UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission File Number 0-22404
ALLIED Life Financial Corporation
(Exact name of registrant as specified in its charter)
Iowa
(State or other jurisdiction of incorporation or organization)
42-1406716
(I.R.S. Employer Identification No.)
701 Fifth Avenue, Des Moines, Iowa
(Address of principal executive offices)
50391-2003
(Zip Code)
515-280-4211
(Registrant's telephone number, including area code)
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 [ ]
Indicate the number of outstanding shares of each of the registrant's classes of
common stock, as of November 1, 1996:
4,491,463 shares of Common Stock.
This document contains 19 pages.
1
<PAGE>
<TABLE>
PART I
Item 1. Financial Statements
ALLIED Life Financial Corporation and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
<S> <C> <C>
September 30, December 31,
1996 1995
Assets
Investments
Fixed maturities
Held to maturity at amortized cost
(fair value $202,281,675 in 1996
and $232,252,223 in 1995) $ 198,393,444 $ 219,418,225
Available for sale at fair value
(amortized cost $464,442,128 in 1996
and $401,492,967 in 1995) 465,468,325 425,098,718
Equity securities at fair value
(cost $5,769,706 in 1996 and $4,256,516 6,145,043 4,332,107
Mortgage loans on real estate 1,577,298 1,829,450
Policy loans 10,278,451 9,526,033
Other invested assets (note 4) 3,933,553 -----
Short-term investments, at cost (note 2) 866,553 721,612
Total investments 686,662,667 660,926,145
Accrued investment income 10,666,495 8,697,634
Accounts receivable 537,160 566,853
Reinsurance ceded receivables 6,283,828 7,626,401
Current income taxes recoverable 301,110 869,664
Deferred policy acquisition costs 96,285,238 79,717,529
Other assets (note 4) 3,716,169 1,543,033
Total assets $ 804,452,667 $ 759,947,259
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
2
<PAGE>
<TABLE>
ALLIED Life Financial Corporation Subsidiaries
Consolidated Balance Sheets
<CAPTION>
<S> <C> <C>
September 30, December 31,
1996 1995
Liabilities
Policy liabilities
Policyholder account balances
Annuity contracts $ 450,678,649 $ 412,216,412
Universal life contracts 178,439,507 168,654,188
Other 8,835,380 7,634,517
Future policy benefits 32,389,805 28,149,304
Policy and contract claims 4,279,707 4,827,540
Other policyholder funds 1,799,885 867,336
676,422,933 622,349,297
Checks drawn in excess of bank balances 1,372,217 2,037,432
Amounts payable to reinsurers 473,906 1,010,800
Deferred income taxes 8,928,130 13,452,845
Indebtedness to affiliates (note 2) 1,861,659 139,380
Note payable (note 3) 13,480,000 16,605,000
Other liabilities 4,451,343 2,670,685
Total liabilities 706,990,188 658,265,439
Stockholders' equity
Preferred stock, no par value, issuable in series,
authorized 7,500,000 shares
6.75% Series, authorized 2,440,000 shares, issued and
outstanding of 2,108,117 in 1996 and 2,004,898 in 1995 22,873,069 21,753,143
ESOP Series, authorized 300,000 shares, issued
and outstanding 93,892 in 1996 and 82,029 in 1995 1,336,267 1,117,780
Common stock, no par value, $1 stated value,
authorized 25,000,000 shares, issued and outstanding
of 4,491,287 in 1996 and 4,632,559 in 1995 4,491,287 4,632,559
Additional paid-in capital 46,514,761 48,773,783
Retained earnings 21,624,064 16,237,501
Unrealized appreciation of investments, net 623,031 9,167,054
Total stockholders' equity 97,462,479 101,681,820
Total liabilities and stockholders' equity $ 804,452,667 $ 759,947,259
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
3
<PAGE>
<TABLE>
ALLIED Life Financial Corporation and Subsidiaries
Consolidated Statements of Income
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Revenues
Insurance revenues
Policyholder assessments on
universal life contracts $ 5,205,649 $ 5,021,455 $ 15,459,557 $ 14,993,073
Surrender charges 501,338 424,068 1,697,709 1,783,081
Life insurance premiums 3,938,434 2,925,957 9,983,794 8,522,849
Other insurance income 1,033,109 710,980 2,725,356 2,003,241
Reinsurance premiums ceded (2,059,834) (1,972,176) (6,327,458) (5,472,533)
Total insurance revenues 8,618,696 7,110,284 23,538,958 21,829,711
Investment income 11,826,527 11,644,171 35,513,401 33,551,182
Realized investment losses (48,532) (234,798) (193,006) (682,628)
Other income 247,403 174,024 805,498 478,211
20,644,094 18,693,681 59,664,851 55,176,476
Benefits and Expenses
Policyholder benefits
Interest credited to policyholder
account balances
Annuity contracts 6,204,824 5,725,344 18,061,925 16,533,461
Universal life contracts 2,357,526 2,428,609 7,081,105 7,182,246
Other 100,855 66,294 272,624 195,148
Death benefits 3,543,015 3,980,794 7,906,412 9,295,706
Other policyholder benefits 2,373,358 1,663,795 5,805,959 4,531,542
Reinsurance recoveries (1,618,997) (2,091,162) (3,601,772) (4,263,473)
Total policyholder benefits 12,960,581 11,773,674 35,526,253 33,474,630
Amortization of deferred policy
acquisition costs 1,921,766 1,367,605 5,764,046 4,598,679
Commissions 889,565 734,972 2,366,136 2,070,207
Affiliated operating expenses 207,875 349,785 817,460 1,066,863
Other insurance operating expenses 1,555,593 1,105,275 4,396,960 3,530,722
17,535,380 15,331,311 48,870,855 44,741,101
Income before income taxes 3,108,714 3,362,370 10,793,996 10,435,375
Income Taxes
Current 976,385 1,048,933 3,451,253 4,156,865
Deferred 26,894 23,802 75,913 (823,331)
1,003,279 1,072,735 3,527,166 3,333,534
Net Income $ 2,105,435 $ 2,289,635 $ 7,266,830 $ 7,101,841
Net income applicable to
common stock $ 1,701,857 $ 1,913,633 $ 6,074,716 $ 5,990,072
Earnings Per Common Share $ 0.37 $ 0.42 $ 1.32 $ 1.30
Weighted average number of
common shares outstanding 4,559,259 4,626,981 4,609,230 4,607,789
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements
4
<PAGE>
<TABLE>
ALLIED Life Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
<S> <C> <C>
Nine Months Ended
September 30,
1996 1995
Cash Flow From Operating Activities
Net income $ 7,266,830 $ 7,101,841
Adjustments to reconcile net income to net cash provided by
operating activities
Policyholder assessments on universal life contracts (15,459,557) (14,993,073)
Surrender charges (1,697,709) (1,783,081)
Interest credited to policyholder account balances 25,415,654 23,910,855
Realized investment losses 193,006 682,628
Change in
Accrued investment income (1,968,861) (1,784,480)
Reinsurance ceded receivables 1,342,573 (2,100,595)
Deferred policy acquisition costs (7,432,551) (8,471,137)
Liabilities for future policy benefits 4,240,501 3,478,674
Policy and contract claims and other policyholder funds 384,716 (221,461)
Income taxes
Current 568,554 396,651
Deferred 75,913 (823,331)
Other, net (708,100) (453,251)
Net cash provided by operating activities 12,220,969 4,940,240
Cash Flows from Investing Activities
Purchase of fixed maturities held to maturity (13,500,000) (29,848,837)
Maturities, calls, and principal reductions of fixed maturities
held to maturity 34,425,618 23,984,256
Purchase of fixed maturities available for sale (103,686,214) (135,795,969)
Proceeds from sale of fixed maturities available for sale 31,635,277 70,915,720
Maturities, calls, and principal reductions of fixed maturities
available for sale 8,870,970 2,353,789
Securities sold, not settled ----- (1,005,050)
Proceeds from sale of equity securities ----- 457,262
Purchase of equity securities (1,513,190) (1,460,249)
Proceeds from repayment of mortgage loans 251,528 175,321
Change in other invested assets, net (4,145,017) -----
Change in policy loans, net (752,418) (325,840)
Net cash used in investing activities (48,413,446) (70,549,597)
Cash Flows from Financing Activities
Change in checks drawn in excess of bank balances (665,215) (355,093)
Deposits to policyholder account balances 79,631,368 96,220,256
Withdrawals from policyholder account balances (38,335,589) (33,077,597)
Change in note payable, net (3,125,000) (305,000)
Note payable from affiliate 1,750,000 -----
Proceeds from issuance of stock, net 359,445 739,386
Repurchase of stock (2,541,250) -----
Dividends paid to stockholders (736,341) (597,086)
Net cash provided by financing activities 36,337,418 62,624,866
Net Increase (Decrease) in Cash and Short-term Investments 144,941 (2,984,491)
Cash and short-term investments at beginning of year 721,612 3,465,285
Cash and short-term investments at end of quarter $ 868,553 $ 480,794
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements
5
<PAGE>
ALLIED Life Financial Corporation and Subsidiaries
Notes to Interim Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of
ALLIED Life Financial Corporation (the Company) and its subsidiaries on a
consolidated basis.
At September 30, 1996, ALLIED Mutual Insurance Company (ALLIED Mutual), an
affiliated property-casualty insurance company, controlled 54% of the voting
stock of the Company and the ALLIED Life Financial Corporation Employee Stock
Ownership Trust owned 1%. The remainder was owned by public stockholders.
The accompanying interim consolidated financial statements should be read in
conjunction with the following notes and with the Notes to Consolidated
Financial Statements included in the ALLIED Life Financial Corporation Annual
Report on Form 10-K for the year ended December 31, 1995. The interim
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP) and include all adjustments
which are in the opinion of management necessary for fair presentation of the
results for the interim periods. In the opinion of management, all such
adjustments are of a normal and recurring nature. All significant intercompany
balances and transactions have been eliminated.
(2) Transactions with Affiliates
The Company and its affiliates pool their excess cash pursuant to the
Intercompany Cash Concentration Fund Agreement. The fund, administered by AID
Finance Services, Inc. (an affiliate of the Company), also issues short-term
loans (30 days or less) to affiliated companies in accordance with the current
intercompany borrowing policy. At September 30, 1996, the Company had an
investment balance, net of loans outstanding, of $718,980. Pursuant to the
Agreement, AID Finance Services, Inc. receives a management fee of 5 basis
points which the fund participants pay in the form of an additional 0.05% in the
interest rate for borrowings and a 0.05% reduction in the interest rate on
invested funds.
The Company has a note payable with ALLIED Mutual. Interest will be paid
quarterly at an annual rate of 7% and final payment shall be on August 15, 1999.
At September 30, 1996 the outstanding balance of the note payable was
$1,750,000.
(3) Note Payable to Nonaffiliates
ALLIED Life Insurance Company, a wholly owned subsidiary, has a line of credit
agreement with the Federal Home Loan Bank (FHLB) to make available borrowings of
$25,000,000. Interest is payable at either an adjustable interest rate with the
interest rate set and charged daily on the outstanding advance amount or at a
fixed rate with the interest rate set at issuance. As of September 30, 1996
borrowings on this line of credit agreement were $13,480,000 at an interest rate
of 5.5% per annum. All borrowings with the FHLB are secured by securities with a
carrying value of $29,622,603.
6
<PAGE>
ALLIED Life Financial Corporation and Subsidiaries
Notes to Interim Consolidated Financial Statements (Continued)
(4) Hedging Activities
In June 1996, the Company began an interest rate hedging program whereby certain
derivative financial instruments including cash settle put swaptions
("swaptions") and interest rate floors ("floors") were purchased. The Company
also began to purchase S&P 500 call options as a result of an equity indexed
annuity product it introduced at the beginning of the second quarter. The
following table presents the carrying values of these instruments at September
30, 1996.
Cash settle put swaptions $ 2,748,184
Interest rate floors 1,185,368
S&P 500 call options 1,580,873
$ 5,514,425
Swaptions are being purchased to reduce the negative effect of increased
withdrawal activity related to the Company's annuity liabilities which may
result from extreme increases in interest rates. The current agreements for
these instruments, which expire quarterly from June 1999 through March 2006,
entitle the Company to receive payments from the instrument's counter parties on
future reset dates if the interest rate (which is directly tied to the 5-year
constant maturity swap curve) on any expiration date is above a specified fixed
rate (8.8% to 10.5% for instruments entered into as of September 30, 1996). At
September 30, 1996, the Company had entered into agreements for a series of 44
quarterly put swaptions with notional amounts between $3 million and $9 million
each.
Floors are being purchased to reduce the negative effect that may result from
extreme decreases in interest rates to a level below the guaranteed interest
rates provided for in the Company's universal life insurance contracts. The
current agreements for the floors, which expire quarterly from June 1999 through
March 2006, entitle the Company to receive payments from the instrument's
counter parties on future reset dates if the interest rate (which is tied
directly to the 10-year constant maturity treasury curve) on the expiration date
is below a specified fixed rate (5.0% for instruments entered into as of
September 30, 1996). At September 30, 1996, the Company had entered into
agreements for a series of 28 quarterly floors with notional amounts between
$140 million and $270 million.
The cost of the interest rate hedging program is not expected to have a material
impact on the interest rate margin. For both swaptions and floors, the Company
pays only the original premium and is not at risk of further payments regardless
of market conditions. The Company does not anticipate making any further
purchases of interest rate hedges in 1996.
The Company has introduced an equity indexed annuity product that guarantees the
return of principal to the customer and credits interest based on a percentage
of the gain of the S&P 500 index. A portion of the premium from each customer is
invested in investment grade fixed income securities to cover the minimum
guaranteedvalue due the customer at the end of the term. A portion of the
premium is used to purchase S&P 500 call options to hedge the growth in interest
credited to the customer as a direct result of increases in the S&P 500 index.
The call option provides the Company the opportunity to participate in the
increases of the S&P 500 index if the market advances. At September 30, 1996 the
Company had entered into agreements for 23 call options with notional amounts
between $65,000 and $900,000.
7
<PAGE>
ALLIED Life Financial Corporation and Subsidiaries
Notes to Interim Consolidated Financial Statements (Continued)
Premiums paid to enter these instruments are capitalized. The swaptions and
floors are included in other invested assets, and the S&P 500 call options are
included in other assets. Premiums are amortized into income over the term of
the instruments on a straight-line basis. Gains and losses on these instruments
and related assets or liabilities will not be recorded in income until realized.
The FASB and the SEC are evaluating the accounting and disclosure requirements
for these instruments and as a result this accounting treatment may change in
the future. The Company is actively monitoring the proposals which are in
various stages of discussion and the impact of the final standards cannot be
clearly projected at this time.
The Company is exposed to the risk of losses in the event of non-performance of
the counter parties of the above swaptions, floors, and calls. Losses recorded
in the Company's financial statements in the event of non-performance will be
limited to the unamortized premium paid to enter into the instruments. Economic
losses would be measured by the net replacement cost, or fair value, for such
instruments if the net fair value is in the Company's favor. The Company limits
its exposure to such losses by diversification among reputable counter parties
with appropriate credit ratings.
(5) Stock repurchase program
Effective August 6, 1996, the Board of Directors approved a stock repurchase
program to acquire shares of the Company common stock on the open market
pursuant to rule 10b-18 under the Securities Exchange Act of 1934. The Company
completed the program during the third quarter of 1996 and repurchased and
cancelled 150,000 shares at an average cost of $16.94 per share.
8
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
The following analysis of the consolidated results of operations and financial
condition of the Company should be read in conjunction with the interim
consolidated financial statements and related footnotes included elsewhere
herein, and with the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
The 1995 Private Securities Litigation Reform Act provides issuers the
opportunity to make cautionary statements regarding forward-looking statements.
Accordingly, any forward-looking statement contained herein or in any other oral
or written statement by the Company or any of its officers, directors or
employees is qualified by the fact that actual results of the Company may differ
materially from such statements due to the following factors, among other risks
and uncertainties inherent in the Company's business:
1.Prevailing interest rate levels, including any continuation of the current
relatively flat yield curve for short-term investments in comparison to
long-term investments, that may affect the ability of the Company to sell its
universal life and fixed annuity products.
2.Fluctuating interest rate levels and the corresponding adverse affect this
could have on equity markets may affect the ability of the Company to sell its
equity indexed annuity product.
3.Overall levels of competitiveness in the life insurance industry.
ALLIED Life Financial Corporation is an insurance holding company formed by
ALLIED Mutual Insurance Company (ALLIED Mutual) in 1993. The financial
statements include the accounts of ALLIED Life Insurance Company (ALLIED Life),
ALLIED Life Brokerage Agency, Inc. (ALBA), and ALLIED Group Merchant Banking
Corporation (AGMB). ALLIED Life accounts for substantially all of the Company's
operations and sells primarily universal life insurance, term life insurance,
and annuity products.
9
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The following table reflects ALLIED Life's production information and pretax
operating results excluding realized investment losses and related amortization
of deferred policy acquisition costs for the periods indicated.
<TABLE>
Life Insurance Operations
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
(Dollars in thousands)
Production information
Life insurance
Face amount in force
Directly produced by agents
Universal Life $ 4,263,599 $ 4,139,910
Term life 4,090,843 3,173,941
Whole Life 49,621 50,106
8,404,063 7,363,957
Other 376,255 441,116
$ 8,780,318 $ 7,805,073
Face amount of new life insurance sold
Directly produced by agents
Universal Life $ 86,690 $ 99,866 $ 273,758 $ 464,927
Term life 512,036 258,217 1,172,788 845,870
Whole life 1,233 1,033 3,392 3,424
599,959 359,116 1,449,938 1,314,221
Other (2,821) 9,737 8,384 19,324
$597,138 $ 368,853 $ 1,458,322 $ 1,333,545
Termination rate
Universal Life 5.9 % 6.0 % 6.5 % 6.9 %
Term life 18.2 % 18.2 % 17.6 % 19.8 %
Annuities
Account balance $ 450,679 $ 402,171
First-year annuity premiums $ 21,105 $ 11,835 $ 47,203 $ 64,537
</TABLE>
10
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
<TABLE>
Life Insurance Operations (Continued)
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
(Dollars in thousands)
Investment income $ 11,818 $ 11,585 $ 35,482 $ 33,377
Interest credited on
Annuities 6,205 5,725 18,062 16,534
Universal life 2,358 2,429 7,081 7,182
Other 100 66 273 195
Total interest expense 8,663 8,220 25,416 23,911
Investment spread 3,155 3,365 10,066 9,466
Fee income
Universal life charges 5,603 5,340 16,788 16,209
Annuity surrender charges 104 105 369 567
Total fee income 5,707 5,445 17,157 16,776
Other insurance income 2,911 1,665 6,382 5,054
Adjusted insurance revenues 11,773 10,475 33,605 31,296
Other expenses
Amortization of deferred policy
acquisition costs (1) 1,946 1,451 5,840 4,708
Renewal commissions 742 623 1,901 1,782
Other operating expenses 1,647 1,352 4,908 4,321
Total acquisition and operating
expenses 4,335 3,426 12,649 10,811
Death benefits, net 2,254 1,890 5,128 5,032
Other policyholder benefits, net 2,044 1,663 4,983 4,532
Total other expenses 8,633 6,979 22,760 20,375
Income before income taxes and realized
investment losses from insurance
operations $ 3,140 $ 3,496 $ 10,845 $ 10,921
<FN>
(1) Excludes excess amortization of deferred policy acquisition costs resulting
from net realized investment losses.
</FN>
</TABLE>
RESULTS OF OPERATIONS
Consolidated revenues for the nine months ended September 30, 1996 were $59.7
million, an 8% increase over the $55.2 million reported for the first nine
months of 1995. The increase was primarily attributable to life insurance
premiums and other insurance income net of reinsurance premiums ceded that rose
26.3%. This was because of increased sales of term life insurance. Also,
realized losses on investments decreased to $193,000 from $683,000.
11
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Consolidated revenues have grown at a slower rate over the last several quarters
due to lower sales of universal life and annuity products. Investment income and
policyholder assessments on universal life have shown decreases in growth
because of lower increases in invested assets and policyholder account balances.
Invested assets, on a cost basis, at September 30, 1996 grew 10.1% from
September 30, 1995 and policyholder account balances grew 10.8% over the same
time period.
For the third quarter only, consolidated revenues grew 10.4%. This was due
primarily to the 74.9% increase in life insurance premiums and other insurance
income net of reinsurance premiums ceded. This increase for the quarter was due
to higher term life insurance sales. Realized losses on investments decreased
79.3% to $49,000 from $235,000.
Operating income before taxes decreased 0.9% to $10.9 million from $11 million
for the nine months ended 1996 and 1995, respectively. Net income increased 2.3%
to $7.3 million ($1.32 per common share) from $7.1 million ($1.30 per common
share) for the same time periods. Operating earnings per common share for the
first nine months of 1996 were $1.34 compared to $1.38 for the first nine months
of 1995. For the third quarter only, operating income before taxes decreased
10.8% to $3.1 million from $3.5 million. Net income decreased to $2.1 million
($0.37 per common share) from $2.3 million ($0.42 per common share) for the same
time periods. Operating earnings per common share for the third quarter of 1996
were $0.38 compared to $0.44 for the third quarter of 1995.
Life Insurance Operations
The following analysis of life insurance operations should be read with
reference to the preceding tables.
Total life insurance in force grew 12.5% to $8.8 billion at September 30, 1996
from $7.8 billion at September 30, 1995. The increase was due to policy
retention and term life insurance sales.
The face amount of new life insurance sold directly by agents through September
30, 1996 increased 9.4% to $1.5 billion from $1.3 billion through September 30,
1995. The primary factor was a 38.7% increase in the face amount of new term
life insurance sold to $1.2 billion from $845.9 million. For the third quarter
only, the face amount of new term life insurance sold increased 98.3% to $512
million from $258.2 million. Sales of ALLIED Life's ten and twenty-year term
product have remained strong.
The face amount of new universal life insurance sold directly by agents
decreased 41.1% to $273.8 million through September 30, 1996 from $464.9 million
through September 30, 1995. For the third quarter only, the face amount of new
universal life insurance sold decreased 13.2% to $86.7 million from $99.9
million. Lower market interest rate levels have reduced the attractiveness of
the savings element of universal life products, especially in the Company's
traditional distribution system, affecting sales. Policyholder account balances
for universal life were up 8% to $178.4 million from $165.2 million.
First-year annuity premiums decreased 26.9% to $47.2 million through September
30, 1996 from $64.5 million through September 30, 1995. For the third quarter
only, first year annuity premiums increased 78.3% to $21.1 million from $11.8
million. Higher market interest rates in the third quarter combined with an
indexed deferred annuity product resulted in the higher third quarter annuity
premiums. This indexed annuity product (introduced in the second quarter of
1996) is expected to continue to contribute to sales growth for the
12
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
remainder of the second half of 1996. The total annuity account balance
increased 12.1% to $450.7 million at September 30, 1996 from $402.2 million at
September 30, 1995.
The Company's goals set in July, 1996 for the second half of 1996 are to sell
$325 million and $825 million of universal life and term life face amount,
respectively. The Company's goal for annuity production is $50 million of
first-year premium. The Company is on track to meet the term life goal and needs
a strong fourth quarter to meet the annuity premium goal. Due to slow third
quarter sales, the universal life goal will not be met.
Effective July 26, 1996, the Company split its property-casualty and traditional
distribution system into two separate areas of responsibility in an effort to
improve traditional distribution sales. The Company hired Joseph P. Ross as the
new marketing vice president for the traditional distribution system for life
and annuity products. Mr. Ross has twelve years experience in the insurance
industry, and his duties will be to recruit life marketing organizations and
develop their sales, specifically in universal life and annuity products. Thomas
F. Van Fossen, Vice President, Marketing, will be responsible for the marketing
and sales of life and annuity products in the property-casualty marketplace.
Adjusted insurance revenues increased 7.4% to $33.6 million for the first nine
months of 1996 from $31.3 million for the first nine months of 1995. For the
third quarter only, adjusted insurance revenues grew 12.4%. The increases were
primarily attributable to an increase in other insurance income. The growth was
due to an increase in term life insurance premiums.
The growth in life insurance in force and policyholder account balances
permitted invested assets, on a cost basis, to increase 10.8% to $685.1 million
at September 30, 1996 from $618.1 million at September 30, 1995, and investment
income increased by 6.3%. Investment income for the third quarter only grew 2%.
ALLIED Life's return on invested assets through September 30, 1996 decreased to
7.14% from 7.57% through September 30, 1995. The decreases were due to a hedging
program begun in the second quarter of 1996 (see page 14) and the fact that
ALLIED Life was reinvesting maturing investments at lower interest rates. Annual
average interest-credited rates on universal life contracts decreased to 5.44%
from 5.96% and on annuities decreased to 5.61% from 5.86%. Investment spread for
the first nine months of 1996 and 1995 grew to $10.1 million from $9.5 million.
For the third quarter only, the investment spread decreased to $3.2 million from
$3.4 million. The hedging program costs will be passed on to customers through
lower interest credited rates. Therefore, the cost of the interest rate hedging
program is not expected to have a material impact on the interest rate margin.
Amortization of deferred policy acquisition costs for the first nine months of
1996 and 1995 increased 24% to $5.8 million from $4.7 million. For the third
quarter only, amortization of deferred policy acquisition costs increased 34.1%
to $1.9 million from $1.5 million. Improved profitability within the universal
life line of business due to improved mortality experience and decreased
production leading to higher costs per unit were the main reason for the
increases. Other insurance operating expenses increased 13.6% to $4.9 million
from $4.3 million. For the third quarter only, other insurance operating
expenses increased 21.8% to $1.6 million from $1.4 million, primarily as a
result of an increase in long term care administration fees.
13
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Death benefits net of reinsurance for the first nine months of 1996 and 1995
increased 1.9% to $5.1 million from $5 million. For the third quarter only,
death benefits net of reinsurance increased 19.3% to $2.3 million from $1.9
million. Third quarter mortality was significantly higher due mainly to a high
number of suicides and accidental deaths, both of which are outside the realm of
underwriting decisions. Suicide cases are non contestable by the Company if the
policies have been in force longer than 2 years. Other policyholder benefits net
of reinsurance increased 9.9% to $5 million from $4.5 million. For the third
quarter only, these same costs increased 22.8% to $2 million from $1.7 million.
Increases were a result of increased reserves on both new term life sales and
future policyholder bonuses on universal life products.
ALLIED Life's operating income before taxes through September 30, 1996 and 1995
was down 0.7% to $10.8 million from $10.9 million. For the first nine months,
the Company has experienced higher term life insurance premiums, an improved
investment spread and only a slight increase in death benefits. These positives
have been more than offset by slow growth in fee income and higher amortization
of deferred policy acquisition costs. For the third quarter only, operating
income before taxes decreased 10.2% to $3.1 million from $3.5 million. Although
term life insurance premiums continued to improve in the quarter, they have been
offset by higher death benefits, amortization of deferred policy acquisition
costs, insurance operating expenses, and other policyholder benefits.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated
Life insurance companies generally produce a positive cash flow from operations.
Its adequacy is measured by the companies' liquidity. There should be sufficient
cash to meet benefit obligations to policyholders and normal operating expenses
as they are incurred and sufficient excess to help meet future policy benefit
payments and to write new business. ALLIED Life's liquidity position continued
to be favorable for the third quarter 1996. Cash inflows were at levels
sufficient to provide the grounds necessary to meet its obligations.
The Company's cash inflows consist primarily of deposits to policyholder account
balances, proceeds from sales, maturities and calls of investments, and
repayments of investment principal. The Company's cash outflows primarily are
related to policyholder account withdrawals, investment purchases, policy
acquisition costs, policyholder benefits, and current operating expenses. These
outflows typically are met from normal annual premium and net investment cash
inflows.
For the first nine months of 1996 the Company operations provided cash inflows
of $12.2 million and financing activities provided cash inflows of $36.3
million. For the first nine months of 1995 it was $4.9 million and $62.6
million, respectively. These inflows were used primarily to increase the
Company's fixed maturity investment portfolio.
Matching the investment portfolio maturities to the cash flow demands of the
insurance coverages being provided is an important consideration. The Company
continually monitors benefit and claims statistics to project future cash
requirements. As part of this monitoring process, the Company performs cash-flow
testing of its assets and liabilities under various scenarios to evaluate the
adequacy of reserves. In developing its
14
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
investment strategy, the Company establishes a level of cash and securities that
when combined with expected net cash inflows from operations, maturities of
fixed-maturity investments, principal payments on mortgage-backed securities,
and its insurance products is believed to be adequate to meet anticipated
short-term and long-term benefit and expense payment obligations.
A source of cash flows for the holding company is dividend payments from ALLIED
Life. Through the third quarter of 1996, the Company paid cash dividends on
common stock of $690,000. ALLIED Life paid to the Company dividends of $712,500
to fund the Company's dividend requirements.
The Company has a line of credit agreement that provides additional liquidity.
The agreement makes $25 million available through March 1, 1997. Interest is
payable at a current rate upon issuance. From time to time, the Company has also
borrowed funds from its affiliates on an arms-length basis. At September 30,
1996, the Company had outstanding borrowings of $13.5 million under the line of
credit agreement and$1.75 million in borrowings from affiliates.
Management anticipates that funds to meet the Company's short-term and long-term
capital expenditures, cash dividends, and operating cash needs will come from
existing capital and internally generated funds and believes the total is
adequate to meet expected cash obligations. As of September 30, 1996, the
Company had no material commitments for capital expenditures. As additional
capital needs arise, the Company will consider taking on additional debt or
issuing equity. Specific methods for meeting such needs will depend upon
financial market conditions at the time.
Hedging Activities
In June 1996, the Company began an interest rate hedging program whereby certain
derivative financial instruments including cash settle put swaptions
("swaptions") and interest rate floors ("floors") were purchased. Swaptions are
being purchased to reduce the negative effect of increased withdrawal activity
related to the Company's annuity liabilities which may result from extreme
increases in interest rates. The current agreements for these instruments, which
expire quarterly from June 1999 through March 2006, entitle the Company to
receive payments from the instrument's counter parties on future reset dates if
the interest rate (which is directly tied to the 5-year constant maturity swap
curve) on any expiration date is above a specified fixed rate (8.8% to 10.5% for
instruments entered into as of September 30, 1996). At September 30, 1996, the
Company had entered into agreements for a series of 44 quarterly swaptions with
notional amounts between $3 million and $9 million each or $244 million in
total.
Floors are being purchased to reduce the negative effect that may result from
extreme decreases in interest rates to a level below the guaranteed interest
rates provided for in the universal life insurance contracts. The current
agreements for the floors, which expire quarterly from June 1999 through March
2006, entitle the Company to receive payments from the instrument's counter
parties on future reset dates if the interest rate (which is tied directly to
the 10-year constant maturity treasury curve) on the expiration date is below a
specified fixed rate (5.0% for instruments entered into as of September 30,
1996). At September 30, 1996, the Company had entered into agreements for a
series of 28 floors with notional amounts between $140 million and $270 million.
15
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The cost of the interest rate hedging program is not expected to have a material
impact on the interest rate margin. For both swaptions and floors, the Company
pays only the original premium and is not at risk of further payments regardless
of market conditions. The Company does not anticipate making any further
purchases of interest rate hedges in 1996.
Premiums paid to enter these instruments are capitalized and included in other
invested assets. Through September 30, 1996, the Company had paid approximately
$4.1 million in premiums. Premiums are amortized into income over the term of
the instruments on a straight-line basis. Gains and losses on these instruments
and related assets or liabilities are not recorded in income until realized.
At the beginning of the second quarter of 1996 the Company introduced an equity
indexed annuity product. While guaranteeing the return of principal to the
customer, interest credited is based on a percentage of the gain of the S&P 500
index. A portion of the premium from each customer is invested in investment
grade fixed income securities to cover the minimum guaranteed value due the
customer at the end of the term. A portion of the premium is used to purchase
S&P 500 call options to hedge the growth in interest credited to the customer as
a direct result of increases in the S&P 500 index. The call options provide the
Company the opportunity to participate in the increases of the S&P 500 index if
the market advances. At September 30, 1996 the Company had entered into
agreements for 23 call options with notional amounts between $65,000 and
$900,000 or a total of $7.6 million.
Premiums paid to enter these instruments are capitalized and included in other
assets. Through September 30, 1996, the Company had paid approximately $1.6
million in premiums. Premiums are amortized as an expense over the term of the
instruments on a straight-line basis. Gains and losses on these instruments and
related assets or liabilities are not recorded in income until realized.
The FASB and the SEC are evaluating the accounting and disclosure requirements
for hedging activities and derivative financial instruments. The Company's
accounting treatment may change in the future. The Company is actively
monitoring the proposals which are in various stages of discussion and the
impact of the final standards cannot be clearly projected at this time.
The Company is exposed to the risk of losses in the event of non-performance of
the counter parties of the above swaptions, floors, and calls. Losses recorded
in the Company's financial statements in the event of non-performance will be
limited to the unamortized premium paid to enter into the instruments. Economic
losses would be measured by the net replacement cost, or market value, for such
instruments if the net market value is in the Company's favor. The Company
limits its exposure to such losses by diversification among reputable counter
parties with appropriate credit ratings.
Stock repurchase program
Effective August 6, 1996, the Board of Directors approved a stock repurchase
program to acquire shares of the Company common stock on the open market
pursuant to rule 10b-18 under the Securities Exchange Act of 1934. The Company
completed the program during the third quarter of 1996 and repurchased and
cancelled 150,000 shares at an average cost of $16.94 per share.
16
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
(b) There were no reports filed on Form 8-K during the third
quarter of 1996.
SIGNATURES
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.
ALLIED Life Financial Corporation
(Registrant)
Date: November 13, 1996 By: /s/ Wendell P. Crosser
Wendell P. Crosser, Vice President and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
17
Exhibit 11
ALLIED Life Financial Corporation and Subsidiaries
Computation of Per Share Earnings
For the nine months ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three months ended September 30,
1996 1995
Primary Fully Diluted Primary Fully Diluted
Net income $ 2,105,435 $ 2,105,435 $ 2,289,635 $ 2,289,635
Preferred stock dividends (379,578) (379,578) (355,002) (355,002)
Adjusted net income $ 1,725,857 $ 1,725,857 $ 1,934,633 $1,934,633
Earnings per share $ 0.37 $ 0.37 $ 0.41 $ 0.41
Weighted average number of
common shares outstanding 4,559,259 4,559,259 4,626,981 4,626,981
Effect of conversion of ESOP Series
preferred stock* 93,982 93,982 83,713 83,713
Dilutive effect of unexercised
stock options** 51,422 51,422 63,672 63,672
Total 4,704,663 4,704,663 4,774,366 4,774,366
Nine months ended September 30,
1996 1995
Primary Fully Diluted Primary Fully Diluted
Net income $ 7,266,830 $ 7,266,830 $ 7,101,841 $ 7,101,841
Preferred stock dividends (1,119,942) (1,119,942) (1,047,431) (1,047,431)
Adjusted net income $ 6,146,888 $ 6,146,888 $ 6,054,410 $6,054,410
Earnings per share $ 1.29 $ 1.29 $ 1.28 $ 1.28
Weighted average number of
common shares outstanding 4,609,230 4,609,230 4,607,789 4,607,789
Effect of conversion of ESOP Series
preferred stock* 95,477 95,477 85,552 85,552
Dilutive effect of unexercised
stock options** 57,547 59,596 51,465 54,146
Total 4,762,254 4,764,303 4,744,806 4,747,487
<FN>
* For purposes of computing primary and fully diluted earnings per share the
Company's ESOP convertible preferred stock (which is convertible to common
stock) is considered a common stock equivalent.
** Note: Primary - Based on average market price.
Fully Diluted - Based on the higher of the average market price or
the market price at the end of each period presented.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 465,468
<DEBT-CARRYING-VALUE> 663,862
<DEBT-MARKET-VALUE> 667,750
<EQUITIES> 6,145
<MORTGAGE> 1,577
<REAL-ESTATE> 0
<TOTAL-INVEST> 686,663
<CASH> 0
<RECOVER-REINSURE> 6,284
<DEFERRED-ACQUISITION> 96,285
<TOTAL-ASSETS> 804,453
<POLICY-LOSSES> 36,670
<UNEARNED-PREMIUMS> 82
<POLICY-OTHER> 1,718
<POLICY-HOLDER-FUNDS> 637,954
<NOTES-PAYABLE> 13,480
0
24,209
<COMMON> 4,491
<OTHER-SE> 68,762
<TOTAL-LIABILITY-AND-EQUITY> 804,453
5,210
<INVESTMENT-INCOME> 35,513
<INVESTMENT-GAINS> (193)
<OTHER-INCOME> 19,135
<BENEFITS> 35,526
<UNDERWRITING-AMORTIZATION> 5,764
<UNDERWRITING-OTHER> 7,581
<INCOME-PRETAX> 10,794
<INCOME-TAX> 3,527
<INCOME-CONTINUING> 7,267
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,267
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.29
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
