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 June 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 August 1, 1996:
4,640,639 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>
June 30, December 31,
1996 1995
Assets
Investments
Fixed maturities
Held to maturity at amortized cost
(fair value $207,774,617 in 1996
and $232,252,223 in 1995) $ 204,063,901 $ 219,418,225
Available for sale at fair value
(amortized cost $442,024,122 in 1996
and $401,492,967 in 1995) 442,104,524 425,098,718
Equity securities at fair value
(cost $5,269,706 in 1996 and $4,256,516 in 1995) 5,508,817 4,332,107
Mortgage loans on real estate 1,736,299 1,829,450
Policy loans 10,152,607 9,526,033
Other invested assets (note 4) 4,122,678 -----
Short-term investments, at cost (note 2) 1,527,097 721,612
Total investments 669,215,923 660,926,145
Accrued investment income 9,210,244 8,697,634
Accounts receivable 726,421 566,853
Reinsurance ceded receivables 5,374,238 7,626,401
Current income taxes recoverable ----- 869,664
Deferred policy acquisition costs 93,704,294 79,717,529
Other assets 2,401,224 1,543,033
Total assets $ 780,632,344 $ 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>
June 30, December 31,
1996 1995
Liabilities
Policy liabilities
Policyholder account balances
Annuity contracts $ 433,196,793 $ 412,216,412
Universal life contracts 175,160,508 168,654,188
Other 7,501,901 7,634,517
Future policy benefits 30,549,517 28,149,304
Policy and contract claims 3,382,047 4,827,540
Other policyholder funds 1,244,042 867,336
651,034,808 622,349,297
Checks drawn in excess of bank balances 1,434,267 2,037,432
Amounts payable to reinsurers 627,579 1,010,800
Current federal income taxes 882,287 -----
Deferred income taxes 8,685,242 13,452,845
Indebtedness to affiliates 155,679 139,380
Note payable (note 3) 16,930,000 16,605,000
Other liabilities 3,148,086 2,670,685
Total liabilities 682,897,948 658,265,439
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 2,073,133 in 1996 and 2,004,898 in 1995 22,493,493 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 4,640,487 in 1996 and 4,632,559 in 1995 4,640,487 4,632,559
Additional paid-in capital 48,895,500 48,773,783
Retained earnings 20,146,749 16,237,501
Unrealized appreciation of investments, net 221,900 9,167,054
Total stockholders' equity 97,734,396 101,681,820
Total liabilities and stockholders' equity $ 780,632,344 $ 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 Six Months Ended
June 30, June 30,
1996 1995 1996 1995
Revenues
Insurance revenues
Policyholder assessments on
universal life contracts $ 5,086,608 $ 5,070,441 $ 10,253,908 $ 9,971,618
Surrender charges 567,911 723,581 1,196,371 1,359,013
Life insurance premiums 3,212,473 2,566,100 6,045,360 5,596,892
Other insurance income 886,819 676,025 1,692,247 1,292,261
Reinsurance premiums ceded (2,203,904) (1,776,900) (4,267,624) (3,500,357)
Total insurance revenues 7,549,907 7,259,247 14,920,262 14,719,427
Investment income 11,936,957 11,218,969 23,686,874 21,907,011
Realized investment losses (60,290) (334,282) (144,474) (447,830)
Other income 270,109 165,248 558,095 304,187
19,696,683 18,309,182 39,020,757 36,482,795
Benefits and Expenses
Policyholder benefits
Interest credited to policyholder
account balances
Annuity contracts 6,056,648 5,582,778 11,857,101 10,808,117
Universal life contracts 2,348,317 2,366,554 4,723,579 4,753,637
Other 87,572 54,583 171,769 128,854
Death benefits 1,724,322 3,079,874 4,363,397 5,314,912
Other policyholder benefits 2,075,341 933,771 3,432,601 2,867,747
Reinsurance recoveries (847,120) (1,506,732) (1,982,775) (2,172,311)
Total policyholder benefits 11,445,080 10,510,828 22,565,672 21,700,956
Amortization of deferred policy
acquisition costs 2,109,686 1,874,813 3,842,280 3,231,074
Commissions 807,240 657,238 1,476,571 1,335,235
Affiliated operating expenses 286,429 342,317 609,585 717,078
Other insurance operating expenses 1,407,346 1,323,430 2,841,367 2,425,447
16,055,781 14,708,626 31,335,475 29,409,790
Income before income taxes 3,640,902 3,600,556 7,685,282 7,073,005
Income Taxes
Current 1,405,807 1,692,334 2,474,868 3,107,932
Deferred (229,000) (535,149) 49,019 (847,133)
1,176,807 1,157,185 2,523,887 2,260,799
Net Income $ 2,464,095 $ 2,443,371 $ 5,161,395 $ 4,812,206
Net income applicable to
common stock $ 2,066,844 $ 2,072,922 $ 4,372,859 $ 4,076,439
Earnings Per Common Share $ 0.45 $ 0.45 $ 0.95 $ 0.89
Weighted average number of
common shares outstanding 4,635,778 4,605,885 4,634,490 4,598,034
See accompanying Notes to Interim Consolidated Financial Statements
</TABLE>
4
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<TABLE>
ALLIED Life Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
Six Months Ended
June 30, 1996
<S> <C> <C>
1996 1995
Cash Flow From Operating Activities
Net income $ 5,161,395 $ 4,812,206
Adjustments to reconcile net income to net cash provided by
operating activities
Policyholder assessments on universal life contracts (10,253,908) (9,971,618)
Surrender charges (1,196,371) (1,359,013)
Interest credited to policyholder account balances 16,752,449 15,690,608
Realized investment losses 144,471 447,830
Change in
Accrued investment income (512,610) (429,871)
Reinsurance ceded receivables 2,252,163 (76,937)
Deferred policy acquisition costs (4,386,713) (6,298,676)
Liabilities for future policy benefits 2,400,213 2,251,755
Policy and contract claims and other policyholder funds (1,068,787) (813,440)
Income taxes
Current 1,751,951 1,323,821
Deferred 49,022 (847,133)
Other, net (818,183) (1,456,516)
Net cash provided by operating activities 10,275,092 3,273,016
Cash Flows from Investing Activities
Purchase of fixed maturities held to maturity (18,090,047) (29,848,837)
Maturities, calls, and principal reductions of fixed maturities
held to maturity 33,366,232 10,857,468
Purchase of fixed maturities available for sale (86,967,282) (101,687,339)
Proceeds from sale of fixed maturities available for sale 30,467,664 67,949,399
Maturities, calls, and principal reductions of fixed maturities
available for sale 15,799,671 1,446,322
Purchase of equity securities (1,013,190) -----
Proceeds from repayment of mortgage loans 92,420 127,578
Change in other invested assets, net (4,122,678) -----
Change in policy loans, net (626,574) (37,814)
Net cash used in investing activities (31,093,784) (51,193,223)
Cash Flows from Financing Activities
Change in checks drawn in excess of bank balances (603,165) (1,105,488)
Deposits to policyholder account balances 47,710,920 73,277,188
Withdrawals from policyholder account balances (25,644,914) (23,370,777)
Change in note payable, net 325,000 (3,340,000)
Proceeds from issuance of stock, net 348,133 712,961
Dividends paid to stockholders (511,797) (411,984)
Net cash provided by financing activities 21,624,177 45,761,900
Net Increase (Decrease) in Cash and Short-term Investments 805,485 (2,158,307)
Cash and short-term investments at beginning of year 721,612 3,465,285
Cash and short-term investments at end of quarter $ 1,527,097 $ 1,306,978
See accompanying Notes to Interim Consolidated Financial Statements
</TABLE>
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 June 30, 1996, ALLIED Mutual Insurance Company (ALLIED Mutual), an affiliated
property-casualty insurance company, controlled 53% 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 1995
Annual Report to Stockholders. 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 June 30, 1996, the Company had a cash balance,
net of loans outstanding, of $1,371,442. 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.
(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 June 30, 1996
borrowings on this line of credit agreement were $16,930,000 at an interest rate
of 5.57% per annum. All borrowings with the FHLB are secured by securities with
a carrying value of $30,798,892.
(4) Hedging Activities
In June 1996, the Company began an interest rate hedging program under whereby
certain derivative financial instruments including cash settle put swaptions
("swaptions") and interest rate floors ("floors") were purchased.
6
<PAGE>
ALLIED Life Financial Corporation and Subsidiaries
Notes to Interim Consolidated Financial Statements (Continued)
The Company also began to purchase S&P 500 call options as the 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 June 30, 1996.
Carrying
Value
Fair Value Hedges
Cash settle put swaptions $ 2,888,843
Interest rate floors 1,233,835
S&P 500 call options 616,145
Total $ 4,738,823
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 June 30, 1996). At June
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 June
30, 1996). At June 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
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
7
<PAGE>
ALLIED Life Financial Corporation and Subsidiaries
Notes to Interim Consolidated Financial Statements (Continued)
index. The call provides the Company the opportunity to participate in the
increases of the S&P 500 index if the market advances. At June 30, 1996 the
Company had entered into agreements for 7 call options with notional amounts
between $65,000 and $900,000.
Premiums paid to enter these instruments will be 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
the preliminary 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) Subsequent event
Effective August 6, 1996, the Board of Directors approved a stock repurchase
program to acquire up to 150,000 shares of the Company common stock on the open
market pursuant to rule 10b-18 under the Securities Exchange Act of 1934.
Completion of this program, expected within 24 months, is dependent upon market
conditions. The repurchase program may be terminated at any time at the
Company's discretion. The Company has no present intention to cause it shares to
be delisted or deregistered as a result of this repurchase program.
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 statments 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
comarison 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>
Three Months Ended Six Months Ended
June 30, June 30,
<S> <C> <C> <C> <C>
1996 1995 1996 1995
(Dollars in thousands)
Production information
Life insurance
Face amount in force
Directly produced by agents
Universal Life $ 4,244,770 $ 4,105,856
Term life 3,758,407 3,055,266
Whole life 49,392 49,911
8,052,569 7,211,033
Other 386,416 436,224
$ 8,438,985 $ 7,647,257
Face amount of new life insurance sold
Directly produced by agents
Universal Life $ 88,742 $ 122,919 $ 187,068 $ 365,061
Term life 366,919 302,050 660,752 587,653
Whole life 1,182 1,599 2,159 2,391
456,843 426,568 849,979 955,105
Other 6,858 3,630 11,205 9,587
$ 463,701 $ 430,198 $ 861,184 $ 964,692
Termination rate
Universal Life 6.5 % 6.8 % 6.8 % 7.3 %
Term life 17.5 % 21.7 % 17.6 % 20.6 %
Annuities
Account balance $ 433,197 $ 390,476
First-year annuity premiums $ 16,830 $ 23,536 $ 26,097 $ 52,702
</TABLE>
10
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
<TABLE>
Life Insurance Operations (Continued)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
<S> <C> <C> <C> <C>
1996 1995 1996 1995
(Dollars in thousands)
Investment income $ 11,924 $ 11,156 $ 23,663 $ 21,792
Interest credited on
Annuities 6,057 5,583 11,857 10,808
Universal life 2,348 2,367 4,724 4,754
Other 87 53 171 129
Total interest expense 8,492 8,003 16,752 15,691
Investment spread 3,432 3,153 6,911 6,101
Fee income
Universal life charges 5,500 5,584 11,185 10,869
nnuity surrender charges 155 210 265 462
Total fee income 5,655 5,794 11,450 11,331
Other insurance income 1,895 1,465 3,470 3,389
Adjusted insurance revenues 10,982 10,412 21,831 20,821
Other expenses
Amortization of deferred policy
acquisition costs (1) 2,131 1,851 3,893 3,257
Renewal commissions 591 565 1,159 1,160
Other operating expenses 1,664 1,547 3,261 2,968
Total acquisition and operating
expenses 4,386 3,963 8,313 7,385
Death benefits, net 1,371 1,573 2,874 3,143
Other policyholder benefits, net 1,582 935 2,939 2,868
Total other expenses 7,339 6,471 14,126 13,396
Income before income taxes and realized
investment losses from insurance
operations $ 3,643 $ 3,941 $ 7,705 $ 7,425
<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 six months ended June 30, 1996 were $39 million, a
7% increase over the $36.5 million reported for the first six months of 1995.
The increase was primarily attributable to higher investment income, which rose
8.1% to $23.7 million from $21.9 million. Also, realized losses on investments
decreased to $144,000 from $448,000.
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 June 30, 1996 grew 10.4% from June 30, 1995
and policyholder account balances grew 10% over the same time period.
For the second quarter only, consolidated revenues grew 7.6%. This was due
primarily to the 82% decrease in realized losses on investments. Again the
slower growth rate was due to slower sales of universal life and annuity
products.
Operating income before taxes increased 3.8% to $7.8 million from $7.5 million
for the six months ended 1996 and 1995, respectively. Net income increased 7.3%
to $5.2 million ($0.95 per common share) from $4.8 million ($0.89 per common
share) for the same time periods. Operating earnings per common share for the
first six months of 1996 were $0.96 compared to $0.95 for the first six month of
1995. For the second quarter only, operating income before taxes decreased 7.1%
to $3.7 million from $4.0 million. Net income increased to $2.5 million ($0.45
per common share) from $2.4 million ($0.45 per common share) for the same time
periods. Operating earnings per common share for the second quarter of 1996 were
$0.45 compared to $0.50 for the second 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 10.4% to $8.4 billion at June 30, 1996 from
$7.6 billion at June 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 June 30,
1996 decreased 11% to $850 million from $955.1 million through June 30, 1995.
The primary factor was a 48.8% decrease in the face amount of new universal life
insurance sold to $187.1 million from $365.1 million. For the second quarter
only, the face amount of new universal life insurance sold decreased 27.8% to
$88.7 million from $122.9 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 8.1% to $175.2 million
from $162 million.
The face amount of new term life insurance sold directly by agents increased
12.4% to $660.8 million through June 30, 1996 from $587.7 million through June
30, 1995. For the second quarter only, the face amount of new term life
insurance sold increased 21.5% to $366.9 million from $302.1 million. Sales of
ALLIED Life's ten and twenty-year term product have remained strong.
First-year annuity premiums decreased 50.5% to $26.1 million through June 30,
1996 from $52.7 million through June 30, 1995. For the second quarter only,
first year annuity premiums decreased 28.4% to $16.8 million from $23.5 million.
The decrease in annuity production was due to lower market interest rates.
Higher market interest rates in the second quarter combined with the
introduction of an indexed deferred annuity product resulted in second quarter
annuity premiums of $16.8 million and that compared to $9.3 million of annuity
premiums for the first quarter of 1996. This new indexed annuity product is
expected to contribute to sales growth for the second half of 1996. The total
12
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
annuity account balance increased 10.9% to $433.2 million at June 30, 1996
from $390.5 million at June 30, 1995.
The Company's goals 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 expects sales of its ten and twenty-year term products to remain strong
for the remainder of the year. 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 4.9% to $21.8 million for the first six
months of 1996 from $20.8 million for the first six months of 1995. The increase
was primarily attributable to increased investment spread. The growth in life
insurance in force and policyholder account balances permitted invested assets,
on a cost basis, to increase 11% to $668 million at June 30, 1996 from $601.8
million at June 30, 1995, allowing investment income to increase by 8.6%. ALLIED
Life's return on invested assets through June 30, 1996 decreased to 7.25% from
7.56% through June 30, 1995. The decrease was due to the fact that ALLIED Life
was reinvesting maturing investments at lower interest rates.
Investment spread for the first six months of 1996 and 1995 grew to $6.9 million
from $6.1 million. For the second quarter only, the investment spread grew to
$3.4 million from $3.2 million. Annual average interest-credited rates on
universal life contracts decreased to 5.49% from 5.98% and on annuities
decreased to 5.61% from 5.88%. The ratio of investment spread to investment
income increased to 29.2% from 28.0% despite the volatile interest rate
environment. This increase is evidence of ALLIED Life's ability to adjust
interest credited to policyholder accounts to reflect trends in investment
earnings.
Amortization of deferred policy acquisition costs for the first six months of
1996 and 1995 increased 19.6% to $3.9 million from $3.3 million. For the second
quarter only, amortization of deferred policy acquisition costs increased 15.2%
to $2.1 million from $1.9 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 9.9% to $3.3 million
from $3 million. For the second quarter only, other insurance operating expenses
increased 7.5% to $1.7 million from $1.5 million, a result of product
development costs, agent recruiting, and overall growth.
Death benefits net of reinsurance for the first six months of 1996 and 1995
decreased 8.5% to $2.9 million from $3.1 million. For the second quarter only,
death benefits net of reinsurance decreased 12.9% to $1.4 million from $1.6
million. Other policyholder benefits net of reinsurance remained steady at $2.9
million through both quarters. For the second quarter only, other policyholder
benefits net of reinsurance increased 69.4% to $1.6 million from $934,000.
Increases for the quarter were a result of increased reserves on both new term
life sales and future policyholder bonuses on universal life products.
13
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
ALLIED Life's operating income before taxes through June 30, 1996 and 1995 was
up 3.8% to $7.7 million from $7.4 million. For the first six months, the Company
has experienced an improved investment spread and lower death benefits. These
positives have been offset by slow growth in fee income and higher amortization
of deferred policy acquisition costs. For the second quarter only, operating
income before taxes decreased 7.6% to $3.6 million from $3.9 million. Although
investment income and death benefits continued to improve in the quarter, they
have been offset by lower fee income, increased amortization of deferred policy
acquisition costs 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 second 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, income 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 six months of 1996 the Company operations provided cash inflows
of $10.3 million and financing activities provided cash inflows of $21.6
million. For the first six months of 1995 it was $3.3 million and $45.8
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 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 second quarter of 1996, the Company paid cash dividends on
common stock of $460,000. ALLIED Life paid to the Company dividends of $475,000
to fund the Company's dividend requirements.
14
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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 June 30, 1996,
the Company had outstanding borrowings of $16.9 million under the line of credit
agreements and no 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 June 30, 1996, the Company had
no material commitments for capital expenditures. As additional capital needs
arise, the Company will consider taking an additional debt or issuing equity.
Specific methods for meeting such needs will depend upon financial market
conditions at the time.
Hedging Program
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 June 30, 1996). At June 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 June 30, 1996). At
June 30, 1996, the Company had entered into agreements for a series of 28 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.
Premiums paid to enter these instruments are capitalized and included in other
invested assets. Through June 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.
15
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Investment in S&P 500 Call Options
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 June 30, 1996 the Company had entered into agreements
for 7 call options with notional amounts between $65,000 and $900,000 or a total
of $2.9 million.
Premiums paid to enter these instruments are capitalized and included in other
assets. Through June 30, 1996, the Company had paid approximately $623,000 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 the preliminary 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.
Subsequent Event
Effective August 6, 1996, the Board of Directors approved a stock repurchase
program to acquire up to 150,000 shares of the Company common stock on the open
market pursuant to rule 10b-18 under the Securities Exchange Act of 1934.
Completion of this program, expected within 24 months, is dependent upon market
conditions. The repurchase program may be terminated at any time at the
Company's discretion. The Company has no present intention to cause it shares to
be delisted or deregistered as a result of this repurchase program.
16
<PAGE>
PART II
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on May 1, 1996.
(b) John E. Evans was elected to serve as director of the Company for a term of
three yearswhich expires in 1999. Current directors whose terms expire in
1997 are Harold S. Evans and George D. Milligan. Current directors whose
terms expire in 1998 are James W. Callison and Dennis H. Kelly, Jr.
For Withheld
John E. Evans 6,366,367 800
Item 6. Exhibits and Reports on Form 8-K
(b) There were no reports filed on Form 8-K during the second 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: August 9, 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 six months ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Three months ended June 30,
<S> <C> <C> <C> <C>
1996 1995
Primary Fully Diluted Primary Fully Diluted
Net income $ 2,464,095 $ 2,464,095 $ 2,443,371 $ 2,443,371
Preferred stock dividends (373,279) (373,279) (349,111) (349,111)
Adjusted net income $ 2,090,816 $ 2,090,816 $ 2,094,260 $ 2,094,260
Earnings per share $ 0.44 $ 0.44 $ 0.44 $ 0.44
Weighted average number of
common shares outstanding 4,635,778 4,635,778 4,605,885 4,605,885
Effect of conversion of ESOP Series
preferred stock* 95,975 95,975 86,124 86,124
Dilutive effect of unexercised
stock options** 66,893 73,668 45,603 52,746
Total 4,798,646 4,805,421 4,737,612 4,744,755
Six months ended June 30,
1996 1995
Primary Fully Diluted Primary Fully Diluted
Net income $ 5,161,395 $ 5,161,395 $ 4,812,206 $ 4,812,206
Preferred stock dividends (740,364) (740,364) (692,429) (692,429)
Adjusted net income $ 4,421,031 $ 4,421,031 $ 4,119,777 $ 4,119,777
Earnings per share $ 0.92 $ 0.92 $ 0.87 $ 0.87
Weighted average number of
common shares outstanding 4,634,490 4,634,490 4,598,034 4,598,034
Effect of conversion of ESOP Series
preferred stock* 96,233 96,233 86,487 86,487
Dilutive effect of unexercised
stock options** 60,610 63,683 45,361 49,384
Total 4,791,333 4,794,406 4,729,882 4,733,905
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 442,105
<DEBT-CARRYING-VALUE> 646,168
<DEBT-MARKET-VALUE> 649,879
<EQUITIES> 5,509
<MORTGAGE> 1,736
<REAL-ESTATE> 0
<TOTAL-INVEST> 669,216
<CASH> 0
<RECOVER-REINSURE> 5,374
<DEFERRED-ACQUISITION> 93,704
<TOTAL-ASSETS> 780,632
<POLICY-LOSSES> 33,932
<UNEARNED-PREMIUMS> 77
<POLICY-OTHER> 1,167
<POLICY-HOLDER-FUNDS> 615,859
<NOTES-PAYABLE> 16,930
0
23,830
<COMMON> 4,640
<OTHER-SE> 69,264
<TOTAL-LIABILITY-AND-EQUITY> 780,632
2,733
<INVESTMENT-INCOME> 23,687
<INVESTMENT-GAINS> (144)
<OTHER-INCOME> 12,746
<BENEFITS> 22,566
<UNDERWRITING-AMORTIZATION> 3,842
<UNDERWRITING-OTHER> 4,928
<INCOME-PRETAX> 7,685
<INCOME-TAX> 2,524
<INCOME-CONTINUING> 5,161
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,161
<EPS-PRIMARY> 0.92
<EPS-DILUTED> 0.92
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
