UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported: February 21, 2000)
AMERUS LIFE HOLDINGS, INC.
(Exact Name of Registrant as Specified in Charter)
IOWA 0-21459 42-1459712
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
699 WALNUT STREET
DES MOINES, IOWA 50309-3948
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (515) 362-3600
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
AMERUS LIFE HOLDINGS, INC.
By: /s/ Michael G. Fraizer
---------------------------------
Michael G. Fraizer
Executive Vice President &
Chief Financial Officer
Dated: February 21, 2000
<PAGE>
The Form 8-K of the Registrant dated February 21, 2000, and filed on February
22, 2000, is hereby amended to include the Consolidated Financial Statements of
Indianapolis Life Insurance Company attached hereto.
EXHIBIT
Exhibit No. Description
- ----------- -----------
23.1 Consent of Independent Auditors
99.1 Consolidated Financial Statements of Indianapolis Life
Insurance Company at December 31, 1999 and 1998, and for
each of the three years in the period ended December 31, 1999.
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, 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, 333-20907, 333-20905, 333-63895, 333-72237 and 333-91493
on Forms S-8, Registration Statement No. 333-40065 on Form S-4, and Registration
Statement Nos. 333-72643 and 333-50249 on Forms S-3 of our report dated February
25, 2000, with respect to the consolidated financial statements of Indianapolis
Life Insurance Company included in Form 8-K/A dated February 21, 2000 of AmerUs
Life Holdings, Inc.
ERNST & YOUNG LLP
Indianapolis, Indiana
March 24, 2000
INDIANAPOLIS LIFE INSURANCE COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.................................................F-2
Consolidated Balance Sheets as of
December 31, 1999 and 1998.................................................F-3
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998, and 1997..........................................F-5
Consolidated Statements of Policyowners' Surplus
For the Years Ended December 31, 1999, 1998, and 1997......................F-6
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998, and 1997....................................F-7
Notes to Consolidated Financial Statements...................................F-8
F-1
<PAGE>
Report of Independent Auditors
Board of Directors
Indianapolis Life Insurance Company
We have audited the accompanying consolidated balance sheets of
Indianapolis Life Insurance Company and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of income,
policyowners' surplus and cash flows each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Indianapolis Life Insurance Company and subsidiaries at December 31,
1999 and 1998, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
Indianapolis, Indiana
February 25, 2000
F-2
<PAGE>
Indianapolis Life Insurance Company and Subsidiaries
Consolidated Balance Sheets
DECEMBER 31,
-----------------------------------
1999 1998
-----------------------------------
ASSETS
Cash and investments:
Fixed maturity securities:
Available for sale, at fair value $ 4,083,679,362 $ 2,862,569,894
Held to maturity, at amortized cost 252,226,207 251,622,891
Trading, at fair value - 104,749,857
Equity securities, at fair value 8,484,261 3,631,961
Mortgage loans 378,053,935 355,034,577
Policy loans 184,737,369 184,910,752
Other invested assets 12,248,011 12,618,722
Cash and cash equivalents 174,417,353 281,380,963
-----------------------------------
Total cash and investments 5,093,846,498 4,056,519,617
Accrued investment income 65,417,285 49,461,962
Reinsurance recoverable 236,849,542 227,119,402
Deferred acquisition costs 328,711,527 255,580,121
Receivables and other assets 8,377,412 8,671,838
Federal income taxes 2,504,823 1,839,703
Property and equipment 23,826,898 22,451,530
Present value of future profits 10,293,213 7,589,856
Goodwill 12,841,316 14,594,029
Separate account assets 341,088,253 220,862,443
-----------------------------------
Total assets $ 6,123,756,767 $ 4,864,690,501
===================================
See accompanying notes.
F-3
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998
--------------------------------
<S> <C> <C>
LIABILITIES AND POLICYOWNERS' SURPLUS
Liabilities:
Policy reserves for future benefits $5,039,879,222 $3,986,061,676
Other policyowner funds 142,752,796 121,243,101
Accrued commissions and general expenses 8,658,801 8,618,558
Surplus notes 25,000,000 25,000,000
Other liabilities and reserves 157,076,129 52,476,120
Deferred federal income taxes 39,870,241 65,373,292
Separate account liabilities 341,088,253 220,862,443
-------------- --------------
Total liabilities 5,754,325,442 4,479,635,190
Minority interest in consolidated subsidiaries 71,657,673 57,675,503
Policyowners' surplus:
Accumulated other comprehensive income (loss) (10,228,978) 18,561,092
Surplus 308,002,630 308,818,716
-------------- --------------
Total policyowners' surplus 297,773,652 327,379,808
-------------- --------------
Total liabilities and policyowners'
surplus $6,123,756,767 $4,864,690,501
============== ==============
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
Indianapolis Life Insurance Company and Subsidiaries
Consolidated Statements of Income
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997
--------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums $ 165,234,240 $168,538,387 $186,385,676
Policy and contract charges 64,466,246 44,452,479 26,049,832
Net investment income 256,904,634 194,081,412 145,757,342
Net realized capital gains
4,822,798 8,200,716 4,435,089
--------------------------------------------------------
Total revenues 491,427,918 415,272,994 362,627,939
BENEFITS AND EXPENSES
Policy benefits 312,845,116 256,853,599 223,955,437
Underwriting, acquisition and insurance
expenses 140,447,107 92,636,739 78,090,869
Interest 2,165,000 2,165,000 2,165,000
Dividends to policyowners 32,981,886 32,348,774 34,251,633
--------------------------------------------------------
Total benefits and expenses 488,439,109 384,004,112 338,462,939
--------------------------------------------------------
Income before federal income taxes and minority
interest
2,988,809 31,268,882 24,165,000
Federal income taxes
1,592,549 8,636,298 8,771,511
--------------------------------------------------------
Income before minority interest
1,396,260 22,632,584 15,393,489
Minority interest in consolidated subsidiaries
2,212,346 1,440,804 -
--------------------------------------------------------
Net income (loss) $ (816,086) $ 21,191,780 $ 15,393,489
========================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
<TABLE>
<CAPTION>
Indianapolis Life Insurance Company and Subsidiaries
Consolidated Statements of Policyowners' Surplus
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE POLICYOWNERS'
INCOME (LOSS) SURPLUS SURPLUS
---------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1997 $ 10,713,558 $272,233,447 $282,947,005
Net income - 15,393,489 15,393,489
Change in net unrealized gains on available
for sale securities, net of deferred taxes 7,090,353 - 7,090,353
-------------------
Comprehensive income 22,483,842
---------------------------------------------------------
Balance at December 31, 1997 17,803,911 287,626,936 305,430,847
Net income - 21,191,780 21,191,780
Change in net unrealized gains on available
for sale securities, net of deferred taxes
757,181 - 757,181
-------------------
Comprehensive income 21,948,961
---------------------------------------------------------
Balance at December 31, 1998 18,561,092 308,818,716 327,379,808
Net income (loss)
- (816,086) (816,086)
Change in net unrealized gains on available
for sale securities, net of deferred taxes (28,790,070) - (28,790,070)
-------------------
Comprehensive income (loss) (29,606,156)
---------------------------------------------------------
Balance at December 31, 1999 $(10,228,978) $308,002,630 $297,773,652
=========================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
<TABLE>
<CAPTION>
Indianapolis Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (816,086) $ 21,191,780 $ 15,393,489
Minority interest in consolidated subsidiaries 2,212,346 1,440,804 -
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization expense 6,682,094 6,509,511 (1,184,934)
Amortization of bond discount (2,256,102) (28,406,065) (4,109,098)
Net realized capital gains (4,822,798) (8,200,716) (4,435,089)
Changes in operating assets and liabilities:
Current and deferred income taxes (26,168,171) 25,444,472 8,778,884
Deferred acquisition costs (103,826,849) (95,711,160) (62,171,552)
Amortization of deferred acquisition costs 52,932,857 38,700,076 27,465,963
Accrued investment income (15,955,323) (17,017,725) (7,290,512)
Reinsurance recoverable (9,730,140) (88,982,087) (36,123,118)
Other assets 12,597,397 (15,112,307) (59,785,717)
Other liabilities 103,942,438 741,337 8,717,796
------------------------------------------------
Net cash provided (used) by operating activities 14,791,663 (159,402,080) (114,743,888)
INVESTING ACTIVITIES
Proceeds from sales, calls or maturities:
Fixed maturities, available for sale 856,930,309 372,305,685 227,952,210
Fixed maturities, trading - 31,972,993 13,576,106
Fixed maturities, held to maturity 18,238,138 27,091,144 23,499,893
Equity securities 20,827,171 2,068,161 302,906
Mortgage loans 27,790,227 31,108,079 27,109,687
Other invested assets 1,111,191 521,313 2,057,719
Purchases:
Fixed maturities, available for sale (2,011,854,922) (1,591,940,461) (710,421,972)
Fixed maturities, trading - (110,308,342) (39,650,252)
Fixed maturities, held to maturity (14,672,704) (8,540,379) (24,172,667)
Equity securities (25,148,486) (22,719,732) (11,619,293)
Mortgage loans (50,217,045) (53,806,953) (56,910,000)
Other invested assets (4,718,163) (6,083,802) (4,898,687)
------------------------------------------------
Net cash used by investing activities (1,181,714,284) (1,328,332,294) (553,174,350)
FINANCING ACTIVITIES
Capital contributions from minority interest in subsidiaries 16,500,000 59,256,667 8,910,000
Deposits to insurance 1,223,148,412 1,691,451,606 836,730,081
Withdrawals from insurance liabilities (179,689,401) (108,117,004) (104,081,649)
------------------------------------------------
Net cash provided by financing activities 1,059,959,011 1,642,591,269 741,558,432
------------------------------------------------
Net increase (decrease) in cash (106,963,610) 154,856,895 73,640,194
Cash and cash equivalents at beginning of year 281,380,963 126,524,068 52,883,874
------------------------------------------------
Cash and cash equivalents at end of year $ 174,417,353 $ 281,380,963 $126,524,068
================================================
</TABLE>
See accompanying notes.
F-7
<PAGE>
INDIANAPOLIS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Indianapolis Life Insurance Company (the "Company") is incorporated in the State
of Indiana and is qualified to do business in forty-six states and the District
of Columbia. Being a mutual company, it is owned and operated exclusively for
the benefit of its policyowners. The Company's business consists primarily of
providing individual life and annuity policies. The consolidated financial
statements include the Company and its majority-owned subsidiary, The
Indianapolis Life Group of Companies, Inc. ("IL Group"). IL Group is a holding
company that owns IL Annuity and Insurance Company, Bankers Life Insurance
Company of New York, Western Security Life Insurance Company, IL Securities,
Inc. and IL Term Insurance Company. IL Term Insurance Company was voluntarily
dissolved effective December 31, 1998; net assets at that date were contributed
to IL Group.
At December 31, 1997, Bankers Life Insurance Company of New York and Western
Security Life Insurance Company were wholly-owned subsidiaries of the Company.
During 1998 the Company contributed its ownership of these entities to IL Group.
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
("GAAP"). All significant intercompany balances and transactions have been
eliminated.
Preparation of the consolidated financial statements requires management to make
estimates and assumptions that affect amounts reported in the consolidated
financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known, which could impact
the amounts reported and disclosed herein.
The Company and its insurance subsidiaries also each prepare their financial
statements in conformity with accounting practices prescribed or permitted by
the Department of Insurance of the respective state of domicile, which practices
differ from GAAP, for the purpose of filing with regulatory authorities. The
Company's statutory surplus at December 31, 1999 and 1998 was $102,608,552 and
$136,023,910, respectively. The Company's statutory net income (loss), excluding
subsidiaries, for 1999, 1998 and 1997 was ($11,483,379), $14,052,835, and
$13,855,923, respectively.
Generally, the net assets of the Company's insurance subsidiaries available for
transfer to the Company are limited to the amounts that the insurance
subsidiaries' net assets of approximately $80,241,000 at December 31, 1999, 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.
INVESTMENTS
Fixed maturity securities which may be sold to meet liquidity and other needs of
the Company are categorized as available for sale and are reported at fair value
with unrealized gains and losses reported as a separate component of
policyowners' surplus, net of deferred income taxes. Fixed maturity securities
which
F-8
<PAGE>
the Company has the positive intent and ability to hold to maturity are
categorized as held-to-maturity and are reported at amortized cost. Fixed
maturity securities that are bought and held principally for the purpose of
selling them in the near term to generate profits from short-term differences in
price are categorized as trading and are reported at fair value with unrealized
holding gains and losses reported in operations. Equity securities (preferred
and common stocks) are classified as available-for-sale and carried at fair
value.
Cash and cash equivalents include all highly liquid debt instruments which have
original maturities of three months or less, and are stated at cost which
approximates fair value.
Mortgage loans and policy loans are stated at aggregate unpaid balances.
Realized gains and losses on sale or maturity of investments are based on
specific identification of the investments sold and do not include amounts
allocable to separate accounts. At the time a decline in value of an investment
is determined to be other than temporary, a provision for loss is recorded which
is included in realized investment gains and losses.
DEFERRED ACQUISITION COSTS
Costs of acquiring new business which vary with and are primarily related to the
production of new business have been deferred to the extent that such costs are
deemed recoverable. Such costs include commissions, certain costs of policy
underwriting and issue and certain variable agency expenses. These costs are
amortized with interest as follows:
For participating whole life insurance products, over 30 years in relation to
the present value of estimated gross margins from expenses, surrender gains,
investments and mortality, discounted using the expected investment yield.
For universal life-type policies and investment contracts, 30 years and 15
years, respectively, in relation to the present value of estimated gross profits
from surrender charges and investment, mortality and expense margins, discounted
using the interest rate credited to the policy.
Recoverability of the unamortized balance of deferred policy acquisition costs
is evaluated regularly. For universal life-type contracts, investment contracts
and participating whole life policies, the accumulated amortization is adjusted
(increased or decreased) whenever there is a material change in the estimated
gross profits or gross margins expected over the life of a block of business in
order to maintain a consistent relationship between cumulative amortization and
the present value of gross profits or gross margins. For all contracts, the
unamortized asset balance is reduced by a charge to income when the present
value of future cash flows, net of policy liabilities, is not sufficient to
cover such asset balance.
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost, less allowances for
depreciation of $29,087,910 and $30,186,199 at December 31, 1999 and 1998,
respectively. Depreciation has been computed using the straight-line method at
rates based on estimated useful lives.
INTANGIBLE ASSETS
Present value of future profits has been recorded in connection with the
acquisition of subsidiaries. The initial value is based on the actuarially
determined present value of the projected future gross profits from the in-force
business acquired. The value of insurance in force purchased is amortized on a
constant yield basis over the estimated life of the insurance in force at the
date of acquisition in proportion to the emergence of profits over a period of
approximately 20 years. Accumulated amortization of present value
F-9
<PAGE>
of future profits is $13,053,567 and $11,271,497 at December 31, 1999 and 1998,
respectively.
Goodwill represents the excess of cost of acquisition of subsidiaries over the
fair value of net assets acquired and is amortized using the straight-line
method over 20 years. Accumulated amortization of goodwill is $4,471,710 and
$3,569,508 at December 31, 1999 and 1998, respectively.
SEPARATE ACCOUNTS
Separate account assets and liabilities represent funds that are separately
administered, principally for variable annuity contracts, and for which the
contractholder, rather than the Company, bears the investment risk. Separate
account contractholders have no claim against the assets of the general account
of the Company. Separate account assets are reported at fair value. The
operations of the separate accounts are not included in the accompanying
consolidated financial statements.
POLICY RESERVES FOR FUTURE BENEFITS
Reserves for participating whole life policies are calculated using the net
level premium method and assumptions as to interest and mortality. The interest
rates and the mortality rates are those guaranteed in the calculation of cash
surrender values described in the contract. Deposit administration funds are
reserved using various rates as the interest credited generally fluctuates with
interest rate changes in the market place. Reserves for term life policies are
determined using the 1980 4% Commissioner's Reserve Valuation Method.
Reserves for universal life policies and investment contracts are the account
values (premiums and interest credits less mortality and expense charges) plus a
deferred revenue liability, if any, for excess first-year policyowner charges
and net unrealized gains on investments allocated to policyowners.
The Company waives deduction of deferred fractional premiums upon death of
insureds and returns any portion of the final premium beyond the date of death.
Surrender values are not promised in excess of the legally computed reserves.
Reinsurance premiums, expenses, recoveries and reserves related to reinsured
business are accounted for on bases consistent with those used in accounting for
the original policies issued and the terms of the reinsurance contracts, and
reported on a gross basis.
PREMIUMS AND RELATED BENEFITS AND EXPENSES
Premium income is recognized as revenue when due.
The dividend scales used for determination of dividends payable to policyowners
are approved by the Board of Directors. The liability for policy dividends
payable in the following year is estimated based on approved dividend scales and
historical experience and is charged to current operations. Participating
policies representing approximately 31% and 39% of the life insurance in force
at December 31, 1999 and 1998, respectively, and approximately 71% and 77% of
premiums in 1999 and 1998, respectively.
THIRD-PARTY ADMINISTRATORS
The Company has contractual arrangements with three third-party administrators
to distribute and administer its annuity products. One of the third-party
administrators, Legacy Marketing Group, distributes and administers the majority
of this business.
F-10
<PAGE>
COMPREHENSIVE INCOME
Comprehensive income is reported separately in policyowners' surplus and is
comprised of the results of operations and the change in a portion of unrealized
gains or losses in the Company's available-for-sale securities.
The Company's reclassification adjustment for 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 GROSS TAX EFFECT NET
- ------------------------------------------------------ -------------- --------------- -------------
<S> <C> <C> <C>
Unrealized holding gains arising during year $88,171,160 $(30,859,906) $57,311,254
Reclassification adjustment for gains realized in net
income (10,949,979) 3,832,493 (7,117,486)
Allocated to future policy benefit reserves (113,900,988) 39,865,346 (74,035,642)
Deferred acquisition costs valuation (7,612,609) 2,664,413 (4,948,196)
-------------- --------------- -------------
Change in net unrealized gains on available for sale
securities $(44,292,416) $15,502,346 $(28,790,070)
============== =============== =============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 GROSS TAX EFFECT NET
- ------------------------------------------------------ -------------- --------------- -------------
<S> <C> <C> <C>
Unrealized holding gains arising during year $138,646,372 $(48,526,230) $90,120,142
Reclassification adjustment for gains realized in net
income (21,935,229) 7,677,330 (14,257,899)
Allocated to future policy benefit reserves (86,663,175) 30,332,111 (56,331,064)
Deferred acquisition costs valuation (28,883,074) 10,109,076 (18,773,998)
Change in net unrealized gains on available for sale
securities $ 1,164,894 $ (407,713) $ 757,181
============== =============== =============
</TABLE>
NEW ACCOUNTING STANDARDS
During 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Investments and Hedging Activities" (SFAS No. 133)
which is effective January 1, 2001. SFAS No. 133 defines derivative instruments
and provides comprehensive accounting and reporting standards for the
recognition and measurement of derivative and hedging activities. It requires
derivatives to be recorded in the consolidated balance sheet at fair value. The
Company is evaluating SFAS No. 133 and has not determined its effect on the
consolidated financial statements.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. AFFILIATION
In 1997, the Company announced its intent to affiliate with American United Life
Insurance Company ("AUL"), an Indiana-domiciled mutual life insurance company.
As of December 31, 1999 and 1998, AUL had invested a total of $54,041,667 and
$49,541,667, respectively, in IL Group, representing a 33% minority interest. In
addition, Legacy Marketing Group ("Legacy"), a third party administrator,
invested $12,000,000 in IL Group during 1999, representing a 6% minority
interest.
On February 18, 2000, the Company entered into a definitive agreement with
American Mutual Holding Company ("AMHC") and AmerUs Life Holdings, Inc.
("AmerUs"), which contemplates the ultimate combination of AMHC, AmerUs and the
Company. The transaction, which includes demutualization by the Company, is
subject to various governmental and insurance department approvals. Under the
agreement, AHMC initially acquired a 45% ownership interest in IL Group for $100
million, and IL Group
F-11
<PAGE>
used the proceeds of the investment to repurchase the ownership interests of AUL
and Legacy in their entirety.
3. INVESTMENTS
Fixed maturity securities and equity securities consist of the following at
December 31:
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
----------------- ---------------- ---------------- ---------------------
<S> <C> <C> <C> <C>
Available for sale:
Fixed maturity securities:
Unites States government $ 214,268,865 $ 367,082 $ 7,169,042 $ 207,466,905
Special revenue 1,000,000 132,410 - 1,132,410
Public utilities 289,208,457 1,219,116 10,893,279 279,534,294
Industrial and miscellaneous 3,133,179,647 272,706,062 161,899,314 3,243,986,395
Mortgage-backed securities 354,234,781 3,840,442 6,515,865 351,559,358
----------------- ---------------- ---------------- ---------------------
Total fixed maturity securities $ 3,991,891,750 $ 278,265,112 $ 186,477,500 $ 4,083,679,362
Equity securities:
Preferred stock 1,062,970 - 103,720 959,250
Common stock 7,574,702 607,955 657,646 7,525,011
----------------- ---------------- ---------------- ---------------------
Total equity securities 8,637,672 607,955 761,366 8,484,261
----------------- ---------------- ---------------- ---------------------
$ 4,000,529,422 $ 278,873,067 $ 187,238,866 $ 4,092,163,623
Held to maturity:
United States government $ 3,096,231 $ 55,267 $ - $ 3,151,498
Special revenue 1,500,000 132,585 - 1,632,585
Public utilities 22,095,418 435,455 360,085 22,170,788
Industrial and miscellaneous 219,182,080 3,337,154 5,412,635 217,106,599
Mortgage-backed securities 6,352,478 - 256,372 6,096,106
----------------- ---------------- ---------------- ---------------------
$ 252,226,207 $ 3,960,461 $ 6,029,092 $ 250,157,576
================= ================ ================ =====================
</TABLE>
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
----------------- ---------------- ---------------- ---------------------
<S> <C> <C> <C> <C
Available for sale:
Fixed maturity securities:
United States government $ 128,524,889 $ 2,949,238 $ 103,035 $ 131,371,092
Special revenue 1,965,157 452,994 - 2,418,151
Public utilities 331,724,101 18,216,972 190,947 349,750,126
Industrial and miscellaneous 1,858,281,651 131,753,912 21,434,562 1,968,601,001
Mortgage-backed securities 393,204,489 17,401,672 176,637 410,429,524
----------------------------------------------------------------------------
Total fixed maturity securities 2,713,700,287 170,774,788 21,905,181 2,862,569,894
Equity securities:
Preferred stock 10,500 - - 10,500
Common stock 3,535,718 310,391 224,648 3,621,461
----------------------------------------------------------------------------
Total equity securities 3,546,218 310,391 224,648 3,631,961
----------------------------------------------------------------------------
$ 2,717,246,505 $ 171,085,179 $ 22,129,829 $ 2,866,201,855
============================================================================
</TABLE>
F-12
<PAGE>
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
----------------- ---------------- ---------------- ---------------------
<S> <C> <C> <C> <C
Held to maturity:
United States government $ 3,038,842 $ 213,312 $ - $ 3,252,154
Special revenue 1,500,000 350,055 - 1,850,055
Public utilities 34,282,843 3,186,353 - 37,469,196
Industrial and miscellaneous 207,254,920 19,300,715 289,082 226,266,553
Mortgage-backed securities 5,546,286 485,199 - 6,031,485
----------------------------------------------------------------------------
$ 251,622,891 $ 23,535,634 $ 289,082 $ 274,869,443
============================================================================
Trading:
United States government $ 8,003,369 $ 26,500 $ 130,372 $ 7,899,497
Special revenue 100,370 - 80,370 20,000
Public utilities 6,578,169 332,988 87,932 6,823,225
Industrial and miscellaneous 92,528,033 1,551,485 4,072,383 90,007,135
----------------------------------------------------------------------------
$ 107,209,941 $ 1,910,973 $ 4,371,057 $ 104,749,857
============================================================================
</TABLE>
Effective January 1, 1999, the Company transferred fixed maturity securities,
with a fair value of $104,749,857, previously classified as trading securities
to available for sale securities.
The amortized cost and fair value of fixed maturity securities at December 31,
1999, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
------------------------------------- --------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------------ ------------------ ------------------- ------------------
<S> <C> <C> <C> <C
Due in one year or less $ - $ - $ - $ -
Due after one year through five
years 760,242,509 788,141,216 61,450,384 61,225,182
Due after five years through ten
years 1,489,024,842 1,448,201,217 109,153,782 108,685,949
Due after ten years 1,388,389,619 1,495,777,570 75,269,563 74,150,339
Mortgage-backed securities 354,234,781 351,559,359 6,352,478 6,096,106
------------------ ------------------ ------------------- ------------------
$3,991,891,750 $4,083,679,362 $252,226,207 $250,157,576
================== ================== =================== ==================
</TABLE>
Net investment income consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Fixed maturity securities $ 210,785,436 $ 148,322,043 $ 108,521,105
Equity securities 165,680 97,018 121,884
Mortgage loans 32,708,068 29,697,737 27,698,145
Real estate - 8,280 7,605
Policy loans 12,159,354 13,256,324 12,086,183
Short term investments 11,594,939 10,322,418 4,027,446
Other 7,259,596 4,183,019 2,496,189
-------------------- -------------------- --------------------
Gross investment income 274,673,073 205,886,839 154,958,557
Less investment expenses 17,768,439 11,805,427 9,201,215
-------------------- -------------------- --------------------
Net investment income $ 256,904,634 $ 194,081,412 $ 145,757,342
==================== ==================== ====================
</TABLE>
F-13
<PAGE>
Net unrealized gains on available-for-sale securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
------------------- ------------------
<S> <C> <C>
Fixed maturities:
Gross unrealized gains $278,265,112 $170,774,788
Gross unrealized losses (186,477,500) (21,905,181)
------------------- ------------------
91,787,612 148,869,607
Equity securities:
Gross unrealized gains 607,955 310,391
Gross unrealized losses 761,366 (224,648)
------------------- ------------------
(153,411) 85,743
Deferred income taxes (34,640,881) (52,105,250)
Allocated to future policy benefit reserves (74,035,642) (56,331,064)
Deferred acquisition costs and present value future
profits valuation 5,236,231 (19,080,030)
Minority interest in consolidated subsidiaries 1,577,113 (2,877,914)
------------------- ------------------
$(10,228,978) $18,561,092
=================== ==================
</TABLE>
Proceeds from the sales of investments in fixed maturities during 1999, 1998 and
1997 were $716,775,997, $226,690,947 and $176,335,768, respectively. Gross gains
of $27,245,476, $20,437,597 and $7,963,187 and gross losses of $17,377,449,
$1,563,754 and $1,082,349 were realized in 1999, 1998 and 1997, respectively.
The Company maintains a diversified mortgage loan portfolio and exercises
internal limits on concentrations of loans by geographic area, industry, use and
individual mortgagor. Net realized capital gains include write downs and changes
in the reserve for losses on mortgage loans and foreclosed real estate of
$232,548, $248,135 and $89,956 for 1999, 1998, and 1997, respectively.
The Company has outstanding mortgage loan commitments at December 31, 1999, of
approximately $13,948,000.
Included in net realized capital gains is a gain (loss) of $275,148 and
($3,815,119) incurred on the sale of a minority interest in IL Group during 1999
and 1998, respectively.
F-14
<PAGE>
4. FEDERAL INCOME TAXES
A reconciliation of federal income taxes computed at statutory tax rates to
federal income tax expense is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ------------------ ----------------
<S> <C> <C> <C>
Income tax computed at statutory tax rates $ 1,046,038 $ 10,944,109 $ 8,457,750
Mutual company differential earning amount 2,637,919 (2,754,247) 1,453,702
Tax credits (1,801,377) (1,383,442) (1,459,000)
Amortization of goodwill 279,988 650,710 692,402
Other (570,019) 1,179,168 (373,343)
----------------- ------------------ ----------------
Federal income taxes $ 1,592,549 $ 8,636,298 $ 8,771,511
================= ================== ================
</TABLE>
Federal income taxes consist of the following:
1999 1998 1997
------------ ------------ ------------
Current taxes $ 9,324,472 $ 14,380,161 $ 10,683,727
Deferred tax credits (7,731,923) (5,743,863) (1,912,216)
------------ ------------ ------------
Total $ 1,592,549 $ 8,636,298 $ 8,771,511
============ ============ ============
Tax benefits of $287,130, $1,124,395 and $899,979 for 1999, 1998 and 1997,
respectively, reduced goodwill related to the acquisition of Bankers Life
Insurance Company of New York because the tax benefit was not recognized at the
date of acquisition.
Significant components of the deferred tax assets (liabilities) at December 31,
1999 and 1998, are as follows:
1999 1998
------------ ------------
Insurance reserves $ 86,202,023 $ 60,959,977
Deferred policy acquisition costs (79,514,798) (68,768,570)
Unrealized appreciation of securities (34,241,704) (52,134,479)
Investments (9,604,925) (3,054,223)
Present value of future profits (2,806,055) (3,429,780)
Other 930,471 2,326,473
------------ ------------
Total deferred tax liabilities (39,034,988) (64,100,602)
Valuation allowance (835,253) (1,272,690)
------------ ------------
Net deferred tax liabilities $(39,870,241) $(65,373,292)
============ ============
Valuation allowances have been created for operating losses, credit carryovers
and alternative minimum tax credit carryovers. The amount of the tax net
operating loss carryforwards are $1,596,818 at December 31, 1999. The operating
loss carryovers expire between 2012 and 2017.
The Company paid federal income taxes of $13,839,934, $18,102,557 and
$13,827,397 in 1999, 1998 and 1997, respectively and received refunds of
$3,257,067 and $824,100 in 1999 and 1998, respectively.
5. REINSURANCE
The Company has entered into reinsurance cession agreements with other insurance
companies to limit the net loss arising from large risks and maintain its
exposure to loss within its capital resources. The Company remains liable for
ceded risks in the event that reinsurers do not meet their obligations.
Management believes its reinsurers will meet their obligations under existing
contracts.
F-15
<PAGE>
The effects of reinsurance on premiums were as follows:
1999 1998 1997
---------------------------------------------
Reinsurance assumed $ 47,600,550 $ 41,940,233 $ 74,239,472
Reinsurance ceded (68,031,375) (56,776,068) (80,084,294)
Reinsurance recoveries on ceded reinsurance contracts were $28,126,006,
$23,457,066 and $15,695,935 during 1999, 1998 and 1997, respectively.
IL Annuity and Insurance Company entered into a modified coinsurance cession
agreements covering flexible premium deferred annuity policies distributed
through a third-party administrator. Future policy benefit reserves include
reinsurance payable of $2,279,437,605 and $1,511,542,946 at December 31, 1999
and 1998, respectively. Net realized capital gains are net of realized gains
allocated to the reinsurer of $15,316,835, $14,194,580 and $2,587,253 in 1999,
1998 and 1997, respectively.
6. BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan, which generally
covers all qualified employees that have attained the age of twenty-one.
Benefits are based on years of service and compensation levels during
employment. All plan assets consist primarily of deposit administration funds
and group annuity contracts held by the Company. Company contributions to the
employee plan are computed actuarially and funded annually.
In addition to the Company's defined benefit plan, the Company offers retired
employees, retired full-time agents and eligible spouses and dependents certain
postretirement benefits such as medical, life, and dental insurance.
The most recent actuarial valuation date for pension benefits was September 30
while the most recent date for postretirement benefits was December 31.
The reconciliation of the benefit obligation is as follows:
<TABLE>
<CAPTION>
PENSION BENEFITS
1999 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
Benefit obligation at beginning of year $ 31,443,397 $26,371,315 $24,678,651
Service cost 1,593,714 1,224,152 1,125,145
Interest cost 2,043,821 1,845,992 1,665,809
Actuarial (gain) loss (1,129,236) 3,013,204 (231,144)
Benefits paid (1,040,698) (1,011,266) (867,146)
----------------------------------------------------
Benefit obligation at end of year $ 32,910,998 $31,443,397 $26,371,315
====================================================
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
POSTRETIREMENT BENEFITS
1999 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
Benefit obligation at beginning of year $ 6,717,388 $6,450,925 $6,193,641
Service cost 281,668 229,772 214,740
Interest cost 558,538 437,536 421,331
Actuarial loss 1,200,682 - -
Benefits paid (428,172) (400,845) (377,787)
----------------------------------------------------
Benefit obligation at end of year $ 8,330,104 $6,717,388 $6,450,925
====================================================
</TABLE>
The changes in pension plan assets were as follows:
<TABLE>
<CAPTION>
PENSION BENEFITS
1999 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
Fair value of plan assets at beginning of year $25,191,760 $23,046,044 $21,123,697
Actual return on plan assets 1,790,758 1,681,535 1,600,582
Employer contributions 1,608,017 1,473,610 1,306,200
Benefits paid (1,002,432) (1,009,429) (984,435)
----------------------------------------------------
Fair value of plan assets at end of year $27,588,103 $25,191,760 $23,046,044
====================================================
</TABLE>
The reconciliation of the funded status to the net benefit cost recognized is as
follows:
<TABLE>
<CAPTION>
PENSION BENEFITS
1999 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
Funded status ($5,322,895) ($6,251,637) ($3,325,271)
Unrecognized net loss 4,101,140 5,154,917 1,955,475
Unrecognized transition obligation 1,248,046 1,404,052 1,560,058
----------------------------------------------------
Prepaid benefit cost at December 31 $ 26,291 $ 307,332 $ 190,262
====================================================
</TABLE>
<TABLE>
<CAPTION>
POSTRETIREMENT BENEFITS
1999 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
Funded status ($8,330,104) ($6,717,388) ($6,450,925)
Unrecognized net loss 834,481 1,512,229 1,657,138
Unrecognized prior service cost 435,809 (1,486,994) (1,774,999)
----------------------------------------------------
Accrued benefit cost at December 31 ($7,059,814) ($6,692,153) ($6,568,786)
====================================================
</TABLE>
F-17
<PAGE>
6. BENEFIT PLANS (CONTINUED)
The weighted average assumptions used in calculating the accrued liabilities are
as follows:
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
1999 1998 1997 1999 1998 1997
--------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 6.75% 6.50% 7.00% 7.25% 7.00% 7.00%
Rate of compensation increase 4.50% 4.50% 4.50% 5.00% 5.00% 5.00%
Expected rate of return on plan assets 8.00% 8.00% 8.00% - - -
</TABLE>
The assumed health care cost trend rate used in measuring the postretirement
benefit obligations were as follows:
1999
- ----
Under age 65 8.2% with an assumed graded decrease to 5%
Over age 65 7.8% with an assumed graded decrease to 5%
1998
- ----
Under age 65 8.6% with an assumed graded decrease to 5%
Over age 65 8.2% with an assumed graded decrease to 5%
1997
- ----
Under age 65 9.0% with an assumed graded decrease to 5%
Over age 65 8.5% with an assumed graded decrease to 5%
Below are the components of net periodic benefit cost:
<TABLE>
<CAPTION>
PENSION BENEFITS
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
Service cost $1,593,714 $1,224,152 $1,125,145
Interest cost 2,008,426 1,809,049 1,635,222
Expected return on assets (2,007,071) (1,832,667) (1,682,793)
Amortization of unrecognized net loss 137,985 - -
Amortization of transition obligation 156,006 156,006 156,006
-------------------------------------------
Net periodic benefit cost $1,889,060 $1,356,540 $1,233,580
===========================================
</TABLE>
F-18
<PAGE>
6. BENEFIT PLANS (CONTINUED)
<TABLE>
<CAPTION>
POSTRETIREMENT BENEFITS
1999 1998 1997
--------------------------------------
<S> <C> <C> <C>
Service cost $281,668 $229,772 $214,740
Interest cost 558,538 437,536 420,331
Expected return on assets (169,106) - -
Amortization of unrecognized prior service cost - (288,005) (288,005)
Amortization of unrecognized net loss 124,733 144,909 149,046
--------------------------------------
Net periodic benefit cost $795,833 $524,212 $496,112
======================================
</TABLE>
The Company sponsors a salary reduction/savings plan for employees as defined by
Section 401(k) of the Internal Revenue Code. Participants may contribute on a
pre-tax basis from 1% to 15% of their eligible earnings up to a maximum amount
as permitted by law. Voluntary employee contributions are matched at an amount
equal to 50% of the first 3% of each participant's contribution. Contributions
made by the Company totaled $271,307, $282,510 and $328,342 for 1999, 1998 and
1997, respectively. Other liabilities and reserves include $11,915,375 and
$11,075,419 at December 31, 1999 and 1998, respectively, relating to the plan.
The Company has a defined contribution pension plan covering substantially all
of the agents. Company contributions are based on agent compensation and are
funded annually; contributions for 1999, 1998 and 1997 were $202,000, $266,000
and $639,000, respectively. Other policyowner funds include $13,631,072 and
$13,186,031 at December 31, 1999 and 1998, respectively, relating to the plan.
The Company also sponsors a deferred compensation plan for agents and a separate
deferred compensation plan for officers and directors. Other liabilities and
reserves include $5,797,227 and $4,557,099 at December 31, 1999 and 1998,
respectively, relating to these plans. The deferred compensation plans are
contributory and nonqualified.
F-19
<PAGE>
7. SURPLUS NOTES
Any payment of interest and repayment of principal on the surplus notes may be
paid only out of the Company's earnings, subject to approval by the Indiana
Department of Insurance. A summary of the terms of these surplus notes follows:
ACCRUED
ANNUAL INTEREST
DATE INTEREST AMOUNT INTEREST AT DATE OF
ISSUED RATE OF NOTES PAID DECEMBER 31 MATURITY
- -------------------------------------------------------------------------------
May 8, 1996 8.66% $25,000,000 $2,165,000 $541,250 April 1, 2011
8. COMMITMENTS AND CONTINGENCIES
The Company is involved in pending and threatened litigation of the character
incidental to the business transacted. Management believes that the conclusion
of the litigation will not have a material adverse affect on the Company's
financial position or results of operations.
During 1999, the Company reached an agreement to settle a market conduct class
action lawsuit. The terms of the agreement call for the Company to make payments
of cash, policy credits or additional death benefits to owners of eligible
policies. These costs, plus legal expenses, total approximately $21,284,500 (net
of taxes of $11,460,885) and have been recorded in the accompanying consolidated
financial statements.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments in the accompanying financial
statements and notes thereto:
Cash and cash equivalents, accrued investment income and policy loans: The
carrying amounts reported in the accompanying balance sheets for these financial
instruments approximate their fair values.
Fixed maturity and equity securities: Fair values of bonds and stocks are
based on quoted market prices where available. For bonds not actively traded,
fair values are estimated using values obtained from independent pricing
services, or in the case of private placements, are estimated by discounting
expected future cash flow using a current market rate applicable to the yield,
credit quality and maturity of the investments.
Mortgage loans: The fair value of mortgage loans was estimated by discounting
the future cash flows using current rates at which similar loans would be made
to borrowers with similar credit ratings for similar maturities.
Investment-type contracts: The fair value of deferred annuities is believed to
approximate the cash surrender value. The carrying amounts of other
investment-type contracts approximate their fair value.
Surplus notes: The fair value of surplus notes is estimated using values
obtained from an independent pricing service based on the bid price of the
notes on the given date.
The carrying value and fair values of the Company's financial instruments at
December 31, are as follows:
F-20
<PAGE>
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Fixed maturity securities:
Available for sale $4,083,679,362 $4,083,679,362 $2,862,569,894 $2,862,569,894
Trading - - 104,749,857 104,749,857
Held to Maturity 252,226,207 250,157,576 251,622,891 274,869,443
Equity securities 8,484,261 8,484,261 3,631,961 3,631,961
Mortgage loans 378,053,935 382,843,780 355,034,577 395,190,779
LIABILITIES:
Deferred annuities 3,268,272,248 3,087,879,171 2,323,647,052 2,185,660,794
Surplus notes 25,000,000 25,906,250 25,000,000 29,508,700
</TABLE>
The fair values of the Company's liabilities for insurance contracts other than
investment-type contracts are not required to be disclosed. However, the
estimated fair values for all insurance liabilities are taken into consideration
in the Company's overall management of interest rate risk, which minimizes
exposure to changing interest rates through the matching of investment
maturities with amounts due under insurance contracts.
10. YEAR 2000 (UNAUDITED)
In 1997, the Company's Board of Directors adopted a Year 2000 Plan to address
all major computing information systems including hardware, software, equipment
and business partners. The objective of the Year 2000 Plan was to ensure that
the Company can continue to serve its customers with minimal business
disruptions and business risk. The Year 2000 Plan was supported by Company
officers and executive management, and is closely monitored by the Board of
Directors.
As a result of the foregoing, the Company conducted business as usual on work
day one of the new year. All business units experienced a smooth transition into
the Year 2000. A few minor issues were quickly identified and resolved, but
there was no impact to business operations and no need to invoke the Company's
contingency plans. Although it anticipates no problems, the Company will
continue to monitor systems and business applications to ensure the first
quarter and full year processing dates are successfully completed.
The costs to address the Company's Year 2000 issues for 1999, 1998 and 1997 were
approximately $2,500,000, $11,000,000 and $1,000,000, respectively.
F-21
