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 September 30, 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: 0-1283
American Life Holdings, Inc.
Delaware No. 42-0951848
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State of Incorporation IRS Employer Identification No.
11825 N. Pennsylvania Street
Carmel, Indiana 46032 (317) 817-6100
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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 November 1, 1996: 18,876,858
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN LIFE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
ASSETS
Prior basis
------------
September 30, December 31,
1996 1995
---- -----
(unaudited) (audited)
<S> <C> <C>
Investments:
Actively managed fixed maturity securities at fair value (amortized cost:
1996 - $4,897.8; 1995 - $4,667.3).................................................. $4,940.3 $5,083.1
Equity securities at fair value (cost: 1996 - $12.1; 1995 - $16.5)................... 12.8 18.8
Credit-tenant loans.................................................................. 25.3 13.6
Mortgage loans....................................................................... 59.1 64.6
Policy loans......................................................................... 63.7 62.9
Short-term investments............................................................... 95.0 108.2
Other invested assets................................................................ 21.1 18.2
-------- --------
Total investments.............................................................. 5,217.3 5,369.4
Accrued investment income............................................................... 81.3 80.8
Cost of policies purchased.............................................................. 382.7 250.1
Cost of policies produced............................................................... 54.6 77.6
Income tax assets....................................................................... 25.4 -
Property and equipment (net of accumulated depreciation: 1996 - $1.4; 1995 - $1.1)...... 6.2 8.9
Securities segregated for the future redemption of redeemable
preferred stock of a subsidiary...................................................... 45.0 39.2
Goodwill (net of accumulated amortization: 1996 - $18.1; 1995 - $11.3).................. 399.3 348.9
Other assets............................................................................ 31.3 33.1
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Total assets................................................................... $6,243.1 $6,208.0
======== ========
(continued on next page)
The accompanying notes are an integral
part of the consolidated financial
statements.
2
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AMERICAN LIFE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, continued
(Dollars in millions, except per share amounts)
LIABILITIES AND SHAREHOLDERS' EQUITY
Prior basis
------------
September 30, December 31,
1996 1995
---- -----
(unaudited) (audited)
<S> <C> <C>
Liabilities:
Insurance liabilities............................................................... $5,278.7 $5,148.7
Income tax liabilities.............................................................. - 38.1
Investment borrowings............................................................... 123.1 130.7
Contingent consideration payable upon determination of the Savings Bank Litigation.. 30.1 30.1
Other liabilities................................................................... 72.8 71.5
Accounts payable to affiliates...................................................... .8 1.2
Notes payable....................................................................... 171.3 282.5
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Total liabilities............................................................. 5,676.8 5,702.8
Minority interest, primarily redeemable preferred stock of a subsidiary................ 99.6 99.6
Shareholders' equity:
Series Preferred Stock ............................................................. 72.9 66.6
Common stock, $1 par value, and additional paid-in capital; 35,000,000
shares authorized; shares issued and outstanding: 1996 - 18,876,858;
1995 - 13,442,075................................................................. 344.8 75.9
Unrealized appreciation of securities:
Fixed maturity securities (net of applicable
deferred income taxes: 1996 - $7.4; 1995 - $105.0).............................. 13.8 194.9
Other investments (net of applicable deferred income taxes:
1996 - $.3; 1995 - $.8)......................................................... .5 1.5
Retained earnings................................................................... 34.7 66.7
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Total shareholders' equity.................................................... 466.7 405.6
-------- --------
Total liabilities and shareholders' equity.................................... $6,243.1 $6,208.0
======== ========
The accompanying notes are an integral
part of the consolidated financial
statements.
3
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AMERICAN LIFE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions, except per share amounts)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
-------------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income.................................. $ 10.9 $ 13.8 $ 33.0 $ 43.6
Net investment income.................................... 102.7 105.4 306.4 312.9
Net trading income....................................... 1.1 .3 .1 1.1
Net realized gains....................................... 5.8 11.1 9.8 63.2
Other income............................................. 1.2 1.5 3.9 4.9
------ ------ ------ -------
Total revenues..................................... 121.7 132.1 353.2 425.7
------ ------ ------ -------
Benefits and expenses:
Insurance policy benefits................................ 6.1 7.0 18.1 22.0
Change in future policy benefits......................... .6 1.5 (.2) 2.5
Interest expense on annuities and financial products..... 62.2 64.9 184.2 194.3
Interest expense on notes payable........................ 7.2 8.3 21.5 25.7
Interest expense on investment borrowings................ 1.1 2.3 2.9 6.7
Amortization of cost of policies purchased
and cost of policies produced:
Related to operations................................ 11.2 9.3 29.4 26.4
Related to realized gains............................ 2.2 4.4 4.8 33.6
Amortization of goodwill................................. 2.3 2.3 6.8 6.8
Restructuring expenses................................... 4.3 - 5.7 -
Other operating costs and expenses....................... 5.8 7.7 18.8 23.8
------ ------ ------ ------
Total benefits and expenses........................ 103.0 107.7 292.0 341.8
------ ------ ------ ------
Income before income taxes, minority interest
and extraordinary charge......................... 18.7 24.4 61.2 83.9
Income tax expense.......................................... 7.3 9.4 23.6 31.7
------ ------ ------ ------
Income before minority interest and
extraordinary charge............................. 11.4 15.0 37.6 52.2
Minority interest - primarily dividends on redeemable
preferred stock of a subsidiary.......................... 2.2 2.2 6.6 6.6
------ ------ ------ ------
Income before extraordinary charge................. 9.2 12.8 31.0 45.6
Extraordinary charge on extinguishment of debt,
net of income tax benefit................................ .8 - .8 -
------ ------ ------ ------
Net income......................................... 8.4 12.8 30.2 45.6
Less preferred stock dividends.............................. 2.1 1.9 6.3 5.6
------ ------ ------ ------
Net income applicable to common stock.............. $ 6.3 $ 10.9 $ 23.9 $ 40.0
====== ====== ====== ======
The accompanying notes are an
integral part of the consolidated
financial statements.
4
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AMERICAN LIFE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in millions)
(unaudited)
Nine months ended
September 30,
--------------------
1996 1995
---- ----
(prior basis)
<S> <C> <C>
Series Preferred Stock:
Balance, beginning of period....................................................... $ 66.6 $ 58.9
Accrued dividends on 1994 Series Preferred Stock................................. 6.3 5.6
------- -------
Balance, end of period............................................................. $ 72.9 $ 64.5
======= =======
Common stock and additional paid-in capital:
Balance, beginning of period....................................................... $ 75.9 $ 45.9
Issuance of common stock......................................................... 125.0 -
Adjustment of balance due to adoption of new basis............................... 143.9 -
------- -------
Balance, end of period............................................................. $ 344.8 $ 45.9
======= =======
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities:
Balance, beginning of period..................................................... $ 194.9 $ (28.5)
Change in unrealized appreciation (depreciation)............................... (159.0) 191.8
Adjustment of balance due to adoption of new basis............................. (22.1) -
------- -------
Balance, end of period........................................................... $ 13.8 $ 163.3
======= =======
Other investments:
Balance, beginning of period..................................................... $ 1.5 $ (.5)
Change in unrealized appreciation (depreciation)............................... (.1) 1.9
Adjustment of balance due to adoption of new basis............................. (.9) -
------- -------
Balance, end of period........................................................... $ .5 $ 1.4
======= =======
Retained earnings:
Balance, beginning of period....................................................... $ 66.7 $ 3.3
Net income....................................................................... 30.2 45.6
Preferred stock dividends (payable in additional shares)......................... (6.3) (5.6)
Adjustment of balance due to adoption of new basis............................... (55.9) -
------- -------
Balance, end of period............................................................. $ 34.7 $ 43.3
======= =======
Total shareholders' equity....................................................... $ 466.7 $ 318.4
======= =======
The accompanying notes are an integral
part of the consolidated financial
statements.
5
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AMERICAN LIFE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(unaudited)
Nine months ended
September 30,
----------------------
1996 1995
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Cash flows from operating activities:
Net income....................................................................... $ 30.2 $ 45.6
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and depreciation.................................................. 41.5 67.6
Income taxes................................................................... 18.0 32.8
Insurance liabilities.......................................................... 26.1 25.8
Interest credited to insurance liabilities..................................... 184.2 194.3
Fees charged to insurance liabilities.......................................... (24.5) (21.9)
Accrual and amortization of investment income.................................. (16.8) (52.0)
Deferral of cost of policies produced.......................................... (61.7) (58.0)
Other liabilities.............................................................. (1.6) (11.7)
Extraordinary charge on extinguishment of debt................................. 1.3 -
Realized (gains) and trading (income) losses on investments.................... (9.9) (64.3)
Other.......................................................................... (1.9) (3.7)
-------- --------
Net cash provided by operating activities.................................. 184.9 154.5
-------- --------
Cash flows from investing activities:
Purchases of investments......................................................... (1,323.4) (1,987.9)
Sales of investments............................................................. 1,067.0 1,691.5
Maturities and redemptions....................................................... 123.7 46.5
-------- --------
Net cash used by investing activities...................................... (132.7) (249.9)
-------- --------
Cash flows from financing activities:
Proceeds from sale of stock to Conseco, Inc...................................... 125.0 -
Payments on notes payable........................................................ (125.0) (15.0)
Investment borrowings, net....................................................... (7.6) 60.8
Cash released from segregated account for redemption of Convertible Debentures... - 9.2
Conversion and redemption of Convertible Debentures.............................. (2.1) (9.2)
Deposits to insurance liabilities................................................ 529.4 625.2
Withdrawals from insurance liabilities........................................... (585.1) (580.5)
-------- --------
Net cash provided (used) by financing activities........................... (65.4) 90.5
-------- --------
Net decrease in short-term investments..................................... (13.2) (4.9)
Short-term investments, beginning of period......................................... 108.2 53.6
-------- --------
Short-term investments, end of period............................................... $ 95.0 $ 48.7
======== ========
The accompanying notes are an integral
part of the consolidated financial
statements.
6
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AMERICAN LIFE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In 1996, American Life Holdings, Inc. ("we" or the "Company") changed its
name from American Life Group, Inc. (formerly The Statesman Group, Inc. prior to
its name change in 1995). The following notes should be read in conjunction with
the notes to the consolidated financial statements included in the Company's
1995 Form 10-K.
SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements as of and for the periods
ended September 30, 1996 and 1995, reflect all adjustments (consisting only of
normal recurring items) necessary to present fairly the Company's financial
position and results of operations. To conform with the current presentation,
certain amounts previously reported have been reclassified. In preparing
financial statements in conformity with generally accepted accounting
principles, we are required to make estimates and assumptions that significantly
affect various reported amounts. For example, we use significant estimates and
assumptions in calculating the cost of policies produced, the cost of policies
purchased, goodwill, insurance liabilities, liabilities related to litigation,
guaranty fund assessment accruals and deferred income taxes. If our future
experience differs from these estimates and assumptions, our financial
statements would be affected.
On September 29, 1994, Conseco Capital Partners II, L.P. ("Partnership
II"), a Delaware limited partnership, completed the acquisition (the
"Acquisition") of the Company. The sole general partner of Partnership II was a
wholly owned subsidiary of Conseco, Inc. ("Conseco"). As a result of the
acquisition and related financing transactions, Partnership II owned 80 percent
of the Company's outstanding common stock. Conseco, through its direct
investment and interests in certain of its subsidiaries, had a 38 percent
ownership interest in the Company prior to the transactions described in the
following paragraph.
Effective September 30, 1996, Conseco and its subsidiaries purchased all of
the outstanding common stock of the Company not already owned by Conseco and its
subsidiaries for approximately $165 million in cash (the "Conseco Transaction").
Subsequent to the Conseco Transaction, Conseco and its subsidiaries own all the
outstanding shares of the Company's common stock. At the same time as the
Conseco Transaction, Conseco purchased 5,434,783 newly issued shares of the
Company's common stock for $125.0 million. The Company used the proceeds from
the stock sale to repay all amounts borrowed under the senior credit facility.
As a result of the Conseco Transaction, a new basis of accounting under the
"push down" method was adopted effective September 30, 1996. Under this method,
the assets and liabilities of the Company were revalued to reflect Conseco's
cost basis, which is based on the fair values of such assets and liabilities on
the dates Conseco's ownership interests were acquired. The new accounting basis
was reflected in the consolidated balance sheet and statement of shareholders'
equity at September 30, 1996, and will be reflected in the statements of
operations and cash flows in periods subsequent to September 30, 1996. As a
result, the assets and liabilities of the Company included in the September 30,
1996, consolidated balance sheet reflect the following combination of values:
(i) the portion of the Company's net assets acquired by Conseco in the
Acquisition of the Company made by Partnership II is valued as of September 29,
1994; and (ii) the portion of the Company's net assets acquired in the Conseco
Transaction is valued as of September 30, 1996.
7
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AMERICAN LIFE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The effect of the adoption of the new basis of accounting on the Company's
balance sheet accounts is as follows (dollars in millions):
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Debit
(Credit)
--------
<S> <C>
Cost of policies purchased................................................... $ 110.0
Cost of policies produced.................................................... (88.0)
Goodwill..................................................................... 57.2
Mortgage loans............................................................... 1.6
Income tax assets............................................................ (4.2)
Securities segregated for the future redemption of redeemable
preferred stock of a subsidiary............................................ 3.5
Other liabilities............................................................ (1.3)
Notes payable................................................................ (13.8)
Common stock and additional paid-in capital.................................. (143.9)
Net unrealized appreciation of securities.................................... 23.0
Retained earnings............................................................ 55.9
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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, through its wholly owned
subsidiary, American Life Holding Company ("American Life Holding"), owns 100
percent of American Life and Casualty, which owns 98 percent of Vulcan Life.
ADJUSTMENT TO ACTIVELY MANAGED FIXED MATURITY SECURITIES
We classify fixed maturity securities into three categories: "actively
managed" and "trading account" (which we carry at estimated fair value) and
"held to maturity" (which we carry at amortized cost). We did not classify any
fixed maturity investments in the trading account or held to maturity categories
at September 30, 1996 or December 31, 1995. When we adjusted the carrying value
of our actively managed fixed maturity securities to fair value (as described in
note 1 to the consolidated financial statements included in the Company's 1995
Form 10-K) at September 30, 1996, we also adjusted several related balance sheet
accounts as follows:
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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............................... $4,897.8 $ 42.5 $4,940.3
Cost of policies purchased............................................... 398.7 (16.0) 382.7
Cost of policies produced................................................ 59.9 (5.3) 54.6
Income tax assets ....................................................... 32.8 (7.4) 25.4
Unrealized appreciation of fixed maturity securities..................... - 13.8 13.8
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8
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AMERICAN LIFE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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. We account for these transactions as
short-term collateralized borrowings. Such borrowings averaged approximately
$73.0 million and $156.3 million during the nine months ended September 30, 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 5.3 percent and 5.7 percent for
the nine months ended September 30, 1996 and 1995, respectively.
CHANGES IN NOTES PAYABLE
Effective September 30, 1996, the Company repaid the $125.0 million
principal balance outstanding under the senior credit facility using the
proceeds from the sale of stock to Conseco. As a result of the repayment, the
Company recognized an extraordinary charge of $.8 million, net of an income tax
benefit of $.5 million.
During the nine months ended September 30, 1996, $2.1 million principal
amount of the Company's 6-1/4% Convertible Debentures due 2003 (the "Convertible
Debentures") was redeemed and converted, leaving $13.0 million outstanding at
September 30, 1996.
In connection with the Conseco Transaction, Conseco guaranteed the
Company's obligations under its senior subordinated notes due in 2004.
See "Significant Accounting Policies" above for a discussion of the change
in basis resulting from the Conseco Transaction and the adoption of the "push
down" method of accounting.
CHANGES IN CAPITAL STOCK
Effective September 30, 1996, the Company issued approximately 5.4 million
shares to Conseco for $125.0 million. The proceeds were used to repay amounts
outstanding under the Company's senior credit facility.
See "Significant Accounting Policies" above for a discussion of the change
in basis resulting from the Conseco Transaction and the adoption of the "push
down" method of accounting.
SERIES PREFERRED STOCK
In connection with the Acquisition, the Company issued 57,000 shares ($57.0
million) of 1994 Series Preferred Stock in a private placement transaction.
During the quarter ended September 30, 1996, Conseco purchased all such stock
issued but not owned by Conseco for carrying value plus accrued dividends.
Dividends on the 1994 Series Preferred Stock are cumulative through 2005
and accrue annually at 13 percent, payable in additional shares of 1994 Series
Preferred Stock. Thereafter, dividends are payable quarterly at 15 percent per
annum in cash. At September 30, 1996, the carrying value of the 1994 Series
Preferred Stock includes $8.4 million of dividends accrued but undistributed.
CONTINGENT CONSIDERATION PAYABLE UPON DETERMINATION OF SAVINGS BANK
LITIGATION
In conjunction with the Acquisition, each common or equivalent share of the
Company outstanding immediately prior to the Acquisition received a contingent
payment right, designed to provide holders with certain financial benefits that
the Company may receive from a favorable determination of the litigation against
the United States of America (the "Savings Bank Litigation"). This litigation is
described in the notes to the consolidated financial statements included in the
1995 Form 10-K. At the Acquisition date, we established a liability of $30.1
million, representing the consideration that would be payable either to the
holder of the Company's 1988 Series I and Series II Preferred Stock (the "1988
Series Preferred Stock"), or to the Company'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 Company is
unable to predict when such $30.1 million amount will become payable.
9
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AMERICAN LIFE HOLDINGS, INC. 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 Company's favor by a decision of nine to two. On July 1, 1996, the
Supreme Court affirmed the summary judgment of the Court of Federal Claims in
the Company's favor by a decision of seven to two. A trial has been scheduled
for February 25, 1997, in the Court of Federal Claims to determine damages
related to the breach of contract by the United States of America.
At September 30, 1996, cumulative dividends in arrears on the 1988 Series
Preferred Stock were $7.8 million, of which $5.5 million had been accrued.
RELATED PARTY TRANSACTIONS
The Company receives services from Conseco under agreements, including
insurance services and investment management agreements. Fees charged under all
such agreements totaled $11.4 million and $9.7 million for the nine months ended
September 30, 1996 and 1995, respectively.
SUBSEQUENT EVENT
In conjunction with the Company's efforts to reduce its operating expenses
and improve its profitability, the Company has formulated a plan and is in the
process of closing its home office in Des Moines, Iowa, and consolidating its
operations with Conseco in Carmel, Indiana. During the quarter ended September
30, 1996, the Company recorded a $4.3 million restructuring charge, which is the
estimated cost to complete the consolidation based on management's plan, which
is scheduled to be completed in November 1996. Principal items included in the
charge are contract termination costs, severance and related benefits for
employee reductions and other expenses. At September 30, 1996, the balance of
the restructuring charge which was unpaid was $4.3 million, all of which should
be paid during 1996.
10
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AMERICAN LIFE HOLDINGS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion addresses the principal factors affecting the
Company's earnings and financial condition, including liquidity and capital
resources. Financial results for periods subsequent to September 30, 1996, will
reflect the adoption of a new basis of accounting under the "push down" method
and, accordingly, future results may not be comparable with results prior to the
Conseco Transaction. 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
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 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 24 percent, to $33.0 million in the first
nine months of 1996. This decrease was primarily the result of a $13.3 million
reduction in life insurance premiums primarily related to group life insurance
business coinsured to an unaffiliated company at the end of 1995, partially
offset by an increase in surrender charges earned on annuity policy withdrawals.
Surrender charges assessed against annuity withdrawals for the first nine months
of 1996 were $13.7 million compared to $11.3 million for the first nine months
of 1995; annuity policy withdrawals were $576.6 million and $566.8 million for
the respective periods. See "Liquidity and Capital Resources" for a discussion
of withdrawals and surrenders.
Net investment income decreased 2.1 percent to $306.4 million in the first
nine months of 1996 from $312.9 million in the first nine months of 1995. The
average invested assets (amortized cost basis) increased to $5.0 billion in 1996
from $4.7 billion in 1995 while the yield earned on average invested assets
declined to 8.19 percent in 1996 from 8.91 percent in 1995. Cash flows received
during 1995 and the first nine months of 1996 (including cash flows from the
sales of investments) were invested in lower-yielding securities due to a
general decline in interest rates.
Net realized gains and net trading income often fluctuate from period to
period. The Company sold $1.1 billion of investments (principally fixed maturity
securities) in the first nine months of 1996, compared to approximately $1.7
billion in 1995, generating net realized gains of $9.8 million and net trading
gains of $.1 million in the first nine months of 1996, compared to net realized
gains of $69.2 million and net trading income of $1.1 million in 1995. In
addition, during the first nine months of 1995 the Company recorded a realized
loss of $6.0 million on the writedown of an investment as a result of changes in
conditions which caused the Company to conclude that the decline in its fair
value was other than temporary. 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 1995, and to a lesser extent, in 1996.
Selling securities at a gain and reinvesting the proceeds at lower yields
may, absent other management action, tend to decrease future investment yields.
We believe, however, that 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.
Insurance policy benefits and change in future policy benefits decreased 27
percent to $17.9 million in the first nine months of 1996 primarily as a result
of the reinsuring of the group life insurance business to an unaffiliated
company at the end of 1995.
Interest expense on annuities and financial products decreased 5.2 percent,
to $184.2 million in the first nine months of 1996 primarily due to: (i) lower
crediting rates and (ii) the expensing in 1995 of first-year interest rate
bonuses of approximately $5.9 million on policies issued prior to the
Acquisition date as a result of the application of purchase accounting. 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 September 30, 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 September 30, 1995.
Interest expense on notes payable decreased 16 percent, to $21.5 million in
the first nine months of 1996 due to scheduled and unscheduled reductions in
outstanding indebtedness and from lower interest rates on the borrowings.
Interest expense on investment borrowings decreased 57 percent, to $2.9
million in the first nine months of 1996 due to a lower average balance of funds
borrowed and a lower average cost of funds.
11
<PAGE>
AMERICAN LIFE HOLDINGS, INC. AND SUBSIDIARIES
Amortization related to operations (consisting of amortization of the cost
of policies purchased for business in force at the Acquisition date and the cost
of policies produced after the Acquisition date) increased 11 percent to $29.4
million in the first nine months of 1996. Higher amortization of the cost of
policies produced reflected an increase in the amount of business in force
issued since the Acquisition date.
Cost of policies produced represents the cost (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 the lowest
commission paid each year the policy is in force and bonus interest credited
through the first policy anniversary date).
Cost of policies purchased represents the portion of Partnership II's cost
to acquire the Company that is attributable to the right to receive cash flows
from existing insurance contracts. Some costs incurred after 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), were expensed.
Examples include commissions paid in excess of the lowest commissions paid each
year the policy is in force and bonus interest. However, such amounts were
considered in determining the cost of policies purchased and related
amortization.
Amortization related to realized gains decreased to $4.8 million in the
first nine months of 1996 as a result of lower realized gains in the period.
Restructuring expenses in 1996 include expenses incurred in conjunction
with the consolidation of the Company's operations with Conseco in Carmel,
Indiana. Such expenses include contract termination costs, severance and related
benefits for employee reductions and other expenses.
Other operating costs and expenses decreased 21 percent to $18.8 million in
the first nine months of 1996 as a result of: (i) non- deferrable commission
expense related to certain group life insurance business which was coinsured to
an unaffiliated company at the end of 1995; and (ii) cost savings related to the
consolidation of the Company's operations with Conseco in Carmel, Indiana.
Income tax expense decreased 26 percent, to $23.6 million in the first nine
months of 1996 primarily due to the decrease in pretax income resulting from
decreased realized gains. The effective tax rate of 38 percent in 1996 and 1995
exceeded the statutory corporate tax rate (35 percent) primarily because
goodwill amortization cannot be deducted for federal income tax purposes.
Extraordinary charge in the 1996 period represents the loss recognized, net
of income taxes, on the repayment of the $125.0 million principal balance
outstanding under the senior credit facility using the proceeds from the sale of
stock to Conseco.
Third Quarter of 1996 Compared to Third Quarter of 1995
Insurance policy income decreased 21 percent, to $10.9 million in the third
quarter of 1996. This decrease was primarily the result of a $3.6 million
reduction in life insurance premiums primarily related to group life insurance
business that was coinsured to an unaffiliated company at the end of 1995,
partially offset by an increase in surrender charges earned on annuity policy
withdrawals. Surrender charges assessed against annuity withdrawals for the
third quarter of 1996 were $4.6 million compared to $3.9 million for the third
quarter of 1995; annuity policy withdrawals were $179.1 million and $172.0
million for the respective periods. See "Liquidity and Capital Resources" for a
discussion of withdrawals and surrenders.
Net investment income decreased 2.6 percent to $102.7 million in the third
quarter of 1996 from $105.4 million in the third quarter of 1995. The average
invested assets (amortized cost basis) increased to $5.0 billion in 1996 from
$4.8 billion in 1995, while the yield earned on average invested assets declined
to 8.15 percent in 1996 from 8.74 percent in 1995 as a result of the factors
discussed above for the nine month periods.
Net realized gains and net trading income often fluctuate from period to
period. The Company sold $.5 billion of investments (principally fixed maturity
securities) in the third quarter of 1996, compared to $.4 billion in the third
quarter of 1995, generating net realized gains of $5.8 million and net trading
gains of $1.1 million in the third quarter of 1996, compared to net realized
gains of $15.6 million and net trading income of $.3 million in the third
quarter of 1995. In addition, during the third quarter of 1995 the Company
recorded a realized loss of $4.5 million on the writedown of an investment as a
result of changes in conditions which caused the Company to conclude that the
decline in the fair value of the investment was other than temporary. 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 1995, and to a lesser extent, in
1996.
12
<PAGE>
AMERICAN LIFE HOLDINGS, INC. AND SUBSIDIARIES
Insurance policy benefits and change in future policy benefits decreased 21
percent to $6.7 million in the third quarter of 1996 consistent with the
explanation above for the nine month periods.
Interest expense on annuities and financial products decreased 4.2 percent,
to $62.2 million in the third quarter of 1996 primarily due to the factors
described above for the nine month periods.
Interest expense on notes payable decreased 13 percent, to $7.2 million in
the third quarter of 1996 as a result of the factors discussed above for the
nine month periods.
Interest expense on investment borrowings decreased 52 percent, to $1.1
million in the third quarter of 1996 due to a lower average balance of funds
borrowed and a lower average cost of funds.
Amortization related to operations increased 20 percent, to $11.2 million
in the third quarter of 1996 consistent with the explanation above for the nine
month periods.
Amortization related to realized gains decreased in the third quarter of
1996 as a result of lower realized gains in the period.
Restructuring expenses in 1996 include expenses incurred in conjunction
with the consolidation of the Company's operations with Conseco consistent with
the explanation above for the nine month periods.
Other operating costs and expenses decreased 25 percent, to $5.8 million in
the third quarter of 1996 consistent with the explanation above for the nine
month periods.
Income tax expense decreased 22 percent, to $7.3 million in the third
quarter of 1996 primarily due to the decrease in pretax income. The effective
tax rate of 39 percent in 1996 and 1995 exceeded the statutory corporate tax
rate (35 percent) primarily because goodwill amortization cannot be deducted for
federal income tax purposes.
Extraordinary charge in the 1996 period represents the loss recognized, net
of income taxes, on the repayment of the $125.0 million principal balance
outstanding under the senior credit facility using the proceeds from the sale of
stock to Conseco.
SALES
In accordance with generally accepted accounting principles, the insurance
policy income shown on our consolidated statement of operations consists of
premiums we receive on policies which have life contingencies or morbidity
features. For annuity and universal life contracts without such features,
accounting rules dictate that premiums collected are not reported as revenues,
but rather as deposits to insurance liabilities. We recognize revenues for these
products in the form of investment income and surrender or other charges.
Net premiums collected in the nine months ended September 30, 1996, were
$537.9 million, of which $529.4 million were recorded as deposits to policy
liability accounts. This compares to $647.0 million collected and $625.2 million
recorded as deposits to policy liability accounts in the nine months ended
September 30, 1995. Net premiums collected declined in the first nine months of
1996 compared to the first nine months 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.
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.
13
<PAGE>
AMERICAN LIFE HOLDINGS, INC. AND SUBSIDIARIES
The trend of significant increases in withdrawals and surrenders subsided
in the first nine months of 1996 as policy withdrawal and surrender payments
increased moderately to $585.1 million compared to $580.5 million in the first
nine months of 1995. This increase was primarily due to an increase in annuity
penalty-free partial withdrawals. Total withdrawals and surrenders by
policyholders were 14.2 percent of the average cash values outstanding during
both the nine months ended September 30, 1996, and the year ended December 31,
1995.
The following table summarizes the Company's deferred annuity liabilities
at September 30, 1996 and December 31, 1995, and sales for the nine months and
year then ended, respectively, by surrender charge category (dollars in
millions):
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
---------------------------------------- ------------------------------------
Annuity Annuity
Surrender charge percent sales Percent Liabilities Percent sales Percent Liabilities Percent
- ------------------------ ----- ------- ----------- ------- ----- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
No surrender charge................... $ .2 *% $ 925.9 19% $ .2 * % $ 986.1 21%
1 to 3.9 percent...................... - - 419.0 9 - - 352.3 7
4 to 6.9 percent...................... 1.9 * 788.9 16 6.4 1 901.6 19
7 to 9.9 percent...................... 42.9 9 1,358.3 28 64.4 9 1,100.6 23
10 to 11.9 percent.................... 150.3 32 926.0 19 371.3 51 1,016.5 22
12 percent and greater................ 280.3 59 410.2 9 285.9 39 359.3 8
------ --- -------- --- ------- --- -------- ---
$475.6 100% $4,828.3 100% $ 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 $925.9 million, or 19 percent of deferred annuity
liabilities, at September 30, 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 third quarter of 1989
and were insignificant after the third quarter of 1990. At September 30, 1996,
the aggregate account balances in force for this product were $489.2 million, of
which $452.5 million could be surrendered without penalty.
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 September 30, 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
September 30, 1996................................... 70.1 157.5 227.6
</TABLE>
Most of our 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, we could liquidate portions of our investments
or use them to facilitate borrowings under reverse repurchase agreements, if
such a need arose. At September 30, 1996, the Company's portfolio of bonds,
notes and redeemable preferred stocks had an aggregate net unrealized gain of
$42.5 million.
Parent Holding Companies
Changes in the consolidated balance sheet from December 31, 1995 to
September 30, 1996, reflect: (i) a decrease in the fair value of actively
managed fixed maturity investments and its effects on the consolidated balance
sheet accounts; (ii) an increase in retained earnings attributable to the
Company's operations; (iii) the notes payable and capital stock transactions
described in the accompanying notes to the consolidated financial statements;
and (iv) the change in basis resulting from the Conseco Transaction and adoption
of the "push down" method of accounting as described in the accompanying notes
to the consolidated financial statements.
14
<PAGE>
AMERICAN LIFE HOLDINGS, INC. AND SUBSIDIARIES
Excluding the effect of reporting fixed maturities at fair value, the ratio
of debt to total capital decreased to 24 percent at September 30, 1996, from 48
percent at December 31, 1995. Including the effect of reporting fixed maturities
at fair value, the ratio of debt to total capital decreased to 23 percent at
September 30, 1996, from 36 percent at December 31, 1995. Such ratios decreased
primarily as a result of the items discussed in the preceding paragraph.
INVESTMENTS
At September 30, 1996, the amortized cost and estimated fair value of fixed
maturity securities (all of which were actively managed) were as follows:
<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...................................... $ 59.8 $ 1.2 $ - $ 61.0
Obligations of states and political subdivisions....................... 32.9 .8 .1 33.6
Foreign government obligations......................................... 19.7 - .4 19.3
Public utility securities.............................................. 782.7 16.0 1.3 797.4
Other corporate securities............................................. 2,501.4 29.0 16.2 2,514.2
Mortgage-backed securities............................................. 1,501.3 19.8 6.3 1,514.8
-------- ----- ----- --------
Total fixed maturity securities ................................... $4,897.8 $66.8 $24.3 $4,940.3
======== ===== ===== ========
</TABLE>
The following table sets forth the investment ratings of fixed maturity
securities at September 30, 1996 (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 $84.5 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 securities are 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 25
BBB...................................... 25 23
--- ---
Investment grade.................. 96 90
--- ---
BB....................................... 3 3
B+ and below............................. 1 1
---- ---
Below investment grade............... 4 4
---- ---
Total fixed maturity securities... 100% 94%
=== ==
</TABLE>
At September 30, 1996, our below investment grade fixed maturity securities
had an amortized cost of $183.0 million and an estimated fair value of $183.1
million.
The Company's investment portfolio is subject to the risk of declines in
realizable value. We attempt to mitigate this risk through the diversification
and active management of our portfolio. As of September 30, 1996, there were no
fixed maturity securities about which we had serious doubts as to the ability of
the issuer to comply with the contractual terms of its obligations on a timely
basis.
Sales of investments (principally fixed maturity securities) during the
nine months ended September 30, 1996, generated proceeds of $1.1 billion, net
realized gains of $9.8 million and trading gains of $.1 million. Proceeds from
sales of investments during the first nine months of 1995 generated proceeds of
$1.7 billion, net realized gains of $69.2 million and trading gains of $1.1
million. In addition, during the first nine months of 1995 the Company recorded
a realized loss of $6.0 million on the writedown of an investment as a result of
changes in conditions which caused the Company to conclude that the decline in
the fair value of the investment was other than temporary.
15
<PAGE>
AMERICAN LIFE HOLDINGS, INC. AND SUBSIDIARIES
At September 30, 1996, fixed maturity securities included $1.5 billion (or
31 percent of all fixed maturity investments) of mortgage-backed securities, of
which $920.0 million were collateralized mortgage obligations ("CMOs") and
$594.8 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". These securities provide for sequential retirement of principal
rather than the retirement of principal on a pro rata share basis, such as
occurs on pass-through securities through regular monthly principal payments.
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 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 on the
securities backed by these loans, increase when prevailing interest rates
decline 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. Mortgage-backed
securities purchased at a premium to par that prepay faster than expected will
incur a reduction in yield. When interest rates decline, the proceeds from
prepayments are likely to be reinvested at lower rates than the Company was
earning on the prepaid securities. As interest rates rise, prepayments decrease
(because fewer underlying mortgages are refinanced). When this occurs, the
average maturity and duration of the mortgage-backed securities increase. This
lowers the yield on mortgage-backed securities purchased at a discount, since
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 the 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 September 30, 1996:
<TABLE>
<CAPTION>
Par Amortized Estimated
value cost fair value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Below 7 percent..................................................................... $ 460.3 $ 426.8 $ 430.6
7 percent - 8 percent............................................................... 932.3 874.9 881.7
8 percent - 9 percent............................................................... 165.9 156.7 159.4
9 percent and above................................................................. 48.7 42.9 43.1
-------- -------- --------
Total mortgage-backed securities......................................... $1,607.2 $1,501.3 $1,514.8
======== ======== ========
</TABLE>
The amortized cost and estimated fair value of mortgage-backed securities
including CMOs at September 30, 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............ $1,054.9 $1,059.7 21%
Support classes........................................................... 150.5 155.6 3
Accrual (Z tranche) bonds................................................. 24.2 24.7 1
Planned amortization classes and accretion directed bonds................. 148.4 150.1 3
Subordinated classes ..................................................... 123.3 124.7 3
-------- -------- --
$1,501.3 $1,514.8 31%
======== ======== ==
</TABLE>
16
<PAGE>
AMERICAN LIFE HOLDINGS, INC. 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 when interest rates are volatile. This type of security
is also frequently used as collateral in the dollar-roll market. Sequential
classes pay in a strict sequence; all principal payments received by the CMO are
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; they thus offer
slightly better call protection than sequential classes or pass-throughs.
Planned amortization and targeted amortization classes are protected from
prepayment risk; this risk is absorbed by support classes. As such, support
classes are usually extremely sensitive to prepayments. Most of the support
classes we own are higher- average-life instruments whose duration generally
will not lengthen if interest rates rise further and will tend to shorten if
interest rates decline. Since the par values of these bonds exceed amortized
cost, 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 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
like zero coupon bonds until cash payments begin. Cash payments typically do not
commence until earlier classes in the CMO structure have been retired, the
timing of which can be significantly influenced by the prepayment experience of
the underlying mortgage loan collateral. 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 are other CMOs, pass-through securities or 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 prepays within an
expected 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, both prepayment and credit risk associated with this
class are generally higher than that of the senior 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.
The Company's mortgage loans are primarily commercial loans, including
retail, multifamily residential, office, industrial, nursing home, restaurant
and other properties. Less than 1 percent of the mortgage loan balance was
noncurrent at September 30, 1996. There were no realized losses on mortgage
loans in either the first nine months of 1996 or 1995. At September 30, 1996,
our loan loss reserve was $.5 million.
Borrowings under reverse repurchase agreements and dollar-roll transactions
were $123.1 million at September 30, 1996 and averaged approximately $73.0
million during the first nine months of 1996. These borrowings were
collateralized by pledged securities with fair values approximately equal to the
borrowings.
STATUTORY INFORMATION
Our insurance subsidiaries are required to follow statutory accounting
practices ("SAP") prescribed or permitted by state insurance regulators. SAP
differs in many respects from generally accepted accounting principles ("GAAP").
Accordingly, statutory operating results and statutory capital and surplus may
differ substantially from amounts reported in our GAAP basis financial
statements. Our insurance subsidiaries do not employ surplus relief reinsurance
(which some other firms use to increase statutory surplus), nor have our
subsidiaries adopted any accounting practice not specifically prescribed by SAP
which has the effect of increasing statutory surplus.
After appropriate eliminations of intercompany accounts, the Company's life
insurance subsidiaries reported combined statutory net income of $19.2 million
for the nine months ended September 30, 1996, and the following amounts on the
combined statutory balance sheet at that date (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Statutory capital and surplus................................................... $218.0
Asset valuation reserve......................................................... 44.9
Interest maintenance reserve ................................................... 22.8
------
Total........................................................................ $285.7
======
</TABLE>
17
<PAGE>
AMERICAN LIFE HOLDINGS, INC. AND SUBSIDIARIES
At September 30, 1996, American Life and Casualty's surplus included a
surplus note with a balance of $50.0 million. The payment by American Life and
Casualty of dividends and other distributions, including surplus note payments,
is subject to regulation by the Iowa Insurance Division. 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
September 30, 1996, American Life and Casualty had earned surplus of $113.2
million. American Life and Casualty may pay dividends or make other
distributions without the prior approval of the Iowa Insurance Division as long
as such payments, together with all other such payments within the preceding 12
months, do not 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. Under this formula, American Life and Casualty is
entitled to distribute up to $31.0 million as dividends and surplus note
payments during 1996 without the prior approval of the Iowa Insurance Division
($9.8 million had been distributed through September 30, 1996).
18
<PAGE>
AMERICAN LIFE HOLDINGS, INC. 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 September 30, 1996.
19
<PAGE>
AMERICAN LIFE HOLDINGS, INC. AND SUBSIDIARIES
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 HOLDINGS, INC.
Dated: November 13, 1996 By: /s/ ROLLIN M. DICK
------------------
Rollin M. Dick,
Executive Vice President and
Chief Financial Officer
(authorized officer and principal
financial officer)
20
J:\10Q-3-96.ALG\PART1.#1
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM FORM 10-Q FOR AMERICAN
LIFE HOLDINGS, INC. DATED SEPTEMBER 30, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 4,940,300
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 12,800
<MORTGAGE> 84,400 <F1>
<REAL-ESTATE> 0
<TOTAL-INVEST> 5,217,300
<CASH> 0 <F2>
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 437,300 <F3>
<TOTAL-ASSETS> 6,243,100
<POLICY-LOSSES> 5,177,100
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 4,400
<POLICY-HOLDER-FUNDS> 97,200
<NOTES-PAYABLE> 171,300
0
72,900
<COMMON> 344,800
<OTHER-SE> 49,000 <F4>
<TOTAL-LIABILITY-AND-EQUITY> 6,243,100
33,000
<INVESTMENT-INCOME> 306,400
<INVESTMENT-GAINS> 9,900 <F5>
<OTHER-INCOME> 3,900
<BENEFITS> 202,100 <F6>
<UNDERWRITING-AMORTIZATION> 34,200 <F7>
<UNDERWRITING-OTHER> 18,800
<INCOME-PRETAX> 61,200
<INCOME-TAX> 23,600
<INCOME-CONTINUING> 37,600
<DISCONTINUED> 0
<EXTRAORDINARY> (800)
<CHANGES> 0
<NET-INCOME> 30,200
<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 $25,300 of credit-tenant loans.
<F2> Cash and cash equivalents are classified as short-term investments,
which are included in total investments.
<F3> Includes $382,700 of cost of policies purchased.
<F4> Includes retained earnings of $34,700 and net unrealized appreciation
of securities of $14,300.
<F5> Includes net realized gains of $9,800 and net trading income of $100.
<F6> Includes insurance policy benefits of $18,100, change in future policy
benefits of $(200) and interest expense on annuities and financial products
of $184,200.
<F7> Includes amortization of cost of policies purchased of $24,800 and cost
of policies produced of $4,600 and amortization related to realized
gains of $4,800.
</FN>
</TABLE>
