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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
----------------------------------------
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
COMMISSION FILE NUMBER 000-30898
AMERUS GROUP CO.
(Exact name of Registrant as specified in its charter)
699 WALNUT STREET
DES MOINES, IOWA 50309-3948
(Address of principal executive offices)
IOWA 42-1458424
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Registrant's telephone number, including area code (515) 362-3600
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 / /
The number of shares outstanding of each of the Registrant's classes of common
stock on August 6, 2002 was as follows:
Common Stock 39,723,659 shares
Exhibit index - Page 51
Page 1 of 56
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION................................................................... 4
Item 1. Financial Statements............................................................... 4
Consolidated Balance Sheets
June 30, 2002 (Unaudited) and December 31, 2001.................................... 4
Consolidated Statements of Income (Unaudited)
For the Three and Six Months Ended June 30, 2002 and 2001.......................... 6
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
For the Three and Six Months Ended June 30, 2002 and 2001.......................... 7
Consolidated Statements of Stockholders' Equity
For the Six Months Ended June 30, 2002 (Unaudited) and
the Year Ended December 31, 2001................................................... 8
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2002 and 2001.................................... 9
Notes to Consolidated Financial Statements
(Unaudited) ....................................................................... 12
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition ............................................................... 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 46
PART II - OTHER INFORMATION...................................................................... 48
Item 1. Legal Proceedings.................................................................. 48
Item 4. Submission of Matters to a Vote of Security Holders................................ 48
Item 6. Exhibits and Reports on Form 8-K................................................... 49
Signatures....................................................................................... 50
Index to Exhibits................................................................................ 51
2
SAFE HARBOR STATEMENT
All statements, trend analyses and other information contained in this
report relative to markets for our products and trends in our operations or
financial results, as well as other statements including words such as
"anticipate", "believe", "plan", "estimate", "expect", "intend", and other
similar expressions, constitute forward-looking statements under the Private
Securities Litigation Reform Act of 1995. Factors that may cause our actual
results to differ materially from those contemplated by these forward-looking
statements include, among others, the following possibilities: (a) general
economic conditions and other factors, including prevailing interest rate levels
and stock market performance, which may affect our ability to sell our products,
the market value of our investments and the lapse rate and profitability of
policies; (b) our ability to achieve anticipated levels of operational
efficiencies and cost-saving initiatives and to meet cash requirements based
upon projected liquidity sources; (c) customer response to new products,
distribution channels and marketing initiatives; (d) mortality, morbidity, and
other factors which may affect the profitability of our insurance products; (e)
our ability to develop and maintain effective risk management policies and
procedures and to maintain adequate reserves for future policy benefits and
claims; (f) changes in the federal income tax laws and regulations which may
affect the relative tax advantages of some of our products; (g) increasing
competition in the sale of insurance and annuities and the recruitment of sales
representatives; (h) regulatory changes or actions, including those relating to
regulation of insurance products and of insurance companies; (i) our ratings and
those of our subsidiaries by independent rating organizations which we believe
are particularly important to the sale of our products; (j) the performance of
our investment portfolios; (k) the impact of changes in standards of accounting
for derivatives and business combinations, goodwill and other intangibles and
purchase accounting adjustments; (l) our ability to integrate the business and
operations of acquired entities; (m) expected life and annuity product margins;
(n) the impact of anticipated investment transactions; and (o) unanticipated
litigation or regulatory investigations.
There can be no assurance that other factors not currently anticipated
by us will not materially and adversely affect our results of operations. You
are cautioned not to place undue reliance on any forward-looking statements made
by us or on our behalf. Forward-looking statements speak only as of the date the
statement was made. We undertake no obligation to update or revise any
forward-looking statement.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERUS GROUP CO.
CONSOLIDATED BALANCE SHEETS
($ in thousands)
June 30, December 31,
2002 2001
-----------------------------------
(unaudited)
Assets
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities $11,850,297 $11,037,425
Equity securities 45,562 11,362
Short-term investments 15,149 14,881
Securities held for trading purposes, at fair value:
Fixed maturity securities 1,941,177 2,175,106
Equity securities -- 12,013
Short-term investments 7,985 4,212
Mortgage loans 926,903 944,532
Real estate 1,287 1,405
Policy loans 500,273 506,318
Other investments 307,495 345,179
-----------------------------------
Total investments 15,596,128 15,052,433
Cash and cash equivalents 102,272 179,376
Accrued investment income 182,467 174,238
Premiums, fees and other receivables 7,502 9,920
Reinsurance receivables 805,130 732,030
Deferred policy acquisition costs 788,190 642,680
Value of business acquired 546,131 583,829
Goodwill 217,632 195,484
Property and equipment 77,900 83,221
Deferred income taxes -- 12,140
Other assets 293,023 270,888
Separate account assets 283,975 328,385
Assets of discontinued operations 30,152 34,528
-----------------------------------
Total assets $18,930,502 $18,299,152
===================================
See accompanying notes to consolidated financial statements.
4
AMERUS GROUP CO.
CONSOLIDATED BALANCE SHEETS
($ in thousands)
June 30, December 31,
2002 2001
----------------------------
(unaudited)
Liabilities and Stockholders' Equity
Liabilities:
Policy reserves and policyowner funds:
Future life and annuity policy benefits $ 15,581,845 $ 15,102,001
Policyowner funds 785,759 432,941
----------------------------
16,367,604 15,534,942
Accrued expenses and other liabilities 281,146 488,949
Dividends payable to policyowners 246,615 221,224
Policy and contract claims 42,994 33,147
Income taxes payable 12,534 45,809
Deferred income taxes 10,044 --
Notes payable 419,617 315,574
Separate account liabilities 283,975 328,385
Liabilities of discontinued operations 19,484 23,551
----------------------------
Total liabilities 17,684,013 16,991,581
Company-obligated mandatorily redeemable preferred
capital securities of subsidiary trusts holding solely
junior subordinated debentures of the Company 48,249 69,054
Stockholders' equity:
Preferred Stock, no par value, 20,000,000 shares
authorized, none issued -- --
Common Stock, no par value, 230,000,000 shares
authorized; 39,721,666 shares issued and
outstanding in 2002 (net of 3,916,622 treasury
shares) and 41,759,450 shares issued and outstanding
in 2001 (net of 1,746,548 treasury shares) 39,722 41,759
Additional paid-in capital 1,048,979 1,122,853
Accumulated other comprehensive income 18,910 12,669
Unearned compensation (510) (727)
Unallocated ESOP shares (224) (224)
Retained earnings 91,363 62,187
----------------------------
Total stockholders' equity 1,198,240 1,238,517
----------------------------
Total liabilities and stockholders' equity $ 18,930,502 $ 18,299,152
============================
See accompanying notes to consolidated financial statements.
5
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
For The Three Months Ended June 30, For The Six Months Ended June 30,
2002 2001 2002 2001
---------------------------------- ----------------------------------
(unaudited)
Revenues:
Insurance premiums $ 93,247 $ 71,712 $ 185,355 $ 128,879
Universal life and annuity product charges 39,314 34,847 82,185 59,113
Net investment income 251,897 207,093 491,667 388,221
Realized/unrealized (losses) on investments (75,911) (11,825) (100,623) (51,660)
Other income 19,925 11,952 31,937 22,284
---------------------------- ----------------------------
328,472 313,779 690,521 546,837
---------------------------- ----------------------------
Benefits and expenses:
Policyowner benefits 220,376 189,363 433,932 309,847
Underwriting, acquisition and other expenses 43,201 35,121 79,454 66,455
Demutualization costs 179 202 464 202
Restructuring costs 6,416 -- 8,211 --
Amortization of deferred policy acquisition costs
and value of business acquired 28,324 29,971 68,164 55,242
Dividends to policyowners 19,221 23,067 47,624 42,225
---------------------------- ----------------------------
317,717 277,724 637,849 473,971
---------------------------- ----------------------------
Income from continuing operations 10,755 36,055 52,672 72,866
Interest expense 6,337 7,410 12,364 14,742
---------------------------- ----------------------------
Income before income tax expense 4,418 28,645 40,308 58,124
Income tax expense 696 8,950 12,128 18,971
---------------------------- ----------------------------
Net income from continuing operations 3,722 19,695 28,180 39,153
Discontinued operations (net of tax):
Income from discontinued operations 540 532 996 946
---------------------------- ----------------------------
Net income before cumulative effect of change in
accounting for derivatives 4,262 20,227 29,176 40,099
Cumulative effect of change in accounting for
derivatives, net of tax -- -- -- (8,236)
---------------------------- ----------------------------
Net income $ 4,262 $ 20,227 $ 29,176 $ 31,863
============================ ============================
Net income from continuing operations per common share:
Basic $ 0.09 $ 0.57 $ 0.69 $ 1.22
============================ ============================
Diluted $ 0.09 $ 0.57 $ 0.68 $ 1.21
============================ ============================
Net income from discontinued operations per common share:
Basic $ 0.01 $ 0.02 $ 0.02 $ 0.03
============================ ============================
Diluted $ 0.01 $ 0.02 $ 0.02 $ 0.03
============================ ============================
Net income per common share:
Basic $ 0.11 $ 0.59 $ 0.72 $ 0.99
============================ ============================
Diluted $ 0.10 $ 0.59 $ 0.71 $ 0.99
============================ ============================
Weighted average common shares outstanding:
Basic 40,155,276 34,364,932 40,749,054 32,181,646
============================ ============================
Diluted 40,661,337 34,528,541 41,311,695 32,325,847
============================ ============================
See accompanying notes to consolidated financial statements.
6
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
For The Three Months Ended June 30, For The Six Months Ended June 30,
2002 2001 2002 2001
----------------------------------- ---------------------------------
(unaudited)
Net income $ 4,262 $ 20,227 $ 29,176 $ 31,863
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Transfer related to unrealized gain on available-
for-sale securities reclassified to trading -- -- -- (662)
Unrealized holding gains (losses) arising during
period 27,724 (38,083) (31,860) (2,110)
Less: Reclassification adjustment for (losses)
included in net income (37,697) (7,247) (41,461) (14,223)
----------------------------------- ---------------------------------
Other comprehensive income (loss), before tax 65,421 (30,836) 9,601 11,451
Income tax (expense) benefit related to items of other
comprehensive income (22,897) 10,792 (3,360) (4,008)
----------------------------------- ---------------------------------
42,524 (20,044) 6,241 7,443
Amounts attributable to:
Change in accounting for derivatives -- -- -- 2,661
----------------------------------- ---------------------------------
Other comprehensive income (loss), net of taxes 42,524 (20,044) 6,241 10,104
Comprehensive income (loss) $ 46,786 $ 183 $ 35,417 $ 41,967
=================================== =================================
See accompanying notes to consolidated financial statements.
7
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($ in thousands)
Accumulated
Other
Additional Comprehensive Unallocated Total
Common Paid-In Income Unearned ESOP Retained Stockholders'
Stock Capital (Loss) Compensation Shares Earnings Equity
------- ----------- -------------- ------------ ----------- -------- -------------
Balance at December 31, 2000 $30,011 $ 809,894 $(17,188) $ (146) $(683) $ 6,067 $ 827,955
2001:
Net income -- -- -- -- -- 72,907 72,907
Change in accounting for derivatives -- -- 2,661 -- -- -- 2,661
Transfer related to unrealized gain
on available-for-sale securities
reclassified to trading -- -- (430) -- -- -- (430)
Net unrealized gain (loss) on
securities -- -- 35,891 -- -- -- 35,891
Net unrealized gain (loss) on
derivatives designated as cash
flow hedges -- -- (5,933) -- -- -- (5,933)
Stock issued under various incentive
plans, net of forfeitures 338 8,921 -- (581) -- -- 8,678
Dividends declared on common stock -- -- -- -- -- (16,787) (16,787)
Purchase of treasury stock (1,406) (43,579) -- -- -- -- (44,985)
Acquisition of IL Holdings 9,047 223,358 -- -- -- -- 232,405
Conversion of company-obligated
mandatorily redeemable preferred
capital securities 3,769 123,779 -- -- -- -- 127,548
Allocation of shares in leveraged
ESOP -- 480 -- -- 459 -- 939
Minimum pension liability adjustment -- -- (2,332) -- -- -- (2,332)
------- ----------- -------- ------- ----- ------- -----------
Balance at December 31, 2001 $41,759 $ 1,122,853 $ 12,669 $ (727) $(224) $ 62,187 $1,238,517
2002 (unaudited):
Net income -- -- -- -- -- 29,176 29,176
Net unrealized gain on securities -- -- 5,955 -- -- -- 5,955
Net unrealized gain on derivatives
designated as cash flow hedges -- -- 286 -- -- -- 286
Stock issued under various incentive
plans, net of forfeitures 477 12,864 -- 217 -- -- 13,558
Purchase of treasury stock (2,514) (86,738) -- -- -- -- (89,252)
------- ----------- -------- ------- ----- ------- -----------
Balance at June 30, 2002 $39,722 $ 1,048,979 $ 18,910 $ (510) $(224) $ 91,363 $1,198,240
======= =========== ======== ======= ===== ======== ==========
See accompanying notes to consolidated financial statements.
8
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
For The Six Months Ended June 30,
2002 2001
---------------------------------
(unaudited)
Cash flows from operating activities
Net income $ 29,176 $ 31,863
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting
for derivatives -- 8,236
Policyowner assessments on universal life
and annuity products (70,159) (46,255)
Interest credited to policyowner account
balances 222,872 181,081
Change in option value of equity-indexed products
and market value adjustments on total
return strategy annuities (35,867) (32,510)
Realized/unrealized (gains) losses on investments 100,623 51,660
Goodwill amortization -- 3,898
DAC amortization 32,682 18,185
VOBA amortization 35,482 37,057
Change in:
Accrued investment income (8,229) (8,046)
Reinsurance receivables (73,100) 16,677
Securities held for trading purposes:
Fixed maturities 215,125 (48,891)
Equity securities 12,471 (1,648)
Short-term investments (3,780) --
Deferred policy acquisition costs (201,575) (107,687)
Liabilities for future policy benefits 434,465 (3,283)
Accrued expenses and other liabilities (29,499) (59,110)
Policy and contract claims and other
policyowner funds 28,122 (1,720)
Income taxes:
Current (33,277) (12,292)
Deferred 25,637 20,690
Other, net (41,007) (17,890)
---------------------------
Net cash provided by operating activities 640,162 30,015
---------------------------
Cash flows from investing activities:
Purchase of fixed maturities available-for-sale (3,033,669) (1,603,208)
Proceeds from sale of fixed maturities available-for-sale 1,686,139 909,026
Maturities, calls and principal reductions of
fixed maturities available-for-sale 507,723 257,064
Purchase of equity securities (35,945) (52,541)
Proceeds from sale of equity securities 3,604 54,749
Change in short-term investments, net (334) 9,473
Purchase of mortgage loans (36,558) (81,967)
9
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
For The Six Months Ended June 30,
2002 2001
---------------------------------
(unaudited)
Proceeds from repayment and sale of mortgage loans 53,520 50,752
Purchase of real estate and other invested assets (29,551) (49,002)
Proceeds from sale of real estate and other
invested assets 30,230 57,603
Change in policy loans, net 6,045 1,459
Other assets, net (8,977) (51,991)
Acquisitions, net of cash acquired -- 156,959
--------------------------
Net cash (used in) investing activities (857,773) (341,624)
--------------------------
Cash flows from financing activities:
Deposits to policyowner account balances 998,428 1,010,247
Withdrawals from policyowner account balances (859,614) (639,913)
Change in debt, net (80,957) (11,471)
Stock issued under various incentive plans, net of
forfeitures 13,558 1,495
Purchase of treasury stock (89,252) (857)
Proceeds from issuance of OCEANs 178,494 --
Retirement of company-obligated mandatorily
redeemable capital securities (20,150) --
--------------------------
Net cash provided by financing activities 140,507 359,501
--------------------------
Net (decrease) in cash (77,104) 47,892
Cash and cash equivalents at beginning of period 179,376 65,485
--------------------------
Cash and cash equivalents at end of period $ 102,272 $ 113,377
==========================
Supplemental disclosure of cash activities:
Interest paid $ 11,402 $ 14,392
==========================
Income taxes paid $ 26,921 $ 9,829
==========================
10
AMERUS GROUP CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
For The Six Months Ended June 30,
2002 2001
---------------------------------
(unaudited)
Details of acquisitions:
Fair value of assets acquired $ -- $5,671,628
Liabilities assumed -- 5,345,186
----------=---------------
Carrying value of acquisitions -- 326,442
Common stock issued -- (232,318)
Accrual of cash payout component of purchase price -- (9,121)
Preliminary investment in ILGC -- (77,200)
Acquisition costs previously paid -- (2,857)
--------------------------
Cash paid -- 4,946
Less: Cash acquired -- 161,905
--------------------------
Net cash (received in) acquisitions $ -- $ (156,959)
==========================
11
AMERUS GROUP CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States (GAAP) for interim financial information and the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by GAAP for annual financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. All adjustments were of a normal
recurring nature, unless otherwise noted in Management's Discussion and Analysis
and the Notes to Consolidated Financial Statements. Operating results for the
six months ended June 30, 2002 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2002 (see further
discussion in Management's Discussion and Analysis). For further information and
for capitalized terms not defined in this Form 10-Q, refer to the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2001.
The accompanying consolidated financial statements include the accounts and
operations of the Company and its wholly-owned subsidiaries, principally AmerUs
Life Insurance Company (ALIC), AmerUs Annuity Group Co. (AAG), AmerUs Capital
Management Group, Inc. (ACM), and ILICO Holdings, Inc., holding company of
Indianapolis Life Insurance Company (ILIC) and its subsidiaries (ILICO). All
significant intercompany transactions and balances have been eliminated in
consolidation.
Effective on March 29, 2002, Western Security Life Insurance Company, a
subsidiary of ILIC, was sold. The insurance business of Western Security Life
Insurance Company was transferred to ILIC prior to the sale. The sale of the
corporate organization and insurance licenses resulted in a gain of
approximately $1.9 million which is included in realized gains.
Certain amounts in the 2001 financial statements have been reclassified to
conform to the 2002 financial statement presentation.
(2) EARNINGS PER SHARE
Basic earnings per share of common stock are computed by dividing net
income by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share assumes the issuance of common shares
applicable to stock options and warrants calculated using the treasury stock
method. In addition, diluted earnings per share applicable to the Company's
Optionally Convertible Equity-linked Accreting Notes (OCEANs(SM)) are determined
using the if-converted method for the number of days in the period in which the
common stock price conversion condition is met. No undistributed net income has
been allocated to the convertible securities holders since their participation
in dividends with common stockholders is established at the amount of the annual
regular dividend. See further discussion of the OCEANs in note 5.
(3) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 133 "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS 137 and SFAS 138, which requires that
all derivative instruments, including certain derivative instruments embedded in
other contracts, be reported on the balance sheet at fair value. Accounting for
gains and losses resulting from changes in the values of derivatives is
dependent upon the use of the derivative and its qualification for special hedge
accounting. In accordance with the provisions of SFAS
12
No. 133, the Company recorded a transition adjustment as of January 1, 2001 upon
adoption of the standard to recognize its derivative instruments at fair value
resulting in a pre-tax reduction to income of $12.4 million ($8.2 million
after-tax) and an increase to Accumulated Other Comprehensive Income (AOCI) of
$2.7 million. The reduction to income which is classified as a "cumulative
effect of change in accounting for derivatives, net of tax" in the Consolidated
Statements of Income, is attributable to losses on basis swaps that were natural
hedges and losses on interest rate swaps reclassified from AOCI that have been
redesignated as cash flow hedges of floating rate funding agreement liability
effective January 1, 2001. In addition, the reduction to income includes
adjustments to fair value for options being used to hedge embedded options
contained within equity-indexed annuity products. The increase in AOCI, which is
classified as "change in accounting for derivatives" in the Consolidated
Statements of Comprehensive Income, is attributable to the reclassification of
the interest rate swap's fair value adjustment from AOCI to the Consolidated
Statements of Income.
During the first six months of 2002 and 2001, realized/unrealized gains
(losses) on investments included an unrealized loss of $34.8 million and $34.1
million, respectively, from the change in fair value on call options used as a
natural hedge of embedded options within equity-indexed annuities. Additionally,
the first six months of 2002 and 2001 included an unrealized loss of $19.5
million and $3.5 million, respectively, from the change in fair value on the
trading securities backing the total return strategy products. Policyowner
benefits included an offsetting adjustment to reduce contract liabilities for
fair value changes in options embedded within the equity-indexed products and
fair value changes on total return strategy products of $35.9 million and $32.5
million for the first six months of 2002 and 2001, respectively. In addition,
basis swaps were terminated during the first quarter of 2001 and an increase in
fair value of $1.8 million on those swaps was included in net investment income.
AOCI included an unrealized gain of $0.3 million and loss of $2.1 million from
the fair value change in interest rate swaps used to hedge the floating rate
funding agreement liability during the first six months of 2002 and 2001,
respectively. The Company undesignated a cash flow hedge and is now amortizing
the amount in AOCI to earnings over the remaining life of the basis swap, which
amounted to $0.7 million expense in the second quarter of 2002. The Company
estimates that $4.0 million of derivative losses included in AOCI will be
reclassified into earnings within the next twelve months.
The following table summarizes the income (loss) impact of the market value
adjustments on trading securities and derivatives and the cash flow hedge
amortization for the first six months ended June 30, 2002 and 2001 (in
thousands):
For The Six Months Ended June 30,
2002 2001
---------------------------------
($ in thousands)
Fixed maturity securities held for trading $ (19,450) $ (3,519)
Options on equity-indexed annuities (34,786) (34,096)
Equity-indexed and total return strategy fixed
annuity liabilities 35,867 32,510
Cash flow hedge amortization (697) -
Deferred policy acquisition cost amortization
impact of net annuity adjustments (2,662) 2,102
---------------------------------
Pre-tax total (21,728) (3,003)
Income taxes 7,605 1,051
---------------------------------
After-tax total $ (14,123) $ (1,952)
===============================
13
(4) CLOSED BLOCK
The Company has established two closed blocks, which we refer to as the
Closed Block. The first was established on June 30, 1996 in connection with the
reorganization of ALIC to a stock form. The second was established as of March
31, 2000 in connection with the reorganization of ILIC to a stock form. The
operations of ILIC have been included in the consolidated financial statements
of the Company since May 18, 2001. Insurance policies which had a dividend scale
in effect as of each Closed Block establishment date, were included in the
Closed Block. The Closed Block was designed to provide reasonable assurance to
owners of insurance policies included therein that, after the reorganization of
ALIC and ILIC, assets would be available to maintain the dividend scales and
interest credits in effect prior to the reorganization if the experience
underlying such scales and credits continues.
Summarized financial information of the Closed Block as of June 30, 2002
and December 31, 2001 and for the three months and six months ended June 30,
2002 and 2001 are as follows:
June 30, December 31,
2002 2001
----------------------------
($ in thousands)
(unaudited)
LIABILITIES
Future life and annuity policy benefits $ 2,821,245 $ 2,835,423
Policyowner funds 4,745 4,656
Accrued expenses and other liabilities 72,964 69,678
Dividends payable to policyowners 154,966 154,139
Policy and contract claims 11,865 8,843
Policyowner dividend obligation 54,542 61,486
-------------------------
Total Liabilities 3,120,327 3,134,225
-------------------------
ASSETS
Fixed maturity securities available-for-sale 1,869,819 1,829,060
Mortgage loans 100,872 105,901
Policy loans 357,964 363,981
Other investments 31,350 4,653
Cash and cash equivalents 3,612 18,382
Accrued investment income 31,258 32,396
Premiums and fees receivable 14,778 22,414
Other assets 45,726 41,827
-------------------------
Total Assets 2,455,379 2,418,614
-------------------------
Maximum future earnings to be recognized from assets and
liabilities of the Closed Block $ 664,948 $ 715,611
=========================
14
For The Three
Months Ended June 30,
2002 2001
-------------------------
($ in thousands)
(unaudited)
OPERATIONS:
Insurance premiums $ 68,323 $ 59,714
Universal life and annuity product charges 544 3,015
Net investment income 38,934 29,530
Realized gains (losses) on investments (5,378) 69
Policyowner benefits (72,634) (62,075)
Underwriting, acquisition and other expenses (1,481) (922)
Dividends to policyowners (16,970) (21,195)
----------------------
Contribution from the Closed Block before
income taxes $ 11,338 $ 8,136
======================
For The Six
Months Ended June 30,
2002 2001
-------------------------
($ in thousands)
(unaudited)
OPERATIONS:
Insurance premiums $ 134,111 $ 104,562
Universal life and annuity product charges 3,441 6,329
Net investment income 76,977 54,809
Realized gains (losses) on investments (754) 313
Policyowner benefits (144,749) (110,898)
Underwriting, acquisition and other expenses (2,736) (1,687)
Dividends to policyowners (43,304) (38,823)
----------------------
Contribution from the Closed Block before
income taxes $ 22,986 $ 14,605
======================
15
(5) NOTES PAYABLE AND CAPITAL SECURITIES
Notes payable and capital securities consist of the following:
June 30, December 31,
2002 2001
----------------------
($ in thousands)
(unaudited)
Federal Home Loan Bank community investment
long-term advances with a weighted average
interest rate of 5.80% at June 30, 2002 (A) $ 14,124 $ 14,369
Optionally Convertible Equity-linked Accreting Notes
due on March 6, 2032 (B) 185,493 --
Senior notes bearing interest at 6.95%
due June, 2005 125,000 125,000
Revolving credit agreement 70,000 150,000
Surplus notes bearing interest at 8.66% due on
April 11,2011 25,000 25,000
Note payable to a bank bearing interest at 7.24%
due March, 2004 -- 1,205
-------- --------
$419,617 $315,574
======== ========
AmerUs Capital I 8.85 % Capital
Securities Series A due
February 1, 2007 (C) $ 48,095 $ 68,900
AmerUs Capital II 7.00 % Adjustable
Conversion-rate Equity Security
Units are due July 27, 2003 154 154
-------- --------
$ 48,249 $ 69,054
======== ========
(A) The Company has multiple credit arrangements with the Federal Home Loan Bank
(FHLB). In addition to the long-term advances disclosed above, the Company is
eligible to borrow under variable-rate short term fed funds arrangements of
which no amount was outstanding at June 30, 2002. These borrowings are secured
and interest is payable at the current rate at the time of each advance.
(B) On March 6, 2002, the Company issued and sold in a private placement $185
million aggregate original principal amount of OCEANs. The OCEANs are senior
subordinated debt and were issued and sold in an original principal amount of
$1,000 per OCEAN, with a principal amount at maturity of $1,270 per OCEAN. The
maturity date of the OCEANs is March 6, 2032. The OCEANs will have aggregate
principal amount at maturity of $234,950,000. The notes are convertible into
shares of the Company's
16
common stock at an initial conversion price (subject to adjustment) of $37.60
per share only if the sale price of the common stock exceeds $47.85 per share
for at least 20 trading days in a 30-day trading period or in certain other
limited circumstances.
Proceeds from the OCEANs were used to repay borrowings on the Company's
revolving credit agreement and to purchase approximately 1.7 million shares
amounting to $59 million of the Company's common stock. The OCEANs are senior
subordinated debt, subordinated in right of payment to all existing and future
senior debt and senior to all existing and future junior subordinated debt.
(C) On March 26, 2002, $20.8 million of the AmerUs Capital I 8.85% Capital
Securities were repurchased which did not result in a material gain.
For an additional discussion of the terms of the above indebtedness refer
to the Company's consolidated financial statements as of December 31, 2001.
(6) FEDERAL INCOME TAXES
The effective income tax rate for the three-months and six months ending
June 30, 2002 and 2001, respectively, varied from the prevailing corporate rate
primarily as a result of non-deductible demutualization costs, low income
housing and rehabilitation credits, and tax exempt income in 2002 and 2001 and
goodwill amortization in 2001.
(7) ACQUISITIONS
On May 18, 2001, the Company completed the acquisition of ILICO for an
amount of cash, policy credits and shares of the Company's common stock equal to
the value of 9.3 million shares of the Company's common stock. The purchase
price totaled approximately $326 million. The acquisition was accounted for
using the purchase method of accounting and accordingly the total purchase price
was allocated to the assets and liabilities of ILICO based on the relative fair
values as of May 18, 2001, with the excess of the purchase price over the fair
value of the assets acquired less the fair value of the liabilities assumed
recorded as goodwill. Goodwill was amortized over thirty years through December
31, 2001. In accordance with SFAS 142, "Goodwill and Other Intangible Assets,"
effective January 1, 2002, goodwill is no longer amortized but instead tested
for impairment on an annual basis (see note 9). The operations of ILICO have
been included in the consolidated financial statements of the Company since May
18, 2001. The allocation of the purchase price of ILICO is as follows (in
millions):
Investments (including cash and short-term investments) $ 4,655.7
Receivables and other assets 402.1
Value of business acquired 215.4
Goodwill 34.9
Separate account assets 345.6
Policyowner reserves and funds (4,801.3)
Other liabilities (155.4)
Debt (25.0)
Separate account liabilities (345.6)
-------
Total investment in ILICO $ 326.4
=======
17
In June 2002, the Company acquired an independent marketing organization
for cash of $7.5 million. The total purchase price was allocated to the assets
and liabilities based on the relative fair values with the excess of the
purchase price over the fair value of the assets acquired less the fair value of
the liabilities assumed recorded as goodwill. Goodwill amounting to $7.2 million
was established in connection with the acquisition.
(8) RESTRUCTURING CHARGES
During the third quarter of 2001, the Company began consolidating various
functions in connection with a restructuring of its protection products and
accumulation products operations and investment activities. The objective of the
restructuring plan is to eliminate duplicative functions for all business units.
The elimination of duplicative functions is intended to reduce on-going
operating costs for the Company. General administrative functions will be
transitioned so they are performed primarily in Des Moines, Iowa. Protection
products processes will be transitioned so they are performed primarily in Des
Moines, Iowa and Indianapolis, Indiana and accumulation products functions will
be transitioned to Topeka, Kansas. Investment activities have been restructured
to eliminate real estate management services which will be outsourced in the
future.
Restructuring charges have been included in the consolidated statement of
income for the three months and six months ended June 30, 2002. The
restructuring charges for the six months ended June 30, 2002 include pre-tax
severance and termination benefits of $5.3 million related to the elimination of
approximately 80 positions and other pre-tax costs of $2.9 million primarily
related to systems conversion and relocation of employees. An accrual for
severance and termination benefits not yet paid amounted to $2.6 million at June
30, 2002.
The Company has not finalized all restructuring activities as of June 30,
2002. Additional activities will primarily involve relocation or severance
benefits for affected employees and various administrative, financial, and
actuarial system conversion costs. Expenditures for all restructuring activities
are expected to be completed by the fourth quarter of 2003.
(9) ADOPTION OF SFAS 142
SFAS 142, "Goodwill and Other Intangible Assets," changes the accounting
for goodwill and other intangible assets and generally became effective January
1, 2002. SFAS 142 adopts a nonamortization, impairment-only model for the
Company's goodwill and indefinite-lived intangible assets. This includes a more
stringent impairment test methodology for measuring and recognizing impairment
losses. The Company accordingly discontinued amortization of goodwill on January
1, 2002. As of June 30, 2002, goodwill of $34.2 million is in the protection
products segment and $183.4 million is in the accumulation products segment. The
only intangible asset other than goodwill, is value of business acquired (VOBA)
which is being amortized and amounted to a gross carrying amount of $819.2
million and accumulated amortization of $273.1 million of at June 30, 2002.
Goodwill changed from $195.5 million at December 31, 2001 to $217.6 million at
June 30, 2002 primarily due to the adjustment of the ILICO purchase price
allocation which increased goodwill approximately $14.0 million and goodwill
attributable to the acquisition of independent marketing organizations of
approximately $8.1 million. The Company has evaluated the transitional
impairment analysis for goodwill and other intangible assets and determined such
assets are not impaired as of January 1, 2002.
18
A reconciliation of net income and basic and diluted earnings per share
reported for the three months and six months ended June 30, 2001 to exclude
amortization expense of goodwill is as follows:
For The Three Months Ended June 30, For The Six Months Ended June 30,
2002 2001 2002 2001
----------------------------------- ---------------------------------
($ in thousands, except per share amounts)
Net income as reported $ 4,262 $ 20,227 $ 29,176 $ 31,863
Goodwill amortization expense - 1,955 - 3,898
------------------------ -------------------------
Adjusted net income $ 4,262 $ 22,182 $ 29,176 $ 35,761
======================== =========================
Basic earnings per share as reported $ 0.11 $ 0.59 $ 0.72 $ 0.99
Goodwill amortization expense - 0.06 - 0.12
------------------------ -------------------------
Adjusted basic earnings per share $ 0.11 $ 0.65 $ 0.72 $ 1.11
======================== =========================
Diluted earnings per share as reported $ 0.10 $ 0.59 $ 0.71 $ 0.99
Goodwill amortization expense - 0.05 - 0.12
------------------------ -------------------------
Adjusted diluted earnings per share $ 0.10 $ 0.64 $ 0.71 $ 1.11
======================== =========================
(10) COMMITMENTS AND CONTINGENCIES
In recent years, the life insurance industry, including the Company and its
subsidiaries, have been subject to an increase in litigation pursued on behalf
of purported classes of insurance purchasers, questioning the conduct of
insurers in the marketing of their products. The Company is involved in
litigation, including class actions, reinsurance claims and regulatory
proceedings, arising in the ordinary course of its business. Some of these
claims and legal actions are in jurisdictions where juries are given substantial
latitude in assessing damages, including punitive damages. Although no
assurances can be given and no determinations can be made at this time, the
Company believes that the ultimate liability, if any, with respect to these
other claims and legal actions, would have no material effect on our results of
operations and financial position.
(11) OPERATING SEGMENTS
The Company has two operating segments: Protection Products and
Accumulation Products. Products generally distinguish a segment. A brief
description of each segment follows:
Protection Products. The primary product offerings consist of whole life,
interest-sensitive whole life, term life, universal life and equity-indexed life
insurance policies. These products are marketed on a national basis primarily
through a Preferred Producer agency system, a Personal Producing General Agent
(PPGA) distribution system and Independent Marketing Organizations (IMOs).
Accumulation Products. The primary product offerings consist of individual
fixed annuities marketed on a national basis primarily through independent
brokers and IMOs and insurance contracts issued through separate account funding
agreements.
The Company uses the same accounting policies and procedures to measure
operating segment income and assets as it uses to measure its consolidated
income from operations and assets with the exception of the elimination of
certain items which management believes are not necessarily indicative of
overall operating trends. These items are shown between adjusted pre-tax
operating income and income from continuing operations on the following
operating segment tables and are as follows:
19
1) Realized gains and losses on open block investments.
2) Market value changes and amortization of assets and liabilities
associated with the application of SFAS 133, such as:
- Unrealized gains and losses on securities held for trading.
- Change in option value of equity-indexed annuity products and market
value adjustments on total return strategy annuities.
- Cash flow hedge amortization.
3) Amortization of deferred policy acquisition costs and VOBA related to
the realized gains and losses on the open block investments and the SFAS
133 adjustments.
4) Demutualization costs.
5) Restructuring costs.
These items will either fluctuate from period to period depending on the
prevailing interest rate and economic environment or are not continuing in
nature, so management believes they do not reflect the Company's ongoing
earnings capacity of its operating segments.
Premiums, product charges, policyowner benefits, insurance expenses,
amortization of deferred policy acquisition costs and VOBA and dividends to
policyowners are attributed directly to each operating segment. Net investment
income and closed block realized gains and losses on investments are allocated
based on directly-related assets required for transacting the business of that
segment. Other revenues and benefits and expenses which are deemed not to be
associated with any specific segment are grouped together in the All Other
category. These items primarily consist of holding company revenues and expenses
and the operations of the Company's real estate management subsidiary.
Assets are segmented based on policy liabilities directly attributable to
each segment. There are no significant intersegment transactions. Depreciation
and amortization, excluding amortization of deferred policy acquisition costs
and VOBA as previously discussed, are not significant. There have been no
material changes in segment assets since December 31, 2001.
20
Operating segment income is as follows:
Operating Segment Income
($ in thousands)
For The Three Months Ended June 30, 2002
-----------------------------------------------------
Protection Accumulation Total
Products Products All Other Consolidated
-----------------------------------------------------
Revenues:
Insurance premiums $ 89,808 $ 3,228 $ 211 $ 93,247
Universal life and annuity product charges 28,590 10,724 -- 39,314
Net investment income 83,418 166,544 1,935 251,897
Realized gains (losses) on closed block investments (5,378) -- -- (5,378)
Other income 992 17,897 1,036 19,925
---------------------------------------------------
197,430 198,393 3,182 399,005
Benefits and expenses:
Policyowner benefits 112,598 127,423 394 240,415
Underwriting, acquisition, and other expenses 21,301 18,390 3,510 43,201
Amortization of deferred policy acquisition costs
and value of business acquired, net of
open block loss adjustment of ($6,840) 14,506 20,658 -- 35,164
Dividends to policyowners 19,221 -- -- 19,221
---------------------------------------------------
167,626 166,471 3,904 338,001
---------------------------------------------------
Adjusted pre-tax operating income $ 29,804 $ 31,922 $ (722) 61,004
==================================
Realized (losses) on open block investments (35,755)
Unrealized (losses) on open block trading investments (34,778)
Change in option value of equity-indexed
annuity products and market value
adjustments on total return strategy annuities 20,736
Cash flow hedge amortization (697)
Amortization of deferred policy acquisition costs and
VOBA due to open block gains or losses 6,840
Demutualization costs (179)
Restructuring costs (6,416)
-------
Income from continuing operations 10,755
Interest (expense) (6,337)
Income tax (expense) (696)
Income from discontinued operations, net of tax 540
-------
Net income $ 4,262
=======
21
Operating Segment Income
($ in thousands)
For The Three Months Ended June 30, 2001
---------------------------------------------------------
Protection Accumulation Total
Products Products All Other Consolidated
---------------------------------------------------------
Revenues:
Insurance premiums $ 68,906 $ 2,581 $ 225 $ 71,712
Universal life and annuity product charges 25,821 9,026 -- 34,847
Net investment income 65,294 138,684 3,115 207,093
Realized gains (losses) on closed block investments 69 (305) -- (236)
Other income -- 9,732 2,220 11,952
---------------------------------------------------
160,090 159,718 5,560 325,368
Benefits and expenses:
Policyowner benefits 82,431 103,877 596 186,904
Underwriting, acquisition, and other expenses 17,911 13,565 3,645 35,121
Amortization of deferred policy acquisition costs
and value of business acquired, net of
open block loss adjustment of ($4,899) 12,123 22,747 -- 34,870
Dividends to policyowners 23,067 -- -- 23,067
---------------------------------------------------
135,532 140,189 4,241 279,962
---------------------------------------------------
Adjusted pre-tax operating income $ 24,558 $ 19,529 $ 1,319 45,406
======================================
Realized (losses) on open block investments (7,223)
Unrealized (losses) on open block trading investments (4,366)
Change in option value of equity-indexed
annuity products and market value
adjustments on total return strategy annuities (2,459)
Amortization of deferred policy acquisition costs and
VOBA due to open block gains or losses 4,899
Demutualization costs (202)
--------
Income from continuing operations 36,055
Interest (expense) (7,410)
Income tax (expense) (8,950)
Income from discontinued operations, net of tax 532
--------
Net income $ 20,227
========
22
Operating Segment Income
($ in thousands)
For The Six Months Ended June 30, 2002
----------------------------------------------------
Protection Accumulation Total
Products Products All Other Consolidated
----------------------------------------------------
Revenues:
Insurance premiums $ 178,343 $ 6,180 $ 832 $ 185,355
Universal life and annuity product charges 61,446 20,739 -- 82,185
Net investment income 163,843 324,887 2,937 491,667
Realized gains (losses) on closed block investments (754) -- -- (754)
Other income 1,945 28,442 1,550 31,937
-----------------------------------------------
404,823 380,248 5,319 790,390
Benefits and expenses:
Policyowner benefits 222,149 245,763 1,190 469,102
Underwriting, acquisition, and other expenses 40,942 31,388 7,122 79,452
Amortization of deferred policy acquisition costs
and value of business acquired, net of
open block loss adjustment of ($5,286) 28,841 44,611 -- 73,452
Dividends to policyowners 47,624 -- -- 47,624
------------------------------------------------
339,556 321,762 8,312 669,630
------------------------------------------------
Adjusted pre-tax operating income $ 65,267 $ 58,486 $ (2,993) 120,760
==================================
Realized (losses) on open block investments (45,633)
Unrealized (losses) on open block trading investments (54,236)
Change in option value of equity-indexed
annuity products and market value
adjustments on total return strategy annuities 35,867
Cash flow hedge amortization (697)
Amortization of deferred policy acquisition costs and
VOBA due to open block gains or losses 5,286
Demutualization costs (464)
Restructuring costs (8,211)
--------
Income from continuing operations 52,672
Interest (expense) (12,364)
Income tax (expense) (12,128)
Income from discontinued operations, net of tax 996
--------
Net income $ 29,176
========
23
Operating Segment Income
($ in thousands)
For The Six Months Ended June 30, 2001
------------------------------------------------------
Protection Accumulation Total
Products Products All Other Consolidated
-------------------------------------------------------
Revenues:
Insurance premiums $ 121,432 $ 7,194 $ 253 $ 128,879
Universal life and annuity product charges 42,955 16,158 -- 59,113
Net investment income 118,325 265,872 4,024 388,221
Realized gains (losses) on closed block investments 313 347 -- 660
Other income -- 17,789 4,495 22,284
-----------------------------------------------------
283,025 307,360 8,772 599,157
Benefits and expenses:
Policyowner benefits 147,537 194,235 585 342,357
Underwriting, acquisition, and other expenses 32,051 28,082 6,322 66,455
Amortization of deferred policy acquisition costs
and value of business acquired, net of
open block loss adjustment of ($5,537) 21,733 39,046 -- 60,779
Dividends to policyowners 42,225 -- -- 42,225
-----------------------------------------------------
243,546 261,363 6,907 511,816
-----------------------------------------------------
Adjusted pre-tax operating income $ 39,479 $ 45,997 $ 1,865 87,341
======================================
Realized (losses) on open block investments (14,664)
Unrealized (losses) on open block trading investments (37,656)
Change in option value of equity-indexed
annuity products and market value
adjustments on total return strategy annuities 32,510
Amortization of deferred policy acquisition costs and
VOBA due to open block gains or losses 5,537
Demutualization costs (202)
---------
Income from continuing operations 72,866
Interest (expense) (14,742)
Income tax (expense) (18,971)
Income from discontinued operations, net of tax 946
Cumulative effect of change in accounting for derivatives, net of tax (8,236)
---------
Net income $ 31,863
=========
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following analysis of the consolidated results of operations and
financial condition of AmerUs Group Co. should be read in conjunction with the
Consolidated Financial Statements and related notes.
NATURE OF OPERATIONS
We are a holding company whose subsidiaries are primarily engaged in
the business of marketing, underwriting and distributing a broad range of
individual life, annuity and insurance deposit products to individuals and
businesses in 50 states, the District of Columbia and the U.S. Virgin Islands.
We have two reportable operating segments: protection products and accumulation
products. The protection products segment was formerly known as the life
insurance segment and the accumulation products segment was formerly known as
the annuity segment. The protection products segment primary offerings consist
of whole life, interest-sensitive whole life, term life, universal life and
equity-indexed life insurance policies. The primary offerings of the
accumulation products segment are individual fixed annuities and funding
agreements.
ADJUSTED NET OPERATING INCOME
The following table reflects net income adjusted to eliminate certain
items (net of applicable income taxes) which our management believes do not
necessarily indicate overall operating trends. Adjusted net operating income,
which is referred to herein as operating income, is the basis we use to assess
our overall performance. Adjusted net operating income as described by us may
not be comparable to similarly titled measures reported by other companies,
including insurance companies. The adjusted net operating income shown below
does not constitute net income computed in accordance with accounting principles
generally accepted in the United States, or GAAP.
25
For The Three Months Ended June 30, For The Six Months Ended June 30,
2002 2001 2002 2001
------------------------------------ ---------------------------------
($ in thousands, except per share data)
Net income $ 4,262 $ 20,227 $ 29,176 $ 31,863
Realized losses on open block investments (A) 23,155 4,677 29,575 9,494
Net amortization of deferred policy
acquisition costs due to open block
gains or losses (B) (3,668) (1,317) (5,166) (2,823)
Net effect of accounting differences
from the adoption of SFAS 133 (C) 8,801 2,541 14,123 2,541
Demutualization costs (D) 179 202 464 202
Restructuring costs (E) 3,937 -- 5,054 --
Discontinued operations (F) (540) (532) (996) (946)
Cumulative effect of change in
accounting for derivatives (G) -- -- -- 8,236
---------------------------- ----------------------------
Adjusted Net Operating Income $ 36,126 $ 25,798 $ 72,230 $ 48,567
============================ ============================
Adjusted Net Operating Income
per common share:
Basic $ 0.90 $ 0.75 $ 1.77 $ 1.51
============================ ============================
Diluted $ 0.89 $ 0.75 $ 1.75 $ 1.50
============================ ============================
Weighted average common
shares outstanding:
Basic 40,155,276 34,364,932 40,749,054 32,181,646
============================ ============================
Diluted 40,661,337 34,528,541 41,311,695 32,325,847
============================ ============================
(A) Represents total open block realized gains or losses on investments
adjusted for income taxes. Open block realized gains or losses may vary
widely between periods. Such amounts are determined by management's
timing of individual transactions or current market conditions and do
not necessarily correspond to the underlying operating trends.
(B) Represents amortization of deferred policy acquisition costs and VOBA
on the open block realized gains or losses that are included in our
product margins, adjusted for income taxes on such amounts.
(C) Represents the net effect of SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," related accounting entries,
adjusted for income taxes. The accounting entries consist of cash flow
hedge amortization, market value adjustments on trading securities,
derivatives, certain annuity contracts, and the associated change in
amortization of deferred acquisition costs and VOBA resulting from such
adjustments.
26
(D) Represents costs directly related to ILIC's demutualization. The costs
consist primarily of legal, actuarial and consulting expenses.
(E) Represents costs of restructuring our operations to eliminate
duplicative functions, adjusted for income taxes. The costs consist
primarily of severance and termination benefits, relocation of
employees and systems conversion.
(F) Represents the net income from our discontinued operations.
(G) Represents the cumulative effect of change in accounting for
derivatives, net of income taxes, as of January 1, 2001, resulting from
our adoption of SFAS 133.
Adjusted net operating income increased $10.3 million to $36.1 million,
or $0.89 per diluted share, for the second quarter of 2002 compared to $25.8
million, or $0.75 per diluted share, for the second quarter of 2001. For the six
months ended June 30, adjusted net operating income was $72.2 million in 2002
compared to $48.6 million in 2001. The increase in adjusted net operating income
in 2002 was primarily attributable to the acquisition of ILICO which operations
have been included in our consolidated financial statements since May 18, 2001.
This change is analyzed further in the operating segment discussion.
SALES
PROTECTION PRODUCTS
The following table sets forth annualized premium information regarding
our protection products segment sales activity by life insurance product:
Sales Activity by Product
For The Three Months Ended June 30, For The Six Months Ended June 30,
2002 2001 2002 2001
----------------------------------- ---------------------------------
($ in thousands)
Traditional life insurance:
Whole life $ 1,140 $ 1,506 $ 2,260 $ 3,518
Interest-sensitive whole life 11,282 2,425 21,486 2,425
Term life 5,967 1,891 8,515 3,294
Universal life 6,399 4,053 14,725 5,702
Equity-indexed life 12,095 5,455 20,760 10,724
---------------------- ------------------------
Direct first year annualized premiums 36,883 15,330 67,746 25,663
Private label term life premiums 1,048 733 4,644 733
---------------------- ------------------------
Total $37,931 $16,063 $72,390 $26,396
====================== ========================
Direct life insurance sales as measured by annualized premiums were
$36.9 million in the second quarter of 2002 compared to $15.3 million in the
second quarter of 2001. Year-to-date, direct life insurance sales increased
$42.0 million to $67.7 million in 2002 compared to $25.7 million in 2001.
Approximately $16.7 million and $35.0 million of the increase for the quarter
and year-to-date periods, respectively, was due to sales from ILICO which was
acquired during the second quarter of 2001. Excluding the sales from ILICO, life
insurance sales increased 47% and 34% for the quarter and year-to-date periods,
respectively, as compared to 2001. The increase, excluding ILICO, was primarily
from the equity-indexed life products which allow the policyowner to elect an
earnings strategy for a portion of the account value whereby earnings are
credited based on increases in the S&P 500 Index, excluding dividends. The
earnings credit is subject to a participation rate and an annual cap. In the
first six months
27
of 2002, sales of these products were $20.8 million as compared to $10.7 million
for the same period a year ago.
We also distribute term products of ILICO through strategic alliances
with private label partners. Under private label arrangements, ILICO designs and
issues products that are distributed through the field forces of other life
insurance companies, our private label partners. ILICO reinsures a portion of
the risks on those products which we refer to as our private label sales. We
have two private label partners that are actively writing new business. During
the second quarter of 2002, we decided to cease recruiting new private label
partners and the impact of this decision on future sales is not yet
determinable.
The following table sets forth the protection products segment life
insurance collected premiums, including collected premiums associated with the
closed block, for the periods indicated:
Collected Premiums by Product
For The Three Months Ended June 30, For The Six Months Ended June 30,
2002 2001 2002 2001
----------------------------------- ---------------------------------
($ in thousands)
Individual life premiums collected:
Traditional life:
First year and single $ 38,210 $ 26,027 $ 80,773 $ 46,091
Renewal 80,690 65,022 175,593 114,222
---------------------- ----------------------
Total 118,900 91,049 256,366 160,313
---------------------- ----------------------
Universal life:
First year and single 13,889 5,290 33,547 9,655
Renewal 33,441 23,494 63,917 42,262
---------------------- ----------------------
Total 47,330 28,784 97,464 51,917
---------------------- ----------------------
Equity-indexed life:
First year and single 19,729 7,474 31,610 14,464
Renewal 1,506 1,053 7,556 2,106
---------------------- ----------------------
Total 21,235 8,527 39,166 16,570
---------------------- ----------------------
Total individual life 187,465 128,360 392,996 228,800
Reinsurance assumed 12,309 5,517 24,914 6,026
Reinsurance ceded (38,467) (15,802) (118,186) (25,152)
---------------------- ----------------------
Total individual life, net of reinsurance $ 161,307 $ 118,075 $ 299,724 $ 209,674
====================== ======================
Traditional life insurance premiums collected were $118.9 million for
the second quarter of 2002 compared to $91.0 million for the second quarter of
2001. Year-to-date, traditional life insurance premiums increased $96.1 million
to $256.4 million in 2002 compared to $160.3 million in 2001. The increase in
2002 was primarily due to the additional premiums from ILICO which increased
$30.4 million and $97.5 million for the quarter and year-to-date periods,
respectively. Excluding the ILICO premiums, first year and single premiums
remained relatively consistent between periods with such premiums decreasing
$0.3 million in the second quarter of 2002 and increasing $1.7 million
year-to-date as compared to the respective 2001 periods, as more of our life
premium growth has shifted to the equity-indexed products. Renewal collected
premium, excluding ILICO premiums, decreased $2.3 million in the second quarter
of 2002 and decreased $3.2 million year-to-date as compared to 2001 primarily
due to continued run-off of the closed block.
Universal life insurance premiums collected were $47.3 million for the
second quarter of 2002 compared to $28.8 million for the second quarter of 2001
and $97.5 million for the first six months of 2002 compared to $51.9 million for
the first six months of 2001. Approximately $18.6 million and $46.0 million of
the increase in universal life insurance premiums for the quarter and
year-to-date periods of
28
2002 were from ILICO. Excluding ILICO, universal life premiums decreased $0.1
million and $0.4 million for the quarter and year-to-date periods, respectively,
as a result of our shift in product focus from universal life to equity-indexed
life.
Equity-indexed life premiums collected were $21.2 million for the
second quarter of 2002 compared to $8.5 million for the second quarter of 2001
and $39.2 million for the first six months of 2002 compared to $16.6 million for
the first six months of 2001. The increase in 2002 reporting periods as compared
to 2001 was a result of our shift in product focus from universal life to
equity-indexed life and continued customer interest in this product following
its introduction in 2000.
Reinsurance assumed increased approximately $6.8 million and $18.9
million in the second quarter and year-to-date periods, respectively, of 2002 as
compared to 2001. The increase is attributable to the acquisition of ILICO which
private labels various term life products. The products are designed by ILICO,
issued by ILICO's private label partners and then assumed in whole or in part by
ILICO.
Reinsurance ceded was $38.5 million in the second quarter of 2002
compared to $15.8 million in the second quarter of 2001 and $118.2 million for
the first six months of 2002 compared to $25.2 million for the first six months
of 2001. ALIC entered into additional reinsurance arrangements in 2000 and in
the fourth quarter of 2001. ALIC has reinsurance arrangements that reduce
retention to 10% of the net amount of mortality risk on any one policy, not to
exceed company retention limits, for the majority of policies issued since July
1, 1996 and for the majority of new business going forward. ALIC's retention
limits on any one life vary by age and rating table and are generally between
$500,000 and $1,000,000. In addition, ALIC has a reinsurance agreement covering
its closed block policies. Under this agreement, ALIC has reinsured
approximately 90% of ALIC's closed block mortality net amount at risk not
previously reinsured. As a result of the new arrangements, ceded reinsurance
premium, excluding ILICO, was $19.7 million in the second quarter of 2002
compared to $9.3 million in the second quarter of 2001 and was $79.2 million for
the first six months of 2002 compared to $18.6 million for the first six months
of 2001. The remainder of the increase in ceded premium amounting to $12.3
million for the second quarter of 2002 and $32.5 million for the first six
months of 2002 was from the ILICO acquisition. ILICO's reinsurance agreements
effectively reduce ILICO's retention of mortality risk to $500,000.
29
The following table sets forth information regarding our protection
products segment life insurance in force for each date presented:
Individual Life Insurance in Force
As of June 30,
2002 2001
----------------------------------
($ in thousands)
Traditional life
Number of policies 444,292 403,718
GAAP life reserves $ 3,178,715 $ 3,058,196
Face amounts $53,381,000 $45,153,000
Universal life
Number of policies 151,609 157,701
GAAP life reserves $ 1,402,581 $ 1,415,319
Face amounts $19,184,000 $20,150,000
Equity-indexed life
Number of policies 15,784 6,226
GAAP life reserves $ 76,345 $ 25,380
Face amounts $ 3,045,000 $ 1,099,000
Total life insurance
Number of policies 611,685 567,645
GAAP life reserves $ 4,657,641 $ 4,498,895
Face amounts $75,610,000 $66,402,000
ACCUMULATION PRODUCTS
The following table sets forth our accumulation products segment
collected deposits for the periods indicated:
Deposits by Product
For The Three Months Ended June 30, For The Six Months Ended June 30,
2002 2001 2002 2001
----------------------------------- ---------------------------------
($ in thousands)
Annuities
Fixed annuities:
Deferred fixed annuities $ 245,936 $ 293,953 $ 470,391 $ 730,991
Equity-indexed annuities 157,137 139,643 326,643 223,996
Variable annuities 1,818 4,197 4,481 4,197
Funding agreements 75,000 - 350,000 -
-------------------------- ------------------------------
Total 479,891 437,793 1,151,515 959,184
Reinsurance assumed - - - -
Reinsurance ceded (2,905) (56,144) (4,382) (104,733)
-------------------------- ------------------------------
Total deposits, net of reinsurance $ 476,986 $ 381,649 $ 1,147,133 $ 854,451
========================== ==============================
30
Fixed Annuity Products. Deferred fixed annuity collected premiums were
$245.9 million in the second quarter of 2002 compared to $294.0 million in the
second quarter of 2001. Year-to-date, deferred fixed annuity collected premiums
were $470.4 million in 2002 compared to $731.0 million in 2001. The decrease in
deferred fixed annuity collected premiums in 2002 as compared to 2001 was
primarily attributable to the decision to manage the growth of the business.
Equity-indexed annuity products have continued to grow in popularity with
consumers and agents and as a result, premiums increased $17.5 million and
$102.6 million in the second quarter and first six months of 2002, respectively,
as compared to the respective 2001 periods. Partially offsetting the second
quarter growth in equity-indexed annuity premiums was a decline of approximately
$19 million in premiums due to the discontinuation of a relationship with a
former marketing partner of ILICO. The discontinuation of this relationship is
not expected to have a significant impact on future period premiums as other
producers have replaced this source.
During 2001, we had a reinsurance agreement which ceded 35% of certain
fixed annuity production on a modified coinsurance basis. Fixed annuity
production ceded under this agreement totaled approximately $52.0 million and
$100.7 million in the second quarter and first six months of 2001, respectively.
In the fourth quarter of 2001, the agreement was cancelled and the previously
ceded premiums were recaptured. In addition, ILICO reinsures approximately 75%
of its fixed annuities on a modified coinsurance basis for which ceded premium
decreased approximately $2.9 million in the second quarter of 2002 and $1.5
million in the first six months of 2002.
Variable Annuities. ILICO had a variable annuity product line. In the
first quarter of 2002, ILICO ceased new sales of these products, except for new
policies issued as part of existing employer-sponsored qualified plan contracts.
The sales of $1.8 million and $4.5 million for the second quarter and first six
months of 2002, respectively, primarily reflect additions to existing contracts
and renewal premiums. Our agents will be encouraged to make new sales of
variable annuities through our Ameritas Joint Venture. Future direct sales of
variable annuities will be reduced significantly as a result of this change. As
these sales will be through our joint venture, they will not appear in our
direct sales amounts. The assets and liabilities related to the direct variable
annuities are shown on the consolidated balance sheets as "separate account
assets" and "separate account liabilities."
Funding Agreements. We have placed fixed rate funding agreements
totaling $75 million and $350 million in the second quarter and first six months
of 2002, respectively. Funding agreements are insurance contracts for which we
receive deposit funds and for which we agree to repay the deposit and a
contractual return for the duration of the contract. The assets backing the
funding agreements are legally segregated and are not subject to claims that
arise from our other business. The funding agreements are further backed by
general account assets. Total funding agreements as of June 30, 2002 amounted to
$600 million. We currently anticipate placing additional funding agreements
during the remainder of the year as conditions warrant. The funding agreements
may not be cancelled unless there is a default under the agreement, but ALIC may
terminate the agreement at any time.
31
The following table sets forth information regarding fixed annuities in
force for each date presented:
Fixed Annuities in Force
As of June 30,
2002 2001
--------------------------------
($ in thousands)
Deferred fixed and immediate annuities
Number of policies 176,393 172,774
GAAP annuity reserves $ 7,250,509 $ 6,546,124
Equity-indexed annuities
Number of policies 74,491 70,488
GAAP annuity reserves $ 3,636,287 $ 3,683,940
Total fixed annuities
Number of policies 250,884 243,262
GAAP annuity reserves $ 10,886,796 $ 10,230,064
32
RESULTS OF OPERATIONS
PROTECTION PRODUCTS
A summary of our protection products segment operations follows:
For The Three Months Ended June 30, For The Six Months Ended June 30,
2002 2001 2002 2001
----------------------------------- ---------------------------------
($ in thousands)
Revenues:
Insurance premiums $ 89,808 $ 68,906 $ 178,343 $ 121,432
Universal life product charges 28,590 25,821 61,446 42,955
Net investment income 83,418 65,294 163,843 118,325
Realized gains (losses) on closed block investments (5,378) 69 (754) 313
Other income 992 -- 1,945 --
-------------------------------- ----------------------------
Total revenues 197,430 160,090 404,823 283,025
-------------------------------- ----------------------------
Benefits and expenses:
Policyowner benefits:
Traditional:
Death benefits 19,971 5,700 28,754 6,224
Change in liability for future policy benefits
and other policy benefits 64,967 51,827 134,520 97,371
Universal:
Death benefits in excess of cash value 2,976 7,877 8,370 16,094
Interest credited on policyowner account balances 18,004 15,763 37,006 26,253
Other 6,680 1,264 13,499 1,595
-------------------------------- ----------------------------
Total policyowner benefits 112,598 82,431 222,149 147,537
Underwriting, acquisition and other expenses 21,301 17,911 40,944 32,051
Amortization of deferred policy acquisition costs
and value of business acquired (VOBA), net of
open block gain/loss adjustment of ($89) and $411
for the three months ended June 30, 2002 and 2001,
respectively, and $110 and $584 for the six months
ended June 30, 2002 and 2001, respectively 14,506 12,123 28,839 21,733
Dividends to policyowners 19,221 23,067 47,624 42,225
-------------------------------- ----------------------------
Total benefits and expenses 167,626 135,532 339,556 243,546
-------------------------------- ----------------------------
Adjusted pre-tax operating income -
Protection Products segment $ 29,804 $ 24,558 $ 65,267 $ 39,479
=============================== ===========================
Traditional life insurance premiums were $89.8 million in the second
quarter of 2002 compared to $68.9 million in the second quarter o