA 42-1459712
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Registrant's telephone number, including area code (515) 362-3600
------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange on Which Registered
- -------------- ------------------------------------
Class A Common Stock (no par value) New York Stock Exchange
7.00% Adjustable Conversion-rate Equity Security Units
issued by AmerUs Capital II, a subsidiary trust New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
Title of each class
8.85% Capital Securities, Series A issued
by AmerUs Capital I, a subsidiary trust
Class A Common Stock Warrants
6.95% Senior Notes
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. /x/ yes / / no
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. /x/
Aggregate market value of voting stock held by non-affiliates of the Registrant
as of March 2, 1999: $271,362,966.
Number of shares outstanding of each of the Registrant's classes of common stock
on March 2, 1999 was as follows: Class A, Common Stock 25,434,573 shares
Class B, Common Stock 5,000,000 shares
DOCUMENTS INCORPORATED BY REFERENCE
Notice of 1999 Annual Meeting of Shareholders and Proxy Statement
(incorporated into Part III)
<PAGE> 2
TABLE OF CONTENTS
Part I
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Item 1. Business ..........................................................2
Item 2. Properties .......................................................18
Item 3. Legal Proceedings.................................................19
Item 4. Submission of Matters to a Vote of Security Holders...............20
Part II
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ..............................................21
Item 6. Selected Financial Data ..........................................24
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition................................27
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.......................................................59
Item 8. Financial Statements and Supplementary Data.......................61
Item 9. Changes in and disagreements with Accountants on
Accounting and Financial Disclosure ..............................62
Part III
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Item 10. Directors and Executive Officers of the Registrant................62
Item 11. Executive Compensation ..........................................62
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................................62
Item 13. Certain Relationships and Related Transactions ...................62
Part IV
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Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ..............................................62
Index to Exhibits...........................................................63
Signatures .................................................................70
Index to Consolidated Financial Statements ................................F-1
Index to Consolidated Financial Statement Schedules........................S-1
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<PAGE> 3
SAFE HARBOR STATEMENT
All statements, trend analyses and other information contained in this
report relative to markets for the Company's products and trends in the
Company's operations or financial results, as well as other statements including
words such as "anticipate", "believe", "plan", "estimate", "expect", "intend",
and other similar expressions, constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors which may cause actual results to be materially different from those
contemplated by the forward-looking statements. Such factors include, among
other things: (1) general economic conditions and other factors, including
prevailing interest rate levels and stock market performance, which may affect
the ability of the Company to sell its products, the market value of the
Company's investments and the lapse rate and profitability of policies; (2) the
Company's ability to achieve anticipated levels of operational efficiencies and
cost-saving initiatives and to meet cash requirements based upon projected
liquidity sources; (3) customer response to new products, distribution channels
and marketing initiatives; (4) mortality, morbidity, and other factors which may
affect the profitability of the Company's insurance products; (5) changes in the
Federal income tax laws and regulations which may affect the relative tax
advantages of some of the Company's products; (6) increasing competition in the
sale of insurance and annuities; (7) regulatory changes or actions, including
those relating to regulation of insurance products and of insurance companies;
(8) ratings assigned to the Company and its subsidiaries by independent rating
organizations which the Company believes are particularly important to the sale
of its products; (9) the Company's ability to successfully complete its Year
2000 remediation efforts and (10) unanticipated litigation. There can be no
assurance that other factors not currently anticipated by management will not
also materially and adversely affect the Company's results of operations.
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<PAGE> 4
PART I
ITEM 1. BUSINESS
GENERAL
AmerUs Life Holdings, Inc. (the Company) is an insurance holding
company engaged through its subsidiaries in the business of marketing,
underwriting and distributing a broad range of individual life insurance and
annuity products to individuals and businesses in 49 states, the District of
Columbia and the U.S. Virgin Islands. The Company was formed in 1996 as a result
of the creation of the first mutual insurance holding company in the United
States, the American Mutual Holding Company (AMHC). AMHC owns 100% of AmerUs
Group Co. (AmerUs Group), the Company's controlling shareholder. The Company's
principal subsidiaries are AmerUs Life Insurance Company (AmerUs Life), Delta
Life Corporation (Delta) and AmVestors Financial Corporation (AmVestors).
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 into Central Life Assurance
Company. On June 30, 1996, American Mutual Life Insurance Company was converted
into a stock life insurance company pursuant to a plan of reorganization
involving the formation of AMHC (the Reorganization) and its name was changed to
AmerUs Life. AmerUs Life is licensed to do business in all states except
Connecticut, Maine, New Hampshire, and New York.
On October 23, 1997, the Company acquired all of the outstanding
capital stock of Delta for approximately $165 million in cash (the Delta
Acquisition). The principal asset of Delta is its wholly-owned subsidiary, Delta
Life and Annuity Company (Delta Life), an Iowa domiciled life insurance company
formed in 1955 that is licensed in the District of Columbia and in all states
except New York.
On December 19, 1997, the Company acquired AmVestors in a stock
exchange valued at approximately $350 million (the AmVestors Acquisition).
AmVestors' principal operating subsidiaries are American Investors Life
Insurance Company, Inc. (American), a Kansas domiciled life insurance company
licensed
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<PAGE> 5
in 48 states and the District of Columbia; and Financial Benefit Life
Insurance Company (FBL), a Kansas domiciled life insurance company doing
business in 40 states, the District of Columbia and the U.S. Virgin Islands.
The Company also participates in a joint venture with Ameritas Life
Insurance Corp. (Ameritas) (Ameritas Joint Venture) through AmerUs Life's 34%
ownership interest in AMAL Corporation, a Nebraska corporation (AMAL). AMAL's
operations are conducted through Ameritas Variable Life Insurance Company
(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. AIC is a
registered broker-dealer which is licensed to do business in all states except
New York. AmerUs Life's partner in the Ameritas Joint Venture, Ameritas, is a
Nebraska mutual life insurance company which has been in existence for more than
100 years.
The Company has two operating segments: Life Insurance and Annuities.
Products generally distinguish a segment. The life insurance segment's primary
product offerings consist of whole life, universal life and term life insurance
policies. The annuity segment product offerings consist primarily of fixed
annuities.
Additional information concerning the Company's segments may be found
in "Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition" and Note 18 of the Consolidated Financial Statements that
begin on page F-1, both of which are incorporated herein by reference.
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LIFE INSURANCE SEGMENT
Products
Over the last three years, the Company's individual life insurance
premiums have consisted of approximately 70% from traditional life insurance
products and 30% from universal life insurance products, as set forth in the
following table:
<TABLE>
<CAPTION>
Sales Activity by Product
For the Year Ended
December 31,
------------------------------------------
($ in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Traditional life insurance:
Participating whole life $17,943 $16,843 $18,253
Term Life 6,111 4,751 2,565
Universal Life 10,005 8,916 7,533
------- ------- -------
Total (A) $34,059 $30,510 $28,351
======= ======= =======
</TABLE>
(A) Direct first year annualized premiums.
TRADITIONAL LIFE INSURANCE PRODUCTS. The Company's traditional life
insurance products have a long history of being highly competitive within the
industry. 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. 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.
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Term life insurance provides 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. Term life
insurance is a highly competitive and quickly changing market. During the first
quarter of 1998, the Company introduced three new term products which
contributed to a 27% increase in first year annualized premiums for term
insurance sales from 1997 to 1998. The Company introduced new 10 and 20 year
term products during 1997 that resulted in an 85% increase in first year
annualized premiums for term insurance sales from 1996 to 1997.
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. 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, 1998, sales of participating whole life
and term life insurance products represented 53% and 18%, respectively, of first
year annualized premiums for all individual life insurance products sold by the
Company.
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
and for expenses. The universal life policy provides flexibility as to the
amount and timing of premium payments and the level of death benefits provided.
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. During 1997 a new second to die
universal life product for the estate planning market was introduced, enhancing
universal life production in 1998 and 1997. The weighted average crediting rate
for universal life insurance liabilities was 6.08% for the year 1998, 6.23% for
the year 1997 and 6.27% for the year 1996. For the year ended December 31, 1998,
sales of universal life insurance products
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<PAGE> 8
represented 29% of first year annualized premiums for all individual life
insurance products sold by the Company.
The following table sets forth the Company's collected individual life
premiums, including collected individual life premiums associated with the
Closed Block, for the periods indicated:
<TABLE>
<CAPTION>
Collected Individual Life
Premiums by Product
For the Year Ended December 31,
------------------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Individual life premiums
collected:
Traditional life:
First year & single $ 82,219 $ 74,132 $ 70,621
Renewal 173,079 166,847 162,168
-------- -------- --------
Total 255,298 240,979 232,789
Universal life:
First year & single 18,987 14,089 14,667
Renewal 73,410 73,779 75,632
-------- -------- --------
Total 92,397 87,868 90,299
Total individual life 347,695 328,847 323,088
Reinsurance assumed 1,224 1,502 1,425
Reinsurance ceded (14,224) (13,155) (12,974)
-------- -------- --------
Total individual life, net of
reinsurance $334,695 $317,194 $311,539
======== ======== ========
</TABLE>
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<PAGE> 9
The following table sets forth information regarding the Company's life
insurance in force for each date presented:
<TABLE>
<CAPTION>
Life Insurance in Force
As of December 31,
--------------------------------------
1998 1997 1996
---- ---- ----
($ in thousands)
<S> <C> <C> <C>
Individual life insurance:
Traditional
Number of policies 254,033 258,087 255,441
GAAP life reserves $ 1,554,681 $ 1,473,240 $ 1,207,656
Face amounts $19,559,000 $18,077,000 $16,882,000
Universal life
Number of policies 115,056 117,824 120,277
GAAP life reserves $ 897,159 $ 867,988 $ 820,250
Face amounts $12,153,000 $12,115,000 $12,206,000
Total life insurance
Number of policies 369,089 375,911 375,718
GAAP life reserves $ 2,451,840 $ 2,341,228 $ 2,027,906
Face amounts $31,712,000 $30,192,000 $29,088,000
Group life insurance (A):
Number of lives 256 20,974 29,801
Face amounts $ 7,000 $ 602,000 $ 815,000
</TABLE>
(A) 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.
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<PAGE> 10
Distribution Systems
The Company's target customers are individuals in the middle and upper
income brackets and small businesses. The Company markets its life insurance
products on a national basis primarily through a Preferred Producer agency
system and a Personal Producing General Agent (PPGA) distribution system. The
Company currently employs ten regional vice presidents who are responsible for
supervising the Preferred Producer agencies and/or PPGA agents within their
assigned geographic regions.
Under the Preferred Producer agency system, a contractual arrangement
is entered into with the Preferred Producer general agent for the sale of
insurance products by the Preferred Producer agents and brokers assigned to the
Preferred Producer general agent's agency. The Preferred Producer general agents
are primarily compensated by receiving a percentage of the first year
commissions paid to Preferred Producer agents and brokers in the Preferred
Producer general agent's agency and by renewal commissions on premiums
subsequently collected on that business. In addition, the Preferred Producers
receive certain fringe benefits and other allowances.
The Preferred Producer 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 Preferred Producer agents and brokers
in their agency. Currently, the Company has 43 Preferred Producer general agents
in 23 states, through which approximately 700 Preferred Producer agents sell the
Company's products. While Preferred Producer agents in the Preferred Producer
agency system are non-exclusive, 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 Preferred Producer general agency accounts for more than 10% of the
total first year commissions paid by the Company.
Preferred Producer agents are also independent contractors and are
primarily compensated by commissions on first year and renewal premiums
collected on business written by them plus certain fringe benefits and other
allowances. In addition, Preferred Producer agents can earn bonus commissions,
graded by production and persistency on their business.
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<PAGE> 11
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. The PPGA system is
comprised of approximately 600 PPGA's, with approximately 1,100 agents.
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.
During 1998, the Company developed programs to sell life insurance
through select banks and brokerages. These alternative distribution programs are
in the early stages of development and expansion. As of December 31, 1998, 12
banks and 8 brokerages were under contract to sell the Company's life products.
ANNUITY SEGMENT
Products
The Company's annuity premiums consisted of approximately 95% from
fixed annuity products and 5% from equity-index fixed annuity products in 1998.
Annuity premiums increased significantly in 1998 due to the Company's
acquisition of Delta and AmVestors in the fourth quarter of 1997. The following
table sets forth annuity collected premiums for the periods indicated:
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<PAGE> 12
<TABLE>
<CAPTION>
Collected Premiums by Product
For the Year Ended December 31,
-------------------------------------------
(in thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Fixed annuities $756,106 $70,298 $81,992
Equity-index fixed annuities 36,418 11,755 -
-------- ------- -------
Total 792,524 82,053 81,992
Reinsurance Ceded (1,247) (2,276) (544)
-------- ------- -------
Total annuities, net of
reinsurance $791,277 $79,777 $81,448
======== ======= =======
</TABLE>
FIXED ANNUITY PRODUCTS. The Company offers a broad portfolio of fixed
annuity products. Annuities provide for the payment of periodic benefits over 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 offers a variety of interest rate crediting strategies on
its fixed annuity products. These strategies include initial interest crediting
rates with guarantees for periods of one to five years. Following the initial
guarantee period, the Company may adjust the credited interest rate annually,
subject to the minimum interest rates specified in the contracts. Such minimum
guarantee rates currently range from 3% to 4%. The Company also offers an
interest rate crediting strategy that credits the policy with a return generally
based upon the interest rates it earns on assets supporting the respective
policies less management fees.
EQUITY-INDEX FIXED ANNUITIES. The Company offers two single premium
equity index annuity products that are based either on Standard & Poor's 500
Composite Stock Price Index - Registered Trademark - or a basket of five
international stock market indices from France, Germany, Japan, Switzerland and
the United Kingdom. Earnings credited to these products generally are linked to
increases in the anniversary date values of the applicable index,
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<PAGE> 13
less management fees. In October of 1998, the Company suspended the sale of the
international index annuity due to the volatility in the cost of options
purchased to support this product.
The following table sets forth information regarding annuities in force
for each date presented:
<TABLE>
<CAPTION>
Annuities in Force
As of December 31,
------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Deferred fixed annuities
Number of policies 179,756 191,803 56,467
GAAP reserves $5,990,580 $5,974,598 $1,363,484
Equity-index fixed annuities
Number of policies 4,578 5,079 -
GAAP reserves $ 224,674 $ 159,622 $ -
Total annuities
Number of policies 184,334 196,882 56,467
GAAP reserves $6,215,254 $6,134,220 1,363,484
</TABLE>
Distribution Systems
The Company directs its marketing efforts towards the asset
accumulation, conservative savings, and retirement markets. The Company markets
its annuity products on a national basis through networks of independent agents.
The independent agents are supervised by regional vice presidents and regional
directors or Independent Marketing Organizations (IMOs).
The regional vice presidents and regional directors are primarily
responsible for recruiting agents and servicing those agents in an effort to
promote the Company's products. The regional vice presidents' and regional
directors' marketing support activities include informational mailings,
seminars, and case consultations, all of which are designed to educate agents
about annuities in general and the Company in particular. Regional vice
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<PAGE> 14
presidents and regional directors are paid a base salary plus incentive
compensation based on the business produced by agents within their territory.
There are currently six regional vice presidents and regional directors covering
the southeastern, western, southwestern and midwestern regions of the United
States.
The Company's IMOs consist of approximately 60 contracted organizations
and two wholly-owned organizations. The IMOs are responsible for recruiting,
servicing and educating agents in an effort to promote the Company's products.
The IMOs receive an override commission based on the business produced by their
agents.
The Company currently has approximately 8,900 independent agents
licensed to sell its products. The Company also maintains contact with
approximately 53,000 agents that are not currently licensed, but have either
sold the company's annuities in the past or have expressed an interest in doing
so. These agents continue to receive periodic mailings related to interest rate
and commission changes, and new product introductions, and are reappointed as
required in order to represent the Company in selling its products. However, in
order to save costs associated with reappointing agents, the Company does not
automatically relicense an agent that has not written business for twelve
months.
No single agent accounted for more than 1.4% of the Company's annuity
sales in 1998. The Company does not have exclusive agency agreements with its
agents and management believes most of these agents sell products, similar to
those sold by the Company for other insurance companies.
The Company also has developed programs to sell annuities through banks
and brokerages. See further discussion of these alternative distribution
channels in the Insurance Segment section of the Business section.
AMERITAS JOINT VENTURE
The Company's investment in the Ameritas Joint Venture affords the
Company access to a line of existing variable life insurance and annuity
products while providing a lower-cost entry into an established business,
thereby eliminating significant start-up costs and allowing for immediate
potential earnings.
The Ameritas Joint Venture offers through AVLIC fixed annuity products,
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
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<PAGE> 15
more separate accounts under which the owner bears the investment risk. Through
AVLIC's fund managers, owners of variable annuities and life insurance policies
are able to choose from a range of investment funds offered by each manager.
Under the terms of the joint venture agreement, AmerUs Life and
Ameritas write their new single and flexible premium deferred fixed annuities
and variable annuities and variable life insurance through the Ameritas Joint
Venture. AmerUs Life has retained the right to continue to issue replacement
business to its fixed annuity customers in existence prior to the effective date
of the joint venture agreement.
The variable life insurance products and the fixed and variable
annuities offered by the Ameritas Joint Venture are distributed through the
Company's Preferred Producer general agency and PPGA distribution systems, as
well as through the distribution systems of Ameritas and AVLIC.
In response to customer demand, AmerUs Life 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. AmerUs Life retained the right to issue this type of
contract to certain of its customers in existence prior to the effective date of
the joint venture agreement and through certain other distribution systems.
Under the terms of the joint venture agreement, AmerUs Life has an
option to purchase an additional 5% to 15% of AMAL if certain premium growth
targets are met. AmerUs Life 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 conditions are met.
As of December 31, 1998, AMAL had total consolidated assets of $2.0
billion and total consolidated shareholder's equity of $81.0 million on a GAAP
basis. AVLIC had $4.6 billion of insurance in force and $44.6 million in surplus
as of December 31, 1998, on a statutory basis.
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<PAGE> 16
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.
As of December 31, 1998, AmerUs Life's claims-paying ability was rated
as "A+" (High) by Duff & Phelps Credit Rating Company. AmerUs Life's financial
strength rating was: rated "A" (Excellent) by A.M. Best Company; rated "A3"
(Good) by Moody's Investors Service; and rated "A" (Strong) by Standard &
Poor's.
Delta Life's claims-paying ability is rated "A+" (High) by Duff &
Phelps. Delta Life's financial strength rating was: rated "A" (Excellent) by
A.M. Best Company; rated "A3" (Good) by Moody's Investors Service; and rated "A"
(Strong) by Standard & Poor's.
American Investors Life Insurance's claims-paying ability was rated as
"A+" (High) by Duff & Phelps Credit Rating Company. American Investors Life's
financial strength rating was: rated "A-" (Excellent) by A.M. Best Company;
rated "Baa3" (Adequate) by Moody's Investors Service; and rated "A pi" (Strong)
by Standard & Poor's.
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<PAGE> 17
Financial Benefit Life's financial strength rating was "B+" (Very
Good) at A.M. Best Company and "BBB pi" (Good) by Standard & Poor's.
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.
REINSURANCE
In accordance with industry practices, the Company reinsures portions
of its life insurance and disability income exposure with unaffiliated insurance
companies under traditional indemnity reinsurance arrangements. Such reinsurance
arrangements entered into with unaffiliated insurance companies are in
accordance with standard reinsurance practices within the industry.
As of December 31, 1998, the Company had reinsurance arrangements in
place for life insurance having a face amount of approximately $3.8 billion with
27 unaffiliated reinsurers. All but one of the companies with which the Company
had life reinsurance arrangements as of such date were rated "A" or better by
A.M. Best. As of December 31, 1998, the Company's top five reinsurers (by face
amount reinsured) constituted approximately 81% of the total face amount
reinsured by the Company as of such date. Of these top five reinsurers, four are
rated "A+" and the other "A" by A.M. Best. In addition, the Company reinsures
44% of its equity index annuity reserves with an unaffiliated reinsurer which is
rated "A++" by A.M. Best.
The Company's subsidiaries enter into indemnity reinsurance
arrangements to assist in diversifying their risks and to limit the maximum loss
on risks that exceed 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 business it reinsures. The Company, as the ceding company, remains
responsible for policy claims to the extent the reinsurer fails to
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<PAGE> 18
pay such claims. The Company annually monitors the creditworthiness of its
primary reinsurers, and has experienced no material reinsurance recoverability
problems in recent years.
EMPLOYEES
As of December 31, 1998, the Company had 710 full-time employees. None
of these employees are covered by a collective bargaining agreement and the
Company believes that its relations with employees are satisfactory.
SUBSIDIARIES
The Company was formed in August,1996 in connection with the creation
of the first mutual insurance holding company in the United States. The Company
has three wholly-owned operating subsidiaries: AmerUs Life, an Iowa life
insurance company; Delta, an Iowa corporation; and AmVestors, a Kansas
corporation. AmerUs Life has two wholly-owned subsidiaries: CLA Assurance
Company, an Iowa life insurance company; 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. Delta has one primary wholly-owned subsidiary,
Delta Life, an Iowa life insurance company. AmVestors has two primary
wholly-owned subsidiaries: American, a Kansas life insurance company; and FBL, a
Kansas life insurance company.
REGULATION
The Company is indirectly controlled by a mutual insurance holding
company, AMHC. Mutual insurance holding companies are subject to regulation by
the Iowa Insurance Division. This includes compliance with the Iowa Insurance
Holding Company Systems Act. The Iowa Commissioner of Insurance also 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 also each subject to the Iowa Insurer
Supervision, Rehabilitation and Liquidation Act, Iowa Code Chapter 507C. In
addition, the assets of AMHC and the Company are available to satisfy claims of
AmerUs Life in the event the Iowa Commissioner
-16-
<PAGE> 19
initiates a proceeding under Chapter 507C. AMHC and the Company may not merge
with or be acquired by another entity without approval of the Iowa Commissioner.
In addition, in the case of a merger of AMHC with another mutual company,
separate approval by the Iowa Attorney general is required.
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 limit the activities and affiliations that are permissible for a mutual
insurance holding company. The Iowa Commissioner also has issued rules which,
under certain circumstances, require prior approval by the Iowa Commissioner of
the issuance of stock by the Company.
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.
AmerUs Life, Delta Life, American and FBL 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 sales practices, 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 the Company's insurance companies are 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
-17-
<PAGE> 20
recovered through a reduction in future premium taxes in some states.
Risk-based capital ("RBC") standards for life insurance companies were
adopted by the National Association of Insurance Commissioners ("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 and Kansas. 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. As of December 31, 1998, AmerUs
Life's, Delta Life's, American's and FBL's RBC levels were 580%, 521%, 447% and
578%, respectively, of each of their respective authorized control level RBC
thresholds. 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.
ITEM 2. PROPERTIES
The Company leases approximately 64,000 square feet at 699 Walnut
Street, Des Moines, Iowa from AmerUs Properties, Inc., an affiliate. The
Company's executive offices and corporate operations, including legal, tax,
finance, human resources, investments, communications and technology, are at
this location.
The Company also leases approximately 103,000 square feet at 611 Fifth
Avenue, Des Moines, Iowa from AmerUs Properties, Inc. The life insurance segment
and the annuity segment occupy approximately 69,000 square feet and 12,000
square feet, respectively, of this space. The remaining space is primarily
utilized for technology and cafeteria facilities.
The Company owns a 105,000 square foot office building in Topeka,
Kansas. The annuity segment occupies approximately 60,000 square feet of this
facility and the remaining space is leased to third parties.
-18-
<PAGE> 21
The Company also leases approximately 48,000 square feet from third
parties for special technology projects, such as Y2K and administration system
conversions, and for records and supply storage.
ITEM 3. LEGAL PROCEEDINGS
The Company, AmerUs Life and their direct and indirect majority
shareholders AmerUs Group and American Mutual Holding Company (collectively
"AmerUs"), are defendants in a class action lawsuit, Bhat v. AmerUs Life
Insurance Company, which was filed in December 1996 in the United States
District Court for the Northern District of California. The complaint, as
amended in 1998, alleges that the defendants breached the terms of certain
universal life policies, breached certain other duties owed to policyowners and
violated RICO in setting their cost of insurance rates and credited interest
rates. These allegations include a claim that the defendants passed an increase
in 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 AmerUs Life, seeks unspecified actual and punitive damages
and injunctive relief on behalf of himself and all similarly situated
policyowners of AmerUs Life with universal life insurance policies. AmerUs
denies the allegations contained in the complaint, including the existence of a
legitimate class. An earlier companion case filed in the same court in June 1996
was dismissed in October 1997. This litigation has been vigorously defended by
AmerUs Life.
The parties have engaged in settlement negotiations and have agreed to
a nationwide class settlement of certain contract and related issues for a
substantial block of AmerUs Life's life insurance policies. The settlement is
subject to court approval; a hearing is scheduled for April 2, 1999. Should the
settlement not be approved, AmerUs would continue to vigorously defend against
the claims asserted.
Due to the potential that a settlement may be reached in this case, the
Company has incurred a charge to income for 1998. Based upon its current
estimates of the costs associated with the settlement, the Company has
established a reserve of $1.2 million.
In recent years, numerous life insurance companies have been named as
defendants in class action lawsuits related to life
-19-
<PAGE> 22
insurance pricing and sales practices. A number of these lawsuits have resulted
in substantial settlements. In September 1998, AmerUs Life was named as a
defendant in another such purported class action lawsuit asserting claims
related to pricing practices on a substantial block of its policies. Given the
uncertain nature of litigation, the early stage of this litigation and the
limited amount of current information, the outcome of this action cannot be
predicted with certainty at this time. However, AmerUs Life believes that the
claim is without merit and that in any case the ultimate outcome of this
litigation will not be material.
Despite the Company's vigorous defense of these class action lawsuits
or other future proceedings and its denial of any wrongdoing, there can be no
assurance that the outcome of this type of lawsuit will not have a material
adverse effect on the Company's results of operations.
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 to the Company's results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-20-
<PAGE> 23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
On February 20, 1998, the AmerUs Class A Common Stock was listed and
trading began on the New York Stock Exchange (NYSE) under the symbol "AMH."
Prior to such listing, the Company's Class A Common Stock was listed and traded
on the Nasdaq National Market System (the Nasdaq) under the symbol "AMRS." The
following table sets forth, for the periods indicated, the high and low sales
prices per share of AmerUs Class A Common Stock as quoted on Nasdaq or the NYSE,
as applicable, and the quarterly dividends per share declared during such
quarter.
<TABLE>
<CAPTION>
AmerUs
Class A Common Stock (A)
----------------------------
High Low Dividends
---- --- ---------
<S> <C> <C> <C>
1997
First Quarter 24 1/4 19 1/8 none
Second Quarter 28 1/8 21 1/8 .10
Third Quarter 33 7/8 27 1/2 .10
Fourth Quarter 36 7/8 29 3/4 .10
1998
First Quarter 36 1/4 30 7/8 .10
Second Quarter 34 7/16 30 5/8 .10
Third Quarter 33 1/16 21 15/16 .10
Fourth Quarter 24 1/8 14 3/4 .10
</TABLE>
(A) The closing of the initial public offering of the Company occurred on
February 3, 1997.
-21-
<PAGE> 24
HOLDERS
As of March 2, 1999, the number of holders of record of each class of
common equity of the Company was as follows:
<TABLE>
<CAPTION>
Number of
Holders
-------
<S> <C>
Class A Common stock 2,563
Class B Common Stock 1
</TABLE>
DIVIDENDS
The Company's Board of Directors has declared and paid a quarterly
dividend of $0.10 per share of Common Stock, beginning in the second quarter of
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 the Company's
life insurance subsidiaries and other factors deemed relevant by the Company's
Board of Directors.
The Company is an insurance holding company whose principal assets
consist of all of the outstanding shares of the common stock of its life
insurance subsidiaries. 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
its life insurance subsidiaries in the form of dividends, interest payments or
loans. As of March 1, 1999, the Company's life insurance subsidiaries could pay
approximately $9 million in dividends without prior regulatory approval.
Under its bank credit facility, the Company is prohibited from paying
dividends on its Common Stock in excess of an amount equal to 3% of the
Company's consolidated net worth as of the last day of the preceding fiscal
year.
In connection with the 8.85% Capital Securities, Series A (the "Capital
Securities"), issued in 1997 by AmerUs Capital I, the Company's subsidiary
trust, and the 7.00% Adjustable Conversion-rate Equity Security Units (ACES),
issued in 1998 by AmerUs Capital II,
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<PAGE> 25
the Company's subsidiary trust, the Company has agreed not to declare or pay any
dividends on the Company's capital stock (including the Class A Common Stock)
during any period for which the Company elects to extend interest payments on
its junior subordinated debentures, 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 interest on the Capital Securities and ACES has been paid.
-23-
<PAGE> 26
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain financial and operating data of
the Company. The selected consolidated financial data below for each of the five
years ending December 31, 1998 are derived from the Consolidated Financial
Statements of the Company, which financial statements have been audited by KPMG
Peat Marwick LLP, independent auditors. During 1997, the Company acquired Delta
and AmVestors in transactions that were accounted for using the purchase method
of accounting. As a result, the Consolidated Income Statement Data includes the
results of Delta and AmVestors from their respective acquisition dates and the
Consolidated Balance Sheet Data includes year-end data for Delta and AmVestors.
<TABLE>
<CAPTION>
As of or for the Year Ended December 31,
----------------------------------------------------------
1998 1997(A) 1996(B) 1995 1994(C)
---- ---- ---- ---- ----
(Dollars in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Income Statement Data:
Revenues:
Insurance premiums $81.2 $48.1 $138.5 $244.1 $237.9
Product charges 71.1 47.3 52.2 57.3 56.3
Net investment income 506.9 224.5 228.6 285.2 275.7
Realized gains (losses) on
investments (0.1) 13.8 66.0 51.4 (19.9)
Contribution from the Closed
Block (B) 31.5 31.0 19.9 - -
----- ----- ------ ------ ------
Total revenues 690.6 364.7 505.2 638.0 550.0
Benefits and expenses:
Total policyowner benefits 430.8 196.0 264.7 374.6 369.9
Total expenses 141.5 73.7 95.1 101.1 103.5
Dividends to policyowners 2.6 1.6 26.3 49.4 45.0
----- ----- ------ ------ ------
Total benefits and expenses 574.9 271.3 386.1 525.1 518.4
----- ----- ------ ------ ------
Income from operations 115.7 93.4 119.1 112.9 31.6
Interest expense 27.1 15.0 2.1 2.4 5.5
----- ----- ------ ------ ------
Income before tax expense and equity
in earnings of unconsolidated
subsidiary 88.6 78.4 117.0 110.5 26.1
Income tax expense 28.4 22.0 43.8 41.2 19.4
Income before equity in earnings
of unconsolidated subsidiary 60.2 56.4 73.2 69.3 6.7
Equity in earnings of unconsolidated
subsidiary 2.6 1.7 1.0 - -
----- ----- ------ ------ ------
Net income $62.8 $58.1 $ 74.2 $ 69.3 $6.7
===== ===== ====== ====== ======
</TABLE>
-24-
<PAGE> 27
<TABLE>
<S> <C> <C> <C> <C> <C>
Earnings per common share:
Basic (D) $1.88 $2.47 $3.20 $2.99 -
Diluted (E) $1.86 $2.46 $3.20 $2.99 -
Dividends declared per common share $0.40 $0.30 - - -
Ratio of earnings to
fixed charges (F) 1.29 2.07 2.73 2.37 1.31
Consolidated Balance Sheet Data:
Total invested assets $7,684.8 $7,695.5 $2,880.8 $3,965.0 $3,491.7
Total assets 10,428.8 10,254.0 4,384.2 4,371.9 4,036.9
Total liabilities 9,361.9 9,240.0 3,926.7 3,832.0 3,618.6
Company-obligated mandatorily
redeemable preferred
securities 216.7 86.0 - - -
Total stockholders' equity (G) 850.2 928.0 457.5 539.9 418.3
Other Operating Data:
Adjusted operating income (H) $68.9 $49.1 $37.6 $38.5 $27.5
Adjusted operating income per common share:
Basic (I) $2.06 $2.08 $1.62 $1.66 -
Diluted (J) $2.04 $2.08 $1.62 $1.66 -
Individual life insurance in
force, net of reinsurance $27,847 $26,703 $25,725 $25,157 $25,282
Annuity account balances (I) 6,214 6,134 1,363 1,467 1,473
Number of employees 710 692 412 406 457
Statutory Data:
Premiums and deposits:
Individual life $334.7 $319.1 $312.7 $307.1 $296.4
Annuities (K) $791.3 $75.5 $81.4 $197.1 $187.8
</TABLE>
- ---------------
(A) Consolidated Income Statement Data for 1997 includes the results for Delta,
subsequent to October 23, 1997 and the results for AmVestors, subsequent to
December 19, 1997, and Consolidated Balance Sheet Data includes year-end data
for Delta and AmVestors.
(B) The Company formed the Closed Block on June 30, 1996. Invested assets
allocated to the Closed Block are classified as Closed Block assets. Revenues
and expenses associated with the Closed Block are shown net as a single line
item. Accordingly, the individual income statement components for 1998 and 1997
are not fully comparable with those of 1996, 1995 and 1994 due to the
establishment of the Closed Block on June 30, 1996.
-25-
<PAGE> 28
(C) The merger of the two predecessor entities of the Company, which was
consummated in 1994, has been accounted for as a pooling of interests
transaction.
(D) Retroactively reflects the pro-forma effect of the issuance of 23.16 million
shares of the common stock at the beginning of 1995. The 1998, 1997 and 1996
calculations reflect 33.46 million, 23.54 million and 23.16 million of weighted
average common shares outstanding, respectively.
(E) Retroactively reflects the pro forma effect of the issuance of 23.16 million
shares of common stock at the beginning of 1995. The 1998, 1997 and 1996
calculations reflect 33.70 million, 23.57 million and 23.16 million of weighted
average common shares outstanding, respectively.
(F) For purposes of computing the ratio of earnings to fixed charges, "earnings"
consist of income from operations before Federal income taxes and fixed charges.
"Fixed charges" consist of interest expense on debt and amortization of debt
expense and interest credited on deferred annuities.
(G) Amounts reported prior to June 30, 1996 reflect policyowners' equity.
(H) Adjusted operating income reflects net income adjusted to eliminate certain
items (net of applicable income taxes) which management believes are not
necessarily indicative of overall operating trends, including net realized gains
or losses on investments. Different items are likely to occur in each period
presented and others may have different opinions as to which items may warrant
adjustment. The adjusted operating income shown does not constitute net income
computed in accordance with GAAP.
(I) Basic adjusted operating income per common share is calculated using the
number of shares reflected in (D) above.
(J) Diluted adjusted operating income per common share is calculated using the
number of shares reflected in (E) above.
-26-
<PAGE> 29
(K) Effective May 1996, substantially all individual deferred annuity sales by
AmerUs Life distribution systems are made through the Ameritas Joint Venture.
See "Item 1 - Business - Ameritas Joint Venture".
ITEM 7. 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.
OVERVIEW
The Company is a holding company engaged through its subsidiaries in
the business of marketing, underwriting and distributing a broad range of
individual life insurance and annuity products to individuals and businesses in
49 states, the District of Columbia and the U.S. Virgin Islands. The Company has
two operating segments: Life Insurance and Annuities. The Life Insurance
segment's primary product offerings consist of whole life, universal life and
term life insurance policies. The primary product offerings of the Annuity
segment are fixed annuities.
In accordance with Generally Accepted Accounting Principals (GAAP),
universal life insurance premiums and annuity deposits received are reflected as
increases in liabilities for policyowner account balances and not as revenues.
Revenues reported for universal life and annuity products consist of policy
charges for the cost of insurance, administration charges and surrender charges
assessed against policyowner account balances. Surrender benefits paid relating
to universal life insurance policies and annuity products are reflected as
decreases in liabilities for policyowner account balances and not as expenses.
Amounts for interest credited to universal life and annuity policyowner account
balances and benefit claims in excess of policyowner account balances are
reported as expenses in the financial statements. The Company receives
investment income earned from the funds deposited into account balances by
universal life and annuity policyowners, the majority of which is passed through
to such policyowners in the form of interest credited.
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
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<PAGE> 30
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 primarily in proportion to expected profits or margins
from such policies. This amortization is adjusted when current or estimated
future gross profits or margins on the underlying policies vary from previous
estimates. For example, the amortization of deferred policy acquisition costs is
accelerated when policy terminations are higher than originally estimated or
when investments supporting the policies are sold at a gain prior to their
anticipated maturity. Death and other policyowner benefits reflect exposure to
mortality risk and fluctuate from period to period based on the level of claims
incurred within insurance retention limits. The profitability of the Company is
primarily affected by expense levels, interest spread results (i.e., the excess
of investment earnings over the interest credited to policyowners) and
fluctuations in mortality, persistency and other policyowner benefits. The
Company has the ability to mitigate adverse experience through adjustments to
credited interest rates, policyowner dividends or cost of insurance charges.
-28-
<PAGE> 31
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. For example, net realized
capital gains or losses on investments, excluding gains or losses on convertible
debt which are considered core earnings, are eliminated. 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>
For the year ended December 31,
-------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net income $62,829 $58,059 $74,173 $69,348 $6,667
Net realized (gains) losses on
investments (A) 72 (9,431) (43,221) (33,349) 11,223
Core realized gains (B) 6,110 - - - -
Amortization of deferred policy
acquisition costs due to
realized gains or losses (C) (129) 423 669 1,105 -
Equity add-on tax (D) - - 4,480 - 9,585
Reorganization costs (E) - - 1,522 1,426 -
------- ------- ------- ------- -------
Adjusted operating income $68,882 $49,051 $37,623 $38,530 $27,475
======= ======= ======== ======= =======
Adjusted operating income
per common share:
Basic (F) $2.06 $2.08 $1.62 $1.66 $ -
Diluted (G) $2.04 $2.08 $1.62 $1.66 $ -
</TABLE>
(A) Represents realized gains or losses on investments adjusted for income
taxes on such amounts. Realized gains or losses may vary widely between
periods. Such amounts are determined by management's timing of individual
transactions and do not necessarily correspond to the underlying operating
trends.
(B) Represents gains on the convertible preferred stock and bond portfolio, net
of income taxes.
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<PAGE> 32
(C) Represents amortization of deferred policy acquisition costs due to
realized gains or losses being included in product margins adjusted for
income taxes on such amounts.
(D) Represents the mutual life insurance company equity add-on tax, which is
applicable only to mutual life insurance companies and which is not
applicable to the Company after June 30, 1996, due to AmerUs Life's
conversion into a stock company.
(E) Represents costs directly related to the reorganization consisting
primarily of printing, postage, legal and consulting costs. These costs
were not of a continuing nature and were not expected to have any effect on
future operations.
(F) Basic adjusted operating income per common share for 1998 and 1997 is
calculated using 33.46 million and 23.54 million shares, respectively.
Basic adjusted operating income per common share for 1996 and 1995 is
calculated using 23.16 million shares.
(G) Diluted adjusted operating income per common share for 1998 and 1997 is
calculated using 33.70 million and 23.57 million shares, respectively.
Diluted adjusted operating income per common share for 1996 and 1995 is
calculated using 23.16 million shares.
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<PAGE> 33
ACQUISITIONS
The Company acquired all of the outstanding stock of Delta Life
Corporation (Delta) on October 23, 1997, for approximately $165 million in cash.
The transaction was accounted for as a purchase and accordingly, the Company's
results of operations include Delta from the date of purchase. The Company
acquired all of the outstanding stock of AmVestors Financial Corporation
(AmVestors) on December 19, 1997, in a stock exchange valued at approximately
$350 million. This transaction was also accounted for as a purchase and the
Company's results of operations include AmVestors from the date of purchase.
(See Note 15 of the Consolidated Financial Statements for the discussion of the
Company's acquisitions.)
THE CLOSED BLOCK
The Closed Block was established on June 30, 1996. 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
owners of insurance policies included therein that, after the reorganization of
AmerUs Life, assets would 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 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 "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. The
expenses associated with the administration of the policies included in the
Closed Block and the renewal commissions on these policies are not charged
against the Contribution from the Closed Block, but rather are grouped with
underwriting, acquisition and insurance expenses. Also, all assets allocated to
the Closed Block are grouped together and shown as a separate item titled
"Closed Block Assets". Likewise, all liabilities attributable to the Closed
Block are combined and disclosed as the "Closed Block Liabilities".
-31-
<PAGE> 34
OPERATING SEGMENTS
The Company has two operating segments: Life Insurance and Annuities.
Products generally distinguish a segment. The Company uses the same accounting
policies and procedures to measure operating segment income as it uses to
measure its consolidated operating income. Revenues and benefits and expenses
are primarily attributed directly to each operating segment. Net investment
income and realized gains (losses) on investments are allocated based on the
directly-related asset portfolios. Other revenues and expenses are deemed not to
be associated with any specific segment and primarily consist of discontinued
product lines such as group and health, and holding company revenues and
expenses not directly associated with a segment.
-32-
<PAGE> 35
RESULTS OF OPERATIONS
A summary of the Company's revenue follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
($ in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Insurance Premiums
Life Insurance - Traditional $ 51,263 $ 30,733 $120,671
Annuities - Immediate annuity and
supplementary contract premiums 29,609 17,238 16,082
Other 325 156 1,723
-------- -------- --------
Total insurance premiums 81,197 48,127 138,476
Product Charges
Life Insurance - Universal Life 46,224 45,637 51,383
Annuities 24,880 1,669 837
Total product charges 71,104 47,306 52,220
Net Investment Income
Life Insurance 72,779 73,407 108,180
Annuities 430,769 147,924 120,445
Other 3,401 3,100 --
-------- -------- --------
Total net investment income 506,949 224,431 228,625
Realized Gains (Losses) on Investments
Life Insurance (1,261) 11,121 36,659
Annuities 3,240 1,563 29,324
Other (2,091) 1,107 --
-------- -------- --------
Total realized gains (losses)
on investments (112) 13,791 65,983
Contribution from the Closed Block 31,478 31,044 19,909
-------- -------- --------
Total revenues $690,616 $364,699 $505,213
======== ======== ========
</TABLE>
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<PAGE> 36
Traditional life insurance premiums increased by $20.5 million to $51.3
million in 1998. The increase in traditional life insurance premiums in 1998 was
primarily the result of continued favorable persistency and increased sales of
term life and participating whole life insurance products. Traditional life
insurance premiums decreased by $90.0 million in 1997 to $30.7 million. The
decrease in traditional life insurance premiums in 1997 was primarily due to the
reclassification resulting from the formation of the Closed Block during 1996.
Premiums on policies included in the Closed Block are reported as part of the
Contribution from the Closed Block.
Immediate annuity and supplementary contract premiums increased by
$12.4 million in 1998 to $29.6 million compared to $17.2 million in 1997 and
$16.1 million in 1996. The increase in contract premiums in 1998 was primarily
due to the acquisitions of Delta and AmVestors. Without these acquisitions,
immediate annuity and supplementary contract premiums increased by $2.5 million
in 1998 due to increased immediate annuity sales.
Other premiums were $0.3 million in 1998 compared to $0.2 million in
1997 and $1.7 million in 1996. The decrease in other premiums in 1997 was
primarily due to the Company's exit from the group life business in 1996.
Universal life product charges increased by $0.6 million in 1998 to
$46.2 million. This increase in product charges in 1998 was primarily due to
increased cost of insurance charges as a result of the normal aging of the block
of business. Universal life product charges decreased by $5.8 million in 1997
primarily due to the formation of the Closed Block in 1996. Universal life
product charges on policies included in the Closed Block are reported as part of
the Contribution from the Closed Block.
Annuity product charges increased by $23.2 million in 1998 to $24.9
million compared to $1.7 million in 1997 and $0.8 million in 1996. Annuity
product charges for 1998 and 1997 included $23.5 million and $0.7 million,
respectively, from Delta and AmVestors.
Life insurance net investment income decreased by $0.6 million in 1998
to $72.8 million compared to $73.4 million in 1997, and $108.2 million in 1996.
The decrease in 1998 in net investment income was primarily attributable to
lower effective yields on average invested assets. Average invested assets
(excluding market value adjustments) in 1998 increased by $61.2 million from
1997 and the effective yield on average invested assets (excluding market value
adjustments) in 1998 was 8.64% compared to 9.39% in 1997. The decrease in
effective yields primarily resulted from reduced limited partnership income and
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<PAGE> 37
lower reinvestment rates in 1998. The decrease in 1997 net investment income was
primarily due to the formation of the Closed Block in 1996. Net investment
income attributable to the Closed Block is reported as part of the Contribution
from the Closed Block.
Annuity net investment income increased to $430.8 million in 1998
compared to $147.9 million in 1997, and $120.4 million in 1996. Net investment
income in 1998 and 1997 included $322.0 million and $30.2 million, respectively,
from Delta and AmVestors. Excluding these acquisitions, net investment income
decreased $8.9 million in 1998 primarily from reduced limited partnership income
and lower reinvestment rates in 1998. The effective yield on average invested
assets in 1998 was 6.70%.
Realized losses on investments were $0.1 million in 1998 compared to
realized gains of $13.8 million in 1997 and $66.0 million in 1996. The level of
realized gains and losses will fluctuate from period to period depending on the
prevailing interest rate and economic environment and the timing of the sale of
investments. Included in the amounts for 1996 is approximately $51.1 million of
gains from the sale of common stock as a result of the liquidation of the
Company's equity portfolio. The sale of the common stock in 1996 was the direct
result of the Company's decision to permanently reduce the level of equity
securities as a percentage of its investment portfolio.
-35-
<PAGE> 38
The Contribution from the Closed Block was $31.5 million in 1998
compared to $31.0 million in 1997 and $19.9 million in 1996. The following table
sets forth the operating results of the Closed Block for the years ended
December 31, 1998 and 1997 and for the six months ended December 31, 1996.
<TABLE>
<CAPTION>
($ in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues
Insurance premiums $198,178 $206,145 $108,315
Product charges 13,695 13,599 6,451
Net investment income 115,762 113,759 56,329
Realized gains on investments 10,324 718 481
-------- -------- --------
Total revenues 337,959 334,221 171,576
Benefits and expenses
Policyowner benefits 200,783 206,638 101,078
Underwriting, acquisition
and insurance expenses 5,042 5,477 2,969
Amortization of deferred policy
acquisition costs 26,286 31,471 18,412
Dividends to policyowners 74,370 59,591 29,208
-------- -------- --------
Total benefits and expenses 306,481 303,177 151,667
-------- -------- --------
Contribution from the Closed Block $ 31,478 $ 31,044 $ 19,909
======== ======== ========
</TABLE>
-36-
<PAGE> 39
Closed Block insurance premiums decreased by $7.9 million in 1998 to
$198.2 million compared to $206.1 million in 1997. The decrease in insurance
premiums is consistent with the reduction of the Closed Block's life insurance
in force that is expected to continue over the life of the Block.
Net investment income for the Closed Block increased by $2.0 million in
1998 to $115.8 million primarily due to an increase in average invested assets
(excluding market value adjustments).
Realized gains on investments of the Closed Block were $9.6 million
higher in 1998 compared to 1997. The level of realized gains is subject to
fluctuation from period to period depending on the prevailing interest rate and
economic environment and the timing of the sale of investments.
Closed Block policyowner benefits decreased by $5.8 million in 1998 to
$200.8 million primarily due to the reduction of life reserves which is
consistent with the reduction of the Closed Block's life insurance in force that
is expected over the life of the Block.
The amortization of deferred policy acquisition costs for the Closed
Block decreased by $5.2 million in 1998 to $26.3 million. Deferred policy
acquisition costs are generally amortized in proportion to gross margins. The
decrease in the amortization of deferred policy acquisition costs in 1998
primarily resulted from changes in assumptions in the estimated future margins
on the Closed Block reflected during 1998.
Closed Block dividends to policyowners increased by $14.8 million to
$74.4 million in 1998. The increase was primarily due to the increase in the
deferred dividend liability resulting from increased realized capital gains and
lower policyowner benefits in 1998.
Closed Block revenues and benefits and expenses increased in 1997
compared to 1996 primarily due to the formation of the Closed Block in June
1996, thereby reflecting twelve months of activity in 1997 compared to six
months of activity in 1996.
-37-
<PAGE> 40
A summary of the Company's policyowner benefits follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
($ in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Life Insurance
Traditional
Death benefits $ 4,475 $ 1,400 $ 15,479
Change in liability for future
policy benefits and other
policy benefits 31,331 19,968 79,770
-------- -------- ---------
Total traditional 35,806 21,368 95,249
Universal
Death benefits in excess of cash value 17,889 20,253 22,275
Interest credited on policyowner
account balances 34,317 32,751 40,759
Other 2,949 3,453 3,026
-------- -------- ---------
Total universal 55,155 56,457 66,060
-------- -------- ---------
Total life insurance benefits 90,961 77,825 161,309
Annuities
Interest credited to deferred annuity
account balances 282,088 80,440 66,254
Other annuity benefits 57,201 37,133 34,334
-------- -------- ---------
Total annuity benefits 339,289 117,573 100,588
Other benefits 506 578 2,845
--------- -------- ---------
Total policyowner benefits $430,756 $195,976 $ 264,742
======== ======== =========
</TABLE>
Total life insurance benefits increased by $13.2 million in 1998 and
decreased by $83.5 million in 1997. The increase in life insurance benefits in
1998 was primarily due to the increase in the change in liability for future
policy benefits and other policy benefits (reserves) in the traditional life
insurance line of business as a result of the growth and aging of the business.
The average interest crediting rate on policyowner account balances in 1998 was
6.08% compared to 6.23% in 1997 and 6.27% in 1996. Spreads between investment
rates and crediting rates are managed on a statutory basis. Crediting rates are
adjusted to maintain targeted spreads on a statutory basis. The decrease in 1997
in life insurance benefits is primarily due to
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<PAGE> 41
the formation of the Closed Block. Life insurance benefits on policies included
in the Closed Block are reported as part of the Contribution from the Closed
Block.
Annuity benefits increased by $221.7 million in 1998 to $339.3 million
compared to $117.6 million in 1997 and $100.6 million in 1996 primarily due to
the acquisitions of Delta and AmVestors. The average interest crediting rate on
deferred annuity account balances in 1998 was 5.23% compared to 5.25% in 1997
and 5.36% in 1996. Spreads between investment rates and crediting rates are
managed on a statutory basis. Crediting rates are adjusted to maintain targeted
spreads on a statutory basis.
Other benefits were $0.5 million in 1998 compared to $0.6 million in
1997 and $2.8 million in 1996. The decrease was primarily due to the Company's
exit from group life business in 1996.
A summary of the Company's expenses follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
($ in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Life Insurance
Underwriting, acquisition and
insurance expenses $ 43,376 $38,496 $42,714
Amortization of deferred policy
acquisition costs and VOBA 22,397 17,316 30,845
-------- ------- -------
Total life insurance 65,773 55,812 73,559
Annuities
Underwriting, acquisition and
insurance expenses 35,592 7,365 6,692
Amortization of deferred policy
acquisition costs and VOBA 37,817 6,460 9,315
-------- ------- -------
Total annuities 73,409 13,825 16,007
Other 2,448 4,138 5,451
-------- ------- -------
Total expenses $141,630 $73,775 $95,017
======== ======= =======
</TABLE>
-39-
<PAGE> 42
Total life insurance expenses increased by $10.0 million in 1998 and
decreased by $17.7 million in 1997. The increase in 1998 was partially due to a
$5.1 million increase in the amortization of deferred policy acquisition costs
and value of business acquired (VOBA). Deferred policy acquisition costs are
generally amortized in proportion to gross margins, including realized capital
gains. Lower death benefits in 1998 on those policies for which deferred costs
are amortized contributed to higher gross margins in 1998, resulting in the
increased amortization. Underwriting, acquisition and insurance expenses
increased by $4.9 million in 1998 primarily due to costs related to the Year
2000 Compliance Project and costs associated with the Company's development of
alternative distribution systems through brokerages and banks. The decrease in
total life insurance expenses from 1996 to 1997 was primarily due to the
decrease in amortization of deferred policy acquisition costs of $13.5 million.
This decrease was primarily due to the formation of the Closed Block.
Amortization of deferred policy acquisition costs on policies included in the
Closed Block is reported as part of the Contribution from the Closed Block.
Underwriting, acquisition and insurance expenses decreased $4.2 million in 1997
primarily due to the establishment of a $5.0 million litigation reserve during
1996.
Total annuity expenses increased by $59.6 million in 1998 to $73.4
million compared to $13.8 million in 1997 and $16.0 million in 1996. The
increase in annuity expenses in 1998 was primarily attributable to the
acquisitions of Delta and AmVestors. Total annuity expenses decreased by $2.2
million in 1997 primarily due to lower amortization of deferred policy
acquisition costs. Effective May 1996, substantially all new sales of individual
deferred annuities (excluding Delta and AmVestors distribution systems) were
made through the AMAL Corp. As a result, gross margins including realized
capital gains or losses on policies for which deferred acquisition costs are
amortized declined, resulting in the decreased amortization. Partially
offsetting the decrease in amortization of deferred policy acquisition costs and
VOBA was an increase in underwriting, acquisition and insurance expenses due to
the inclusion of one quarter of operating expenses related to the acquisitions
of Delta and AmVestors of $1.0 million.
Other expenses decreased by $1.7 million in 1998 and by $1.3 million in
1997. The 1997 other expenses included a $1.3 million write-off of expenses
related to a former bank credit facility which was replaced by a new agreement
in 1997. The 1996 other expenses included non-reoccurring costs related to the
Company's name change and restructuring into a mutual insurance holding company.
-40-
<PAGE> 43
A summary of the Company's income from operations by operating segment
follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
($ in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Life Insurance
Open Block
Revenues $169,005 $160,898 $316,893
Benefits and expenses (156,734) (133,637) (234,868)
Dividends to policyowners (2,558) (1,587) (26,324)
Closed Block Contribution 31,478 31,044 19,909
-------- -------- --------
Income from operations 41,191 56,718 75,610
Annuities
Revenues 488,498 168,394 166,688
Benefits and expenses (412,698) (131,398) (116,595)
-------- -------- --------
Income from operations 75,800 36,669 50,093
Other (1,319) (353) (6,573)
-------- -------- --------
Total income from operations $115,672 $ 93,361 $119,130
======== ======== ========
</TABLE>
Income from Life Insurance operations decreased by $15.5 million in
1998 to $41.2 million compared to $56.7 million in 1997. The decrease in 1998
was primarily due to lower realized gains on investments and increased costs
related to the Year 2000 Compliance Project and costs associated with the
Company's development of alternative distribution systems. Income from Life
Insurance operations decreased by $18.9 million in 1997. The decrease in 1997
was primarily due to lower realized gains on investments.
Income from Annuity operations increased by $38.8 million in 1998 to
$75.8 million compared to $37.0 million in 1997 and $50.1 million in 1996
primarily due to the acquisitions of Delta and AmVestors. The decrease in income
from Annuity operations in 1997 compared to 1996 was primarily due to lower
realized gains on investments.
-41-
<PAGE> 44
Interest expense increased by $12.1 million in 1998 to $27.1 million
compared to $15.0 million in 1997 and $2.1 million in 1996. The increased
interest expense in 1998 was primarily due to increased debt levels from the
1997 fourth quarter acquisitions of Delta and AmVestors. The increased interest
expense in 1997 was primarily due to interest expense on the capital securities
issued by the Company during 1997 and interest expense on the revolving line of
credit established in that year.
Income tax expense increased by $6.4 million in 1998 to $28.4 million.
The effective tax rate in 1998 was 31.1% compared to 27.5% in 1997. The increase
in the effective tax rate in 1998 was primarily due to a $2.4 million increase
in goodwill amortization and a $0.8 million decrease in tax credits generated by
affordable housing and historic rehabilitation investments. Tax credits
generated from these investments totaled $5.5 million in 1998 compared to $6.3
million in 1997. Income tax expense decreased by $21.8 million in 1997 primarily
due to lower pre-tax income, a $4.5 million provision for the equity add-on tax
included in the first half of 1996, and increased tax credits of $3.9 million to
$6.3 million in 1997 compared to $2.4 million in 1996.
The equity in earnings of unconsolidated subsidiary represents 34% of
the net income of AMAL Corporation, net of goodwill amortization. AMAL
Corporation is the parent company of Ameritas Variable Life Insurance Company,
the joint venture partner that markets variable life, and variable and fixed
annuity products.
Net income increased by $4.8 million to $62.8 million in 1998 compared
to $58.1 million in 1997. The increase in net income in 1998 was primarily from
increased annuity operating income which was partially offset by lower realized
gains on investments and increased interest expense. Net income decreased by
$16.1 million in 1997 to $58.1 million compared to $74.2 million in 1996
primarily due to lower realized gains on investments.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
The Company's cash flows from operations consist of dividends from
subsidiaries, if declared and paid, interest income on loans and advances to its
subsidiaries (including a surplus note issued to the Company by AmerUs Life),
investment income on assets held by the Company and fees which the Company
charges its subsidiaries and certain other of its affiliates for management
services, offset by the expenses incurred for debt service, salaries and other
expenses.
-42-
<PAGE> 45
The Company intends to rely primarily on dividends and interest income
from its life insurance subsidiaries in order to make dividend payments to its
shareholders. The payment of dividends by its life insurance subsidiaries is
regulated under various state laws. Under Iowa law, AmerUs Life and Delta Life
may pay dividends only from the earned surplus arising from their respective
businesses and must receive the prior approval of the Iowa Insurance
Commissioner to pay any dividend that would exceed certain statutory
limitations. The current statute limits any dividend, together with dividends
paid out within the preceding 12 months, to the greater of (i) 10% of the
respective company's policyowners' surplus as of the preceding year end or (ii)
the net gain from operations for the previous calendar year. Iowa law gives the
Iowa Commissioner broad discretion to disapprove requests for dividends in
excess of these limits. The payment of dividends by AmVestors' subsidiaries,
American Investors Life Insurance Company, Inc. (American), and Financial
Benefit Life Insurance Company (FBL) is regulated under Kansas law, which has
statutory limitations similar to those in place in Iowa. Based on these
limitations and 1998 results, the Company's subsidiaries could pay an estimated
$9 million in additional dividends in 1999 without obtaining regulatory
approval.
The Company and its subsidiaries generated cash flows from operating
activities of $479.4 million, $224.4 million and $147.6 million for the years
ended December 31, 1998, 1997 and 1996, respectively. Excess operating cash
flows were primarily used to increase the Company's investment portfolio, fund
policyowner account withdrawals and purchase common stock for the treasury.
On October 23, 1997, the Company entered into a $250 million revolving
credit facility with a syndicate of lenders (the "Bank Credit Facility") to be
used to replace its then existing revolving credit facility, to finance the
acquisition of Delta, to finance permitted mergers and acquisitions and for
other general corporate purposes. The commitment under the credit facility was
reduced from $250 million to $150 million in June 1998. As of December 31, 1998,
there was no outstanding loan balance under the facility. The Bank Credit
Facility provides for typical events of default and covenants with respect to
the conduct of the business of the Company and its subsidiaries and requires the
maintenance of various financial levels and ratios. Among other covenants, the
Company (a) cannot have a leverage ratio greater than 0.35:1.0 or an interest
coverage ratio less than 2.5:1.0, (b) is prohibited from paying cash dividends
on its common stock in excess of an amount equal to 3% of its consolidated net
worth as of the last day of the preceding fiscal year, and (c) must cause
certain of its subsidiaries, including AmerUs Life and Delta Life, to maintain
certain ratings from A.M. Best and certain levels of adjusted capital and
surplus and risk-based capital.
-43-
<PAGE> 46
In 1998, the Company completed public offerings of senior notes and
Adjustable Conversion-rate Equity Security units totaling $270 million. The
proceeds from the offerings were primarily utilized to pay down amounts owed
under the revolving credit agreement.
The Company may from time to time review potential acquisition
opportunities. The Company anticipates that funding for any such acquisition may
be provided from available cash resources, from debt or equity financing or
stock-for-stock acquisitions. In the future, the Company anticipates that its
liquidity and capital needs will be met through interest and dividends from its
life insurance subsidiaries, accessing the public equity and debt markets
depending upon market conditions, or alternatively from bank financing.
During 1998, the Company purchased 4,325,019 shares of common stock for
the treasury at a total cost of $102.1 million.
On February 15, 1999, the Company's controlling shareholder, American
Mutual Holding Company (American Mutual), a mutual insurance holding company,
announced that its board of directors had authorized management to review the
potential benefits of a demutualization of American Mutual. American Mutual is
owned by its members who are also policyowners of AmerUs Life. American Mutual
expects to complete the study and make a final decision in the second quarter of
1999.
LIFE INSURANCE SUBSIDIARIES
The cash flows of the Company's life insurance subsidiaries consist
primarily of premium income, deposits to policyowner account balances, income
from investments, sales, maturities and calls of investments and repayments of
investment principal. Cash outflows are primarily related to withdrawals of
policyowner account balances, investment purchases, payment of policy
acquisition costs, payment of policyowner benefits, payment of debt, income
taxes and current operating expenses. Life insurance companies generally produce
a positive cash flow from operations, as measured by the amount by which cash
flows are adequate to meet benefit obligations to policyowners and normal
operating expenses as they are incurred. The remaining cash flow is generally
used to increase the asset base to provide funds to meet the need for future
policy benefit payments and for writing new business.
Management anticipates that funds to meet its short-term and long-term
capital expenditures, cash dividends to shareholders and operating cash needs
will come from existing capital and internally generated funds. Management
believes that the current level of cash and available-for-sale and short-term
securities, combined with expected net cash inflows from operations, maturities
of fixed maturity investments, principal payments on mortgage-backed securities
-44-
<PAGE> 47
and its insurance products, will be adequate to meet the anticipated short-term
cash obligations of the Company's life insurance subsidiaries.
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. The Company continuously monitors
benefits and surrenders to provide projections of future cash requirements. As
part of this monitoring process, the Company performs cash flow testing of its
assets and liabilities under various scenarios to evaluate the adequacy of
reserves. In developing its investment strategy, the Company 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 the claims-paying and financial
strength ratings of the Company's life insurance subsidiaries.
The Company takes into account asset/liability management
considerations in the product development and design process. Contract terms for
the Company'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 liabilities for
interest-sensitive life products and annuities by their contractual withdrawal
provisions at December 31, 1998 (including liabilities in both the Closed Block
and the general account):
(dollars in millions)
<TABLE>
<CAPTION>
<S> <C>
Not subject to discretionary withdrawal $ 368.9
Subject to discretionary withdrawal with adjustments
Specified surrender charges (A) 4,054.4
Market value adjustments 1,676.8
--------
Subtotal 5,731.2
Subject to discretionary withdrawal without adjustments 1,196.8
--------
Total $7,296.9
========
</TABLE>
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<PAGE> 48
(A) Includes $1,146.3 million of liabilities with a contractual surrender
charge of less than five percent of the account balance.
Through its membership in the Federal Home Loan Bank (FHLB) of Des
Moines, AmerUs Life is eligible to borrow on a line of credit available to
provide it additional liquidity. Interest is payable at a current rate at the
time of any advance. As of December 31, 1998, AmerUs Life had a $25.0 million
open secured line of credit against which there were no borrowings. In addition
to the line of credit, AmerUs Life has long-term advances from the FHLB
outstanding of $16.1 million at December 31, 1998.
The Company's life insurance subsidiaries may also obtain liquidity
through sales of investments. The Company's investment portfolio as of December
31, 1998 had a carrying value of $9.0 billion, including Closed Block
investments.
At December 31, 1998, the statutory surplus of the Company's
subsidiaries was approximately $472.9 million. The Company believes that this
level of statutory capital is more than adequate as each life insurance
subsidiary's risk-based capital is significantly in excess of required levels.
In the future, in addition to their cash flows from operations and
borrowing capacity, the life insurance subsidiaries would anticipate obtaining
their required capital from the Company as the Company will have access to the
public debt and equity markets.
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 each of the life insurance companies and are overseen by the
Investment Committee of the Board of Directors of the Company. Management
regularly monitors individual assets and asset groups, in addition to monitoring
the overall asset mix. In addition, the insurance company boards and the
Investment Committee review investment guidelines and monitor internal controls.
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<PAGE> 49
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.
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.
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.
The Closed Block was formed to give certain policyowners additional
assurances as to the dividend policies of the Company. 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 Note 1 to the
Consolidated Financial Statements for further discussion). The following table
summarizes consolidated invested assets by asset category as of December 31,
1998 and 1997, and sets forth the allocation of such assets between the Closed
Block and the general account. The remaining information 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).
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<PAGE> 50
<TABLE>
<CAPTION>
Consolidated Invested Assets
December 31,
------------
1998 1997
---- ----
Carrying Carrying Carrying Carrying
value value value value
Closed general % of Closed general % of
Block account Combined Total Block account Combined Total
----- ------- -------- ----- ----- ------- -------- -----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed maturity securities
Public $ 948.8 $6,298.8 $7,247.6 80.6% $ 894.2 $6,667.7 $7,561.9 84.8%
Private 167.7 411.5 579.2 6.4 158.9 206.7 365.6 4.1
-------- -------- -------- ---- -------- -------- -------- -----
Subtotal 1,116.5 6,710.3 7,826.8 87.0 1,053.1 6,874.4 7,927.5 88.9
Equity securities - 68.5 68.5 0.8 - 61.4 61.4 0.7
Mortgage loans - 566.4 566.4 6.3 - 462.5 462.5 5.2
Policy loans 181.9 110.8 292.7 3.3 168.4 117.8 286.2 3.2
Real estate investments - 0.6 0.6 - - 8.7 8.7 0.1
Other invested assets 3.0 205.8 208.8 2.3 0.6 158.1 158.7 1.8
Short-term investments 8.9 22.4 31.3 0.3 0.6 12.6 13.2 0.1
-------- -------- -------- ----- -------- -------- -------- -----
Total invested assets $1,310.3 $7,684.8 $8,995.1 100.0% $1,222.7 $7,695.5 $8,918.2 100.0%
======== ======== ======== ===== ======== ======== ======== ======
</TABLE>
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<PAGE> 51
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 December 31, 1998 fixed
maturity securities were $7,826.8 million, or 87.0% of the carrying value of
invested assets with public and private fixed maturity securities constituting
$7,247.6 million, or 92.6%, and $579.2 million, or 7.4%, of total fixed maturity
securities, respectively.
The following table summarizes the composition of the fixed maturity
securities by category as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Composition of Fixed Maturity Securities
December 31, 1998 December 31, 1997
----------------- -----------------
Carrying % of Carrying % of
value Total value Total
----- ----- ----- -----
(Dollars in millions)
<S> <C> <C> <C> <C>
U.S. government/agencies $ 70.4 0.9% $ 54.6 0.7%
State and political subdivisions 49.6 0.6 9.6 0.1
Foreign governments 136.9 1.7 76.6 1.0
Corporate 4,678.5 59.8 4,234.4 53.4
Redeemable preferred stocks 76.7 1.0 102.0 1.3
MBS
U.S. government/agencies 2,152.3 27.5 2,793.6 35.2
Non-government/agencies 662.4 8.5 656.7 8.3
-------- ----- -------- -----
Subtotal-MBS 2,814.7 36.0 3,450.3 43.5
-------- ----- -------- -----
Total $7,826.8 100.0% $7,927.5 100.0%
======== ===== ======== =====
</TABLE>
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<PAGE> 52
The following table summarizes fixed maturity securities by remaining
maturity as of December 31, 1998:
Remaining Maturity of Fixed Maturity Securities
<TABLE>
<CAPTION>
Carrying % of
Value Total
----- -----
(Dollars in millions)
<S> <C> <C>
Due:
In one year or less (1999) $ 167.1 2.1%
One to five years (2000-2004) 1,896.5 24.2
Five to 10 years (2005-2009) 2,047.3 26.2
10 to 20 years (2010-2019) 598.4 7.6
Over 20 years (2020 and after) 302.8 3.9
-------- -----
Subtotal 5,012.1 64.0
MBS 2,814.7 36.0
-------- -----
Total $7,826.8 100.0%
======== =====
</TABLE>
The Company's portfolio of investment grade fixed maturity securities
is diversified by number and type of issuer. As of December 31, 1998, investment
grade fixed maturity securities included the securities of over 717 issuers,
with 2,658 different issues of securities. No non-government issuer represents
more than 0.7% of investment grade fixed maturity securities.
Below-investment grade fixed maturity securities as of December 31,
1998, included the securities of 111 issuers representing 5.9% of total invested
assets, with the largest being a $19.2 million investment.
As of December 31, 1998, 81.0% of total invested assets were investment
grade fixed maturity securities. The following table sets forth the credit
quality, by NAIC designation and Standard & Poor's rating equivalents, of fixed
maturity securities as of December 31, 1998:
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<PAGE> 53
FIXED MATURITY SECURITIES BY NAIC DESIGNATION
December 31, 1998
<TABLE>
<CAPTION>
Public Private Total
Standard ------ ------- -----
& Poor's
NAIC equivalent Carrying % of Carrying % of Carrying % of
designation designation value Total value Total value Total
----------- ----------- ----- ----- ----- ----- ----- -----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
1 A- or higher $4,955.9 68.4% $352.3 60.8% $5,308.2 67.8%
2 BBB- to BBB+ 1,776.9 24.5 204.5 35.3 1,981.4 25.3
-------- ---- ------ ---- -------- ----
Total investment grade 6,732.8 92.9 556.8 96.1 7,289.6 93.1
-------- ---- ------ ---- -------- ----
3 BB to BB+ 356.0 4.9 14.4 2.5 370.4 4.7
4 B 152.4 2.1 7.9 1.4 160.3 2.1
5 CCC or lower 6.4 0.1 0.1 - 6.5 0.1
-------- ---- ------ ---- -------- ----
Total below investment grade 514.8 7.1 22.4 3.9 537.2 6.9
-------- ---- ------ ---- -------- ----
Total $7,247.6 100.0% $579.2 100.0% $7,826.8 100.0%
======== ===== ====== ===== ======== =====
</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), manufactured housing, FHA Title I and CMBS. Residential
mortgage pass-throughs and CMOs total $2,302.4 million or 25.6% of total
invested assets. As of December 31, 1998, MBS were $2,814.7 million or 31.3%, of
total invested assets of which $2,152.3 million, or 76.5% of MBS were from
government sponsored enterprises. Other MBS were $662.4 million, or 23.5%, of
MBS as of December 31, 1998. Management believes that the quality of assets in
the MBS portfolio is generally high, with 84.6% of such assets representing
agency backed or "AAA" rated securities.
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<PAGE> 54
The Company uses interest rate swaps, caps, and options 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, caps, and options, which represent
the extent of the Company's involvement in such contracts but not the risk of
loss, at December 31, 1998, amounted to $1,336.0 million. The swaps had no
carrying value at December 31, 1998 and a fair value which amounted to a net
payable position of $1.9 million at December 31, 1998. The carrying value and
fair value of interest rate caps amounted to $1.7 million and $0.5 million,
respectively, and the carrying value and fair value of options amounted to $49.2
million and $70.9 million, respectively. The interest rate caps and options are
reflected as "other investments" on the Company's consolidated financial
statements as of December 31, 1998. The net amount payable or receivable from
interest rate swaps and caps are accrued as an adjustment to interest income.
MORTGAGE LOANS
As of December 31, 1998, mortgage loans in the Company's investment
portfolio were $566.4 million, or 6.3% of the aggregate carrying value of
invested assets, including the Closed Block. As of December 31, 1998, commercial
mortgage loans and residential mortgage loans comprised 66.8% and 33.2%,
respectively, of the mortgage loans in the Company's investment portfolio.
Commercial mortgage loans consist primarily of fixed-rate mortgage
loans. As of December 31, 1998, the Company held 372 individual commercial
mortgage loans with an average balance of $1.1 million.
As of December 31, 1998, only one loan aggregating $2.3 million, or
0.4%, of the Company's loan portfolio (as measured by principal balance) was
classified as delinquent or in foreclosure. As of the same date, only one loan
aggregating $1.7 million, or 0.3%, of the Company's loan portfolio (as measured
by principal balance) was
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<PAGE> 55
classified as restructured. During 1998, the Company had one foreclosure of $0.5
million.
EQUITY REAL ESTATE
In recent years the Company has significantly reduced its equity real
estate portfolio. As of December 31, 1998, the carrying value of investment real
estate, including the Closed Block, was $0.6 million.
OTHER
The Company held $292.7 million of policy loans on individual insurance
products as of December 31, 1998. Policy loans are permitted to the extent of a
policy's contractual limits and are fully collateralized by policy cash values.
As of December 31, 1998, the Company held equity securities of $68.5
million. The largest holding of equity securities, Federal Home Loan Bank, had a
carrying value of $12.3 million as of December 31, 1998.
The Company held $240.1 million of other invested assets (including
short-term investments) on December 31, 1998. Other invested assets consist
primarily of various joint venture and limited partnership investments.
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
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<PAGE> 56
and sells annuities and life insurance policies that permit flexibility to make
interest rate changes as part of its management of interest spreads. However,
the profitability of the Company's products is based upon persistency, mortality
and expenses, as well as interest rate spreads.
The Company manages its investment portfolio in part to reduce its
exposure to interest rate fluctuations. In general, the market value of its
fixed maturity portfolio increases or decreases in an inverse relationship with
fluctuations in interest rates, and net investment income increases or decreases
in a direct relationship with interest rate changes.
The Company has developed an asset/liability management approach with
separate investment portfolios for major product lines such as traditional life,
universal life and annuities. Investment policies and strategies have been
established based on the specific characteristics of each product line. The
portfolio investment policies and strategies establish asset duration, quality
and other guidelines. The Company utilizes analytical systems to establish an
optimal asset mix for each line of business. The Company seeks to manage the
asset/liability mismatch and the associated interest rate risk through active
management of the investment portfolio. Financial, actuarial, investment,
product development and product marketing professionals work together throughout
the product development, introduction and management phases to jointly develop
and implement product features, initial and renewal crediting strategies, and
investment strategies based on extensive modeling of a variety of factors under
a number of interest rate scenarios.
In force reserves and the assets allocated to each segment are modeled
on a regular basis to analyze projected cash flows under a variety of economic
scenarios. The result of this modeling is used to modify asset allocation,
investment portfolio duration and convexity and renewal crediting strategies.
The Company invests in CMOs as part of its basic portfolio strategy, but uses
other types of derivatives only as a hedge against the effects of interest rate
fluctuations or to synthetically alter the investment characteristics of
specific assets. For a further discussion and disclosure of the nature and
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<PAGE> 57
extent of the Company's use of derivatives, see Note 14 to the Consolidated
Financial Statements.
FEDERAL INCOME TAX MATTERS
The Company and its non-life subsidiaries file a consolidated federal
income tax return. The life insurance subsidiaries file separate federal income
tax returns. 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 MATTERS
SFAS 130, 131, AND 132
In 1998, the Company adopted the provisions of SFAS 130, "Reporting
Comprehensive Income," SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information;" and SFAS 132, "Employer's Disclosure about Pensions
and Other Postretirement Benefits." Adoption of these statements were of a
reporting nature and had no impact on the financial position or results of
operations of the Company.
SFAS 133
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 defines derivative instruments
and provides comprehensive accounting and reporting standards for the
recognition and measurement of derivative and hedging activities (including
certain instruments embedded in other contracts). It requires derivatives to be
recorded in the Consolidated Balance Sheet at fair value and establishes
criteria for hedges of changes in the fair value of assets, liabilities or firm
commitments, hedges or variable cash flows or forecasted transactions, and
hedges of foreign currency exposures of net investments in foreign operations.
Changes in the fair value of derivatives not meeting specific hedge accounting
criteria would be recognized in the Consolidated Statement of Operations. SFAS
No. 133 is effective for all fiscal quarters of all years beginning after
December 31, 1999. The Company is evaluating SFAS No. 133 and has not determined
its effect on the Consolidated Financial Statements.
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<PAGE> 58
SOP 97-3
In December 1997, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments." This
statement provides guidance on when an insurance or other enterprise should
recognize a liability for guaranty fund and other assessments and on how to
measure such liability. SOP 97-3 is effective for fiscal years beginning after
December 15, 1998; however, its adoption will not have a material impact on the
financial position or results of operations as the Company currently estimates
assessment liabilities when a determination of an insolvency has occurred.
SOP 98-1
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This SOP provides
guidance for determining whether costs of software developed or obtained for
internal use should be capitalized or expensed as incurred. In the past, the
Company has expensed such costs as they were incurred. This SOP is also
effective for fiscal years beginning after December 15, 1998. The SOP will not
have a material impact on the financial position or results of operations of the
Company.
STATUTORY ACCOUNTING CODIFICATION
The NAIC has codified statutory accounting practices, which are
expected to constitute the only source of prescribed statutory accounting
practices and are effective in 2001. Codification will change prescribed
statutory accounting practices and may result in changes to the accounting
practices that insurance enterprises use to prepare their statutory financial
statements. The Company is currently evaluating the impact of codification to
its statutory financial statements, however the changes will not have a material
impact on statutory surplus.
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<PAGE> 59
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate the date value "2000". Many existing application software products
were designed to accommodate only a two-digit date position which represents the
year (e.g., the number "95" is stored on the system and represents the year
1995). As a result, the year 1999 (i.e., "99") is the maximum date value many
information technology (IT) systems will be able to process accurately.
The Company formed a Year 2000 working group to address potential
problems posed by this development to assure that the Company is prepared for
the year 2000. The Company's overall Year 2000 compliance initiatives include
the following components: (i) assessment of all business critical systems
(business critical systems include computer and embedded systems); processes and
external interfaces and dependencies; (ii) remediation or upgrading of business
critical systems; (iii) testing of both modified and updated systems as well as
integrated systems testing; (iv) implementation of modified and updated systems;
and (v) contingency planning.
The Company has made significant progress in accomplishing the
necessary modifications and conversions to deal with Year 2000 issues. The Year
2000 Project has four main components: IT Systems, Non-IT Systems, Business
Partners and Contingency Planning.
The IT Systems Project has been organized into three phases as follows:
inventory, remediation/replacement and integrated testing. The inventory phase
is complete. Because mainframe systems are a major part of our Year 2000
Project, work on these systems began in 1996. Mainframe remediation efforts are
more than 92% complete, and this work is scheduled for completion in the first
quarter of 1999. Work on personal computer and network systems began in early
1998, and the remediation/replacement phase for these systems is about 62%
complete. This work is scheduled for completion in the second quarter of 1999.
The Company has been testing individual systems as part of its remediation
effort, and full system integration testing of all business critical systems is
scheduled for completion in the second quarter of 1999.
Non-IT Systems include administrative systems such as faxes and phone
systems. Facilities also contain non-IT systems such as elevators, heating and
cooling systems and security systems. Work on
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<PAGE> 60
these embedded systems began in 1998; this project is more than 70% complete.
The scheduled completion date is the second quarter of 1999.
All entities with which the Company does business are part of the
Business Partners component of the Year 2000 Project. The Company has completed
an inventory of business partners, and has identified the significance of
various partners to the Company's business. Correspondence has been initiated
with business partners to ascertain their Year 2000 readiness, and risk/impact
analysis of service or supply disruptions have been completed. Based upon the
results of analysis, action and contingency plans are being developed for
various business partners. This project is scheduled for completion in the
second or third quarter of 1999.
Despite efforts to address all Year 2000 needs in a timely and
effective manner, there are risks that the time frames set forth above may not
be met and that some Year 2000 effects may cause operational difficulties for
the Company. Some causes of these risks are the potential for unanticipated
complications in making Year 2000 modifications, the possibility of oversights
in the remediation process, and the difficulty of hiring and retaining IT
personnel in the current business environment. While the Company does not expect
any such operational difficulties to be material, the potential for these
occurrences cannot be fully assessed at this time. For these reasons, the
Company is in the process of developing contingency plans to cover the risk of
non-compliance due to Year 2000 failures in Company systems or those of its
business partners. Contingency Planning will include an identification of
critical business processes and development of alternative methods of carrying
them out in the event of any system failure. This effort is scheduled for
completion in the third quarter of 1999.
During the second quarter of 1998 the Company engaged an independent IT
consulting firm to review its Year 2000 Project plans, priorities and processes.
This review considered the Company's efforts as compared to industry "best
practices." This review verified the appropriateness of the Company's Year 2000
Project and provided additional direction for its continuation. In December of
1998 the Company hired an independent consulting firm to conduct a quality
assurance review of this project. Recommendations were evaluated and implemented
as appropriate.
Total estimated costs associated with Year 2000 modifications and
conversions are approximately $9 million. These estimated costs have
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increased primarily due to higher than originally estimated outside consulting
costs. These costs are expensed as incurred. For the year ended December 31,
1998, the Company has incurred $3.9 million in Year 2000 expenses, and $4.2
million since the beginning of the Year 2000 Project.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The main objectives in managing the investment portfolios of the
Company and its insurance subsidiaries are to maximize investment income and
total investment returns while minimizing credit risks in order to provide
maximum support to the insurance underwriting operations. Investment strategies
are developed based on many factors including asset liability management,
regulatory requirements, fluctuations in interest rates and consideration of
other market risks. Investment decisions are centrally managed by investment
professionals based on guidelines established by management and approved by the
boards of directors.
Market risk represents the potential for loss due to adverse changes in
the fair value of financial instruments. The market risks related to financial
instruments of the Company and its subsidiaries primarily relate to the
investment portfolio, which exposes the Company to risks related to interest
rates and, to a lesser extent, credit quality and prepayment variation.
Analytical tools and monitoring systems are in place to assess each of these
elements of market risk.
Interest rate risk is the price sensitivity of a fixed income security
to changes in interest rates. Management views these potential changes in price
within the overall context of asset and liability management. Company actuaries
estimate the payout pattern of our liabilities, primarily the Company's
lapsation, to determine duration, which is the present value of the fixed income
investment portfolios after consideration of the duration of these liabilities
and other factors, which management believes mitigates the overall effect of
interest rate risk for the Company.
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<PAGE> 62
The table below provides information about the Company's fixed maturity
investments and mortgage loans at December 31, 1998. The table presents cash
flows of principal amounts and related weighted average interest rates by
expected maturity dates. The cash flows are based on the earlier of the call
date or the maturity date or, for mortgage-backed securities, expected payment
patterns. Actual cash flows could differ from the expected amounts.
EXPECTED CASH FLOWS
<TABLE>
<CAPTION>
Amortized
1999 2000 2001 2002 2003 Thereafter Cost
---- ---- ---- ---- ---- ---------- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturity
Securities $850 $678 $572 $560 $792 $3,140 $6,592
Average interest
rate 6.5% 6.7% 6.8% 6.7% 6.4% 7.5%
Mortgage loans $ 25 $ 19 $ 21 $ 3 $ 4 $ 494 $ 566
Average interest
rate 10.2% 9.6% 9.8% 9.7% 9.5% 8.7%
---- ---- ---- ---- ---- ------ ------
Total $875 $697 $593 $563 $796 $3,634 $7,158
==== ==== ==== ==== ==== ====== ======
</TABLE>
The Company and its subsidiaries have consistently invested in high
quality marketable securities. As a result, management believes that the Company
has minimal credit quality risk. Fixed maturity securities are comprised of U.S.
Treasury, government agency, mortgage-backed and corporate securities.
Approximately 70% of fixed maturity securities are issued by the U.S. Treasury
or U.S. government agencies or are rated A or better by Moody's, Standard and
Poor's, or the NAIC. Less than 8% of the bond portfolio is below investment
grade. Fixed maturity securities have an average maturity of approximately 12
years.
Prepayment risk refers to the changes in prepayment patterns that can
either shorten or lengthen the expected timing of the principal repayments and
thus the average life and the effective yield of a security. Such risk exists
primarily within the Company's portfolio
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<PAGE> 63
of mortgage-backed securities. Management monitors such risk regularly. The
Company invests primarily in those classes of mortgage-backed securities that
are less subject to prepayment risk.
The Company's use of derivatives is generally limited to hedging
purposes and has principally consisted of using interest rate swaps, caps,
swaptions and options. These instruments, viewed separately, subject the Company
to varying degrees of market and credit risk. However when used for hedging, the
expectation is that these instruments would reduce overall market risk. Credit
risk arises from the possibility that counterparties may fail to perform under
the terms of the contracts. (See Note 14 of the Consolidated Financial
Statements for additional information).
Equity price risk is the potential loss arising from changes in the
value of equity securities. In general, equities have more year-to-year price
variability than intermediate term grade bonds. However, returns over longer
time frames have been consistently higher. The Company's equity securities are
high quality and readily marketable.
All of the above risks are monitored on an ongoing basis. A combination
of in-house systems and proprietary models and externally licensed software are
used to analyze individual securities as well as each portfolio. These tools
provide the portfolio managers with information to assist them in the evaluation
of the market risks of the portfolio.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements begin on page F-1.
Reference is made to the Index to Financial Statements on page F-1 herein.
Additional financial statement schedules are included on pages S-1
through S-15 herein. Reference is made to the Index to Financial Statement
Schedules on page S-1 herein.
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<PAGE> 64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
The Notice of 1999 Annual Meeting of Shareholders and Proxy Statement,
which, when filed pursuant to Regulation 14A under the Securities Exchange Act
of 1934, are incorporated by reference in this Annual Report on Form 10-K
pursuant to General Instruction G(3) of Form 10-K, provides the information
required under Part III (Items 10. Directors and Executive Officers of the
Registrant, 11. Executive Compensation, 12. Security Ownership of Certain
Beneficial Owners and Management and 13. Certain Relationships and Related
Transactions).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements. Reference is made to the index on page
F-1 of the report.
2. Financial Statement Schedules. Reference is made to the Index on
page S-1 of the report.
3. Exhibits Reference is made to the Index to Exhibits on page 63 of
the report.
(b) Reports on Form 8-K
1. None.
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<PAGE> 65
AMERUS LIFE HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit
No. Description
- ------- -----------
2.1 Plan of Reorganization dated October 27, 1995, filed as Exhibit 2.1
to the registration statement of the Registrant on Form S-1,
Registration Number 333-12239, is hereby incorporated by reference.
2.2 Amended and Restated Agreement and Plan of Merger, dated as of
September 19, 1997 and as amended and restated as of October 8,
1997, by and among the Registrant, AFC Corp. and AmVestors Financial
Corporation ("AmVestors"), filed as Exhibit 2.2 to the Registration
Statement of the Registrant on Form S-4, Registration Number
333-40065 is hereby incorporated by reference.
2.3 Agreement and Plan of Merger, dated as of August 13, 1997 and as
amended as of September 5, 1997, among the Registrant, a wholly
owned subsidiary of the Registrant and Delta Life Corporation, filed
as Exhibit 2.2 to Form 8-K of the Registrant dated October 8, 1997,
is hereby incorporated by reference.
3.1 Amended and Restated Articles of Incorporation of the Registrant
filed as Exhibit 3.5 to the registration statement of the Registrant
on Form S-1, Registration Number 333-12239, are hereby incorporated
by reference.
3.2 Bylaws of the Registrant, filed as Exhibit 3.2 to the registration
statement of the Registrant on Form S-1, Registration Number
333-12239, are hereby incorporated by reference.
3.3* Articles of Amendment of the Registrant dated September 25, 1998.
4.1 Amended and Restated Trust Agreement dated as of February 3, 1997
among the Registrant, Wilmington Trust Company, as property trustee,
and the administrative trustees named therein (AmerUs Capital I
business trust), filed as Exhibit 3.6 to the registration statement
of the Registrant and AmerUs Capital I on Form S-1, Registration
Number 333-13713, is hereby incorporated by reference.
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<PAGE> 66
4.2 Indenture dated as of February 3, 1997 between the Registrant and
Wilmington Trust Company relating to the Company's 8.85% Junior
Subordinated Debentures, Series A, filed as Exhibit 4.1 to the
registration statement of the Registrant and AmerUs Capital I on
Form S-1, Registration Number, 333-13713, is hereby incorporated by
reference.
4.3 Guaranty Agreement dated as of February 3, 1997 between the
Registrant, as guarantor, and Wilmington Trust Company, as trustee,
relating to the 8.85% Capital Securities, Series A, issued by AmerUs
Capital I, filed as Exhibit 4.4 to the registration statement on
Form S-1, Registration Number, 333-13713, is hereby incorporated by
reference.
4.4 Common Stock Purchase Warrant, filed as Exhibit (10)(v) to Form 10-
of AmVestors Financial Corporation dated May
13, 1992, is hereby incorporated by reference.
4.5 Amended and Restated Declaration of Trust of AmerUs Capital II,
dated as of July 27, 1998, among the Registrant, First Union Trust
Company and the administrative trustees named therein, relating to
the Registrant's 7.0% ACES Units, filed as Exhibit 4.5 on Form 10-Q,
dated August 13, 1998, is hereby incorporated by reference.
4.6 Certificate of Trust of AmerUs Capital III filed as Exhibit 4.7 to
the registration statement of the Registrant, AmerUs Capital II and
AmerUs Capital III, on Form S-3 (No. 333-50249), is hereby
incorporated by reference.
4.7 Common Trust Securities Guarantee Agreement, dated as of July 27,
1998, by the Registrant, relating to the Registrant's 7.0% ACES
Units, filed as Exhibit 4.7 on Form 10-Q, dated August 13, 1998, is
hereby incorporated by reference.
4.8 QUIPS Guarantee Agreement, dated as of July 27, 1998, by the
Registrant, relating to the Registrant's 7.0% ACES Units, filed as
Exhibit 4.8 on Form 10-Q, dated August 13, 1998, is hereby
incorporated by reference.
4.9 Master Unit Agreement, dated as of July 27, 1998, between the
Registrant and First Union National Bank relating to the
Registrant's 7.0% ACES Units, filed as Exhibit 4.9 on Form 10-Q,
dated August 13, 1998, is hereby incorporated by reference.
4.10 Call Option Agreement, dated as of July 27, 1998, between Goldman,
Sachs & Co. and First Union National Bank relating to the
Registrant's 7.0% ACES Units, filed as Exhibit 4.10 on Form 10-Q,
dated August 13, 1998, is hereby incorporated by reference.
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<PAGE> 67
4.11 Pledge Agreement, dated as of July 27, 1998, among the Registrant,
Goldman, Sachs & Co. and First Union National Bank relating to the
Registrant's 7.0% ACES Units, filed as Exhibit 4.11 on Form 10-Q,
dated August 13, 1998, is hereby incorporated by reference.
4.12 Senior Indenture, dated as of June 16, 1998, by and between the
Registrant and First Union National Bank, as Indenture Trustee,
relating to the Registrant's 6.95% Senior Notes, filed as Exhibit
4.14 on Form 10-Q, dated August 13, 1998, is hereby incorporated by
reference.
4.13 Subordinated Indenture, dated as of July 27, 1998, by and between
the Registrant and First Union National Bank, as Indenture Trustee,
relating to the Registrant's 6.86% Junior Subordinated Deferrable
Interest Debentures, filed as Exhibit 4.15 on Form 10-Q, dated
August 13, 1998, is hereby incorporated by reference.
10.1 Amended and Restated Intercompany Agreement dated as of December 1,
1996, among American Mutual Holding Company, AmerUs Group Co. and
the Company. Filed as Exhibit 10.81 to the Registrant's registration
statement on Form S-1, Registration Number 333-12239, is hereby
incorporated by reference
10.2 Joint Venture Agreement, dated as of June 30, 1996, between American
Mutual Insurance Company and Ameritas Life Insurance Corp., filed as
Exhibit 10.2 on Form 10-K, dated March 25, 1998, is hereby
incorporated by reference.
10.3 Management and Administration Service Agreement, dated as of April
1, 1996, among American Mutual Life Insurance Company, Ameritas
Variable Life Insurance Company and Ameritas Life Insurance Corp.,
filed as Exhibit 10.3 to the registration statement of the
Registrant on Form S-1, Registration Number 333-12239, is hereby
incorporated by reference.
10.4 Agreement and Plan of Merger, dated as of August 24, 1994, among
Central Life Assurance Company and American Mutual Life Insurance
Company, filed as Exhibit 10.4 to the registration statement of the
Registrant on Form S-1, Registration Number 333-12239, is hereby
incorporated by reference.
10.5 All-AmerUs Supplemental Executive Retirement Plan, effective January
1, 1996, filed as Exhibit 10.6 to the registration statement of the
Registrant on Form S-1, Registration Number 333-12239, is hereby
incorporated by reference.
10.6 American Mutual Life Insurance Company Supplemental Pension Plan
(which was curtailed as of December 31, 1995), filed as Exhibit 10.7
to the registration statement of the Registrant on Form S-1,
Registration Number 333-12239, is hereby incorporated by reference.
-65-
<PAGE> 68
10.7 Central Life Assurance Company Supplemental Pension Plan (which was
curtailed as of December 31, 1995), filed as Exhibit 10.8 to the
registration statement of the Registrant on Form S-1, Registration
Number 333-12239, is hereby incorporated by reference.
10.8 Management Incentive Plan, filed as Exhibit 10.9 to the registration
statement of the Registrant on Form S-1, Registration Number
333-12239, is hereby incorporated by reference.
10.9 AmerUs Life Insurance Company Performance Share Plan, filed as
Exhibit 10.10 to the registration statement of the Registrant on
Form S-1, Registration Number 333-12239, is hereby incorporated by
reference.
10.10 AmerUs Life Stock Incentive Plan, filed as Exhibit 10.11 to the
registration statement of the Registrant on Form S-1, Registration
Number 333-12239, is hereby incorporated by reference.
10.11 AmerUs Life Non-Employee Director Stock Plan, filed as Exhibit 10.13
to the registration statement of the Registrant on Form S-1,
Registration Number 333-12239, is hereby incorporated by reference.
10.12 Form of Indemnification Agreement executed with directors and
certain officers, filed as Exhibit 10.33 to the registration
statement of the Registrant on Form S-1, Registration Number
333-12239, is hereby incorporated by reference.
10.13 Amended and Restated Agreement of Limited Partnership of American
Mutual Affordable Housing Partners, L.P., dated as of September 1,
1995, among GrA Partners Joint Venture, AmerUs Properties, Inc.,
American Mutual Life Insurance Company, NCC Polar Company and NCC
Orion Company, filed as Exhibit 10.35 to the registration statement
of the Registrant on Form S-1, Registration Number 333-12239, is
hereby incorporated by reference.
10.14 Tax Allocation Agreement dated as of November 4, 1996, filed as
Exhibit 10.68 to the registration statement of the Registrant on
Form S-1, Registration Number 333-12239, is hereby incorporated by
reference.
10.15 Agreement and Plan of Merger, dated as of August 13, 1997 and as
amended as of September 5, 1997, among the Registrant, a
wholly-owned subsidiary of the Registrant and Delta Life
Corporation, filed as Exhibit 2.2 to the Registrant's report on Form
8-K on October 8, 1997, is hereby incorporated by reference.
-66-
<PAGE> 69
10.16 Purchase Agreement between AmerUs Life and AmerUs Bank dated March
5, 1997 relating to the sale of certain loans , filed as Exhibit
10.82 to the registration statement of the Registrant on Form S-4,
Registration Number 333-40065, is incorporated by reference.
10.17 Credit Agreement, dated as of October 23, 1997, among the
Registrant, Various Lender Institutions, the Co-Arrangers and The
Chase Manhattan Bank, as Administrative Agent , filed as Exhibit
10.84 to the registration statement of the Registrant on Form S-4,
Registration Number 333-40065, is incorporated by reference.
10.18 Coinsurance Agreement, effective February 1, 1996, between Delta
Life and Annuity Company and London Life Reinsurance Company , filed
as Exhibit 10.85 to the registration statement of the Registrant on
Form S-4, Registration Number 333-40065, is incorporated by
reference.
10.19 AmVestors Financial Corporation 1996 Incentive Stock Option Plan,
filed as Exhibit (4)(a) to Registration Statement of AmVestors
Financial Corporation on Form S-8, Registration Number 333-14571
dated October 21, 1996, is hereby incorporated by reference.
10.20 1989 Non-Qualified Stock Option Plan adopted March 17, 1989, filed
as Exhibit (10)(q) to Form 10-K of AmVestors Financial Corporation,
dated April 12, 1989, is hereby incorporated by reference.
10.21 Amended and Restated Miscellaneous Service Agreement, dated as of
July 21, 1997, among American Mutual Holding Company, Registrant,
AmerUs Life Insurance Company, AmerUs Group Co., AmerUs Bank, AmerUs
Mortgage, Inc., Iowa Realty Co., Inc., Iowa Title Company, AmerUs
Insurance, Inc., AmerUs Properties, Inc., AmerUs Direct, Inc., filed
as Exhibit 10.57 on Form 10-K, dated March 25, 1998, is hereby
incorporated by reference.
10.22 Lease - Business Property, dated December 1, 1996, between AmerUs
Properties, Inc. and AmerUs Life Insurance Company, property 611
Fifth Avenue, Des Moines, Iowa, filed as Exhibit 10.58 on Form 10-K,
dated March 25, 1998, is hereby incorporated by reference.
10.23 First Amendment dated February 1, 1998 to Lease Agreement dated
December 1, 1996 between AmerUs Properties, Inc. and AmerUs Life
Insurance Company, property 611 Fifth Avenue, Des Moines, Iowa,
filed as Exhibit 10.59 on Form 10-K, dated March 25, 1998, is hereby
incorporated by reference.
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<PAGE> 70
10.24 Lease - Business Property, dated December 1, 1996, between AmerUs
Properties, Inc. and AmerUs Life Insurance Company, 1213 Cherry
Street, Des Moines, Iowa, filed as Exhibit 10.60 on Form 10-K, dated
March 25, 1998, is hereby incorporated by reference.
10.25 Lease - Business Property, dated December 1, 1996, between AmerUs
Properties, Inc. and the Registrant, property 418 Sixth Avenue
Moines, Iowa, filed as Exhibit 10.61 on Form 10-K, dated March 25,
1998, is hereby incorporated by reference.
10.26* Revised and Restated Lease - Business Property, dated May 28, 1998,
between AmerUs Properties, Inc. and the Registrant property, 699
Walnut Street, Des Moines, Iowa.
10.27* Addendum, dated May 28, 1998 to lease dated May 28, 1998 between
AmerUs Properties and the Registrant.
10.28* Addendum II, dated July 21, 1998, to lease dated May 28, 1998
between AmerUs Properties and the Registrant.
10.29 Servicing Agreement, dated March 5, 1997, between AmerUs Life
Insurance Company and AmerUs Properties, Inc., filed as Exhibit
10.64 on Form 10-K, dated March 25, 1998, is hereby incorporated by
reference.
10.30 Consent dated as of May 20, 1998 to the Credit Agreement dated as of
October 23, 1997 among the Registrant, Various Lender Institutions,
the Co-Arrangers and The Chase Manhattan Bank, as Administrative
Agent, filed as Exhibit 10.72 on Form 10-Q, dated November 12, 1998,
is hereby incorporated by reference.
10.31 First Amendment dated as of May 30, 1997 to the Credit Agreement
dated as of October 23, 1997 among the Registrant, Various Lender
Institutions, the Co-Arrangers and The Chase Manhattan Bank, as
Administrative Agent, filed as Exhibit 10.73 on Form 10-Q, dated
November 12, 1998, is hereby incorporated by reference.
10.32 Second Amendment dated as of June 22, 1998 to the Credit Agreement
dated as of October 23, 1997 among the Registrant, Various Lender
Institutions, the Co-Arrangers and The Chase Manhattan Bank, as
Administrative Agent, filed as Exhibit 10.74 on Form 10-Q, dated
November 12, 1998, is hereby incorporated by reference.
10.33 Second Consent and Amendment dated as of October 2, 1998 to the
Credit Agreement dated as of October 23, 1997 among the Registrant,
Various Lender Institutions, the Co-Arrangers and The Chase
Manhattan Bank, as Administrative Agent, filed as Exhibit 10.75 on
Form 10-Q, dated November 12, 1998, is hereby incorporated by
reference.
-68-
<PAGE> 71
10.34 MIP Deferral Plan dated as of September 1, 1998, filed as Exhibit
10.76 on Form 10-Q, dated November 12, 1998, is hereby incorporated
by reference.
10.35* Open Line of Credit Application and Terms Agreement, dated March 4,
1998, between Federal Home Loan Bank of Des Moines and AmerUs Life
Insurance Company.
10.36* Origination Agreement, dated August 1, 1998, between AmerUs Home
Equity, Inc. and AmerUs Life Insurance Company.
10.37* Third Waiver to Credit Agreement dated as of November 16, 1998 to
the Credit Agreement dated as of October 23, 1997 among the
Registrant, Various Lender Institutions, the Co-Arrangers and The
Chase Manhattan Bank, as Administrative Agent.
10.38* Fourth Consent and Amendment, dated as of December 4, 1998 to the
Credit Agreement dated as of October 23, 1997 among the Registrant,
Various Lender Institutions, the Co-Arrangers and The Chase
Manhattan Bank, as Administrative Agent.
10.39* Administrative Services Agreement, dated as of August 1, 1998,
among American Mutual Holding Company, Registrant, AmerUs Group,
AmerUs Home Equity, Inc., AmerUs Mortgage, Inc., AmerUs Properties,
Inc., American Capital Management Group, Inc., AmerUs Life Insurance
Company, AmVestors Financial Corporation, American Investors Life
Insurance Company, Inc., and Delta Life and Annuity Company.
12* Computation of Ratios of Earnings to Fixed Charges
21.1* List of Subsidiaries of the Registrant
23.1* Consent of KPMG Peat Marwick LLP
27.1* Financial Data Schedule
99.3 Employment Agreement, dated as of September 19, 1997, among Mark V.
Heitz, AmVestors Financial Corporation, American Investors Life
Insurance Company, Inc., AmVestors Investment Group, Inc. and
American Investors Sales Group, Inc., filed as Exhibit 99.3 to the
registration statement of the Registrant on Form S-4, Registration
Number 333-40065, is incorporated by reference.
99.4 Agreement of Sale, dated as of October 22, 1997, by and between R.
Rex Lee and AmerUs Group, Co., filed as Exhibit 99.4 to the
registration statement of the Registrant on Form S-4, Registration
Number 333-40065, is incorporated by reference.
99.5* Retirement Agreement, dated June 27, 1997, by and between Victor N.
Daley and AmerUs Life Holdings, Inc.
- ----------------------
* included herein
-69-
<PAGE> 72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERUS LIFE HOLDINGS, INC.
/s/ Roger K. Brooks
Date: March 30, 1999 ----------------------------
Roger K. Brooks
Chairman, President and
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of AmerUs Life Holdings,
Inc., hereby severally and individually constitute and appoint Michael G.
Fraizer, Brenda J. Cushing and James A. Smallenberger, and each of them, the
true and lawful attorneys and agents of each of us to execute in the name, place
and stead of each of us (individually and in any capacity stated below) any and
all amendments to this Annual Report on Form 10-K and all instruments necessary
or advisable in connection therewith and to file the same with the Securities
and Exchange Commission, each of said attorneys and agents to have the power to
act with or without the others and to have full power and authority to do and
perform in the name and on behalf of each of the undersigned every act
whatsoever necessary or advisable to be done on the premises as fully and to all
intents and purposes as any of the undersigned might or could do in person, and
we hereby ratify and confirm our signatures as they may be signed by or said
attorneys and agents or each of them to any and all such amendments and
instruments.
-70-
<PAGE> 73
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
/s/ Roger K. Brooks
- ------------------------------------ Chairman, President and Chief
Executive Officer (principal
executive officer) and Director
/s/ Michael G. Fraizer
- ------------------------------------ Senior Vice President and
Michael G. Fraizer Chief Financial Officer
(principal financial officer)
/s/ Brenda J. Cushing
- ------------------------------------ Vice President and Controller
Brenda J. Cushing (principal accounting officer)
/s/ John R. Albers
- ------------------------------------ Director
John R. Albers
/s/Malcolm Candlish
- ------------------------------------ Director
Malcolm Candlish
/s/ Maureen M. Culhane
- ------------------------------------ Director
Maureen M. Culhane
/s/ Thomas F. Gaffney
- ------------------------------------ Director
Thomas F. Gaffney
/s/ Sam C. Kalainov
- ------------------------------------ Director
Sam C. Kalainov
-71-
<PAGE> 74
/s/ Ralph W. Laster, Jr.
- ------------------------------------ Director
Ralph W. Laster, Jr.
- ------------------------------------ Director
John W. Norris, Jr.
/s/ Jack C. Pester
- ------------------------------------ Director
Jack C. Pester
/s/ John A. Wing
- ------------------------------------ Director
John A. Wing
-72-
<PAGE> 75
AMERUS LIFE HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of
December 31, 1998 and 1997.............................. F-3 through F-5
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996........................ F-6 through F-7
Consolidated Statements of Comprehensive Income for
the years ended December 31, 1998, 1997 and 1996........ F-8
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996.... F-9 through F-10
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996.................. F-11 through F-13
Notes to Consolidated Financial Statements................ F-14 through F-74
Separate financial statements of subsidiaries not consolidated and 50%
or less owned persons accounted for by the equity method have been omitted
because they do not individually constitute a significant subsidiary.
-F 1-
<PAGE> 76
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
AmerUs Life Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of AmerUs
Life Holdings, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, comprehensive income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998. 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 December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Des Moines, Iowa
February 10, 1999
-F 2-
<PAGE> 77
AMERUS LIFE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Assets
Investments
Securities available-for-sale at fair value (note 2)
Fixed maturity securities $ 6,710,246 $ 6,851,427
Equity securities (note 6) 68,483 61,480
Short-term investments 22,428 12,595
Fixed maturity securities held for
trading purposes (note 2) - 22,955
Mortgage loans on real estate (note 3) 566,403 462,473
Real estate 633 8,670
Policy loans 110,786 117,865
Other investments 205,790 158,073
----------- ----------
Total investments 7,684,769 7,695,538
Cash 60,090 58,081
Accrued investment income 79,921 84,713
Premiums and fees receivable 4,385 3,445
Reinsurance receivables 6,174 6,203
Deferred policy acquisition costs (note 4) 246,030 118,896
Value of business acquired (note 5) 224,540 266,014
Investment in unconsolidated subsidiaries 29,602 26,849
Goodwill 215,506 220,250
Property and equipment 23,249 22,863
Other assets 401,239 359,308
Closed Block assets 1,453,305 1,391,848
----------- -----------
Total assets $10,428,810 $10,254,008
=========== ===========
</TABLE>
-F 3-
<PAGE> 78
<TABLE>
<S> <C> <C>
Liabilities and Stockholders' Equity
Liabilities
Policy reserves and policyowner funds:
Future life and annuity policy
benefits $ 7,185,417 $ 7,074,444
Policyowner funds 95,974 89,641
----------- -----------
7,281,391 7,164,085
Accrued expenses 41,323 39,095
Dividends payable to policyowners 1,168 1,575
Policy and contract claims 13,433 4,548
Income taxes payable 9,574 12,753
Deferred income taxes (note 7) 11,398 16,914
Other liabilities 159,350 111,180
Debt (note 6) 141,051 266,435
Closed Block liabilities 1,703,195 1,623,432
----------- ----------
Total liabilities 9,361,883 9,240,017
----------- ----------
Company-obligated mandatorily redeemable preferred capital securities of
subsidiary trusts holding solely junior subordinated debentures of the
Company (note 6) 216,729 86,000
---------- ----------
Stockholders' equity (note 12)
Preferred stock, no par value,
20,000,000 shares authorized,
none issued - v
Common stock, Class A, no par value,
180,000,000 shares authorized 1998; 75,000,000 shares authorized 1997;
issued and outstanding 25,425,983 shares (net of 4,308,936 treasury
shares) in 1998 and 29,734,918 shares
in 1997 25,426 29,735
</TABLE>
-F 4-
<PAGE> 79
<TABLE>
<S> <C> <C>
Common stock, Class B, no par value,
50,000,000 shares authorized;
5,000,000 shares issued and
outstanding 5,000 5,000
Paid-in capital 290,091 383,686
Accumulated other comprehensive income 26,471 55,747
Retained earnings 503,210 453,823
----------- -----------
Total stockholders' equity 850,198 927,991
----------- -----------
Commitments and contingencies (note 11)
Total liabilities and
stockholders' equity $10,428,810 $10,254,008
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-F 5-
<PAGE> 80
AMERUS LIFE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998, 1997 and 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues
Insurance premiums $81,197 $ 48,127 $138,476
Universal life and annuity product charges 71,104 47,306 52,220
Net investment income (note 2) 506,949 224,431 228,625
Realized gains (losses) on investments (note 2) (112) 13,791 65,983
Contribution from the Closed Block 31,478 31,044 19,909
-------- -------- --------
690,616 364,699 505,213
-------- -------- --------
Benefits and expenses
Policyowner benefits 430,756 195,976 264,742
Underwriting, acquisition, and insurance
expenses 81,416 49,999 54,857
Amortization of deferred policy acquisition
costs and value of business acquired
(notes 4 and 5) 60,214 23,776 40,160
Dividends to policyowners 2,558 1,587 26,324
-------- -------- --------
574,944 271,338 386,083
-------- -------- --------
Income from operations 115,672 93,361 119,130
Interest expense (note 6) 27,075 14,980 2,142
-------- -------- --------
Income before income tax expense and
equity in earnings of unconsolidated
subsidiary 88,597 78,381 116,988
Income tax expense (note 7) 28,422 22,022 43,859
-------- -------- --------
Income before equity in earnings of
unconsolidated subsidiary 60,175 56,359 73,129
Equity in earnings of unconsolidated
subsidiary 2,654 1,700 1,044
-------- -------- --------
Net income $ 62,829 $ 58,059 $ 74,173
======== ======== ========
</TABLE>
-F 6-
<PAGE> 81
<TABLE>
<S> <C> <C> <C>
Earnings per common share (note 16)
Basic $1.88 $2.47 $3.20
===== ===== =====
Diluted $1.86 $2.46 $3.20
===== ===== =====
Weighted average common shares outstanding
Basic 33,458,140 23,536,666 23,155,989
========== ========== ==========
Diluted 33,695,752 23,572,259 23,155,989
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-F 7-
<PAGE> 82
AMERUS LIFE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income $62,829 $58,059 $ 74,173
Other comprehensive income(loss), before tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses)
arising during period (29,081) 51,717 (47,503)
Less: reclassification adjustment
for gains included in net income 6,477 18,531 66,016
Minimum pension liability adjustment (1,718) - -
------- ------- --------
Other comprehensive income (loss), before tax (37,276) 33,186 (113,519)
Income tax (expense) benefit related to items
of other comprehensive income (note 7) 8,000 (12,739) 40,105
------- -------- --------
Other comprehensive income (loss), net of tax (29,276) 20,447 (73,414)
------- ------- --------
Comprehensive income $33,553 $78,506 $ 759
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
-F 8-
<PAGE> 83
AMERUS LIFE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997, and 1996
(In thousands)
<TABLE>
<CAPTION>
Accumulated
other Total
Common stock compre- stock-
------------ Paid-in hensive Retained holders'
Class A Class B capital income earnings equity
------- ------- ------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ -- $ -- $ -- $ 108,714 $ 431,195 $ 539,909
Net income -- -- -- -- 74,173 74,173
Net unrealized (loss) on
securities -- -- -- (73,414) v (73,414)
Dividend to American
Mutual Holding Company
(note 9) -- -- -- -- (4,158) (4,158)
Capital contributions to
affiliates (note 9) -- -- -- -- (79,000) (79,000)
Issuance of common stock 14,500 5,000 -- -- (19,500) --
-------- -------- --------- --------- --------- ---------
Balance at December 31, 1996 14,500 5,000 -- 35,300 402,710 457,510
</TABLE>
-F 9-
<PAGE> 84
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net income -- -- -- -- 58,059 58,059
Net unrealized gain on
securities -- -- -- 20,447 -- 20,447
Issuance of common stock 15,235 -- 383,686 -- -- 398,921
Dividends declared on
common stock -- -- -- -- (6,946) (6,946)
-------- -------- ---------- --------- --------- ----------
Balance at December 31, 1997 $ 29,735 $ 5,000 $ 383,686 $ 55,747 $ 453,823 $ 927,991
Net income -- -- -- -- 62,829 62,829
Net unrealized (loss) on
securities -- -- -- (28,076) -- (28,076)
Minimum pension liability
adjustment -- -- -- (1,200) -- (1,200)
Stock issued under various
incentive plans, net of
forfeitures 14 -- 635 -- -- 649
Purchase of treasury stock (4,325) -- (97,810) -- -- (102,135)
Issuance of treasury stock 2 -- 661 -- -- 663
Retirement of company-
obligated mandatorily
redeemable preferred
capital securities (note 6) -- -- 2,919 -- -- 2,919
Dividends declared on common
stock -- -- -- -- (13,442) (13,442)
-------- -------- ---------- --------- --------- ---------
Balance at December 31, 1998 $ 25,426 $ 5,000 $ 290,091 $ 26,471 $ 503,210 $ 850,198
======== ======== ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-F 10-
<PAGE> 85
AMERUS LIFE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 62,829 $ 58,059 $ 74,173
Adjustments to reconcile net income to
net cash provided by operating
activities:
Policyowner assessments on universal
life and annuity products (71,104) (43,441) (49,347)
Interest credited to policyowner
account balances 182,200 127,066 109,457
Realized investment (gains) losses 112 (13,791) (65,983)
Goodwill amortization 7,531 602 -
VOBA amortization 32,932 2,790 -
Change in:
Accrued investment income 4,792 (351) 8,033
Reinsurance ceded receivables 29 (1,548) (6,708)
Deferred policy acquisition costs (125,994) (30,366) (12,235)
Liabilities for future policy benefits 238,885 (21,448) 16,504
Policy and contract claims and other
policyowner funds 8,885 (2,727) (9,578)
Income taxes:
Current (1,607) (1,552) 6,422
Deferred 2,619 2,156 (7,181)
Other, net 31,39 12,971 15,127
Change in Closed Block assets
and liabilities, net 105,911 135,970 68,870
----------- ----------- -----------
Net cash provided by operating activities 479,411 224,390 147,554
----------- ----------- -----------
Cash flows from investing activities
Purchase of fixed maturities
available-for-sale (3,449,439) (1,473,579) (1,423,268)
Maturities, calls, and principal
reductions of fixed maturities
available for sale 3,544,178 1,356,762 1,339,860
Purchase of equity securities (323,295) (53,850) (280,215)
Proceeds from sale of equity securities 331,641 67,794 363,358
Proceeds from repayment and sale
of mortgage loans 118,947 171,082 119,061
Purchase of mortgage loans (231,004) (137,222) (46,532)
</TABLE>
-F 11-
<PAGE> 86
<TABLE>
<S> <C> <C> <C>
Purchase of real estate and other
invested assets (266,416) (22,524) (59,119)
Proceeds from sale of real estate and
other invested assets 232,494 - 26,023
Change in policy loans, net 7,079 (9,625) (6,630)
Other assets, net (5,978) 89,109 (73,735)
Acquisitions, net of cash acquired - (153,798) -
Change in Closed Block
investments, net (93,364) (103,401) (69,550)
Initial establishment of the
Closed Block - - (22,925)
----------- ----------- -----------
Net cash (used in) investing activities (135,157) (269,252) (133,672)
----------- ----------- -----------
Cash flows from financing activities
Deposits to policyowner account balances 855,181 122,531 156,420
Withdrawals from policyowner account
balances (1,087,856) (233,537) (293,521)
Change in debt, net (125,384) 78,054 160,642
Purchase of treasury stock (102,135) - -
Issuance of treasury stock 663 - -
Dividends to American Mutual
Holding Company - - (4,158)
Dividend to shareholders (13,442) (6,946) -
Issuance of company-obligated mandatorily
redeemable capital securities 144,963 86,000 -
Retirement of company-obligated mandatorily
redeemable capital securities (14,235) - -
Net proceeds from initial public stock
offering - 55,027 -
Capital contribution to affiliates - - (36,071)
----------- ----------- -----------
Net cash provided by (used in)
financing activities (342,245) 101,129 (16,688)
----------- ----------- -----------
Net (decrease) increase in cash 2,009 56,267 (2,806)
Cash at beginning of period 58,081 1,814 4,620
----------- ----------- -----------
Cash at end of period $ 60,090 $ 58,081 $ 1,814
=========== =========== ===========
Supplemental disclosure of cash activities
Interest paid $ 26,641 $ 10,420 $ 2,224
=========== =========== ===========
Income taxes paid $ 17,566 $ 42,801 $ 45,417
=========== =========== ===========
</TABLE>
-F 12-
<PAGE> 87
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
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
======== =========== ==========
Details of acquisitions
Fair value of assets acquired $ - $ 5,744,191 $ -
Liabilities assumed - 5,190,829 -
-------- ----------- ---------
Carrying value of acquisitions - 553,362 -
Common stock issued - (343,894) -
Warrants, options and SAR's
rolled over - (23,184) -
Payments made on liabilities
included above - 25,800 -
-------- ----------- ---------
Cash paid - 212,084 -
Less cash acquired - 58,286 -
-------- ----------- ---------
Net cash paid for acquisitions $ - $ 153,798 $ -
======== =========== =========
Capital contribution to affiliates
Net transfer of invested assets:
Fixed maturities $ - $ - $ 3,550
Real estate - - 38,432
Mortgage loans - - 9,309
Equity securities - - 802
Debt assumed from affiliates - - (9,164)
-------- ----------- ---------
Total non-cash items contributed - - 42,929
Cash contributed - - 36,071
-------- ----------- ---------
Total capital contributed $ - $ - $ 79,000
======== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
-F 13-
<PAGE> 88
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 Preferred Producer agency system, a Personal
Producing General Agents (PPGA) system and national networks of independent
agents. The life insurance and annuity operations are the Company's two
operating segments.
Organization
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 this Reorganization which became
effective on June 30, 1996, 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.
As a result of the Reorganization, AMHC indirectly owned, 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. 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 of the Class B shares are adjusted to ensure that
votes of the Class B shares together with the votes of Class A shares held by
the Class B shareholders will always have a majority of the votes. AMHC must
directly or indirectly control a majority of the voting shares of the Company.
In addition, as long as the members of AMHC own directly or indirectly more than
50 percent of the voting power of the outstanding voting stock, AMHC is entitled
to equity purchase rights which provide
-F 14-
<PAGE> 89
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.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements of the Company and
its wholly-owned subsidiaries have been prepared in conformity with Generally
Accepted Accounting Principles (GAAP) which, as to the insurance company
subsidiaries, differ from statutory accounting practices prescribed or permitted
by regulatory authorities.
The accompanying consolidated financial statements include the accounts
and operations, after intercompany eliminations, of the Company and its
wholly-owned subsidiaries, principally, AmerUs Life, AmVestors Financial
Corporation (AmVestors) and Delta Life Corporation (Delta).
The preparation of consolidated financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Certain balances for 1996 and 1997
have been reclassified to conform to the 1998 presentation format.
Closed Block
The Reorganization contained an arrangement, known as a closed block
(the Closed Block), to provide for dividends on policies that were generally in
force on June 30, 1996 and were within the classes of individual policies for
which AmerUs Life 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 Closed Block until the
Closed Block is no longer in effect. The Company will not be required to support
the payment of dividends and interest credits on the Closed Block policies from
its general funds, although it could choose to provide such support. The Company
will
-F 15-
<PAGE> 90
continue to pay guaranteed benefits under all policies, including policies
included in the Closed Block, in accordance with their terms.
The financial information of the Closed Block, while prepared on a GAAP
basis, reflects its contractual provisions and not its actual results of
operations and financial position. Many expenses related to the Closed Block
operations are charged to operations outside of 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 of the Closed Block. Unrealized gains and losses on investments are
included outside of the Closed Block as a component of other comprehensive
income and will be included in the Closed Block operations upon their
realization.
-F 16-
<PAGE> 91
Summarized financial information of the Closed Block as of December 31,
1998, 1997 and 1996 and for the years ended December 31, 1998 and 1997 and for
the six months ended December 31, 1996, is as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Assets
Fixed maturity securities, at fair value
(amortized cost 1998 - $1,074,208;
1997 - $1,004,976; 1996 - $883,259) $ 1,116,540 $ 1,053,066 $ 901,261
Short-term investments, at fair value 8,875 660 3,126
Policy loans 181,866 168,368 166,827
Other investments 3,027 591 -
Cash 4 21 3
Accrued investment income 14,445 12,617 10,798
Premiums and fees receivable 3,385 3,591 4,998
Deferred policy acquisition costs 117,479 143,765 175,235
Other assets 7,684 9,169 7,920
----------- ----------- -----------
$ 1,453,305 $ 1,391,848 $ 1,270,168
=========== =========== ===========
Future life and annuity policy benefits $ 1,517,162 $ 1,448,725 $ 1,363,073
Policyowner funds 6,350 6,786 7,602
Accrued expenses 3,887 5,980 2,969
Dividends payable to policyowners 149,487 135,985 132,661
Policy and contract claims 8,395 5,966 4,765
Other liabilities 17,914 19,990 6,201
----------- ----------- -----------
$ 1,703,195 $ 1,623,432 $ 1,517,271
=========== =========== ===========
Revenues and Expenses
Insurance premiums $ 198,178 $ 206,145 $ 108,315
Universal life and annuity product charges 13,695 13,599 6,451
Net investment income 115,762 113,759 56,329
Realized gains on investments 10,324 718 481
Policyowner benefits (200,783) (206,638) (101,078)
Underwriting, acquisition, and insurance
expenses (5,042) (5,477) (2,969)
Amortization of deferred policy acquisition
costs (26,286) (31,471) (18,412)
Dividends to policyowners (74,370) (59,591) (29,208)
----------- ----------- -----------
Contribution from the Closed Block
before income taxes $ 31,478 $ 31,044 $ 19,909
=========== =========== ===========
</TABLE>
-F 17-
<PAGE> 92
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
stockholders' equity, except for certain policies of Delta Life and Annuity
Company (Delta Life) which have specific investments identified and for which
valuation changes and related unrealized gains and losses are included in future
life and annuity policy benefits. These unrealized gains or losses, excluding
certain Delta Life unrealized gains or losses as described above, in
stockholders' equity are reported net of taxes and adjustments to deferred
policy acquisition costs and value of business acquired.
Investments in debt securities which were purchased principally for the
purpose of selling such securities in the near term are classified as trading
securities and are carried at market. Unrealized gains (losses) are included in
earnings.
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 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 18-
<PAGE> 93
Interest Rate Swaps, Caps, Swaptions and Options
The Company uses interest rate swaps, caps, swaptions and options 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.
The Company has equity-indexed annuity products that guarantee the
return of principal to the customer and credits interest based on a percentage
of the gain in the S&P 500 Index -Registered Trademark-. A portion of the
premium from each customer is invested in investment grade fixed income
securities to cover the minimum guaranteed value due the customer at the end of
the term. A portion of the premium is used to purchase S&P 500 call options to
hedge the growth in interest credited to the customer as a direct result of
increases in the S&P 500 Index -Registered Trademark-. The call options provide
the Company the opportunity to participate in the increases of the S&P 500 Index
- -Registered Trademark- if the market advances.
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
-F 19-
<PAGE> 94
deferred. The method of amortizing deferred policy acquisition costs for
traditional life insurance products varies, dependent upon whether the contract
is participating or non-participating. Participating contracts are those which
are expected to pay dividends to policyowners in proportion to their relative
contribution to the Company's statutory surplus. Deferred policy acquisition
costs for participating traditional life insurance are generally amortized over
the life of the policies in proportion to the present value of estimated gross
margins. Non-participating traditional life insurance deferred policy
acquisition costs are amortized over the premium-paying period of the related
policies in proportion to the ratio of annual premium revenues to total
anticipated premium revenues using assumptions consistent with those used in
computing policy benefit reserves. For universal life insurance and annuity
products, deferred policy acquisition costs are generally amortized 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 margins on the underlying
policies vary from previous estimates. The deferred policy acquisition cost
asset is adjusted for the impact on estimated gross profits of net unrealized
gains and losses on securities.
Value of Business Acquired
Value of Business Acquired (VOBA) from insurance companies acquired
represents the portion of the purchase price allocated to the right to receive
future cash flows from insurance contracts existing at the date of the
acquisition. This cost of policies purchased represents the actuarially
determined present value of the projected future cash flows from the acquired
policies.
The expected future cash flows used in determining such value are based
on actuarially determined projections of future premium receipts, mortality,
surrenders, operating expenses, changes in insurance liabilities, investment
yields on the assets retained to support the policy liabilities and other
factors. These projections take into account all factors known or expected at
the valuation date, based on the judgment of management. The actual experience
on purchased business may vary from projections due to differences in renewal
premium, investment spread, investment gains or losses, mortality and morbidity
costs and other factors.
The discount rate used to determine the value of policies purchased is
the rate of return required in order to invest in the business being acquired.
Factors in determining this rate include the cost of capital required to fund
the acquisition; the acquired company's compatibility with other Company
activities that may impact
-F 20-
<PAGE> 95
future cash flows; the complexity of the acquired company; and recent discount
rates used by others to determine valuations to acquire similar blocks of
business.
VOBA is amortized based on the incidence of the expected cash flows
using the interest rate credited to the underlying policies. If cash flows
differ from expectations, the amortization of the VOBA is adjusted. The VOBA
asset is adjusted for the impact on estimated gross profits of net unrealized
gains and losses on securities. Each year, the recoverability of the VOBA is
evaluated and if the evaluation indicates that the existing insurance
liabilities, together with the present value of future net cash flows from the
blocks of business acquired, is insufficient to recover the VOBA, the difference
is charged to expense as an additional write-off of the VOBA.
Goodwill
Goodwill represents the excess of the amount paid to acquire a company
over the fair value of its net assets. Goodwill is amortized on a straight-line
basis over a thirty year period. The value of goodwill is monitored based on the
estimates of future earnings. If it is determined that future earnings do not
support the recoverability of goodwill, its carrying value is reduced by a
corresponding charge to expense.
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 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 the 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
-F 21-
<PAGE> 96
average assumed interest rate for all traditional life policy reserves was 4.30
percent in 1998, 4.27 percent in 1997 and 4.23 percent in 1996. 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 rates for universal life products were 6.08 percent in 1998, 6.23
percent in 1997 and 6.27 percent in 1996. The range of interest crediting rates
for annuity products excluding bonus interest payouts, were 4.00 to 6.70 percent
in 1998, 4.50 to 6.70 percent in 1997 and 4.50 to 6.15 percent in 1996.
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 approximately 62 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.
Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) 123, "Accounting for
Stock-Based Compensation," requires increased disclosure of compensation expense
arising from stock compensation plans. SFAS 123 encourages rather than requires
companies to adopt a new method of accounting for stock compensation awards
based on their estimated fair value at the date they are granted. Companies are
permitted to continue accounting under APB Opinion 25 which requires
compensation cost be recognized based on the difference, if any, between the
quoted market price of the stock on the date of grant and the amount an employee
must pay to acquire the stock. The Company has elected to continue to apply APB
Opinion 25 in its consolidated financial statements and has disclosed proforma
net income and earnings per share information.
-F 22-
<PAGE> 97
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 December 31, 1998, 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.
Income Taxes
The Company and its non-life insurance subsidiaries file a consolidated
federal income tax return. The life insurance subsidiaries file separate federal
income tax returns. 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.
Earnings Per Share
Basic earnings per share of common stock are computed by dividing net
income by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share assumes the issuance of common shares
applicable to stock options and warrants and is calculated using the treasury
stock method.
-F 23-
<PAGE> 98
Emerging Accounting Matters
SFAS 130, 131, and 132
In 1998, the Company adopted the provisions of SFAS 130, "Reporting
Comprehensive Income," SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information;" and SFAS 132, "Employer's Disclosure about Pensions
and Other Postretirement Benefits." A consolidated statement of comprehensive
income has been included as provided by SFAS 130. Disclosures for segment
information have been included in note 18 as provided by SFAS 131 and
disclosures for pensions and other postretirement benefits have been included in
note 8 as provided by SFAS 132. Adoption of these statements were of a reporting
nature and had no impact on the financial position or results of operations of
the Company.
SFAS 133
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 defines derivative instruments
and provides comprehensive accounting and reporting standards for the
recognition and measurement of derivative and hedging activities (including
certain instruments embedded in other contracts). It requires derivatives to be
recorded in the consolidated balance sheet at fair value and establishes
criteria for hedges of changes in the fair value of assets, liabilities or firm
commitments, hedges of variable cash flows or forecasted transactions, and
hedges of foreign currency exposures of net investments in foreign operations.
Changes in the fair value of derivatives not meeting specific hedge accounting
criteria would be recognized in the consolidated statement of operations. SFAS
No. 133 is effective for all fiscal quarters of all years beginning after
December 31, 1999. The Company is evaluating SFAS No. 133 and has not determined
its effect on the consolidated financial statements.
SOP 97-3
In December 1997, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments." This
statement provides guidance on when an insurance or other enterprise should
recognize a liability for guaranty fund and other assessments and on how to
measure such liability. SOP 97-3 is effective for fiscal years beginning after
December 15, 1998; however, its adoption will not have a material impact on the
financial position or results of operations as the Company currently estimates
assessment liabilities when a determination of an insolvency has occurred.
-F 24-
<PAGE> 99
SOP 98-1
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This SOP provides
guidance for determining whether costs of software developed or obtained for
internal use should be capitalized or expensed as incurred. In the past, the
Company has expensed such costs as they were incurred. This SOP is also
effective for fiscal years beginning after December 15, 1998. The SOP will not
have a material impact on the financial position or results of operations of the
Company.
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, holding a well diversified portfolio of assets
to minimize concentrations, maintaining sound reinsurance and credit and
collection policies, and providing allowances or reserves for any amounts deemed
uncollectible.
-F 25-
<PAGE> 100
(2) Investments
The Company's investments at December 31, 1998 and 1997 are classified
as available-for-sale securities and trading securities and are summarized as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---- ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities
available-for-sale
at December 31, 1998
Corporate bonds $3,810,435 $122,087 $ 35,411 $3,897,111
U.S. government bonds 67,804 2,601 30 70,375
State and political subdivisions 47,441 2,139 - 49,580
Foreign government bonds 138,924 7,801 9,836 136,889
Mortgage-backed bonds 2,462,292 32,776 3,623 2,491,445
Redeemable preferred stock 65,180 1,679 2,013 64,846
---------- -------- ---------- ----------
Total fixed maturities
available-for-sale $6,592,076 $169,083 $ 50,913 $6,710,246
========== ======== ========== ==========
Equity securities available-for-sale $ 86,864 $ 2,625 $ 21,006 $ 68,483
========== ======== ========== ==========
Short-term investments
available-for-sale $ 22,428 $ - $ - $ 22,428
========== ======== ========== ==========
</TABLE>
-F 26-
<PAGE> 101
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---- ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities
available-for-sale
at December 31, 1997
Corporate bonds $3,513,858 $ 85,494 $ 2,347 $3,597,005
U.S. government bonds 49,058 555 11 49,602
State and political subdivisions 9,563 65 5 9,623
Foreign government bonds 68,592 4,048 1,469 71,171
Mortgage-backed bonds 3,002,523 33,897 1,669 3,034,751
Redeemable preferred stock 87,233 2,042 - 89,275
---------- ---------- ---------- ----------
Total fixed maturities
available-for-sale 6,730,827 126,101 5,501 6,851,427
Fixed maturity securities held for
trading purposes
Corporate bonds 22,799 - - 22,799
Redeemable preferred stock 156 - - 156
---------- ---------- ---------- ----------
Total fixed maturities held for
trading purposes 22,955 - - 22,955
---------- ---------- ---------- ----------
Total fixed maturities $6,753,782 $ 126,101 $ 5,501 $6,874,382
========== ========== ========== ==========
Equity securities available-for-sale $ 60,262 $ 1,218 $ - $ 61,480
========== ========== ========== ==========
Short-term investments
available-for-sale $ 12,595 $ - $ - $ 12,595
========== ========== ========== ==========
</TABLE>
-F 27-
<PAGE> 102
The amortized cost and estimated fair value of investments in fixed
maturity securities at December 31, 1998, are summarized by stated maturity as
follows:
<TABLE>
<CAPTION>
Amortized Fair
cost value
---- -----
(In thousands)
<S> <C> <C>
Fixed maturity available-for-sale
Due in 1999 $ 155,901 $ 156,388
Due in 2000 - 2004 1,630,582 1,677,688
Due in 2005 - 2009 1,673,703 1,696,911
Due after 2009 669,598 687,814
Mortgage-backed securities 2,462,292 2,491,445
--------- ----------
$6,592,076 $6,710,246
========== ==========
</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 December 31,
1998 are summarized as follows (in thousands):
<TABLE>
<S> <C>
Treasuries and AAA $2,833,956
AA 306,920
A 1,565,355
BBB 1,489,302
BB 377,350
Less than BB 137,363
----------
$6,710,246
==========
</TABLE>
-F 28-
<PAGE> 103
Ratings are those assigned primarily by Standard & Poor's when
available, with remaining ratings as assigned by Moody's and converted to a
generally comparable Standard & Poor's rating. Bonds not rated by either
organization are included based on the rating prescribed by the Securities
Valuation Office of the National Association of Insurance Commissioners (NAIC).
NAIC Class 1 is considered equivalent to an A or higher rating; Class 2, BBB;
Class 3, BB; and Classes 4-6, less than BB.
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Fixed maturity securities $443,502 $178,429 $195,073
Equity securities 14,176 9,122 2,993
Mortgage loans on real estate 45,999 30,373 26,254
Real estate 1,629 1,048 6,891
Policy loans 6,632 5,215 9,426
Other 4,394 10,03 600
-------- -------- --------
Gross investment income 516,332 234,223 241,237
Investment expenses 9,383 9,792 12,612
-------- -------- --------
Net investment income $506,949 $224,431 $228,625
======== ======== ========
</TABLE>
Investment expenses include depreciation on real estate of $0.9
million, $0.3 million and $2.0 million in the years ended December 31, 1998,
1997 and 1996, respectively.
-F 29-
<PAGE> 104
Realized gains and losses on investments and provisions for loan losses
are summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Securities available-for-sale
Fixed maturity securities
Gross realized gains $45,897 $15,862 $21,088
Gross realized losses (32,003) (9,335) (13,331)
Equity securities
Gross realized gains 7,800 3,670 55,646
Gross realized losses (7,771) (57) (451)
Other investments (3,661) 8,219 3,031
Provision for loan losses (10,374) (4,568) -
-------- ------- -------
$ (112) $13,791 $65,983
======= ======= =======
</TABLE>
The unrealized appreciation on invested assets available-for-sale is
reported as a separate component of stockholders' equity, reduced by adjustments
to deferred acquisition costs, VOBA, and a provision for deferred income taxes.
A summary of the components of the net unrealized appreciation on
invested assets carried at fair value is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Unrealized appreciation
Fixed maturity securities $107,796 $119,507 $ 78,932
Equity securities (18,381) 1,218 3,786
Other investments 674 304 3,263
Closed Block investments 42,332 48,090 18,002
Deferred policy acquisition costs
and value of business acquired (82,286) (83,426) (51,476)
Deferred income taxes (22,464) (29,946) (17,207)
-------- -------- --------
$ 27,671 $ 55,747 $ 35,300
======== ======== ========
</TABLE>
-F 30-
<PAGE> 105
The change in unrealized appreciation on fixed maturity securities was
($12) million, $41 million and ($112) million for the years ended December 31,
1998, 1997 and 1996, respectively; the corresponding amounts for equity
securities were ($20) million, ($3) million and ($53) million, respectively.
At December 31, 1998, investments in fixed maturity securities with a
carrying amount of $27.3 million were on deposit with state insurance
departments to satisfy regulatory requirements.
No investment in any person or its affiliates exceeded 10 percent of
stockholders' equity at December 31, 1998.
(3) Mortgage Loans on Real Estate
Mortgage loans on real estate consist of commercial and residential
mortgage loan investments as follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Commercial loans $393,842 $460,591 $234,002
Residential and other mortgage loans 194,860 17,166 3,363
Valuation allowance (22,299) (15,284) (11,622)
-------- -------- --------
Total mortgage loans $566,403 $462,473 $225,743
======== ======== ========
</TABLE>
-F 31-
<PAGE> 106
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 states with
the highest concentration of mortgage loans were Florida, Texas, and Iowa with
principal balances of $91.2 million, $68.7 million and $46.3 million,
respectively.
At December 31, 1998, the Company's investment in mortgage loans
included $15.4 million in loans that are considered to be impaired, for which
the related allowance for credit losses is $4.0 million. The average recorded
investment in impaired loans during the years ended December 31, 1998, and 1997
was $18.9 million and $23.7 million, respectively. For the years ended December
31, 1998 and 1997, the Company recorded $2.1 million each year in interest
income on those impaired loans.
No mortgage loan on any one individual property exceeded $13 million at
December 31, 1998.
Provisions for losses are summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $15,284 $11,622 $30,067
Charge offs, net of recoveries (2,259) (855) (4,029)
Write down on mortgages sold/transferred
to real estate (1,100) (51) (14,416)
------- ------- -------
Net decrease for year (3,359) (906) (18,445)
Provision for losses 10,374 4,568 -
------- ------- -------
Balance at end of year $22,299 $15,284 $11,622
======= ======= =======
</TABLE>
-F 32-
<PAGE> 107
(4) Deferred Policy Acquisition Costs
A summary of the policy acquisition costs deferred and amortized are as
follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $202,322 $171,957 $355,750
Deferred policy acquisition costs
associated with Closed Block
policies at formation of
Closed Block - - (193,647)
Policy acquisition costs deferred 144,735 51,351 50,014
Policy acquisition costs amortized (27,283) (20,986) (40,160)
-------- -------- --------
319,774 202,322 171,957
Unrealized gain on
available-for-sale securities (73,744) (83,426) (51,476)
-------- -------- --------
Balance at end of year $246,030 $118,896 $120,481
======== ======== ========
</TABLE>
The components of the deferred policy acquisition costs are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Universal life insurance $116,734 $117,673 $116,719
Annuity products 127,116 39,782 39,859
Participating traditional life
insurance 58,402 36,006 13,419
Non-participating traditional life
insurance 17,522 8,861 1,960
-------- ------- --------
319,774 202,322 171,957
Unrealized gain on
available-for-sale securities (73,744) (83,426) (51,476)
-------- ------- --------
$246,030 $118,896 $120,481
======== ======== ========
</TABLE>
-F 33-
<PAGE> 108
Commissions represent approximately 75 percent of deferred policy
acquisition costs.
(5) Value of Business Acquired
A summary of VOBA established and amortized is as follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Balance at beginning of the year $266,014 $ -
Value of business acquired during the year - 268,804
Amortization of VOBA asset (32,932) (2,790)
Unrealized gain on available-for-sale securities (8,542) -
-------- --------
Balance at end of year $224,540 $266,014
======== ========
</TABLE>
Amortization is recognized in proportion to expected future gross
profits over a 20 year period and is based on the average interest crediting
rates which range from 4.1% to 7.6% for 1998 and over the next five years.
Interest accrued on the unamortized VOBA amounted to $14.6 million in 1998 which
is netted with the VOBA amortization expense. The estimated amortization for the
next five years is as follows:
<TABLE>
<S> <C>
1999 $36,014
2000 36,652
2001 34,325
2002 29,125
2003 24,709
</TABLE>
-F 34-
<PAGE> 109
(6) Debt and Capital Securities
Debt consists of the following:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Federal Home Loan Bank community investment
long-term advances with a weighted
average interest rate of 6.34% at December 31, 1998,
maturing at various dates through July, 2010(A) $ 16,051 $ 16,435
Revolving credit agreement (B) - 250,000
Senior notes bearing interest at 6.95%
due June, 2005 125,000 -
-------- --------
$141,051 $266,435
======== ========
</TABLE>
(A) The Company has multiple credit arrangements with the Federal Home Loan
Bank (FHLB). In addition to the long-term advances disclosed above, the
Company has a $25 million open secured line of credit and periodically,
the Company borrows amounts under repurchase agreements, of which no
amount was outstanding under either type of facility at December 31,
1998. The carrying value of the securities pledged to the FHLB under all
agreements was $24.3 million at December 31, 1998.
(B) The revolving credit agreement provides for a maximum borrowing of $150
million in 1998 with the balance maturing in October, 2002. The interest
rate is variable, however, the Company may elect to fix the rate for
periods from 30 days to six months. The loan agreement contains various
financial and operating covenants which, among other things, limit
future indebtedness and restrict the amount of future dividend payments.
-F 35-
<PAGE> 110
Capital securities consist of the following:
<TABLE>
<CAPTION>
December 31,
------------
(In thousands)
1998 1997
---- ----
<S> <C> <C>
AmerUs Capital I 8.85% Capital
Securities Series A due
February 1, 2007 (A) $ 86,000 $86,000
AmerUs Capital II 7.00% Adjustable
Conversion-rate Equity Security
Units due July 27, 2003 (B) 130,729 -
-------- -------
$216,729 $86,000
======== =======
</TABLE>
(A) The Capital Securities were issued through a wholly-owned subsidiary
trust, AmerUs Capital I. The sole asset of the trust is the junior
subordinated debentures of the Company in the principal amount of $88.66
million with interest at 8.85% maturing February 1, 2027. The Company
has fully and unconditionally guaranteed the obligation of the trust
under the Capital Securities and is obligated to mandatorily redeem the
securities on February 1, 2027. The Company may prepay the securities at
anytime after February 1, 2007.
(B) The Adjustable Conversion-rate Equity Security Units were issued through
a wholly-owned subsidiary trust, AmerUs Capital II. Each unit consists
of a forward common stock purchase contract for a share at a price of
$31.5625 per share on July 27, 2001, and a quarterly income preferred
security bearing interest at 6.86% and due July 27, 2003. The Company
repurchased 451,000 units on December 31, 1998 at an average unit price
of $22.89 resulting in a gain of $2.9 million which has been reflected
as an addition to paid-in capital as the gain is primarily attributable
to the change in value of the forward common stock purchase contract.
The Company is obligated to mandatorily redeem the capital securities on
July 27, 2003. At December 31, 1998, 4,141,900 units were outstanding.
-F 36-
<PAGE> 111
Maturities of debt and capital securities are as follows for each of
the five years ending December 31:
<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C>
Year ending December 31,
1999 $410
2000 438
2001 467
2002 498
2003 131,261
Thereafter 224,706
--------
$357,780
========
</TABLE>
Interest expense on the debt and capital securities totaled $27.1
million, $14.9 million and $2.1 million in the years ended December 31, 1998,
1997 and 1996, respectively.
(7) Income Taxes
Comprehensive federal income tax expense is summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Income tax expense (benefit) on
Operations $28,422 $22,022 $ 43,859
Other comprehensive income (8,000) 12,739 (40,105)
------- ------- --------
$20,422 $34,761 $ 3,754
======= ======= ========
</TABLE>
-F 37-
<PAGE> 112
The effective income tax rate on pre-tax income varies from the
prevailing corporate federal income tax rate and is summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Corporate federal income tax rate 35.00% 35.00% 35.00%
Differential earnings amount - - 3.78
Tax-exempt investment income (.34) (.54) (.20)
Acquisitions costs and reorganization expenses - .22 .30
Goodwill amortization 3.01 .39 .06
Net benefit of tax credits (6.04) (7.88) (2.39)
Other items, net (.48) .31 .61
----- ----- -----
Effective tax rate 31.15% 27.50% 37.16%
===== ===== =====
</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. This tax is not applicable
to the Company after June 30, 1996, due to AmerUs Life's conversion to a stock
life insurance company.
The Company's federal income tax expense (benefit) is summarized as
follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Current $25,803 $19,866 $51,849
Deferred 2,619 2,156 (7,990)
------- ------- -------
Total federal income tax expense $28,422 $22,022 $43,859
======= ======= =======
</TABLE>
-F 38-
<PAGE> 113
The significant components of net deferred income tax liabilities are
summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Deferred income tax assets
Policy reserves and policyholder funds $248,011 $ 240,245
Policy acquisition costs capitalized for tax 14,920 39,899
Deferred policy acquisition costs related to
unrealized appreciation 23,953 29,199
Deferred compensation 14,881 14,670
Other 31,617 34,348
-------- --------
Total gross deferred income tax asset 333,382 358,361
-------- --------
Deferred income tax liabilities
Deferred policy acquisition costs (123,205) (120,536)
Net unrealized appreciation on available-for-sale
securities (71,510) (58,811)
Net unrealized investment appreciation from
acquisitions - (38,421)
Reinsurance receivable (50,743) (41,738)
Value of business acquired (81,579) (93,105)
Other (17,743) (22,664)
-------- --------
Total gross deferred tax liability (344,780) (375,275)
-------- --------
Net deferred income tax liability $(11,398) $(16,914)
======== ========
</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 1989 are
closed to further assessment of taxes. The Internal Revenue Service is examining
federal income tax returns of the Company for 1990 through 1994. Management
believes adequate provisions have been made for any additional taxes which may
become due with respect to open years.
-F 39-
<PAGE> 114
(8) Employee Benefit Plans
Defined Benefit Plans
The Company has defined benefit pension plans which covered
substantially all of the Company's employees, as well as employees of certain
other subsidiary companies of AMHC. The plans provided for benefits based upon
years of service and the employee's compensation. The Company froze 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. Effective January 1, 1996, the defined benefit pension
plans were replaced by a defined contribution savings and retirement plan which
also replaced the Company's defined contribution pension plans.
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $40,865 $50,229
Service cost - 784
Interest cost 2,916 3,457
Amendments 799 -
Actuarial (gain)/loss 627 1,577
Settlements - 1,040
Actual benefits paid (3,005) (16,222)
------- -------
Benefit obligation at end of year $42,202 $40,865
======= =======
Change in plan assets
Fair value of plan assets at beginning of year $43,392 $53,638
Actual return on plan assets 3,250 5,841
Company contribution 348 135
Benefits paid and transfers (3,399) (16,222)
------- --------
Fair value of plan assets at end of year $43,591 $43,392
======= =======
</TABLE>
-F 40-
<PAGE> 115
<TABLE>
<S> <C> <C>
Reconciliation of funded status
Accumulated benefit obligation $(42,202) $(40,865)
Projected benefit obligation (42,202) (40,865)
Market value of plan assets 43,591 43,392
-------- --------
Funded status 1,389 2,527
Unrecognized transition obligation (55) (61)
Unrecognized prior service cost 248 218
Unrecognized net (gain)/loss 812 (382)
-------- --------
Prepaid benefit cost $ 2,394 $2,302
======== ========
Amounts recognized in the consolidated balance
sheet consist of
Liabilities
Accrued pension cost $ (7,158) $ (5,627)
Additional minimum liability (1,898) (1,192)
-------- --------
Total accrued pension liability $ (9,056) $ (6,819)
======== ========
Assets
Prepaid pension cost $ 9,312 $ 7,930
Intangible asset 420 406
-------- --------
Total assets $ 9,732 $ 8,336
======== ========
Other comprehensive income
Accumulated other comprehensive income $ 1,718 $ -
Prepaid pension cost $ 2,394 $ 2,302
Weighted-average assumptions as of end of year
Discounted rate 6.75% 7.25%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase NA NA
</TABLE>
-F 41-
<PAGE> 116
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Components of net periodic benefit cost
Service cost $ -- $ 784 $ 113
Interest cost 2,916 3,457 3,476
Expected return on plan assets (3,463) (4,006) (4,281)
Amortization of transition obligation (6) (61) (80)
Amortization of prior service cost 769 (30) (30)
Recognized actuarial loss 40 22 23
------- ------- -------
Net periodic benefit cost 256 166 (779)
Settlement cost -- 141 --
------- ------- -------
Total expense $ 256 $ 307 $ (779)
======= ======= =======
</TABLE>
Defined Contribution Pension Plans
The Company had three defined contribution 401(k) plans which covered
substantially all employees. Effective January 1, 1996, the defined contribution
401(k) plans together with the defined benefit pension plans were replaced by a
single defined contribution savings and retirement plan to which total
contributions from the Company amounted to $3.1 million, $3.7 million and $2.4
million in 1998, 1997 and 1996, respectively.
Nonqualified Pension Plan
The Company has a nonqualified pension plan covering substantially all
of AmerUs Life's career and general agents. Accumulated benefits of the plan are
unfunded and have been included in other liabilities at December 31, 1998, and
December 31, 1997, amounting to $16.9 million, and $16.7 million, respectively.
Total nonqualified pension expense amounted to $0.5 million, $0.7 million, and
$(1.0) million for the years ended December 31, 1998, 1997 and 1996,
respectively.
Postretirement Plans
The Company has postretirement benefit plans which provide eligible
participants and dependents with certain medical, dental, and life insurance
benefits. The Company's plan for medical and life insurance benefits is combined
with that of the subsidiaries of AMHC.
-F 42-
<PAGE> 117
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 8,918 $ 8,375
Service cost 268 363
Interest cost 536 592
Plan participants' contributions 52 60
Actuarial (gain)/loss (519) 391
Actual benefits paid (1,670) (863)
------- -------
Benefit obligation at end of year $ 7,585 $ 8,918
======= =======
Change in plan assets
Fair value of plan assets at beginning of year $ -- $ --
Company contribution (766) (863)
Plan participant contribution 52 60
Benefits paid 714 803
------- -------
Fair value of plan assets at end of year $ -- $ --
======= =======
Reconciliation of funded status
Accumulated postretirement benefit obligation $(7,585) $(8,918)
Market value of plan assets -- --
------- -------
Funded status $(7,585) $(8,918)
Unrecognized prior service cost 823 906
Unrecognized net (gain)/loss (1,470) (1,014)
------- -------
Prepaid/(accrued) benefit cost $(8,232) $(9,026)
======= =======
Weighted-average assumptions as of end of year:
Discount rate 6.75% 7.25%
Initial weighted health care cost trend rate 7.50% 8.00%
Ultimate health care cost trend rate 5.00% 5.00%
</TABLE>
-F 43-
<PAGE> 118
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Components of net periodic benefit cost
Service cost $ 268 $ 363 $ 409
Interest cost 536 592 572
Expected return on plan assets -- -- --
Amortization of prior service cost 83 83 --
Recognized actuarial loss (62) (59) 57
----- ----- ------
Net periodic benefit cost 825 979 1,038
Settlement gain (904) -- --
----- ----- ------
Total expense $ (79) $ 979 $1,038
===== ===== ======
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in the
assumed health care cost trend rates would have the following effects:
1% Point 1% Point
Increase (Decrease)
-------- ----------
(In thousands)
Effect on total of service and interest cost
components $ 20 $ (20)
Effect of postretirement benefit obligation $181 $(175)
Leveraged Employee Stock Ownership Plan
The Company has a Leveraged Employee Stock Ownership Plan ("LESOP")
which was sponsored by AmVestors for all full-time employees with one year of
service. The LESOP acquired AmVestors stock, which was subsequently exchanged
for the Company's stock, through the proceeds of a note payable to American
Investors Life Insurance Company, a subsidiary of AmVestors. The note bears
interest at 7.0% and is payable in annual installments through December 30,
2002. The note had an unpaid principal balance of $1.9 million at December 31,
1998. The LESOP held 102,362 unallocated shares of the Company's Class A Common
Stock at December 31, 1998.
-F 44-
<PAGE> 119
(9) Related Party Transactions
The following summarizes transactions of the Company with affiliates:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Dividend to AmerUs Group $ 6,948 $ 5,012 $ 4,158
Management, administrative, data
processing, rent and other services
fee income from affiliates 10,750 10,983 7,640
Interest income from financings of
affiliates 3,154 5,300 6,794
Interest expense paid to an affiliate
on capital securities 1,387 -- --
Commissions paid to affiliates for the
sale of insurance products 877 1,833 521
Rent paid to an affiliate 3,205 1,790 --
Real estate management and mortgage
servicing fees paid to an affiliate 1,421 1,050 2,528
Investments in bonds and accrued
interest of affiliates -- -- 7,648
Investments in partnerships and joint
ventures in which an affiliate has an
interest 7,149 11,987 18,557
Investments in mortgages and other loans from
affiliated companies and joint ventures 20,873 46,004 62,372
Contribution of joint venture interests
and sale of partnership interests to
partnerships in which an affiliate has
an interest 4,739 10,979 1,638
Purchase of limited partnership interest
in which an affiliate has an interest -- -- 2,160
Purchase of investments backed by the
assets of a trust which acquired loans
from an affiliate -- -- 46,755
Purchase of mortgage loans from affiliates 175,496 111,361 --
Sale of limited partnership interest to
an affiliate 11,933 -- --
Redemption of adjustable conversion-rate
equity security units from an affiliate 10,324 -- --
</TABLE>
-F 45-
<PAGE> 120
The Company made a capital contribution of $79 million to the non-life
insurance subsidiaries which were then distributed to AmerUs Group in 1996.
(10) Reinsurance
At December 31, 1998, the Company's maximum retention limit for
acceptance of risk on life insurance was $1 million. The Company has indemnity
reinsurance agreements with various companies whereby insurance in excess of its
retention limits are reinsured. Insurance in-force ceded to nonaffiliated
companies under risk sharing arrangements at December 31, 1998, 1997 and 1996,
totaled approximately $3,779 million, $4,102 million and $4,170 million,
respectively.
Total life premiums ceded amounted to $15.7 million, $16.4 million and
$14.8 million for the years ended December 31, 1998, 1997, and 1996,
respectively. Total life premiums assumed amounted to $1.0 million, $1.4 million
and $1.5 million, for the years ended December 31, 1998, 1997 and 1996,
respectively.
At December 31, 1998 and 1997, Delta Life reinsured 44% and 50%,
respectively, of its equity index annuity reserves amounting to $92.6 million
and $76.9 million, respectively, with an unaffiliated reinsurer.
The Company is contingently liable for the portion of the policies
reinsured under each of its existing reinsurance agreements in the event the
reinsurance companies are unable to pay their portion of any reinsured claim.
Management believes that any liability from this contingency is unlikely.
However, to limit the possibility of such losses, the Company evaluates the
financial condition of its reinsurers and monitors concentration of credit risk.
-F 46-
<PAGE> 121
(11) Commitments and Contingencies
The Company has agreed to loan up to $6.9 million to newly formed
partnerships.
The Company has entered into agreements with various partnerships in
which a subsidiary of AMHC has an interest. Pursuant to these agreements the
Company is obligated to make future capital contributions to the partnerships of
up to $16.5 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, 1998, outstanding commitments to
extend credit totaled approximately $11.2 million.
The Company, AmerUs Life and their direct and indirect majority
shareholders AmerUs Group and American Mutual Holding Company (collectively
"AmerUs"), are defendants in a class action lawsuit, Bhat v. AmerUs Life
Insurance Company, which was filed in December 1996 in the United States
District Court for the Northern District of California. The complaint, as
amended in 1998, alleges that the defendants breached the terms of certain
universal life policies, breached certain other duties owed to policyowners and
violated RICO in setting their cost of insurance rates and credited interest
rates. These allegations include a claim that the defendants passed an increase
in 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 AmerUs Life, seeks unspecified actual and punitive damages
and injunctive relief on behalf of himself and all similarly situated
policyowners of AmerUs Life with universal life insurance policies. AmerUs
denies the allegations contained in the complaint, including the existence of a
legitimate class. An earlier companion case filed in the same court in June 1996
was dismissed in October 1997. This litigation has been vigorously defended by
AmerUs Life.
The parties have engaged in settlement negotiations and have agreed to a
nationwide class settlement of certain contract and related issues for a
substantial block of AmerUs Life's life insurance policies. The settlement is
subject to court approval; a hearing is
-F 47-
<PAGE> 122
scheduled for April 2, 1999. Should the settlement not be approved, AmerUs would
continue to vigorously defend against the claims asserted.
Due to the potential that a settlement may be reached in this case, the
Company has incurred a charge to income for 1998. Based upon its current
estimates of the costs associated with the settlement, the Company has
established a reserve of $1.2 million.
In recent years, numerous life insurance companies have been named as
defendants in class action lawsuits related to life insurance pricing and sales
practices. A number of these lawsuits have resulted in substantial settlements.
In September 1998, AmerUs Life was named as a defendant in another such
purported class action lawsuit asserting claims related to pricing practices on
a substantial block of its policies. Given the uncertain nature of litigation,
the early stage of this litigation and the limited amount of current
information, the outcome of this action cannot be predicted with certainty at
this time. However, AmerUs Life believes that the claim is without merit and
that in any case the ultimate outcome of this litigation will not be material.
Despite the Company's vigorous defense of these class action lawsuits or
other future proceedings and its denial of any wrongdoing, there can be no
assurance that the outcome of this type of lawsuit will not have a material
adverse effect on the Company's results of operations.
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 to the Company's results of operations.
-F 48-
<PAGE> 123
(12) Stockholders' Equity
Generally, the stockholders' equity of the Company's insurance
subsidiaries available for distribution to the Company is 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 1999, the Company's insurance subsidiaries can
distribute approximately $9 million in the form of dividends to the Company
without prior approval of such regulatory authorities.
Stock Option Plans
The Company has two stock incentive plans authorizing the issuance of
incentive and non-qualified stock options to employees, officers and
non-employee directors of the Company. The Company has reserved 1,400,000 shares
and 150,000 shares of Class A Common Stock for issuance under these plans.
In conjunction with the acquisition of AmVestors, the Company has two
additional plans in which no additional shares may be granted. They are a
non-qualified stock option plan and an incentive stock option plan.
The option price per share under all plans may not be less than the fair
value of the Company's common stock on the date of grant and the term of the
option may not be longer than ten years. Generally, all options have a three
year vesting schedule with one-third of the options granted vesting at the end
of each of the three years.
-F 49-
<PAGE> 124
A summary of the Company's stock option plan follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997
---- ----
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding, beginning of year 1,485,709 $ 23.57 -- $ --
Granted at market price 163,550 31.19 684,000 28.09
Conversion of AmVestors stock
options -- -- 801,709 19.72
Exercised (268,786) 20.51 -- --
Forfeited (53,000) 28.19 -- --
---------- ----------- --------- -----------
Outstanding, end of year 1,327,473 $ 25.02 1,485,709 $ 23.57
========== =========== ========= ===========
Exercisable, end of year 700,381 801,709
========== =========
</TABLE>
The following table summarizes information about stock options
outstanding under the Company's option plan as of December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding
-------------------
Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise
Prices Outstanding Life in Years Price
------ ----------- ------------- -----
<S> <C> <C> <C>
$10.88 - $14.50 13,448 5.9 $13.01
14.51 - 18.12 105,225 5.3 15.17
18.13 - 21.75 266,646 7.0 19.12
21.76 - 23.37 147,604 3.3 23.24
23.38 - 29.00 616,000 8.3 27.88
29.01 - 32.62 138,550 9.6 31.19
32.63 - 36.25 40,000 9.0 35.63
------- --- ------
1,327,473 7.4 $25.02
========= === ======
</TABLE>
-F 50-
<PAGE> 125
The following table summarizes information about stock options exercisable
under the Company's option plan as of December 31, 1998:
<TABLE>
<CAPTION>
Options Exercisable
-------------------
Weighted
Range of Average
Exercise Options Exercise
Prices Exercisable Price
------ ----------- -----
<S> <C> <C>
$10.88 - $14.50 13,448 $13.01
14.51 - 18.12 105,225 15.17
18.13 - 21.75 231,888 19.12
21.76 - 23.37 124,476 23.24
23.38 - 29.00 218,677 27.88
29.01 - 32.62 -- --
32.63 - 36.25 6,667 35.63
------- -----
700,381 $22.03
======= ======
</TABLE>
The estimated fair value of options granted in 1998 was $14.55 per
share. The estimated fair value of options granted in 1997 was $9.86 per share.
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its stock option plans. Accordingly, no
compensation expense has been recognized for its option plans. Had compensation
expense for the Company's option plans been determined based on the fair value
at the grant dates for awards under those plans consistent with the method
prescribed by SFAS 123, the Company's net earnings and diluted earnings per
share for the years ended December 31, 1998 and 1997 would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Net earnings (in thousands):
As reported $ 62,829 $ 58,059
Pro forma $ 61,268 $ 57,466
Diluted earnings per share:
As reported $ 1.86 $ 2.46
Pro forma $ 1.82 $ 2.44
</TABLE>
The fair value of options granted was estimated on the date of grant
using the Black-Scholes pricing model with an expected life
-F 51-
<PAGE> 126
equal to the contractual expiration and the following weighted average
assumptions:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Expected Volatility 25.00% 25.00%
Risk free Interest Rate 5.02% 5.56%
Dividend Yield 2.97% 1.79%
</TABLE>
Restricted Stock
The Company has awarded common stock to eligible employees and
non-employee directors under the two stock incentive plans. The plans have
restriction periods of two to three years tied to employment and/or service. A
portion of the awards were recorded at the market value on the date of the grant
as unearned compensation since common shares were legally issued on that date.
The initial values of these grants are amortized over the restriction periods,
net of forfeitures. The remaining awards, for which common shares will not be
issued until the end of the restriction period, are being accrued net of
forfeitures over the required service period at the market value on the date of
issuance.
Restricted stock and compensation expense information for the year ended
December 31, 1998 is as follows:
Number of restricted shares awarded 19,949
Restricted shares outstanding 17,899
Weighted average market price of awarded shares $ 31.17
Compensation expense (in thousands) $ 264
Stock Appreciation Rights
As part of the Stock Incentive Plan, the Board of Directors is
authorized to grant stock appreciation rights ("SARs") to employees and officers
in tandem with stock options. 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. Issuance of
SARs is made at the sole discretion of the Board of Directors. The Company's SAR
is summarized
-F 52-
<PAGE> 127
as follows (the compensation expense relates to the stock appreciation rights
obtained in conjunction with the acquisition of AmVestors):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Rights outstanding, beginning of year 81,024 --
Conversion of AmVestors rights -- 81,024
Exercise of rights (81,024) --
-------- -------
Rights outstanding, end of year -- 81,024
======== =======
Compensation expense (in thousands) $ -- $ --
======== =======
</TABLE>
Stock Warrants
In conjunction with the acquisition of AmVestors, the Company has
outstanding warrants to purchase shares of the Company's Class A common stock.
The Company's stock warrant activity is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Warrants outstanding, beginning of year 477,770 --
Acquisition of AmVestors warrants -- 477,770
Exercise of rights (4,174) --
--------- --------
Warrants outstanding, end of year 473,596 477,770
========= ========
Compensation expense (in thousands) $ -- $ --
========= ========
</TABLE>
The remaining warrants are exercisable at $24.42 per share and expire
on April 2, 2002.
-F 53-
<PAGE> 128
(13) Statutory Accounting Practices
The Company's insurance subsidiaries' statutory net income was $61.0
million, $58.9 million and $62.4 million in the years ended December 31, 1998,
1997, and 1996, respectively. The Company's insurance subsidiaries' statutory
surplus and capital was $472.9 million, $572.3 million and $283.0 million at
December 31, 1998, 1997 and 1996, respectively.
The Company's insurance subsidiaries are domiciled in Iowa and Kansas
and prepare their statutory-basis financial statements in accordance with
accounting practices prescribed or permitted by those respective state insurance
departments. Prescribed statutory accounting practices include state laws,
regulations, and general administrative rules, as well as a variety of
publications of the 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 has codified statutory accounting practices which
are expected to constitute the only source of prescribed statutory accounting
practices and are effective in 2001. Codification will change prescribed
statutory accounting practices and may result in changes to the accounting
practices that insurance enterprises use to prepare their statutory financial
statements. The Company is currently evaluating the impact of codification on
its statutory financial statements, however the changes will not have a material
impact on statutory surplus.
The respective insurance departments impose minimum risk-based capital
(RBC) requirements on insurance enterprises that were developed by the NAIC. The
formulas for determining the amount of 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. The life
insurance subsidiaries exceed the authorized control level RBC requirements.
-F 54-
<PAGE> 129
(14) 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, swaptions and options) 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 transactions with only highly rated counterparties.
The credit risk on all financial instruments, whether on or off the
balance sheet, is controlled through an ongoing 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 55-
<PAGE> 130
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>
December 31, 1998
-----------------
Notional Carrying Fair
amount value value
------ ----- -----
(In thousands)
<S> <C> <C> <C>
Interest rate caps $1,050,000 $ 1,749 $ 457
Interest rate swaps 200,000 -- (1,879)
Options 86,035 49,167 70,862
Futures -- -- (298)
---------- ------- --------
$1,336,035 $50,916 $ 69,142
========== ======= ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------
Notional Carrying Fair
amount value value
------ ----- -----
(In thousands)
<S> <C> <C> <C>
Interest rate caps $1,050,000 $2,117 $ 2,062
Pay 3 month LIBOR 50,000 -- (144)
Options 160 643 643
Futures 2 -- (2,402)
---------- ------ -------
$1,100,162 $2,760 $ 159
========== ====== =======
</TABLE>
-F 56-
<PAGE> 131
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. Interest rate swap agreements, which expire in
2002 and 2003, generally involve the exchange of fixed and floating rate
interest payments. The interest rate cap agreements, which expire between 2000
and 2003, involve the payment of a maximum fixed interest rate when an indexed
rate exceeds that fixed rate. Swaption agreements 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 a decrease of $0.8 million in
1998, a decrease of $0.5 million in 1997, and an increase of $0.9 million for
the year ended December 31, 1996. 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.
-F 57-
<PAGE> 132
The following table shows unrealized gains and losses on derivative
positions:
<TABLE>
<CAPTION>
December 31, 1998
-----------------
Net
Total unrealized
notional Unrealized Unrealized gains
value gains (losses) (losses)
----- ----- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Interest rate caps $1,050,000 $ -- $ (1,292) $ (1,292)
Interest rate swaps 200,000 -- (1,879) (1,879)
Options 86,035 21,695 -- 21,695
Futures -- -- (298) (298)
---------- -------- -------- --------
$1,336,035 $ 21,695 $ (3,469) $ 18,226
========== ======== ======== ========
<CAPTION>
Net
Total unrealized
notional Unrealized Unrealized gains
value gains (losses) (losses)
----- ----- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Interest rate caps $1,050,000 $-- $ (55) $ (55)
Pay 3 month LIBOR 50,000 -- (144) (144)
Options 160 -- -- --
Futures 2 -- (2,402) (2,402)
---------- --- ------- -------
$1,100,162 $-- $(2,601) $(2,601)
========== === ======= =======
</TABLE>
-F 58-
<PAGE> 133
The Company is exposed to credit loss in the event of nonperformance by
counterparties on its derivative positions. 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 59-
<PAGE> 134
<TABLE>
<CAPTION>
Maturity Schedule by Year for Derivative Products
-------------------------------------------------
1999 2000 2001 2002 2003 2004 2005
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Pay fixed swaps:
Notional amount $ -- $ -- $ -- $50,000 $150,000 $ -- $ --
Weighted average:
Receive rate(A) 4.619% 4.619% 4.619% 4.619% 4.582% -- --
Pay rate(B) 5.319% 5.319% 5.319% 5.319% 5.342% -- --
Interest rate caps:
Notional amount $ -- $ 450,000 $ -- $ -- $600,000 $ -- $ --
Options:
Notional amount $ -- $ -- $ -- $ 440 $ 47,048 $32,581 $5,966
Contracts 246 -- -- -- -- -- --
Futures:
Contracts (18) -- -- -- -- -- --
Total notional value of
swaps, caps and swaptions $ -- $ 450,000 $ -- $50,440 $797,048 $32,581 $5,966
Total option and future
contracts 228 -- -- -- -- -- --
- --------------
</TABLE>
(A) The actual variable rates in the agreements are based on a constant
maturity treasury (CMT) plus a spread, and the table assumes that such
rates will remain constant at December 31, 1998, levels. To the extent
that actual rates change, the variable interest rate information will
change accordingly.
(B) The actual variable rates in the agreements are based on three-month
LIBOR, and the table assumes that such rates will remain constant at
December 31, 1998, levels. To the extent that actual rates change, the
variable interest rate information will change accordingly.
-F 60-
<PAGE> 135
(15) Acquisitions
On October 23, 1997, the Company acquired all of the outstanding capital
stock of Delta in exchange for cash of approximately $165 million. The
acquisition was accounted for using the purchase method of accounting with
goodwill of $69.4 million established which is being amortized on a
straight-line basis over 30 years. The operations of Delta for the period from
October 23, 1997 through December 31, 1997 have been included in the
consolidated statement of income of the Company.
On December 19, 1997, the Company acquired AmVestors in a stock
exchange valued at approximately $350 million. The acquisition was accounted for
using the purchase method of accounting with goodwill of $152.9 million
established which is being amortized on a straight-line basis over 30 years. The
operations of AmVestors for the period of December 19, 1997 through December 31,
1997 have been included in the consolidated statement of income of the Company.
The following table sets forth certain pro forma operating data of the
Company for the years ended December 31, 1997 and 1996. This pro forma data
assumes the acquisitions of Delta and AmVestors occurred on January 1, 1997 and
1996, respectively.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1996
---- ----
(In thousands, except per share data)
<S> <C> <C>
Pro forma operating data:
Total revenue $712,400 $859,700
Net income $ 75,000 $ 87,000
Diluted earnings per share of
common stock $ 2.14 $ 2.48
======== ========
</TABLE>
-F 61-
<PAGE> 136
(16) Earnings per Share (EPS)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1998 1997
---- ----
Number Per
Net of Share Net
income shares amount income
------ ------ ------ ------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Basic EPS:
Net income $62,829 33,458 $1.88 $58,059
Effect of dilutive
securities:
Options -- 162 (.01) --
Warrants -- 76 (.01) --
Stock appreciation
rights -- -- --
------- ------ ----- -------
Diluted EPS: $62,829 33,696 $1.86 $58,059
======= ====== ===== =======
<CAPTION>
Year ended December 31,
-----------------------
1997 1996
---- ----
Number Per Number Per
of Share Net of Share
shares amount income shares amount
------ ------ ------ ------ ------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Basic EPS:
Net income 23,537 $2.47 $74,173 23,156 $3.20
Effect of dilutive
securities:
Options 29 (.01) -- -- --
Warrants 5 -- -- -- --
Stock appreciation
rights 1 -- -- -- --
------ ----- ------- ------ -----
Diluted EPS: 23,572 $2.46 $74,173 23,156 $3.20
====== ===== ======= ====== =====
</TABLE>
-F 62-
<PAGE> 137
(17) Fair Value of Financial Instruments
SFAS 107, "Disclosures about Fair Values of Financial Instruments,"
requires disclosures 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 stockholders'
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 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 following presentation reflects fair values for those instruments
specifically covered by SFAS 107, along with fair value
-F 63-
<PAGE> 138
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, other investments, 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 December 31, 1998, 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, in foreclosure, 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.
-F 64-
<PAGE> 139
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
(annuities primarily) are stated at the cost the Company would incur to
extinguish the liability (i.e., the cash surrender value).
Debt and capital securities: 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 65-
<PAGE> 140
The estimated fair values of the Company's significant financial
instruments are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------ ---------- ------ ----------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Securities available-
for-sale:
Fixed maturity $ 6,710,246 $ 6,710,246 $ 6,851,427 $ 6,851,427
=========== =========== =========== ===========
Equity securities $ 68,483 $ 68,483 $ 61,480 $ 61,480
=========== =========== =========== ===========
Short-term investments $ 22,428 $ 22,428 $ 12,595 $ 12,595
=========== =========== =========== ===========
Fixed maturity securities
held for trading purposes $ -- $ -- $ 22,955 $ 22,955
=========== =========== =========== ===========
Mortgage loans on real
estate $ 566,403 $ 616,806 $ 462,473 $ 466,471
=========== =========== =========== ===========
Other investments $ 205,790 $ 205,790 $ 158,073 $ 158,073
=========== =========== =========== ===========
Interest rate swaps:
Net receivable position $ -- $ -- $ -- $ --
=========== =========== =========== ===========
Net payable position $ -- $ (1,879) $ -- $ (144)
=========== =========== =========== ===========
Interest rate caps $ 1,749 $ 457 $ 2,117 $ 2,062
=========== =========== =========== ===========
Swaptions $ -- $ -- $ -- $ --
=========== =========== =========== ===========
Options $ 49,167 $ 70,862 $ 643 $ 643
=========== =========== =========== ===========
Futures $ -- $ (298) $ -- $ (2,402)
=========== =========== =========== ===========
Financial liabilities-
policy reserves for
annuities $ 6,203,214 $ 5,977,945 $ 6,244,677 $ 6,130,925
=========== =========== =========== ===========
Debt and capital
securities $ 357,780 $ 357,780 $ 352,435 $ 352,435
=========== =========== =========== ===========
</TABLE>
-F 66-
<PAGE> 141
(18) Operating Segments
The Company has two operating segments: Life Insurance and Annuities.
Products generally distinguish a segment. A brief description of each segment
follows:
Life Insurance
Open Block: The primary product offerings consist of whole life,
universal life and term life insurance policies. These products are
marketed on a national basis primarily through a Preferred Producer
agency system and a Personal Producing General Agent ("PPGA")
distribution system.
Closed Block: The Closed Block was established for insurance policies
which had a dividend scale in effect as of June 30, 1996. The Closed
Block was designed to provide reasonable assurance to owners of
insurance policies included therein that, after the Reorganization of
AmerUs Life, assets would 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 primary
products included in the Closed Block are whole life, certain universal
life policies and term life insurance policies.
Annuities
The Annuity segment markets fixed annuities on a national basis
primarily through independent brokers and marketing companies.
The Company uses the same accounting policies and procedures to measure
operating segment income and assets as it uses to measure its consolidated
operating income and assets. Operating segment income is generally income before
interest expense and income tax. Premiums, product charges, policyowner
benefits, insurance expenses, amortization of deferred policy acquisition costs
and VOBA and dividends to policyowners are attributed directly to each operating
segment. Net investment income and realized gains and losses on investments are
allocated based on directly-related assets required for transacting the business
of that segment. Other revenues and benefits and expenses are deemed not to be
associated with any specific segment. The contribution to the operating income
of the life insurance segment from the Closed Block is reported as a single line
item.
-F 67-
<PAGE> 142
Assets are segmented based on policy liabilities directly attributable
to each segment. All assets allocated to the Closed Block are grouped together
and shown as a separate item entitled ?Closed Block Assets."
There are no significant intersegment transactions.
Operating segment income and assets are as follows:
-F 68-
<PAGE> 143
<TABLE>
<CAPTION>
Operating Segment Income
(In thousands)
--------------
Total
Life Insurance Annuities Other Consolidated
-------------- --------- ----- ------------
<S> <C> <C> <C> <C>
Year Ended December 31,
1998
Revenues
Insurance premiums $ 51,263 $ 29,609 $ 325 $ 81,197
Product charges 46,224 24,880 -- 71,104
Net investment income 72,779 430,769 3,401 506,949
Realized gains (losses) on
investments (1,261) 3,240 (2,091) (112)
Contribution from the
Closed Block 31,478 -- -- 31,478
-------- --------- ------ -------
200,483 488,498 1,635 690,616
Benefits and expenses
Policyowner benefits 90,961 339,289 506 430,756
Insurance expenses 43,376 35,592 2,448 81,416
Amortization of deferred
policy acquisition costs and VOBA 22,397 37,817 -- 60,214
Dividends to policyowners 2,558 -- -- 2,558
-------- --------- ------ -------
159,292 412,698 2,954 574,944
-------- --------- ------ -------
Income from operations $ 41,191 $ 75,800 (1,319) 115,672
======== =========
Interest expense 27,075 27,075
Income tax expense 28,422 28,422
Equity in earnings of unconsolidated
subsidiary 2,654 2,654
-------
Net income $62,829
=======
</TABLE>
-F 69-
<PAGE> 144
<TABLE>
<CAPTION>
Operating Segment Income
(In thousands)
- ------------------------
Total
Life Insurance Annuities Other Consolidated
-------------- --------- ----- ------------
<S> <C> <C> <C> <C>
Year Ended December 31,
1997
Revenues
Insurance premiums $ 30,733 $ 17,238 $ 156 $ 48,127
Product charges 45,637 1,669 -- 47,306
Net investment income 73,407 147,924 3,100 224,431
Realized gains on investments 11,121 1,563 1,107 13,791
Contribution from the
Closed Block 31,044 -- -- 31,044
-------- -------- -------- -------
191,942 168,394 4,363 364,699
Benefits and expenses
Policyowner benefits 77,825 117,573 578 195,976
Insurance expenses 38,496 7,365 4,138 49,999
Amortization of deferred
policy acquisition costs and VOBA 17,316 6,460 -- 23,776
Dividends to policyowners 1,587 -- -- 1,587
-------- -------- -------- -------
135,224 131,398 4,716 271,338
-------- -------- -------- -------
Income from operations $ 56,718 $ 36,996 (353) 93,361
======== ========
Interest expense 14,980 14,980
Income tax expense 22,022 22,022
Equity in earnings of unconsolidated
subsidiary 1,700 1,700
--------
Net income $ 58,059
========
</TABLE>
-F 70-
<PAGE> 145
<TABLE>
<CAPTION>
Operating Segment Income
(In thousands)
- ------------------------
Total
Life Insurance Annuities Other Consolidated
-------------- --------- ----- ------------
<S> <C> <C> <C> <C>
For Year Ended December 31,
1996
Revenues
Insurance premiums $120,671 $ 16,082 $ 1,723 $138,476
Product charges 51,383 837 -- 52,220
Net investment income 108,180 120,445 -- 228,625
Realized gains on investments 36,659 29,324 -- 65,983
Contribution from the
Closed Block 19,909 -- -- 19,909
-------- -------- --------- --------
336,802 166,688 1,723 505,213
Benefits and expenses
Policyowner benefits 161,309 100,588 2,845 264,742
Insurance expenses 42,714 6,692 5,451 54,857
Amortization of deferred
policy acquisition costs and VOBA 30,845 9,315 -- 40,160
Dividends to policyowners 26,324 -- -- 26,324
-------- -------- --------- --------
261,192 116,595 8,296 386,083
-------- -------- --------- --------
Income from operations $ 75,610 $ 50,093 (6,573) 119,130
======== ========
Interest expense 2,142 2,142
Income tax expense 43,859 43,859
Equity in earnings of unconsolidated
subsidiary 1,044 1,044
--------
Net income $ 74,173
========
</TABLE>
-F 71-
<PAGE> 146
<TABLE>
<CAPTION>
Operating Segment Assets Total
(In thousands) Life Insurance Annuities Other Consolidated
- ------------------------ -------------- --------- ----- ------------
<S> <C> <C> <C> <C>
December 31,
1998
Investments $ 1,163,503 $6,510,465 $10,801 $ 7,684,769
Deferred policy acquisition costs
and VOBA 140,379 330,191 -- 470,570
Other assets 93,807 684,520 41,839 820,166
Closed Block assets 1,453,305 -- -- 1,453,305
----------- ---------- ------- -----------
Total Assets $ 2,850,994 $7,525,176 $52,640 $10,428,810
=========== ========== ======= ===========
1997
Investments $ 1,224,307 $6,467,265 $ 3,966 $ 7,695,538
Deferred policy acquisition costs
and VOBA 98,817 286,093 -- 384,910
Other assets 68,254 671,687 41,771 781,712
Closed Block assets 1,391,848 -- -- 1,391,848
----------- ---------- ------- -----------
Total Assets $ 2,783,226 $7,425,045 $45,737 $10,254,008
=========== ========== ======= ===========
1996
Investments $ 1,211,368 $1,669,475 $ -- $ 2,880,843
Deferred policy acquisition costs
and VOBA 101,328 19,153 -- 120,481
Other assets 59,451 27,001 26,285 112,737
Closed Block assets 1,270,168 -- -- 1,270,168
----------- ---------- ------- -----------
Total Assets $ 2,642,315 $1,715,629 $26,285 $ 4,384,229
=========== ========== ======= ===========
</TABLE>
-F 72-
<PAGE> 147
(19) Quarterly Results (Unaudited)
<TABLE>
<CAPTION>
1998 Quarterly Data
Quarter Ended
-------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(dollars in thousands, except earnings per common share)
<S> <C> <C> <C> <C>
Total revenues (excluding
realized gains) $ 175,822 $ 173,987 $ 165,874 $ 175,045
Realized gains (losses) $ 6,219 $ 4,564 $ (8,393) $ (2,502)
Total benefits and expenses $ 143,843 $ 145,290 $ 142,104 $ 143,707
Net income $ 21,757 $ 20,863 $ 6,862 $ 13,347
Weighted average number of
common shares
- basic 34,734,918 34,732,514 33,726,221 30,680,339
Weighted average number of
common shares
- diluted 34,831,363 35,021,958 33,951,365 30,712,432
Earnings per common share
- basic $ 0.63 $ 0.60 $ 0.20 $ 0.44
Earnings per common share
- diluted $ 0.62 $ 0.60 $ 0.20 $ 0.43
</TABLE>
-F 73-
<PAGE> 148
<TABLE>
<CAPTION>
1997 Quarterly Data Quarter Ended
-------------
Quarter Ended
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(dollars in thousands, except earnings per common share)
<S> <C> <C> <C> <C>
Total revenues (excluding
realized gains and
losses) $ 79,546 $ 77,425 $ 82,305 $ 111,632
Realized gains (losses) $ 5,259 $ 4,264 $ 4,987 $ (719)
Total benefits and expenses $ 61,712 $ 58,867 $ 62,249 $ 88,510
Net income $ 14,580 $ 14,442 $ 16,475 $ 12,562
Weighted average number of
common shares
- basic 23,155,989 23,155,989 23,155,989 24,666,285
Weighted average number of
common shares
- diluted 23,155,989 23,155,989 23,155,989 24,774,973
Earnings per common share
- basic $ 0.63 $ 0.62 $ 0.71 $ 0.51
Earnings per common share
- diluted $ 0.63 $ 0.62 $ 0.71 $ 0.50
</TABLE>
-F 74-
<PAGE> 149
AMERUS LIFE HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule Page
- -------- ----
Independent Auditors' Report on Schedules . . . . . . . . . . . . . . . . S-2
I Summary of Investments - Other than Investments
in Related Parties . . . . . . . . . . . . . . . . . . . . . . . S-3
II Condensed Financial Information of Registrant . . . . S-4 through S-8
III Supplementary Insurance Information . . . . . . . . . . . . . . . S-9
IV Reinsurance . . . . . . . . . . . . . . . . . . . . .S-10 through S-11
V Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . S-12
All other schedules are omitted for the reason that they are not required,
amounts are not sufficient to require submission of the schedule, or that the
equivalent information has been included in the consolidated financial
statements, and notes thereto.
- S 1 -
<PAGE> 150
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
The Board of Directors and Stockholders'
AmerUs Life Holdings, Inc.:
Under date of February 10, 1999 we reported on the consolidated balance
sheets of AmerUs Life Holdings, Inc. and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, stockholder's
equity, comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 1998, as contained in Part II, Item 8 of
the annual report on Form 10-K for the year 1998. In connection with our audits
of the aforementioned consolidated financial statements, we also have audited
the related consolidated financial statement schedules as listed in the
accompanying index. These financial statement schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Des Moines, Iowa
February 10, 1999
- S 2 -
<PAGE> 151
AMERUS LIFE HOLDINGS, INC.
SCHEDULE I
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
<TABLE>
<CAPTION>
Amount at
which
Amortized Market Shown in the
Type of Investment Cost Value Balance Sheet
- ------------------ ---- ----- -------------
(In thousands)
<S> <C> <C> <C>
December 31, 1998
Fixed Maturities:
Bonds
United States Government and government
agencies and authorities $2,018,742 $2,044,552 $2,044,552
States, municipalities and
political subdivisions 47,441 49,580 49,580
Foreign governments 138,923 136,889 136,889
Public utilities 522,774 538,971 538,971
Convertibles and bonds with
warrants attached 101,210 104,233 104,233
All other corporate bonds 3,697,806 3,771,175 3,771,175
Redeemable preferred stock 65,180 64,846 64,846
---------- ---------- ----------
Total fixed maturities $6,592,076 $6,710,246 $6,710,246
Equity securities:
Common stocks
Banks, trust and insurance companies $ 33,300 $ 16,892 $ 16,892
Industrial, miscellaneous and all
other 9,219 10,099 10,099
Nonredeemable preferred stocks 44,345 41,492 41,492
---------- ---------- ----------
Total equity securities $ 86,864 $ 68,483 $ 68,483
Mortgage loans on real estate 566,403 566,403
Real estate 633 633
Policy loans 110,786 110,786
Other long-term investments 205,790 205,790
Short-term investments 22,428 22,428
---------- ----------
Total investments $7,584,980 $7,684,769
========== ==========
</TABLE>
-S 3-
<PAGE> 152
AMERUS LIFE HOLDINGS, INC.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(Parent Company)
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
- ------ ---- ----
(In thousands)
<S> <C> <C>
Investments:
Securities available-for-sale at fair value:
Fixed maturity securities $ -- $ 3,955
Equity securities 3,095 --
Short-term investments 7,753 --
Investments in subsidiaries, at equity 1,161,541 1,230,664
Other investments 50,009 50,011
Cash -- 12,402
Accrued Investment income 2,544 4,759
Income taxes receivable 5,218 2,155
Other assets 12,100 2,519
---------- ----------
Total assets $1,242,260 $1,306,465
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Checks written in excess of bank balance $ 108 $ --
Other liabilities 43,082 39,814
Debt (note 2) 132,143 252,660
---------- ----------
Total liabilities 175,243 292,474
---------- ----------
Capital Securities (note 2) 216,729 86,000
---------- ----------
Stockholders' equity:
Preferred stock, no par value,
20,000,000 shares authorized, none issued -- --
Common stock, Class A, no par value,
180,000,000 shares authorized 1998;
75,000,000 shares authorized 1997, issued
and outstanding 25,425,983 shares
in 1998 and 29,734,918 shares in 1997 25,426 29,735
Common stock, Class B, no par value,
50,000,000 shares authorized,
5,000,000 shares issued and outstanding 5,000 5,000
Paid-in-capital 290,091 383,686
Accumulated other comprehensive income 26,471 55,747
Retained earnings 503,210 453,823
---------- ----------
Total stockholders' equity 850,198 927,991
---------- ----------
Total liabilities and stockholders' equity $1,242,260 $1,306,465
========== ==========
</TABLE>
See accompanying notes to condensed financial statements
-S 4-
<PAGE> 153
AMERUS LIFE HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME
(Parent Company)
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Revenues:
Equity in undistributed earnings of subsidiaries $70,267 $60,942
Net investment income 18,693 13,255
Other income -- 1,107
------- -------
88,960 75,304
Expenses:
Operating expenses 30,093 18,527
------- -------
30,093 18,527
------- -------
Income before income tax expense 58,867 56,777
Income tax benefit 3,962 1,282
------- -------
Net income $62,829 $58,059
======= =======
</TABLE>
See accompanying notes to condensed financial statements.
-S 5-
<PAGE> 154
AMERUS LIFE HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(Parent Company)
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 62,829 $ 58,059
Adjustments to reconcile net income to
net cash provided by (used by) operating
activities
Equity in undistributed earnings (70,267) (60,942)
Change in:
Accrued investment income 2,215 (4,500)
Income taxes (3,063) (2,187)
Other, net (8,535) 10,701
--------- ---------
Net cash provided by (used by) operating
activities (16,821) 1,131
--------- ---------
Cash flows from investing activities:
Purchase of investments (27,292) (3,966)
Sale of investments 3,955 --
Cash paid for acquisitions -- (212,084)
--------- ---------
Net cash (used in) investing activities (23,337) (216,050)
--------- ---------
Cash flows from financing activities:
Change in checks written in excess of bank
balance 108 --
Change in debt, net 10,212 163,660
Purchase of treasury stock, net of issuance (101,472) --
Capital contribution to subsidiaries (10,000) --
Dividends from subsidiaries 142,350 15,000
Net proceeds from initial public
stock offering -- 55,027
Dividends paid to stockholders (13,442) (6,446)
Net cash provided by financing activities 27,756 227,241
--------- ---------
Net increase (decrease) in cash (12,402) 12,322
Cash at beginning of period 12,402 80
--------- ---------
Cash at end of period $ -- $ 12,402
========= =========
</TABLE>
See notes to accompanying condensed financial statements.
-S 6-
<PAGE> 155
AMERUS LIFE HOLDINGS, INC.
(Parent Company)
Notes to Condensed Financial Statements
(1) Basis of Presentation
AmerUs Life Holdings, Inc. (the "Company") is the parent company of its
primary subsidiaries, AmerUs Life Insurance Company ("AmerUs Life"), AmVestors
Financial Corporation ("AmVestors") and Delta Life Corporation ("Delta"). The
Company's investment in its subsidiaries is stated at cost plus equity in
undistributed earnings of the subsidiaries. The Company's share of net income of
its unconsolidated subsidiaries is included in income using the equity method.
These financial statements should be read in conjunction with AmerUs Life
Holdings, Inc. consolidated financial statements.
(2) Debt and Capital Securities
Debt and capital securities consists of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revolving Credit Agreement (A) $ -- $250,000
Senior notes bearing interest at
6.95% due June 2005 125,000 --
Junior Subordinated debentures bearing
interest at 8.85%(B) 88,660 88,660
Junior Subordinated debentures bearing
interest at 7.00% (C) 135,212 --
-------- --------
$348,872 $338,660
======== ========
</TABLE>
(A) The revolving credit agreement provides for a maximum borrowing of $150
million with the balance maturing in October 2002. The interest rate is
variable, however, the Company may elect to fix the rate for periods
from 30 days to six months. The loan agreement contains various
financial and operating covenants which, among other things, limit
future indebtedness and restrict the amount of future dividend
payments.
-S 7-
<PAGE> 156
(B) The Company issued $88.66 million of junior subordinated debentures to
a wholly-owned subsidiary trust in connection with capital securities
issued by the trust. The debentures bear interest at the rate of 8.85%
and mature February 1, 2027.
(C) The Company issued $149.4 million of junior subordinated debentures to
a wholly-owned subsidiary trust in connection with adjustable
conversion-rate equity security units issued by the trust. The
debentures bear interest at the rate of 7.00% and mature July 27, 2003.
Maturities of long-term debt and capital securities are as follows for
each of the five years ending December 31:
Year ending December 31: (In thousands)
- ------------------------ --------------
1999 $ --
2000 --
2001 --
2002 --
2003 135,212
Thereafter 213,660
--------
$348,872
========
-S 8-
<PAGE> 157
AMERUS LIFE HOLDINGS, INC.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
<TABLE>
<CAPTION>
Future
policy
benefits, Other
Deferred losses, Policy
policy claims & claims & Net in-
acquisition loss Unearned benefits Premium vestment
cost & VOBA expenses(1) premiums payable(2) revenue income
----------- ----------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Segment
Life Insurance (3)
12/31/98 $257,858 $2,638,268 $- $21,506 $249,441 $188,541
12/31/97 $242,582 $2,524,216 $- $ 8,461 $236,878 $187,166
12/31/96 $276,563 $2,192,447 $- $ 9,825 $228,986 $164,509
Annuities
12/31/98 $330,191 $6,302,489 $- $- $ 29,609 $430,769
12/31/97 $286,093 $6,215,935 $- $- $ 17,238 $147,924
12/31/96 $ 19,153 $1,418,478 $- $- $ 16,082 $120,445
Other
12/31/98 $- $ 17,801 $- $ 322 $ 325 $ 3,401
12/31/97 $- $ 17,005 $- $ 2,053 $ 156 $ 3,100
12/31/96 $- $ 1,520 $- $ 1,979 $ 1,723 $-
Total (3)
12/31/98 $588,049 $8,955,558 $- $21,828 $279,375 $622,711
12/31/97 $528,675 $8,757,156 $- $10,514 $254,272 $338,190
12/31/96 $295,716 $3,612,445 $- $11,804 $246,791 $284,954
</TABLE>
<TABLE>
<CAPTION>
Benefits, Amortization
claims, of deferred
losses & policy Other
settlement acquis. operating Prem.
expenses costs&VOBA expenses written
---------- ------------ --------- -------
<S> <C> <C> <C> <C>
Segment
Life Insurance (3)
12/31/98 $368,672 $48,683 $48,418 n/a
12/31/97 $345,641 $48,787 $43,973 n/a
12/31/96 $317,919 $49,257 $45,683 n/a
Annuities
12/31/98 $339,289 $37,817 $35,592 n/a
12/31/97 $117,573 $ 6,460 $ 7,365 n/a
12/31/96 $100,588 $ 9,315 $ 6,692 n/a
Other
12/31/98 $ 506 $- $ 2,448 n/a
12/31/97 $ 578 $- $ 4,138 n/a
12/31/96 $ 2,845 $- $ 5,451 n/a
Total (3)
12/31/98 $708,467 $86,500 $86,458 n/a
12/31/97 $463,792 $55,247 $55,476 n/a
12/31/96 $421,352 $58,572 $57,826 n/a
</TABLE>
- ------------------------
(1) Includes policy reserves, policyholder funds, and dividends payable
(2) Policy and contract claims
(3) Includes Closed Block amounts
- S 9 -
<PAGE> 158
AMERUS LIFE HOLDINGS, INC.
SCHEDULE IV
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of amount
Gross Other From Other Net assumed to
Amount Companies Companies Amount Net
------ --------- --------- ------ ---
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Life insurance in
force $31,092,285 $3,778,838 $626,086 $ 27,939,533 2.24%
=========== ========== ======== ============ ====
Premiums
Life insurance premiums
and charges $ 166,590 $ 15,650 $ 1,036 $ 151,976 0.68%
Accident and health
insurance 1,542 1,376 -- 166 0.00%
Other 884 725 -- 159 0.00%
----------- ---------- -------- ------------ ----
Total premiums $ 169,016 $ 17,751 $ 1,036 $ 152,301 0.68%
=========== ========== ======== ============ ====
Year ended December 31, 1997
Life insurance in
force $30,312,097 $4,102,216 $500,613 $ 26,710,494 1.87%
=========== ========== ======== ============ ====
Premiums
Life insurance premiums
and charges $ 110,618 $ 16,716 1,375 95,277 1.44%
Accident and health
insurance 1,502 1,332 -- 170 -%
Other 2,741 2,755 -- (14) -%
----------- ---------- -------- ------------ ----
Total premiums $ 114,861 $ 20,803 $ 1,375 $ 95,433 1.44%
=========== ========== ======== ============ =====
</TABLE>
-S 10-
<PAGE> 159
<TABLE>
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Life insurance in
force $29,456,101 $4,170,418 $446,785 $25,732,468 1.74%
=========== ========== ======== =========== ====
Premiums
Life insurance premiums
and charges $ 202,288 $ 14,790 $ 1,475 $ 188,973 .48%
Accident and health
insurance 2,154 1,915 -- 239 --%
Other 3,394 1,921 11 1,484 --%
----------- ---------- -------- ----------- ----
Total premiums $ 207,836 $ 18,626 $ 1,486 $ 190,696 .48%
=========== ========== ======== =========== ====
</TABLE>
-S 11-
<PAGE> 160
AMERUS LIFE HOLDINGS, INC.
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Charged to Deductions-
other provisions on
Balance at Charged to accounts- mortgages Balance at
Description beginning of costs and mortgages sold end of
Mortgage Loans period expenses acquired transferred period
- -------------- ------ -------- -------- ----------- ------
(In thousands)
<S> <C> <C> <C> <C> <C>
1998 $15,284 $(6,785) $14,900 $ (1,100) $22,299
1997 $11,622 $ (856) $ 4,568 $ (50) $15,284
1996 $30,067 $(4,029) $ -- $(14,416) $11,622
</TABLE>
-S 12-
<PAGE> 1
Exhibit 3.3
ARTICLES OF AMENDMENT
OF
AMERUS LIFE HOLDINGS, INC.
TO THE SECRETARY OF STATE OF THE STATE OF IOWA:
Pursuant to Section 1006 of the Iowa Business Corporation Act, the
undersigned corporation adopts the following amendment to the Corporation's
Amended and Restated Articles of Incorporation.
1. The name of the corporation is AmerUs Life Holdings, Inc.
2. The first paragraph of Article IV of the Amended and Restated Articles
of Incorporation is amended and restated as follows:
ARTICLE IV
The aggregate number of shares of all classes of capital stock which
the corporation shall have authority to issue is two hundred and fifty
million (250,000,000) shares, of which twenty million (20,000,000)
shares shall be Preferred Stock, no par value, issuable in one or more
series, one hundred eighty million (180,000,000) shares shall be Class
A common stock, no par value, and fifty million (50,000,000) shares
shall be Class B common stock, no par value. [changes underlined]
3. The date of adoption of the amendment was May 8, 1998.
4A. The amendment was approved by the shareholders. The designation, number
of outstanding shares, number of votes entitled to be cast by each
voting group entitled to vote separately on the amendment, and the
number of votes of each voting group indisputably represented at the
meeting is as follows:
<TABLE>
<CAPTION>
Designation Shares Votes Entitled to be Votes Represented
of Group Outstanding Cast on Amendment at Meeting
-------------- ---------------- --------------------------- -----------------------
<S> <C> <C> <C>
Class A and Class B
Common Stock 34,734,918 34,734,918 32,278,392
Class A Common
Stock 29,734,918 29,734,918 27,278,392
</TABLE>
4B. The total number of votes cast for and against the
amendment by each voting group entitled to vote separately
on the amendment is as follows:
<TABLE>
Voting Group Votes For Votes Against
----------------- ------------ -----------------
<S> <C> <C>
Class A and Class B Common Stock 27,686,461 4,558,263
Class A Common Stock 22,686,461 4,558,263
</TABLE>
The number of votes cast for the amendment by each voting group was
sufficient for approval by that voting group.
Dated this 25th day of September, 1998.
AMERUS LIFE HOLDING, INC.
<PAGE> 2
By: /s/ Roger K. Brooks
----------------------------------------
Roger K. Brooks
Chairman, President and Chief Executive
Officer
By: /s/ James A. Smallenberger
----------------------------------------
James A. Smallenberger
Senior Vice President and Secretary
<PAGE> 3
CERTIFICATE OF APPROVAL
ATTORNEY GENERAL
Pursuant to provisions of the Iowa Code, the undersigned
approves the Articles of Amendment (adopted May 8, 1998) to the Amended
and Restated Articles of Incorporation for AmerUs Life Holdings, Inc.,
and finds them in conformance with the laws of the United States and
with the laws and Constitution of the State of Iowa.
THOMAS J. MILLER
Attorney General of Iowa
12-23-98 /s/ Scott M. Galenbeck
------------------ ----------------------------------
Date By: SCOTT M. GALENBECK
Assistant Attorney General
CERTIFICATE OF APPROVAL
COMMISSIONER OF INSURANCE
Pursuant to the provisions of the Iowa Code, the undersigned
approves the Articles of Amendment (adopted May 8, 1998) to the Amended
and Restated Articles of Incorporation for AmerUs Life Holdings, Inc.
THERESE M. VAUGHAN
Commissioner of Insurance
12-24-98 /s/ Robert L. Howe
------------------ ----------------------------------
Date By: ROBERT L. HOWE
Deputy Commissioner of Insurance
<PAGE> 1
EXHIBIT 10.26
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<TABLE>
<CAPTION>
<S> <C> <C>
THE IOWA STATE BAR ASSOCIATION ISBA # 02 FOR THE LEGAL EFFECT OF THE USE OF
Official Form No. 165 THIS FORM, CONSULT YOUR LAWYER
Preparer
Information Diane M. Davidson, Esq., 699 Walnut St., Ste. 1700, Des Moines, IA 50309-3945 (515) 362-3607
---------------------------------------------------------------------------------------------------------------
Individual's Name Street Address City Phone
---------------------------------------------------------------------------------------------------------------
SPACE ABOVE THIS LINE
REVISED AND RESTATED FOR RECORDER
</TABLE>
[LOGO] LEASE-BUSINESS PROPERTY - SHORT FORM
NOTE: This Lease-Business Property - Short Form supersedes the December
31, 1997 Lease-Business Property - Short Form and the First,
Second and Third Amendments to same.
THIS AGREEMENT, made and entered into this 28th day of May, 1998, by and between
AmerUs Properties, Inc.
- --------------------------------------------------------------------------------
("Landlord"), whose address, for the purpose of this lease, is:
699 Walnut Street, Suite 1700
- --------------------------------------------------------------------------------
(Street and Number)
Des Moines, Iowa 50309-3945
- --------------------------------------------------------------------------------
(City) (State) (Zip Code)
and AmerUs Life Holdings, Inc.
----------------------------------------------------------------------------
("Tenant"), whose address for the purpose of this lease is:
699 Walnut Street, Suite 2000
- --------------------------------------------------------------------------------
(Street and Number)
Des Moines, Iowa 50309
- --------------------------------------------------------------------------------
(City) (State) (Zip Code)
The parties agree as follows:
1. PREMISES AND TERM. Landlord leases to Tenant the following real
estate, situated in Polk County, Iowa: Space in The Hub Tower as follows:
Effective May 1, 1998: Monthly
Thirteenth Floor 500 rentable sq.ft. Rental:
Seventeenth Floor 15,518 rentable sq.ft.
Nineteenth Floor 3,190 rentable sq.ft.
Twentieth Floor 15,518 rentable sq.ft; $ 59,537.79
Effective July, 1998 the addition of:
Third Floor 19,603 rentable sq.ft.
Fourteenth Floor 15,518 rentable sq.ft. $ 57,397.73
-------------
For a New Total Monthly Rent Effective July 1, 1998 of: $ 116,935.52
together with all improvements thereon, and all rights, easements and
appurtenances thereto belonging, for a term beginning on the 1st day of May,
1998, and ending on the 31st day of December, 2007 upon the condition that
Tenant performs as provided in this lease.
2. RENT. Tenant agrees to pay Landlord as rent $ (See amounts listed above)
per month, in advance commencing on the 1st day of May 1998 and on the 1st day
of each month thereafter, during the term of this lease. Rent for any partial
month shall be prorated as additional rent above monthly rental is calculated
at $17.50 per square foot per annum plus the amortized cost of tenant
improvements.
All sums shall be paid at the address of Landlord, or at such other place
as Landlord may designate in writing. Delinquent payments shall draw interest at
12 % per annum.
3. POSSESSION. Tenant shall be entitled to possession on the first day of
the lease term, and shall yield possession to Landlord at the termination of
this lease. SHOULD LANDLORD BE UNABLE TO GIVE POSSESSION ON SAID DATE, TENANT'S
ONLY DAMAGES SHALL BE A PRO RATA ABATEMENT OF RENT.
4. USE. Tenant shall use the premises only for
general office and related business use.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5. CARE AND MAINTENANCE. (a) Tenant takes the premises as is, except as
herein provided. (b) Landlord shall keep the following in good repair: (roof)
(exterior walls) (foundation)(sewer)(plumbing)(heating)(wiring)(air
conditioning)(plate glass) (windows and window glass) (parking area) (driveways)
(sidewalks) (exterior decorating) (interior decorating)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
except when the same area occasioned by the misuse of negligence of Tenant, its
agents, employees or invitees. Landlord shall not be liable for failure to make
any repairs or replacements unless Landlord fails to do so within a reasonable
time after written notice from Tenant.
(c) Tenant shall maintain the premises in a reasonable safe, serviceable,
clean and presentable condition, and except for the repairs and replacements
provided to be made by Landlord in subparagraph (b) above, shall make all
repairs, replacements and improvements to the premises. INCLUDING ALL CHANGES,
ALTERATIONS OR ADDITIONS ORDERED BY ANY LAWFULLY CONSTITUTED GOVERNMENT
AUTHORITY DIRECTLY RELATED TO TENANT'S USE OF THE PREMISES. Tenant shall make
no structural changes or alterations without the prior written consent of
Landlord. Unless otherwise provided, and if the premises include the ground
floor, Tenant agrees to remove all snow and ice and other obstructions from the
sidewalk on or abutting the premises.
<PAGE> 2
6. UTILITIES AND SERVICES. Landlord shall pay for all utilities and
services which may be used on the premises, except the following to be furnished
by Tenant:
Communications Systems
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Landlord shall not be liable for damages for failure to perform as herein
provided, or for any stoppage for needed repairs or for improvements or arising
from causes beyond the control of Landlord, provided Landlord uses reasonable
diligence to resume such services.
7. SURRENDER. Upon the termination of this lease, Tenant will surrender the
premises to Landlord in good and clean condition, except for ordinary wear and
tear or damage without fault or liability of Tenant. Continued possession,
beyond the term of this Lease and the acceptance of rent by Landlord shall
constitute a month-to-month extension of this lease.
8. ASSIGNMENT AND SUBLETTING. No assignment or subletting, either voluntary
or by operation of law, shall be effective without the prior written consent of
Landlord, which consent shall not unreasonably be withheld. Landlord
acknowledges that 445 rentable square feet of premises will be occupied by
Tenant's parent, Amerus Group Co.
9. PROPERTY INSURANCE. (a) Tenant will not do or omit the doing of any act
which would invalidate any insurance, or increase the insurance rates in force
on the promises. (b) To the extent of all insurance collectible for damage to
property, and to the extent permitted by their respective policies of fire and
extended coverage insurance, each party hereby waives rights of subrogation
against the other, regardless of fault.
10. INDEMNITY AND LIABILITY INSURANCE. Except for any negligence of
Landlord, Tenant will protect, defend, and indemnify Landlord from and against
any and all loss, costs, damage and expenses occasioned by, or arising out of,
any accident or other occurrence causing or inflicting injury or damage to any
person or property, happening or done in, upon or about the promises, or due
directly or indirectly to the tenancy, use or occupancy thereof, or any part
thereof by Tenant or any person claiming through or under Tenant. Tenant will
procure and maintain liability insurance in amounts not less than $ l,000,000.00
for any person injured, $2,000,000.00 for any one accident, which names Landlord
as an insured.
11. DAMAGE. In the event of damage to the premises, so that Tenant is
unable to conduct business on the premises, this lease may be terminated at the
option of either party. Such termination shall be affected by notice of one
party to the other within twenty days after such notice, and both parties shall
thereafter be released from all future obligations hereunder.
12. MECHANICS' LIENS. Neither Tenant, nor anyone claiming by, through, or
under Tenant, shall have the right to file any mechanic's lien against the
premises. Tenant shall give notice in advance to all contractors and
subcontractors who may furnish, or agree to furnish, any material, service or
labor for any improvement on the premises.
13. TERMINATION UPON DEFAULT OF TENANT. Upon default in payment of rent,
abandonment of the premises, or upon any other default by Tenant of the terms of
this lease, this lease may, at the option of Landlord, and without prejudice to
any other rights or remedies afforded Landlord by law, be cancelled and
forfeited; PROVIDED, HOWEVER, before any such cancellation and forfeiture,
Landlord shall give Tenant notice specifying the default, or defaults, and
stating that this Lease will be cancelled and forfeited ten days after notice,
unless such default or defaults are remedied within such period.
14. SIGNS. Landlord, during the last ninety (90) days of this lease, shall
have the right to maintain on the premises either or both a "For Rent" or "For
Sale" sign. Tenant will permit prospective tenants or buyers to enter and
examine the premises.
15. NOTICES AND DEMANDS. All notices shall be given to the parties hereto
at the addresses designated unless either party notifies the other, in writing,
of a different address. Without prejudice to any other method of notifying a
party in writing or making a demand or other communication, such notice shall be
considered given under the terms of this lease when it is deposited in the U.S.
Mail, registered or certified, properly addressed, return receipt requested, and
postage prepaid.
16. PROVISIONS BINDING. Each and every covenant and agreement herein
contained shall extend to and be binding upon the respective successors, heirs,
administrators, executors and assigns of the parties hereto.
17. ADDITIONAL PROVISIONS. Within ten (10) days after written request from
Landlord, Tenant shall execute and deliver to Landlord or Landlord's designee, a
written statement certifying that this Lease is unmodified and in full force and
effect, or is in full force and effect as modified and stating the
modifications; the amount of rent and the date to which rent has been paid in
advance; and that Landlord is not in default hereunder or if Landlord is in
default, stating the nature of the claimed default. Any such statement may be
relied upon by a purchaser or lender.
AmerUs Properties, Inc. AmerUs Life Holdings, Inc.
- ------------------------------------- ------------------------------------
LANDLORD TENANT
By: /s/ James A. McClarnon By: /s/ Gene Harris
- ------------------------------------- ---------------------------------
James A. McClarnon Printed name: Gene Harris
Title: Senior Vice President
<PAGE> 1
Exhibit 10.27
ADDENDUM
TO
LEASE - BUSINESS PROPERTY - SHORT FORM
IN THE
THE HUB TOWER
THIS ADDENDUM TO LEASE - BUSINESS PROPERTY - SHORT FORM ( the "Lease"),
is made and entered into this 28th day of May, 1998, between AMERUS PROPERTIES,
INC., ("Landlord") and AMERUS LIFE HOLDINGS, INC., ("Tenant").
ADDITIONAL RENT - DEFINITIONS. In addition to paying the Rent set forth
in Paragraph 1 of the Lease, Tenant will pay as "Additional Rent" the amounts
set forth in this Paragraph in the same manner and place as the base Rent. As
used in this Lease:
(a) "CALENDAR YEAR" means any twelve (12) month period, January through
December, which contains any part of the Term of this Lease.
(b) "TENANT'S PROPORTIONATE SHARE" means as of May 1, 1998, twelve and
six-tenths percent (12.6%), and as of July 1, 1998, twenty-five and
two-tenths percent (25.2%), which percentage has been determined by
dividing the net rentable square feet of the Premises by the total net
rentable square feet contained in the Building (277,462 square feet).
In the event the rentable square feet of either the Premises or the
total Building changes, the Landlord reserves the right to adjust the
Tenant's Proportionate Share at the beginning of each Calendar Year. In
no event shall the total net rentable square feet of the Building be
adjusted to a total less than that set forth herein.
(c) "TAXES" means all real estate taxes and assessments, special or
otherwise, levied or assessed upon or with respect to the Land and
Building, or either, and ad valorem taxes for Landlord's personal
property located in and used in connection with the Premises required
to be paid during the Calendar Year. Should the State of Iowa, any
political subdivision thereof or any other governmental authority
having jurisdiction over the Land or the Building impose a tax,
assessment, charge, penalty or fee or increase a then existing tax,
assessment, charge, penalty or fee that the Landlord is required to
pay, either by way of substitution for real estate taxes or ad valorem
personal property taxes, or impose, license or a tax on rents in
substitution for, or in addition to, a tax levied against the Land
and/or the Building and/or the Landlord's personal property located in
and used in connection with the Land or the Building, such taxes,
assessments, fees or charges will be deemed to constitute Taxes
hereunder. "Taxes" include all reasonable fees and costs incurred by
the Landlord in seeking to obtain a reduction of, or a limit on the
increase in any Taxes, regardless of whether any reduction or
limitation is obtained. Taxes will not include any inheritance; estate,
succession, transfer, gift, franchise, income or capital stock tax
except as expressly provided herein.
<PAGE> 2
(d) "OPERATING EXPENSES" means Landlord's operating expenses that are
reasonable, actual and necessary, out-of-pocket (except Landlord may
use its normal accrual method accounting), obtained at competitive
prices, and that are directly attributable to the operation,
maintenance, management, and repair of the Land and Building, as
determined under generally accepted accounting principles consistently
applied, including:
(A) salaries, and other compensation; including payroll taxes,
vacation, holiday, and other paid absences; and welfare, retirement,
and other fringe benefits; that are paid to employees, independent
contractors, or agents of Landlord engaged in the operation, repair,
management, or maintenance of the Building;
(B) repairs and maintenance of the Building and the cost of
supplies, tools, materials and equipment for Building repairs and
maintenance, that under generally accepted accounting principles
consistently applied, would not be capitalized;
(C) premiums and other charges incurred by Landlord for
insurance on the Building and for employees specified in subparagraph
(A) above including:
(I) fire insurance, extended coverage insurance, and
earthquake, windstorm, hail, and explosion insurance;
(ii) public liability and property damage insurance;
(iii) elevator insurance;
(iv) workers' compensation insurance;
(v) boiler and machinery insurance, sprinkler leakage,
water damage, water damage legal liability insurance,
burglary, fidelity, and pilferage insurance on equipment and
materials;
(vi) health, accident, and group life insurance;
(vii) insurance Landlord is required to carry under this
Lease; and
(viii) other insurance as is customarily carried by
operators of comparable first class office buildings in the
area;
(D) costs incurred for inspection and servicing, including all
outside maintenance contracts necessary for the proper maintenance of
the Building, such as janitorial and window cleaning, rubbish removal,
landscape maintenance, snow removal, exterminating, water treatment,
elevator, electrical, plumbing, and mechanical equipment, and the cost
of materials, tools, supplies, and equipment used for inspection and
servicing;
(E) costs incurred for electricity, water, gas, fuel, or other
utilities;
<PAGE> 3
(F) payroll taxes, federal taxes, state and local unemployment
taxes, and social security taxes paid for the employees specified in
subparagraph (A) above;
(G) sales, use, and excise taxes on goods and services
purchased by Landlord, but Tenant's pro rata share shall exclude
prepaid services that are not used by Landlord;
(H) license, permit, and inspection fees;
(I) auditor's fees for public accounting;
(J) legal fees, costs, and disbursements but excluding those
(i) relating to disputes with tenants;
(ii) based upon Landlord's negligence or other
tortious conduct;
(iii) relating to enforcing any leases except for
enforcing lease provisions for the benefit of the Building
tenants generally; or
(iv) relating to the defense of Landlord's title
to, or interest in, the Land or Building.
(K) reasonable property management fees;
(L) the annual amortization over its useful life with a
reasonable salvage value on a straight-line basis of the costs of any
capital improvements made by Landlord and required by any changes in
applicable laws, rules, or regulations of any governmental authorities
enacted after the Building was fully assessed as a completed and
occupied unit and the Lease was signed;
(M) the annual amortization over its useful life with a
reasonable salvage value on a straight-line basis of the costs of any
equipment or capital improvements made by Landlord after the Building
was fully assessed as a completed and occupied unit and the Lease was
signed, as a laborsaving measure or to accomplish other savings in
operating, repairing, managing, or maintaining of the Land or Building,
but only to the extent of the savings;
(N) the annual amortization over its useful life on a
straight-line basis of the costs of any window draperies for exterior
windows provided by Landlord and the carpeting in the common areas;
<PAGE> 4
(O) any costs for substituting work, labor, materials, or
services in place of any of the above items, or for any additional
work, labor, materials, services, or improvements to comply with any
governmental laws, rules, regulations, or other requirements applicable
to the Land or Building enacted after the Building as fully assessed as
a completed and occupied unit and the Lease was signed, that, at the
time of a substitution or addition, are considered operating expenses
under generally accepted accounting principles consistently applied;
and
(P) other costs reasonably necessary to operate, repair,
manage, and maintain the Land or Building in a first class manner and
condition.
Operating expenses shall not include:
(i) cost of alterations resulting from Tenant Improvements
except for repairs to the Building or capital improvements
otherwise includable in Operating Expenses;
(ii) principal and interest payments on loans secured by
mortgages or trust deeds on the Building or the Land;
(iii) cost of capital improvements, except that Operating
Expenses includes the cost during the Term, as reasonably
amortized by the Landlord with interest at the then current
rates for construction financing on the unamortized amount, of
any capital improvements made during the Term which reduces
any of the costs included within Operating Expenses;
(iv) costs with respect to which the Landlord receives direct
reimbursement from the tenants of the Building excluding those
received in accordance with the operating expense escalation
clauses;
(v) leasing commissions, advertising costs and other expenses
incurred solely to locate new tenants for the Building;
(vi) depreciation;
(vii) cost of legal expenses incurred to enforce lease terms
that are specifically allocable to a particular tenant;
(viii) costs of any repairs, restoration or other work
necessitated by fire, windstorm or other insured casualty to
the extent that proceeds have been received by the Landlord;
and
(ix) costs, fines, or penalties incurred as a result of
Landlord violating any governmental rule or authority.
<PAGE> 5
(e) "BUILDING" as used in this Lease is the Hub Tower, 699 Walnut
Street and includes all common areas, corridors, parking
areas, lobbies, or sidewalks located in or related to the
operation of the Building, loading areas, parking areas and
driveways and other public areas in or around the Building as
well as all structural components of the Building.
(f) "LAND" as used in this Lease includes the real property upon
which the Building is located.
(g) "BASE YEAR" as used in this Lease shall mean the calendar year
1998.
PAYMENT OF ADDITIONAL RENT. The Tenant will pay to the Landlord as
Additional Rent, in addition to the Base Rent, an amount ("Tax Amount") equal to
the Tenant's Proportionate Share of the Taxes paid with respect to each Calendar
Year in excess of Tenant's Proportionate Share of the Taxes paid with respect to
the Base Year. The Tenant will also pay to the Landlord as Additional Rent, in
addition to the base Rent, an amount ("Operating Expense Amount") equal to the
Tenant's Proportionate Share of the Operating Expenses incurred by the Landlord
with respect to each Calendar Year in excess of Tenant's Proportionate Share of
the Operating Expenses paid with respect to the Base Year. The Tax Amount and
the Operating Expense Amount with respect to each Calendar Year will be paid in
monthly installments at the same time and place as base Rent is to be paid in an
amount estimated from time to time by the Landlord. The Landlord shall estimate
the Tax Amount and Operating Expense Amount at the beginning of each Calendar
Year and require the Tenant to pay one-twelfth (1/12th) of the estimated amount
as Additional Rent. Written notice of the amounts will be given to the Tenant.
One-twelfth (1/12th) of the Tenant's estimated Proportionate Share of the Tax
Amount and Operating Expenses Amount for the Calendar Year in which the Term of
this Lease commences is per budget per month.
ACCOUNTING. The Landlord will keep books and records showing the Tax
Amount and the Operating Expenses in accordance with generally accepted
accounting principles. The Landlord will cause the amount of the Tax Amount and
Operating Expense Amount for the Calendar Year to be computed and will deliver
to the Tenant a statement of the Tax Amount and the Operating Expense Amount. In
determining the amount of Taxes for any year, the amount of special assessments
to be included will be limited to the amount of installment (plus any interest
payable thereon) of the special assessment that would have been required to be
paid during such year if the Landlord had elected to have such special
assessment paid over the maximum period of time permitted by laws. The amount of
any refund of Taxes received by the Landlord will be credited against Taxes for
the year in which the refund is received. The Landlord will furnish a statement
of actual costs with respect to the items set forth above no later than March
31st of the following Calendar Year including the year following the year in
which this Lease terminates. In the event that the Landlord is, for any reason,
unable to furnish the accounting for the prior year by such date of any year,
the Landlord will furnish such accounting as soon thereafter as practicable with
the same force and effect as the statement would have had if delivered on or
before March 31st of the year. The Tenant will pay any deficiency to the
Landlord as shown by such statement within fifteen (15) days after demand
therefor. If the total amount paid by the
<PAGE> 6
Tenant during any Calendar Year exceeds the actual Tax Amount or Operating
Expense Amount due from the Tenant for such Calendar Year, the excess will be
credited against payments next due. If no such payments are next due, the excess
will be refunded by the Landlord. Landlord, at Tenant's request, shall furnish
appropriate documentation of the expenses set forth herein.
RENT NET. The provisions above requiring the Tenant to pay its
Proportionate Share of Taxes and Operating Expenses are intended to pass on to
the Tenant and to reimburse the Landlord for all direct increases in the direct
costs of operating, repairing and managing the Building and the Premises.
IN WITNESS WHEREOF, this Lease Agreement is executed on the day and
year first above written.
LANDLORD: TENANT:
AMERUS PROPERTIES, INC., AMERUS LIFE HOLDINGS, INC.,
an Iowa corporation an Iowa corporation
By: /s/ James A. McClarnon By: /s/ Gene Harris
------------------------- ---------------------------
Vice President Title: Vice President
<PAGE> 1
EXHIBIT 10.28
ADDENDUM II TO LEASE - BUSINESS PROPERTY -
SHORT FORM IN THE HUB TOWER
THIS ADDENDUM II TO LEASE-BUSINESS PROPERTY-SHORT FORM (the "Lease") is
made and entered into this 21st day of July, 1998 between AmerUs Properties,
Inc., ("Landlord") and AmerUs Life Holdings, Inc. ("Tenant").
1. Section 2. Rent is amended to add the following:
If the Landlord, its successors or assigns, should default under
the terms of that certain Promissory Note dated July 17, 1998, from
Landlord as Maker to Massachusetts Mutual Life Insurance Company ("Mass
Mutual"), that certain Mortgage and Security Agreement dated July 17,
1998 from Landlord as Mortgagor to Mass Mutual, or that certain
Assignment of Leases and Rents dated July 17, 1998 with Landlord as
Assignee to Mass Mutual, the monthly rental for the Third Floor and the
Fourteenth Floor shall be increased from $57,397.73 to $91,392.67.
While this increase in the Tenant's rent is triggered by a default of
the Landlord, this provision is given for the benefit of Mass Mutual and
recognizes that the Landlord, at the time this is executed, is a
wholly-owned subsidiary of the Tenant, and that this requirement has
been relied upon by Mass Mutual to enter into the loan transaction with
Landlord.
IN WITNESS WHEREOF, this Addendum II is executed on the 21st day of
July, 1998.
LANDLORD: TENANT:
AMERUS PROPERTIES, INC., AMERUS LIFE HOLDINGS, INC.,
an Iowa corporation an Iowa corporation
By: /s/ James A. McClarnon By: /s/ Gene Harris
-------------------------------------- ------------------------------
James A. McClarnon, Vice President Gene Harris, Vice President
<PAGE> 1
EXHIBIT 10.35
[LOGO FEDERAL HOME LOAN BANK]
OPEN LINE OF CREDIT APPLICATION AND TERMS AGREEMENT
APPLICATION
AMERUS LIFE INSURANCE COMPANY ("Member") hereby applies to the Federal
Home Loan Bank of Des Moines ("Bank") for an Open Line of Credit commitment
beginning on the date of approval and ending one year from the date of approval,
("Ending Date") in the amount of $25,000,000.00.
TERMS
1. Member, through its authorized representative may request funds by
telephone advice up to the approved Open Line of Credit limit. Funds will be
available upon advice.
2. The interest rate on advances funded under the Open Line of Credit will be
set and charged daily on the outstanding advance amount. The interest amount
will be deducted daily by the Bank from the member's demand account.
3. Advances funded under the Open Line of Credit will be available after the
approval date and will mature on the Ending Date.
4. Member represents and warrants that the Open Line of Credit amount requested
does not exceed 10% of the assets, not to exceed $50 million.
5. The Bank shall have no obligation to make any advance under the Open Line of
Credit unless the Bank is satisfied as to Member's continued creditworthiness
and compliance with the terms of the Agreement for Advances, Pledge and Security
Agreement ("AAPSA"). If adverse facts develop which make the member ineligible
for Bank advances, the member must provide the Bank with immediate written
notification of its ineligibility and the Bank may cancel this commitment.
6. The fee for this Open Line of Credit commitment equals .05% times the amount
of the commitment. This fee will be charged to the member's demand account on
the date this application is approved by the Bank.
Page 1 of 2
<PAGE> 2
7. This Application and Terms Agreement, if approved by the Bank, will
constitute the Agreement between Member and Bank as to the Open Line of Credit
and will be wholly incorporated into and become a part of the AAPSA.
By signing this agreement, member hereby accepts the terms hereof.
AmerUs Life Insurance Company Date: March 4, 1998
- ------------------------------------- ------------------------------------
Member
By /s/ Michael G. Fraizer By: Thomas C. Godlasky
- ------------------------------------- ------------------------------------
Michael G. Fraizer Thomas C. Godlasky
- ------------------------------------- ------------------------------------
Typed Name of Signer Typed Name of Signer
Senior Vice President Executive Vice President and
and Controller/Treasurer Chief Investment Officer
- ------------------------------------- ------------------------------------
Title Title
- -----------------------------------------------------------------------------
FOR FHLB USE
Date Approved: 3-6-98 FEDERAL HOME LOAN BANK OF DES MOINES
---------------------
Expiration Date: 3-5-99 By: /s/ Jerry R. Dergrim
------------------- --------------------------------
Amount Approved:$25,000,000 By
-------------------
Commitment Number: 980306A
------------------
Commitment Fee: $12,500
-------------------
<PAGE> 1
Exhibit 10.36
August 1, 1998
Mr. Gene Harris
AmerUs Life Insurance Company
611 Fifth Avenue611 Fifth Avenue
Des Moines, Iowa 50309
Dear Gene:
As you know, AmerUs Home Equity, Inc. ("AmerUs Home Equity") has begun
originating mortgage loans in the name of AmerUs Life Insurance Company ("AmerUs
Life") in certain states in which it has been determined that AmerUs Home Equity
cannot or does not wish to become licensed but in which AmerUs Life is legally
permitted to originate mortgage loans. Such loans ("AmerUs Life Loans") shall be
originated in AmerUs Life's name and shall be owned by AmerUs Life, but shall be
originally funded by AmerUs Home Equity.
Subject to the terms and conditions hereof, AmerUs Home Equity and AmerUs Life
hereby agree to the following:
1. Each month, AmerUs Home Equity shall provide AmerUs Life with a list
of AmerUs Life Loans originated in AmerUs Life's name during the
previous month. AmerUs Life shall reimburse AmerUs Home Equity for the
principal balance and the interest expense of each AmerUs Life Loan
originated during the previous month. The interest expense
reimbursement shall be based upon AmerUs Home Equity's borrowing rate
at Bank One from the date the AmerUs Life Loan is funded to the date
AmerUs Life reimburses AmerUs Home Equity for the principal balance of
such AmerUs Life Loan.
2. In the event any AmerUs Life Loan is sold at a premium to an outside
investor, AmerUs Home Equity shall remit to AmerUs Life the premium
(net of broker fees). In the event that any AmerUs Life Loan is sold
at a discount to an outside investor, AmerUs Life's reimbursement of
the principal balance of thereof shall be net of the discount and any
broker fees.
3. Each month, AmerUs Life shall reimburse AmerUs Home Equity for the
following items:
<PAGE> 2
Mr. Gene Harris
August 1, 1998
Page 2
(i) Direct expenses of AmerUs Home Equity's regional production
units, based on the percentage of AmerUs Life Loans originated
each month divided by the total number of loans originated each
month.
(ii) Total branch expenses of AmerUs Home Equity's loan production
offices that only originate AmerUs Life Loans. AmerUs Life shall
be entitled to the initial processing fee income related to the
origination of the AmerUs Life Loans, and such fees shall be
netted against amounts reimbursed to AmerUs Home Equity under
this provision.
(iii) A portion of the total branch expenses of AmerUs Home Equity's
loan production offices in which first mortgage loans are
originated in AmerUs Life's name and second mortgage loans are
originated in AmerUs Home Equity's name, based on the percentage
of loans originated for each entity. AmerUs Life shall be
entitled to the initial processing fee income related to the
origination of the AmerUs Life Loans, and such fees shall be
netted against amounts reimbursed to AmerUs Home Equity under
this provision.
4. The AmerUs Life Loans shall be serviced by AmerUs Home Equity for 50
basis points per year; provided, however, that if AmerUs Home Equity's
internal servicing costs decrease from 56 basis points per loan,
AmerUs Life will be charged the lesser of 50 basis points and AmerUs
Home Equity's internal servicing cost. The servicing charge shall be
assessed on the aggregate outstanding principal balance of the AmerUs
Life Loans serviced by AmerUs Home Equity at the beginning of the each
month. Except as set forth in this provision, the AmerUs Life Loans
shall be serviced by AmerUs Home Equity in accordance with the terms
and conditions set forth in that certain Loan Servicing Agreement
dated as of March 5, 1997 (the "Servicing Agreement"), by and between
AmerUs Life and AmerUs Home Equity, as assignee of AmerUs Bank.
This letter agreement shall be binding upon the parties hereto and their
respective successors and assigns. This letter agreement and the rights and
duties of the parties hereto shall be governed by, and construed in accordance
with, the laws of the State of Iowa, without regard to principles of conflicts
of laws.
<PAGE> 3
Mr. Gene Harris
August 1, 1998
Page 3
Upon your acceptance hereof in the manner hereinafter set forth, this letter
agreement shall constitute a contract between us for the uses and purposes
hereinabove set forth.
Very truly yours,
AMERUS HOME EQUITY, INC.
By /s/ Brenda J. Cushing
-------------------------
Its Senior Vice President
Accepted and agreed to as of this 1st day of August, 1998:
AMERUS LIFE INSURANCE COMPANY
By /s/ Gene Harris
--------------------
Its Vice President
<PAGE> 1
Exhibit 10.37
THIRD WAIVER TO CREDIT AGREEMENT
THIRD WAIVER TO CREDIT AGREEMENT (this "Waiver"), dated as of
November 16, 1998, among AMERUS LIFE HOLDINGS, INC., an Iowa corporation (the
"Borrower"), the various Banks from time to time party to the Credit Agreement
referred to below (the "Banks"), BANK ONE, INDIANA, NA and ABN AMRO BANK, N.V.,
as Co-Arrangers (the "Co-Arrangers") and THE CHASE MANHATTAN BANK, as
Administrative Agent (the "Administrative Agent"). All capitalized terms used
herein and not otherwise defined shall have the respective meanings assigned to
such terms in the Credit Agreement.
W I T N E S S E T H:
WHEREAS, the Borrower, the Banks, the Co-Arrangers and the
Administrative Agent are parties to a Credit Agreement, dated as of October 23,
1997 (as amended, modified or supplemented to the date hereof, the "Credit
Agreement");
WHEREAS, the Borrower has requested that the Banks extend the
waiver described below and the Banks have agreed to such waiver to the extent
and on the terms and conditions set forth herein;
NOW, THEREFORE, the parties hereto agree as follows:
1. The Banks hereby waive compliance with the provisions of
Section 7.13 of the Credit Agreement solely as such section relates to American
Investors Life Insurance Company for the period beginning July 1, 1998 and
ending November 11, 1998.
2. In order to induce the Banks to enter into this Waiver,
Holdings and the Borrower hereby represent and warrant that (x) all
representations and warranties contained in Section 5 of the Credit Agreement
are true and correct in all material respects on and as of the Third Waiver
Effective Date (as defined below), after giving effect to this Waiver (unless
such representations and warranties relate to a specific earlier date, in which
case such representations and warranties shall be true and correct as of such
earlier date) and (y) there exists no Default or Event of Default on the Third
Waiver Effective Date, after giving effect to this Waiver.
3. This Waiver is limited in scope and time as specified and
shall not constitute a modification, acceptance or waiver of any other provision
of the Credit Agreement or any other Credit Document, or of any such provision
beyond the time specified herein. This waiver shall not extend to any Person
other than American Investors Life Insurance Company.
4. This Waiver may be executed in any number of counterparts
and by the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same
<PAGE> 2
instrument. A complete set of counterparts shall be lodged with the Borrower and
the Administrative Agent.
5. THIS WAIVER AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF NEW YORK.
6. This Waiver shall become effective on the date (the "Third
Waiver Effective Date") when each Credit Party and the Required Banks shall have
signed a counterpart hereof (whether the same or different counterparts) and
shall have delivered (including by way of facsimile transmission) the same to
the Administrative Agent at its Notice Office.
7. From and after the Third Waiver Effective Date, all
references in the Credit Agreement and each of the Credit Documents to the
Credit Agreement shall be deemed to be references to the Credit Agreement after
giving effect to this Waiver.
* * *
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused a
counterpart of this Waiver to be duly executed and delivered as of the date
first above written.
AMERUS LIFE HOLDINGS, INC.
By /s/ Joseph K. Haggerty
---------------------------------------------
Title: Senior Vice President
THE CHASE MANHATTAN BANK,
Individually and as Administrative Agent
By /s/ Peter Platten
---------------------------------------------
Title: Vice President
BANK ONE, INDIANA, NA, Individually and
as a Co-Arranger
By /s/ Robert E. McElwain
---------------------------------------------
Title: Vice President
ABN AMRO BANK N.V., Individually and as a
Co-Arranger
By
---------------------------------------------
Name:
Title:
<PAGE> 4
BANK OF MONTREAL
By /s/ Robert C. Meyer
---------------------------------------------
Title: Director
BANK OF TOKYO MITSUBISHI TRUST COMPANY
By
---------------------------------------------
Name:
Title:
BANQUE NATIONALE DE PARIS
By /s/ Frederick H. Moryl
---------------------------------------------
Title: Senior Vice President
CIBC INC.
By
---------------------------------------------
Name:
Title:
<PAGE> 5
DRESDNER BANK AG, NEW YORK
BRANCH AND GRAND CAYMAN
BRANCH
By /s/ Anthony Valencourt
---------------------------------------------
Title: Senior Vice President
By /s/ Lloyd C. Stevens
---------------------------------------------
Title: Vice President
FIRST UNION NATIONAL BANK
By /s/ Thomas L. Stitchberry
---------------------------------------------
Title: Senior Vice President
FLEET NATIONAL BANK
By /s/ David A. Bosselait
---------------------------------------------
Title: Vice President
MELLON BANK, N.A.
By /s/ Kim A. Daffinger
---------------------------------------------
Title: Senior Relationship Manager
<PAGE> 6
NATIONSBANK OF TEXAS, N.A.
By /s/ Debra L. Basler
---------------------------------------------
Title: Assistant Vice President
NORWEST BANK IOWA, NATIONAL ASSOCIATION
By /s/ William C. Green, Jr.
---------------------------------------------
Title: Vice President
ROYAL BANK OF CANADA
By /s/ Marek Ulanicki
---------------------------------------------
Title: Manager, Global Insurance Group
SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION
By /s/ Darryl J. Weaver
---------------------------------------------
Title: First Vice President
<PAGE> 1
Exhibit 10.38
FOURTH CONSENT AND AMENDMENT TO CREDIT AGREEMENT
------------------------------------------------
FOURTH CONSENT AND AMENDMENT TO CREDIT AGREEMENT (this
"Amendment"), dated as of December 4, 1998, among AMERUS LIFE HOLDINGS, INC., an
Iowa corporation (the "Borrower"), the various Banks from time to time party to
the Credit Agreement referred to below (the "Banks"), BANK ONE, INDIANA, NA and
ABN AMRO BANK, N.V., as Co-Arrangers (the "Co-Arrangers") and THE CHASE
MANHATTAN BANK, as Administrative Agent (the "Administrative Agent"). All
capitalized terms used herein and not otherwise defined shall have the
respective meanings assigned to such terms in the Credit Agreement.
W I T N E S S E T H:
WHEREAS, the Borrower, the Banks, the Co-Arrangers and the
Administrative Agent are parties to a Credit Agreement, dated as of October 23,
1997 (as amended, modified or supplemented to the date hereof, the "Credit
Agreement");
WHEREAS, the Borrower has requested the Banks' consent to
effect the transactions described herein and has further requested that the
Banks agree to amend the Credit Agreement as herein provided; and
WHEREAS, the Banks have consented to the transactions
described herein and agreed to amend the Credit Agreement as herein provided
subject to the terms and conditions set forth herein;
NOW, THEREFORE, the parties hereto agree as follows:
1. Notwithstanding anything to the contrary contained in the
Credit Agreement, the Borrower may establish and administer an executive stock
purchase program pursuant to which the Borrower shall offer to employees of the
Borrower and its Subsidiaries the opportunity to purchase from the Borrower
treasury shares of the Borrower's common stock using either personal funds of
such employees or funds borrowed from a third-party financial institution, which
loans may be guaranteed by the Borrower; provided that at no time shall the
aggregate outstanding principal amount of loans guaranteed by the Borrower
pursuant to this paragraph 1 exceed $25,000,000. In addition, so long as no
Default or Event of Default exists or would result therefrom, notwithstanding
anything to the contrary contained in the Credit Agreement, and in addition to
any other funds available to the Borrower for such purpose, the Borrower may use
the proceeds received from the employees pursuant to the common stock purchases
described above in this paragraph 1, plus up to $30,000,000 in additional funds
of the Borrower, to make purchases of its common stock and/or convertible equity
units in the open market or otherwise.
<PAGE> 2
2. Section 7.03 of the Credit Agreement is hereby amended by
(i) deleting the word "and" after the semi-colon appearing at the end of clause
(q) thereof, (ii) replacing the period appearing at the end of clause (r)
thereof with the word "; and" and (ii) inserting the following new clause (s)
immediately following clause (r) thereof:
(s) Liens on property acquired pursuant to Permitted
Transactions.
3. Section 9 of the Credit Agreement is hereby amended by
deleting the definitions of "Capital Lease" and "Subsidiary" contained therein
and inserting the following new definitions, respectively, in lieu thereof:
"Subsidiary" of any Person shall mean and include (i) any
corporation more than 50% of whose stock of any class or classes having
by the terms thereof ordinary voting power to elect a majority of the
directors of such corporation (irrespective of whether or not at the
time stock of any class or classes of such corporation shall have or
might have voting power by reason of the happening of any contingency)
is at the time owned by such Person directly or indirectly through
Subsidiaries and (ii) any partnership, association, joint venture or
other entity in which such Person directly or indirectly through
Subsidiaries has more than a 50% equity or voting interest at the time.
Unless otherwise expressly provided, all references to "Subsidiary"
shall mean a Subsidiary of the Borrower, provided that, notwithstanding
the foregoing provisions of this definition, any grantor trust or
limited liability company established by the Borrower and/or its
Subsidiaries in order to effectuate the lease/leaseback transaction
with Linzer Elektrizitats-, Fernwarme- und Verkehrsbetriebe
Aktiengesellschaft ("ESG") with respect to a cogeneration facility in
Linz, Austria as described in the summary of terms and structure
delivered to the Administrative Agent and the Banks prior to the Fourth
Amendment Effective Date, and any trust or limited liability company
formed by the Borrower and/or its Subsidiaries after the Fourth
Amendment Effective Date to effectuate transactions with ESG or any
other Person in which the Indebtedness of the Borrower and its
Subsidiaries incurred in connection therewith is comprised solely of
(x) obligations which are non-recourse to the Borrower or any of its
Subsidiaries and (y) other obligations which are or will be 100%
defeased by U.S. Government obligations (each such transaction,
including the lease/leaseback with ESG, a "Permitted Transaction"),
shall not constitute Subsidiaries for purposes of this Agreement.
"Capital Lease" as applied to any Person, shall mean any lease
of any property (whether real, personal or mixed) by that Person as
lessee which, in conformity with GAAP, is, or is required to be,
accounted for as a capital lease on the balance sheet of such Person;
provided that, notwithstanding the foregoing, "Capital Lease" shall not
include any lease which is entered into solely to effect a Permitted
Transaction.
4. Section 9 of the Credit Agreement is hereby further amended
by inserting the following new definitions in appropriate alphabetical order:
"ESG" shall have the meaning provided in the definition of
"Subsidiary".
2
<PAGE> 3
"Permitted Transaction" shall have the meaning provided in the
definition of "Subsidiary".
5. Section 9 of the Credit Agreement is hereby further amended
by inserting, immediately prior to clause (x) appearing in the proviso to the
definition of "Indebtedness" appearing therein, the following new clause (w):
"(w) obligations of the Borrower or any of
its Subsidiaries described in clauses (x) or (y) of the
definition of "Subsidiary",
6. In order to induce the Banks to enter into this Amendment,
the Borrower hereby represents and warrants that (x) all representations and
warranties contained in Section 5 of the Credit Agreement are true and correct
in all material respects on and as of the Fourth Amendment Effective Date (as
defined below), both before and after giving effect to this Amendment (unless
such representations and warranties relate to a specific earlier date, in which
case such representations and warranties shall be true and correct as of such
earlier date) and (y) there exists no Default or Event of Default on the Fourth
Amendment Effective Date, both before and after giving effect to this Amendment.
7. This Amendment is limited as specified and shall not
constitute a modification, acceptance or waiver of any provision of the Credit
Agreement or any other Credit Document except as expressly set forth herein.
8. This Amendment may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which counterparts when executed and delivered shall be an original, but all
of which shall together constitute one and the same instrument. A complete set
of counterparts shall be lodged with the Borrower and the Administrative Agent.
9. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW
OF THE STATE OF NEW YORK.
10. This Amendment shall become effective as of the date
hereof on the date (the "Fourth Amendment Effective Date") when each of the
Borrower and the Required Banks shall have signed a counterpart hereof (whether
the same or different counterparts) and shall have delivered (including by way
of facsimile transmission) the same to the Administrative Agent at its Notice
Office.
11. From and after the Fourth Amendment Effective Date, all
references in the Credit Agreement and each of the Credit Documents to the
Credit Agreement shall be deemed to be references to the Credit Agreement after
giving effect to this Amendment.
* * *
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused a
counterpart of this Amendment to be duly executed and delivered as of the date
first above written.
AMERUS LIFE HOLDINGS, INC.
By /s/ Michael G. Fraizer
---------------------------------------------
Title: Senior Vice President
& Controller/Tresurer
THE CHASE MANHATTAN BANK,
Individually and as Administrative Agent
By /s/ Peter Platten
---------------------------------------------
Title: Vice President
BANK ONE, INDIANA, NA, Individually and as a
Co-Arranger
By /s/ Peter S. Little
----------------------------------------------
Title: Vice President
ABN AMRO BANK N.V., Individually and as a
Co-Arranger
By /s/ Andres C. Haak
---------------------------------------------
Name: Vice President and Director
Title:
<PAGE> 5
BANK OF MONTREAL
By /s/ Robert C. Meyer
---------------------------------------------
Title: Director
BANK OF TOKYO MITSUBISHI TRUST COMPANY
By
---------------------------------------------
Title:
BANQUE NATIONALE DE PARIS
By /s/ Arnaud Collin de Bocage
---------------------------------------------
Title: EVP and General Manager
CIBC INC.
By /s/ Gerald Girardi
---------------------------------------------
Title: Executive Director
CIBC Oppenheimer Corp., as agent
<PAGE> 6
DRESDNER BANK AG, NEW YORK
BRANCH AND GRAND CAYMAN
BRANCH
By
---------------------------------------------
Name:
Title:
Name:
---------------------------------------------
Title:
FIRST UNION NATIONAL BANK
By /s/ T. L. Stitchberry
---------------------------------------------
Title: Senior Vice President
FLEET NATIONAL BANK
By /s/ David A. Bosselait
---------------------------------------------
Title: Vice President
MELLON BANK, N.A.
By /s/ Kim A Daffinger
---------------------------------------------
Title: Officer
<PAGE> 7
NATIONSBANK OF TEXAS, N.A.
By /s/ Debra Basler
---------------------------------------------
Title: Assistant Vice President
NORWEST BANK IOWA, NATIONAL ASSOCIATION
By /s/ William C. Green, Jr.
---------------------------------------------
Title: Vice President
ROYAL BANK OF CANADA
By /s/ V. Abdelmessih
---------------------------------------------
Title: Senior Vice President
SUNTRUST BANK, CENTRAL FLORIDA,
NATIONAL ASSOCIATION
By
---------------------------------------------
Title:
<PAGE> 1
Exhibit 10.39
FORM OF
ADMINISTRATIVE SERVICES AGREEMENT
This Administrative Services Agreement (the "Agreement") is made as of the
1st day of August, 1998, by and among American Mutual Holding Company, an Iowa
mutual insurance holding company having its corporate offices at 699 Walnut
Street, Des Moines, Iowa 50309 ("AMHC"); AmerUs Group Co., an Iowa corporation
having its corporate offices at 699 Walnut Street, Des Moines, Iowa 50309;
AmerUs Home Equity, Inc., an Iowa corporation having its corporate offices at
699 Walnut Street, Des Moines, Iowa 50309; AmerUs Mortgage, Inc., an Iowa
corporation having its corporate offices at 4949 Westown Parkway, West Des
Moines, Iowa 50266; AmerUs Properties, Inc., an Iowa corporation having its
corporate offices at 699 Walnut Street, Des Moines, Iowa 50309; AmerUs Life
Holdings, Inc., an Iowa corporation having its corporate offices at 699 Walnut
Street, Des Moines, Iowa 50309; AmerUs Capital Management Group, Inc. ("ACM"),
an Iowa corporation having its corporate offices at 699 Walnut Street, Des
Moines, Iowa 50309; AmerUs Life Insurance Company ("AmerUs Life") an Iowa
corporation having its corporate offices at 611 Fifth Avenue, Des Moines, Iowa;
AmVestors Financial Corporation, a Kansas corporation having its corporate
offices at 555 South Kansas Avenue, Topeka, Kansas 66603; American Investors
Life Insurance Company, Inc., a Kansas corporation having its corporate offices
at 555 South Kansas Avenue, Topeka, Kansas 66603; Delta Life and Annuity
Company, an Iowa corporation having its corporate offices at 611 Fifth Avenue,
Des Moines, Iowa 50309 (collectively, the "AmerUs Companies" and, individually,
an "AmerUs Company").
WHEREAS, in the course of the operation and administration of the business
of the AmerUs Companies, an AmerUs Company may require certain services from
another AmerUs Company; and
WHEREAS, the AmerUs Companies desire to provide and receive such services
on the basis described in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the AmerUs Companies do hereby
agree as follows:
ARTICLE I. SERVICES TO BE PROVIDED
Section 1.01. For a period from the date hereof through December 31, 1998
(hereinafter referred to as the "Services Period") and from month to month
thereafter until terminated in accordance with the provisions contained in
Article V hereof, the AmerUs Companies identified in the schedules to this
Agreement, which are attached hereto and made a part hereof (the "Schedules"),
shall provide to each of the other AmerUs Companies (unless otherwise specified)
those services described in the appropriate Schedule.
Section 1.02. The parties agree that any ancillary or support services
necessary or, in the usual and customary manner and the normal course of
business, associated with the specific
1
<PAGE> 2
services described in the Schedules shall be deemed to be included in, and
governed by, this Agreement unless specifically excluded.
Section 1.03. The parties agree that on forty-five (45) days' prior written
notice to the AmerUs Companies affected thereby, any AmerUs Company providing
services hereunder may modify the services described in the Schedule pertaining
to such company, provided that:
(a) Such modified services shall be equivalent to or better than the
services being replaced; and
(b) Each affected AmerUs Company consents to the modified services, such
consent not to be unreasonably withheld.
Section 1.04. The services provided by each AmerUs Company under this
Agreement shall be performed in a professional manner consistent with industry
standards and in accordance with applicable laws and regulations.
Section 1.05. The services rendered by an AmerUs Company shall in no way
constitute the relinquishment of the management's responsibility of the AmerUs
Company receiving such service, which shall not be relieved of any obligation or
liability which it would otherwise be subject by law as a result of those
services being rendered.
ARTICLE II. ADEQUATE STAFF AND FACILITIES
Section 2.01. During the Service Period, each AmerUs Company shall maintain
adequate staff, support services and facilities as may be necessary to perform
its responsibilities under this Agreement.
ARTICLE III. RESPONSIBLE PERSONS
Section 3.01. Each of the AmerUs Companies shall each appoint in writing
one or more individuals who shall serve as contact person(s) for purposes of the
carrying out of this Agreement. Such contact person(s) shall be authorized to
act on behalf of their respective parties as to matters pertaining to this
Agreement.
ARTICLE IV. COMPENSATION
Section 4.01. Except as otherwise provided in the Schedules, in connection
with the services to be performed under this Agreement, the AmerUs Companies
shall compensate a service provider hereunder as set forth in this Article IV.
Section 4.02. For each of the services described in the Schedules, the
parties agree to pay the compensation set forth for such services on the
appropriate Schedule. It is agreed that the charges or fees for such services
will be reasonable and that any expenses incurred and payments received will be
allocated to the customer in conformity with customary and consistently applied
insurance accounting practices.
Section 4.03. Unless otherwise agreed to, bills shall be rendered no
later than fifteen (15) business days after the first of the month and payment
shall be remitted no later than fifteen (15) business days after receipt of a
proper bill. If an AmerUs Company determines that the services
2
<PAGE> 3
performed hereunder are not satisfactory or that the fees charged are in excess
of those provided for in this Agreement, the affected AmerUs Company is hereby
authorized to withhold payment for such service until the matter in dispute is
resolved or the fees charged are substantiated or adjusted appropriately.
Adjustments for errors on previous billings and for a final settlement shall be
made no more than sixty (60) days after this Agreement terminates.
ARTICLE V. TERM AND TERMINATION
Section 5.01. Unless this Agreement is otherwise terminated according to
its provisions and except as may otherwise be provided in the Schedules, each
service provider shall be obligated to provide, and each recipient of such
services shall be obligated to pay for, the services described in the Schedules
during the Service Period.
Section 5.02. Except as otherwise provided in this Agreement, during the
Service Period or any extension thereof, an AmerUs Company may terminate with
respect to itself this Agreement at its option, at any time, upon sixty (60)
days' written notice to all of the other AmerUs Companies. In addition, an
AmerUs Company may terminate or substantially reduce any one or more of the
services to be furnished hereunder by it, but such termination or reduction
shall not be deemed to terminate this Agreement in its entirety.
Section 5.03. This Agreement, or any service provided hereunder, may be
terminated or substantially reduced at a time by mutual consent of the parties.
The termination of any one or more, but less than all, of the services provided
hereunder by an AmerUs Company shall not be deemed to terminate this Agreement
in its entirety.
ARTICLE VI. MISCELLANEOUS
Section 6.01. This Agreement is the complete and exclusive statement of the
agreement between the parties and supersedes all prior agreements and
representations between them relating to the subject matter of this Agreement,
except as set forth in the Schedules. Amendments to this Agreement shall not be
effective unless in writing and signed by the duly authorized representative of
the party against whom enforcement of the amendment is sought.
Section 6.02. Any notice or other communication given pursuant to this
Agreement shall be given in writing to the other party at the address stated
herein or at such other address as such party shall specify by notice hereunder.
Such notice shall be conclusively deemed to be served when delivered personally
or three (3) calendar days after sending by registered mail or one (1) business
day after sending by telecopy or telex or similar electronic means.
Section 6.03. This Agreement and the rights and duties of the parties shall
be governed by and construed in accordance with the laws of the State of Iowa,
without regard to principles of conflicts of laws.
Section 6.04. No delay or failure by any party to exercise any of its
rights or remedies hereunder shall operate as a waiver thereof. Each party shall
reimburse the other parties for all expenses, including reasonable attorneys'
fees, incurred by the other party in exercising any of its rights or remedies
hereunder, or resulting from any default by the reimbursing party.
3
<PAGE> 4
Section 6.05. This Agreement shall be binding upon the parties and their
respective successors and assigns and shall inure to the benefit of the parties
and to the benefit of their successors and assigns.
Section 6.06. Nothing herein contained is intended to confer upon any
person, other than the parties and their respective successors and assigns, any
rights, remedies, obligations or liabilities under or by reason of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Administrative
Services Agreement effective as of the day and year first above written.
AMERICAN MUTUAL HOLDING COMPANY AMERUS GROUP CO.
By: ___________________________ By:_____________________________
Roger K. Brooks, Chairman, Roger K. Brooks, Chairman,
President and Chief Executive Officer President and Chief Executive
Officer
AMERUS HOME EQUITY, INC. AMERUS PROPERTIES, INC.
By: _____________________________ By:___________________________
Marcia S. Hanson, Chairman and Gene C. Harris, President and
Chief Executive Officer Chief Executive Officer
AMERUS LIFE HOLDINGS, INC. AMERUS LIFE INSURANCE COMPANY
By: _____________________________ By:___________________________
Roger K. Brooks, Chairman, Gary R. McPhail, President and
President and Chief Executive Officer Chief Executive Officer
AMERUS CAPITAL MANAGEMENT AMVESTORS FINANCIAL
GROUP, INC. CORPORATION
By: ______________________________ By:___________________________
Thomas C. Godlasky, President and Mark V. Heitz, President and
Chief Executive Officer Chief Executive Officer
AMERICAN INVESTORS LIFE DELTA LIFE AND ANNUITY
INSURANCE COMPANY COMPANY
By: ______________________________ By:___________________________
Mark V. Heitz, President and Cody H. Phillips, President and
Chief Executive Officer Chief Operating Officer
4
<PAGE> 1
EXHIBIT 12
AMERUS LIFE HOLDINGS, INC.
EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIOS
RATIO OF EARNINGS FIXED CHARGES
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(In thousands)
Earnings:
- ---------
Income before income taxes
and accounting changes $ 91,251 $ 80,081 $118,032 $110,550 $ 26,131
Add, Combined Fixed Charges 309,863 74,866 68,396 80,476 83,403
-------- -------- -------- -------- --------
Adjusted Earnings 401,114 155,047 186,428 191,026 109,534
======== ======== ======== ======== ========
Fixed Charges:
- --------------
Interest on indebtedness $ 14,784 $ 7,961 $ 2,142 $ 2,356 $ 5,356
Preferred stock dividends 12,291 7,019 - - -
Interest credited to deferred
annuities 282,788 59,886 66,254 78,120 77,980
-------- -------- -------- -------- --------
$309,863 $ 74,866 $ 68,396 $ 80,476 $ 83,403
======== ======== ======== ======== ========
Ratio of Earnings to
Combined Fixed
Changes and Preferred
Stock Dividends 1.29 2.07 2.73 2.37 1.31
</TABLE>
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
NAME JURISDICTION
---- ------------
<S> <C>
AmerUs Life Insurance Company Iowa
Delta Life Corporation Delaware
Delta Life Annuity Company Tennessee
AmVestors Financial Corporation Kansas
American Investors Life Insurance Company, Inc. Kansas
AmVestors Acquisition Subsidiary, Inc. Kansas
AmVestors CBO II, Inc. Kansas
Annuity International Marketing Corporation Florida
Financial Benefit Life Insurance Company Kansas
The Insurance Mart, Inc. Florida
Rainbow Card Pack Publication, Inc. Florida
AmerUs Capital I Delaware Business Trust
AmerUs Capital II Delaware Business Trust
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
AmerUs Life Holdings, Inc.:
We consent to incorporation by reference in the Registration Statement Nos.
333-32201, 333-32203, 333-40065, 333-20907, 333-20905, 333-63895, and 333-72237
on Forms S-8 and Registration Statement Nos. 333-72643 and 333-50249 on Forms
S-3 of our reports dated February 10, 1999, relating to the consolidated balance
sheets of AmerUs Life Holdings, Inc. and subsidiaries as of December 31, 1998
and 1997, and related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows and related schedules for each of the years
in the three-year period ended December 31, 1998, which appears in the December
31, 1998 annual report on Form 10-K of AmerUs Life Holdings, Inc.
KPMG Peat Marwick LLP
Des Moines, Iowa
March 25, 1999
<PAGE> 1
Exhibit 99.5
AGREEMENT
This Agreement dated as of 27th day of June , 1997 between AmerUs Life
Holdings, Inc., an Iowa Corporation ("AmerUs") and Victor N. Daley, Senior Vice
President - Human Resources of AmerUs and certain of its affiliates ("Mr.
Daley") hereby confirms and formalizes certain understandings between Mr. Daley
and AmerUs which were agreed to by Mr. Daley and AmerUs at the time Mr. Daley
agreed to undertake his duties on behalf of AmerUs and its affiliates and
predecessors.
IN CONSIDERATION of Mr. Daley's agreement to accept the aforementioned
position with AmerUs and the continuing performance of those duties and in
consideration of the premises and covenants made hereunder, AmerUs and Mr. Daley
agree as follows.
1. Beginning August 31, 2008, AmerUs agrees to pay to Mr. Daley, or his
spouse in the event that Mr. Daley should predecease her, a monthly amount equal
to the Retirement Amount as calculated below. These amounts should be payable
monthly on the last day of each month beginning August 31, 2008, until the later
of the death of Mr. Daley or his spouse.
2. The "Retirement Amount" means the amount calculated by (A) multiplying
.2693% by the number of months that Mr. Daley has been and is employed on a full
time basis by AmerUs and its predecessor companies, (B) multiplying such amount
by his average monthly income as derived from his Pensionable Earnings, as
defined in Article I Subsection (17) of the All AmerUs Savings and Retirement
Plan (without regard to the last sentence in such Subsection (17)), but
excluding stock options, stock grants or similar compensation payments from
AmerUs and its predecessor companies, and (C) taking that amount and subtracting
the "Monthly Base Amount". The Monthly Base Amount is an amount calculated by
(i) taking 2% of Mr. Daley's
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Pensionable Earnings (as defined above) for each month that he is employed,
plus the entire amount of AmerUs' core and interim benefit supplement
contributions to his accounts in the AlliAmerUs Savings and Retirement Plan and
the AlliAmerUs Supplemental Executive Retirement Plan (together the "Plans");
(ii) crediting such amounts with an 8% per annum compound interest rate; and
(iii) taking the aggregate of those amounts as of August 8, 2008 and determining
the monthly amount that would be payable under a net single premium life annuity
purchased on that date, with an initial payment on August 31, 2008, utilizing
the method of determining assumptions present in the 1/1/96 American Mutual Life
Insurance Pension Plan.
3. This Agreement does not constitute an agreement of employment or the
promise to employ Mr. Daley for any specified period of time. It continues to be
the understanding between AmerUs and Mr. Daley that Mr. Daley is and will
continue to be an employee at will.
4. This Agreement may not be amended or modified in any way except in a
writing signed by both parties.
5. This Agreement shall be binding upon and inure to the benefit of the
respective successors and assigns of the parties.
6. AmerUs and Mr. Daley designate the AmerUs Benefit and Pension Committee,
as appointed by the Board of Directors, to administer and interpret this
Agreement with all necessary discretion. The determinations of the AmerUs
Benefit and Pension Committee shall be binding on the parties hereto.
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7. This Agreement constitutes the entire agreement of the parties with
respect to the subject matter hereof and supersedes all prior agreements and
understandings, written and oral, among the parties with respect to the subject
matter hereof.
Executed as of the 27th day of June, 1997.
AmerUs Life Holdings, Inc.
6/30/97 By /s/ Roger K. Brooks
- ------- ----------------------------
Date
6/27/97 /s/ Victor N. Daley
- ------- ----------------------------
Date Victor N. Daley
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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216,729
0
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152,301
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