<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-20174
American Life Holding Company
Delaware No. 42-1362294
---------------------- -------------------------------
State of Incorporation IRS Employer Identification No.
1100 Des Moines Building
Des Moines, Iowa 50309 (515) 284-7500
------------------------------- --------------
Address of principal executive offices Telephone
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: Yes [X] No [ ]
Shares of common stock outstanding as of May 1, 1996: 1,500,100
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN LIFE HOLDING COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
ASSETS
March 31, December 31,
1996 1995
---- ----
(unaudited) (audited)
<S> <C> <C>
Investments:
Actively managed fixed maturity securities at fair value (amortized cost:
1996 - $4,711.5; 1995 - $4,667.3).................................................. $4,896.0 $5,083.1
Equity securities at fair value (cost: 1996 and 1995 - $16.5)........................ 18.7 18.8
Credit-tenant loans.................................................................. 18.2 13.6
Mortgage loans....................................................................... 62.9 64.6
Policy loans......................................................................... 63.7 62.9
Short-term investments............................................................... 23.0 89.5
Other invested assets................................................................ 17.4 18.2
-------- --------
Total investments............................................................... 5,099.9 5,350.7
Accrued investment income............................................................... 89.7 80.8
Cost of policies purchased.............................................................. 265.4 250.1
Cost of policies produced............................................................... 94.9 77.6
Income tax assets....................................................................... 26.6 -
Property and equipment (net of accumulated depreciation: 1996 - $1.0; 1995 - $.9)....... 7.2 8.2
Securities segregated for the future redemption of redeemable preferred stock........... 39.9 39.2
Goodwill (net of accumulated amortization: 1996 - $13.5; 1995 - $11.3).................. 346.7 348.9
Other assets............................................................................ 34.0 29.9
-------- --------
Total assets.................................................................... $6,004.3 $6,185.4
======== ========
(continued on next page)
<FN>
The accompanying notes are an integral
part of the consolidated financial statements.
</FN>
</TABLE>
2
<PAGE>
AMERICAN LIFE HOLDING COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET (Continued)
(Dollars in millions, except per share amounts)
LIABILITIES AND SHAREHOLDER'S EQUITY
March 31, December 31,
1996 1995
---- ----
(unaudited) (audited)
<S> <C> <C>
Liabilities:
Insurance liabilities............................................................... $5,198.0 $5,148.7
Income tax liabilities.............................................................. - 40.6
Investment borrowings............................................................... 54.1 130.7
Payable to AGP upon determination of the Savings Bank Litigation.................... 30.1 30.1
Other liabilities................................................................... 52.0 48.1
Accounts payable to AGP and affiliates.............................................. 8.3 .9
Notes payable....................................................................... 267.7 267.5
-------- --------
Total liabilities.............................................................. 5,610.2 5,666.6
Redeemable preferred stock............................................................. 99.0 99.0
Minority interest...................................................................... .6 .6
Shareholder's equity:
Common stock, $.01 par value, and additional paid-in capital; 1,600,000
shares authorized; 1,500,100 shares issued and outstanding........................ 143.0 143.0
Unrealized appreciation of securities:
Fixed maturity securities (net of applicable
deferred income taxes: 1996 - $32.4; 1995 - $105.0)............................. 60.1 194.9
Other investments (net of applicable deferred income taxes:
1996 and 1995 - $.8)............................................................ 1.4 1.5
Retained earnings................................................................... 90.0 79.8
-------- --------
Total shareholder's equity..................................................... 294.5 419.2
-------- --------
Total liabilities and shareholder's equity..................................... $6,004.3 $6,185.4
======== ========
<FN>
The accompanying notes are an integral
part of the consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
AMERICAN LIFE HOLDING COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions)
(unaudited)
Three months ended
March 31,
---------------------
1996 1995
---- ----
<S> <C> <C>
Revenues:
Insurance policy income........................................................... $ 13.8 $ 14.6
Net investment income............................................................. 102.1 102.1
Net trading income................................................................ - .6
Net realized gains ............................................................... 3.4 3.8
Other income...................................................................... 1.0 1.3
------ -------
Total revenues............................................................. 120.3 122.4
------ -------
Benefits and expenses:
Insurance policy benefits......................................................... 7.3 7.2
Change in future policy benefits.................................................. 1.2 .9
Interest expense on annuities and financial products.............................. 61.2 64.1
Interest expense on notes payable................................................. 6.9 8.5
Interest expense on investment borrowings......................................... 1.0 1.5
Amortization of cost of policies purchased
and cost of policies produced:
Related to operations........................................................ 8.8 8.2
Related to realized gains.................................................... 2.6 2.4
Amortization of goodwill.......................................................... 2.2 2.2
Nonrecurring expenses............................................................. 1.4 -
Other operating costs and expenses................................................ 7.5 7.8
------ -------
Total benefits and expenses.................................................. 100.1 102.8
------ -------
Income before income taxes................................................... 20.2 19.6
Income tax expense.................................................................... 7.8 7.6
------ -------
Net income................................................................... 12.4 12.0
Dividend requirements of Series Preferred Stock....................................... 2.2 2.2
------ -------
Net income applicable to common stock........................................ $ 10.2 $ 9.8
====== =======
<FN>
The accompanying notes are an integral
part of the consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
AMERICAN LIFE HOLDING COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in millions)
(unaudited)
Three months ended
March 31,
----------------------
1996 1995
---- ----
<S> <C> <C>
Common stock and additional paid-in capital:
Balance, beginning and end of period............................................ $ 143.0 $ 113.0
======= =======
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities:
Balance, beginning of period.................................................. $ 194.9 $ (28.5)
Change in unrealized appreciation (depreciation)........................... (134.8) 77.8
------- --------
Balance, end of period........................................................ $ 60.1 $ 49.3
======= =======
Other investments:
Balance, beginning of period.................................................. $ 1.5 $ (.5)
Change in unrealized appreciation (depreciation)........................... (.1) 1.2
------- -------
Balance, end of period........................................................ $ 1.4 $ .7
======= =======
Retained earnings:
Balance, beginning of period.................................................... $ 79.8 $ 5.1
Net income.................................................................... 12.4 12.0
Preferred stock dividends..................................................... (2.2) (2.2)
------- -------
Balance, end of period.......................................................... $ 90.0 $ 14.9
======= =======
Total shareholder's equity.................................................... $ 294.5 $ 177.9
======= =======
<FN>
The accompanying notes are an integral
part of the consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
AMERICAN LIFE HOLDING COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(unaudited)
Three months ended
March 31,
----------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................................. $ 12.4 $ 12.0
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization and depreciation.......................................... 13.8 13.1
Income taxes........................................................... 5.4 9.1
Insurance liabilities.................................................. 8.5 7.5
Interest credited to insurance liabilities............................. 61.2 64.1
Fees charged to insurance liabilities.................................. (7.8) (7.0)
Accrual and amortization of investment income.......................... (14.7) (32.4)
Deferral of cost of policies produced.................................. (19.9) (23.3)
Other liabilities...................................................... 10.6 (6.0)
Realized gains and trading income on investments....................... (3.4) (4.4)
Other.................................................................. (4.8) (.5)
------- -------
Net cash provided by operating activities............................ 61.3 32.2
------- -------
Cash flows from investing activities:
Purchases of investments.................................................... (362.6) (815.2)
Sales of investments........................................................ 292.6 383.3
Maturities and redemptions.................................................. 33.6 8.4
------- -------
Net cash used by investing activities................................ (36.4) (423.5)
------- -------
Cash flows from financing activities:
Payments on notes payable................................................... - (15.0)
Investment borrowings, net.................................................. (76.6) 312.9
Deposits to insurance liabilities........................................... 172.7 241.9
Withdrawals from insurance liabilities...................................... (185.3) (178.4)
Dividends paid.............................................................. (2.2) (2.2)
------- -------
Net cash provided (used) by financing activities..................... (91.4) 359.2
------- -------
Net decrease in short-term investments............................... (66.5) (32.1)
Short-term investments, beginning of period..................................... 89.5 51.2
------- -------
Short-term investments, end of period........................................... $ 23.0 $ 19.1
======= =======
<FN>
The accompanying notes are an integral
part of the consolidated financial statements.
</FN>
</TABLE>
6
<PAGE>
AMERICAN LIFE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following notes should be read in conjunction with the notes to the
consolidated financial statements included in the 1995 Form 10-K of American
Life Holding Company (the "Company").
SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements as of and for the periods
ended March 31, 1996 and 1995, reflect all adjustments, consisting only of
normal recurring items, which are necessary to present fairly the Company's
financial position and results of operations on a basis consistent with that of
prior audited financial statements. Certain amounts previously reported in the
Form 10-Q for the period ended March 31, 1995, have been reclassified to conform
with the current presentation. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
preparation period. Actual results could differ from those estimates.
Significant estimates and assumptions are utilized in the calculation of cost of
policies produced, cost of policies purchased, goodwill, insurance liabilities,
liabilities related to litigation, guaranty fund assessment accruals and
deferred income taxes. It is reasonably possible that actual experience could
differ from the estimates and assumptions utilized which could have a material
impact on the financial statements.
The Company is a wholly owned subsidiary of American Life Holdings, Inc.
("AGP"). In 1996, AGP changed its name from American Life Group, Inc. (formerly
The Statesman Group, Inc. prior to its name change in 1995).
On September 29, 1994, Conseco Capital Partners II, L.P. ("Partnership
II"), a Delaware limited partnership, completed the acquisition (the
"Acquisition") of AGP. The sole general partner of Partnership II is a wholly
owned subsidiary of Conseco, Inc. ("Conseco"). Conseco is a publicly-held
specialized financial services holding company which manages several wholly or
partially owned life insurance companies and provides services to its managed
companies and other businesses for fees. After the Acquisition and related
financing transactions, Partnership II owns 80 percent of AGP's outstanding
common stock. Conseco, through its direct investment and interests in certain of
its subsidiaries, has a 36 percent ownership interest in AGP and the Company.
In March 1996, Conseco announced it is dissolving Partnership II.
Accordingly, the partners have no further commitment to make additional
contributions of capital to Partnership II or AGP. In accordance with the
partnership agreement, all of Partnership II's assets (primarily its investment
in AGP) will be distributed to its partners subject to the conditions contained
in the partnership agreement. In any event, Partnership II's assets must be
distributed within two years of the effective date of dissolution.
The consolidated financial statements include the accounts of American Life
and Casualty Insurance Company ("American Life and Casualty") and Vulcan Life
Insurance Company ("Vulcan Life"). The Company owns 100 percent of American Life
and Casualty, which owns 98 percent of Vulcan Life.
7
<PAGE>
AMERICAN LIFE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
ADJUSTMENT TO ACTIVELY MANAGED FIXED MATURITY SECURITIES
The Company classifies fixed maturity securities into three categories:
"actively managed" (which are carried at estimated fair value), "trading
account" (which are carried at estimated fair value) and "held to maturity"
(which are carried at amortized cost). The Company has not held any securities
in the "held to maturity" classification since the Acquisition and did not
classify any fixed maturity securities in the "trading account" category at
March 31, 1996. The adjustment to carry actively managed fixed maturity
securities at fair value (as described in note 1 to the consolidated financial
statements included in the Company's 1995 Form 10-K) resulted in the following
cumulative effects on balance sheet accounts as of March 31, 1996:
<TABLE>
<CAPTION>
Effect of fair value
Balance adjustment to actively
before managed fixed Reported
adjustment maturity securities amount
---------- ------------------- ------
(Dollars in millions)
<S> <C> <C> <C>
Actively managed fixed maturity securities............................... $4,711.5 $184.5 $4,896.0
Cost of policies purchased............................................... 334.0 (68.6) 265.4
Cost of policies produced................................................ 118.3 (23.4) 94.9
Income tax assets ....................................................... 59.0 (32.4) 26.6
Unrealized appreciation of fixed maturity securities..................... - 60.1 60.1
</TABLE>
CHANGES IN INVESTMENT BORROWINGS
As part of its investment strategy, the Company enters into reverse
repurchase agreements and dollar-roll transactions to increase its return on
investments and improve its liquidity. These transactions are accounted for as
short-term collateralized borrowings. Such borrowings averaged approximately
$75.9 million and $104.7 million during the three months ended March 31, 1996
and 1995, respectively, and were collateralized by investment securities with
fair values approximately equal to the loan value. The weighted average interest
rate on short-term collateralized borrowings was 5.4 percent and 5.7 percent for
the three months ended March 31, 1996 and 1995, respectively.
NOTES PAYABLE
At March 31, 1996, $105.0 million and $20.0 million principal amounts were
outstanding under the Tranche A facility ("Tranche A") and the Tranche B
facility ("Tranche B"), respectively, of the Company's senior credit facility
(the "Senior Credit Facility"). The Senior Credit Facility also includes a
$100.0 million revolving credit facility (the "Revolver") of which no amounts
were outstanding at March 31, 1996. The Senior Credit Facility bears interest
based on defined rates as selected by the Company plus an applicable margin
which varies based on the Company's long-term senior debt rating. At March 31,
1996, borrowings under Tranche A and Tranche B bear interest at 7.32 percent and
7.82 percent, respectively. The Company pays a per annum non-use fee on the
unused portion of the Revolver of .2 percent to .5 percent depending on the
long-term senior debt rating of the Company.
PAYABLE TO AGP UPON DETERMINATION OF SAVINGS BANK LITIGATION
In conjunction with the Acquisition, each common or equivalent share of AGP
outstanding immediately prior to the Acquisition received a contingent payment
right, designed to provide holders with certain financial benefits that AGP and
American Life and Casualty (the "plaintiffs") may receive from a favorable
determination of the litigation against the United States of America described
in the notes to the consolidated financial statements included in the 1995 Form
10-K (the "Savings Bank Litigation"). A liability of $30.1 million was
established at the Acquisition date representing the consideration that would be
payable either to the holder of AGP's 1988 Series I and Series II Preferred
Stock or to AGP's other former shareholders, depending upon the outcome of the
Savings Bank Litigation. Since the timing of a final determination of the
Savings Bank Litigation is uncertain, the plaintiffs are unable to predict when
such $30.1 million amount will become payable.
8
<PAGE>
AMERICAN LIFE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
On August 30, 1995, the United States Court of Appeals for the Federal
Circuit, in banc, affirmed the summary judgment of the Court of Federal Claims
in the plaintiffs' favor by a decision of nine to two. Subsequently, the United
States of America filed a petition for certiorari to the United States Supreme
Court which was granted. The Supreme Court heard oral arguments on April 24,
1996. In the event the Supreme Court affirms the summary judgment of the Court
of Federal Claims, a trial will be held in the Court of Federal Claims to
determine damages related to the breach of contract by the United States.
9
<PAGE>
AMERICAN LIFE HOLDING COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion addresses the principal factors affecting earnings
and financial condition including liquidity and capital resources. This
discussion should be read in conjunction with the consolidated financial
statements and notes thereto included in the 1995 Form 10-K.
RESULTS OF OPERATIONS
First Quarter of 1996 Compared to First Quarter of 1995
Insurance policy income, which consists of premiums received on traditional
life insurance products and policy fund and surrender charges assessed against
investment type products, decreased 5 percent to $13.8 million in the first
quarter of 1996 from $14.6 million in the first quarter of 1995. This decrease
was the result of a $1.6 million decrease in life insurance premiums primarily
related to group life insurance business that was coinsured to an unaffiliated
company at the end of 1995. This decrease was partially offset by an increase in
surrender charges earned on annuity policy withdrawals. Surrender charges
assessed against annuity withdrawals for the first quarter of 1996 were $4.2
million compared to $3.5 million for the first quarter of 1995 while annuity
policy withdrawals were $182.4 million and $176.8 million for the same periods,
respectively. The Company has experienced increases in withdrawals during 1996,
however, the rate of withdrawals (relative to total annuities in force) has
subsided (see "Liquidity and Capital Resources").
Net investment income of $102.1 million in the first quarter of 1996 was
equal to net investment income in the first quarter of 1995. The average
invested assets (amortized cost basis) increased to $4.9 billion in 1996
compared to $4.6 billion in 1995. The increase in average invested assets was
offset by a decrease in the yield earned on average invested assets to 8.3
percent in 1996 from 8.8 percent in 1995. The decrease in yield resulted from
cash flows received during 1995 and the first quarter of 1996 (including cash
flows from the sales of investments) being invested in lower yielding securities
due to the general decline in interest rates.
Net realized gains and net trading income often fluctuate from period to
period. The Company sold approximately $.3 billion of investments (principally
fixed maturity securities) in the first quarter of 1996 compared to $.4 billion
in the first quarter of 1995, which sales resulted in net realized gains of $3.4
million in the first quarter of 1996 compared to net realized gains of $3.8
million and trading income of $.6 million in the first quarter of 1995. The
declining interest rate environment since the Acquisition date, which increased
the market value of fixed maturity securities, contributed to the Company's
ability to realize gains on investment sales in 1996 and 1995.
Selling securities at a gain and reinvesting the proceeds at lower yields
may, absent other management action, tend to decrease future investment yields.
The Company believes, however, the following factors would mitigate the adverse
effect of such decreases on net income: (i) the Company recognizes additional
amortization of the cost of policies purchased and the cost of policies produced
in the same period as the gain in order to reflect reduced future yields thereby
reducing such amortization in future periods (see amortization related to
realized gains below); (ii) the Company can reduce interest rates credited to
some products thereby diminishing the effect of the yield decrease on the
investment spread; and (iii) the investment portfolio grows as a result of
reinvesting the realized gains.
Interest expense on annuities and financial products decreased 5 percent to
$61.2 million in the first quarter of 1996 from $64.1 million in the first
quarter of 1995 primarily due to: (i) lower crediting rates; and (ii) the
expensing of the first year interest rate bonuses of approximately $3.3 million
in the first quarter of 1995 on policies issued prior to the Acquisition date as
a result of the application of purchase accounting on the Acquisition date.
Prior to the Acquisition date, such first year interest rate bonuses (related to
policies issued prior to the Acquisition date) were capitalized as a cost of
policies produced. At March 31, 1996, the weighted average crediting rate for
the Company's annuity liabilities excluding interest rate bonuses guaranteed for
the first year of the annuity contract was 5.0 percent compared to 5.4 percent
at March 31, 1995.
Interest expense on notes payable decreased 19 percent to $6.9 million in
the first quarter of 1996 from $8.5 million in the first quarter of 1995 due to
scheduled and unscheduled reductions in outstanding indebtedness and more
favorable interest rates on the borrowings under the Senior Credit Facility than
under the prior senior term loan.
Interest expense on investment borrowings decreased 33 percent to $1.0
million in the first quarter of 1996 from $1.5 million in the first quarter of
1995 primarily due to a lower average balance of funds borrowed.
10
<PAGE>
AMERICAN LIFE HOLDING COMPANY AND SUBSIDIARIES
Amortization related to operations increased 7 percent to $8.8 million in
the first quarter of 1996 from $8.2 million in the first quarter of 1995.
Amortization related to operations consists of amortization of the cost of
policies purchased for business in force at the Acquisition date and the cost of
policies produced subsequent to the Acquisition date. The increase in
amortization related to operations is primarily attributable to the amortization
of the cost of policies produced which has increased as a result of the increase
in the amount of business in force issued since the Acquisition date.
Cost of policies produced represents the cost of producing new business
(primarily commissions, bonus interest and certain costs of policy issuance and
underwriting) which varies with and is primarily related to the production of
new business. Costs deferred may represent amounts paid in the period the new
business is written (such as underwriting costs and first year commissions) or
in periods after the business is written (such as commissions paid in subsequent
years in excess of ultimate commissions paid and bonus interest credited through
the first policy anniversary date).
Cost of policies purchased represents the portion of the cost to acquire
the Company that is attributable to the right to receive cash flows from
insurance contracts written at the Acquisition date. Some costs incurred
subsequent to the Acquisition date on policies issued prior to such date, which
otherwise would have been deferred had it not been for the Acquisition (because
they vary with and are primarily related to the production of the acquired
policies), are expensed. Examples include commissions paid in excess of ultimate
commissions and bonus interest. However, such amounts were considered in
determining the cost of policies purchased and its amortization.
Amortization related to realized gains increased 8 percent to $2.6 million
in the first quarter of 1996 from $2.4 million in the first quarter of 1995
primarily as a result of an increase in the effect of realized gains in 1996 on
the expected future gross profits of policies purchased.
Nonrecurring expenses for 1996 primarily include expenses incurred in
conjunction with the consolidation of the Company's Alabama operations with the
home office operations.
Other operating costs and expenses decreased 4 percent to $7.5 million in
the first quarter of 1996 from $7.8 million in the first quarter of 1995
primarily as a result of a reduction in non-deferrable commission expense
related to certain group life insurance business that was coinsured to an
unaffiliated company at the end of 1995.
Income tax expense increased 3 percent to $7.8 million in the first quarter
of 1996 from $7.6 million in the first quarter of 1995. This increase is
primarily due to the increase in pretax income to $20.2 million in the first
quarter of 1996 from $19.6 million in the first quarter of 1995. The effective
tax rate for 1996 and 1995 of 39 percent exceeded the statutory corporate tax
rate (35 percent) because goodwill amortization is not deductible for federal
income tax purposes.
SALES
In accordance with generally accepted accounting principles, insurance
policy income shown on the Company's consolidated statement of operations
consists of premiums received for policies which have life contingencies or
morbidity features. For annuity and universal life contracts without such
features, premiums collected are not reported as revenues, but rather are
reported as deposits to insurance liabilities. Revenues for these products are
recognized in the form of investment income and surrender or other charges.
Net premiums collected in the three months ended March 31, 1996, were
$178.8 million, of which $172.7 million were recorded as deposits to policy
liability accounts. This compared to $249.6 million collected and $241.9 million
recorded as deposits to policy liability accounts in the three months ended
March 31, 1995. Net premiums collected declined in the first quarter of 1996
compared to the first quarter of 1995 primarily due to a declining interest rate
environment which resulted in increased competition from alternative investments
such as certificates of deposit, mutual funds and variable annuity products.
LIQUIDITY AND CAPITAL RESOURCES
Insurance Operations
The Company's annuity and life insurance business generally provides the
insurance subsidiaries with positive cash flows from premium collections and
investment income. Cash flows from insurance subsidiary financing activities are
principally the result of premium collections from annuities and
interest-sensitive insurance contracts and the related benefit payments,
including withdrawal and surrender payments.
11
<PAGE>
AMERICAN LIFE HOLDING COMPANY AND SUBSIDIARIES
Withdrawals and surrenders have increased in recent years due to: (i) the
aging of the Company's annuity business in force resulting in an increased
amount of deferred annuity liabilities that could be surrendered without penalty
or with a nominal penalty; (ii) growth in the Company's annuity business
resulting from the substantial volume of premium collections in 1993 through
1995; (iii) increased policyholder utilization of the systematic withdrawal
features which first became available on annuity policies in 1992; (iv)
increased competition from alternative investments such as certificates of
deposit, mutual funds and variable annuity products as a result of a flattened
yield curve and declining interest rates in 1995; and (v) to a certain extent,
during 1995 and the second half of 1994, reductions in American Life and
Casualty's ratings from two nationally recognized insurance company ratings
organizations as a result of the Acquisition and related financing transactions.
Approximately one third of the 1995 increase in withdrawals and surrenders was
attributable to surrenders of a single policy form principally issued during
1988 through 1990 in which the surrender charge declined from 4 percent at the
fifth policy anniversary date to zero percent at the sixth policy anniversary
date.
The trend of significant increases in withdrawals and surrenders subsided
in the first quarter of 1996 as policy withdrawal and surrender payments
increased moderately to $185.3 million compared to $178.4 million in the first
quarter of 1995. This increase was primarily due to an increase in annuity
penalty-free partial withdrawals. Total withdrawals and surrenders by
policyholders were 13.7 percent (annualized) and 14.2 percent of the average
cash values outstanding during the three months ended March 31, 1996, and the
year ended December 31, 1995, respectively.
The following table summarizes the Company's annuity liabilities at March
31, 1996 and December 31, 1995, and sales for the three months and year then
ended, respectively, by surrender charge category (dollars in millions):
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
---------------------------------------- --------------------------------------
Annuity Annuity
Surrender charge percent deposits Percent Liabilities Percent deposits Percent Liabilities Percent
- - ------------------------ -------- ------- ----------- ------- -------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
No surrender charge................... $ - -% $ 988.0 21% $ .2 *% $ 986.1 21%
1 to 3.9 percent...................... - - 359.6 7 - - 352.3 7
4 to 6.9 percent...................... .5 * 885.8 19 6.4 1 901.6 19
7 to 9.9 percent...................... 4.7 3 1,156.4 24 64.4 9 1,100.6 23
10 to 11.9 percent.................... 55.6 37 1,005.1 21 371.3 51 1,016.5 22
12 percent and greater................ 91.0 60 365.5 8 285.9 39 359.3 8
------ --- -------- --- ------- --- -------- ----
$151.8 100% $4,760.4 100% $ 728.2 100% $4,716.4 100%
====== === ======== === ======= === ======== ===
<FN>
* less than 1%
</FN>
</TABLE>
Deferred annuity liabilities that could be surrendered without penalty
increased from $508.8 million, or 14 percent of deferred annuity liabilities, at
December 31, 1993 to $988.0 million, or 21 percent of deferred annuity
liabilities, at March 31, 1996. This increase was primarily attributable to the
policy form discussed above whose surrender charge declined from 4 percent at
the fifth policy anniversary date to zero percent at the sixth policy
anniversary date. Sales of this policy form peaked in the second quarter of 1989
and were insignificant after the second quarter of 1990. At March 31, 1996, the
aggregate account balances in force for this product were $604.1 million, of
which $505.6 million could be surrendered without penalty.
Deferred annuity liabilities that initially become surrenderable without
penalty are expected to decline over the remainder of 1996 and 1997. The
following table summarizes the Company's deferred annuity liabilities in
which the surrender charge expires within the first subsequent year and the
second subsequent year at December 31, 1994 and 1995, and March 31, 1996.
<TABLE>
<CAPTION>
Within
-----------------------
first second Total
subsequent subsequent within next
year year 2 years
---- ---- -------
(Dollars in millions)
<S> <C> <C> <C>
December 31, 1994......................... $456.0 $168.1 $624.1
December 31, 1995......................... 158.9 71.3 230.2
March 31, 1996............................ 116.7 79.9 196.6
</TABLE>
Most of the Company's assets are invested in fixed maturity securities,
substantially all of which are readily marketable. Although there is no present
need or intent to dispose of such investments, the Company could liquidate
portions of its investments or use them to facilitate borrowings under reverse
repurchase agreements if such a need arose. At March 31, 1996, the Company's
portfolio of bonds, notes and redeemable preferred stocks had an aggregate net
unrealized gain of $184.5 million.
12
<PAGE>
AMERICAN LIFE HOLDING COMPANY AND SUBSIDIARIES
Parent Holding Company
The comparison of March 31, 1996, balances to December 31, 1995, balances
in the consolidated balance sheet reflects the following: (i) a decrease in the
fair value of actively managed fixed maturity securities and its effects on the
consolidated balance sheet accounts; (ii) a decrease in short-term investments
primarily as a result of a decrease of $76.6 million in investment borrowings;
and (iii) an increase in retained earnings attributable to the Company's
operations.
The ratio of debt to total capital excluding the effect of reporting fixed
maturities at fair value decreased to .44 to 1 at March 31, 1996, from .45 to 1
at December 31, 1995. The ratio of debt to total capital including the effect of
the change in the fair value of actively managed fixed maturity investments
increased to .40 to 1 at March 31, 1996, from .34 to 1 at December 31, 1995.
As a result of Conseco's announcement that it is dissolving Partnership II,
the partners have no further commitment to make additional contributions of
capital to Partnership II or AGP. However, the Company believes that amounts
required to meet its financial obligations are available from its insurance
operations. In addition, at March 31, 1996, $100.0 million was available to be
borrowed under the Revolver.
INVESTMENTS
The amortized cost and estimated fair value of fixed maturity securities
(all of which were actively managed) were as follows at March 31, 1996:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
United States Treasury securities...................................... $ 84.2 $ 4.7 $ - $ 88.9
Obligations of states and political subdivisions....................... 31.9 2.3 .1 34.1
Foreign government obligations......................................... 33.0 .5 2.3 31.2
Public utility securities.............................................. 808.8 55.6 2.4 862.0
Other corporate securities............................................. 2,328.5 103.6 31.5 2,400.6
Mortgage-backed securities............................................. 1,425.1 66.2 12.1 1,479.2
-------- ------ ----- --------
Total fixed maturity securities ................................... $4,711.5 $232.9 $48.4 $4,896.0
======== ====== ===== ========
</TABLE>
The following table sets forth fixed maturity securities at March 31, 1996,
classified by rating categories (designated categories include securities with
"+" or "-" rating modifiers). The category assigned is the highest rating by a
nationally recognized statistical rating organization or, as to $66.2 million
fair value of fixed maturities not rated by such firms, the rating assigned by
the National Association of Insurance Commissioners ("NAIC"). For the purposes
of this table, NAIC Class 1 is included in the "A" rating; Class 2, "BBB"; Class
3, "BB" and Classes 4 to 6, "B and below."
<TABLE>
<CAPTION>
Percent of
-------------------------------
Fixed maturity Total
Investment rating securities investments
----------------- ---------- -----------
<S> <C> <C>
AAA................................... 33% 31%
AA.................................... 11 11
A..................................... 27 26
BBB................................... 25 24
---- ----
Investment grade............... 96 92
---- ----
BB.................................... 3 3
B and below........................... 1 1
---- ----
Below investment grade......... 4 4
---- ----
Total fixed maturity securities 100% 96%
==== ====
</TABLE>
At March 31, 1996, the Company's below investment grade fixed maturity
securities had an amortized cost of $180.1 million and an estimated fair value
of $182.9 million.
13
<PAGE>
AMERICAN LIFE HOLDING COMPANY AND SUBSIDIARIES
The Company's investment portfolio is subject to the risk of declines in
realizable value; however, the Company attempts to mitigate this risk through
the diversification and active management of its portfolio. As of March 31,
1996, there were no fixed maturity securities about which the Company has
serious doubts as to the ability of the issuer to comply with the contractual
terms of their obligations on a timely basis.
Proceeds from the sales of investments (principally fixed maturity
securities) were $292.6 million for the three months ended March 31, 1996. Such
sales resulted in net realized gains of $3.4 million. Proceeds from sales of
investments during the first three months of 1995 were $383.3 million. These
sales resulted in net realized gains of $3.8 million and trading gains of $.6
million.
At March 31, 1996, fixed maturity securities included $1.5 billion (30
percent of the fixed maturity investment portfolio) of mortgage-backed
securities of which $894.6 million were collateralized mortgage obligations
("CMOs") and $584.6 million were pass-through securities. CMOs are securities
backed by pools of pass-through securities and/or mortgages that are segregated
into sections or "tranches" which provide for sequential retirement of principal
rather than the pro rata share of principal return which occurs through regular
monthly principal payments on pass-through securities.
The yield characteristics of mortgage-backed securities differ from those
of traditional fixed income securities. Interest and principal payments occur
more frequently, often monthly, and mortgage-backed securities are subject to
risks associated with variable prepayments. Prepayment rates are influenced by a
number of factors which cannot be predicted with certainty, including the
relative sensitivity of the underlying mortgages backing the assets to changes
in interest rates, a variety of economic, geographic and other factors and the
repayment priority of the securities in the overall securitization structures.
In general, prepayments on the underlying mortgage loans, and the
securities backed by these loans, increase when the level of prevailing interest
rates declines significantly below the interest rates on such loans.
Mortgage-backed securities purchased at a discount to par will experience an
increase in yield when the underlying mortgages prepay faster than expected.
Those securities purchased at a premium that prepay faster than expected will
incur a reduction in yield. When declines in interest rates occur, the proceeds
from the prepayment of mortgage-backed securities are likely to be reinvested at
lower rates than the Company was earning on the prepaid securities. As the level
of prevailing interest rates increases, prepayments on mortgage-backed
securities decrease as fewer underlying mortgages are refinanced. When this
occurs, the average maturity and duration of the mortgage-backed securities
increase, which decreases the yield on mortgage-backed securities purchased at a
discount because the discount is realized as income at a slower rate and
increases the yield on those purchased at a premium as a result of a decrease in
annual amortization of the premium.
The following table sets forth the par value, amortized cost and estimated
fair value of mortgage-backed securities including CMOs, summarized by interest
rates on the underlying collateral at March 31, 1996:
<TABLE>
<CAPTION>
Par Amortized Estimated
value cost fair value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Below 7 percent..................................................................... $ 420.8 $ 380.7 $ 396.0
7 percent - 8 percent............................................................... 882.5 812.4 837.4
8 percent - 9 percent............................................................... 195.4 178.0 190.2
9 percent and above................................................................. 60.3 54.0 55.6
-------- -------- --------
Total mortgage-backed securities......................................... $1,559.0 $1,425.1 $1,479.2
======== ======== ========
</TABLE>
The amortized cost and estimated fair value of mortgage-backed securities
including CMOs at March 31, 1996, summarized by type of security were as
follows:
<TABLE>
<CAPTION>
Estimated fair value
-----------------------
Percent of
Amortized fixed maturity
Type cost Amount securities
- - ---- ---- ------ ----------
(Dollars in millions)
<S> <C> <C> <C>
Pass-throughs and sequential and targeted amortization classes............ $1,028.6 $1,052.0 21%
Support classes........................................................... 181.0 198.5 4
Accrual (Z tranche) bonds................................................. 22.9 24.9 1
Planned amortization classes and accretion directed bonds................. 87.3 92.6 2
Subordinated classes ..................................................... 105.3 111.2 2
-------- -------- ----
$1,425.1 $1,479.2 30%
======== ======== ====
</TABLE>
14
<PAGE>
AMERICAN LIFE HOLDING COMPANY AND SUBSIDIARIES
Pass-throughs and sequential and targeted amortization classes have similar
prepayment variability. Pass-throughs have historically provided the best
liquidity in the mortgage-backed securities market and the best
price/performance ratio in a highly volatile interest rate environment. This
type of security is also frequently used as collateral in the dollar-roll
market. Sequential classes pay in a strict sequence with all principal payments
received by the CMO paid to the sequential tranches in order of priority.
Targeted amortization classes provide a modest amount of prepayment protection
when prepayments on the underlying collateral increase from those assumed at
pricing and thus offer slightly better call protection than sequential classes
and pass-throughs.
Support classes absorb the prepayment risk from which planned amortization
and targeted amortization classes are protected. As such, they are usually
extremely sensitive to prepayments. Most of the Company's support classes are
higher average life instruments that generally will not lengthen if interest
rates rise further and will have a tendency to shorten if interest rates
decline. However, since these bonds have current values below par values, higher
prepayments will have the effect of increasing yields.
Accrual bonds are CMOs structured such that the payment of coupon interest
is deferred until principal payments begin on these bonds. On each accrual date,
the principal balance is increased by the amount of the interest (based upon the
stated coupon rate) that otherwise would have been payable. As such, these
securities act much the same as zero coupon bonds until cash payments begin.
Cash payments typically do not commence until earlier classes in the CMO
structure have been retired, which can be significantly influenced by the
prepayment experience of the underlying mortgage loan collateral in the CMO
structure. Because of the zero coupon element of these securities and the
potential uncertainty as to the timing of cash payments, their market values and
yields are more sensitive to changing interest rates than other CMOs,
pass-through securities and coupon bonds.
Planned amortization classes and accretion directed bonds are some of the
most stable and liquid instruments in the mortgage-backed securities market.
Planned amortization class bonds adhere to a fixed schedule of principal
payments provided that the underlying mortgage collateral experiences
prepayments within a certain range. Changes in prepayment rates are first
absorbed by support classes which insulate the planned amortization classes from
the consequences of both faster prepayments (average life shortening) and slower
prepayments (average life extension).
Subordinated CMO classes have both prepayment and credit risk. The
subordinated classes are used to lend credit enhancement to the senior
securities and as such, rating agencies require that this support not
deteriorate due to the prepayment of the subordinated securities. The credit
risk of subordinated classes is derived from the negative leverage of owning a
small percentage of the underlying mortgage loan collateral while bearing a
majority of the risk of loss due to homeowners' defaults.
At March 31, 1996, the mortgage loan portfolio was diversified across 65
properties with an average loan size of approximately $1.0 million.
Approximately 99 percent of the mortgage loan balance relates to commercial
loans including retail, multifamily residential, office, industrial, nursing
home, restaurant and other properties. Approximately 2 percent of the mortgage
loan balance was noncurrent at March 31, 1996. There were no realized losses on
mortgage loans during the three months ended March 31, 1996 and 1995. At March
31, 1996, the Company had a loan loss reserve of $1.4 million.
Borrowings under reverse repurchase agreements and dollar-roll transactions
were $54.1 million at March 31, 1996, and were collateralized by pledged
securities with fair values approximately equal to the borrowings. Such
borrowings averaged approximately $75.9 million during the first three months of
1996.
STATUTORY INFORMATION
Statutory accounting practices prescribed or permitted for the Company's
insurance subsidiaries by regulatory authorities differ in many respects from
those governing the preparation of financial statements under generally accepted
accounting principles ("GAAP"). Accordingly, statutory operating results and
statutory capital and surplus may differ substantially from amounts reported in
the GAAP basis financial statements for comparable items. The Company's
insurance subsidiaries follow certain permitted accounting practices which are
not specifically prescribed in state laws, regulations, general administrative
rules and various NAIC publications. Such permitted accounting practices do not
enhance statutory surplus. Further, the Company's insurance subsidiaries do not
have any reinsurance agreements generally known as "surplus relief reinsurance"
which have the effect of increasing statutory surplus at inception and reducing
statutory surplus in subsequent years as amounts are recaptured by reinsurers.
After appropriate eliminations of intercompany accounts, the Company's life
insurance subsidiaries reported combined statutory net income of $7.1 million
for the three months ended March 31, 1996, and the following amounts on the
combined statutory balance sheet at March 31, 1996 (dollars in millions):
<TABLE>
<S> <C>
Statutory capital and surplus................................................... $219.6
Asset valuation reserve......................................................... 39.0
Interest maintenance reserve ................................................... 25.2
------
Total........................................................................ $283.8
======
</TABLE>
15
<PAGE>
AMERICAN LIFE HOLDING COMPANY AND SUBSIDIARIES
American Life and Casualty's surplus includes a surplus note with a balance
of $50.0 million at March 31, 1996. The payment of dividends and other
distributions, including surplus note payments, by American Life and Casualty is
subject to regulation by the Iowa Insurance Division. Currently, American Life
and Casualty may pay dividends or make other distributions without the prior
approval of the Iowa Insurance Division, unless such payments, together with all
other such payments within the preceding 12 months, exceed the greater of (i)
American Life and Casualty's net gain from operations (excluding net realized
capital gains or losses) for the preceding calendar year or (ii) 10 percent of
its statutory surplus at the preceding December 31. For 1996, up to $31.0
million can be distributed as dividends and surplus note payments, by American
Life and Casualty (of which $1.5 million had been distributed through March 31,
1996). Dividends and surplus note payments may be made only out of earned
surplus, and all surplus note payments are subject to prior approval by the Iowa
Insurance Division. At March 31, 1996, American Life and Casualty had earned
surplus of $113.3 million.
In addition, the ability of the insurance subsidiaries to transfer funds to
stockholders is limited by certain provisions in the Company's loan agreements
relating to the maintenance of specified minimum levels of statutory capital and
surplus and minimum levels of statutory risk-based capital. Under the most
restrictive of these limitations, $29.5 million of earned surplus at March 31,
1996, would be available for distribution by American Life and Casualty to the
Company in the form of dividends or other distributions.
16
<PAGE>
AMERICAN LIFE HOLDING COMPANY AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibit.
27.0 Financial Data Schedule.
b) No reports on Form 8-K were filed for the quarter ended March 31, 1996.
17
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
AMERICAN LIFE HOLDING COMPANY
Dated: May 14, 1996 By: /s/ ROLLIN M. DICK
------------------
Rollin M. Dick,
Executive Vice President and
Chief Financial Officer
(authorized officer and principal
financial officer)
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FORM 10-Q FOR AMERICAN LIFE HOLDING COMPANY DATED MARCH
31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 4,896,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 18,700
<MORTGAGE> 81,100 <F1>
<REAL-ESTATE> 0
<TOTAL-INVEST> 5,099,900
<CASH> 0 <F2>
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 360,300 <F3>
<TOTAL-ASSETS> 6,004,300
<POLICY-LOSSES> 5,101,500
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 5,900
<POLICY-HOLDER-FUNDS> 90,600
<NOTES-PAYABLE> 267,700
<COMMON> 143,000
0
0
<OTHER-SE> 151,500 <F4>
<TOTAL-LIABILITY-AND-EQUITY> 6,004,300
13,800
<INVESTMENT-INCOME> 102,100
<INVESTMENT-GAINS> 3,400
<OTHER-INCOME> 1,000
<BENEFITS> 69,700 <F5>
<UNDERWRITING-AMORTIZATION> 11,400 <F6>
<UNDERWRITING-OTHER> 7,500
<INCOME-PRETAX> 20,200
<INCOME-TAX> 7,800
<INCOME-CONTINUING> 12,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,400
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<PAGE>
<FN>
<F1> Includes $18,200 of credit-tenant loans.
<F2> Cash and cash equivalents are classified as short-term investments,
which are included in total investments.
<F3> Includes $265,400 of cost of policies purchased.
<F4> Includes retained earnings of $90,000 and net unrealized appreciation
of securities of $61,500.
<F5> Includes insurance policy benefits of $7,300, change in future policy
benefits of $1,200 and interest expense on annuities and financial
products of $61,200.
<F6> Includes amortization of cost of policies purchased of $7,700 and cost
of policies produced of $1,100 and amortization related to realized
gains of $2,600.
</FN>
</TABLE>
