UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] Annual report pursuant to Section
13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required] For the fiscal year
ended December 31, 1995 or
[ ] Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 [Fee Required] For
the transition period from to
Commission file number: 0-1283
American Life Group, Inc.
Delaware No. 42-0951848
State of Incorporation RS Employer Identification No.
1100 Des Moines Building
Des Moines, Iowa 50309 (515) 284-7500
Address of principal executive offices Telephone
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Aggregate market value of common stock held by nonaffiliates: Effective
September 29, 1994, the Company's common stock is no longer traded on an
established public trading market.
Shares of common stock outstanding as of February 22, 1996: 13,442,075
DOCUMENTS INCORPORATED BY REFERENCE: None
<PAGE>
PART I
ITEM 1. BUSINESS OF AMERICAN LIFE GROUP, INC.
Background
American Life Group, Inc. (the "Company" or "AGP") (formerly The Statesman
Group, Inc. prior to its name change in August 1995) is an insurance holding
company specializing in the development, marketing, issuance and administration
of individual fixed annuity products and, to a lesser extent, individual life
insurance products through its insurance subsidiaries, American Life and
Casualty Insurance Company ("American Life and Casualty"), Des Moines, Iowa and
Vulcan Life Insurance Company ("Vulcan Life"), Birmingham, Alabama. 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.
American Life and Casualty and Vulcan Life are licensed to sell annuities
and life insurance in 48 states and the District of Columbia. The Company
collected $825.6 million of annuity deposits and insurance premiums in 1995, of
which approximately 94 percent (99 percent of first year premiums) was from the
sale of annuities. At December 31, 1995, the Company had approximately 288,000
individual policies in force.
The Company was incorporated under the laws of the State of Delaware on
March 2, 1959. Its executive offices are located at 1100 Des Moines Building,
Des Moines, Iowa, 50309, and its telephone number is (515) 284-7500.
On September 29, 1994, Conseco Capital Partners II, L.P. ("Partnership
II"), a Delaware limited partnership, completed the acquisition of the Company
(the "Acquisition") pursuant to an Agreement and Plan of Merger, providing for
the merger of AGP with a subsidiary of Partnership II. The Company's former
stockholders received $15.25 in cash per common equivalent share plus a
contingent payment right to receive up to another $2.00 in cash per common
equivalent share based on the outcome of the Company's pending litigation
against the U.S. Government concerning the Company's former savings bank
subsidiary (for further discussion see "Item 3 - Legal Proceedings" and note 9
to the consolidated financial statements).
Partnership II was formed by Conseco, Inc. ("Conseco") to invest in
privately negotiated acquisitions of specialized annuity, life and accident and
health insurance companies and related businesses. The sole general partner of
Partnership II is a wholly owned subsidiary of Conseco. Conseco is a
publicly-held company that owns, operates and provides services to companies in
the financial services industry (primarily life insurance companies).
Partnership II owns 80 percent of the Company's outstanding common stock and
Conseco, through its direct investment and interests in certain of its
subsidiaries and affiliates, has approximately a 36 percent ownership interest
in the Company. In March 1996, Conseco announced it is terminating Partnership
II because changes in the regulatory and rating agency environment have made it
impractical to structure leveraged acquisitions of life insurance companies in a
manner that produces the expected returns to the limited partners. In accordance
with the partnership agreement, all of Partnership II's assets (primarily its
investment in AGP) will be distributed to its partners subject to the conditions
contained in the partnership agreement. In any event, Partnership II's assets
must be distributed within two years of the effective date of dissolution.
Products
The Company's products include single premium deferred annuities ("SPDAs"),
flexible premium deferred annuities ("FPDAs"), single premium immediate
annuities, interest-sensitive life insurance products (primarily universal life
insurance), traditional life insurance products and accident and health
insurance products. Of the $825.6 million of annuity deposits and insurance
premiums collected in 1995, approximately 91 percent were from sales of deferred
annuities, 6 percent were from life insurance products, 3 percent were from
single premium immediate annuities and less than 1 percent were from accident
and health insurance products.
Annuities accounted for $777.2 million of the Company's annuity deposits
and insurance premiums collected in 1995. In general, a SPDA is a savings
vehicle in which the policyholder, or annuitant, makes a single premium payment
to an insurance company which guarantees the principal and accrues a stated rate
of interest. After a number of years, as specified in the annuity contract, the
annuitant may elect to take the proceeds of the annuity in a single payment, a
specified income for life for a fixed number of years or a combination of
certain and life contingent payments. FPDAs are similar to SPDAs in many
respects, except that FPDAs allow additional premium payments in varying
amounts.
The Company's SPDAs and FPDAs typically have an interest rate (the
"crediting rate") that is guaranteed by the Company for the first policy year,
after which the Company has the discretionary ability to change the crediting
rate to any rate not below a guaranteed minimum rate generally ranging from 3.0
percent to 5.5 percent. The initial crediting rate is largely a function of the
interest rate the Company can earn on invested assets acquired with the new
annuity fund deposits and the rates offered on similar products by the Company's
competitors. For subsequent adjustments to crediting rates, the Company takes
into account the yield on
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<PAGE>
its investment portfolio, annuity surrender assumptions, competitive industry
pricing and the crediting rate history for particular groups of annuity policies
with similar characteristics. Since 1992, approximately 84 percent of the
Company's new annuity sales have been "bonus" products. The initial crediting
rate on these products specifies a bonus crediting rate ranging from 1 percent
to 8 percent of the annuity deposit for the first policy year only, after which
the bonus interest portion of the initial crediting rate is automatically
discontinued and the renewal crediting rate is established. Commissions to
agents are generally reduced by 3 or more percentage points on products with
bonus crediting rates of 3 percent or more to partially compensate the Company
for the higher initial crediting rate on these products. As of December 31,
1995, crediting rates on the Company's outstanding SPDAs and FPDAs generally
ranged from 5.0 percent to 9.8 percent with an average rate, including interest
bonuses guaranteed for the first year of the annuity contract only, of 5.7
percent (the average rate exclusive of the bonuses was 5.3 percent).
The policyholder is typically permitted to withdraw all or a part of the
premium paid plus the accumulated interest credited to his account (the
"accumulation value"), subject in many cases to the assessment of a surrender
charge for withdrawals in excess of specified limits. Most of the Company's
SPDAs and FPDAs provide for penalty-free withdrawals of up to 10 percent of the
accumulation value each year, subject to limitations. Withdrawals in excess of
allowable penalty-free amounts are assessed a surrender charge during a penalty
period which generally ranges from five to 12 years after the date a policy was
issued. The surrender charge is initially 6 percent to 12 percent of the
accumulation value and generally decreases by approximately 1 to 2 percentage
points per year during the penalty period. Surrender charges are set at levels
to protect the Company from loss on early terminations and to reduce the
likelihood of policyholders terminating their policies during periods of
increasing interest rates, thereby lengthening the effective duration of policy
liabilities and better enabling the Company to maintain profitability on such
policies. In addition, beginning in September 1995, the Company offered a
deferred annuity product with a "market value adjustment" feature that is
designed to provide the Company with additional protection from early
terminations during a period of rising interest rates by reducing the surrender
value payable upon a full or partial surrender of the policy in excess of the
allowable penalty-free withdrawal amount. Conversely, during a period of
declining interest rates, the market value adjustment feature would increase the
surrender value payable to the policyholder.
Life insurance products accounted for $44.8 million of the Company's
annuity deposits and insurance premiums collected in 1995. The Company offers a
portfolio of interest-sensitive life insurance products, including single and
flexible premium universal life insurance products and single premium whole life
products and traditional life insurance, including term insurance. The principal
differences among these types of products offered by the Company relate to
policy provisions affecting the amount and timing of premium payments. The
Company derived approximately one-third of its life insurance premiums from
several group term life insurance programs, including a program established in
1963 for members of state National Guard Associations. On December 31, 1995, the
Company entered into a coinsurance agreement that ceded the National Guard group
insurance to another life insurance company.
The Company's interest-sensitive life insurance products offer
policyholders life insurance protection and the opportunity to accumulate assets
at competitive interest rates. Interest-sensitive life insurance products have
similar characteristics to annuities with respect to the crediting of a current
rate of interest above a guaranteed minimum rate and the use of surrender
charges to discourage premature withdrawal of cash values. The surrender charges
are typically larger and decline over a longer period. Interest-sensitive life
insurance policies also generally provide for charges against the policyholder's
account balance for the cost of insurance and administrative expenses.
Accident and health insurance is no longer being actively marketed by the
Company. Premiums are being generated principally from renewals of guaranteed
renewable and non-cancelable individual plans.
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Premium collections by product type for the periods presented are as
follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
First year premiums collected:
Traditional individual life....................... $ 1.1 $ 1.7 $ 1.7 $ 1.4 $ 1.3
Universal life.................................... 4.2 3.8 4.1 5.0 5.5
------- -------- ------- ------ ------
Total life...................................... 5.3 5.5 5.8 6.4 6.8
Individual annuities ............................. 754.0 1,055.5 989.9 434.7 306.8
------- -------- ------- ------ ------
Total first year premiums....................... 759.3 1,061.0 995.7 441.1 313.6
------- -------- ------- ------ ------
Renewal premiums collected:
Traditional individual life....................... 13.5 13.4 12.9 13.6 14.0
Universal life.................................... 15.7 15.5 14.9 14.5 14.3
Group life and other.............................. 14.2 15.1 15.0 16.1 16.6
------- -------- ------- ------ ------
Total life...................................... 43.4 44.0 42.8 44.2 44.9
Individual annuities ............................. 23.2 24.8 26.1 24.1 27.4
Accident and health............................... 4.1 4.4 4.7 4.7 5.0
------- -------- ------- ------ ------
Total renewal premiums.......................... 70.7 73.2 73.6 73.0 77.3
------- -------- ------- ------ ------
Total gross premiums............................ 830.0 1,134.2 1,069.3 514.1 390.9
Reinsurance ceded.................................... (4.4) (5.1) (4.4) (4.4) (4.7)
------- -------- -------- ------ ------
Net premiums collected.......................... $ 825.6 $1,129.1 $1,064.9 $509.7 $386.2
======== ======== ======== ====== ======
</TABLE>
4
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Insurance liabilities and life insurance in force as of the dates presented are
as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
---- ----
(Dollars in millions)
<S> <C> <C>
Insurance liabilities:
Deferred annuities.................................................. $4,716.4 $4,444.8
Universal life-type contracts....................................... 234.2 225.6
Traditional life insurance contracts................................ 87.0 78.0
Limited-payment contracts........................................... 8.1 8.3
Individual accident and health...................................... 7.2 7.5
Group life and health............................................... 3.3 3.2
Other policyholders' funds and claims payable....................... 92.5 76.4
-------- --------
Total insurance liabilities..................................... $5,148.7 $4,843.8
======== ========
Life insurance in force:
Individual life:
Universal life.................................................... $1,598.4 $1,616.5
Single premium life............................................... 180.4 181.4
Traditional whole life............................................ 595.3 637.1
Individual term................................................... 1,364.7 1,385.1
--------- --------
Gross individual life insurance................................. 3,738.8 3,820.1
Reinsurance ceded................................................... (949.9) (926.9)
--------- --------
Net individual life insurance.................................. 2,788.9 2,893.2
--------- --------
Group life and other................................................ 3,727.1 3,794.9
Reinsurance ceded on group life and other (a)....................... (3,700.3) (25.0)
--------- --------
Net group life insurance and other.............................. 26.8 3,769.9
--------- --------
Net life insurance in force..................................... $2,815.7 $6,663.1
======== ========
<FN>
(a) In 1995, the Company entered into a reinsurance contract to cede
substantially all of its group life insurance.
</FN>
</TABLE>
Marketing and Distribution
The Company maintains a diverse distribution network and provides high
quality service to its agents and policyholders. The Company markets its
products through a general agency and insurance brokerage distribution system
comprised of approximately 25,000 independent licensed agents located in the 48
states in which the Company is licensed to transact business.
The insurance brokerage distribution system is comprised of insurance
brokers and marketing organizations. In the past several years, the Company has
pursued a strategy to increase the size of its brokerage distribution network by
developing relationships with national and regional marketing organizations.
These organizations typically recruit agents for the Company by advertising the
Company's products and its commission structure, through direct mail
advertising, or through seminars for insurance agents and brokers. These
organizations bear most of the costs incurred in marketing the Company's
products. The Company compensates the marketing organizations by paying them a
percentage of the commissions earned on new annuity and life insurance policy
sales generated by the agents recruited by such organizations. The Company
generally does not enter into exclusive arrangements with these marketing
organizations. The insurance brokerage distribution network accounted for
approximately 85 percent of 1995 annuity sales (75 percent in 1994).
The Company also distributes its products through financial institutions
which accounted for approximately 10 percent of 1995 annuity sales (20 percent
in 1994). Financial institutions are particularly sensitive to an insurance
company's ratings, and several large financial institution accounts were lost
and other prospective accounts did not materialize in 1995 and 1994 due to
American Life and
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Casualty's ratings downgrades which resulted from the Acquisition. In response,
the Company shifted its marketing emphasis toward smaller financial institutions
such as community banks and credit unions that are generally less sensitive to
an insurance company's ratings than are larger financial institutions.
The Company's distribution costs, which principally consist of commissions
to agents based upon premiums actually received, are largely variable.
Management believes that its distribution methods and relatively low average
premium per annuity ($29,000 in 1995) result in a lower policy termination rate
and more stable earnings than a strategy emphasizing larger individual sales or
relying on substantial sales through stock brokerage firms.
The Company does not believe that the loss of any agent, broker or
organization would have a material adverse effect on its operating results. No
single agent, insurance broker or marketing organization accounted for more than
10 percent of annuity deposits and insurance premium collections in any of the
past five years. The seven states with the largest shares of premiums collected
in 1995 were Florida (11.9 percent), California (8.1 percent), Pennsylvania (6.5
percent), Michigan (6.4 percent), Texas (6.2 percent), Illinois (6.0 percent)
and New Jersey (5.6 percent). No other state accounted for more than 4 percent
of total collected premiums in 1995.
Competition and Ratings
The insurance industry is highly competitive and consists of a large number
of insurance companies, many of which are substantially larger and have greater
financial resources, higher ratings, broader and more diversified product lines,
larger sales forces and/or more widespread agency and brokerage relationships
than the Company. Competition also is encountered from the expanding number of
banks, securities brokerage firms and other financial intermediaries which
market insurance products and offer competing products, such as mutual fund
products, traditional bank investments and/or other investment and retirement
funding alternatives. Insurers compete with other insurance companies, financial
intermediaries and other institutions based on a number of factors, including
pricing and other product terms and service provided to distributors and
policyholders. The Company must also compete with other insurers to attract and
retain the allegiance of agents.
Crediting rates, commissions, the perceived quality of the insurer, product
features and service are generally the principal factors influencing an agent's
willingness and ability to sell particular annuity products. The Company does
not have exclusive agency agreements with its agents and believes most of these
agents sell products, similar to those sold by American Life and Casualty, for
other insurance companies. This can result in reduced sales if for any reason
American Life and Casualty is relatively less competitive or there are concerns
about asset quality or a rating downgrade.
In addition, over the past two years the Company has experienced
increased competition from issuers of variable annuity and life insurance
products. Variable annuities differ from the annuities that the Company offers
in that the annuitant's rate of return is dependent upon the investment
performance of the particular equity, fixed income, money market, asset
allocation or other mutual fund selected by the annuitant. The Company does not
currently have any variable annuity products available but expects to consider
the development of this product in the future.
An important competitive factor for life insurance companies is the ratings
they receive from nationally recognized rating organizations. Agents, brokers,
marketing companies and financial institutions who market the Company's products
and prospective purchasers of the Company's products use the ratings of an
insurer as one factor in determining which insurer's annuity to market or
purchase. American Life and Casualty and Vulcan Life are rated "A- (Excellent)"
by A.M. Best Company ("A.M. Best"). Publications of A.M. Best indicate the "A-"
rating is assigned to those companies that, in A.M. Best's opinion, have
achieved excellent overall performance when compared to the standards
established by A.M. Best and have demonstrated a strong ability to meet their
obligations to policyholders over a long period of time. American Life and
Casualty has also been assigned a claims-paying rating of "A- (Good)" by
Standard & Poor's Corporation ("Standard & Poor's"). An "A" is assigned by
Standard & Poor's to those companies which, in its opinion, have a secure
claims-paying ability and whose financial capacity to meet policyholder
obligations is viewed on balance as sound, but their capacity to meet such
policyholder obligations is somewhat more susceptible to adverse changes in
economic or underwriting conditions than more highly rated insurers. According
to Standard & Poor's, a minus (-) sign attached to a Standard & Poor's
claims-paying rating shows relative standing within a ratings category. A.M.
Best's rating and Standard & Poor's claims-paying rating are principally based
upon factors of concern to policyholders, agents and intermediaries and are not
directed toward the protection of investors. Given the competitive nature of the
Company's business and the increasing focus placed on the aforementioned
ratings, the Company manages its business with the objective of preserving
existing ratings and, where possible, achieving more favorable ratings. There
can be no assurance that any particular rating will continue for any given
period of time or that it will not be changed or withdrawn entirely if, in the
judgment of the rating agency, circumstances so warrant. If the Company's
ratings were downgraded from their current levels, sales of its products and the
persistency of its in force business could be materially and adversely affected.
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Reinsurance
Consistent with the general practice of the life insurance industry, the
Company reinsures portions of the coverage provided by their insurance products
with other insurance companies under agreements of indemnity reinsurance.
Reinsurance assumed from other insurers is not significant. Indemnity
reinsurance agreements are intended to limit a life insurer's maximum loss on a
large or unusually hazardous risk or to obtain a greater diversification of
risk. Indemnity reinsurance does not discharge the original insurer's primary
liability to the insured. The Company's reinsured business is ceded to numerous
reinsurers. The amount of business ceded to any one reinsurer is not material.
The Company believes the assuming companies are able to honor all contractual
commitments, based on the Company's periodic reviews of their financial
statements, insurance industry reports and reports filed with state insurance
departments.
As of December 31, 1995, the Company's policy risk retention limit on the
life of any one individual is $.1 million and aggregate reinsurance ceded by the
Company of $4.7 billion represented 62 percent of gross combined life insurance
in force. At December 31, 1995, the reinsurance receivable balance from the
Company's largest reinsurer was $4.0 million, and no other balance from a single
reinsurer exceeded $1.5 million.
Underwriting
Substantially all the life insurance policies issued by the Company are
underwritten individually, although standardized underwriting procedures have
been adopted for certain coverages. After initial processing, each file is
reviewed and the information needed to make an underwriting decision (such as
medical examinations, doctors' statements and special medical tests) is
obtained. After the information is collected and reviewed, the Company either
issues the policy as applied for, issues the policy with an extra premium charge
because of unfavorable factors, or rejects the application. Group insurance
policies are underwritten based on the characteristics of the group and its past
claim experience. Underwriting with respect to SPDAs and FPDAs is minimal.
Investments
Investment activities are an integral part of the Company's business;
investment income is the most significant component of the Company's total
revenues. The Company's investment strategy seeks to: (i) maintain a diversified
predominantly investment grade fixed income portfolio; (ii) provide adequate
liquidity to meet the cash flow requirements of policyholder and other
obligations; and (iii) maximize current income and total investment return
through active investment management.
Since the Acquisition, the Company's investment portfolio has been managed
by Conseco Capital Management, Inc., ("CCM") a registered investment advisor
wholly owned by Conseco. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Investments" for discussion of the
Company's portfolio management activities since the Acquisition.
The Company attempts to manage its assets and liabilities so that income
and principal payments received from investments are adequate to meet the cash
flow requirements of its policyholder liabilities. Approximately 97 percent of
the Company's insurance liabilities may be partially or totally surrendered at
the policyholders' option, subject to surrender charges or other limitations,
when applicable. The cash flows of the Company's liabilities are affected by
actual maturities, surrender experience and credited interest rates. The Company
periodically performs cash flow studies under various interest rate scenarios to
evaluate the adequacy of expected cash flows from its assets to meet the
expected cash requirements of its liabilities. The Company utilizes these
studies to determine if it is necessary to lengthen or shorten the average life
and duration of its investment portfolio. (The "duration" of a security is the
time weighted present value of the security's expected cash flows and is used to
measure a security's price sensitivity to changes in interest rates.) At
December 31, 1995, the adjusted modified duration of fixed maturities and
short-term investments was approximately 5.8 years and the estimated duration of
the Company's insurance liabilities was approximately 6.1 years.
For additional information regarding the composition and diversification of
the Company's fixed maturity investments, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Investments."
Regulation
Insurance companies are subject to regulation and supervision by the states
in which they transact business. The laws of these jurisdictions generally
establish agencies with broad regulatory authority, including powers to: (i)
grant and revoke licenses to transact business; (ii) regulate and supervise
trade practices and market conduct; (iii) establish guaranty associations; (iv)
license agents; (v) approve policy forms; (vi) approve premium rates for some
lines of business; (vii) establish reserve requirements; (viii) prescribe the
form and content of required financial statements and reports; (ix) determine
the reasonableness and adequacy of statutory capital and surplus; and (x)
regulate the type and amount of permitted investments.
7
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Most states also have enacted legislation which regulates insurance holding
company systems, including acquisitions, extraordinary dividends, the terms of
surplus notes, the terms of affiliate transactions and other related matters.
Currently, the Company and its insurance subsidiaries have registered as holding
company systems pursuant to such legislation in Iowa and Alabama and routinely
report to other jurisdictions.
The federal government does not directly regulate the insurance business.
However, federal legislation and administrative policies in several areas,
including pension regulation, age and sex discrimination, financial services
regulation and federal taxation, do affect the insurance business. Recently,
increased scrutiny has been placed upon the insurance regulatory framework, and
a number of state legislatures have considered or enacted legislative proposals
that alter, and in many cases increase, the authority of state agencies to
regulate insurance companies and holding company systems. In addition,
legislation has been introduced from time to time in recent years which, if ever
enacted, could result in the federal government assuming a more direct role in
the regulation of the insurance industry.
State insurance regulators and the National Association of Insurance
Commissioners (an association of state regulators and their staffs, the "NAIC")
are continually re-examining existing laws and regulations and their application
to insurance companies. In recent years, the NAIC has approved and recommended
to the states for adoption and implementation several regulatory initiatives
designed to decrease the risk of insolvency of insurance companies in general.
These initiatives include risk based capital ("RBC") requirements for
determining the levels of statutory capital and surplus an insurer must maintain
in relation to its investment and insurance risks. The NAIC regulatory
initiatives also impose restrictions on an insurance company's ability to pay
dividends to its stockholders. These initiatives may be adopted by the various
states in which the Company's insurance subsidiaries are licensed, but the
ultimate content and timing of any statutes and regulations adopted by the
states cannot be determined at this time. It is not possible to predict the
future impact of changing state and federal regulations on the Company's
operations, and there can be no assurance that existing insurance related laws
and regulations will not become more restrictive in the future or that laws and
regulations enacted in the future will not be more restrictive.
The NAIC's RBC requirements, which became effective December 31, 1993, are
intended to be used by insurance regulators as an early warning tool to identify
deteriorating or weakly capitalized companies for the purpose of initiating
regulatory action. Such requirements are not designed as a ranking mechanism for
adequately capitalized companies. In addition, the formula defines a new minimum
capital standard which supplements the low, fixed minimum capital and surplus
requirements previously implemented on a state-by-state basis.
The NAIC's RBC requirements provide for four levels of regulatory
attention, depending on the ratio of the company's total adjusted capital
(defined as the total of its statutory capital, surplus, asset valuation reserve
and certain other adjustments) to its RBC. If a company's total adjusted capital
is less than 100 percent but greater than or equal to 75 percent of its RBC, or
if a negative trend has occurred (as defined by the regulations) and total
adjusted capital is less than 125 percent of its RBC (the "Company Action
Level"), the company must submit a comprehensive plan to the regulatory
authority which discusses proposed corrective actions to improve its capital
position. If a company's total adjusted capital is less than 75 percent but
greater than or equal to 50 percent of its RBC (the "Regulatory Action Level"),
the regulatory authority will perform a special examination of the company and
issue an order specifying corrective actions that must be followed. If a
company's total adjusted capital is less than 50 percent but greater than or
equal to 35 percent of its RBC (the "Authorized Control Level"), the regulatory
authority may take any action it deems necessary, including placing the company
under regulatory control. If a company's total adjusted capital is less than 35
percent of its RBC (the "Mandatory Control Level"), the regulatory authority is
mandated to place the company under its control. The total adjusted capital of
American Life and Casualty at December 31, 1995, was approximately two times the
Company Action Level.
In the event of default on the Company's debt or the bankruptcy,
liquidation or other reorganization of the Company, the creditors and
shareholders of the Company would have no right to proceed against the assets of
the Company's insurance subsidiaries. If American Life and Casualty or Vulcan
Life were to be liquidated, such liquidation would be conducted by the Iowa
Insurance Commissioner or the Alabama Insurance Commissioner, as the case may
be, as the receiver with respect to such insurance company's property and
business. Under the Iowa and Alabama insurance laws, all creditors of the
Company's insurance subsidiaries, including, without limitation, holders of its
reinsurance agreements and the various state guaranty associations, would be
entitled to payment in full from such assets before the Company as a shareholder
would be entitled to receive any distribution.
Effective for annual statements filed for the year ending December 31,
1992, insurance companies are required to establish an asset valuation reserve
consisting of two components: (i) a "default component" which provides for
future credit-related losses on fixed maturity investments; and (ii) an "equity
component" which provides for losses on all types of equity investments,
including real estate. Insurers are also required to establish an interest
maintenance reserve ("IMR") for fixed maturity realized capital gains and
losses, net of tax, related to changes in interest rates. The IMR is required to
be amortized into earnings on a basis reflecting the remaining period to
maturity of the fixed maturity securities sold. These reserves are required by
state insurance regulatory authorities to be established as a liability on a
life insurer's statutory financial statements, but do not affect financial
statements of the Company
8
<PAGE>
prepared in accordance with generally accepted accounting principles ("GAAP").
Although future additions to such reserves are expected to reduce future
statutory surplus, the Company does not believe that the impact of such current
reserve requirements will affect its ability to pay dividends to its
stockholders.
The Life/Health Task Force of the NAIC recently adopted Actuarial Guideline
No. 33 (the "Guideline") which defines minimum reserves for certain annuity
products (including certain of the Company's annuity products) which have
multiple benefit streams. The requirements of the Guideline affect the
accounting for applicable contracts issued on or after January 1, 1981, in
financial statements prepared for state regulatory authorities for years ending
on or after December 31, 1995. The effect of implementing the Guideline on the
December 31, 1995, financial statements prepared for state regulatory
authorities by the Company's insurance subsidiaries was immaterial.
Approximately once every three to five years as part of their routine
regulatory oversight process, insurance departments conduct detailed
examinations of the books, records and accounts of insurance companies domiciled
in their states. Such examinations are generally conducted in cooperation with
the departments of two or three other states, under guidelines promulgated by
the NAIC. An examination of American Life and Casualty was completed in 1995 for
the years 1991, 1992 and 1993. The conclusions reached in the examination report
did not have a material adverse effect on either the Company's or American Life
and Casualty's business or operations. Vulcan Life was last examined as of
December 31, 1991, and the conclusions reached did not have a material adverse
effect on either the Company's or Vulcan Life's business or operations.
Under the solvency or guaranty laws of most states in which they do
business, the Company's insurance subsidiaries may be required to pay
assessments (up to certain prescribed limits) to guaranty funds, which are
established by various states to fund policyholder losses or liabilities of
insolvent or rehabilitated insurance companies. These assessments may be
deferred or forgiven under most guaranty laws if they would threaten an
insurer's financial strength. In certain instances, the assessments may be
offset against future premium taxes. Prior to 1991, these assessments were not
material. However, the amount of such assessments has increased in recent years.
The Company's insurance subsidiaries statutory financial statements for the year
ended December 31, 1995, include $4.6 million of expenses as a result of such
assessments. The likelihood and amount of any other future assessments in
addition to estimated amounts accrued at December 31, 1995, cannot be estimated
and are beyond the control of the Company.
Employees
As of March 6, 1996, the Company had approximately 315 employees. None of
the Company's employees are covered by a collective bargaining agreement. The
Company believes that it has excellent relations with its employees.
Federal Income Taxation
The annuity and life insurance products marketed and issued by the Company
generally provide the policyholder with an income tax advantage, as compared to
other savings investments such as certificates of deposit and bonds, in that
income taxation on the increase in value of the product is deferred until
receipt by the policyholder. With most other savings investments, the increase
in value is taxed as earned. Annuity benefits and life insurance benefits which
accrue prior to the death of the policyholder are generally not taxable until
paid. Life insurance death benefits are generally exempt from income tax. Also,
benefits received on immediate annuities (other than structured settlements) are
recognized as taxable income ratably as opposed to the economic accrual methods,
which tend to accelerate taxable income into earlier years and which are
required for other investments. The tax advantage for annuities and life
insurance is provided in the Internal Revenue Code (the "Code"), and is
generally followed in all states and other United States taxing jurisdictions.
Accordingly, it is subject to change by Congress and the legislatures of the
respective taxing jurisdictions.
The Company's insurance subsidiaries are taxed under the life insurance
company provisions of the Code. Provisions in the Code require a portion of the
expenses incurred in selling insurance products to be deducted over a period of
years, as opposed to immediate deduction in the year incurred. This provision
increases the tax for statutory accounting purposes which reduces statutory
surplus and, accordingly, decreases the amount of cash dividends that may be
paid by the life insurance subsidiaries. For 1995 the increase in the Company's
current tax due to this provision was $2.9 million.
The Company had regular tax loss carryforwards ("NOLs") at December 31,
1995 of approximately $51.0 million, portions of which begin expiring in 1999.
The utilization of the NOLs is limited by Section 382 of the Code to
approximately $12 million per year, subject to certain exceptions for gains
existing at the Acquisition date.
9
<PAGE>
ITEM 2. PROPERTIES
The Company owns the building and annex housing its principal operations in
Des Moines, Iowa, consisting of approximately 122,000 square feet of space. The
land underlying the building is subject to a long-term lease expiring in 2016,
at which time title to the building will pass to the lessor. The Company also
owns another office building housing its operations in Birmingham, Alabama
consisting of approximately 44,000 square feet.
The Company believes that these facilities are adequate for its current
operating needs.
ITEM 3. LEGAL PROCEEDINGS
The Company has filed suit in the United States Court of Federal Claims
(the "Court of Federal Claims") against the United States of America for breach
of certain contractual agreements which were made by certain former government
regulatory agencies to induce the Company to capitalize its former savings bank
subsidiary (the "Savings Bank") in connection with the acquisition of four
failed thrift institutions in March 1988 and the subsequent seizure of the
Savings Bank by the Office of Thrift Supervision in July 1990 (the "Savings Bank
Litigation"). In the Savings Bank Litigation, the Company claims that the
defendant breached its contractual agreements with respect to regulatory capital
and contends that this breach, which resulted in the disallowance of $21 million
of capital which the defendant contractually promised would be perpetual for
regulatory accounting purposes, and such subsequent seizure, constitutes a
taking of the Company's property without just compensation and due process of
law, in violation of the Fifth Amendment of the United States Constitution.
The Savings Bank Litigation seeks monetary damages from the government,
including recovery of: (i) the Company's investment in the Savings Bank of
143,640 shares of the 1988 Series Preferred Stock and $8.4 million of cash and
(ii) compensation for costs incurred and the value of benefits conferred on the
defendant through the Company's purchase, operation and management of the
Savings Bank. Total damages sought by the Company exceed $30 million.
On July 24, 1992, the Court of Federal Claims granted the Company's motion
for summary judgment as to the defendant's liability for breach of contract in
the Savings Bank Litigation. The court also consolidated this case with two
others and certified these cases for interlocutory appeal to the United States
Court of Appeals for the Federal Circuit (the "Court of Appeals"). Subsequently,
the Court of Appeals entered a judgment reversing the order of the Court of
Federal Claims by a decision of two to one, and the Company filed a Petition for
Rehearing with Suggestion for Rehearing in Banc (the "Rehearing Petition") with
the Court of Appeals. On August 18, 1993, the Court of Appeals accepted the
Rehearing Petition, vacated the judgment which was entered in favor of the
defendant and withdrew its opinion accompanying such judgment. On August 30,
1995, the Court of Appeals, in banc, affirmed the summary judgment of the Court
of Federal Claims in the Company's favor by a decision of nine to two.
Subsequently, the United States of America filed a petition for certiorari to
the United States Supreme Court which was granted. The Supreme Court scheduled
oral arguments for April 1996. In the event the Supreme Court affirms the
summary judgment of the Court of Federal Claims, a trial will be held in the
Court of Federal Claims to determine damages related to the breach of contract
by the United States.
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 if the Company prevails in the Savings Bank Litigation.
If the rights of the holder of the 1988 Series Preferred Stock were not an issue
in the Savings Bank Litigation, the 1988 Series Preferred Stock would be
convertible, at the option of the holder thereof, into approximately $30 million
in connection with the Acquisition.
If the Savings Bank Litigation results in the return of the 1988 Series
Preferred Stock to the Company, the $30 million amount referred to above will be
payable to the holders of the Contingent Payment Rights, together with any money
damages recovered by the Company, subject to certain adjustments and
limitations. If, however, the Company is unsuccessful in the Savings Bank
Litigation, the $30 million will instead become payable to the holder of the
1988 Series Preferred Stock upon the conversion thereof or as otherwise directed
by the court. Since the timing of a final determination of the Savings Bank
Litigation is uncertain, the Company is unable to predict when such $30 million
will become payable.
The Company, Conseco, Partnership II and certain of the persons formerly
serving as directors on the Board of Directors of the Company have been named as
defendants in a purported class action commenced on May 3, 1994, entitled Nitti
v. Statesman Group, Inc. et al., No. 13501 (Delaware Chancery Court, New Castle
County) (the "Nitti Action"). The complaint in the Nitti Action alleges that in
authorizing the Company to enter into the Agreement and Plan of Merger (see note
1 to the consolidated financial statements), the members of the Board of
Directors failed to maximize the value received by the Company's stockholders in
the sale of the Company and, accordingly, breached their fiduciary duties. On
September 21, 1994, an Amended Class Action Complaint adding a second plaintiff
and additional allegations were filed. On October 5, 1994, a Motion to Dismiss
for failure to state a claim was filed on behalf of the Company. The Company
believes that this complaint is without merit and intends to defend it
vigorously.
10
<PAGE>
The Company, Vulcan Life and certain of its independent agents have been
named as defendants in litigation in the state of Alabama concerning life
insurance products sold to school teachers in the late 1980's. The cases are:
(i) Sentell, et al. v. Vulcan Life Insurance Company et al., filed in the
Circuit Court for Pickens County, Alabama, on August 22, 1994; (ii) Rembert, et
al. v. Vulcan Life insurance Company et al., filed on June 29, 1995, and pending
in the Circuit Court of Marengo County, Alabama; (iii) Baldwin et al. v. Vulcan
Life Insurance Company et al., filed on July 6, 1995, and pending in the Circuit
Court of Marengo County, Alabama; (iv) Thomas, et al., v. Charley, et al.,
filed in the Circuit Court of Wilcox County, Alabama on or about December 20,
1994; and (v) Wheeler v. Vulcan Life Insurance Company, et al., filed in the
Circuit Court in Lamar County, Alabama on May 18, 1995 (all cases are referred
to herein as the "Vulcan Life Litigation"). The plaintiffs in the Vulcan Life
Litigation allege, among other things, that the agent defendants misrepresented
that the life insurance products were part of an employee benefit plan and that
such plan would pay the premiums for their policies although, under the Code,
life insurance products may not be purchased through such a plan. The plaintiffs
allege that they purchased the life insurance products because of such alleged
misrepresentations. The plaintiffs have requested an award of compensatory and
punitive damages of unspecified amounts. The defendants have denied any
liability and have raised numerous defenses including the statute of
limitations.
In addition to the foregoing, the Company's subsidiaries are involved in
various pending or threatened legal proceedings arising from the conduct of
their businesses. These proceedings in some instances include claims for
punitive damages and similar types of relief in unspecified or substantial
amounts, in addition to amounts for alleged contractual liability or claims for
equitable relief. In management's opinion, after consultation with counsel and a
review of available facts, these proceedings will be ultimately resolved without
materially affecting the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Effective September 29, 1994, the Company's common stock is no longer
traded on an established public trading market. As of March 1, 1996, there were
10 holders of record of the Company's common stock.
The Company declared and paid a cash dividend of $.05 per common share in
February 1994 (adjusted to reflect the August 8, 1995 one-for-two stock split).
Restrictions and limitations on the Company's ability to pay cash dividends and
on the ability of the Company's subsidiaries to transfer funds to the Company in
the form of cash dividends, surplus note payments, loans or advances are
discussed in "Item 7 - Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations-Liquidity and Capital Resources"
and notes 6 and 14 to the consolidated financial statements.
12
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following table presents certain consolidated financial data for the
periods indicated and should be read in conjunction with the consolidated
financial statements and notes thereto and Management's Discussion and Analysis
of Financial Condition and Results of Operations appearing elsewhere in this
Form 10-K. The Acquisition was accounted for as a purchase business combination
pursuant to which the reported values of the Company's assets and liabilities
were adjusted to their estimated fair values on the Acquisition date, September
29, 1994. The Company's income statement data for the year ended December 31,
1995, and the three months ended December 31, 1994, and the balance sheet data
as of December 31, 1995 and 1994, represent results since the date of the
Acquisition. Because of the purchase accounting adjustments and the indebtedness
incurred in connection with the Acquisition, the financial data for periods
following the Acquisition may not be comparable to the financial data for
periods prior to the Acquisition. All share and per share information has been
adjusted for the August 8, 1995 one-for-two stock split.
<TABLE>
<CAPTION>
Predecessor Basis
------------------------------------------
Three months Nine months
Year ended ended ended Year ended December 31,
December 31, December 31, September 30, -------------------------
1995 1994 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
(Amounts in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data
Insurance policy income................................ $ 58.1 $ 13.6 $ 40.2 $ 50.0 $51.7 $53.3
Investment activity:
Net investment income................................ 415.6 92.8 250.8 304.8 273.6 244.4
Net trading income (losses).......................... 1.5 (.8) - - - -
Net realized gains (losses).......................... 147.8 1.2 (16.8) 18.9 11.0 10.7
Total revenues......................................... 629.3 108.9 278.5 379.2 340.1 312.0
Interest expense on notes payable...................... 33.8 8.8 6.7 6.1 5.6 5.8
Amortization of cost of policies purchased
and cost of policies produced:
Related to operations............................. 33.2 6.7 29.7 31.7 25.4 16.9
Related to realized gains......................... 83.3 - 2.8 9.8 5.3 -
Total benefits and expenses............................ 495.5 96.4 259.9 310.7 297.1 277.5
Income before income taxes, minority interest
and extraordinary items........................... 133.8 12.5 18.6 68.5 43.0 34.5
Income before extraordinary items...................... 75.1 5.2 5.2 37.3 25.9 22.6
Net income (1)......................................... 71.1 5.2 5.2 37.3 30.8 28.4
Net income applicable to common shares (1)............. 63.4 3.3 4.1 35.7 29.2 26.6
Earnings per common share (2).......................... 5.52 .30
Weighted average common shares outstanding (2)......... 11.5 11.3
Balance Sheet Data (at period end)
Total assets........................................... $6,202.1 $5,449.7 $4,490.7 $3,466.0 $2,957.3
Total investments...................................... 5,363.5 4,319.7 4,066.2 3,120.9 2,647.7
Notes payable.......................................... 282.5 330.0 118.8 69.9 63.5
Insurance liabilities.................................. 5,148.7 4,843.8 4,069.5 3,153.8 2,741.7
Redeemable preferred stock and minority interest,
primarily subsidiary's redeemable preferred stock.... 99.6 99.6 99.0 67.5 1.4
Shareholders' equity .................................. 405.6 79.1 145.3 113.8 88.0
Book value per common share (2)........................ 25.22 1.79
Common shares outstanding (2).......................... 13.4 11.3
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Predecessor Basis
----------------------------------------
Three months Nine months
Year ended ended ended Year ended December 31,
December 31, December 31, September 30, -------------------------
1995 1994 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
(Amounts in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Other Financial Data (3)
Premiums collected (4)................................. $825.6 $283.2 $845.9 $1,064.9 $509.7 $386.2
Operating earnings (5)................................. 35.7 4.9 24.2 31.4 22.1 16.3
Operating earnings per common share (2), (5)........... 2.44 .27
Shareholders' equity excluding unrealized
appreciation (depreciation) of fixed
maturity securities (6).............................. 210.7 107.6 145.3 113.8 88.0
Book value per common share, excluding
unrealized appreciation (depreciation) of
fixed maturity securities (2), (6)................... 10.72 4.31
<FN>
(1) In 1995, the Company recognized an extraordinary charge of $4.0 million on
the extinguishment of debt. Net income in 1992 and 1991 includes
extraordinary credits of $4.9 million and $5.8 million, respectively,
attributable to the reduction of federal income tax expense arising from
the carryforward of prior years' realized losses on investments and, in
1991, non-life operating losses.
(2) Share and per share data for periods prior to the Acquisition are not
presented, because such amounts are based on shares outstanding under the
capital structure which existed prior to the Acquisition and are not
comparable to amounts after the Acquisition.
(3) Amounts included in this section are to assist the reader in analyzing the
Company's financial position and results of operations. Such amounts are
not intended to represent revenues, net income, net income per share,
shareholders' equity or book value per share prepared in accordance with
GAAP.
(4) Includes premiums received from annuities and universal life policies,
which amounts are not reported as revenues under GAAP.
(5) Represents income before extraordinary items, excluding net trading income
(losses) (net of income taxes), net realized gains (losses) on investments
(less that portion of amortization of the cost of policies purchased and
the cost of policies produced and income taxes relating to such gains),
expenses related to the Acquisition (net of income taxes) and other
nonrecurring expenses (net of income taxes).
(6) Excludes the effects of reporting fixed maturities at fair value and
recording the unrealized gain or loss on such securities as a component of
shareholders' equity, net of tax and other adjustments, which the Company
began to do in 1994 in accordance with Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115") as described in note 1 to the consolidated
financial statements. In accordance with SFAS 115, prior period financial
statements have not been restated to reflect this change in accounting
principle and there was no effect on net income as a result of adopting
SFAS 115.
</FN>
</TABLE>
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion addresses the principal factors affecting earnings
and financial condition including liquidity and capital resources and should be
read in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this Form 10-K.
Results Of Operations
Operating data for periods subsequent to the Acquisition reflect the effect
of purchase accounting adjustments to record the Company's assets and
liabilities at their estimated fair value as of the Acquisition date and,
accordingly, financial data of the Company for periods prior to the Acquisition
may not be comparable with current financial data. Significant purchase
accounting adjustments recorded at the Acquisition date include: (i) a reduction
of $454.2 million in the amortized cost basis of fixed maturity investments;
(ii) the establishment of a $454.3 million asset for the cost of policies
purchased and the elimination of the $346.6 million asset for the cost of
policies produced existing at the Acquisition date; (iii) the establishment of a
$360.2 million goodwill asset to reflect the excess of the total purchase cost
over the fair value of the net assets acquired; and (iv) the establishment of a
deferred income tax asset of $129.3 million to reflect the income tax effects of
all purchase accounting adjustments. These adjustments impact the comparability
of operating data principally by causing net yields on invested assets, and
thereby net investment income, to increase and by replacing amortization expense
for the cost of policies produced with amortization expense for the cost of
policies purchased and goodwill which have different amortization assumptions
and bases than the amortization of the cost of policies produced prior to the
Acquisition. Comparability is further impacted by the Acquisition due to the
additional interest expense resulting from the Acquisition indebtedness and by
the incurrence of the Acquisition transaction expenses.
Year Ended December 31, 1995 Compared to 1994 Periods Combined (Three
Months Ended December 31, 1994 and Nine Months Ended September 30, 1994)
Operating data for 1994 are presented in two periods: the three months
ended December 31, 1994, and the nine months ended September 30, 1994 (the
period preceding the Acquisition). As explained above, the purchase accounting
adjustments resulting from the Acquisition materially affect the comparability
of operating data for the periods before and after the Acquisition.
Insurance policy income, which consists of premiums received on traditional
life insurance products and policy fund and surrender charges assessed against
investment type products, increased 8 percent to $58.1 million in 1995 from
$53.8 million in the 1994 periods, primarily because increased annuity policy
withdrawals resulted in higher surrender charges. Surrender charges assessed
against annuity withdrawals for 1995 were $15.4 million compared to $10.2
million for the 1994 periods while annuity policy withdrawals were $750.4
million and $532.8 million for the same periods, respectively. Surrender charges
as a percentage of annuity policy withdrawals declined in 1995 as a result of
increased withdrawals of a certain policy form whose surrender charge expired in
1995 upon such policies reaching their sixth anniversary. In addition, the
Company has experienced increases in withdrawals during 1995 due to: (i) the
increased size of the Company's annuity portfolio; and (ii) competition from
other investment products in 1995 and the second half of 1994, which caused some
policyholders to surrender policies and incur a surrender charge to invest funds
in alternative investments.
Net investment income increased 21 percent to $415.6 million in 1995 from
$343.6 million in the 1994 periods on a 7 percent increase in average invested
assets (amortized cost basis) to $4.7 billion in 1995 compared to $4.4 billion
in the 1994 periods. The percentage increase in net investment income was
greater than the percentage increase in average invested assets because the
yield earned on average invested assets increased to 8.78 percent in 1995 from
7.88 percent in the 1994 periods. The increase in yield primarily resulted from
the application of purchase accounting on the Acquisition date as discussed
above.
Net realized gains (losses) and net trading income (losses) often fluctuate
from period to period. The Company sold approximately $2.8 billion of
investments (principally fixed maturities) in 1995 compared to $1.1 billion in
the 1994 periods which sales resulted in net realized gains of $154.9 million
and trading income of $1.5 million in 1995 compared to net realized gains of
$6.9 million and trading losses of $.8 million in the 1994 periods. Net realized
gains from sales of investments in the 1994 periods were offset by a loss on
certain interest rate swap contracts that no longer effectively hedged interest
rate risks in the second quarter of 1994 and were therefore recorded at fair
value, resulting in a net realized loss of $21.3 million. Substantially all of
the Company's interest rate swap contracts were terminated subsequent to the
Acquisition with no additional loss. In addition, during 1995 and the 1994
periods, the Company recorded realized losses on the writedown of investments
totalling $7.1 million and $1.2 million, respectively, as a result of changes in
conditions which caused the Company to conclude that a decline in fair value of
the investments was other than temporary.
15
<PAGE>
The increased level of investment activity in 1995 is the result of more
active investment portfolio management by the Company's investment advisor since
the Acquisition and planned changes in the fixed maturity investment portfolio
to reduce the portfolio's duration and exposure to more volatile CMO investments
(see "-Investment Portfolio"). The declining interest rate environment since the
Acquisition date, which increased the market value of fixed maturity
investments, contributed to the Company's ability to realize gains on investment
sales in 1995.
Selling securities at a gain and reinvesting the proceeds at lower yields
may, absent other management action, tend to decrease future investment yields.
The Company believes, however, that certain factors would mitigate the adverse
effect of such decreases as follows: (i) additional amortization of the cost of
policies purchased and the cost of policies produced is recognized 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) interest rates credited to some products can be reduced 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.
Other income decreased 2 percent to $6.3 million in 1995 from $6.4 million
in the 1994 periods. The decrease was principally due to a reduction in fees
received from nonaffiliated companies for data processing services offset, in
part, by interest earned in 1995 on cash segregated at the Acquisition date for
the conversion of the Company's 6-1/4% Convertible Subordinated Debentures due
2003 (the "Convertible Debentures") and an increase in the interest earned on
assets segregated for the future redemption of the redeemable preferred stock
issued by a subsidiary.
Interest expense on annuities and financial products increased 18 percent
to $258.8 million in 1995 from $220.1 million in the 1994 periods primarily due
to: (i) a larger block of annuity business in force in 1995; and (ii) the
expensing of the first year interest rate bonuses of approximately $5.9 million
in 1995 on policies issued prior to the Acquisition date as a result of the
application of purchase accounting on the Acquisition date. Prior to the
Acquisition date, such first year interest rate bonuses (related to policies
issued prior to the Acquisition date) were capitalized as a cost of policies
produced. At December 31, 1995 and 1994, the weighted average crediting rate for
the Company's annuity liabilities excluding interest bonuses guaranteed for the
first year of the annuity contract was 5.3 percent.
Interest expense on notes payable increased to $33.8 million in 1995 from
$15.5 million in the 1994 periods as a result of additional interest on debt
incurred to finance the Acquisition, partially offset by reductions in interest
expense resulting from: (i) the conversion and retirement of $9.2 million
principal amount of the Convertible Debentures during 1995 and $44.8 million in
the 1994 periods; and (ii) the repayment of subsidiary bank debt that had been
outstanding prior to the Acquisition.
Interest expense on investment borrowings increased to $7.7 million in 1995
from $2.8 million in the 1994 periods as a result of increased investment
borrowing activity and a higher cost of funds in 1995.
Amortization related to operations decreased 9 percent to $33.2 million in
1995 from $36.4 million in the 1994 periods. Amortization related to operations
during the first nine months of 1994 is comprised solely of amortization of cost
of policies produced. Amortization related to operations during 1995 and the
last three months of 1994 is comprised of amortization of: (i) the cost of
policies purchased for business in force at the Acquisition date; and (ii) the
cost of policies produced for business written subsequent to the Acquisition
date.
Cost of policies produced represents the cost of producing new business
(primarily commissions, bonus interest and certain costs of policy issuance and
underwriting) which varies with and is primarily related to the production of
new business. Costs deferred may represent amounts paid in the period the new
business is written (such as underwriting costs and first year commissions) or
in periods after the business is written (such as commissions paid in subsequent
years in excess of ultimate commissions paid and bonus interest credited through
the first policy anniversary date).
Cost of policies purchased represents the portion of the cost to acquire
the Company that is attributable to the right to receive cash flows from
insurance contracts written at the Acquisition date. Some costs incurred
subsequent to the Acquisition date on policies issued prior to such date, which
otherwise would have been deferred had it not been for the Acquisition (because
they vary with and are primarily related to the production of the acquired
policies), are expensed. Examples include commissions paid in excess of ultimate
commissions and bonus interest. However, such amounts were considered in
determining the cost of policies purchased and its amortization. The amount of
amortization related to operations in the 1995 period is less than the 1994
period primarily due to costs related to purchased policies that would have been
deferred as the cost of policies produced but instead are expensed as either:
(i) other operating costs; or (ii) interest on annuities and financial products.
16
<PAGE>
Amortization related to realized gains increased to $83.3 million in 1995
from $2.8 million in the 1994 periods as a result of the increase in realized
gains discussed above.
Amortization of goodwill increased to $9.1 million in 1995 from $2.2
million in the 1994 periods. The 1995 amount includes an entire year of
amortization and 1994 includes amortization for three months. Goodwill prior to
the Acquisition was insignificant.
Acquisition, merger and other nonrecurring expenses for 1995 include
expenses related to: (i) the initial public offering of the Company's common
stock that was withdrawn in the fourth quarter; (ii) payments made in
conjunction with the discontinuation of employment of the Company's former
president; and (iii) the termination of certain computer equipment leases. Such
expenses for 1994 represent costs incurred by the Company related to the
Acquisition, including legal, investment banking, accounting and actuarial fees
and certain compensation expense. The aforementioned compensation expense
represents amounts incurred to redeem certain unexercised options and stock
appreciation rights in conjunction with the Acquisition.
Income tax expense increased to $49.9 million in 1995 from $11.8 million in
the 1994 periods. This increase is primarily due to the increase in pretax
income to $133.8 million in 1995 from $31.1 million in the 1994 periods. The
effective tax rate for 1995 of 37 percent exceeded the statutory corporate
federal income tax rate (35 percent) because goodwill amortization is not
deductible for federal income tax purposes. The effective tax rate for the 1994
periods of 38 percent exceeded the statutory corporate federal income tax rate
because goodwill amortization and certain acquisition and merger expenses are
not deductible for federal income tax purposes.
Extraordinary charge incurred in 1995 relates to debt issuance costs that
were written off when the former senior term loan was paid off with the proceeds
of new bank financing.
Dividends on preferred stock increased to $7.7 million in 1995 from $3.0
million in the 1994 periods primarily due to the dividends on the 1994 Series
Preferred Stock issued in connection with the Acquisition. This increase was
partially offset by the elimination of the dividends on the other issues of
preferred stock redeemed at the Acquisition date.
1994 Periods Combined (Three Months Ended December 31, 1994 and Nine Months
Ended September 30, 1994)Compared to Year Ended December 31, 1993
Insurance policy income increased 8 percent to $53.8 million during the
1994 periods from $50.0 million in 1993, primarily because increased annuity
policy withdrawals during 1994 resulted in higher surrender charges. Surrender
charges assessed against annuity withdrawals for the 1994 periods were $10.2
million compared to $6.2 million for 1993 while annuity policy withdrawals were
$532.8 million and $277.9 million for the same periods, respectively. Surrender
charges as a percentage of annuity policy withdrawals declined in the 1994
periods as a result of increased withdrawals of a certain policy form whose
surrender charge expired in 1994 upon such policies reaching their sixth
anniversary. In addition, the Company experienced increases in withdrawals
during the 1994 periods due to: (i) the increased size of the Company's annuity
portfolio; and (ii) the increases in interest rates during 1994, which caused
some policyholders to surrender policies and incur a surrender charge to invest
funds in higher yielding alternative investments.
Net investment income increased 12 percent to $343.6 million in the 1994
periods from $304.8 million in 1993 on a 19 percent increase in average invested
assets (amortized cost basis) to $4.4 billion in the 1994 periods compared to
$3.7 billion in 1993. The percentage increase in net investment income was less
than the percentage increase in average invested assets because the yield earned
on average invested assets decreased to 7.88 percent in the 1994 periods from
8.27 percent in 1993. The decrease in yield resulted from the cash flows
received during 1994 and 1993 being invested in lower yielding securities due to
the general decline in interest rates during 1993, partially offset by the
increase in yields during the fourth quarter of 1994 because of the application
of purchase accounting. Redemption of fixed maturity investments prior to their
regularly scheduled maturity dates resulted in additional investment income of
approximately $.5 million in the 1994 periods compared to $5.9 million in 1993.
Net realized gains (losses) and net trading income (losses) often fluctuate
from period to period. The Company sold approximately $1.1 billion and $2.2
billion of investments (principally fixed maturities) in the 1994 periods and
1993, respectively, which sales resulted in net realized gains of $6.9 million
and trading losses of $.8 million, in the 1994 periods compared to net realized
gains of $19.5 million in 1993. Net realized gains from sales of investments in
the 1994 periods were offset by a loss on certain interest rate swap contracts
that no longer effectively hedged the interest rate exposure and were therefore
recorded at fair value resulting in a net realized loss of $21.3 million in the
second quarter of 1994. Substantially all of the Company's interest rate swap
contracts were terminated subsequent to the Acquisition at no additional loss.
Net realized losses in 1994 also included a $1.2 million write-down of an equity
security as a result of changes in conditions which caused the Company to
conclude that a decline in the fair value of such security was other than
temporary. Net realized gains in 1993 were net of a $.6 million increase to the
mortgage loan valuation reserve.
17
<PAGE>
Other income increased 16 percent to $6.4 million in the 1994 periods from
$5.5 million in 1993. The increase was due to the greater interest earned on
assets segregated for the future redemption of the redeemable preferred stock
issued by a subsidiary in February 1993 and interest earned on cash segregated
at the Acquisition date for the conversion of the Convertible Debentures. These
increases were partially offset by decreased rental income and data processing
fees received from nonaffiliated companies.
Insurance policy benefits (including change in future policy benefits)
increased 12 percent to $35.5 million in the 1994 periods from $31.7 million in
1993 due to an increase in death benefits paid on annual renewable term policies
during 1994 and the impact of certain non-recurring reserve adjustments recorded
in 1993 which reduced benefits.
Interest expense on annuities and financial products increased 12 percent
to $220.1 million in the 1994 periods from $195.9 million in 1993 primarily due
to a larger block of annuity business in force in 1994, higher crediting rates
and with respect to the fourth quarter of 1994, the expensing of first year
interest rate bonuses on policies issued prior to the Acquisition date on which
interest had previously been capitalized as a cost of policies produced. The
weighted average crediting rate for the Company's annuity liabilities excluding
interest bonuses guaranteed for the first year of the annuity contract was 5.3
percent at December 31, 1994 and 1993.
Interest expense on notes payable increased to $15.5 million in the 1994
periods from $6.1 million in 1993 as a result of additional interest on debt
incurred to finance the Acquisition, partially offset by reductions in interest
expense resulting from: (i) the conversion and retirement of $44.8 million of
the Convertible Debentures; and (ii) the repayment of subsidiary bank debt that
had been outstanding prior to the Acquisition.
Amortization related to operations increased 15 percent to $36.4 million in
the 1994 periods from $31.7 million in 1993 due to an increase in the total
costs subject to such amortization.
Amortization related to realized gains decreased 71 percent to $2.8 million
in the 1994 periods from $9.8 million in 1993 primarily as a result of the
decrease in realized gains. Amortization attributable to realized gains is a
higher percentage of realized gains on sales of investments (excluding the loss
on interest rate swaps) in the 1994 periods than 1993 because such amortization
is based solely on net gains from fixed maturity securities.
Amortization of goodwill of $2.2 million for the three months ended
December 31, 1994 reflects amortization of the goodwill recorded at the
Acquisition date. Goodwill amortization prior to the Acquisition was
insignificant.
Acquisition, merger and other nonrecurring expenses during the 1994 periods
represent costs incurred by the Company related to the Acquisition. These
expenses include legal, investment banking, accounting and actuarial fees and
certain compensation expense. The aforementioned compensation expense represents
amounts incurred to redeem certain unexercised stock options and stock
appreciation rights in conjunction with the Acquisition.
Income tax expense decreased 47 percent to $11.8 million during the 1994
periods from $22.4 million during 1993 primarily as a result of the decrease in
pretax income. The effective tax rate for 1994 of 38 percent exceeded the
statutory corporate federal income tax rate (35 percent) because goodwill
amortization and certain acquisition and merger expenses are not deductible for
federal income tax purposes. The effective tax rate for 1993 of 33 percent was
less than the statutory corporate federal income tax rate primarily because of a
reduction in the valuation allowance for net operating loss carryforwards.
Dividends on preferred stock increased 88 percent to $3.0 million in 1994
from $1.6 million in 1993 primarily due to the dividend on the 1994 Series
Preferred Stock issued in connection with the Acquisition. This increase was
partially offset by the elimination of the dividends on the other issues of
preferred stock retired at the Acquisition date.
Investment Portfolio
The Company's investment strategy is to: (i) maintain a diversified
predominantly investment grade fixed income portfolio; (ii) provide adequate
liquidity to meet the cash flow requirements of policyholder and other
obligations; and (iii) maximize current income and total investment return
through active investment management. Consistent with this strategy, investments
in fixed maturity securities, mortgage loans, policy loans and short-term debt
investments collectively comprised 99 percent of the Company's investment
portfolio at December 31, 1995. The remainder of the invested assets was in
equity securities and other investments. To increase its return on investments,
the Company from time to time lends securities in reverse repurchase agreements
or dollar roll transactions.
18
<PAGE>
The Company's insurance subsidiaries are regulated by insurance statutes
and regulations as to the type of investments that they are permitted to make
and the amount of funds that may be used for any one type of investment. In
light of these statutes and regulations and the Company's business and
investment strategy, the Company generally seeks to invest in United States
government and government agency securities and corporate securities rated
investment grade by established nationally recognized rating organizations or,
if not rated, in securities of comparable investment quality.
On January 1, 1994, the Company adopted SFAS 115, which requires the
Company to carry actively managed fixed maturity securities and equity
securities at fair value and the unrealized gain or loss is recorded in
shareholders' equity (see note 1 in the consolidated financial statements).
Prior to adopting SFAS 115, actively managed fixed maturity securities were
carried at the lower of amortized cost or fair value, in the aggregate. There
was no effect on net income as a result of adopting SFAS 115. Since the
Acquisition, all of the Company's fixed maturity securities have been classified
as actively managed or trading account securities consistent with the intent of
the new owner. Fixed maturity and equity investments are reported at their
estimated fair value in the consolidated balance sheet at December 31, 1995 and
1994.
The Company's investment portfolio has been managed by CCM since the
Acquisition. Prior to the Acquisition, the Company maintained a predominantly
investment grade fixed maturity investment portfolio with the primary goal of
avoiding credit risk. As a result, fixed maturity investments on the Acquisition
date included approximately $2.0 billion of mortgage-backed securities which
comprised 50 percent of the Company's fixed maturity investments. While these
securities had minimal credit risk they were subject to greater interest rate
risk (as discussed hereafter) than traditional fixed income securities. Since
the Acquisition, the Company has reduced its overall exposure to interest rate
risk by, in part, reducing mortgage-backed security investments to $1.5 billion
at December 31, 1995, or 30 percent of fixed maturity securities, and investing
proceeds from the sale of mortgage-backed securities and new cash flows in
intermediate term investment grade corporate securities. The changes in the
fixed maturity investment portfolio (including cash equivalents) since the
Acquisition are summarized in the following portfolio statistics as of the
respective dates indicated:
<TABLE>
<CAPTION>
1995 1994
------- --------------------
Dec. 31 Dec. 31 Sept. 30
------- ------- --------
<S> <C> <C> <C>
Yield to maturity (1)
Statutory....................................... 7.59% 7.71% 7.53%
GAAP............................................ 8.23% 8.81% 8.75%
Weighted average duration (2)...................... 5.8 yrs 7.2 yrs 7.3 yrs
Weighted average life (3).......................... 9.5 yrs 14.7 yrs 15.0 yrs
Weighted average quality (3)....................... A+ AA- AA-
<FN>
(1) Based on the amortized cost basis. GAAP yields reflect the
application of purchase accounting at the Acquisition date.
Purchase accounting is not applicable to statutory yields.
(2) Average adjusted modified duration weighted by market value.
(3) Weighted by market value.
</FN>
</TABLE>
The Company believes that the changes made in its fixed maturity investment
portfolio since the Acquisition date advance its investment goals of reducing
interest rate risk (without materially adding to credit risk) and enhancing
liquidity to meet the cash flow requirements of its policyholders and other
creditors. The Company currently does not anticipate further material investment
policy changes from those described above.
19
<PAGE>
The amortized cost and estimated fair value of fixed maturities (all of
which were actively managed) at December 31, 1995 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........................ $ 95.0 $ 7.8 $ - $ 102.8
Obligations of states and political subdivisions
and foreign government obligations.................... 55.3 2.1 1.7 55.7
Public utility securities................................ 821.5 104.1 .2 925.4
Other corporate securities............................... 2,304.6 189.9 11.9 2,482.6
Mortgage-backed securities............................... 1,390.9 126.7 1.0 1,516.6
-------- ------- ----- ---------
Total fixed maturities.............................. $4,667.3 $430.6 $14.8 $5,083.1
======== ====== ===== ========
</TABLE>
The following table sets forth fixed maturity investments at December 31,
1995, classified by rating categories (designated categories include securities
with "+" or "-" ratings modifiers). The category assigned is the highest rating
by Standard & Poor's or Moody's Investors Service or, as to $130.1 million fair
value of fixed maturities not rated by such firms, the rating assigned by the
NAIC. For the purposes of this table, NAIC Class 1 is included in the "A"
rating; Class 2, "BBB"; and Class 3, "BB".
<TABLE>
<CAPTION>
Percent of
---------------------------
Fixed Total
Investment rating maturities investments
----------------- ---------- -----------
<S> <C> <C>
AAA................................................... 31% 30%
AA.................................................... 13 12
A..................................................... 29 27
BBB................................................... 24 23
--- ---
Investment grade................................... 97 92
BB.................................................... 3 3
--- ---
Total fixed maturities........................... 100% 95%
=== ==
</TABLE>
Since the Acquisition, the level of below investment grade fixed maturities
remained approximately the same, but may increase in future periods. The
Company's senior credit facility limits the amount of below investment grade
securities to 7 percent of invested assets. These securities generally have
greater risks than other corporate debt investments, including risk of loss upon
default by the borrower, and are often unsecured and subordinated to other
creditors. Below investment grade issuers usually have high levels of
indebtedness and are more sensitive to adverse economic conditions, such as
recession or increasing interest rates, than are investment grade issuers. The
Company is aware of these risks and monitors its below investment grade
securities closely. At December 31, 1995, the Company's below investment grade
corporate fixed maturities had an amortized cost of $162.7 million and an
estimated fair value of $168.5 million.
The Company, in conjunction with CCM, periodically evaluates the
creditworthiness of each issuer whose securities are held in the portfolio.
Special attention is paid to those securities whose market values have declined
materially for reasons other than changes in interest rates or other general
market conditions. The Company considers available information to evaluate the
realizable value of the investment, the specific condition of the issuer, and
the issuer's ability to comply with the material terms of the security.
Information reviewed may include the recent operational results and financial
position of the issuer, information about its industry, recent press releases
and other information. If evidence does not exist to support a realizable value
equal to or greater than the carrying value of the investment and such decline
in market value is determined to be other than temporary, the Company reduces
the carrying amount to its net realizable value, which becomes the new cost
basis, and the amount of the reduction is reported as a realized loss. The
Company recognizes any recovery of such reductions in the cost basis of an
investment as a realized gain only upon the sale, repayment or other disposition
of the investment. During 1995 and 1994, the Company recorded realized losses
for investment writedowns of $7.1 million and $1.2 million, respectively, as a
result of changes in the financial condition of an issuer and changes in the
value of the underlying collateral, which caused the Company to conclude that
the decline in fair value of such investments was
20
<PAGE>
other than temporary. The Company's investment portfolio is subject to the risk
of further declines in realizable value, however, the Company attempts to
mitigate this risk through the diversification and active management of its
portfolio.
The Company had no fixed maturity investments in technical or substantive
default as of December 31, 1995. There were no fixed maturity investments about
which the Company had serious doubts as to the ability of the issuers to comply
with the contractual terms of their obligations on a timely basis.
The Company's policy is to discontinue the accrual of interest and
eliminate all previous interest accruals for defaulted securities, if based on
the Company's assessment such amounts will not be ultimately realized in full.
Investment income forgone due to defaulted securities was $.5 million and $.7
million for the years ended December 31, 1995 and 1993, respectively. There was
no forgone investment income in the 1994 periods.
Proceeds from the sales of investments (principally fixed maturities) were
$2.8 billion for the year ended December 31, 1995. Such sales resulted in net
realized gains of $154.9 million and trading gains of $1.5 million. Proceeds
from the sales of investments (principally fixed maturities) were $.5 billion
for the three months ended December 31, 1994. Such sales resulted in net
realized gains of $1.7 million and trading losses of $.8 million. These sales
were the result of a more active portfolio management by CCM and the
implementation of strategies discussed above.
Proceeds from sales of fixed maturity securities during the first nine
months of 1994 were $604 million, of which $596 million were from sales of
securities classified as actively managed and $8 million were from the sale of
securities classified as held-to- maturity as of January 1, 1994. These sales
resulted in net realized gains of $5.8 million. The securities classified as
held-to-maturity were sold subsequent to a debtor being placed on credit watch
by a major independent rating agency. A loss of $1.6 million was recognized on
such sale. The issuer's credit ratings were subsequently downgraded.
Proceeds from sales of fixed maturity investments during 1993 were $2.2
billion and resulted in net realized gains of $23.0 million. These securities
were principally sold to create taxable capital gains to offset capital losses
prior to the expiration of the capital loss carryforward period.
At December 31, 1995, fixed maturity investments included $1.5 billion (30
percent of the fixed maturity investment portfolio) of mortgage-backed
securities of which $941.9 million were CMOs and $574.7 million were
pass-through securities. CMOs are securities backed by pools of pass-through
securities and/or mortgages that are segregated into sections or "tranches"
which provide for sequential retirement of principal rather than the pro rata
share of principal return which occurs through regular monthly principal
payments on pass-through securities.
The yield characteristics of mortgage-backed securities differ from those
of traditional fixed income securities. Interest and principal payments occur
more frequently, often monthly, and mortgage-backed securities are subject to
risks associated with variable prepayments. Prepayment rates are influenced by a
number of factors which cannot be predicted with certainty, including the
relative sensitivity of the underlying mortgages backing the assets to changes
in interest rates; a variety of economic, geographic and other factors; and the
repayment priority of the securities in the overall securitization structures.
In general, prepayments on the underlying mortgage loans, and the
securities backed by these loans, increase when the level of prevailing interest
rates declines significantly below the interest rates on such loans.
Mortgage-backed securities purchased at a discount to par will experience an
increase in yield when the underlying mortgages prepay faster than expected.
Those securities purchased at a premium that prepay faster than expected will
incur a reduction in yield. When declines in interest rates occur, the proceeds
from the prepayment of mortgage-backed securities are likely to be reinvested at
lower rates than the Company was earning on the prepaid securities. As the level
of prevailing interest rates increases, prepayments on mortgage-backed
securities decrease as fewer underlying mortgages are refinanced. When this
occurs, the average maturity and duration of the mortgage-backed securities
increase, which decreases the yield on mortgage-backed securities purchased at a
discount because the discount is realized as income at a slower rate and
increases the yield on those purchased at a premium as a result of a decrease in
annual amortization of the premium.
21
<PAGE>
The following table sets forth the par value, amortized cost and estimated
fair value of mortgage-backed securities including CMOs at December 31, 1995,
summarized by interest rates on the underlying collateral at December 31, 1995:
<TABLE>
<CAPTION>
Par Amortized Estimated
value cost fair value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Below 7 percent..................................................... $ 401.8 $ 361.1 $ 395.6
7 percent - 8 percent............................................... 849.0 777.2 845.5
8 percent - 9 percent............................................... 220.9 201.6 222.6
9 percent and above................................................. 57.1 51.0 52.9
-------- -------- --------
Total mortgage-backed securities............................... $1,528.8 $1,390.9 $1,516.6
======== ======== ========
</TABLE>
The amortized cost and estimated fair value of mortgage-backed securities
including CMOs at December 31, 1995, summarized by type of security, were as
follows:
<TABLE>
<CAPTION>
Estimated fair value
---------------------
% of
Amortized fixed
Type cost Amount maturities
- ---- ---- ------ ----------
(Dollars in millions)
<S> <C> <C> <C>
Pass-throughs and sequential and targeted amortization classes............... $ 994.5 $1,064.0 21%
Support classes.............................................................. 56.1 66.6 1
Accrual (Z tranche) bonds.................................................... 31.9 37.6 1
Planned amortization classes and accretion directed bonds.................... 182.9 208.5 4
Subordinated classes......................................................... 125.5 139.9 3
-------- -------- --
$1,390.9 $1,516.6 30%
======== ======== ==
</TABLE>
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 provide the best
price/performance ratio in a highly volatile interest rate environment. This
type of security is also frequently used as collateral in the dollar roll
market. Sequential classes pay in a strict sequence with all principal payments
received by the CMO paid to the sequential tranches in order of priority.
Targeted amortization classes provide a modest amount of prepayment protection
when prepayments on the underlying collateral increase from those assumed at
pricing and thus offer slightly better call protection than sequential classes
and pass-throughs.
Support classes absorb the prepayment risk from which planned amortization
and targeted amortization classes are protected. As such, they are usually
extremely sensitive to prepayments. Most of the Company's support classes are
higher average life instruments that generally will not lengthen if interest
rates rise from year end levels and will have a tendency to shorten if interest
rates decline. However, since these bonds have costs below par values, higher
prepayments will have the effect of increasing yields.
Accrual bonds are CMOs structured such that the payment of coupon interest
is deferred until principal payments begin on these bonds. On each accrual date,
the principal balance is increased by the amount of the interest (based upon the
stated coupon rate) that otherwise would have been payable. As such, these
securities act much the same as zero coupon bonds until cash payments begin.
Cash payments typically do not commence until earlier classes in the CMO
structure have been retired, which can be significantly influenced by the
prepayment experience of the underlying mortgage loan collateral in the CMO
structure. Because of the zero coupon element of these securities and the
potential uncertainty as to the timing of cash payments, their market values and
yields are more sensitive to changing interest rates than other CMOs,
pass-through securities and coupon bonds.
Planned amortization classes and accretion directed bonds are some of the
most stable and liquid instruments in the mortgage-backed securities market.
Planned amortization class bonds adhere to a fixed schedule of principal
payments provided that the underlying mortgage collateral experiences
prepayments within a certain range. Changes in prepayment rates are first
absorbed by support classes which insulate the planned amortization classes from
the consequences of both faster prepayments (average life shortening) and slower
prepayments (average life extension).
22
<PAGE>
Subordinated CMO classes have both prepayment and credit risk. The
subordinated classes are used to lend credit enhancement to the senior
securities and as such, rating agencies require that this support not
deteriorate due to the prepayment of the subordinated securities. The credit
risk of subordinated classes is derived from the negative leverage of owning a
small percentage of the underlying mortgage loan collateral while bearing a
majority of the risk of loss due to homeowner defaults.
At December 31, 1995, the mortgage loan portfolio of the Company was
diversified across 74 properties with an average loan size of approximately $.9
million. Approximately 99 percent of the mortgage loan balance relates to
commercial properties including retail, multifamily residential, office,
industrial, nursing home, restaurant and other properties. Less than 2 percent
of the mortgage loan balance was noncurrent at December 31, 1995. There were no
realized losses on mortgage loans during 1995. At December 31, 1995, the Company
had a loan loss reserve of $1.4 million.
Liquidity and Capital Resources
Insurance Operations
The Company's annuity and life insurance business generally provides the
Company's insurance subsidiaries with positive cash flows from premium
collections and investment income. Cash flows from insurance subsidiary
financing activities principally result from the excess of premium collections
from annuities and interest-sensitive insurance contracts over related benefit
payments, including withdrawal and surrender payments. Changes in the account
balances for insurance liabilities accounted for as universal life-type and
investment-type contracts (primarily deferred annuities) (see note 1 in the
consolidated financial statements) for the three years ended December 31, 1995
are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1995 1994 1993
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Account balances, beginning of period..................... $4,677.9 $3,904.8 $3,018.4
Annuity deposits....................................... 777.2 1,080.3 1,016.0
Life insurance deposits................................ 19.9 19.3 19.0
Interest credited, including first year bonus interest. 271.4 232.4 200.8
Policy fund and surrender charges assessed............. (29.6) (24.3) (20.1)
Withdrawals and surrender payments..................... (766.2) (539.2) (309.8)
Other reserve adjustments.............................. - 4.6 (19.5)
-------- -------- ---------
Account balances, end of period........................... $4,950.6 $4,677.9 $3,904.8
======== ======== ========
Net cash flows (total deposits less withdrawal
and surrender payments)................................ $ 30.9 $ 560.4 $ 725.2
======== ======== ========
</TABLE>
Growth in annuity deposits began to slow in 1994 and declined in 1995 as a
result of several factors. The demand for individual fixed annuity products
offered by all insurance companies decreased during 1995. Such decrease is
believed to be attributable to increased competition from products such as
mutual funds, traditional bank investments, variable annuities and other
investment and retirement funding alternatives as a result of a flattened yield
curve and rising equity markets. Additionally, new annuity sales have been
negatively impacted by a reduction of American Life and Casualty's A.M. Best and
Standard & Poor's claims-paying ratings to "A-" as a result of the Acquisition
and related financing transactions. These rating declines have directly affected
American Life and Casualty's competitive position in the financial institution
marketplace where many financial institutions require an insurer's ratings to be
at least "A" resulting in a loss of certain former customers and forgone
opportunities for new sales.
The increases in policy withdrawals and surrender payments generally
correspond to the aging and growth of the Company's annuity business in force,
and to a certain extent, during 1995 and the second half of 1994, the reductions
in the Company's ratings described in the previous paragraph. In addition, the
Company has experienced increases in policyholder utilization of the systematic
withdrawal features in several of its annuity policies and a moderate increase
in surrenders and withdrawals as a result of interest rates increasing during
1994 and the first quarter of 1995 which has increased the yields on alternative
investments.
Total withdrawals and surrenders were 14.2 percent, 11.2 percent and 9.6
percent of the average cash values outstanding during the years ended December
31, 1995, 1994 and 1993, respectively. Withdrawal and surrender payments
accelerated in 1994 and 1995 primarily due to a certain policy form principally
issued during 1988 through 1990 whose surrender charge declined from 4 percent
at the fifth policy anniversary date to 0 percent at the sixth policy
anniversary date. As these policies reached their sixth anniversary, surrenders
occurred. The Company expects the trend of accelerated withdrawals and
surrenders of this product to subside over the
23
<PAGE>
next 12 months since sales of this product peaked in the second quarter of 1989
and were effectively discontinued after June 30, 1990. At December 31, 1995, the
aggregate account balances still in force for this product were $651.5 million,
of which $152.9 million still carried a surrender charge of at least 4 percent.
With respect to such product, the Company's recent experience indicates that
approximately 50 percent of the account balances that still have a surrender
charge in place at December 31, 1995, will surrender within one year after the
affected policies reach their sixth anniversary. There can be no assurance that
surrenders of such account balances will not exceed 50 percent in the future.
Substantially all of the Company's annuity products have a surrender charge
feature designed to reduce early withdrawal or surrender of the policies and to
partially compensate the Company for its costs if policies are withdrawn early.
Surrender charge periods on annuity policies currently being issued generally
range from five years to 12 years with 90 percent or more of such policies
issued during 1994 and 1995 having a surrender charge period of eight years or
more. The initial surrender charge on annuity policies ranges from 6 percent to
12 percent of the accumulation value and generally decreases by approximately 1
to 2 percentage points per year during the surrender charge period.
The following table summarizes the Company's deferred annuity liabilities
at December 31, 1995 and 1994, and sales for the years then ended, respectively,
by surrender charge category.
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
-------------------------------------- --------------------------------------
Annuity Annuity
Surrender Charge % Deposits % Liabilities % Deposits % Liabilities %
- ------------------ -------- ---- ----------- ---- -------- --- ----------- --
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
No surrender charge................. $ .2 * $ 986.1 21% $ 2.1 * $ 827.0 19%
1 to 3.9 percent.................... - - 317.2 7 - - 450.2 10
4 to 6.9 percent.................... 6.4 1 555.7 12 9.2 1 588.3 13
7 to 9.9 percent.................... 64.4 9 605.4 13 145.1 14 610.7 14
10 to 11.9 percent.................. 371.3 51 1,059.6 22 551.0 53 907.1 20
12 percent and greater.............. 285.9 39 1,192.4 25 327.4 32 1,061.5 24
------- ---- -------- ---- ------- --- ------- --
$728.2 100% $4,716.4 100% $1,034.8 100% $4,444.8 100%
====== === ======== === ======== === ======== ===
<FN>
* less than 1 percent
</FN>
</TABLE>
The increase in deferred annuity liabilities that can be surrendered
without penalty is principally attributable to the policy form discussed above
where the surrender charge declines from 4 percent to 0 percent on the sixth
policy anniversary.
Most of the Company's assets are invested in bonds and other securities,
substantially all of which are readily marketable. Although there is no present
need or intent to dispose of such investments, the Company could liquidate
portions of its investments or use them to facilitate borrowings under reverse
repurchase agreements if such a need arose. At December 31, 1995, the Company's
portfolio of bonds, notes and redeemable preferred stocks had an aggregate net
unrealized gain of $415.8 million.
Parent Holding Companies
The Acquisition of the Company by Partnership II and related transactions
were funded with $45.9 million in cash contributions made to Partnership II by
its partners, which was effectively contributed to the Company as part of the
Acquisition, $57 million in cash from the issuance in a private placement of the
1994 Series Preferred Stock and $320 million in cash from the issuance of
long-term debt by American Life Holding.
24
<PAGE>
The aggregate proceeds from the Acquisition financing of $422.9 million
(excluding $30 million not yet borrowed to be used in connection with the
Savings Bank Litigation) were used as follows (dollars in millions):
<TABLE>
<S> <C>
Pay the cash consideration to acquire the Company.......................... $314.1
Repay bank indebtedness of a subsidiary of the Company..................... 55.5
Purchase a surplus note from American Life and Casualty.................... 24.0
Transaction fees and expenses.............................................. 15.7
Cash retained.............................................................. 13.6
------
$422.9
======
</TABLE>
The cash consideration to acquire the Company included $69.0 million for
the conversion of the Convertible Debentures. As of December 31, 1995, $54.0
million principal amount of the Convertible Debentures had been converted and
$15.0 million principal amount remained outstanding. In addition, the Company is
obligated to pay the holders of the Contingent Payment Rights or the holder of
the 1988 Series Preferred Stock (depending on the outcome of the Savings Bank
Litigation) upon conversion of the 1988 Series Preferred Stock, an amount of not
less than approximately $30 million. Funds to make these payments are available
under the Company's Senior Credit Facility as discussed hereafter.
In the fourth quarter of 1995, AGP completed the following financing
transactions: (i) sold 2,142,857 shares of its common stock for $30.0 million in
a private placement transaction; (ii) made a $30.0 million unscheduled principal
payment on the then outstanding senior term loan; (iii) executed a new credit
facility to provide for aggregate borrowings of up to $225.0 million (the
"Senior Credit Facility"); and (iv) borrowed $125 million under the Senior
Credit Facility and repaid in full the remaining principal balance under the
then outstanding senior term loan. Eighty percent of the common shares sold were
purchased by Partnership II and the remaining shares were purchased by other
holders of the Company's common stock. The proceeds from the issuance of the
shares were used to make a $30.0 million capital contribution to American Life
Holding to enable American Life Holding to prepay its previous existing senior
term loan. The general terms and conditions of the Senior Credit Facility are
discussed in note 6 of the accompanying consolidated financial statements. The
Company believes the Senior Credit Facility provides greater flexibility to
American Life Holding than the prior senior term loan because the Senior Credit
Facility: (i) provides additional available working capital by increasing the
aggregate maximum borrowings to $225.0 million; (ii) provides for a revolving
credit facility; (iii) provides for more favorable interest rates; (iv) has less
restrictive covenants; and (v) has a more favorable repayment schedule.
AGP and American Life Holding need liquidity primarily to service their
debt, pay dividends on their capital stock and pay operating expenses. The
primary sources of funds for these payments are dividends on capital stock from
subsidiaries and interest payments on surplus notes and net tax sharing payments
received from American Life and Casualty.
AGP has no direct ownership interest in the insurance subsidiaries and must
rely on dividends from American Life Holding and payments under the tax sharing
agreement with its subsidiaries to fund its operating expenses and any dividends
or interest expense it may seek or be obligated to pay. Since the Acquisition,
AGP's direct obligations for dividends on preferred stock and interest on
indebtedness have been substantially reduced as a result of the retirement of
certain preferred stock as part of the Acquisition and the conversion of $54.0
million principal amount of the Convertible Debentures. AGP remains obligated to
pay interest on the remaining $15.0 million principal balance of the Convertible
Debentures as long as such amounts remain outstanding.
At December 31, 1995, American Life Holding had $150 million of senior
subordinated notes outstanding and $125 million in outstanding indebtedness
under the Senior Credit Facility. AGP and its subsidiaries may incur additional
indebtedness in the future, subject to the limitations contained in the Senior
Credit Facility and the indenture for the senior subordinated indebtedness. In
addition, the Senior Credit Facility and the indenture contain limitations on
the ability of American Life Holding to pay dividends on its capital stock
(other than the two series of its redeemable preferred stock discussed in the
following paragraph), which could impact AGP's access to funds to meet its
obligations. Under the most restrictive covenants of the Senior Credit Facility,
American Life Holding is limited to paying dividends of $.5 million per year to
AGP. In the event that the Company is required to pay unpaid dividends on the
1988 Series Preferred Stock, limitations in the Senior Credit Facility would
require the Company (absent a waiver from the lenders) to seek sources of funds
other than dividends from American Life Holding or borrowing. The Company
believes it will have sufficient resources to pay such preferred stock dividends
if payment becomes necessary.
25
<PAGE>
American Life Holding has two series of redeemable preferred stock
outstanding. Principal and interest payments on American Life Holding's
indebtedness have priority over dividend payments on these issues of preferred
stock, however the rights of the holders of such preferred stock with respect to
the securities segregated in escrow accounts for the future redemption of that
stock are unaffected by the incurrence of the new indebtedness.
The payment of dividends and other distributions, including surplus note
payments, by American Life and Casualty are subject to regulation by the Iowa
Insurance Division. Currently, American Life and Casualty may pay dividends or
make other distributions without the prior approval of the Iowa Insurance
Division, unless such payments, together with all other such payments within the
preceding 12 months, exceed the greater of (1) American Life and Casualty's net
gain from operations (excluding net realized capital gains or losses) for the
preceding calendar year or (2) 10 percent of its statutory surplus at the
preceding December 31. For 1996, up to $31.0 million can be distributed as
dividends or surplus note payments without prior approval of the Iowa Insurance
Division. In addition, dividends and surplus note payments may be made only out
of earned surplus, and all surplus note payments are subject to prior approval
by regulatory authorities. Vulcan Life, which is subject to similar regulatory
limitations on its ability to pay dividends, has not paid a dividend during the
entire period of time it has been a subsidiary of the Company and no future
dividend payments by Vulcan Life are currently contemplated.
The maximum distributions permitted by law is not necessarily indicative of
an insurer's actual ability to pay such distributions, which may be constrained
by business and regulatory considerations, such as the impact of such
distributions on surplus, which could affect an insurer's ratings or competitive
position, the amount of premiums that can be written and the ability to pay
future dividends or make other distributions. Further, the Iowa insurance laws
and regulations require that the statutory surplus of American Life and Casualty
following any dividend or distribution be reasonable in relation to its
outstanding liabilities and adequate for its financial needs. The Iowa Insurance
Division may bring an action to enjoin or rescind the payment of a dividend or
distribution by American Life and Casualty that would, in its judgment, cause
American Life and Casualty's statutory surplus to be unreasonable or inadequate
under this standard.
The transfer of funds by the Company's insurance subsidiaries is also
restricted by certain covenants in the Company's loan agreements which, among
other things, require American Life and Casualty to maintain statutory capital
and surplus (including the asset valuation and interest maintenance reserves) of
$250 million. Under the most restrictive of these limitations, $24.2 million of
earned surplus at December 31, 1995 would be available for distribution by
American Life and Casualty to American Life Holding in the form of dividends or
other distributions.
Statutory accounting practices prescribed or permitted for the Company's
insurance subsidiaries differ in many respects from those governing the
preparation of financial statements under GAAP. Accordingly, statutory operating
results and statutory capital and surplus may differ substantially from amounts
reported in the GAAP basis financial statements for comparable items. The
Company's insurance subsidiaries follow certain permitted statutory accounting
practices which are not specifically prescribed in state laws, regulations,
general administrative rules or various NAIC publications. Such permitted
practices do not enhance statutory surplus. Further, the Company's insurance
subsidiaries do not have any reinsurance agreements generally known as "surplus
relief reinsurance" which have the effect of increasing statutory surplus at
inception and reducing statutory surplus in subsequent years as amounts are
recaptured by reinsurers. Information as to statutory capital and surplus and
statutory net income for the Company's insurance subsidiaries as of and for the
years ended December 31, 1995 and 1994, is included in note 14 in the
accompanying consolidated financial statements.
American Life Holding's cash flow also includes dividends and tax sharing
payments derived from American Life and Casualty Marketing Division Co.'s
("AMCO") income, if any. AMCO functions as a general agent for American Life and
Casualty, and its primary purpose is to pay commissions to American Life and
Casualty's agents on annuity and life insurance policies issued by American Life
and Casualty pursuant to a general agency commission and servicing agreement
between AMCO and American Life and Casualty. This agreement initially benefits
the statutory surplus of American Life and Casualty by extending the payment of
first year commissions by American Life and Casualty to AMCO on certain deferred
annuity policies over a longer period of time. In subsequent periods, American
Life and Casualty's statutory surplus is reduced through the payment of renewal
commissions to AMCO equal to a specified percentage of the accumulated
policyholder account values of certain deferred annuity policies in force issued
by American Life and Casualty since July 1990 remaining in force. These renewal
commissions and capital contributions and/or advances from American Life Holding
are the sources of funds for AMCO's payment of the first year commissions to
agents on the deferred annuity policies issued by American Life and Casualty.
26
<PAGE>
Federal Income Tax Legislation
The annuity products marketed and issued by the Company enjoy certain
income tax advantages as compared to certain other savings investments such as
certificates of deposit and taxable bonds. One important tax advantage is the
deferral of income taxation on any increases in the contract values during the
accumulation phase of these annuity products as opposed to the current taxation
of all earnings that is imposed on many other savings and investment products.
In the event that the federal income tax laws are changed such that accumulated
earnings on annuity products do not enjoy the tax deferral described above, or
such that additional savings and investment products were to achieve similar tax
deferral status, or such that tax rates were significantly lower so that the
annuitant's ability to defer tax on annuity earnings was no longer a significant
factor for the policyholder, consumer demand for the affected annuity products
could decline materially or be eliminated. From time to time, Congress has
considered proposals to revise or eliminate this tax deferral. There is no such
proposal currently pending in Congress, nor has the current administration
announced any consideration of such proposals. If legislation were enacted to
eliminate the tax deferral for certain annuities, such a change would have an
adverse effect on the ability of the Company to sell certain annuities.
Inflation
Disclosures related to the financial effect of inflation generally focus on
the items most often affected by inflation - inventories and property, plant and
equipment. For a life insurance organization these items are insignificant or
nonexistent. Most of the Company's assets are investments, repayable in the
future in dollars that, assuming that inflation continues, will have less
purchasing power than the dollars originally invested. Similarly, most of the
Company's reserves and liabilities would be payable in the future with dollars
with less purchasing power. An effect of inflation is a decline in purchasing
power when monetary assets exceed monetary liabilities.
27
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Index to Consolidated Financial Statements
Page
----
<S> <C>
Report of Management....................................................................................... 29
Report of Independent Accountants on the Consolidated Financial Statements as of
December 31, 1995 and 1994, and for the year ended December 31, 1995, the
three months ended December 31, 1994, and the nine months ended
September 30, 1994.................................................................................... 30
Report of Independent Auditors for the year ended December 31, 1993........................................ 31
Consolidated Balance Sheet................................................................................. 32
Consolidated Statement of Operations....................................................................... 34
Consolidated Statement of Shareholders' Equity............................................................. 36
Consolidated Statement of Cash Flows....................................................................... 38
Notes to Consolidated Financial Statements................................................................. 40
</TABLE>
28
<PAGE>
REPORT OF MANAGEMENT
To Our Shareholders
Management of American Life Group, Inc. is responsible for the reliability
of the financial information in this annual report. The financial statements are
prepared in accordance with generally accepted accounting principles and the
other financial information in this annual report is consistent with that of the
financial statements (except for such information described as being in
accordance with regulatory or statutory accounting requirements).
The integrity of the financial information relies in large part on
maintaining a system of internal control that is established by management to
provide reasonable assurance that assets are safeguarded and transactions are
properly authorized, recorded and reported. Reasonable assurance is based upon
the premise that the cost of controls should not exceed the benefits derived
from them. The Company's internal auditors continually evaluate the adequacy and
effectiveness of this system of internal control and actions are taken to
correct deficiencies as they are identified.
Certain financial information presented depends upon management's estimates
and judgments regarding the ultimate outcome of transactions which are not yet
complete. Management believes these estimates and judgments are fair and
reasonable in view of present conditions and available information.
The Company engages independent accountants to audit its financial
statements and express their opinion thereon. They have full access to each
member of management in conducting their audits. Such audits are conducted in
accordance with generally accepted auditing standards and include a review of
internal controls, tests of the accounting records, and such other auditing
procedures as they consider necessary to express an opinion on the Company's
financial statements.
Jon P. Newsome Rollin M. Dick
President and Chief Executive Officer Executive Vice President and
Chief Financial Officer
29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Shareholders and Board of Directors
American Life Group, Inc.
We have audited the accompanying consolidated balance sheet of American
Life Group, Inc. (formerly known as The Statesman Group, Inc.) and subsidiaries
as of December 31, 1995 and 1994, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year ended December 31,
1995, and the three months ended December 31, 1994. We have also audited the
accompanying consolidated statements of operations, shareholders' equity and
cash flows of American Life Group, Inc. and subsidiaries for the nine months
ended September 30, 1994 based on the historical predecessor basis applicable to
periods prior to the acquisition of the Company (see Note 1 of the notes to
consolidated financial statements regarding the September 29, 1994 acquisition).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
American Life Group, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for the year
ended December 31, 1995, and the three months ended December 31, 1994 and the
consolidated results of operations and cash flows for the nine months ended
September 30, 1994 of American Life Group, Inc. in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
February 23, 1996
30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Shareholders and Board of Directors
American Life Group, Inc.
We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of American Life Group, Inc. (formerly
known as The Statesman Group, Inc.) and subsidiaries for the year ended December
31, 1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of American Life Group, Inc. and subsidiaries for the year ended
December 31, 1993, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Des Moines, Iowa
January 27, 1994, except for the
August 8, 1995 one-for-two stock
split as to which the date is August 9, 1995
31
<PAGE>
<TABLE>
<CAPTION>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1995 and 1994
(Dollars in millions)
ASSETS
1995 1994
---- ----
<S> <C> <C>
Investments:
Actively managed fixed maturities at fair value (amortized cost:
1995 - $4,667.3; 1994 - $4,144.0)..................................................... $5,083.1 $4,100.1
Equity securities at fair value (cost: 1995 - $16.5; 1994 - $19.7)....................... 18.8 18.9
Credit-tenant loans...................................................................... 13.6 -
Mortgage loans........................................................................... 64.6 64.7
Policy loans............................................................................. 62.9 59.7
Short-term investments................................................................... 102.3 53.6
Other invested assets.................................................................... 18.2 22.7
--------- --------
Total investments................................................................... 5,363.5 4,319.7
Accrued investment income .................................................................. 80.8 71.3
Cost of policies purchased.................................................................. 250.1 447.8
Cost of policies produced................................................................... 77.6 25.0
Income tax assets........................................................................... - 130.4
Property and equipment (net of accumulated depreciation: 1995 - $1.1; 1994 - $.3) .......... 8.9 11.7
Cash segregated for the conversion of 6-1/4% debentures..................................... - 24.2
Securities segregated for the future redemption of redeemable preferred stock
of a subsidiary........................................................................... 39.2 36.2
Goodwill ( net of accumulated amortization: 1995 - $11.3; 1994 - $2.2)...................... 348.9 353.2
Other assets................................................................................ 33.1 30.2
-------- --------
Total assets........................................................................ $6,202.1 $5,449.7
======== ========
(Continued on next page)
<FN>
The accompanying notes are an integral
part of the consolidated financial statements.
</FN>
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
December 31, 1995 and 1994
(Dollars in millions, except per share amounts)
LIABILITIES AND SHAREHOLDERS' EQUITY
1995 1994
---- ----
<S> <C> <C>
Liabilities:
Insurance liabilities.................................................................... $5,148.7 $4,843.8
Income tax liabilities................................................................... 38.1 -
Investment borrowings.................................................................... 130.7 -
Contingent consideration payable upon determination of
the Savings Bank Litigation (see note 9)............................................... 30.1 30.1
Other liabilities........................................................................ 65.6 65.0
Accounts payable to affiliates........................................................... 1.2 2.1
Notes payable............................................................................ 282.5 330.0
-------- --------
Total liabilities................................................................... 5,696.9 5,271.0
Minority interest, primarily redeemable preferred stock of a subsidiary..................... 99.6 99.6
Shareholders' equity:
Series Preferred Stock $1 Par........................................................... 66.6 58.9
Common stock, $1 par value, and additional paid-in capital;
35,000,000 shares authorized; outstanding:
1995 - 13,442,075 shares; 1994 - 11,299,218 shares..................................... 75.9 45.9
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities (net of applicable deferred income taxes:
1995 - $105.0; 1994 - $(15.4))...................................................... 194.9 (28.5)
Other investments (net of applicable deferred income taxes:
1995 - $.8; 1994 - $(.3))........................................................... 1.5 (.5)
Retained earnings........................................................................ 66.7 3.3
-------- --------
Total shareholders' equity.......................................................... 405.6 79.1
-------- --------
Total liabilities and shareholders' equity.......................................... $6,202.1 $5,449.7
======== ========
<FN>
The accompanying notes are an integral
part of the consolidated financial statements.
</FN>
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions, except per share amounts)
Predecessor Basis
---------------------------
Three months Nine months
Year ended ended ended Year ended
December 31, December 31, September 30, December 31,
1995 1994 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income............................. $ 58.1 $ 13.6 $ 40.2 $ 50.0
Net investment income............................... 415.6 92.8 250.8 304.8
Net trading income (losses) ........................ 1.5 (.8) - -
Net realized gains (losses)......................... 147.8 1.2 (16.8) 18.9
Other ............................................. 6.3 2.1 4.3 5.5
------- ------ ------ -------
Total revenues................................. 629.3 108.9 278.5 379.2
------- ------ ------ -------
Benefits and expenses:
Insurance policy benefits........................... 28.7 6.0 16.7 25.6
Change in future policy benefits.................... 4.4 3.4 9.4 6.1
Interest expense on annuities and financial products 258.8 61.3 158.8 195.9
Interest expense on notes payable................... 33.8 8.8 6.7 6.1
Interest expense on investment borrowings........... 7.7 - 2.8 -
Amortization of cost of policies purchased
and cost of policies produced:
Related to operations.......................... 33.2 6.7 29.7 31.7
Related to realized gains ..................... 83.3 - 2.8 9.8
Amortization of goodwill............................ 9.1 2.2 - -
Acquisition, merger and other nonrecurring expenses 5.4 - 7.2 -
Other operating costs and expenses.................. 31.1 8.0 25.8 35.5
------- ------ ------ -------
Total benefits and expenses.................... 495.5 96.4 259.9 310.7
------- ------ ------ -------
Income before income taxes, minority
interest and extraordinary charge............ 133.8 12.5 18.6 68.5
Income tax expense...................................... 49.9 5.1 6.7 22.4
------- ------ ------ -------
Income before minority interest and
extraordinary charge......................... 83.9 7.4 11.9 46.1
Minority interest-primarily dividends on preferred
stock of subsidiary................................. 8.8 2.2 6.7 8.8
------- ------ ------ -------
Income before extraordinary charge............. 75.1 5.2 5.2 37.3
Extraordinary charge on extinguishment of debt,
net of income tax benefit........................... 4.0 - - -
------- ------ ------ -------
Net income..................................... 71.1 5.2 5.2 37.3
Dividend requirements of Series Preferred Stock
$1 Par, net of income tax benefit................... 7.7 1.9 1.1 1.6
------- ------ ------ -------
Net income applicable to common stock.......... $ 63.4 $ 3.3 $ 4.1 $ 35.7
======= ====== ====== =======
(Continued on next page)
<FN>
The accompanying notes are an integral
part of the consolidated financial statements.
</FN>
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (Continued)
Predecessor Basis
----------------------------
Three months Nine months
Year ended ended ended Year ended
December 31, December 31, September 30, December 31,
1995 1994 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings per common share:
Primary:
Weighted average shares outstanding........... 11,487,000 11,299,000 7,100,000 7,161,000
Earnings before extraordinary charge.......... $5.87 $.30 $.58 $4.98
Extraordinary charge.......................... .35 - - -
----- ---- ---- -----
Net income............................... $5.52 $.30 $.58 $4.98
===== ==== ==== =====
Fully diluted:
Weighted average shares outstanding........... 11,487,000 11,299,000 7,100,000 10,556,000
Earnings before extraordinary charge.......... $5.87 $.30 $.58 $3.69
Extraordinary charge.......................... .35 - - -
----- ---- ---- -----
Net income............................... $5.52 $.30 $.58 $3.69
===== ==== ==== =====
<FN>
The accompanying notes are an integral
part of the consolidated financial statements.
</FN>
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in millions, except per share amounts)
Predecessor Basis
--------------------------
Three months Nine months
Year ended ended ended Year ended
December 31, December 31, September 30, December 31,
1995 1994 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Series Preferred Stock $1 Par:
Balance, beginning of period............................... $58.9 $57.0 $ .3 $ .3
Retirement of 1976 Series Preferred
Stock pursuant to Acquisition......................... - - (.2) -
1994 Series Preferred Stock issued....................... - - 45.7 -
Allocation to 1994 Series Preferred Stock
from additional paid-in capital....................... - - 11.3 -
Distribution of paid-in-kind dividend on
1994 Series Preferred Stock........................... 7.4 - - -
Change in accrued dividend on 1994 Series
Preferred Stock....................................... .3 1.9 - -
Other ................................................... - - (.1) -
----- ----- ------ -----
Balance, end of period..................................... $66.6 $58.9 $57.0 $ .3
===== ===== ====== =====
Common stock and additional paid-in capital:
Balance, beginning of period............................... $45.9 $45.9 $65.9 $62.0
Issuance of common stock................................. 30.0 - - -
Stock dividend........................................... - - - 9.4
Cost of shares acquired.................................. - - (.6) (6.2)
Amounts related to stock option plans and
employee benefit plans................................ - - (3.4) .1
Exchange of 1987 Series II Preferred Stock............... - - - .4
Tax benefit related to issuance of shares
under stock option plans.............................. - - 3.2 .2
Conversion of 6-1/4% debentures.......................... - - 2.5 -
Retirement of common and preferred stock
pursuant to Acquisition .............................. - - (67.6) -
Issuance of common stock to Partnership II............... - - 45.9 -
Issuance of common stock to holders of the 1994
Series Preferred Stock................................ - - 11.3 -
Allocation of additional paid-in capital to 1994
Series Preferred Stock................................ - - (11.3) -
----- ------ ----- -----
Balance, end of period..................................... $75.9 $45.9 $45.9 $65.9
===== ===== ===== =====
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities:
Balance, beginning of period ............................ $(28.5) $ - $ - $ -
Adoption of FASB Statement 115 ....................... - - 38.2 -
Change in unrealized appreciation (depreciation)...... 223.4 (28.5) (188.9) -
Elimination of balance pursuant to Acquisition........ - - 150.7 -
------ ------ ------ -----
Balance, end of period................................... $194.9 $(28.5) $ - $ -
====== ====== ====== =====
(Continued on next page)
<FN>
The accompanying notes are an integral
part of the consolidated financial statements.
</FN>
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Continued)
(Dollars in millions, except per share amounts)
Predecessor Basis
----------------------------
Three months Nine months
Year ended ended ended Year ended
December 31, December 31, September 30, December 31,
1995 1994 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Other investments:
Balance, beginning of period......................... $ (.5) $ - $ (.3) $ (1.5)
Change in unrealized appreciation (depreciation) 2.0 (.5) (1.3) 1.2
Elimination of balance pursuant to Acquisition.... - - 1.6 -
------ ----- ------ ------
Balance, end of period............................... $ 1.5 $ (.5) $ - $ (.3)
====== ===== ====== ======
Retained earnings:
Balance, beginning of period........................... $ 3.3 $ - $ 79.4 $ 53.0
Net income........................................... 71.1 5.2 5.2 37.3
Dividends:
Preferred stock (paid in cash).................... - - (1.4) (1.0)
Preferred stock (payable in additional shares).... (7.7) (1.9) - -
Common stock (paid in cash)....................... - - (1.3) (.6)
Common stock (paid in additional shares).......... - - - (9.4)
Tax benefit on 1987 Series II Preferred
Stock dividends................................... - - .1 .1
Elimination of balance pursuant to Acquisition....... - - (82.0) -
------ ----- ------ ------
Balance, end of period................................. $ 66.7 $ 3.3 $ - $ 79.4
====== ===== ====== ======
Total shareholders' equity............................. $405.6 $79.1 $102.9 $145.3
====== ===== ====== ======
<FN>
The accompanying notes are an integral
part of the consolidated financial statements.
</FN>
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
Predecessor Basis
-----------------------------
Three months Nine months
Year ended ended ended Year ended
December 31, December 31, September 30, December 31,
1995 1994 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 71.1 $ 5.2 $ 5.2 $ 37.3
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization and depreciation.................. 126.6 9.9 34.3 42.9
Income taxes................................... 48.8 5.1 (1.1) 2.5
Insurance liabilities.......................... 44.8 4.3 13.9 14.6
Interest credited to insurance liabilities..... 258.8 61.3 158.8 195.9
Fees charged to insurance liabilities.......... (29.6) (5.9) (18.4) (20.1)
Accrual and amortization of investment income (54.6) (25.1) (39.8) (60.5)
Deferral of cost of policies produced.......... (87.3) (25.2) (85.2) (100.3)
Other liabilities.............................. (5.8) (14.3) 4.3 2.1
Accounts and notes receivable.................. (2.6) (.6) .8 (8.0)
Extraordinary charge on extinguishment of debt 6.2 - - -
Realized (gains) losses and trading (gains)
losses on investments....................... (149.3) (.4) 16.8 (18.9)
Other.......................................... (9.4) (1.1) (4.3) (3.2)
--------- ------- --------- ----------
Net cash provided by operating activities...... 217.7 13.2 85.3 84.3
--------- ------- --------- ----------
Cash flows from investing activities:
Purchases of investments............................ (3,244.2) (764.8) (1,324.6) (3,860.9)
Sales of investments................................ 2,835.9 505.5 629.9 2,226.3
Maturities and redemptions.......................... 77.7 36.1 241.8 763.0
--------- ------- --------- ----------
Net cash used by investing activities.......... (330.6) (223.2) (452.9) (871.6)
--------- ------- --------- ----------
(Continued on next page)
<FN>
The accompanying notes are an integral
part of the consolidated financial statements.
</FN>
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Dollars in millions)
Predecessor Basis
-----------------------------
Three months Nine months
Year ended ended ended Year ended
December 31, December 31, September 30, December 31,
1995 1994 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Issuance of notes payable........................... $ 125.0 $ - $ 336.8 $ 115.7
Payments on notes payable........................... (170.0) - (79.3) (37.3)
Cash released from (placed in) segregated account
for conversion of Convertible Debentures.......... 15.0 - (66.5) -
Issuance of common stock............................ 30.0 - 45.9 -
Payments to former stockholders pursuant to
merger agreement.................................. - - (244.4) -
Issuance of 1994 Series Preferred Stock............. - - 57.0 -
Purchase of securities segregated for future
redemption of redeemable preferred stock of
a subsidiary...................................... - - - (9.9)
Payments to repurchase equity securities............ - - (.6) (6.2)
Investment borrowings, net.......................... 130.7 - - -
Deposits to insurance liabilities................... 797.1 275.5 824.1 1,035.0
Withdrawals from insurance liabilities.............. (766.2) (149.8) (389.4) (309.8)
Dividends paid...................................... - - (1.7) (1.3)
Other............................................... - (.3) - (2.1)
------- -------- ---------- ----------
Net cash provided by financing activities...... 161.6 125.4 481.9 784.1
------- -------- ---------- ----------
Net increase (decrease) in short-term
investments.................................. 48.7 (84.6) 114.3 (3.2)
Short-term investments, beginning of period... 53.6 138.2 23.9 27.1
------- -------- ---------- ----------
Short-term investments, end of period.......... $ 102.3 $ 53.6 $ 138.2 $ 23.9
======= ======== ========== ==========
<FN>
The accompanying notes are an integral
part of the consolidated financial statements.
</FN>
</TABLE>
39
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
American Life Group, Inc. (the "Company") (formerly The Statesman Group,
Inc. prior to its name change in August 1995) is an insurance holding company
engaged primarily in the development, marketing, issuance and administration of
annuity and life insurance products through its insurance subsidiaries, American
Life and Casualty Insurance Company ("American Life and Casualty") and Vulcan
Life Insurance Company ("Vulcan Life"). The Company markets its annuity and life
insurance products primarily to middle-income individuals, ages 45 and over,
through a general agency and insurance brokerage distribution system. 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.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP"), which, as to
the subsidiary insurance companies, differ in some respects from statutory
accounting practices followed in the preparation of financial statements
submitted to state insurance departments. All share and per share amounts have
been restated to reflect the August 8, 1995 one-for-two stock split, unless
otherwise noted. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the preparation period. Actual results could differ from those
estimates. Significant estimates and assumptions are utilized in the calculation
of cost of policies produced, cost of policies purchased, goodwill, insurance
liabilities, liabilities related to litigation, guaranty fund assessment
accruals and deferred income taxes. It is reasonably possible that actual
experience could differ from the estimates and assumptions utilized which could
have a material impact on the financial statements.
On September 29, 1994, Conseco Capital Partners II, L.P. ("Partnership
II"), a Delaware limited partnership, completed the acquisition (the
"Acquisition") of the Company. Under an Agreement and Plan of Merger dated May
1, 1994, the Company merged with a subsidiary of Partnership II. The Company's
former shareholders received $15.25 (not adjusted for the August 8, 1995
one-for- two stock split) in cash per common equivalent share plus a contingent
payment right (the "Contingent Payment Right") to receive up to another $2.00
(not adjusted for the August 8, 1995 one-for-two stock split) in cash per common
equivalent share (the "Contingent Consideration"), based on the outcome of the
Company's pending litigation against the U.S. Government concerning its former
savings bank subsidiary (the "Savings Bank Litigation") (see note 9).
Partnership II was formed by Conseco, Inc. ("Conseco") to invest in
privately negotiated acquisitions of specialized annuity, life and accident and
health insurance companies and related businesses. The sole general partner of
Partnership II is a wholly owned subsidiary of Conseco. Conseco is a
publicly-held specialized financial services holding company which manages
several wholly or partially owned life insurance companies and provides services
to its managed companies and other businesses for fees. After the Acquisition
and related financing transactions, Partnership II owns 80 percent of the
Company's outstanding common stock. Conseco, through its direct investment and
interests in certain of its subsidiaries and affiliates, has a 36 percent
ownership interest in the Company.
In March 1996, Conseco announced it is terminating Partnership II because
changes in the regulatory and rating agency environment have made it impractical
to structure leveraged acquisitions of life insurance companies in a manner that
produces the expected returns to the limited partners (see note 16).
The Acquisition and related transactions were funded with: (i) $45.9
million of cash contributions from Partnership II (including $14.7 million
provided by Conseco and its affiliates); (ii) $57.0 million in cash from the
sale in a private placement of the Company's 1994 Series Preferred Stock $1 Par
(the "1994 Series Preferred Stock" - see note 8)(including $49.9 million
provided by Conseco and its affiliates, of which $3.0 million was sold in
December 1994 to an unaffiliated company); and (iii) $320.0 million in cash from
the issuance of notes payable by American Life Holding (see note 6). As partial
consideration for the purchase of the 1994 Series Preferred Stock, the
purchasers received 20 percent of the outstanding common stock of the Company.
40
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Acquisition is accounted for using the purchase method of accounting.
Under purchase accounting, the total purchase cost was allocated to the assets
and liabilities acquired based on their fair values, with the excess of the
total purchase cost over the fair value of the net assets acquired recorded as
goodwill. The consolidated balance sheet as of December 31, 1995 and 1994, and
consolidated statements of operations, shareholders' equity and cash flows for
the year ended December 31, 1995, and the three months ended December 31, 1994,
are reported based on such purchase values.
The values of the assets and liabilities acquired were as follows
(dollars in millions):
<TABLE>
<S> <C>
Fixed maturities........................................................ $ 3,906.0
Mortgage loans.......................................................... 64.7
Policy loans............................................................ 59.1
Short-term investments.................................................. 138.2
Other investments....................................................... 51.9
Cost of policies purchased.............................................. 454.3
Goodwill................................................................ 360.2
Income taxes............................................................ 121.9
Reinsurance receivables................................................. 5.6
Cash segregated for conversion of convertible debentures................ 66.5
Securities segregated for future redemption of redeemable preferred
stock of a subsidiary................................................. 35.5
Insurance liabilities................................................... (4,658.4)
Notes payable........................................................... (371.7)
Minority interest....................................................... (99.0)
Other................................................................... (31.9)
---------
Net assets acquired................................................. $ 102.9
=========
</TABLE>
Assuming the Acquisition and related transactions had occurred as of
January 1, 1994, revenues, income before extraordinary charge and loss before
extraordinary charge per common share were $397.6 million, $7.3 million and
$.01, respectively, for the year ended December 31, 1994. All such pro forma
amounts are unaudited.
The consolidated financial statements include the accounts of the Company
and its subsidiaries after elimination of all significant intercompany accounts
and transactions. Certain amounts from prior periods were reclassified to
conform to the 1995 presentation.
Investments
Fixed maturity investments are securities that mature more than one year
after they are issued and include bonds, notes receivable and preferred stocks
with mandatory redemption features. Equity securities include investments in
common stocks and non-redeemable preferred stock. Effective January 1, 1994, the
Company adopted Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS 115"), and,
accordingly, classifies its fixed maturity and equity securities into the
following three categories:
o Actively managed fixed maturity securities that may be sold prior
to maturity due to changes that might occur in market interest
rate risks, changes in the security's prepayment risk, the
management of income tax position, general liquidity needs, an
increase in loan demand, the need to increase regulatory capital,
changes in foreign currency risk or similar factors. Actively
managed fixed maturity securities and equity securities are
carried at fair value and the unrealized gain or loss is recorded
as a component of shareholders' equity, net of tax and the related
adjustments described in the second following paragraph.
o Trading account securities are fixed maturity and equity
securities that are bought and held principally for the purpose of
selling them in the near term. Trading account securities are
carried at estimated fair value and the unrealized gain or loss is
included as a component of net trading income. No trading
securities were held at December 31, 1995 or 1994.
41
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
o All other fixed maturity securities are those securities which the
Company has the ability and positive intent to hold to maturity,
and are carried at amortized cost. The Company may dispose of such
securities under certain unforeseen circumstances, such as issuer
credit deterioration or regulatory requirements. In conjunction
with the Acquisition, all fixed maturity securities previously
classified as held to maturity were transferred to actively
managed to reflect the intent of the current management. The
Company has not held any securities in this classification since
the Acquisition.
There was no effect on net income as a result of adopting SFAS 115.
Anticipated returns, including realized gains and losses, from the
investment of policyholder balances are considered in determining the
amortization of the cost of policies purchased and the cost of policies
produced. When actively managed fixed maturity securities are stated at fair
value, an adjustment to the cost of policies purchased and the cost of policies
produced may be necessary if a change in amortization would have been recorded
if such securities had been sold at their fair value and the proceeds reinvested
at current yields. Furthermore, if future yields expected to be earned on such
securities decline, it may be necessary to increase certain insurance
liabilities. Adjustments to such liabilities are required when their balances,
in addition to future net cash flows including investment income, are
insufficient to cover future benefits and expenses.
Unrealized gains and losses and the related adjustments described in the
preceding paragraph have no effect on earnings, but are recorded, net of tax, as
a component of shareholders' equity. The following table summarizes the effect
of these adjustments as of December 31, 1995:
<TABLE>
<CAPTION>
Effect of fair value
adjustment to
Balance actively managed Reported
before adjustment fixed maturities amount
----------------- ---------------- ------
(Dollars in millions)
<S> <C> <C> <C>
Actively managed fixed maturities.............. $4,667.3 $ 415.8 $5,083.1
Cost of policies purchased..................... 343.7 (93.6) 250.1
Cost of policies produced...................... 99.9 (22.3) 77.6
Income tax (assets) liabilities ............... (66.9) 105.0 38.1
Unrealized appreciation of fixed
maturity securities......................... - 194.9 194.9
</TABLE>
Effective January 1, 1994, when the Company recognizes changes in
conditions that cause a fixed maturity investment to be transferred to a
different category (e.g., actively managed, held to maturity or trading), the
security is transferred to the new category at its fair value at the date of the
transfer. At the date of transfer, the security's unrealized gain or loss (which
was immaterial for 1994 and 1995) is accounted for as follows:
o For transfers to the trading category, the unrealized gain or loss is
recognized in earnings;
o For transfers from the trading category, the unrealized gain or loss
already recognized in earnings is not reversed;
o For transfers to actively managed from held to maturity, the
unrealized gain or loss is recognized in shareholders' equity; and
o For transfers to held to maturity from actively managed, the
unrealized gain or loss at the date of transfer continues to be
reported in shareholders' equity, but is amortized over the remaining
life of the security as an adjustment of yield.
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 liquidity. These transactions are accounted for as
collateral borrowings, where the amount borrowed is equal to the sales price of
the underlying securities.
42
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Credit-tenant loans are loans for commercial properties. When these loans
are made: (i) the lease of the principal tenant is assigned to the Company; (ii)
the lease must produce adequate cash flow to fund substantially all the
requirements of the loan; and (iii) the principal tenant or the guarantor of
such tenant's obligations must have an investment-grade credit rating when the
loan is made. These loans also must be secured by the value of the related
property. Underwriting guidelines take into account such factors as: (i) the
lease term of the property; (ii) the borrower's management ability, including
business experience, property management capabilities and financial soundness;
and (iii) such economic, demographic or other factors that may affect the income
generated by the property, or its value. The underwriting guidelines generally
require a loan-to-value ratio of 75 percent or less. Credit-tenant loans and
traditional mortgage loans are carried at amortized cost.
Policy loans are stated at their current unpaid principal balance.
Short-term investments include commercial paper, invested cash and other
investments purchased with maturities less than three months and are carried at
amortized cost, which approximates estimated fair value. The Company considers
all short-term investments to be cash equivalents.
Other invested assets principally consist of debt instruments, which are
generally recorded at amortized cost, and limited partnership investments which
are reported under the equity method.
Fees received and costs incurred in connection with origination of
investments, principally mortgage loans, are deferred. Fees, costs, discounts
and premiums are amortized as yield adjustments over the contractual life of the
investments. Anticipated prepayments on mortgage-backed securities are taken
into consideration in determining estimated future yields on such securities.
The specific identification method is used to account for the disposition
of investments. The differences between sale proceeds and carrying values are
reported as gains and losses on investments, or as adjustments to investment
income if the proceeds are prepayments by issuers prior to maturity.
The Company manages its investments to limit credit risk by diversifying
its portfolio among various security types and industry sectors. The Company
regularly evaluates investment securities, credit-tenant loans and mortgage
loans based on current economic conditions, past credit loss experience and
other circumstances of the investee. A decline in a security's net realizable
value that is other than temporary is treated as a realized loss and the cost
basis of the security is reduced to its estimated fair value. Impaired loans are
revalued at the present value of expected cash flows discounted at the loan's
effective interest rate when it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the agreement. The
Company accrues interest on the net carrying amount of impaired loans.
Cost of Policies Purchased
The cost of policies purchased represents the portion of the cost to
acquire the Company that is attributable to the right to receive future cash
flows from insurance contracts existing at the date of the Acquisition. The
value of cost of policies purchased is the actuarially determined present value
of the projected future cash flows from the insurance contracts existing at the
Acquisition date.
The method used by the Company to value the cost of policies purchased is
consistent with the valuation methods used most commonly to value blocks of
insurance business, which is also consistent with the basic methodology
generally used to value assets.
The method used by the Company is summarized as follows:
o Identify the expected future cash flows from the blocks of business.
o Identify the risks inherent in realizing those cash flows (i.e.,
the probability that the cash flows will be realized).
o Identify the rate of return that the Company believes it must earn in
order to accept the risks inherent in realizing the cash flows, based
on consideration of the factors summarized below.
o Determine the value of the policies purchased by discounting the
expected future cash flows by the discount rate the Company requires.
43
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Expected future cash flows used in determining such value are based on
actuarially determined projections of future premium collections, mortality,
surrenders, operating expenses, changes in insurance liabilities, investment
yields on the assets held to back the policy liabilities and other factors.
These projections take into account all factors known or expected at the
valuation date based on the collective judgment of the management of the
Company. Actual experience on purchased business may vary from projections due
to differences in renewal premiums collected, investment spread, investment
gains or losses, mortality and morbidity costs and other factors.
The discount rate of 19.5 percent used to determine the value of the cost
of policies purchased is the rate of return required by Partnership II to invest
in the business being acquired. The following factors have been considered in
determining this rate:
o The magnitude of the risks associated with each of the actuarial
assumptions used in determining expected future cash flows as
described in the preceding paragraphs.
o The cost of capital to fund the Acquisition.
o The perceived likelihood of changes in projected future cash flows
that might occur if there are changes in insurance regulations and
tax laws.
o The compatibility with other company activities that may favorably
affect future cash flows.
o The complexity of the acquired business.
o Recent purchase prices (i.e., discount rates used in
determining valuations) on similar blocks of business.
After the cost of purchased policies is determined using the methods
described above, the amount is amortized based on the incidence of the expected
cash flows and the interest rate credited to the underlying products.
To the extent that past or future experience on purchased business varies
from projections due to differences in renewal premiums collected, investment
spread, investment gains or losses, mortality and morbidity costs and other
factors, it may be necessary to adjust the amortization of the cost of policies
purchased. For example, sales of fixed maturity investments that result in a
gain (or loss), but also reduce (or increase) the future investment spread
because the sale proceeds are reinvested at a lower (or higher) earnings rate,
may cause amortization to increase (or decrease) reflecting the change in the
incidence of cash flows. For universal life-type contracts and investment-type
contracts, the accumulated amortization is adjusted (whether an increase or a
decrease) whenever there is a material change in the estimated gross profits
expected over the life of a block of business in order to maintain a constant
relationship between cumulative amortization and the present value (discounted
at the rate of interest that accrues to the policies) of expected gross profits.
For most other contracts, the unamortized asset balance is reduced by a charge
to income only when the present value of future cash flows, net of the policy
liabilities, is not sufficient to cover such asset balance.
Recoverability of the cost of policies purchased is evaluated regularly
by comparing the current estimate of expected future cash flows (discounted at
the rate of interest earned on invested assets) to the unamortized asset balance
by line of insurance business. If such current estimate indicates that the
existing insurance liabilities, together with the present value of future net
cash flows from the blocks of business purchased, will not be sufficient to
recover the cost of policies purchased, the difference would be charged to
expense.
Cost of Policies Produced
Costs of producing new business (primarily commissions, bonus interest
and certain costs of policy issuance and underwriting, net of fees charged to
the policy in excess of ultimate fees charged), which vary with and are
primarily related to the production of new business, are deferred to the extent
recoverable from future profits. Such costs are amortized with interest as
follows:
o For universal life-type contracts and investment-type contracts, in
relation to the present value of expected gross profits from these
contracts, discounted using the interest rate credited to the policy.
44
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
o For immediate annuities with mortality risks, in relation to the
present value of benefits to be paid.
o For traditional life insurance products, in relation to future
anticipated premium revenue using the same assumptions that are used
in calculating the insurance liabilities.
Recoverability of the unamortized balance of the cost of policies
produced is evaluated regularly. Cumulative and future amortization of the cost
of policies produced is adjusted, when there is a material change in estimated
gross profits expected over the life of a block of business, consistent with the
methods described above for the cost of policies purchased.
Goodwill
The excess of the cost of acquiring the Company's net assets over their
estimated fair values on the Acquisition date is recorded as goodwill and is
being amortized on the straight-line basis over a 40 year period. The Company
periodically assesses the recoverability of goodwill through projections of
future earnings of the related subsidiaries. Such assessment is made based on
whether goodwill is fully recoverable from projected undiscounted net cash flows
from earnings of the subsidiaries over the remaining amortization period. If
future evaluations of goodwill indicate a material change in the factors
supporting recoverability over the remaining amortization period, all or a
portion of goodwill may need to be written off or the amortization period
shortened.
Property and Equipment
Property and equipment are reported at cost, less accumulated
depreciation and amortization. Provisions for depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets.
Insurance Liabilities, Recognition of Insurance Policy Income and Related
Benefits and Expenses
Reserves for universal life-type and investment-type contracts
(principally deferred annuities) are based on the contract account balance, if
future benefit payments in excess of the account balance are not guaranteed, or
on the present value of future benefit payments when such payments are
guaranteed. Additions to insurance liabilities are made if future cash flows
including investment income are insufficient to cover future benefits and
expenses.
For investment contracts without mortality risk (such as deferred
annuities and immediate annuities with benefits paid for a period certain) and
for contracts that permit the Company or the insured to make changes in the
contract terms (such as universal life), premium deposits and benefit payments
are recorded as increases or decreases in a liability account rather than as
revenue and expense. Amounts charged against the liability account for the cost
of insurance, policy administration fees, surrender penalties and amortization
of policy initiation fees are recorded as revenues. Interest credited to the
liability account and benefit payments made in excess of the contract liability
account balance are charged to expense.
Reserves for traditional life insurance policy benefits are generally
calculated using the net level premium method and assumptions made at the time
the contract is issued (or in the case of policies acquired by purchase, at
purchase date) as to investment yields, mortality, withdrawals and other
assumptions based on projections of past experience modified as necessary to
reflect anticipated trends and include provisions for possible unfavorable
deviation. Policy benefit claims are charged to expense in the period that
claims are incurred.
For traditional insurance contracts, premiums are recognized as income
when due or, for short duration contracts, over the period to which the premiums
relate. Benefits and expenses are recognized as a level percentage of earned
premiums. Such recognition is accomplished through the provision for future
policy benefits and the amortization of the cost of policies produced.
Participating business is immaterial and dividends related to such business are
included as part of the policy reserves.
For investment contracts with mortality risk, but with premiums paid for
only a limited period (such as single-premium immediate annuities with benefits
paid for the life of the annuitant), the accounting treatment is similar to
traditional contracts. However, the excess of the gross premium over the net
premium is deferred and recognized in relation to the present value of expected
future benefit payments (when accounting for annuity contracts) or in relation
to insurance in force (when accounting for life insurance contracts).
45
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Liabilities for incurred claims are determined using historical
experience and published tables for disabled lives and represent an estimate of
the present value of the remaining ultimate net cost of all reported and
unreported claims. Management believes these estimates are adequate. Such
estimates are reviewed continually and any adjustments are reflected in current
operations.
Accident and health insurance reserves are comprised of unearned premium
reserves computed on a pro rata basis, return of premium reserves and the
present value of amounts not yet due on long-term disability policies computed
on the same basis as life insurance.
Reinsurance
In the normal course of business, the Company seeks to limit its exposure
to loss on any single insured and to recover a portion of the benefits paid by
ceding reinsurance to other insurance enterprises or reinsurers under agreements
of indemnity reinsurance. The Company has set its retention limit on life
insurance policies at $.1 million.
Assets and liabilities related to insurance contracts are reported before
the effects of reinsurance. Reinsurance receivables and prepaid reinsurance
premiums (including amounts related to insurance liabilities) are reported as
assets. Estimated reinsurance receivables are recognized in a manner consistent
with the liabilities related to the underlying reinsured contracts.
Income Taxes
Effective January 1, 1993, the Company changed its method of accounting
for income taxes from the deferred method to the liability method required by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). The cumulative effect of adopting SFAS 109 as of January 1,
1993, and the effect of the change on federal income tax expense for the year
ended December 31, 1993, were not material.
Income tax expense includes deferred income taxes arising from temporary
differences between the financial statement and income tax reporting basis of
assets and liabilities. Deferred income tax expense or benefit is based on the
changes in the deferred income tax asset or liability from period to period.
Additionally, the effect of a tax rate change on accumulated deferred income
taxes is reflected in income in the period in which the change is enacted.
In assessing the realization of deferred income tax assets, management
considers whether it is more likely than not that the deferred income tax assets
will be realized. The ultimate realization of deferred income tax assets is
dependent upon the generation of future taxable income during the periods in
which temporary differences become deductible. If future taxable income does not
occur as expected, deferred income tax assets may need to be written off.
Minority Interest
A charge is made against consolidated income representing: (i) the share
of earnings of Vulcan Life attributable to its minority interest; and (ii)
dividends on the redeemable preferred stock of American Life Holding.
Shareholders' equity attributable to the minority interests is shown separately
on the consolidated balance sheet.
Earnings Per Share
Primary earnings per common share is based on the weighted average number
of common and common equivalent shares outstanding and net income applicable to
common stock.
For periods prior to October 1, 1994, fully diluted earnings per common
share assume that the Series Preferred Stock $1 Par and the 6-1/4% Convertible
Subordinated Debentures were converted into common stock as of the date of
issuance and that the related dividend and interest requirements were
eliminated. In addition, net income has been reduced by the additional
contribution to the employee stock ownership plan ("ESOP"), less applicable
income tax benefits, that would have been required to service the ESOP debt, if
the shares of 1987 Series II Preferred Stock were converted into common stock.
For the year ended December 31, 1995, and the three month period ended December
31, 1994, there were no dilutive securities.
46
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
All share and per share amounts have been restated to give retroactive
effect to: (i) the August 8, 1995 one-for-two stock split, and (ii) the 5
percent stock dividend paid in December 1993.
Securities Segregated for the Future Redemption of Redeemable Preferred
Stock of a Subsidiary
Securities segregated for the future redemption of redeemable preferred
stock of American Life Holding are reported at amortized cost. The Company has
the positive intent and ability to hold these securities until maturity. See
note 7 for a description of these securities and the redeemable preferred stock.
Employee Benefits
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," and Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits." These statements require
companies to recognize expense related to anticipated postretirement and
postemployment benefits (other than pensions) over the period the employee
provides services. Adoption of these statements did not have a material impact
on results of operations for the year ended December 31, 1993, and the
cumulative effect of these changes in accounting principle was not material.
Interest Rate Swaps
Net interest received or paid on interest rate swap contracts that reduce
the Company's exposure to interest rate risk and qualify as hedges is recognized
as an adjustment to net investment income over the term of the contract. To
qualify as a hedge, it must be probable that a high correlation will exist
between: (i) changes in the estimated fair value of the interest rate swap
contract; and (ii) changes in the estimated fair value of the related financial
instrument exposed to interest rate risk. If conditions change so that the
contracts no longer effectively hedge the interest exposure, the contracts are
recorded at fair value with the appropriate charge or credit to income. The
Company had no material interest rate swap contracts outstanding at December 31,
1995.
Business Segments
The Company operates in the single business segment of providing
individual life insurance and annuity coverage within the United States.
Fair Values of Financial Instruments
The following methods and assumptions are used by the Company in
determining estimated fair values of financial instruments:
Investment securities: The estimated fair values for fixed maturity
securities (including redeemable preferred stocks) and equity securities are
based on quotes from independent pricing services, where available. For
investment securities for which such quotes are not available, the estimated
fair values are determined using values obtained from broker-dealer market
makers or by discounting expected future cash flows using current market
interest rates applicable to the yield, credit quality and, for fixed
maturity securities, the maturity of the investments.
Credit-tenant loans, mortgage loans and policy loans: The estimated fair
values of these loans are determined by discounting future expected cash
flows using interest rates currently being offered for similar loans to
borrowers with similar credit ratings.
Loans with similar characteristics are aggregated for purposes of the
calculations.
Short-term investments: The estimated fair values for short-term investments
are based on quoted market prices. The carrying amount reported in the
consolidated balance sheet for these instruments approximates their estimated
fair value.
Other invested assets: The estimated fair value of these assets, which are
not material, have been assumed to be equal to carrying value.
47
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Securities segregated for the future redemption of redeemable preferred stock
of a subsidiary: Estimated fair values of the U.S. Treasury securities held
in escrow for the future redemption of redeemable preferred stock of American
Life Holding are based on quoted market prices.
Insurance liabilities for investment contracts: The estimated fair values of
the Company's liabilities under investment-type insurance contracts are
determined using discounted cash flow calculations using interest rates
currently being offered for similar contracts with maturities consistent with
those remaining for the contracts being valued.
Investment borrowings: Due to the short-term nature of these borrowings
(terms generally less than 30 days), estimated fair values are assumed to
approximate the carrying amount reported in the consolidated balance sheet.
Notes payable: The estimated fair value of the Company's convertible
subordinated debentures is based on the outstanding principal amount, which
is approximately equal to the cash held in an escrow account for their
conversion. The estimated fair value of variable rate notes payable
approximates their par value. The estimated fair value of fixed rate notes
payable (other than the convertible subordinated debentures) is based on
quoted market prices.
Redeemable preferred stock of a subsidiary: The estimated fair value of the
publicly-traded redeemable preferred stock issued by American Life Holding is
based on quoted market prices. The estimated fair value of the privately
placed redeemable preferred stock issued by American Life Holding is
determined by discounting expected future cash flows using assumed
incremental dividend rates for similar duration securities.
Interest rate swaps: Estimated fair values of interest rate swap contracts
are based on estimates of fair value from dealers which represent the net
value or the cost of terminating the contracts at the balance sheet date.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1995 1994
----------------------- ---------------------
Carrying Fair Carrying Fair
amount value amount value
------ ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Financial assets:
Fixed maturities................................... $5,083.1 $5,083.1 $4,100.1 $4,100.1
Equity securities.................................. 18.8 18.8 18.9 18.9
Credit-tenant loans................................ 13.6 14.5 - -
Mortgage loans..................................... 64.6 74.0 64.7 64.7
Policy loans....................................... 62.9 62.9 59.7 59.7
Short-term investments............................. 102.3 102.3 53.6 53.6
Other invested assets.............................. 18.2 18.2 22.7 22.7
Securities segregated for the future redemption
of redeemable preferred stock of a subsidiary... 39.2 50.1 36.2 36.4
Financial liabilities:
Insurance liabilities for investment contracts (1). $4,716.4 $4,716.4 $4,444.8 $4,444.8
Investment borrowings.............................. 130.7 130.7 - -
Notes payable ..................................... 282.5 299.4 330.0 339.7
Redeemable preferred stock of a subsidiary......... 99.0 94.0 99.0 90.9
Liability related to interest rate swaps........... - - 10.6 10.6
<FN>
(1) The estimated fair values of the insurance liabilities for investment
contracts were approximately equal to their carrying value at December 31,
1995 and 1994, because interest rates credited on the vast majority of
account balances approximate current rates paid on similar contracts and
are not generally guaranteed beyond one year. Fair values for the Company's
insurance liabilities other than those for investment contracts are not
required to be disclosed. However, the estimated fair values of liabilities
for all insurance contracts are taken into consideration in the Company's
overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
</FN>
</TABLE>
48
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2. INVESTMENTS
At December 31, 1995, the amortized cost and estimated fair value of
actively managed fixed maturity investments 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..................... $ 95.0 $ 7.8 $ - $ 102.8
Obligations of states and political subdivisions...... 22.2 1.4 - 23.6
Foreign government obligations........................ 33.1 .7 1.7 32.1
Public utility securities............................. 821.5 104.1 .2 925.4
Other corporate securities............................ 2,304.6 189.9 11.9 2,482.6
Mortgage-backed securities............................ 1,390.9 126.7 1.0 1,516.6
-------- ------ ----- --------
$4,667.3 $430.6 $14.8 $5,083.1
======== ====== ===== ========
</TABLE>
At December 31, 1994, the amortized cost and estimated fair value of
actively managed fixed maturity investments 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.................... $ 285.3 $ .5 $ 3.1 $ 282.7
Obligations of states and political subdivisions..... 23.0 .1 1.2 21.9
Foreign government obligations....................... 54.5 - 1.0 53.5
Public utility securities............................ 669.2 2.3 4.2 667.3
Other corporate securities........................... 1,514.6 10.4 15.7 1,509.3
Mortgage-backed securities........................... 1,597.4 5.0 37.0 1,565.4
-------- ----- ----- --------
$4,144.0 $18.3 $62.2 $4,100.1
======== ===== ===== ========
</TABLE>
The following table sets forth the amortized cost and estimated fair value
of fixed maturities at December 31, 1995, based upon the pricing source used to
determine the estimated fair value:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Nationally recognized pricing services............................................ $3,969.7 $4,341.7
Broker-dealer market makers....................................................... 689.4 733.6
Internally developed methods (calculated based on a
weighted-average current market yield of 12.1 percent)......................... 8.2 7.8
-------- --------
Total fixed maturities................................................... $4,667.3 $5,083.1
======== ========
</TABLE>
49
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table sets forth fixed maturity investments at December 31,
1995, classified by rating categories. The category assigned is the highest
rating by a nationally recognized statistical rating organization or, as to
$130.1 million fair value of fixed maturities not rated by such firms, the
rating assigned by the National Association of Insurance Commissioners ("NAIC").
For the purposes of this table, NAIC Class 1 is included in the "A" rating;
Class 2, "BBB-"; and Class 3, "BB-".
<TABLE>
<CAPTION>
Percent of Percent of
Investment rating fixed maturities total investments
----------------- ---------------- -----------------
<S> <C> <C>
AAA............................ 31% 30%
AA............................. 13 12
A.............................. 29 27
BBB+........................... 8 8
BBB............................ 11 10
BBB-........................... 5 5
----- -----
Investment grade............ 97 92
---- ----
BB+............................ 1 1
BB............................. 1 1
BB-............................ 1 1
---- ----
Below investment grade...... 3 3
---- ----
Total fixed maturities...... 100% 95%
=== ==
</TABLE>
At December 31, 1995, the Company's below investment grade corporate fixed
maturities had an amortized cost of $162.7 million and an estimated fair value
of $168.5 million. For substantially all of these securities, the amortized cost
exceeded the fair value by less than 5 percent or the fair value of the
securities exceeded amortized cost. During the year ended December 31, 1995 and
the nine months ended September 30, 1994, the Company recorded realized losses
for investment writedowns of $7.1 million and $1.2 million, respectively, as a
result of changes in the financial condition of an issuer and changes in the
value of underlying collateral, which caused the Company to conclude that a
decline in fair value of such investments was other than temporary. There were
no such realized losses in the three months ended December 31, 1994, and the
year ended December 31, 1993. The Company had no fixed maturity investments in
technical or substantive default as of December 31, 1995. As of December 31,
1995, there were no fixed maturity investments about which the Company had
serious doubts as to the ability of the issuer to comply with the contractual
terms of their obligations on a timely basis.
The following table sets forth the amortized cost and estimated fair value
of fixed maturity securities at December 31, 1995, by contractual maturity.
Actual maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties and because most mortgage-backed securities provide for periodic
payments throughout their lives.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Due in one year or less................................... $ 13.2 $ 13.3
Due after one year through five years..................... 559.1 587.9
Due after five years through ten years.................... 1,340.2 1,423.6
Due after ten years....................................... 1,363.9 1,541.7
--------- ---------
Subtotal............................................... 3,276.4 3,566.5
Mortgage-backed securities................................ 1,390.9 1,516.6
--------- ---------
$4,667.3 $5,083.1
========= ========
</TABLE>
50
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Net investment income consisted of the following:
<TABLE>
<CAPTION>
Three months Nine months
Year ended ended ended Year ended
December 31, December 31, September 30, December 31,
1995 1994 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Fixed maturities...................... $398.8 $90.8 $239.9 $287.6
Equity securities..................... 1.7 .3 1.4 1.5
Mortgage loans........................ 6.9 1.8 5.1 8.2
Policy loans.......................... 4.0 1.0 2.9 3.4
Short-term investments................ 6.6 1.5 3.0 6.1
Other................................. 2.2 .7 1.7 2.5
------ ----- ------ ------
Gross investment income......... 420.2 96.1 254.0 309.3
Less investment expenses.............. 4.6 3.3 3.2 4.5
------ ----- ------ ------
Net investment income........... $415.6 $92.8 $250.8 $304.8
====== ===== ====== ======
</TABLE>
Proceeds from sales of fixed maturity investments were $2,822.1 million,
$502.0 million, $603.8 million and $2,166.2 million for the year ended December
31, 1995, the three months ended December 31, 1994, the nine months ended
September 30, 1994, and the year ended December 31, 1993, respectively.
Net realized gains (losses) included in revenues were as follows:
<TABLE>
<CAPTION>
Three months Nine months
Year ended ended ended Year ended
December 31, December 31, September 30, December 31,
1995 1994 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Fixed maturities:
Gross gains............................. $163.0 $1.8 $ 18.0 $78.7
Gross losses............................ (1.3) (.1) (12.2) (55.7)
Other than temporary decline in fair
value............................... (7.1) - - -
------ ----- ------ ------
Net realized gains from
fixed maturities................. 154.6 1.7 5.8 23.0
Equity securities, net gains (losses)...... 1.1 (.1) .3 (2.9)
Other than temporary decline in fair
value of equity securities.............. - - (1.2) -
Mortgage loans............................. - - (.1) (1.0)
Interest rate swap contracts............... - - (21.3) -
Other...................................... .3 (.4) (.3) (.2)
------- ----- ------ ------
Net realized gains (losses)
before expenses.................... 156.0 1.2 (16.8) 18.9
Less realized gains expenses .............. 8.2 - - -
------- ----- ------ ------
Net realized gains (losses).......... $147.8 $1.2 $(16.8) $ 18.9
======= ===== ====== ======
</TABLE>
51
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Changes in unrealized appreciation (depreciation) of investments were as
follows:
<TABLE>
<CAPTION>
Three months Nine months
Year ended ended ended Year ended
December 31, December 31, September 30, December 31,
1995 1994 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Fixed maturities carried at amortized cost . $ - $ - $(315.2) $46.1
======= ====== ======= =====
Investments carried at fair value:
Actively managed fixed maturities......... $459.7 $(43.9) $(249.7) $ -
Equity securities......................... 3.1 (.8) (1.2) 1.0
Other invested assets..................... (.1) - - -
------- ------ ------- -----
462.7 (44.7) (250.9) 1.0
Adjustment for effect on other balance
sheet accounts:
Cost of policies purchased........... (93.6) - - -
Cost of policies produced............ (22.3) - 17.9 -
Income tax assets (liabilities)...... (121.4) 15.7 81.0 .2
------- ------ ------- -----
225.4 (29.0) (152.0) 1.2
Elimination of balance pursuant to
Acquisition............................ - - 152.3 -
------- ------ ------- -----
Change in unrealized appreciation
(depreciation) of investments
carried at fair value.............. $225.4 $(29.0) $ .3 $ 1.2
====== ====== ======= =====
</TABLE>
At December 31, 1995, net unrealized appreciation of equity securities
(before income taxes) was $2.3 million, consisting of $2.3 million of gross
appreciation and no depreciation.
The following table sets forth the par value, amortized cost and
estimated fair value of mortgage-backed securities including CMOs at December
31, 1995, summarized by interest rates on the underlying collateral at December
31, 1995:
<TABLE>
<CAPTION>
Par Amortized Estimated
value cost fair value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Below 7 percent..................................................... $ 401.8 $ 361.1 $ 395.6
7 percent - 8 percent............................................... 849.0 777.2 845.5
8 percent - 9 percent............................................... 220.9 201.6 222.6
9 percent and above................................................. 57.1 51.0 52.9
-------- -------- --------
Total mortgage-backed securities............................... $1,528.8 $1,390.9 $1,516.6
======== ======== ========
</TABLE>
52
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The amortized cost and estimated fair value of mortgage-backed securities
including CMOs at December 31, 1995, summarized by type of security were as
follows:
<TABLE>
<CAPTION>
Estimated Fair Value
----------------------
% of
Amortized fixed
Type cost Amount maturities
---- ---- ------ ----------
(Dollars in millions)
<S> <C> <C> <C>
Pass-throughs and sequential and targeted amortization classes............. $ 994.5 $1,064.0 21%
Support classes............................................................ 56.1 66.6 1
Accrual (Z tranche) bonds.................................................. 31.9 37.6 1
Planned amortization classes and accretion directed bonds.................. 182.9 208.5 4
Subordinated classes....................................................... 125.5 139.9 3
-------- -------- ---
$1,390.9 $1,516.6 30%
======== ======== ===
</TABLE>
At December 31, 1995, approximately 85 percent of the estimated fair
value of the Company's mortgage-backed securities was determined by nationally
recognized pricing services and 15 percent was determined by broker-dealer
market makers.
At December 31, 1995, the mortgage loan balance was comprised of 99
percent commercial loans (including multifamily residential) and 1 percent
single family residential loans. Approximately 16 percent, 16 percent, 12
percent and 11 percent of the mortgage loan balance was on properties located in
Florida, Minnesota, Iowa and Nevada, respectively. No other state comprised
greater than 9 percent of the mortgage loan balance. Less than 2 percent of the
mortgage loan balance was noncurrent at December 31, 1995. The Company had a
loan loss reserve of $1.4 million at December 31, 1995.
As part of its investment strategy, the Company enters into reverse
repurchase agreements and dollar roll transactions to increase its return on
investments and improve its liquidity. These transactions are accounted for as
short-term collateralized borrowings. Such borrowings averaged approximately
$132.8 million and $105.0 million during the year ended December 31, 1995, and
the nine months ended September 30, 1994, respectively, and were collateralized
by mortgage-backed securities with fair values approximately equal to the loan
value. The weighted average interest rate on short-term collateralized
borrowings was 5.8 percent in 1995 and 3.5 percent in the first nine months of
1994. Investment borrowings were not significant in the fourth quarter of 1994.
Life insurance companies are required to maintain certain amounts of
assets on deposit with state regulatory authorities. Such assets had an
aggregate carrying value of $22.7 million at December 31, 1995.
53
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Investments, all of which are fixed maturities, in any single entity in
excess of ten percent of shareholders' equity at December 31, 1995, other than
mortgage-backed securities and investments issued or guaranteed by the United
States Government or a United States Government agency, were as follows:
<TABLE>
<CAPTION>
Estimated
Amortized fair
Issuer cost value
------ ---- -----
(Dollars in millions)
<S> <C> <C>
Green Tree Financial Corporation..................... $97.8 $99.2
Marshall and Isley................................... 47.0 48.6
Bankers Trust........................................ 42.6 45.7
Texas Utilities Electric............................. 42.0 45.7
Smith Barney Holdings................................ 38.6 41.3
Countrywide Funding.................................. 37.6 40.8
</TABLE>
Mortgage-backed securities issued by a single entity in excess of ten
percent of shareholders' equity at December 31, 1995, other than mortgage-backed
securities issued or guaranteed by the United States Government or a United
States Government agency, were as follows. Mortgage-backed securities issued by
non-government entities are aggregated by the issuing entity with the number of
individual securities (if greater than one) identified parenthetically following
the issuer's name. The creditworthiness of such mortgage-backed securities is
based solely on the underlying segregated pools of mortgage loan collateral and
related credit enhancements rather than the general creditworthiness of the
issuing entity.
<TABLE>
<CAPTION>
Estimated
Amortized fair
Issuer cost value
------ ---- -----
(Dollars in millions)
<S> <C> <C>
Prudential Home Mortgage Securities (4 issues)...... $146.6 $166.5
GE Capital Mortgage Services (7 issues).............. 133.4 154.4
Countrywide Funding Corp. (2 issues)................. 55.7 65.8
Housing Securities Inc. (2 issues)................... 51.6 60.1
Residential Funding Mortgage Section I (5 issues)... 46.0 55.6
</TABLE>
54
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
3. INSURANCE LIABILITIES
Insurance liabilities consisted of the following:
<TABLE>
<CAPTION>
Interest December 31,
Withdrawal Mortality rate ----------------------
assumption assumption assumption 1995 1994
---------- ---------- ---------- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Future policy benefits:
Investment contracts............................ N/A N/A (b) $4,716.4 $4,444.8
Limited-payment contracts....................... None (a) 6% 8.1 8.3
Traditional life insurance contracts............ Company (a) 6% 87.0 78.0
experience
Universal life-type contracts................... N/A N/A (b) 234.2 225.6
Individual accident and health ................. Company Company 6% 7.2 7.5
experience experience
Group life and health........................... N/A N/A N/A 3.3 3.2
Other policyholders' funds and claims payable...... N/A N/A N/A 92.5 76.4
-------- --------
Total insurance liabilities.............. $5,148.7 $4,843.8
======== ========
<FN>
(a) Principally modifications of the 1965 - 70 Basic, Select and Ultimate
Tables.
(b) This balance represents account balances because future benefits are
not guaranteed.
</FN>
</TABLE>
4. REINSURANCE
Reinsurance contracts do not relieve the Company from its obligations to
its policyholders. The Company remains contingently liable to its policyholders
for the portion reinsured to the extent that the reinsuring companies do not
meet their obligations assumed under the reinsurance agreements. The aggregate
receivable from reinsurers at December 31, 1995 and 1994, was $8.7 million and
$5.2 million, respectively, all of which was deemed collectible. At December 31,
1995, the reinsurance receivable balance from the Company's largest reinsurer
was $4.0 million and no other balance from a single reinsurer exceeded $1.5
million. Ceded reinsurance premiums deducted from premiums and policy fund
charges were $6.0 million, $1.2 million, $3.9 million and $4.4 million for the
year ended December 31, 1995, the three months ended December 31, 1994, the nine
months ended September 30, 1994, and the year ended December 31, 1993,
respectively.
55
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
5. INCOME TAXES
Income tax assets (liabilities) were comprised of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1995 1994
---- ----
(Dollars in millions)
<S> <C> <C>
Deferred income tax assets (liabilities):
Cost of policies purchased, cost of policies
produced and policy initiation fees.................. $(100.7) $(150.9)
(Increase) reduction in reported values of investments
not currently deductible for tax..................... (53.4) 170.2
Insurance liabilities .................................. 101.6 93.2
Net operating loss carryforwards........................ 17.8 13.5
Other................................................... (3.3) (3.3)
-------- --------
Deferred income tax assets (liabilities)................ (38.0) 122.7
Current income tax assets (liabilities).................... (.1) 7.7
-------- --------
Income tax assets (liabilities)......................... $ (38.1) $ 130.4
======== =======
</TABLE>
The $38.0 million deferred income tax liability at December 31, 1995
includes $105.0 million which is attributed to the effect of the fair value
adjustment to actively managed fixed maturities pursuant to SFAS 115.
Income tax expense was as follows:
<TABLE>
<CAPTION>
Three months Nine months
Year ended ended ended Year ended
December 31, December 31, September 30, December 31,
1995 1994 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Current income tax provision........ $ 6.4 $ (5.1) $5.2 $21.2
Deferred income tax provision....... 43.5 10.2 1.5 1.2
------ ------ ---- -----
Income tax expense............... $49.9 $ 5.1 $6.7 $22.4
===== ====== ==== =====
</TABLE>
56
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Federal income tax expense differed from that computed at the applicable
federal statutory income tax rate (35 percent for all periods) for the following
reasons:
<TABLE>
<CAPTION>
Three months Nine months
Year ended ended ended Year ended
December 31, December 31, September 30, December 31,
1995 1994 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Tax on income before income taxes
at statutory rate.......................... $46.8 $4.4 $6.5 $24.0
Change in valuation allowance, excluding
impact on unrealized depreciation of
equity securities......................... - - (1.2) (1.4)
Nondeductible items.......................... 3.2 .8 1.6 -
Other ...................................... (.1) (.1) (.2) (.2)
----- ---- ---- -----
Income tax expense...................... $49.9 $5.1 $6.7 $22.4
===== ==== ==== =====
</TABLE>
The Company files a consolidated federal income tax return including all
subsidiaries. At December 31, 1995, the Company has net operating loss
carryforwards of $51.0 million which expire in 1999 through 2010. These loss
carryforwards relate to the operations of the non-life consolidated group.
Utilization of the operating loss carryforwards to offset taxable income of the
life insurance subsidiaries is limited under existing federal income tax rules
and regulations. In connection with the adoption of SFAS 109 on January 1, 1993,
a $4.1 million valuation allowance was established relating to the uncertainty
of realizing the benefit of loss carryforwards. Of the allowance, $2.6 million
was reversed prior to the Acquisition date and the remaining $1.5 million was
eliminated in the purchase accounting adjustments at the Acquisition date.
The Omnibus Reconciliation Act of 1993 changed the Company's prevailing
federal income tax rate from 34 percent to 35 percent effective January 1, 1993.
The Company recognized additional federal income tax expense of $.8 million in
1993 due to the increase in the tax rate.
6. NOTES PAYABLE
Notes payable are summarized as follows:
<TABLE>
<CAPTION>
Amount
outstanding
net of
Principal amount unamortized Estimated
outstanding at issuance costs fair value at
December 31, at December 31, December 31,
------------------ ------------------ -----------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Senior credit facility................ $125.0 $ - $123.4 $ - $125.0 $ -
Senior term loan...................... - 170.0 - 162.4 - 170.0
Senior subordinated notes............. 150.0 150.0 144.1 143.4 159.4 145.5
Convertible debentures................ 15.0 24.2 15.0 24.2 15.0 24.2
------ ------ ------ ------ ------ ------
$290.0 $344.2 $282.5 $330.0 $299.4 $339.7
====== ====== ====== ====== ====== ======
</TABLE>
57
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the financing of the Acquisition, American Life
Holding executed a $200 million senior term loan with a group of banks. In 1995,
American Life Holding made a $15.0 million scheduled payment and a $30.0 million
unscheduled payment on the senior term loan. As discussed in note 10, the $30.0
million unscheduled principal payment was made using the proceeds from the
issuance of common stock. In addition, American Life Holding executed a $225
million credit facility (the "Senior Credit Facility") and simultaneously
borrowed $125.0 million under the Senior Credit Facility. Such proceeds were
used for the repayment in full of the remaining principal balance under the
existing senior term loan, resulting in an extraordinary charge of $4.0 million
(net of a $2.2 million income tax benefit).
The Senior Credit Facility provides for $225 million of senior secured
credit facilities comprised of: (i) a Tranche A Facility ("Tranche A") in the
amount of $105 million; (ii) a Tranche B Facility ("Tranche B") in the amount of
$20 million; and (iii) a Revolving Credit Facility (the "Revolver") in an amount
of up to $100 million. The Senior Credit Facility was recorded net of debt
issuance costs of $1.6 million. At December 31, 1995, the Company had borrowed
$105 million and $20 million under Tranche A and Tranche B, respectively. There
were no outstanding borrowings under the Revolver at December 31, 1995.
Unless otherwise extended, the Revolver will mature, and all principal
and interest thereunder will become due and payable, in October 1998. The
Revolver may be extended in one year increments through October 2001, subject to
defined conditions.
Tranche A and Tranche B mature in April 2002 and April 2003, respectively.
The Senior Credit Facility bears interest based on defined rates as
selected by the Company plus an applicable margin which varies based on American
Life Holding's long-term senior debt rating. At December 31, 1995, borrowings
under Tranche A and Tranche B bear interest at 7.32 percent and 7.82 percent,
respectively. The Company pays a per annum non-use fee on the unused portion of
the Revolver of .2 percent to .5 percent depending on the long-term senior debt
rating of American Life Holding.
The Senior Credit Facility provides for mandatory prepayments under
certain conditions and is collateralized by, among other things: (i) pledges of
the capital stock of the Company's significant subsidiaries and a surplus note
issued by American Life and Casualty to American Life Holding; and (ii) the
assignment of investment advisory agreements among the Company's principal
subsidiaries and a subsidiary of Conseco. In addition, the Company and another
non-insurance subsidiary have unconditionally guaranteed the Senior Credit
Facility.
In connection with the financing of the Acquisition, American Life
Holding issued $150 million of senior subordinated notes in a public offering.
The senior subordinated notes bear interest at 11.25 percent, payable
semiannually and will mature on September 15, 2004. Such notes are unsecured and
are subordinated in right of payment to the prior payment in full of all senior
indebtedness (as defined in the indenture for the subordinated notes), including
American Life Holding's obligations under the Senior Credit Facility. The notes
are redeemable at the Company's option, in whole or in part, at any time on or
after September 15, 1999, initially at 105.625 percent of their principal
amount, plus accrued interest, declining to 100 percent of their principal
amount, plus accrued interest, on or after September 15, 2001. At the date of
Acquisition, the senior subordinated notes were recorded net of $6.6 million of
debt issuance costs (including $2.4 million paid to Conseco).
The Senior Credit Facility and the indenture governing the senior
subordinated notes contain a waiver of any rights, claims or interests in the
securities held in escrow for the benefit of the holders of the redeemable
preferred stock issued by American Life Holding and contain certain covenants,
which among other things: (i) require the maintenance of specified statutory
capital and surplus, ratings, and financial and other ratios by the Company's
subsidiaries; (ii) limit the incurrence of additional indebtedness, the payment
of dividends by the Company's subsidiaries and investments in certain types of
investments including non-investment grade securities and certain classes of
collateralized mortgage obligations; and (iii) restrict transfers of funds from
the Company's principal subsidiaries to the Company. In addition, the occurrence
of a change of control (as defined) would accelerate the repayment of the Senior
Credit Facility and senior subordinated notes at the holders' option.
58
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In April 1993, the Company issued $69.0 million face amount of
Convertible Debentures in a public offering. As of December 31, 1995, $54.0
million principal amount of the Convertible Debentures have been converted. In
connection with the Acquisition, the Convertible Debentures became convertible
into $15.25 in cash plus a Contingent Payment Right for each common equivalent
share into which such debenture was convertible immediately prior to the
Acquisition. The requirement to hold funds in escrow for the conversion of the
outstanding Convertible Debentures was eliminated upon execution of the Senior
Credit Facility and repayment of the senior term loan. The Convertible
Debentures continue to receive interest semi-annually at a rate of 6.25 percent
until maturity or redemption. The debentures are redeemable, in whole or in
part, at the option of the Company, at any time on or after May 1, 1996,
initially at 106 percent of the principal amount and declining to 100 percent of
the principal amount on or after May 1, 1999.
Aggregate maturities of notes payable during each of the five years
subsequent to 1995 are as follows: 1996 - none; 1997 - $.3 million; 1998 - $15.3
million; and 1999 and 2000 - $20.3 million; thereafter $233.8 million.
7. MINORITY INTEREST
In August 1992 and February 1993, American Life Holding issued 2.8
million shares and 1.2 million shares, respectively, of non-convertible
redeemable preferred stock. The 2.8 million shares were issued in a public
offering at a price of $25 per share (aggregate $69.0 million) and the 1.2
million shares were issued at a price of $25 per share (aggregate $30.0 million)
in exchange for all of American Life Holding's then outstanding 11.5 percent
subordinated debentures which were retired.
American Life Holding's redeemable preferred stock is entitled to annual
cumulative cash dividends of $2.16 per share on the 2.8 million shares and $2.32
per share on the 1.2 million shares, each payable quarterly. The 2.8 million and
1.2 million redeemable preferred shares are mandatorily redeemable in September
2007 and February 2008, respectively, at a redemption price of $25 per share,
plus cumulative unpaid dividends. In liquidation, holders of the redeemable
preferred stock are entitled to $25 per share (aggregate $99.0 million) plus
cumulative unpaid dividends.
American Life Holding purchased $99.0 million face amount of zero coupon
U.S. Treasury securities maturing in September 2007 ($69.0 million) and February
2008 ($30.0 million). These securities have been placed in escrow accounts to be
used for the future redemption of the redeemable preferred shares on or before
the mandatory redemption date of each issue.
In connection with the Acquisition, American Life Holding's redeemable
preferred stock was recorded at its estimated fair value at September 29, 1994
of $99.0 million.
8. SERIES PREFERRED STOCK $1 PAR
The Board of Directors has authorized the Company to issue 5 million
shares of Series Preferred Stock $1 Par from time to time in one or more series
and to fix the number of shares, designations, voting powers (if any), and other
terms of each series. Each series shall be distinctly designated and, except as
otherwise stated, shall rank equally and be identical in all respects.
Preferred stock outstanding at December 31, 1995 and 1994, was as
follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1995 1994
---------------------- --------------------
Shares Amount Shares Amount
------ ------ ------ ------
(Dollars in millions)
<S> <C> <C> <C> <C>
1994 Series Preferred Stock......................... 64,410 $64.4 57,000 $57.0
Accrued paid-in-kind dividends thereon.............. - 2.2 - 1.9
------ ----- ------ -----
Total............................................ 64,410 $66.6 57,000 $58.9
====== ===== ====== =====
</TABLE>
59
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the Acquisition, the Company issued 57,000 shares
($57.0 million) of 1994 Series Preferred Stock in a private placement
transaction. Dividends are cumulative and accrue annually at 13 percent in
additional shares of 1994 Series Preferred Stock through September 2005.
Thereafter, dividends are payable quarterly at 15 percent per annum in cash. At
December 31, 1995, the $66.6 million reported value of the 1994 Series Preferred
Stock includes $2.2 million of paid-in-kind dividends accrued but undistributed
through December 31, 1995. The 1994 Series Preferred Stock ranks senior to the
Company's common stock with respect to dividends, and upon liquidation will have
a liquidation preference equal to $1,000 per share, plus accrued unpaid
dividends. The shares are redeemable at the option of the Company, in whole or
from time to time in part, at a redemption price of $1,000 per share, plus
accrued and unpaid dividends, and generally have no voting rights.
The Company issued 200,000 shares of its 1976 Series Preferred Stock $1
Par to its employee stock ownership plan (the "ESOP") of which 5,000 shares were
converted into 7,641 shares of common stock during 1993. The remaining 195,000
shares outstanding at December 31, 1993 were converted into the merger
consideration on September 29, 1994 as a result of the Acquisition. Prior to
their conversion, the 1976 Series Preferred Stock received annual cumulative
cash dividends of $.425 per share.
The Company issued 100,000 shares of 1987 Series II Preferred Stock $1
Par of which 18,099 had been exchanged for common stock prior to 1993. During
1994 and 1993 the Company exchanged 453 shares and 35,255 shares, respectively,
of its common stock with the ESOP for 66 shares and 4,771 shares, respectively,
of its 1987 Series II shares for the purpose of making distributions to
terminated ESOP plan participants. The remaining 77,064 1987 Series II shares
outstanding at September 29, 1994, were converted into the merger consideration
and retired as a result of the Acquisition.
Cash dividends paid on the 1987 Series II shares were $.4 million and $.6
million for the nine months ended September 30, 1994, and the year ended
December 31, 1993, respectively. Such dividends were used by the ESOP to fund
the interest expense on the ESOP's note obligation.
See note 9 for a discussion regarding the 1988 Series I and II Preferred
Stock (the "1988 Series Preferred Stock").
9. CONTINGENT CONSIDERATION PAYABLE UPON DETERMINATION OF SAVINGS BANK
LITIGATION
The Company has filed suit in the United States Court of Federal Claims
(the "Court of Federal Claims") against the United States of America for breach
of certain contractual agreements which were made by certain former government
regulatory agencies to induce the Company to capitalize its former savings bank
subsidiary (the "Savings Bank") in connection with the acquisition of four
failed thrift institutions in March 1988 and the subsequent seizure of the
Savings Bank by the Office of Thrift Supervision in July 1990 (the "Savings Bank
Litigation"). In the Savings Bank Litigation, the Company claims that the
defendant breached its contractual agreements with respect to regulatory capital
and contends that this breach, which resulted in the disallowance of $21 million
of capital which the defendant promised would be perpetual for regulatory
accounting purposes, and such subsequent seizure, constitutes a taking of the
Company's property without just compensation and due process of law, in
violation of the Fifth Amendment of the United States Constitution.
The Savings Bank Litigation seeks monetary damages from the government
including recovery of: (i) the Company's investment in the Savings Bank of
143,640 shares of the 1988 Series Preferred Stock and $8.4 million of cash; and
(ii) compensation for costs incurred and the value of benefits conferred on the
defendant through the Company's purchase, operation and management of the
Savings Bank. Total restitution sought by the Company exceeds $30 million.
On July 24, 1992, the Court of Federal Claims granted the Company's
motion for summary judgment as to the defendant's liability for breach of
contract in the Savings Bank Litigation. The court also consolidated this case
with two others and certified these cases for interlocutory appeal to the United
States Court of Appeals for the Federal Circuit (the "Court of Appeals").
Subsequently, the Court of Appeals entered a judgment reversing the order of the
Court of Federal Claims by a decision of two to one and the Company filed a
Petition for Rehearing with Suggestion for Rehearing in Banc (the "Rehearing
Petition") with the Court of Appeals. On August 18, 1993, the Court of Appeals
accepted the Rehearing Petition, vacated the judgment which was entered in favor
of the defendant and withdrew its opinion accompanying the judgment. On August
30, 1995, the Court of Appeals, in banc, affirmed the summary judgment of the
Court of Federal Claims in the Company's favor by a decision of nine to two.
Subsequently, the United States of America filed a petition for certiorari to
the United States Supreme Court which was granted. The Supreme Court scheduled
60
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
oral arguments for April 1996. In the event the Supreme Court affirms the
summary judgment of the Court of Federal Claims, a trial will be held in the
Court of Federal Claims to determine damages related to the breach of contract
by the United States.
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
Savings Bank Litigation. If the rights of the holder of the 1988 Series
Preferred Stock were not an issue in the Savings Bank Litigation, the 1988
Series Preferred Stock was convertible into approximately $30.1 million in
conjunction with the Acquisition.
If the Savings Bank Litigation results in the return of the 1988 Series
Preferred Stock to the Company, the $30.1 million amount referred to above will
be payable to the holders of the Contingent Payment Rights, together with any
money damages recovered by the Company, subject to certain adjustments and
limitations. If, however, the Company is unsuccessful in the Savings Bank
Litigation, the $30.1 million amount will instead become payable to the holder
of the 1988 Series Preferred Stock upon the conversion thereof or as otherwise
directed by the court. 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.
A liability of $30.1 million was established at the Acquisition date
representing the consideration that would be payable to either the holder of the
1988 Series Preferred Stock or the Company's other former shareholders. The
unused commitments under the Senior Credit Facility include $30.0 million
available to be borrowed at a later date when needed for such payment. Prior to
the Acquisition, the 1988 Series Preferred Stock was presented as issued and
outstanding and was considered in the computation of primary and fully diluted
earnings per share.
The terms of the 143,640 shares of the 1988 Series Preferred Stock
provide for: (i) cash dividends of $8 per share, payable quarterly; (ii)
redemption, at the Company's option, any time after 1999 at a price of $100 per
share plus cumulative dividends; and (iii) no voting rights (except if the
Company fails to pay dividends for six consecutive quarters, in which case the
holder is entitled to one vote per share on each matter submitted to a vote at
any meeting of the Company's shareholders). The Company has accrued all
cumulative dividends on the 1988 Series Preferred Stock through the Acquisition
date. Cumulative dividends in arrears on the 1988 Series Preferred Stock through
December 31, 1995, were $7.0 million, of which $5.5 million have been accrued.
10. COMMON SHAREHOLDERS' EQUITY
Changes in the number of shares of common stock outstanding are as
follows:
<TABLE>
<CAPTION>
Three months Nine months
Year ended ended ended Year ended
December 31, December 31, September 30, December 31,
1995 1994 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Outstanding at beginning of the period................. 11,299,218 11,299,218 6,714,828 6,554,619
5 percent stock dividend........................... - - - 317,572
Shares acquired through open market purchases...... - - (23,656) (258,300)
Issued in exchange for 1987 Series II
Preferred Stock................................. - - 453 35,255
Conversion of 1976 Series Preferred Stock.......... - - - 7,641
Conversion of Convertible Debentures............... - - 83,993 -
Issued upon exercise of stock options.............. - - 422,343 58,041
Shares retired as a result of the Acquisition...... - - (7,197,961) -
Shares issued on Acquisition date.................. - - 11,299,218 -
Shares issued in private placement transaction..... 2,142,857 - - -
---------- ---------- ---------- ----------
Outstanding at end of the period....................... 13,442,075 11,299,218 11,299,218 6,714,828
========== ========== ========== =========
</TABLE>
61
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On November 30, 1995, the Company issued 2,142,857 shares of its common
stock for $30.0 million in a private placement transaction. Eighty percent of
the shares were purchased by Partnership II and the remainder were purchased by
other holders of the Company's common stock. The proceeds from the issuance of
the shares were used to make a $30.0 million capital contribution to American
Life Holding, which used the funds to make a $30.0 million principal payment on
its senior term loan (see note 6). If the issuance of common stock and the
resulting principal payment on the senior term loan had been completed at
January 1, 1995, pro forma earnings per common share would have been $5.22 on
both a primary and full diluted basis for the year ended December 31, 1995,
rather than $5.87. Such pro forma amount reflects the sale of common stock and
the reduction in interest expense (net of income taxes) resulting from the use
of proceeds to reduce the senior term loan.
As a result of the Acquisition, all common stock outstanding prior to the
Acquisition was exchanged or converted for the merger consideration of $15.25
(not adjusted for the August 8, 1995 one-for-two stock split) in cash per common
share plus the Contingent Consideration.
Under the terms of two stock option plans adopted by the Company's
stockholders, options to purchase up to 623,146 shares of the Company's common
stock were available for grant prior to 1994 to certain officers and key
employees of the Company and its subsidiaries. Because the exercise price of all
stock options awarded under these plans could be no less than the fair market
value of a share of optioned stock at the date of grant, no compensation expense
was recorded for these awards at the date of grant or at any time subsequent
thereto prior to September 29, 1994. On September 29, 1994, options to purchase
94,125 shares of the Company's common stock were redeemed for cash pursuant to
the terms of the merger agreement between the Company and Partnership II and
accordingly, compensation expense of $1.6 million equal to the difference
between the merger consideration of $15.25 (not adjusted for the August 8, 1995
one-for-two stock split) per share and the option price, was recorded at that
time and included in the consolidated statement of operations for the nine
months ended September 30, 1994.
In addition, one of the stock option plans provided for the granting of
stock appreciation rights ("SARs") on a maximum of 232,517 shares of the
Company's common stock. SARs entitle the holder to receive, upon exercise, a
cash payment equal to the excess of the fair market value of a share of common
stock on the date of exercise over the option price. Compensation expense of $.5
million and $.1 million attributable to the exercise or redemption of the SARs
is included in the consolidated statement of operations for the nine months
ended September 30, 1994, and the year ended December 31, 1993, respectively.
Changes in the number of stock options and SARs outstanding for the nine
months ended September 30, 1994, and the year ended December 31, 1993, were as
follows. All shares and option prices have been adjusted to give retroactive
effect to stock dividends declared and the August 8, 1995 one-for-two stock
split subsequent to the date of grant.
<TABLE>
<CAPTION>
Number of shares
------------------------ Price
Options SARs per share
------- ----- ---------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1992................. 524,163 53,013 $4.76 - $ 9.62
Granted.................................... 85,250 78,750 24.76
Exercised.................................. (88,863) (14,416) 5.20 - 9.62
-------- -------
Outstanding, December 31, 1993................. 520,550 117,347 4.76 - 24.76
Exercised.................................. (426,424) (26,041) 4.76 - 24.76
Redeemed for cash.......................... (94,126) (91,306) 4.76 - 24.76
-------- --------
Outstanding, September 30, 1994................ - -
======== ========
</TABLE>
Under the terms of a stock option plan adopted in 1994, options to
purchase 15,000 shares of the Company's common stock were granted to the
Company's non-employee directors in 1994. Pursuant to the terms of the merger
agreement between the Company and Partnership II, these options were redeemed
for cash on September 29, 1994, and the consolidated statement of operations for
the nine months ended September 30, 1994, includes an insignificant charge for
the redemption of these options. Subsequent to the Acquisition, this plan was
terminated.
62
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
11. OTHER DISCLOSURES:
Leases
Total rental expense for all leases is as follows: year ended December
31, 1995 - $1.4 million; three months ended December 31, 1994 - $.3 million;
nine months ended September 30, 1994 - $1.0 million; and year ended December 31,
1993 - $1.2 million. Future minimum rental commitments for operating leases
having initial or remaining noncancelable lease terms in excess of one year are
not material.
Benefit Plans
The Company and its subsidiaries participate in the Statesman Savings
Plan 401(k) (the "401(k) plan"), a qualified salary deferral retirement plan
covering all eligible employees of the Company and its subsidiaries. Employees
may contribute a portion of their annual salary, subject to limitation, to the
401(k) plan. The Company and its subsidiaries contribute an additional amount,
subject to limitation but not to exceed a certain percent of eligible
compensation (5 percent in 1995 and 2 percent in 1994), based on the voluntary
contributions of the employees. Prior to 1994, all employer matching
contributions were invested in shares of the Company's common stock. Plan
contributions charged to expense were $.3 million, $.1 million and $.1 million
for 1995, the 1994 periods and 1993, respectively.
The Company and its subsidiaries participate in a qualified trusteed plan,
The Statesman Group, Inc. Employee Stock Ownership Plan and Trust ("Plan"),
which provides for a uniform noncontributory retirement program covering all
eligible employees of the Company and its subsidiaries. The Plan was frozen
effective December 16, 1994, and no contributions will accrue after that date.
Prior to December 16, 1994, contributions to the Plan were equal to 10 percent
of eligible compensation of all participants plus such additional amounts (2.9
percent for the year ended December 31, 1993) as may be determined annually by
the Board of Directors. Total plan expense for the three months ended December
31, 1994, the nine months ended September 30, 1994, and the year ended December
31, 1993, amounted to $.2 million, $.6 million and $.9 million, respectively.
Employment Arrangements
The Company has entered into employment continuation agreements with
certain officers of the Company and its subsidiaries that provide for payments
if there is a change in control of the Company (as defined) and a termination of
their employment. The agreements do not constitute employment contracts and
apply only in circumstances following a change in control. The Acquisition
constituted a change of control under the agreements. Nonrecurring expenses in
1995 include a payment of $3.3 million under one of these agreements. The
maximum contingent liability under these agreements at December 31, 1995 is $.6
million.
Litigation
See note 9 for a description of the Savings Bank Litigation.
The Company, Conseco, Partnership II and certain of the persons formerly
serving as directors on the Board of Directors of the Company have been named as
defendants in a purported class action commenced on May 3, 1994, entitled Nitti
v. Statesman Group, Inc., et al., No. 13501 (Delaware Chancery Court, New Castle
County) (the "Nitti Action"). The complaint in the Nitti Action alleges that in
authorizing the Company to enter into the merger agreement, the members of the
board of directors failed to maximize the value received by the Company's
stockholders in a sale of the Company and accordingly breached their fiduciary
duties. On September 21, 1994, an amended class action complaint adding a second
plaintiff and additional allegations were filed. On October 5, 1994, a motion to
dismiss for failure to state a claim was filed on behalf of the Company. The
Company believes that this complaint is without merit and intends to defend it
vigorously.
The Company, Vulcan Life and certain of its independent agents have been
named as defendants in litigation in the state of Alabama concerning life
insurance products sold to school teachers in the late 1980's. The cases are:
(i) Sentell, et al. v. Vulcan Life Insurance Company et al., filed in the
Circuit Court for Pickens County, Alabama, on August 22, 1994; (ii) Rembert, et
al. v. Vulcan Life Insurance Company et al., filed on June 29, 1995, and pending
in the Circuit Court of Marengo County,
63
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Alabama; (iii) Baldwin et al, v. Vulcan Life Insurance Company et al., filed on
July 6, 1995, and pending in the Circuit Court of Marengo County, Alabama; (iv)
Thomas, et al., v. Charley, et al., filed in the Circuit Court of Wilcox County,
Alabama on or about December 20, 1994; and (v) Wheeler v. Vulcan Life Insurance
Company, et al., filed in the Circuit Court in Lamar County, Alabama on May 18,
1995 (all cases are referred to herein as the "Vulcan Life Litigation"). The
plaintiffs in the Vulcan Life Litigation allege, among other things, that the
agent defendants misrepresented that the life products were part of an employee
benefit plan and that such plan would pay the premiums for their policies
although, under the Code, life insurance products may not be purchased through
such a plan. The plaintiffs allege that they purchased the life insurance
products because of such alleged misrepresentations. The plaintiffs have
requested an award of compensatory and punitive damages of unspecified amounts.
The defendants have denied any liability and have raised numerous defenses
including the statute of limitations.
The Company's subsidiaries are involved in various pending or threatened
legal proceedings arising from the conduct of their businesses. These
proceedings in some instances include claims for punitive damages and similar
types of relief in unspecified or substantial amounts, in addition to amounts
for alleged contractual liability or claims for equitable relief. In
management's opinion, after consultation with counsel and review of available
facts, these proceedings will ultimately be resolved without materially
affecting the Company's financial condition or results of operations.
Guaranty Fund Assessments
From time to time, mandatory assessments are levied on the Company's
insurance subsidiaries by life and health guaranty associations of most states
in which these subsidiaries are licensed to cover losses to policyholders of
insolvent or rehabilitated insurance companies. The associations levy
assessments (up to prescribed limits) on all insurers in a particular state in
order to pay claims on the basis of the proportionate share of premiums written
by insurers in the lines of business in which the insolvent or rehabilitated
insurer are engaged. These assessments may be deferred or forgiven in certain
states if they would threaten an insurer's financial strength and, in some
states, these assessments can be partially recovered through a reduction in
future premium taxes. Assessments levied against the Company's insurance
subsidiaries and charged to expense in the year ended December 31, 1995, the
three month period ended December 31, 1994, the nine month period ended
September 30, 1994 and the year ended December 31, 1993 were $.2 million, $.6
million, $1.4 million and $2.6 million, respectively. The balance sheet at
December 31, 1995, includes a liability of $7.2 million representing the
Company's estimate of all known assessments that will be levied against the
Company's insurance subsidiaries by various state guaranty associations on
premiums that have been written through December 31, 1995. Such estimate is
subject to change as the associations determine more precisely the losses due to
all failures that have occurred and how such losses will be allocated to
insurance companies.
Interest Rate Swaps
Prior to the Acquisition, the Company entered into certain interest rate
swap agreements primarily to: (i) match the interest rate characteristics of
investments and related insurance liabilities for a portion of its single
premium annuity liabilities; (ii) offset a portion of the cost of interest rate
swaps used as hedges; and (iii) convert a portion of its floating rate bank debt
to fixed rate debt. Prior to the Acquisition, several contracts ceased to
effectively hedge risks and the Company began reporting them at their estimated
fair value with changes in fair value reflected in income as they occurred.
Realized losses on interest rate swap contracts of $13.8 million, net of income
taxes of $7.5 million were recognized in the nine months ended September 30,
1994. All swap agreements were recorded at their estimated fair values at the
Acquisition date pursuant to purchase accounting and all material agreements
were terminated during 1995 and 1994. No significant gain or loss was recognized
on the swap contracts during the year ended December 31, 1995, and the three
months ended December 31, 1994.
Related Party Transactions
In accordance with its partnership agreement: (i) Partnership II paid
acquisition fees of $.9 million in 1994 to a subsidiary of Conseco for services
related to the Acquisition; and (ii) the Company paid $4.0 million in 1994 to a
subsidiary of Conseco for services provided in connection with the financings
related to the Acquisition.
64
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Since the Acquisition, the Company and certain of its subsidiaries have
received services from or shared expenses with subsidiaries of Conseco under
written agreements or based on cost allocation principles in accordance with
GAAP, including investment advisory agreements which provide investment
management and related accounting and reporting services. The fee for such
investment related services is .0625 percent of the value of managed investable
assets at the beginning of each quarter. Fees charged under all such
arrangements totaled $14.2 million and $2.6 million for the year ended December
31, 1995, and the three months ended December 31, 1994, respectively.
12. OTHER OPERATING DATA
Insurance policy income consisted of the following:
<TABLE>
<CAPTION>
Three months Nine months
Year ended ended ended Year ended
December 31, December 31, September 30, December 31,
1995 1994 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Direct premiums collected.............................. $830.0 $284.4 $849.8 $1,069.3
Reinsurance ceded...................................... 4.4 1.2 3.9 4.4
------- ------- ------ --------
Premiums collected, net of reinsurance........... 825.6 283.2 845.9 1,064.9
Less premiums on universal life and products
without mortality and morbidity risk which are
recorded as additions to insurance liabilities .... 797.1 275.5 824.1 1,035.0
------- ------- ------ --------
Premiums on products with mortality risk,
recorded as insurance policy income 28.5 7.7 21.8 29.9
Fees and surrender charges............................. 29.6 5.9 18.4 20.1
------- ------- ------ --------
Insurance policy income.......................... $ 58.1 $ 13.6 $40.2 $ 50.0
======= ====== ===== =======
</TABLE>
The seven states with the largest shares of the subsidiaries' premiums
collected in 1995 were Florida (11.9 percent), California (8.1 percent),
Pennsylvania (6.5 percent), Michigan (6.4 percent), Texas (6.2 percent),
Illinois (6.0 percent), and New Jersey (5.6 percent). No other state accounted
for more than 4 percent of total collected premiums.
Other operating costs and expenses were as follows:
<TABLE>
<CAPTION>
Three months Nine months
Year ended ended ended Year ended
December 31, December 31, September 30, December 31,
1995 1994 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Commission expense..................................... $ 7.4 $2.2 $ 4.3 $ 8.2
Other.................................................. 23.7 5.8 21.5 27.3
------ ----- ------ ------
Other operating costs and expenses................. $31.1 $8.0 $25.8 $35.5
===== ==== ===== =====
</TABLE>
Anticipated returns from the investment of policyholder balances are
considered in determining the amortization of the cost of policies purchased and
cost of policies produced. Sales of fixed maturity investments change the
incidence of profits on such policies because capital gains (losses) are
recognized currently and the expected future yields on the investment of
policyholder balances are reduced (increased). Accordingly, amortization of the
cost of policies produced and the cost of policies purchased was increased by
$83.3 million, $2.8 million and $9.8 million for the year ended December 31,
1995, the nine months ended September 30, 1994, and the year ended December 31,
1993, respectively.
65
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The changes in the cost of policies purchased were as follows:
<TABLE>
<CAPTION>
Three months
Year ended ended
December 31, December 31,
1995 1994
---- ----
(Dollars in millions)
<S> <C> <C>
Balance, beginning of period........................................................ $447.8 $454.3
Amortization related to operations:
Cash flow realized........................................................... (53.3) (13.7)
Interest added............................................................... 22.8 7.2
Amortization related to gains on sales of investments........................... (73.6) -
Effect of fair value adjustment to actively managed fixed maturities............ (93.6) -
------ ------
Balance, end of period ............................................................. $250.1 $447.8
====== ======
</TABLE>
Based on current conditions and assumptions as to future events on all
policies in force, the Company expects to amortize approximately 10 percent of
the cost of policies purchased balance in each of the next 5 years. The discount
rate used to determine the amortization of the cost of policies purchased was
approximately 5 percent.
The changes in the cost of policies produced were as follows:
<TABLE>
<CAPTION>
Three months Nine months
Year ended ended ended Year ended
December 31, December 31, September 30, December 31,
1995 1994 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Balance, beginning of period.............................. $25.0 $ - $ 293.9 $235.1
Additions ............................................ 87.3 25.2 85.2 100.3
Amortization related to operations.................... (2.7) (.2) (29.7) (31.7)
Amortization related to gains on sales of investments. (9.7) - (2.8) (9.8)
Effect of fair value adjustment to actively managed
fixed maturities................................... (22.3) - - -
Amounts eliminated at Acquisition date................ - - (346.6) -
----- ----- ------- ------
Balance, end of period.................................... $77.6 $25.0 $ - $293.9
===== ===== ======= ======
</TABLE>
66
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
13. CONSOLIDATED STATEMENT OF CASH FLOWS
Supplemental disclosures and non-cash items that are not reflected in the
consolidated statement of cash flows were as follows:
<TABLE>
<CAPTION>
Three months Nine months
Year ended ended ended Year ended
December 31, December 31, September 30, December 31,
1995 1994 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Cash paid during the period for:
Interest.......................................... $30.0 $5.4 $2.3 $ 4.8
Income taxes...................................... 3.7 - 7.9 20.0
Non-cash items:
Reduction in ESOP loan guarantee balance.......... - - 4.8 1.2
Exchange of subordinated debentures for redeemable
preferred stock of American Life Holding ...... - - - 30.0
Conversion of Convertible Debentures.............. 9.2 42.3 2.5 -
</TABLE>
14. STATUTORY INFORMATION
Statutory accounting practices prescribed or permitted for the Company's
insurance subsidiaries by regulatory authorities differ from GAAP. The Company's
life insurance subsidiaries reported the following amounts to regulatory
agencies, after appropriate eliminations of intercompany accounts among such
subsidiaries:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
---- ----
(Dollars in millions)
<S> <C> <C>
Statutory capital and surplus................................................... $215.4 $237.2
Asset valuation reserve ........................................................ 37.5 27.2
Interest maintenance reserve ................................................... 24.9 18.7
------ -------
Total...................................................................... $277.8 $283.1
====== ======
</TABLE>
Combined statutory net income of the Company's life insurance
subsidiaries was $27.1 million, $39.7 million and $31.9 million in 1995, 1994
and 1993, respectively, after appropriate eliminations of intercompany accounts
between such subsidiaries. The Company's insurance subsidiaries follow certain
permitted accounting practices which are not specifically prescribed in state
laws, regulations, general administrative rules and various NAIC publications.
Such permitted accounting practices do not enhance statutory surplus.
American Life and Casualty's surplus includes a surplus note held by
American Life Holding with a balance of $50.0 million at December 31, 1995. Each
payment of interest or principal on the surplus note requires the prior approval
of the Iowa Insurance Division. The Iowa insurance law provides that payments of
dividends on capital stock and interest and principal on surplus notes may be
made only out of an insurer's earned surplus. At December 31, 1995, American
Life and Casualty had earned surplus of $109.5 million.
67
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The net assets of the insurance subsidiaries available for transfer to
stockholders are limited to the amounts by which the insurance subsidiaries' net
assets, as determined in accordance with statutory accounting practices
prescribed or permitted by state regulatory authorities, exceed minimum
regulatory statutory capital and surplus requirements; however, payment of
dividends or other distributions to stockholders may also be subject to prior
approval by regulatory authorities. The Iowa laws require that the statutory
surplus of American Life and Casualty following any dividend or distribution be
reasonable in relation to its outstanding liabilities and adequate for its
financial needs (as determined under standards contained therein). The Iowa
Insurance Commissioner may bring an action to enjoin or rescind the payment of a
dividend or distribution by an insurer domiciled in its state that would cause
such insurer's statutory surplus to be unreasonable or inadequate under this
standard.
In addition, the ability of the insurance subsidiaries to transfer funds
to stockholders is limited by certain provisions in the Company's loan
agreements relating to the maintenance of specified minimum levels of statutory
capital and surplus (see note 6) and minimum levels of statutory risk-based
capital. At December 31, 1995, $24.2 million was available to be transferred
from American Life and Casualty (based on amounts reported in accordance with
statutory accounting practices) to American Life Holding in the form of
dividends, surplus note payments, loans or advances.
Statutory accounting practices require that portions of surplus, called
the asset valuation reserve ("AVR") and the interest maintenance reserve
("IMR"), be appropriated and reported as liabilities. The purpose of these
reserves is to stabilize statutory surplus against fluctuations in the market
value of investments. The IMR captures all investment gains and losses on debt
instruments resulting from changes in interest rates and provides for subsequent
amortization of such amounts into statutory net income on a basis reflecting the
remaining life of the assets sold. The AVR captures investment gains and losses
related to changes in creditworthiness and is also adjusted each year based on a
formula related to the quality and loss experience of the Company's investment
portfolio.
A non-insurance subsidiary of the Company functions as a general agent
for American Life and Casualty and its primary purpose is to pay commissions to
American Life and Casualty's agents on annuity policies issued by American Life
and Casualty pursuant to a general agency commission and servicing agreement
between the non-insurance subsidiary and American Life and Casualty. This
agreement initially benefits the statutory surplus of American Life and Casualty
by extending the payment of first year commissions to the subsidiary on certain
deferred annuity policies over a longer period of time. In subsequent periods,
American Life and Casualty's statutory surplus is reduced through the payment of
renewal commissions to the subsidiary equal to a specified percentage of the
accumulated policyholder account values of certain deferred annuity policies
issued by American Life and Casualty since 1990 remaining in force.
Included in statutory capital and surplus at December 31, 1995, is $3.9
million related to 463,649 shares of the Company's common stock held by Vulcan
Life. Such amount is eliminated in the consolidated financial statements.
Most states have adopted risk-based capital ("RBC") rules, to evaluate
the adequacy of statutory capital and surplus in relation to investment and
insurance risks. The RBC formula is designed as an early warning tool to help
state regulators identify possible weakly capitalized companies for the purpose
of initiating regulatory action. At December 31, 1995, the ratios of total
adjusted capital to RBC, as defined by the rules, for the Company's insurance
subsidiaries were approximately twice the level at which regulatory attention is
triggered.
68
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
15. QUARTERLY FINANCIAL INFORMATION (Unaudited)
Earnings per common share for each quarter are calculated independently
of earnings per share for the year. The sum of the quarterly earnings per share
may not equal the earnings per share for the year because of: (i) transactions
affecting the weighted average number of shares outstanding in each quarter; and
(ii) the uneven distribution of earnings during the year.
Unaudited quarterly results of operations are as follows:
<TABLE>
<CAPTION>
1995
----------------------------------------------
1st qtr. 2nd qtr. 3rd qtr. 4th qtr.
-------- -------- -------- --------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C>
Insurance policy income...................................... $ 14.6 $ 15.2 $ 13.8 $ 14.5
Net investment income........................................ 102.1 105.4 105.4 102.7
Net realized gains........................................... 3.8 48.3 11.1 84.6
Total revenues............................................... 122.8 170.8 132.1 203.6
Income before income taxes, minority interest
and extraordinary charge................................... 19.5 40.0 24.4 49.9
Income before extraordinary charge........................... 9.7 23.1 12.8 29.5
Net income................................................... 9.7 23.1 12.8 25.5
Net income applicable to common stock........................ 7.9 21.2 10.9 23.4
Net income per common share - primary and fully diluted:
Income before extraordinary charge......................... .70 1.88 .96 2.27
Extraordinary charge....................................... - - - .33
Net income................................................. .70 1.88 .96 1.94
</TABLE>
<TABLE>
<CAPTION>
1994
-----------------------------------------------
1st qtr. 2nd qtr. 3rd qtr. 4th qtr.
-------- -------- -------- --------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C>
Insurance policy income...................................... $ 13.5 $ 12.8 $ 13.9 $ 13.6
Net investment income........................................ 80.3 83.8 86.7 92.8
Net realized gains (losses).................................. 5.3 (22.0) (.1) 1.2
Total revenues............................................... 100.4 76.0 102.1 108.9
Income (loss) before income taxes and minority interest...... 17.5 (6.8) 7.9 12.5
Net income (loss)............................................ 9.6 (6.2) 1.8 5.2
Net income (loss) applicable to common stock................. 9.2 (6.6) 1.5 3.3
Net income (loss) per common share:
Primary.................................................... 1.31 (.94) .21 .30
Fully diluted.............................................. .92 (.94) .21 .30
</TABLE>
The results of operations for 1995 and the fourth quarter of 1994
represent results since the date of the Acquisition and are reported based on
the purchase method of accounting. The results of operations for the first three
quarters of 1994 are reported based on historical accounting. Net income, as
previously reported for the quarterly period ended June 30, 1994, has been
adjusted for the $13.8 million net realized loss (net of income taxes of $7.5
million) incurred on interest rate swap contracts as discussed in note 11 to the
consolidated financial statements.
69
<PAGE>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
16. SUBSEQUENT EVENT (Unaudited)
In March 1996, Conseco announced that Partnership II would be dissolved.
Accordingly, the partners have no further commitment to make additional
contributions of capital to Partnership II or the Company. In accordance with
the partnership agreement, all of Partnership II's assets (primarily its
investment in AGP) will be distributed to its partners subject to the conditions
contained in the partnership agreement. In any event, Partnership II's assets
must be distributed within two years of the effective date of dissolution.
70
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this Item regarding the Company's change of
independent public accountants was previously reported by the Registrant in a
current report on Form 8-K dated December 5, 1994 filed with the Commission on
December 9, 1994. Accordingly, the information is omitted pursuant to
Instruction 1 of Item 304 of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
directors and executive officers of the Company and the positions and offices
held by each person. Except for Mr. Newsome, the current directors and executive
officers were elected on September 29, 1994, concurrent with the acquisition of
the Company by Partnership II. Directors hold their positions until the annual
meeting of stockholders, or until their respective successors are elected and
qualify. It is intended that the current directors will be nominated for
re-election as Directors of the Company at the next annual meeting of
stockholders. Officers serve at the discretion of the Board of Directors and are
subject to removal at any time. There is no family relationship between any of
the persons named.
<TABLE>
<CAPTION>
Name (Age) Positions and Offices
---------- ---------------------
<S> <C>
Stephen C. Hilbert (50).................... Director and Chairman of the Board
Jon P. Newsome (53)........................ Director, President and Chief Executive Officer (since November 1995)
Ngaire E. Cuneo (45)....................... Director and Executive Vice President, Corporate Development
Rollin M. Dick (64)........................ Director, Executive Vice President and Chief Financial Officer
Donald F. Gongaware (60)................... Director, Executive Vice President and Chief Operating Officer
Lawrence W. Inlow (45)..................... Director, Executive Vice President and General Counsel
</TABLE>
Business experience during the past five years of each director and
executive officer is as follows:
Stephen C. Hilbert
Director, Chairman of the Board and Chief Executive Officer since 1979
and President since 1988 of Conseco (an affiliate of the Company).
Director and Chairman of the Board of American Life Holding since
September 1994.
Director of Bankers Life Holding Corporation.
Jon P. Newsome
Director, President and Chief Executive Officer of the Company and
American Life Holding since November 1995.
Chairman of the Board and Chief Executive Officer of American Life
and Casualty and Vulcan Life since November 1995.
Executive Vice President of Equitable of Iowa Companies from
1993 until November 1995.
President of USG Annuity & Life Company from 1988 until November 1995.
71
<PAGE>
Ngaire E. Cuneo
Director since 1994 and Executive Vice President since 1992 of Conseco.
Senior Vice President and Corporate Officer of General Electric Capital
Corporation from 1986 to 1992.
Director of American Life Holding, Bankers Life Holding Corporation
and Duke Realty Investments, Inc.
Rollin M. Dick
Director, Executive Vice President and Chief Financial Officer of
Conseco since 1986.
Director of American Life Holding, Bankers Life Holding Corporation,
General Acceptance Corporation and Brightpoint, Inc.
Donald F. Gongaware
Director and Executive Vice President of Conseco since 1985.
Director of American Life Holding and Bankers Life Holding Corporation.
Lawrence W. Inlow
Executive Vice President and General Counsel of Conseco since 1987.
Director of American Life Holding.
During the past five years, none of the directors or executive officers has
been convicted in a criminal proceeding or is a named subject of a pending,
criminal proceeding. None of the directors or executive officers is the subject
of any order, judgment or decree enjoining that person, or otherwise limiting,
his activities in securities or other similar business. None of the directors or
executive officers has been the subject of any bankruptcy or similar act, nor
been a partner or executive officer in any firm or company that has been the
subject of the bankruptcy act or any similar law during the past five years.
72
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Except for Mr. Newsome, none of the Company's current executive officers
are compensated for serving in such capacity. The following table sets forth the
compensation paid by the Company to Mr. Newsome (who has served as chief
executive officer since November 1995), Mr. Hilbert (who served as chief
executive officer until November 1995) and one other individual who served as an
executive officer in 1995 (collectively, the "Named Individuals").
<TABLE>
<CAPTION>
Summary Compensation Table
Annual
Compensation (l)
---------------- All Other
Compen-
Name and Principal Position Year Salary Bonus sation(2)
--------------------------- ---- ------ ----- ---------
<S> <C> <C> <C> <C>
Jon P. Newsome................................ 1995 $57,484 $ -- $40
President and Chief Executive Officer
since November 1995
D. J. Noble................................... 1995 800,000 500,000 3,257,418
President until November 1995 and, 1994 794,000 200,000 17,124
through September 29, 1994, Chief 1993 550,000 400,000 28,498
Executive Officer
Stephen C. Hilbert............................ 1995 -- -- --
Chairman of the Board since September 29, 1994 -- -- --
1994 and Chief Executive Officer from
September 29, 1994 until November 1995
<FN>
(1) Includes employee tax-deferred contributions to the Company's 401(k)
savings plan and the deferred portions of Mr. Noble's compensation pursuant
to his deferred compensation agreement with the Company. Mr. Noble elected
to defer receipt of $1,000,000 in 1995 (including the entire amount of his
bonus), $500,000 in 1994 and $750,000 in 1993 (including the entire amount
of his bonus). Interest on the amounts deferred is payable annually within
60 days after the end of the year at an annual rate of 2% under the prime
rate of interest. Mr. Noble's employment with the Company terminated on
December 31, 1995 and his entire deferred compensation balance was
subsequently distributed to him in 1996.
(2) Of such amounts, $3,249,444 was paid to Mr. Noble in 1996 in connection
with his termination of employment under an employment continuation
agreement as discussed hereafter. The remaining amounts represent employer
contributions to the Company's 401(k) savings plan and the Company's
employee stock ownership plan and group term life insurance premiums. Such
amounts for 1995 for Mr. Newsome were $40 for life insurance and for Mr.
Noble were $7,500 for the 401(k) savings plan and $474 for life insurance.
</FN>
</TABLE>
73
<PAGE>
Employment Contracts and Change-In-Control Arrangements
The Company had an employment continuation agreement with Mr. Noble with
respect to his continued employment in the event of a change of control of the
Company. The acquisition of the Company by Partnership II constituted a change
of control under the agreement. Subject to certain conditions, the agreement
provided that Mr. Noble would be entitled to continue employment with the
Company for a period of three years following the date of a change of control,
or in the event of discharge or voluntary termination, be paid an amount
determined under the provisions of the agreement, based on the time and
circumstances of termination of employment. The maximum remaining amount payable
under such agreement, equal to 2-3/4 times Mr. Noble's compensation for the year
immediately preceding the date of the change in control, became payable to Mr.
Noble in connection with the termination of his employment on December 31, 1995
and was subsequently paid to him in 1996 (see footnote (2) to Summary
Compensation Table).
Compensation of Directors
The current Directors of the Company receive no compensation for serving in
such capacity.
Compensation Committee Interlocks and Insider Participation
The current members of the Compensation Committee are Rollin M. Dick,
Donald F. Gongaware and Stephen C. Hilbert, all of whom are executive officers
and directors of Conseco. See "Item 13. Certain Relationships and Related
Transactions." Although they receive no compensation from the Company, Messrs.
Dick, Gongaware and Hilbert are executive officers of the Company.
74
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 1, 1996, regarding
ownership of the Company's common stock (excluding shares held by subsidiaries
not entitled to vote) by the only persons known to own beneficially more than
five percent thereof, by the directors, executive officers and Named Individuals
individually, and by all directors and executive officers as a group. Except as
otherwise indicated in the footnotes to the table, persons have sole voting and
investment powers over the shares. Except as indicated below, the directors,
executive officers and Named Individuals do not own any shares of any other
class of equity securities of the Company.
<TABLE>
<CAPTION>
Shares Owned and
Nature of Ownership
-----------------------
Name and Address (1) Number Percent
-------------------- ------ -------
<S> <C> <C>
Five Percent Owners:
Conseco, Inc.
11825 N. Pennsylvania Street
Carmel, Indiana 46043....................................................... 13,006,784(2) 96.8%
Conseco Capital Partners II, L.P.
11825 N. Pennsylvania Street
Carmel, Indiana 46032....................................................... 10,753,661 80.0%
Bankers Life Holding Corporation
222 Merchandise Mart Plaza
Chicago, Illinois 60654..................................................... 1,244,821(2) 9.3%
CIHC, Incorporated
One Commerce Center, Suite 789
1201 Orange Street
Wilmington, Delaware 19801.................................................. 1,008,302(2) 7.5%
Directors, Executive Officers and Named Individuals:
Ngaire E. Cuneo............................................................. - -
Rollin M. Dick.............................................................. 23,582(3) *
Donald F. Gongaware......................................................... - -
Stephen C. Hilbert.......................................................... - -
Lawrence W. Inlow........................................................... - -
Jon P. Newsome.............................................................. - -
D. J. Noble................................................................. - -
All directors and executive officers as a group (six persons)............... 23,582(3) *
<FN>
*Less than one percent.
(1) Address given for five percent owners only.
(2) A wholly owned subsidiary of Conseco is the sole general partner of
Partnership II and in such capacity has sole voting and dispositive power
of the shares owned by Partnership II. Conseco owns approximately 90.5
percent of Bankers Life Holding Corporation. CIHC, Incorporated is a wholly
owned subsidiary of Conseco and the successor in interest to GARCO Holding
Corporation as to its shares. Conseco expressly disclaims beneficial
ownership of all shares held by Partnership II and Bankers Life Holding
Corporation.
(3) These shares are owned by a charitable foundation as to which Mr. Dick
shares voting and investment power. Such foundation also owns 500 shares
(less than one percent) of the Company's 1994 Series Preferred Stock $1
Par, which shares have no voting rights. Mr. Dick expressly disclaims
beneficial ownership of the shares held by such foundation.
</FN>
</TABLE>
The United States of America, or an agency thereof claims beneficial
ownership of 143,640 shares of 1988 Series I and II Preferred Stock which has
voting rights under certain limited circumstances and represents 100 percent of
the outstanding 1988 Series I and II Preferred Stock. The 1988 Series I and II
Preferred Stock was used by the Company in 1988 - 1990 to partially capitalize a
savings bank acquired by the Company in 1988 pursuant to agreements entered into
with agencies of the United States of America. The Company has sued the United
States of America, alleging breach of these agreements. (see "Item 3 - Legal
Proceedings" and
75
<PAGE>
note 9 to the consolidated financial statements). The 1988 Series I and II
Preferred Stock, when allowed to vote, has the right to vote less than one
percent of the total voting power of all stock entitled to vote.
In addition to the equity securities of the Company reflected in the table
above, Mr. Noble beneficially owns shares of the $2.16 Redeemable Cumulative
Preferred Stock of American Life Holding (the "ALHC Preferred Stock"), a wholly
owned subsidiary of the Company, of which there are 2,760,000 shares
outstanding. Mr. Noble has allocated a portion of his employee tax deferred
contributions and employer matching contributions to the ALHC Preferred Stock
investment option in the Company's 401(k) Savings Plan. The 401(k) Savings
Plan's accounting records do not provide for a specific allocation of such
shares to individual participant accounts; rather, each participant has a
proportionate interest in the shares of the ALHC Preferred Stock owned by the
401(k) Savings Plan based upon the ratio of the participant's account balance in
the ALHC Preferred Stock investment option to the total of all participant
account balances in such investment option. As of December 31, 1995, the most
recent date for which information is available, the proportionate interest of
the directors, executive officers and Named Individuals in the 16,539 shares of
the ALHC Preferred Stock owned by the 401(k) Savings Plan was as follows: Mr.
Noble - 709 shares; and all directors and executive officers as a group (six
persons) - 0 shares.
Ownership of Partnership II
Partnership II is the holder of 80 percent of the outstanding shares of the
Company's common stock. The following table sets forth information as of March
1, 1996, regarding the ownership of limited partnership interests of Partnership
II by the directors, executive officers and Named Individuals and by all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Percentage
Ownership of
Name Partnership II (1)
- ---- ------------------
<S> <C>
Ngaire E. Cuneo................................................................................... *
Rollin M. Dick.................................................................................... *
Donald F. Gongaware............................................................................... *
Stephen C. Hilbert................................................................................ 2.4%
Lawrence W. Inlow................................................................................. *
Jon P. Newsome.................................................................................... -
D.J. Noble........................................................................................ *
All directors and executives officers as a group (six persons).................................... 4.7%
<FN>
* Less than one percent.
(1) Reflects the percentage of total capital commitments made to Partnership II.
</FN>
</TABLE>
Ownership of Common Stock of Conseco
The following table sets forth information as of March 20, 1996, regarding
ownership of common stock of Conseco by the directors, executive officers and
Named Individuals individually and by all directors and executive officers as a
group. Where any footnote indicates that shares included in the table are owned
by, or jointly with, family members or by an affiliate, such person may be
deemed to exercise shared voting and investment power with respect to those
shares, unless otherwise indicated. The Company's directors, executive officers
and Named Individuals do not own any shares of any other class of equity
securities of Conseco.
<TABLE>
<CAPTION>
Shares Owned
-----------------------
Number Percent
------ -------
<S> <C> <C>
Ngaire E. Cuneo...................................................................... 133,783 (1) *
Rollin M. Dick....................................................................... 636,852 (2) 3.1%
Donald F. Gongaware.................................................................. 702,336 (3) 3.4%
Stephen C. Hilbert................................................................... 1,298,930 (4) 6.1%
Lawrence W. Inlow.................................................................... 587,262 (5) 2.8%
Jon P. Newsome....................................................................... - -
D. J. Noble.......................................................................... - -
All directors and executive officers as a group (six persons)........................ 3,359,163 (6) 15.3%
<FN>
* Less than one percent.
76
<PAGE>
(1) Of these shares, 120,749 are subject to options held by Ms. Cuneo which are
exercisable within 60 days.
(2) Of these shares, 99,180 are owned by Mr. Dick's wife, 101,331 are owned by
a charitable foundation as to which shares he shares voting and investment
power, 163,075 are subject to options held by Mr.Dick which are exercisable
within 60 days and 254 are attributable to Mr. Dick's account under a 401(k)
savings plan. Mr. Dick expressly disclaims beneficial ownership of all
shares owned by his wife, the charitable foundation and the trust.
(3) Of these shares, 31,000 are owned by Mr. Gongaware's wife, 70,000 shares
are owned by a charitable trust as to which he shares voting and investment
power, 18,000 shares are owned by irrevocable trusts as to which Mr.
Gongaware's wife has sole voting and investment power, 233,075 shares are
subject to options held by Mr. Gongaware which are exercisable within 60
days and 230 are attributable to Mr. Gongaware's account under a 401(k)
savings plan. Mr. Gongaware expressly disclaims beneficial ownership of all
shares owned by his wife and the trusts as to which she has sole voting and
investment power.
(4) Of these shares, 456,435 are subject to options held by Mr. Hilbert which
are exercisable within 60 days.
(5) Of these shares, 283,075 are subject to options held by Mr. Inlow which
are exercisable within 60 days and 254 are attributable
to Mr. Inlow's account under a 401(k) savings plan.
(6) Includes 1,256,409 shares subject to outstanding stock options which are
exercisable within 60 days.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Partnership II owns 80 percent of the Company's outstanding voting shares
of common stock. A wholly owned subsidiary of Conseco is the sole general
partner of Partnership II. Consequently, Conseco, through such subsidiary, is
able to control the Company and is able to determine such actions as the
election of directors and the approval of any other matters submitted for
stockholder approval. Also, five of the Company's six directors are persons who
are also executive officers of Conseco and limited partners of Partnership II.
Since the Acquisition, the Company and its subsidiaries have received
services from or shared expenses with other affiliates or subsidiaries of
Conseco under written agreements or based on cost allocation principles in
accordance with GAAP. For 1995 and 1994, the aggregate fees paid or accrued by
the Company and its subsidiaries to Conseco or its subsidiaries or affiliates
under all such arrangements (including the Advisory Agreements described below)
were $14.2 million and $2.6 million, respectively. The charges for services
rendered by Conseco and its affiliates were not the result of arms-length
negotiations between independent parties. It has been the intention of the
Company and Conseco that these arrangements as a whole should accommodate the
parties' interests in a manner that is fair and mutually beneficial.
These agreements may be modified in the future and additional agreements or
transactions may be entered into between Conseco and its subsidiaries and the
Company and its subsidiaries. The provisions of the Senior Credit Facility and
the indenture relating to the senior subordinated notes require that each
agreement or transaction between the Company and Conseco or their respective
subsidiaries be on terms at least as favorable to the Company as could be
obtained from unaffiliated parties for comparable services or arrangements.
Additionally, the Partnership II partnership agreement requires that any
agreements between entities in which Partnership II invests and Conseco be on
terms that are reasonable based upon the review of two nationally recognized
accounting firms.
Since the Acquisition, each of the Company and its principal subsidiaries
has been party to an agreement with Conseco Capital Management, Inc. ("CCM"), a
registered investment advisor wholly owned by Conseco (collectively, the
"Advisory Agreements") pursuant to which, subject to any limitations or
directions of the Board of Directors or officers of the Company and such
subsidiaries, CCM supervises and directs the investment of its invested assets
of the Company and such subsidiaries. For these services, CCM receives a
quarterly fee equal to .0625 percent (.25 percent annually) of the market value
of the investable assets under its supervision. For 1995 and 1994, the fees
under the Advisory Agreements aggregated $11.8 million and $2.5 million,
respectively. The Advisory Agreements continue in effect until terminated on
their respective annual anniversary by either party upon 60 days' notice or by
the Company or its subsidiary, as the case may be, upon a default or failure of
CCM to perform its obligations thereunder.
American Life and Casualty and Vulcan Life intend to enter into service
agreements with a subsidiary of Conseco (collectively, the "Service
Agreements"), pursuant to which, subject to any limitations or directions of the
Board of Directors or officers of such insurance companies, the Conseco
subsidiary will provide data processing and other services. The Service
Agreements have been filed with the Insurance Departments of Iowa and Alabama.
77
<PAGE>
Stockholders' Agreement
In connection with the Acquisition, the Company entered into an agreement
with Partnership II and the existing stockholders (the "Stockholders'
Agreement") which is being amended to include shares of common stock acquired by
such stockholders in November 1995. (See "--Other Transactions"). The
Stockholders' Agreement provides to the Company first and then to the existing
stockholders a right of first refusal which applies when such holder seeks to
sell its common stock to an unaffiliated third party (other than in a public
offering). The Stockholders' Agreement also provides demand registration rights
and piggyback registration rights.
Other Transactions
In connection with a rights offering made to the existing stockholders,
Partnership II, Bankers Life Holding Corporation and CIHC, Incorporated,
purchased 1,714,286, 216,949 and 125,728 shares of common stock, respectively,
for $14 per share on November 30, 1995. The proceeds of such sales were used to
make a capital contribution to American Life Holding which used such
contribution to make a principal payment on the senior term loan.
78
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) l. Financial Statements. See Index to Financial Statements on page 28 for
a list of financial statements included in this Report.
2. Financial Statement Schedules. The following consolidated financial
statement schedules are included as part of this Report
immediately following the signature page on pages 81 through 86.
Schedule II--Condensed Financial Information of Registrant
(Parent Company)
Schedule IV--Reinsurance
All other schedules to the consolidated financial statements required
by Article 7 of Regulation S-X are omitted because they are not
applicable or because the information is included elsewhere in the
consolidated financial statements or notes.
3. Exhibits. See Exhibit Index immediately preceding the Exhibits filed
with the Report.
(b) Reports on Form 8-K. None
79
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) 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, this 29th day of
March, 1996.
AMERICAN LIFE GROUP, INC.
By: /s/ ROLLIN M. DICK
-----------------------
Rollin M. Dick
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title (Capacity) Date
--------- ---------------- ----
<S> <C> <C>
/s/ STEPHEN C. HILBERT Chairman of the Board and Director March 29, 1996
----------------------
Stephen C. Hilbert
/s/ JON P. NEWSOME Chief Executive Officer, March 29, 1996
------------------ President and Director
Jon P. Newsome (Principal Executive Officer)
/s/ ROLLIN M. DICK Executive Vice President, Chief March 29, 1996
------------------- Financial Officer and Director
Rollin M. Dick (Principal Financial Officer and
Principal Accounting Officer)
/s/ NGAIRE E. CUNEO Director March 29, 1996
-------------------
Ngaire E. Cuneo
/s/DONALD F. GONGAWARE Director March 29, 1996
----------------------
Donald F. Gongaware
/s/LAWRENCE W. INLOW Director March 29, 1996
--------------------
Lawrence W. Inlow
</TABLE>
80
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Shareholders and Board of Directors
American Life Group, Inc.
Our report on the consolidated financial statements of American Life Group,
Inc. and subsidiaries is included on page 30 of this Form 10-K. In connection
with our audits of such financial statements, we have also audited the related
financial statement schedules listed in the index on page 79 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
February 23, 1996
81
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON SCHEDULES
To the Shareholders and Board of Directors
American Life Group, Inc.
We have audited the consolidated statements of operations, shareholders' equity,
and cash flows of American Life Group, Inc. (formerly known as The Statesman
Group, Inc.) for the year ended December 31, 1993, and have issued our report
thereon dated January 27, 1994, except for the August 8, 1995 one-for-two stock
split as to which the date is August 9, 1995 (included elsewhere in this Annual
Report on Form 10-K). Our audit also included the financial schedules listed in
the index at Item 14(a) for the year ended December 31, 1993. These schedules
are the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Des Moines, Iowa
January 27, 1994
82
<PAGE>
<TABLE>
<CAPTION>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information of Registrant (Parent Company)
Balance Sheet
as of December 31, 1995 and 1994
(Dollars in millions)
ASSETS
1995 1994
---- ----
<S> <C> <C>
Short-term investments............................................................ $ 12.8 $ 2.2
Cash segregated for the conversion of the 6-1/4% debentures....................... - 24.2
Investment in subsidiaries (eliminated in consolidation).......................... 411.2 79.0
Receivables from subsidiaries (eliminated in consolidation)....................... 48.4 48.4
Other assets...................................................................... 5.8 2.0
------ ------
Total assets................................................................ $478.2 $155.8
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Income tax liabilities......................................................... $ 10.2 $ 11.8
Contingent consideration payable upon determination
of the Savings Bank Litigation.............................................. 30.1 30.1
Notes payable.................................................................. 15.0 24.2
Notes and accounts payable due to subsidiaries (eliminated in consolidation)... .3 1.1
Accounts payable due to affiliates............................................. .6 .4
Other liabilities.............................................................. 16.4 9.1
------- ------
Total liabilities........................................................... 72.6 76.7
------- ------
Shareholders' equity:
Series Preferred Stock $1 Par.................................................. 66.6 58.9
Common stock, $1 par value, and additional paid-in capital;
35,000,000 shares authorized; outstanding:
1995 - 13,442,075 shares; 1994 - 11,299,218 shares.......................... 75.9 45.9
Unrealized appreciation (depreciation) of securities:
Fixed maturity investments (net of applicable deferred income taxes:
1995 - $105.0; 1994 - $(15.4))............................................ 194.9 (28.5)
Other investments (net of applicable deferred income taxes:
1995 - $.8; 1994 - $(.3))................................................. 1.5 (.5)
Retained earnings ............................................................. 66.7 3.3
------- ------
Total shareholders' equity.................................................. 405.6 79.1
------- ------
Total liabilities and shareholders' equity.................................. $478.2 $155.8
====== ======
<FN>
The condensed financial information should be read in
conjunction with the consolidated financial statements
of American Life Group, Inc.
</FN>
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information of Registrant (Parent Company)
Statement of Operations
(Dollars in millions)
Predecessor Basis
---------------------------
Three months Nine months
Year ended ended ended Year ended
December 31, December 31, September 30, December 31,
1995 1994 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net investment income............................... $ .1 $ .1 $ 2.6 $ 1.7
Dividends from subsidiaries
(eliminated in consolidation)................... - - .6 1.9
Interest income from subsidiaries
(eliminated in consolidation).................... .9 .2 3.1 1.9
Net realized losses................................. - - (.6) -
Other income........................................ 1.2 .8 .4 .2
----- ------ ------ -----
Total revenues................................... 2.2 1.1 6.1 5.7
----- ------ ------ -----
Expenses:
Interest expense on notes payable................... 1.2 .7 3.7 3.9
Interest expense on investment borrowings........... - - 2.8 -
Acquisition, merger and other nonrecurring
expenses......................................... 4.6 - 7.2 -
Operating costs and expenses........................ .2 .5 1.1 2.5
----- ------ ------ -----
Total expenses................................... 6.0 1.2 14.8 6.4
----- ------ ------ -----
Loss before income taxes, equity in undistributed
earnings of subsidiaries and
extraordinary charge.......................... (3.8) (.1) (8.7) (.7)
Income tax benefit .................................... (1.3) - (4.1) (4.0)
----- ------ ------ -----
Income (loss) before equity in undistributed
earnings of subsidiaries and extraordinary
charge........................................ (2.5) (.1) (4.6) 3.3
Equity in undistributed earnings of subsidiaries
(eliminated in consolidation)....................... 77.6 5.3 9.8 34.0
------ ------ ------ -----
Income before extraordinary charge............... 75.1 5.2 5.2 37.3
Extraordinary charge on extinguishment
of debt, net of income tax benefit.................. 4.0 - - -
------ ------ ------ -----
Net income....................................... 71.1 5.2 5.2 37.3
Dividend requirements of Series Preferred Stock
$1 Par, net of income tax benefit................... 7.7 1.9 1.1 1.6
------ ------ ------ -----
Net income applicable to common stock............ $63.4 $3.3 $ 4.1 $35.7
===== ====== ====== =====
<FN>
The condensed financial information should be read in
conjunction with the consolidated financial
statements of American Life Group, Inc.
</FN>
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information of Registrant (Parent Company)
Statement of Cash Flows
(Dollars in millions)
Predecessor Basis
---------------------------
Three months Nine months
Year ended ended ended Year ended
December 31, December 31, September 30, December 31,
1995 1994 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 71.1 $ 5.2 $ 5.2 $ 37.3
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Equity in undistributed earnings of subsidiaries.... (77.6) (5.3) (9.8) (34.0)
Extraordinary charge................................. 6.2 - - -
Other................................................ (1.6) (1.9) (3.2) (1.6)
------- -------- ------- --------
Net cash provided by (used for) operating activities... (1.9) (2.0) (7.8) 1.7
------- -------- ------- ---------
Cash flows from investing activities:
Proceeds from sales and redemptions of surplus notes
and subsidiary preferred stock......................... - - 17.5 1.0
Equity distribution from subsidiary...................... - - 153.0 -
Investment in subsidiary................................. (30.0) - - -
------ -------- ------- --------
Net cash provided by (used for) investing activities... (30.0) - 170.5 1.0
------ -------- ------- --------
Cash flows from financing activities:
Issuance of notes payable................................ - - - 76.3
Payments on notes payable................................ - - - (19.5)
Cash segregated for conversion of Convertible Debentures 15.0 - (66.5) -
Issuance of common stock................................. 30.0 - 45.9 -
Payments to former stockholders pursuant to
merger agreement....................................... - - (244.4) -
Issuance of 1994 Series Preferred Stock.................. - - 57.0 -
Federal income taxes received from subsidiaries, net
of amounts paid to Internal Revenue Service............ (2.3) - 6.8 3.9
Increase (decrease) in intercompany payables............. (.1) .3 .1 (3.8)
(Increase) decrease in intercompany receivables.......... (.1) (.6) 45.5 (49.6)
Payments to repurchase equity securities................. - - (.6) (6.2)
Dividends paid to stockholders (including subsidiary:
1995--$ -; 1994--$.1; 1993--$.1)....................... - - (1.8) (1.4)
Other.................................................... - (1.2) .1 (2.0)
------ -------- ------- --------
Net cash provided by (used for) financing activities. 42.5 (1.5) (157.9) (2.3)
------ -------- ------- --------
Net increase (decrease) in short-term investments........... 10.6 (3.5) 4.8 .4
Short-term investments, beginning of period................. 2.2 5.7 .9 .5
------ -------- ------- --------
Short-term investments, end of period....................... $ 12.8 $ 2.2 $ 5.7 $ .9
====== ======== ======= =======
<FN>
The condensed financial information should be read in
conjunction with the consolidated financial
statements of American Life Group, Inc.
</FN>
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
SCHEDULE IV
Reinsurance
(Dollars in millions)
Three months Nine months
Year ended ended ended Year ended
December 31, December 31, September 30, December 31,
1995 1994 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Life insurance in force:
Direct........................................ $ 7,465.7 $7,614.8 $7,787.5
Assumed....................................... .2 .2 .2
Ceded......................................... (4,650.2) (951.9) (906.3)
--------- -------- -------
Net insurance in force..................... $2,815.7 $6,663.1 $6,881.4
======== ======== ========
Percentage of assumed to net (a)........... - - -
======== ======== =========
Premiums recorded as revenue for generally
accepted accounting principles:
Direct..................................... $32.9 $ 8.9 $25.7 $34.3
Assumed.................................... - - - -
Ceded...................................... (4.4) (1.2) (3.9) (4.4)
------- ------ ------ --------
Net premiums............................ $28.5 $ 7.7 $21.8 $29.9
======= ====== ====== ========
Percentage of assumed to net............ - - - -
======= ====== ====== =======
<FN>
(a) All percentages are less than .01 percent.
</FN>
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
Number Exhibit Description Page
- ------ ------------------- ----
<S> <C> <C> <C>
(2) (a) Agreement and Plan of Merger, dated as of May 1, 1994, by
and among Conseco Capital Partners II, L.P., CCP II Acquisition
Company and the Company incorporated herein by reference to the
Form 8-K dated May 1, 1994
(3) (a) Certificate of Incorporation, as amended, incorporated herein by
reference to the Registration Statement on Form S-1
(file no. 33-95644)
(b) By-Laws, as amended, incorporated herein by reference to the
Form 10-K for the year ended December 31, 1994
(c) Certificate of Designations, Preferences and Rights of 1976
Series Preferred Stock $1 Par incorporated herein by reference
to the Form 10-Q for the quarter ended March 31, 1994
(d) Certificate of Designations, Preferences and Rights of 1987
Series II Preferred Stock $1 Par incorporated herein by
reference to the Form 10-K for the year ended December 31, 1992
(e) Certificate of Designations, Preferences and Rights of 1988
Series I Preferred Stock $1 Par incorporated herein by reference
to the Form 10-K for the year ended December 31, 1992
(f) Certificate of Designations, Preferences and Rights of 1988
Series II Preferred Stock $1 Par incorporated herein by
reference to the Form 10-K for the year ended December 31, 1992
(g) Certificate of Powers, Designations, Preferences and Rights of
1994 Series Preferred Stock $1 Par incorporated herein by
reference to the Form 8-K dated September 29, 1994
(h) Amendment to Certificate of Incorporation*
(4) (a) Specimen of the 6-1/4% Convertible Subordinated Debentures due
2003 incorporated herein by reference to the Registration
Statement on Form S-3 (file no. 33-58672)
(b) Indenture, dated as of April 21, 1993, between the Company and
Boatmen's Trust Company for the 6- 1/4% Convertible Subordinated
Debentures due 2003 incorporated herein by reference to the Form
10-Q for the quarter ended March 31, 1993
(c) Supplemental Indenture, dated as of September 29, 1994, between
the Company and Boatmen's Trust Company for the 6-1/4%
Convertible Subordinated Debentures due 2003 incorporated herein
by reference to the Form 10-Q for the quarter ended September
30, 1994
(d) Indenture, dated as of September 29, 1994, between ALHC Merger
Corporation and LTCB Trust Company and First Supplemental
Indenture, dated as of September 29, 1994, between American Life
Holding Company and LTCB Trust Company for the 11-1/4% Senior
Subordinated Notes due 2004 incorporated herein by reference to
the Form 8-K dated September 29, 1994
The Company agrees to furnish the Commission upon its request a
copy of any instrument defining the rights of holders of long-
term debt of the Company and its consolidated subsidiaries
(10) (a) Advisory Agreements between Conseco Capital Management, Inc. and
the following companies are incorporated herein by reference to
the Form 10-K for the year ended December 31, 1994:
(1) American Life Group, Inc.
(2) American Life Holding Company
(3) American Life and Casualty Insurance Company
(4) Vulcan Life Insurance Company
</TABLE>
87
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
Number Exhibit Description Page
- ------ ------------------- ----
<S> <C> <C> <C>
(b) Stockholders' Agreement among the Company and the holders of
common stock incorporated herein by reference to the Form 10-K
for the year ended December 31, 1994.
(c) Securities Purchase Agreements between the Company and the
following companies are incorporated herein by reference to the
Form 10-K for the year ended December 31, 1994:
(1) Bankers Life and Casualty Company
(2) GARCO Holding Corporation
(d) Securities Purchase Agreements dated November 30, 1995 between
the Company and the following companies:
(1) Bankers Life Holding Corporation*
(2) CIHC, Incorporated*
(3) Conseco Capital Partners II, L.P.*
(e) Lease by and among John Trostel, as lessor, and Morris Joseph
and Jacob Joseph, as lessees, dated June 27, 1917; Supplemental
Agreement by and among John Trostel, as lessor, and Morris
Joseph and Jacob Joseph, as lessees, dated July 20, 1927;
Amendment to Lease by and between John Trostel, George W.
Trostel, Carl Trostel and Netti Trostel, Fred B. Trostel, Ruth
Trostel Holman and Harry A. Holman, and Helen Trostel Brobeck
and Von H. Brobeck, as lessors and Burton Building Company as
lessee, dated May 31, 1930; and September 1, 1959 Amendment to
Lease, Des Moines Building, Des Moines, Iowa, are incorporated
herein by reference to Exhibits 10.9.1 through 10.9.4 to the
Registration Statement on Form S-1 (file no. 33-95644)
(f) Deferred compensation agreements with the following are
incorporated herein by reference to the Form 10-K for the year
ended December 31, 1992:**
(1) John M. Matovina
(2) Virgil A. Maxwell
(3) D. J. Noble
(g) Employment continuation agreements with the following are
incorporated herein by reference to the Form 10-Q for the
quarter ended March 31, 1994:**
(1) James M. Gerlach
(2) Walter J. Hughes
(3) John M. Matovina
(4) Virgil A. Maxwell
(5) D. J. Noble
(11) (a) Computation of Earnings Per Share - Primary*
(b) Computation of Earnings Per Share - Fully Diluted*
(21) Subsidiaries of the Registrant incorporated herein by reference
to the Form 10-K for the year ended December 31, 1994
(27) Financial Data Schedule*
<FN>
* Filed herewith.
** Compensation plans or arrangements for management.
</FN>
</TABLE>
88
AMENDMENT TO CERTIFICATE OF
INCORPORATION OF AMERICAN
LIFE GROUP, INC.
American Life Group, Inc., formerly The Statesman Group, Inc.
(hereinafter the "Corporation") existing pursuant to the General Corporation
Law, desiring to give notice of corporate action effectuating amendment of a
certain provision of its Certificate of Incorporation sets forth the following
facts:
Paragraph 1 of the Certificate of the Powers, Designations, Preferences
and Rights of the 1994 Series Preferred Stock is hereby amended by increasing
the number of designated shares of such stock from 150,000 shares to 250,000
shares. Except as set forth above, all of the terms and provisions of paragraph
1 remain in full force and effect.
This Amendment has been duly adopted in accordance with Section 242 of
the Delaware General Corporation Law.
IN WITNESS WHEREOF, the undersigned hereby executes this Amendment to
the Certificate of Incorporation of the Corporation and certifies to the truth
of the facts herein stated this 31st day of October, 1995.
AMERICAN LIFE GROUP, INC.
By:/s/ Lawrence W. Inlow
------------------------
Lawrence W. Inlow,
Executive Vice President
State of Indiana )
)ss:
County of Hamilton)
On October 31, 1995, in the County of Hamilton, before me, a Notary
Public duly commissioned and qualified, in and for the state and county
aforesaid, personally appeared Lawrence W. Inlow, and who executed the foregoing
amendment, and acknowledged to me that he executed the same; and being by me
duly sworn, did depose and say that he is the incumbent Executive Vice President
of American Life Group, Inc.; that, as such officer, he keeps the corporate
minute books and seal of the Corporation; and that the foregoing certificate is
true to his own knowledge.
Subscribed and sworn to before me this 31st day of October, 1995.
/s/ Stephanie Swaney
Commission Expires: January 6, 1999 ------------------------
Residing in: Marion County Stephanie Swaney,
Notary Public
G:\LEGAL\ARTOFIN\AMENDED2.ALG
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of November 30, 1995 is
entered into by and between AMERICAN LIFE GROUP, INC., a Delaware corporation
(the "Company"), and BANKERS LIFE HOLDING CORPORATION, a Delaware corporation
(the "Purchaser").
In consideration of the mutual promises and consideration hereinafter
set forth, it is agreed as follows:
I. THE PURCHASE OF SECURITIES
1.1 Purchase of Securities. The Purchaser agrees to subscribe for and
purchase from the Company, and the Company agrees to issue and sell to the
Purchaser, 216,949 shares of its common stock, $1.00 par value (the "Common
Stock"), for an aggregate purchase price of $3,037,292.
The shares of Common Stock to be sold hereunder are hereinafter
referred to as the "Securities."
1.2 Closing. The closing of the purchase and sale of the Securities
(the "Closing") shall take place at such date (the "Closing Date"), time and
place as shall be mutually agreed to by the parties hereto. On the Closing Date,
the Company will deliver to the Purchaser a certificate for the Securities sold
by the Company, against delivery by the Purchaser of the purchase price therefor
by wire transfer of funds into the account specified by the Company.
II. REPRESENTATIONS AND WARRANTIES OF PURCHASER
The Purchaser makes the following representations and warranties to the
Company, each and all of which shall survive the execution and delivery of this
Agreement and the Closing:
2.1 Organization. The Purchaser is a corporation duly organized,
validly existing, and in good standing under the laws of the State of Delaware
and has full power and authority to enter into this Agreement and to perform its
obligations hereunder.
2.2 Due Execution, Delivery and Performance of the Agreement. The
execution, delivery, and performance of this Agreement (i) have been duly
authorized by all requisite action by the Purchaser, and (ii) will not violate
the Certificate of Incorporation or Bylaws of the Purchaser or any provision of
any indenture, mortgage, agreement, contract, or other instrument to which the
Purchaser is a party or by which it or any of its properties or assets are
bound, or be in conflict with, result in a breach of or constitute (upon notice
or lapse of time or both) a default under any such indenture, mortgage,
agreement, contract, or other instrument.
<PAGE>
This Agreement is a legal, valid, and binding obligation of the Purchaser,
enforceable against the Purchaser in accordance with its terms.
2.3 Investment Representation. The Purchaser is purchasing the
Securities for its own account, for investment purposes and not with a view to
the distribution thereof. The Purchaser agrees that it will not, directly or
indirectly, offer, transfer, sell, assign, pledge, hypothecate or otherwise
dispose of any of the Securities (or solicit any offers to buy, purchase, or
otherwise acquire or take a pledge of any of the Securities), except in
compliance with the Securities Act of 1933, as amended (the "Act"), the rules
and regulations thereunder and any applicable state securities laws.
III. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company makes the following representations and warranties to the
Purchaser, each and all of which shall survive the execution and delivery of
this Agreement and the Closing:
3.1 Authorized and Outstanding Shares of Capital Stock. After giving
effect to the Closing, the authorized capital stock of the Company consists of
35,000,000 shares of Common Stock, $1.00 par value, of which 13,442,075 shares
are issued and outstanding, and 5,000,000 shares of Preferred Stock, $1.00 par
value, of which 126,000 shares of 1988 Series II Preferred Stock, 17,640 shares
of 1988 Series II Preferred Stock and 64,410 shares of 1994 Series Preferred
Stock are issued and outstanding.
3.2 Authorization and Issuance of Securities. The issuance of the
Securities has been duly authorized and, upon delivery to the Purchaser of
certificates therefor against payment in accordance with the terms hereof, the
Securities will have been validly issued and fully paid and non-assessable, free
and clear of all pledges, liens, encumbrances and pre-emptive rights.
3.3 Securities Laws. In reliance on the investment representations and
agreements contained in Section 2.3 hereof, the offer, issuance, sale and
delivery of the Securities, as provided in this Agreement, are exempt from the
registration requirements of the Act and all applicable state securities laws.
3.4 Organization. The Company is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Delaware and has
full corporate power and authority to enter into this Agreement and to perform
its obligations hereunder.
3.5 Due Execution, Delivery and Performance of the Agreement. The
execution, delivery, and performance of this Agreement (i) have been duly
authorized by all requisite corporate action by the Company, and (ii) will not
violate the Certificate of Incorporation
2
<PAGE>
or Bylaws of the Company or any provision of any indenture, mortgage, agreement,
contract, or other instrument to which it is a party or by which it or any of
its properties or assets are bound, or be in conflict with, result in a breach
of or constitute (upon notice or lapse of time or both) a default under any such
indenture, mortgage, agreement, contract, or other instrument. This Agreement is
a legal, valid, and binding obligation of the Company, enforceable against the
Company in accordance with its terms.
IV. STOCKHOLDERS' AGREEMENT; LEGENDS
4.1 Stockholders' Agreement. The Company and the Purchaser
shall enter into an amendment to the Stockholders' Agreement dated
September 29, 1994 to provide that the Securities are subject to
such Agreement.
4.2 Legends. Each certificate representing the Securities
shall bear legends substantially in the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED BY THE
HOLDER PURSUANT TO A SECURITIES PURCHASE AGREEMENT DATED NOVEMBER 30,
1995 BY AND BETWEEN BANKERS LIFE HOLDING CORPORATION AND AMERICAN LIFE
GROUP, INC., AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT
BE SOLD OR OTHERWISE TRANSFERRED UNLESS THEY HAVE BEEN SO REGISTERED OR
AMERICAN LIFE GROUP, INC. HAS BEEN FURNISHED EVIDENCE SATISFACTORY TO
IT THAT SUCH REGISTRATION IS NOT REQUIRED."
"THE SHARES ARE ALSO SUBJECT TO CERTAIN RESTRICTIONS ON
TRANSFER CONTAINED IN A STOCKHOLDERS' AGREEMENT, AS
AMENDED, TO WHICH AMERICAN LIFE GROUP, INC. AND THE
REGISTERED HOLDER ARE PARTIES, A COPY OF WHICH IS ON FILE
WITH THE SECRETARY OF AMERICAN LIFE GROUP, INC."
V. INDEMNIFICATION
5.1 Indemnification by the Company. The Company agrees to indemnify and
hold harmless the Purchaser from and against any liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys'
fees, expenses and disbursements of any kind which may be imposed upon, incurred
by or asserted against the Purchaser in any manner relating to or arising out of
any untrue representation, breach of warranty or failure to perform any
covenants by the Company contained herein.
5.2 Indemnification by the Purchaser. The Purchaser agrees to indemnify
and hold harmless the Company from and against any liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys'
fees, expenses and
3
<PAGE>
disbursements of any kind which may be imposed upon, incurred by or asserted
against the Company in any manner relating to or arising out of any untrue
representation or breach of warranty contained herein.
VI. MISCELLANEOUS
6.1 Notices. Whenever it is provided herein that any notice, demand,
request, consent, approval, declaration or other communication shall or may be
given to or served upon any of the parties by another, or whenever any of the
parties desires to give or serve upon another any such communication with
respect to this Agreement, each such notice, demand, request, consent, approval,
declaration or other communication shall be in writing and either shall be
delivered in person with receipt acknowledged or by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
If to the Company at:
American Life Group, Inc.
1100 Des Moines Building
Des Moines, Iowa 50309
Attn: President
with a copy to:
Conseco, Inc.
11825 N. Pennsylvania Street
Carmel, Indiana 46032
Attn: General Counsel
If to the Purchaser at:
Bankers Life Holding Corporation
222 Merchandise Mart Plaza
Chicago, Illinois 60654
Attn: President
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration or other communication hereunder shall be deemed
to have been duly given or served on the date personally delivered, with receipt
acknowledged, or upon receipt if delivered by registered or certified mail.
6.2 Binding Effect; Benefits. Except as otherwise provided herein,
this Agreement shall be binding upon and inure to the benefit of the parties to
this Agreement and their respective successors and permitted assigns. Nothing
in this Agreement,
4
<PAGE>
express or implied, is intended or shall be construed to give any person other
than the parties to this Agreement or their respective successors or assigns any
legal or equitable right, remedy or claim under or in respect of any agreement
or any provision contained herein.
6.3 Waiver. Any party hereto may by written notice to the other (a)
extend the time for the performance of any of the obligations or other actions
of the other under this Agreement; (b) waive compliance with any of the
conditions or covenants of the other contained in this Agreement; and (c) waive
or modify performance of any of the obligations of the other under this
Agreement. The waiver by any party hereto of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any preceding or
succeeding breach and no failure by either party to exercise any right or
privilege hereunder shall be deemed a waiver of such party's rights or
privileges hereunder or shall be deemed a waiver of such party's rights to
exercise the same at any subsequent time or times hereunder.
6.4 Amendment. This Agreement may be amended, modified or
supplemented only by a written instrument executed by the Company and the
Purchaser.
6.5 Assignability. Neither this Agreement nor any right, remedy,
obligation or liability arising hereunder or by reason hereof shall be
assignable by the Company or the Purchaser without the prior written consent of
the other party.
6.6 Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without regard
to the principles thereof regarding conflict of laws.
6.7 Section and Other Headings. The section and other headings
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
6.8 Severability. In the event that any one or more of the provisions
contained in this Agreement shall be determined to be invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision or provisions in every other respect and
the remaining provisions of this Agreement shall not be in any way impaired.
6.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
G:\LEGAL\AGREEMNT\SECPUR\ALGI.BLH
5
<PAGE>
IN WITNESS WHEREOF, each of the Company and the Purchaser has executed
this Agreement as of the day and year first above written.
AMERICAN LIFE GROUP, INC.
By:/S/ROLLIN M. DICK
-------------------------------
Rollin M. Dick,
Executive Vice President
BANKERS LIFE HOLDING CORPORATION
By:/S/FRED E. CROSLEY
------------------------------
Fred E. Crosley, President
6
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of November 30, 1995 is
entered into by and between AMERICAN LIFE GROUP, INC., a Delaware corporation
(the "Company"), and CIHC, INCORPORATED, a Delaware corporation (the
"Purchaser").
In consideration of the mutual promises and consideration hereinafter
set forth, it is agreed as follows:
I. THE PURCHASE OF SECURITIES
1.1 Purchase of Securities. The Purchaser agrees to subscribe for and
purchase from the Company, and the Company agrees to issue and sell to the
Purchaser, 175,728 shares of its common stock, $1.00 par value (the "Common
Stock"), for an aggregate purchase price of $2,460,192.
The shares of Common Stock to be sold hereunder are hereinafter
referred to as the "Securities."
1.2 Closing. The closing of the purchase and sale of the Securities
(the "Closing") shall take place at such date (the "Closing Date"), time and
place as shall be mutually agreed to by the parties hereto. On the Closing Date,
the Company will deliver to the Purchaser a certificate for the Securities sold
by the Company, against delivery by the Purchaser of the purchase price therefor
by wire transfer of funds into the account specified by the Company.
II. REPRESENTATIONS AND WARRANTIES OF PURCHASER
The Purchaser makes the following representations and warranties to the
Company, each and all of which shall survive the execution and delivery of this
Agreement and the Closing:
2.1 Organization. The Purchaser is a corporation duly organized,
validly existing, and in good standing under the laws of the State of Delaware
and has full power and authority to enter into this Agreement and to perform its
obligations hereunder.
2.2 Due Execution, Delivery and Performance of the Agreement. The
execution, delivery, and performance of this Agreement (i) have been duly
authorized by all requisite action by the Purchaser, and (ii) will not violate
the Certificate of Incorporation or Bylaws of the Purchaser or any provision of
any indenture, mortgage, agreement, contract, or other instrument to which the
Purchaser is a party or by which it or any of its properties or assets are
bound, or be in conflict with, result in a breach of or constitute (upon notice
or lapse of time or both) a default under any such indenture, mortgage,
agreement, contract, or other instrument.
<PAGE>
This Agreement is a legal, valid, and binding obligation of the Purchaser,
enforceable against the Purchaser in accordance with its terms.
2.3 Investment Representation. The Purchaser is purchasing the
Securities for its own account, for investment purposes and not with a view to
the distribution thereof. The Purchaser agrees that it will not, directly or
indirectly, offer, transfer, sell, assign, pledge, hypothecate or otherwise
dispose of any of the Securities (or solicit any offers to buy, purchase, or
otherwise acquire or take a pledge of any of the Securities), except in
compliance with the Securities Act of 1933, as amended (the "Act"), the rules
and regulations thereunder and any applicable state securities laws.
III. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company makes the following representations and warranties to the
Purchaser, each and all of which shall survive the execution and delivery of
this Agreement and the Closing:
3.1 Authorized and Outstanding Shares of Capital Stock. After giving
effect to the Closing, the authorized capital stock of the Company consists of
35,000,000 shares of Common Stock, $1.00 par value, of which 13,442,075 shares
are issued and outstanding, and 5,000,000 shares of Preferred Stock, $1.00 par
value, of which 126,000 shares of 1988 Series II Preferred Stock, 17,640 shares
of 1988 Series II Preferred Stock and 64,410 shares of 1994 Series Preferred
Stock are issued and outstanding.
3.2 Authorization and Issuance of Securities. The issuance of the
Securities has been duly authorized and, upon delivery to the Purchaser of
certificates therefor against payment in accordance with the terms hereof, the
Securities will have been validly issued and fully paid and non-assessable, free
and clear of all pledges, liens, encumbrances and pre-emptive rights.
3.3 Securities Laws. In reliance on the investment representations and
agreements contained in Section 2.3 hereof, the offer, issuance, sale and
delivery of the Securities, as provided in this Agreement, are exempt from the
registration requirements of the Act and all applicable state securities laws.
3.4 Organization. The Company is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Delaware and has
full corporate power and authority to enter into this Agreement and to perform
its obligations hereunder.
3.5 Due Execution, Delivery and Performance of the Agreement. The
execution, delivery, and performance of this Agreement (i) have been duly
authorized by all requisite corporate action by the Company, and (ii) will not
violate the Certificate of Incorporation
2
<PAGE>
or Bylaws of the Company or any provision of any indenture, mortgage, agreement,
contract, or other instrument to which it is a party or by which it or any of
its properties or assets are bound, or be in conflict with, result in a breach
of or constitute (upon notice or lapse of time or both) a default under any such
indenture, mortgage, agreement, contract, or other instrument. This Agreement is
a legal, valid, and binding obligation of the Company, enforceable against the
Company in accordance with its terms.
IV. STOCKHOLDERS' AGREEMENT; LEGENDS
4.1 Stockholders' Agreement. The Company and the Purchaser shall
enter into an amendment to the Stockholders' Agreement dated September 29, 1994
to provide that the Securities are subject to such Agreement.
4.2 Legends. Each certificate representing the Securities shall
bear legends substantially in the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED BY THE
HOLDER PURSUANT TO A SECURITIES PURCHASE AGREEMENT DATED NOVEMBER 30,
1995 BY AND BETWEEN CIHC, INCORPORATED AND AMERICAN LIFE GROUP, INC.,
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED UNLESS THEY HAVE BEEN SO REGISTERED OR AMERICAN
LIFE GROUP, INC. HAS BEEN FURNISHED EVIDENCE SATISFACTORY TO IT THAT
SUCH REGISTRATION IS NOT REQUIRED."
"THE SHARES ARE ALSO SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER
CONTAINED IN A STOCKHOLDERS' AGREEMENT, AS AMENDED, TO WHICH AMERICAN
LIFE GROUP, INC. AND THE REGISTERED HOLDER ARE PARTIES, A COPY OF WHICH
IS ON FILE WITH THE SECRETARY OF AMERICAN LIFE GROUP, INC."
V. INDEMNIFICATION
5.1 Indemnification by the Company. The Company agrees to indemnify and
hold harmless the Purchaser from and against any liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys'
fees, expenses and disbursements of any kind which may be imposed upon, incurred
by or asserted against the Purchaser in any manner relating to or arising out of
any untrue representation, breach of warranty or failure to perform any
covenants by the Company contained herein.
5.2 Indemnification by the Purchaser. The Purchaser agrees to indemnify
and hold harmless the Company from and against any liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys'
fees, expenses and
3
<PAGE>
disbursements of any kind which may be imposed upon, incurred by or asserted
against the Company in any manner relating to or arising out of any untrue
representation or breach of warranty contained herein.
VI. MISCELLANEOUS
6.1 Notices. Whenever it is provided herein that any notice, demand,
request, consent, approval, declaration or other communication shall or may be
given to or served upon any of the parties by another, or whenever any of the
parties desires to give or serve upon another any such communication with
respect to this Agreement, each such notice, demand, request, consent, approval,
declaration or other communication shall be in writing and either shall be
delivered in person with receipt acknowledged or by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
If to the Company at:
American Life Group, Inc.
1100 Des Moines Building
Des Moines, Iowa 50309
Attn: President
with a copy to:
Conseco, Inc.
11825 N. Pennsylvania Street
Carmel, Indiana 46032
Attn: General Counsel
If to the Purchaser at:
CIHC, Incorporated
One Commerce Center, Suite 789
1201 Orange Street
Wilmington, Delaware 19801
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration or other communication hereunder shall be deemed
to have been duly given or served on the date personally delivered, with receipt
acknowledged, or upon receipt if delivered by registered or certified mail.
6.2 Binding Effect; Benefits. Except as otherwise provided herein,
this Agreement shall be binding upon and inure to the benefit of the parties to
this Agreement and their respective successors and permitted assigns. Nothing
in this Agreement,
4
<PAGE>
express or implied, is intended or shall be construed to give any person other
than the parties to this Agreement or their respective successors or assigns any
legal or equitable right, remedy or claim under or in respect of any agreement
or any provision contained herein.
6.3 Waiver. Any party hereto may by written notice to the other (a)
extend the time for the performance of any of the obligations or other actions
of the other under this Agreement; (b) waive compliance with any of the
conditions or covenants of the other contained in this Agreement; and (c) waive
or modify performance of any of the obligations of the other under this
Agreement. The waiver by any party hereto of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any preceding or
succeeding breach and no failure by either party to exercise any right or
privilege hereunder shall be deemed a waiver of such party's rights or
privileges hereunder or shall be deemed a waiver of such party's rights to
exercise the same at any subsequent time or times hereunder.
6.4 Amendment. This Agreement may be amended, modified or supplemented
only by a written instrument executed by the Company and the Purchaser.
6.5 Assignability. Neither this Agreement nor any right, remedy,
obligation or liability arising hereunder or by reason hereof shall be
assignable by the Company or the Purchaser without the prior written consent of
the other party.
6.6 Applicable Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, without regard to the
principles thereof regarding conflict of laws.
6.7 Section and Other Headings. The section and other headings
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
6.8 Severability. In the event that any one or more of the provisions
contained in this Agreement shall be determined to be invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision or provisions in every other respect and
the remaining provisions of this Agreement shall not be in any way impaired.
6.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
G:\LEGAL\AGREEMNT\SECPUR\ALGI.CIH
5
<PAGE>
IN WITNESS WHEREOF, each of the Company and the Purchaser has executed
this Agreement as of the day and year first above written.
AMERICAN LIFE GROUP, INC.
By:/S/ROLLIN M. DICK
-------------------------------
Rollin M. Dick,
Executive Vice President
CIHC, INCORPORATED
By:/S/DAVID A. HILL
-------------------------------
David A. Hill, Vice President
6
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of November 30, 1995 is
entered into by and between AMERICAN LIFE GROUP, INC., a Delaware corporation
(the "Company"), and CONSECO CAPITAL PARTNERS II, L.P., a Delaware limited
partnership (the "Purchaser").
In consideration of the mutual promises and consideration hereinafter
set forth, it is agreed as follows:
I. THE PURCHASE OF SECURITIES
1.1 Purchase of Securities. The Purchaser agrees to subscribe for and
purchase from the Company, and the Company agrees to issue and sell to the
Purchaser, 2,142,857 shares of its common stock, $1.00 par value (the "Common
Stock"), for an aggregate purchase price of $30,000,000.
The shares of Common Stock to be sold hereunder are hereinafter
referred to as the "Securities."
1.2 Closing. The closing of the purchase and sale of the Securities
(the "Closing") shall take place at such date (the "Closing Date"), time and
place as shall be mutually agreed to by the parties hereto. On the Closing Date,
the Company will deliver to the Purchaser a certificate for the Securities sold
by the Company, against delivery by the Purchaser of the purchase price therefor
by wire transfer of funds into the account specified by the Company.
II. REPRESENTATIONS AND WARRANTIES OF PURCHASER
The Purchaser makes the following representations and warranties to the
Company, each and all of which shall survive the execution and delivery of this
Agreement and the Closing:
2.1 Organization. The Purchaser is a limited partnership duly
organized, validly existing, and in good standing under the laws of the State of
Delaware and has full power and authority to enter into this Agreement and to
perform its obligations hereunder.
2.2 Due Execution, Delivery and Performance of the Agreement. The
execution, delivery, and performance of this Agreement (i) have been duly
authorized by all requisite action by the Purchaser, and (ii) will not violate
the Agreement of Limited Partnership or any provision of any indenture,
mortgage, agreement, contract, or other instrument to which the Purchaser is a
party or by which it or any of its properties or assets are bound, or be in
conflict with, result in a breach of or constitute (upon notice or lapse of time
or both) a default under any such indenture, mortgage, agreement, contract, or
other instrument. This Agreement is a legal, valid, and binding obligation of
the Purchaser, enforceable against the Purchaser in accordance with its terms.
<PAGE>
2.3 Investment Representation. The Purchaser is purchasing the
Securities for its own account, for investment purposes and not with a view to
the distribution thereof. The Purchaser agrees that it will not, directly or
indirectly, offer, transfer, sell, assign, pledge, hypothecate or otherwise
dispose of any of the Securities (or solicit any offers to buy, purchase, or
otherwise acquire or take a pledge of any of the Securities), except in
compliance with the Securities Act of 1933, as amended (the "Act"), the rules
and regulations thereunder and any applicable state securities laws.
III. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company makes the following representations and warranties to the
Purchaser, each and all of which shall survive the execution and delivery of
this Agreement and the Closing:
3.1 Authorized and Outstanding Shares of Capital Stock. After giving
effect to the Closing, the authorized capital stock of the Company consists of
35,000,000 shares of Common Stock, $1.00 par value, of which 13,442,075 shares
are issued and outstanding, and 5,000,000 shares of Preferred Stock, $1.00 par
value, of which 126,000 shares of 1988 Series II Preferred Stock, 17,640 shares
of 1988 Series II Preferred Stock and 64,410 shares of 1994 Series Preferred
Stock are issued and outstanding.
3.2 Authorization and Issuance of Securities. The issuance of the
Securities has been duly authorized and, upon delivery to the Purchaser of
certificates therefor against payment in accordance with the terms hereof, the
Securities will have been validly issued and fully paid and non-assessable, free
and clear of all pledges, liens, encumbrances and pre-emptive rights.
3.3 Securities Laws. In reliance on the investment representations and
agreements contained in Section 2.3 hereof, the offer, issuance, sale and
delivery of the Securities, as provided in this Agreement, are exempt from the
registration requirements of the Act and all applicable state securities laws.
3.4 Organization. The Company is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Delaware and has
full corporate power and authority to enter into this Agreement and to perform
its obligations hereunder.
3.5 Due Execution, Delivery and Performance of the Agreement. The
execution, delivery, and performance of this Agreement (i) have been duly
authorized by all requisite corporate action by the Company, and (ii) will not
violate the Certificate of Incorporation or Bylaws of the Company or any
provision of any indenture, mortgage, agreement, contract, or other instrument
to which it is a party or by which it or any of its properties or assets are
bound, or be in conflict with, result in a breach of or constitute
2
<PAGE>
(upon notice or lapse of time or both) a default under any such indenture,
mortgage, agreement, contract, or other instrument. This Agreement is a legal,
valid, and binding obligation of the Company, enforceable against the Company in
accordance with its terms.
IV. STOCKHOLDERS' AGREEMENT; LEGENDS
4.1 Stockholders' Agreement. The Company and the Purchaser shall
enter into an amendment to the Stockholders' Agreement dated September 29, 1994
to provide that the Securities are subject to such Agreement.
4.2 Legends. Each certificate representing the Securities shall
bear legends substantially in the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED BY THE
HOLDER PURSUANT TO A SECURITIES PURCHASE AGREEMENT DATED NOVEMBER 30,
1995 BY AND BETWEEN CONSECO CAPITAL PARTNERS II, L.P. AND AMERICAN LIFE
GROUP, INC., AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT
BE SOLD OR OTHERWISE TRANSFERRED UNLESS THEY HAVE BEEN SO REGISTERED OR
AMERICAN LIFE GROUP, INC. HAS BEEN FURNISHED EVIDENCE SATISFACTORY TO
IT THAT SUCH REGISTRATION IS NOT REQUIRED."
"THE SHARES ARE ALSO SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER
CONTAINED IN A STOCKHOLDERS' AGREEMENT, AS AMENDED, TO WHICH AMERICAN
LIFE GROUP, INC. AND THE REGISTERED HOLDER ARE PARTIES, A COPY OF WHICH
IS ON FILE WITH THE SECRETARY OF AMERICAN LIFE GROUP, INC."
V. INDEMNIFICATION
5.1 Indemnification by the Company. The Company agrees to indemnify and
hold harmless the Purchaser from and against any liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys'
fees, expenses and disbursements of any kind which may be imposed upon, incurred
by or asserted against the Purchaser in any manner relating to or arising out of
any untrue representation, breach of warranty or failure to perform any
covenants by the Company contained herein.
5.2 Indemnification by the Purchaser. The Purchaser agrees to indemnify
and hold harmless the Company from and against any liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys'
fees, expenses and disbursements of any kind which may be imposed upon, incurred
by or asserted against the Company in any manner relating to or arising out of
any untrue representation or breach of warranty contained herein.
3
<PAGE>
VI. MISCELLANEOUS
6.1 Notices. Whenever it is provided herein that any notice, demand,
request, consent, approval, declaration or other communication shall or may be
given to or served upon any of the parties by another, or whenever any of the
parties desires to give or serve upon another any such communication with
respect to this Agreement, each such notice, demand, request, consent, approval,
declaration or other communication shall be in writing and either shall be
delivered in person with receipt acknowledged or by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
If to the Company at:
American Life Group, Inc.
1100 Des Moines Building
Des Moines, Iowa 50309
Attn: President
with a copy to:
Conseco, Inc.
11825 N. Pennsylvania Street
Carmel, Indiana 46032
Attn: General Counsel
If to the Purchaser at:
Conseco Capital Partners II, L.P.
11825 N. Pennsylvania Street
Carmel, Indiana 46032
Attn: General Counsel
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration or other communication hereunder shall be deemed
to have been duly given or served on the date personally delivered, with receipt
acknowledged, or upon receipt if delivered by registered or certified mail.
6.2 Binding Effect; Benefits. Except as otherwise provided herein,
this Agreement shall be binding upon and inure to the benefit of the parties to
this Agreement and their respective successors and permitted assigns. Nothing in
this Agreement, express or implied, is intended or shall be construed to give
any person other than the parties to this Agreement or their respective
successors or assigns any legal or equitable right, remedy or claim under or in
respect of any agreement or any provision contained herein.
4
<PAGE>
6.3 Waiver. Any party hereto may by written notice to the other (a)
extend the time for the performance of any of the obligations or other actions
of the other under this Agreement; (b) waive compliance with any of the
conditions or covenants of the other contained in this Agreement; and (c) waive
or modify performance of any of the obligations of the other under this
Agreement. The waiver by any party hereto of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any preceding or
succeeding breach and no failure by either party to exercise any right or
privilege hereunder shall be deemed a waiver of such party's rights or
privileges hereunder or shall be deemed a waiver of such party's rights to
exercise the same at any subsequent time or times hereunder.
6.4 Amendment. This Agreement may be amended, modified or
supplemented only by a written instrument executed by the Company and the
Purchaser.
6.5 Assignability. Neither this Agreement nor any right, remedy,
obligation or liability arising hereunder or by reason hereof shall be
assignable by the Company or the Purchaser without the prior written consent of
the other party.
6.6 Applicable Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, without regard to the
principles thereof regarding conflict of laws.
6.7 Section and Other Headings. The section and other headings
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
6.8 Severability. In the event that any one or more of the provisions
contained in this Agreement shall be determined to be invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision or provisions in every other respect and
the remaining provisions of this Agreement shall not be in any way impaired.
6.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
G:\LEGAL\AGREEMNT\SECPUR\ALGI.DOC
5
<PAGE>
IN WITNESS WHEREOF, each of the Company and the Purchaser has executed
this Agreement as of the day and year first above written.
AMERICAN LIFE GROUP, INC.
By:/S/ROLLIN M. DICK
------------------------------
Rollin M. Dick,
Executive Vice President
CONSECO CAPITAL PARTNERS II, L.P.
By:Conseco Partnership Management, Inc.,
its General Partner
By:/S/LAWRENCE W. INLOW
------------------------------
Lawrence W. Inlow,
Executive Vice President
6
<TABLE>
<CAPTION>
Exhibit 11(a)
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE - PRIMARY (a)
(Dollars in millions, except per share data)
Three months Nine months
Year ended ended ended Year ended
December 31, December 31, September 30, December 31,
1995 1994 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average primary shares outstanding........ 11,487,000 11,299,000 6,766,000 6,784,000
Net effect of exercisable stock options............ - - 334,000 377,000
----------- ----------- ---------- -----------
Weighted average primary shares outstanding........ 11,487,000 11,299,000 7,100,000 7,161,000
========== =========== ========== ============
Net income for primary earnings per share:
Net income as reported............................. $71.1 $5.2 $5.2 $37.3
Dividend requirements on
Series Preferred Stock $1 Par................... 7.7 1.9 1.1 1.6
----- ---- ---- ------
Net income for primary earnings per share.......... $63.4 $3.3 $4.1 $35.7
===== ==== ==== =====
Net income per primary common share................ $5.52 $.30 $.58 $4.98
===== ==== ==== =====
<FN>
(a) The number of shares and per share amounts have been restated to give
retroactive effect to: (i) the August 8, 1995 one-for-two stock split, and
(ii) the 5 percent stock dividend paid in December 1993.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Exhibit 11(b)
AMERICAN LIFE GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE - FULLY DILUTED (a)
(Dollars in millions, except per share data)
Three months Nine months
Year ended ended ended Year ended
December 31, December 31, September 30, December 31,
1995 1994 1994 1993
---- ---- ---- -----
<S> <C> <C> <C> <C>
Weighted average primary shares outstanding............ 11,487,000 11,299,000 6,766,000 6,784,000
Incremental common equivalent shares:
Net effect of exercisable stock options (b)......... - - 334,000 377,000
Assumed conversion of Series Preferred Stock
$1 Par (b).......................................... - - - 1,864,000
Assumed conversion of Convertible Debentures (b).... - - - 1,531,000
---------- ------------ --------- -----------
Weighted average fully diluted shares outstanding...... 11,487,000 11,299,000 7,100,000 10,556,000
========== ========== ========= ===========
Net income for fully diluted earnings per share:
Net income as reported.............................. $71.1 $5.2 $5.2 $37.3
Reduction for additional contribution that
would be required for ESOP debt service,
less applicable income taxes (b).................. - - - ( .3)
Dividend requirements on Series
Preferred Stock $1 Par (b)........................ 7.7 1.9 1.1 -
Elimination of interest expense on convertible
subordinated debentures, less applicable
income taxes (b).................................. - - - 2.0
----- ----- ---- -----
Net income for fully diluted earnings per share... $63.4 $3.3 $4.1 $39.0
===== ===== ==== =====
Net income per fully diluted common share....... $5.52 $.30 $.58 $3.69
===== ==== ==== =====
<FN>
(a) The number of shares and per share amounts have been restated to give
retroactive effect to: (i) the August 8, 1995 one-for-two stock split,
and (ii) to the 5 percent stock dividend paid in December 1993.
(b) The effect of the adjustments on the computation of fully diluted
earnings per share was antidilutive for the nine months ended September
30, 1994.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM FORM 10-K FOR AMERICAN
LIFE GROUP,INC. DATED DECEMBER 31, 1995 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 5,083,100
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 18,800
<MORTGAGE> 78,200 <F1>
<REAL-ESTATE> 0
<TOTAL-INVEST> 5,363,500
<CASH> 0 <F2>
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 327,700 <F3>
<TOTAL-ASSETS> 6,202,100
<POLICY-LOSSES> 5,056,100
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 5,000
<POLICY-HOLDER-FUNDS> 87,600
<NOTES-PAYABLE> 282,500
<COMMON> 75,900
0
66,600
<OTHER-SE> 263,100 <F4>
<TOTAL-LIABILITY-AND-EQUITY> 6,202,100
58,100
<INVESTMENT-INCOME> 415,600
<INVESTMENT-GAINS> 149,300 <F5>
<OTHER-INCOME> 6,300
<BENEFITS> 291,900 <F6>
<UNDERWRITING-AMORTIZATION> 116,500 <F7>
<UNDERWRITING-OTHER> 31,100
<INCOME-PRETAX> 133,800
<INCOME-TAX> 49,900
<INCOME-CONTINUING> 83,900
<DISCONTINUED> 0
<EXTRAORDINARY> (4,000)
<CHANGES> 0
<NET-INCOME> 71,100
<EPS-PRIMARY> 5.52
<EPS-DILUTED> 5.52
<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 $13,600 of credit-tenant loans.
<F2> Cash and cash equivalents are classified as short-term investments,
which are included in total investments.
<F3> Includes $250,100 of cost of policies purchased.
<F4> Includes retained earnings of $66,700 and net unrealized appreciation
of securities of $196,400.
<F5> Includes net realized gains of $147,800 and net trading income of $1,500.
<F6> Includes insurance policy benefits of $28,700, change in future policy
benefits of $4,400 and interest expense on annuities and financial products
of $258,800.
<F7> Includes amortization of cost of policies purchased of $30,500 and cost
of policies produced of $2,700 and amortization related to realized
gains of $83,300.
</FN>
</TABLE>
