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UNITED STATES
SEURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to _______________
Commission file number: 33-64820
AMERICO LIFE, INC.
(Exact Name of Registrant as Specified in its Charter)
Missouri No. 43-1627599
(State of Incorporation) (I.R.S. Employer Identification No.)
1055 Broadway 64105
Kansas City, Missouri (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number including area code: (816) 391-2000
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicated 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 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.
Shares of common stock outstanding as of March 26, 2001: 10,000,
none of which is held by non-affiliates.
Documents Incorporated by Reference: None
===== ========================================================================
TABLE OF CONTENTS
Item Page
PART I
1. Business 2
2. Properties 12
3. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders 14
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 15
6. Selected Consolidated Financial Data 15
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16
7A. Quantitative and Qualitative Disclosure about Market Risk 25
8. Financial Statements and Supplementary Data 25
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 25
PART III
10. Directors and Executive Officers of the Registrant 26
11. Executive Compensation 27
12. Security Ownership of Certain Beneficial Owners and Management 28
13. Certain Relationships and Related Transactions 28
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 30
PART I
ITEM 1. BUSINESS
General
Americo Life, Inc. ("Americo" or the "Company") is a financial services
holding company whose subsidiaries are engaged in providing life insurance and
annuity products through its life insurance and asset accumulation operating
segments. At December 31, 2000, the Company had approximately $3.5 billion of
invested assets under management and $43.5 billion of gross life insurance in
force. Americo is wholly-owned by Financial Holding Corporation ("FHC"), a
privately-owned corporation.
The Company's wholly-owned insurance subsidiaries are: Americo Financial
Life and Annuity Insurance Company ("AFL") (formerly The College Life Insurance
Company of America), Great Southern Life Insurance Company ("Great Southern"),
United Fidelity Life Insurance Company ("United Fidelity"), National Farmers
Union Life Insurance Company ("National Farmers Union"), The Ohio State Life
Insurance Company ("Ohio State") and Financial Assurance Life Insurance Company
("Financial Assurance").
In addition, the Company owns 100% of Americo Financial Services, Inc.
and Pension Consultants and Administrators, Inc., which comprise the marketing
operations of the Company's Americo Financial Services ("AFS") operation.
Historically, the Company's focus was to grow principally through
acquisitions. This strategy has proven successful, providing the Company with
critical mass and a large, stable block of in force business. While acquisitions
have not been abandoned as a growth strategy, the Company has more recently
focused on growth through new sales. The Company's current business strategy is
to develop innovative and competitive products and expand distribution sources
in its existing markets. Additionally, the Company intends to look for
opportunities to expand into new markets. Presently, the Company's new sales
activities are divided into three divisions, Americo Individual Sales, Americo
Financial Services and Americo Preneed. These are more fully described in the
"Life Insurance and Annuity Business" section.
In addition to the operations described above, the Company occasionally
makes financial investments in other businesses. The Company has an investment,
in the form of a 50% interest, in Argus Health Systems, Inc. ("Argus"), which is
engaged in prescription drug claim processing. The Company also owns several
real estate investments.
Acquisitions and Reinsurance Transactions
As described above, acquisitions and reinsurance transactions have added
significantly to the Company's growth. Since 1988, the Company has acquired
seven companies or blocks of insurance policies and continues to investigate
acquisition opportunities in the insurance industry. The principal additions
were College Life in 1988, Great Southern in 1989, Loyalty Life Insurance
Company ("Loyalty Life") and National Farmers Union in 1991, The Victory Life
Insurance Company ("Victory Life") in 1995, Ohio State and Investors Guaranty
Life Insurance Company ("Investors Guaranty") in 1997, and two significant
reinsurance transactions in 1996 and 1995. Victory Life was merged into United
Fidelity during 1998.
In certain transactions more fully described below, the Company has used an
unaffiliated reinsurer ("the Reinsurer") to reinsure substantial blocks of
insurance business that it has acquired. Such transactions result in the policy
liabilities and related assets being transferred to the Reinsurer in exchange
for a ceding commission and subsequently being reinsured to the Company on a
modified coinsurance basis. In these transactions, the assets supporting the
insurance liabilities are held in escrow for the benefit of the Company.
In 1995 and 1996, the Company entered into separate agreements with The
Ohio Casualty Insurance Company ("Ohio Casualty"), Fremont General Corporation
and the Reinsurer under which the direct liabilities of The Ohio Life Insurance
Company ("Ohio Life") and Fremont Life Insurance Company ("Fremont Life"),
respectively, were reinsured with the Reinsurer on a coinsurance basis. Pursuant
to these agreements, the Company services the life insurance and annuity
policies of Ohio Life and Fremont Life. At December 31, 2000, these agreements
covered 58,261 policies with associated liabilities totaling $404.7 million.
On April 15, 1997, the Company acquired all of the outstanding stock of
Ohio State and Investors Guaranty from Farmers Group, Inc. for a purchase price
of $345.4 million. Immediately thereafter, Ohio State and Investors Guaranty
entered into coinsurance agreements to reinsure all of their insurance
liabilities to the Reinsurer while retaining the administration of these
policies. At December 31, 2000, the policy liabilities associated with the
186,405 administered policies totaled $589.4 million.
The Company and the Reinsurer entered into agreements which reinsure
certain risks on the Ohio Life, Fremont Life, Ohio State and Investors Guaranty
insurance policies back to the Company. The risks associated with the Ohio Life
and Fremont Life policies are reinsured on a 100% quota share basis. The risks
associated with the Ohio State and Investors Guaranty policies are reinsured on
a 70% quota share basis. These agreements provide that the assets related to the
reinsured policies are to be retained by the Reinsurer. The Company began
directly assuming certain of the policies of Fremont Life, Ohio Life and
Investors Guaranty in 1996, 1997 and 1999, respectively.
In October 1998, the Company acquired the 50% interest in College Insurance
Group, Inc. ("CIG") not previously owned by the Company. Through the formation
of CIG in 1993, the Company entered into a joint venture with an unrelated
individual to promote the sale of life insurance and annuity products in
tax-qualified markets. By acquiring the other 50% of the joint venture and the
related marketing entities previously wholly-owned by the individual, the
Company believes it can expand its presence in the asset accumulation market,
particularly the tax-qualified market.
In May 1998, Great Southern sold the stock of Investors Guaranty for $14.8
million, resulting in a $4.9 million gain before income taxes. The reinsurance
agreements with the Reinsurer are unaffected by the sale. As of the date of
sale, Investors Guaranty had assets totaling $10.3 million and liabilities
totaling $0.4 million.
In May 2000, the Company entered into an agreement to permanently reinsure
a block of payroll-deduction life insurance business to an unaffiliated company
on an indemnity coinsurance basis using an effective date of January 1, 2000.
However, the policy liabilities remain direct liabilities of the Company in the
accompanying consolidated financial statements. As of the effective date,
liabilities associated with these policies totaled $138.5 million.
Life Insurance and Annuity Business
The Company's insurance business is divided into two segments: life
insurance operations and asset accumulation operations. The life insurance
operations consist primarily of insurance and annuity business acquired by the
Company and is supplemented by life insurance business sold through its Americo
Individual Sales ("AIS") division and Americo Preneed ("APN") sales division.
The life insurance operations generated $364.1 million of revenues, or 81% of
total Company revenues, in 2000. The Company's asset accumulation operations
consist of annuity products sold through the Company's AFS division. The asset
accumulation operations generated $57.8 million, or 13% of total Company
revenues, in 2000 and have grown at a compound annual growth rate of 35.9% over
the last four years. Policy liabilities and the number of policies in force as
of December 31, 2000 for the Company's segments are summarized below.
Asset Accumulation
Life Insurance Operations
Operations Total
(Dollars in thousands)
Policyholder account balances:
Universal life $ 1,433,707 $ 42,290 $ 1,475,997
Annuities 424,632 723,118 1,147,750
------------- ------------- -------------
$ 1,858,339 $ 765,408 $ 2,623,747
============= ============= =============
Reserves for future policy benefits $ 819,943 $ - $ 819,943
============= ============= =============
Policies in force 833,691 90,760 924,451
============= ============= =============
Information concerning reported revenues and income before provision for
income taxes for the Company's operating segments is set forth in Item 7 under
"Results of Operations-Segment Results" and in Note 12 of the Company's Notes to
Consolidated Financial Statements.
The following table shows the Company's collected premiums during 2000,
1999 and 1998 by product category. The table below excludes from direct and
assumed premiums any premiums of blocks of insurance business which have been
permanently reinsured.
Premiums Collected
for periods indicated
-----------------------------------------------------------------------------------
Life Insurance Operations Asset Accumulation Operations
------------------------------------- --------------------------------------
First Year Renewal Total First Year Renewal Total
------------- ------------- ------------- ------------- ------------- -------------
(in thousands of dollars)
Year ended
December 31, 2000
Traditional 20,430 76,852 97,282 1,922 27 1,949
Interest-sensitive 17,376 137,055 154,431 2,993 14,984 17,977
----------- ----------- ----------- ----------- ----------- -----------
Total life 37,806 213,907 251,713 4,915 15,011 19,926
Annuities 26,470 3,809 30,279 172,995 44,592 217,587
----------- ----------- ----------- ----------- ----------- -----------
Direct and assumed premiums 64,276 217,716 281,992 177,910 59,603 237,513
----------- ----------- ----------- -----------
Less ceded premiums (36,848) (53)
----------- -----------
Total 245,144 237,460
=========== ===========
Year ended
December 31, 1999
Traditional 14,370 81,444 95,814 1,672 - 1,672
Interest-sensitive 26,603 176,313 202,916 5,034 12,751 17,785
----------- ----------- ----------- ----------- ----------- -----------
Total life 40,973 257,757 298,730 6,706 12,751 19,457
Annuities 27,471 6,028 33,499 156,814 43,901 200,715
----------- ----------- ----------- ----------- ----------- -----------
Direct and assumed premiums 68,444 263,785 332,229 163,520 56,652 220,172
----------- ----------- ----------- -----------
Less ceded premiums (36,261) (52)
----------- -----------
Total 295,968 220,120
=========== ===========
Year ended
December 31, 1998
Traditional 13,411 84,929 98,340 915 - 915
Interest-sensitive 36,455 185,374 221,829 6,152 6,840 15,992
----------- ----------- ----------- ----------- ----------- -----------
Total life 49,866 270,303 320,169 7,067 9,840 16,907
Annuities 18,979 6,377 25,356 40,491 45,975 86,466
----------- ----------- ----------- ----------- ----------- -----------
Direct and assumed premiums 68,845 276,680 345,525 47,558 55,815 103,373
----------- ----------- ----------- -----------
Less ceded premiums (47,059) (52,752)
----------- -----------
Total 298,466 50,621
=========== ===========
General Sales and Marketing
The Company began an initiative in 2000 to conduct its sales and marketing
efforts through a single life insurance subsidiary, Americo Financial Life and
Annuity Insurance Company. Historically, several of the Company's life insurance
subsidiaries issued their own products. The objectives of this initiative
include (i) establishing a brand name in the marketplace to create name
recognition with policyholders and agents, (ii) eliminating duplicative costs
for items such as regulatory product filings, marketing materials and other
agent materials, and (iii) focusing the Company's financial resources and
personnel on one of its life insurance companies. The transition of the
Company's sales and marketing to AFL is being completed during the first half of
2001.
Americo Individual Sales
The Company's principal distribution channels for AIS products are through
independent agents. Although the Company does not employ these agents, each is a
party to a general agency agreement which governs the terms of the agent's
relationship with the Company. The Company manages these agents either through
National Vice Presidents (NVP) or through Independent Marketing Organizations
(IMO's).
The Company's AIS division offers a variety of life insurance and annuity
products primarily focused on life insurance sold to individuals. The Company
offers a portfolio of interest-sensitive whole life, universal life and term
products. The Company also offers equity-indexed annuities and single premium
and flexible premium annuities. Sales through the AIS division totaled $45.1
million during 2000. The Company measures sales as the sum of annualized first
year premiums and excess annuity premiums.
Americo Financial Services
Recognizing the potential for growth from increasing its presence in the
growing asset accumulation products market, the Company formed the AFS division
in 1998. The AFS division focuses on the sale of asset accumulation products,
principally tax-qualified life and annuity products sold under Sections 403(b),
401(a) and 457 of the Internal Revenue Code. These products are marketed to
public school teachers and administrators through a specialized field force of
independent producers who have captive sales agents. Sales from these agents
totaled $123 million (74% of total AFS) in 2000. The AFS operation also offers
annuity products to individuals in the senior market through independent sales
organizations. The senior market, generally considered to include individuals
over age 55, is expected to experience double digit annual growth resulting from
a number of factors, including consumer concerns over the adequacy of Social
Security and pension plans and the aging of the consumer population. Sales in
this market totaled $44 million (26% of AFS total) in 2000.
The Company offers a variety of life and annuity products through the AFS
division. The Company's life insurance products consists of interest-sensitive
whole life and universal life products. The Company's annuity products include
equity-indexed, single premium and flexible premium annuities. Sales from
equity-indexed products, introduced in 1999, accounted for $121 million and $120
million of sales through the AFS division in 2000 and 1999, respectively. The
equity-indexed products include an interest credit component which is based on
changes in the Standard & Poor's 500 Index.
Americo Preneed Sales
In 1999, the Company formed the Americo Preneed Division to offer life
insurance products focused on providing benefits for funeral expenses of the
insured. The Company has developed a relationship with seven large marketing
organizations to market preneed and final expense life insurance products.
Currently, the Company has contacts with over 400 funeral homes and is approved
for selling in 39 states. The target market for the preneed business is the
50-to-75 year old age group as a funding vehicle of pre-arrangement. Based on
the population and age of this market, the Company expects the demand for
preneed products to expand in the future.
Sales through the APN division began in October of 1999 and have grown from
$2.2 million during 1999 to $17.5 million in 2000.
Operations
An integral part of the Company's philosophy is to improve profitability by
operating at the lowest achievable cost level consistent with providing good
service. Over the years, the Company has made decisions to (i) invest in
technology, (ii) centralize certain functions and (iii) outsource data
processing.
The Company has made significant investments in technology to lower its
operating costs. Its use of digital imaging technology has substantially
eliminated the typical paper-intensive life insurance processing procedures,
resulting in lower operating costs, improved customer service and an improved
working environment. As part of the imaging technology, the Company uses a third
party system called Automated Work Distributor to control workflow and perform
other functions designed to increase efficiency. As the investment in this
technology is relatively fixed, the Company has been able to leverage this
investment by increasing the number of policies administered.
In order to more effectively manage its various insurance operations, the
Company has consolidated certain common functions into its Kansas City, Missouri
offices. These centralized functions include product development, marketing,
finance, investment management, data processing, personnel and regulatory
compliance. The Company believes that this approach allows it to more
effectively manage the business and, by eliminating duplicate functions, reduce
operating costs and improve returns on acquired business. In order to provide
capital for anticipated expenses associated with expanding sales in the AFS and
Preneed markets, the Company has reviewed the levels of general expenses in all
of its operating and corporate departments. The Company identified sources of
expense savings in 1999 through increased cost controls which benefited the
Company beginning in 2000.
In addition, the Company expects its 2000 initiative to consolidate its
sales and marketing efforts to result in reduced costs during 2001. This
reduction should result from eliminating duplicate costs for items such as
regulatory product filings, marketing materials and other agent materials.
The Company has outsourced its data processing requirements, with the
exception of local area networks, through contracts entered into by FHC. The
principal such contract is with Computer Sciences Corporation ("CSC"), which
provides all of the Company's data processing needs. By outsourcing these
functions, the Company believes it has reduced operating costs by eliminating
the fixed costs associated with a data processing function and improved its
ability to increase its policyholder base without significant investment. In
addition, the use of a vendor such as CSC provides the Company access to current
technology and access to staff with expertise and experience that the Company
might not be able to employ on its own.
Recognizing the possible benefits of the internet, the Company is pursuing
opportunities to integrate the internet into its insurance operations. The
Company has developed a web site devoted to providing agents access to data such
as pending policy information and illustration software updates for the
Company's products. In addition, the Company is developing internet-based
software for use in the 403(b) market which can be used by school districts to
enroll their employees in tax-qualified plans.
Investments
A significant factor contributing to the Company's earnings is its ability
to earn investment income sufficient to provide for its insurance liabilities
and generate a profit. A portfolio composed principally of fixed-rate
investments that generate predictable yields backs the Company's insurance
liabilities. The yields on the Company's investments vary over time depending on
the current interest rate environment, the spread at which fixed-rate
investments are priced over the yield curve and other factors. FHC manages the
Company's invested assets as described under the heading "Agreements with FHC"
in Item 13 appearing elsewhere in this Form 10-K. The Company's investment
philosophy is conservative with an emphasis on balancing credit and interest
rate risk and is influenced by regulatory requirements and asset-liability
management principles.
The Company's insurance subsidiaries are governed by insurance statutes and
regulations which restrict the type of investments they are permitted to make
and the amount of funds that may be used for any one type of investment. In
compliance with these regulations and consistent with the Company's investment
philosophy, the Company invests principally in investment grade securities (as
rated by nationally recognized rating organizations). At December 31, 2000,
96.5% of the Company's fixed-rate investments were investment grade. There were
no securities which were in default as to principal or interest.
A goal of the Company's investment strategy is to provide liquidity for its
insurance liabilities. Through computer-based models, the Company conducts
studies of the cash flow characteristics of its liabilities using numerous
interest rate scenarios. The Company uses this information to assist it in
managing the duration of its asset portfolio so that it corresponds to the
duration of its liabilities.
The Company's general investment philosophy is to hold fixed-rate
securities for long-term investment. Its fixed-maturity portfolio is divided
into those securities being held to maturity, those available for sale and those
held for trading purposes. The primary factor which influences the Company's
decision to characterize its investments as held to maturity is the cash flow
requirements of the Company's liabilities. Securities have been categorized as
available for sale except for those securities that the Company has the intent
and ability to hold until maturity or has classified as trading. Securities
designated as available for sale include those that may be sold in response to
changes in interest rates, changes in prepayment risk, liquidity needs,
management of taxable income, changes in credit quality and similar economic
factors. The Company's trading portfolio is used to take advantage of short-term
market value changes. Any gains or losses are reported in current earnings.
There were no investments in the trading portfolio as of December 31, 2000.
The carrying amounts of the Company's investments at December 31, 2000 were
as follows:
Total
Held to Available for Carrying
Investment Category Maturity (1) Sale (2) Amount Percentage
------------------- ------------ -------- ------ ----------
(in thousands)
Fixed maturities:
U.S. Treasury and government securities $ 2,333 $ 24,646 $ 26,979 1.1
Mortgage-backed securities:
Collateralized mortgage obligations 174,240 42,618 216,858 8.5
Pass-through certificates:
GNMA 19,005 58,702 77,707 3.1
FHLMC 1,054 222 1,276 0.1
FNMA 509 26,567 27,076 1.1
Other agency 4,835 7,932 12,767 0.4
Other asset-backed securities 18,633 152,176 170,809 6.7
Corporate bonds 522,009 720,075 1,242,084 49.1
----------- ----------- ----------- ----------
Total fixed maturities $ 742,618 $ 1,032,938 $ 1,775,556 70.1
=========== =========== ----------- ----------
Equity securities 104,771 4.1
Investment in equity subsidiaries 14,259 0.6
Mortgage loans on real estate 268,902 10.6
Investment real estate 30,398 1.2
Policy loans 194,651 7.7
Cash and cash equivalents 110,260 4.4
Other invested assets 32,345 1.3
----------- ----------
Total cash and invested assets $2,531,142 100.0
========== ==========
- ------------------------------------------------------
(1) Carrying amount is amortized cost. The market value of held to maturity
securities at December 31, 2000 was $737.5 million.
(2) Carrying amount is market value. The amortized cost of available for sale
securities at December 31, 2000 was $1,050.4 million.
See Note 4 of the Notes to Consolidated Financial Statements, and the
discussion under the heading "Investment Portfolio" in Item 7 appearing
elsewhere in this Form 10-K for information about the composition and
performance of the Company's investment portfolio and the risks inherent in such
investments.
In addition to the investments owned by the Company which are described
above, certain investments supporting the Company's insurance liabilities are
held by the Reinsurer. These investments are managed by FHC. The carrying
amounts, at amortized cost, of these investments at December 31, 2000 were as
follows:
Total Carrying
Amount Percentage
(in thousands)
Fixed maturities:
U.S. Treasury and government securities $ 47,910 5.7
Mortgage-backed securities 157,333 18.7
Other asset-backed securities 113,223 13.4
Corporate bonds 493,002 58.6
------------ -------
Total fixed maturities 811,468 96.4
------------ -------
Cash 30,345 3.6
------------ -------
Total cash and invested assets $ 841,813 100.0
============ =======
Non-Insurance Operations
The Company also makes selective investments in businesses outside of the
life insurance industry. The primary investments of this nature owned at
December 31, 2000 were the investments in Argus, which is accounted for using
the equity method, and in real estate investments. The Company's investments in
Argus and the real estate investments collectively comprise the Company's
non-insurance operations segment.
Argus: The Company and an unrelated third party each own a 50% equity
interest in Argus. Argus is principally engaged in the business of
electronically processing prescription drug claims, including providing services
in connection with the point-of-sale adjudication, processing and payment of
these claims. Argus' principal customers include health maintenance
organizations, preferred provider organizations, health insurance companies and
managed health companies. For 2000, Argus generated revenues of $35.8 million
and processed over 158 million claims compared with 150 million claims processed
in 1999, an increase of 5%. At December 31, 2000, Argus had approximately 281
full-time employees and maintains its corporate headquarters in Kansas City,
Missouri. Currently, there are less than 15 prescription drug claim processors
in the managed care business. Argus faces increasing competition from other drug
claim processors and customers choosing to perform their own drug claim
processing.
Real Estate Investments: The Company manages eleven investment properties
with a carrying value of $27.3 million including office space and apartments
principally located in Texas and Missouri. In 2000 and 1998, the Company
disposed of several of the properties for gains of $0.4 million and $3.1
million, respectively. There were no such sales during 1999. The proceeds from
these sales have been reinvested in similar properties.
Reinsurance
In keeping with industry practices, the Company reinsures portions of its
life insurance exposure with unaffiliated reinsurance companies under
traditional indemnity reinsurance agreements. Generally, the Company enters into
indemnity reinsurance arrangements to diversify its risk and to limit its
maximum loss on risks that exceed the Company's policy retention limits,
currently ranging from $50,000 to $350,000 per life. Additionally, the Company
has certain products on which it reinsures a significant quota share to
unaffiliated reinsurers in order to improve the profitability of these products.
Indemnity reinsurance does not fully discharge the Company's obligation to pay
policy claims on the reinsured business. The Company remains responsible for
policy claims to the extent the reinsurer fails to pay such claims. At December
31, 2000, the Company had ceded to reinsurers approximately $9.9 billion (23%)
of life insurance in force, of which 99% was reinsured with insurance companies
rated "A (Excellent)" or better by A.M. Best. Approximately $5.5 billion of the
insurance in force was ceded to two reinsurers, which were both rated "A+" by
A.M. Best. The Company evaluates the financial strength of its reinsurers upon
inception of a reinsurance treaty and on an annual basis thereafter.
The Company has entered into several coinsurance and modified coinsurance
agreements with the Reinsurer with related insurance liabilities totaling $1.0
billion at December 31, 2000. The assets supporting these liabilities are held
in escrow by the Reinsurer for the benefit of the Company. The Reinsurer is
rated "AAA" by Standard and Poor's and "A++" by A.M. Best. See "Business:
Acquisitions and Reinsurance Transactions" described above.
Certain of the insurance subsidiaries of the Company have ceded blocks of
insurance under financial reinsurance treaties which have the effect of
increasing the statutory surplus of the Company. As a result of such reinsurance
transactions, the Company has increased its statutory surplus after the effect
of income taxes by approximately $12.1 million; however, the effect of these
reinsurance treaties is not included in stockholder's equity of the Company
presented in accordance with generally accepted accounting principles ("GAAP").
Financial reinsurance increases the ceding insurer's statutory surplus with the
expectation that such increased surplus will be returned to the reinsurer out of
future earnings, if any, and guarantees the reinsured against any future
statutory losses, if any, on the policies reinsured. The ability of an insurance
subsidiary to pay dividends to Americo may be adversely affected by the
reduction in statutory earnings caused by reductions in the outstanding levels
of financial reinsurance. The risk fees paid to the reinsurers under these
financial reinsurance treaties totaled $0.4 million and $0.6 million for the
years ended December 31, 2000 and 1999, respectively. See Note 6 of the Notes to
the Consolidated Financial Statements of the Company included in Item 8
appearing elsewhere in this Form 10-K.
Competition and Ratings
The financial services industry in which the Company operates is highly
competitive. The Company competes with a large number of other insurers as well
as non-insurance financial services companies, such as banks, investment
advisors, mutual fund companies and other financial institutions, some of which
have greater financial resources, offer alternative products and, with respect
to other insurers, have higher ratings than the Company. National banks, with
their preexisting customer bases for financial services products, may pose
increasing competition in the future to insurers who sell annuities, including
the Company, as a result of the U.S. Supreme Court's 1994 decision in
NationsBank of North Carolina v. Variable Annuity Life Insurance Company. That
decision permits national banks to sell annuity products of life insurance
companies in certain circumstances.
The Gramm-Leach-Bliley Act of 1999 implemented fundamental changes in the
regulation of the financial services industry in the U.S. The Act permits
mergers that combine commercial banks, insurers and securities firms under one
holding company. Under the Act, national banks retain their existing ability to
sell insurance products in some circumstances. In addition, bank holding
companies that qualify and elect to be treated as "financial holding companies"
may engage in activities, and acquire companies engaged in activities, that are
"financial" in nature or "incidental" or "complementary" to such financial
activities, including acting as principal, agent or broker in selling life,
property and casualty and other forms of insurance and annuities. Under the Act,
no state may prevent or interfere with affiliations between banks and insurers,
insurance agents or brokers, or the licensing of a bank or affiliate as an
insurer or agent or broker. Until passage of the Gramm-Leach-Bliley Act, the
Bank Holding Company Act of 1956, as amended, had restricted banks from being
affiliated with insurers. With the passage of the Gramm-Leach-Bliley Act, among
other things, bank holding companies may acquire insurers, and insurance holding
companies may acquire banks. The ability of banks to affiliate with insurers may
materially adversely affect all of the Company's product lines by substantially
increasing the number, size and financial strength of potential competitors.
The Company believes that the principal competitive factors in the sale of
life insurance and asset accumulation products are product features, product
flexibility, product pricing and crediting rates, commission structure, high
credit standing and perceived stability of insurer, and service provided to the
policyholder and the agent. The Company believes that its ability to compete
with other insurance companies is dependent upon its ability to attract and
retain agents to market its insurance products and its ability to develop
competitive products that are also profitable. The Company also competes with
other entities in acquiring life insurance companies and blocks of insurance
business. The acquisition of insurance companies or blocks of business is
extremely competitive. Many of the companies with which the Company competes
have a stronger capital position, lower cost of capital and better access to the
capital markets.
A primary factor in a company's ability to compete in the sales of life
insurance business and the acquisition of life insurance companies is the
ratings it receives from various rating agencies. Two of the Company's primary
marketing subsidiaries, Great Southern and Americo Financial, are rated "A
(Excellent)" by A.M. Best and have a Claims Paying Ability rating of "A (Good)"
from Standard and Poor's Corporation ("S&P"). Ohio State is rated "A-
(Excellent)" by A.M. Best and has a Claims Paying Ability rating of "BBBpi
(Good)" from S&P. National Farmers Union is rated "B+ (Very Good)" by A.M. Best.
While ratings do not constitute recommendations to buy or sell a company's
insurance products, and are subject to change or withdrawal at any time, they
are considered an important measurement in some markets.
Regulation
All of the Company's life insurance company subsidiaries are domiciled in
Texas. One or more of the life insurance subsidiaries is licensed to sell
insurance in the District of Columbia and all states, except New York.
General Regulation. The Company is subject to comprehensive regulation in
the various states in which it is authorized to conduct business. The laws of
these states establish supervisory agencies with broad regulatory authority to,
among other matters, grant and revoke licenses for transacting business,
regulate trade practices, establish reserve requirements, regulate the form and
content of policies, and prescribe the type and amount of investments permitted.
These supervisory agencies periodically examine the business and accounts of the
Company's insurance subsidiaries and require them to file detailed annual
statements prepared in accordance with statutory accounting practices.
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, state authority to regulate
insurance companies and their holding company systems. In addition, although the
federal government generally does not directly regulate the insurance business,
federal initiatives often have an impact on the business in a variety of ways.
Current and proposed federal measures that may significantly affect the
insurance business include limitations on antitrust immunity and minimum
solvency requirements. For a discussion of the Gramm-Leach-Bliley Act of 1999,
permitting affiliations between banks and insurers, see "Business-Competition
and Ratings". The NAIC has also taken initiatives to reduce insurance company
insolvencies and market conduct violations. Most recently, the NAIC has adopted
the Codification of Statutory Accounting Principles for life insurers, which
became effective on January 1, 2001. A detailed analysis has determined that the
adoption of Codification will not have a material adverse impact on the
statutory financial position of the Company. Also, the NAIC has adopted a
revision to the Valuation of Life Insurance Policies Model Regulation (known as
XXX Regulation). This model regulation would establish new minimum statutory
reserve requirements for certain individual life insurance policies written in
the future. Before the new reserve standards can become effective, individual
states must adopt the regulation. The State of Texas adopted XXX Regulation
effective January 1, 2000. The Company modified certain of its products during
1999 in response to XXX Regulation. It is not possible to predict the future
impact of changing state and federal regulation on the operations of the Company
and its insurance subsidiaries.
Under applicable state insurance laws, all of the Company's insurance
subsidiaries are required to maintain minimum levels of capital stock and
statutory surplus. The capital and surplus of each of the Company's insurance
subsidiaries exceeds the minimum requirements. In addition, each of the
Company's insurance subsidiaries is subject to the supervision of the regulators
of each state in which it is licensed. Such regulators have the discretionary
authority, in connection with the continual licensing of any such subsidiary, to
limit or prohibit new issuances of business to policyholders within their
jurisdiction when, in their judgement, such regulators determine that such
subsidiary is not maintaining adequate statutory surplus or capital. The Company
does not believe the current or anticipated levels of statutory surplus of its
insurance subsidiaries present a material risk that any such regulator would
limit the amount of new insurance business that an insurance subsidiary intends
to issue.
Holding Company Regulations. Substantially all states also regulate members
of insurance holding company systems. FHC is registered as a holding company
system pursuant to such legislation in Texas. The insurance holding company
statutes regulate certain transactions among affiliates, including the payment
of dividends by an insurance company to its parent. Generally, without the
consent of the domiciliary state's insurance commissioner, an insurance company
may not pay dividends to its parent in excess of the greater of (i) the
insurer's prior year statutory net gain from operations, or (ii) 10% of its
prior year ending statutory capital and surplus. Dividends may be paid only from
statutory earned surplus as determined by the Texas Department of Insurance.
Generally, state laws require an insurance company to file a dividend
notification prior to payment of ordinary dividends.
Under Texas regulations, interest and principal on surplus debentures may
be paid only with prior approval of the Texas Department of Insurance. Surplus
debentures issued by United Fidelity contain payment schedules which have been
approved by the Texas Department of Insurance. Therefore, United Fidelity does
not require approval from the Texas Department of Insurance for each payment of
principal and interest unless such payments differ from the approved schedule.
Risk-Based Capital Requirements. The NAIC's risk-based capital ("RBC")
rules are used to evaluate the adequacy of statutory capital and surplus in
relation to a company's investment and insurance risks. The RBC formula is used
by the states as an early warning tool to identify under-capitalized companies
for the purpose of initiating regulatory action. Generally, action will be
triggered when the ratio of a company's total adjusted capital (defined as the
total of its statutory capital, surplus and asset valuation reserve ("AVR")) to
its Authorized Control Level RBC (the "RBC Ratio") falls below 200%. Based upon
the Company's calculations, all of its insurance subsidiaries had RBC ratios
exceeding 200% at December 31, 2000.
There can be no assurance that insurance-related laws and regulations will
not become more restrictive in the future and thereby have a material adverse
effect on the operations of the Company or on the ability of the Company's
subsidiaries to make payments on the surplus debentures or to pay dividends and
thus on the Company's ability to service its debt.
Employees
At March 1, 2001, Americo and its wholly-owned subsidiaries employed
approximately 630 persons.
ITEM 2. PROPERTIES
The principal executive offices of the Company are located at 1055
Broadway, Kansas City, Missouri 64105 and the Company's telephone number is
(816) 391-2000.
The principal operations of the insurance subsidiaries are conducted from
Kansas City, Missouri and Dallas, and Austin, Texas. The Company's locations
include leased office space located at 1055 Broadway, Kansas City, Missouri
64105 and 333 West 11th Street, Kansas City, Missouri 64105. These properties
are leased from Broadway Square Partners, a Missouri limited partnership, of
which a corporation controlled by a related party is a partner as described in
the "Certain Relationships and Related Transactions" section included elsewhere
in this Form 10-K. The leases expire on August 31, 2010 and August 31, 2013,
respectively.
The Company occupies leased office space located at 500 N. Akard, Dallas,
Texas 75221. The lease expires in June 2007.
The Company also occupies leased office space located at 3755 Capitol of
Texas Highway South, Austin, Texas 78704. The two leases related to this office
space expire in May 2001 and 2003.
ITEM 3. LEGAL PROCEEDINGS
Great Southern is a defendant in four purported class action lawsuits that
were consolidated in May 1998 for multidistrict litigation pretrial proceedings
in the U.S. District Court for the Northern District of Texas (In re Great
Southern Life Insurance Company Sales Practice Litigation). These lawsuits
allege deceptive sales practices in the marketing of Great Southern's whole life
and universal life insurance policies and seek unspecified compensatory,
punitive and/or treble damages. On March 14, 2000, the court filed an order
certifying a class of all current and former owners of excess interest whole
life and/or universal life policies issued from 1982 through 1997. Additionally,
on August 13, 1998, a fifth purported class action lawsuit also alleging
deceptive sales practices was filed against Great Southern in state court in
Dallas, Texas (Ebling v. Great Southern Life Insurance Co., 68th District Court,
Dallas County, Texas.) In December 2000, the Ebling action was dismissed without
prejudice for want of prosecution. The dismissal order became final in January
2001.
On July 16, 1998, Great Southern, Fremont Life Insurance Company and
Fremont General Corporation (collectively Fremont) were named as defendants in a
purported class action lawsuit arising out of the sale of, and imposition of
surrender charges under, deferred annuity contracts (Gularte v. Fremont Life
Ins. Co., et al., Los Angeles Superior Court, Los Angeles, California). On April
2, 1999, the court entered judgment dismissing with prejudice the action against
Great Southern and all other defendants. On May 31, 2000, the California Court
of Appeals affirmed the dismissal of plaintiff's fraud and reformation claims,
but reversed the dismissal of claims alleging unconscionability, breach of
covenant of good faith and fair dealing, and statutory unfair business
practices. The California Supreme Court denied defendants' petition for review,
and the case has been remanded to the trial court for further proceedings.
Great Southern and the Company, together with one of Great Southern's
general agents, Great American Life Underwriters ("GALU"), Entrepreneur
Corporation, Mercantile Life Insurance Company, American Planning Corporation
and various individuals, including certain officers of Great Southern and the
Company, are named defendants in an action that was certified as a class action
on April 28, 1998 (Thibodeau et al. v. Great American Life Underwriters, et al.,
District Court, Dallas County, Texas). The class members, who were life
insurance agents for GALU, allege that they were defrauded by defendants into
surrendering renewal commissions in return for the promise of stock ownership in
an unrelated company (Entrepreneur Corporation) to be made public at some point
in the future. On July 26, 2000, the Court approved a class action settlement
pursuant to which Great Southern paid $1.1 million to settle the claims asserted
by the plaintiff class. The costs of implementing the settlement, after
consideration of amounts provided in the consolidated financial statements, did
not have a material adverse effect on the financial condition of the Company.
Some members of the class appealed the trial court's approval of the settlement,
which appeal is pending. Shortly before the settlement was approved by the
Court, a co-defendant named in the lawsuit, Norman T. Faircloth, filed a
cross-claim against several of the other defendants, including the Company,
Great Southern, Great American Life Underwriters, Inc., Entrepreneur Corp., and
certain officers of Great Southern and the Company. The cross-claim asserts
claims similar to those asserted by the plaintiffs in the underlying lawsuit,
and seeks similar relief including actual damages, treble and punitive damages,
emotional distress damages and an accounting. The cross-claim is brought by a
single individual and does not seek relief on behalf of a class or any other
persons. The Court has severed this cross-claim.
On July 2, 1999, a purported class action lawsuit (Notzon v. The College
Life Insurance Company of America, et al., 111th District Court, Webb County,
Texas) was filed against the Company, The College Life Insurance Company of
America and several of its officers, directors and other affiliated parties,
several other subsidiaries of the Company and several other defendants.
Plaintiff's claims against the various defendants include allegations of various
misrepresentations, deceptive trade practices and statutory violations in
connection with the marketing and administration of deferred annuity and life
insurance products sold to school teachers and others. The suit seeks actual,
rescissory, treble and punitive damages, as well as injunctive and declaratory
relief. The suit initially was removed to federal court but was remanded to
state court.
On October 21, 1999, a purported class action lawsuit was filed against
Great Southern in Orange County Superior Court, California (Alexander v. Fremont
General Corporation, Fremont Life Insurance Co., and Great Southern Life
Insurance Co.). Plaintiff alleges misrepresentations and other wrongful conduct
in connection with the imposition of increased cost of insurance charges under
certain universal life policies assumed or issued by Fremont Life Insurance
Company, and which were subsequently assumed by Great Southern. The suit seeks
actual and punitive damages, as well as injunctive and restitutionary relief and
an accounting.
On August 16, 1999, a purported class action lawsuit (Pritzker v. The
College Life Insurance Company of America, and Loyalty Life Insurance Company,
U.S. District Court for the District of Massachusetts) was filed against the
Company's subsidiary, The College Life Insurance Company of America, and former
subsidiary, Loyalty Life Insurance Company. Plaintiff alleges
misrepresentations, breach of contract, and other wrongful conduct in connection
with the imposition of increased cost of insurance charges under certain
universal life policies assumed by defendants. Plaintiff also alleges defendants
paid less than the minimum guaranteed interest due under such policies.
Plaintiff also has sought leave to add a claim that defendants misrepresented
the amount of interest paid in excess of the guaranteed amounts. The suit seeks
actual and punitive damages, restitutionary and injunctive relief and an
accounting.
On November 22, 1999, a purported class action lawsuit (Knauer v. Ohio
State Life Insurance Company) was filed in the Court of Common Pleas, Erie
County, Ohio, and subsequently was removed by defendant to the U.S. District
Court for the Northern District of Ohio, Western Division. The suit alleged
misrepresentations and other wrongful conduct wherein defendant allegedly
collected premiums for life insurance policies prior to being bound to provide
coverage and allegedly misrepresented that premiums would "vanish" after a
certain time period. The suit sought actual and punitive damages, and
declaratory, restitutionary and injunctive relief. The suit was settled in
January 2001 by a payment of a nominal amount to the individual named
plaintiffs. Plaintiffs' class allegations were withdrawn and their individual
claims were dismissed with prejudice.
A purported class action lawsuit (Elizabeth Lukens v. Ohio State Life
Insurance Company) was filed in the U.S. District Court for the Eastern District
of California in November, 2000. The suit alleges that on or before June 25,
1990, defendant breached the terms of its universal life policies by increasing
its insurance rates without justification. The suit alleges that the increased
rates were improperly motivated by defendant's desire to pass on to
policyholders its increased tax liabilities under federal legislation passed in
1990 governing the tax accounting for deferred policy acquisition costs. The
suit asserts claims for breach of contract, breach of duty of good faith and
fair dealing, and acts of unfair competition under the California Business and
Professions Code. The suit seeks compensatory and exemplary damages in
unspecified amounts, in addition to injunctive and restitutionary relief.
The Company and its subsidiaries named in the above pending actions deny
any allegations of wrongdoing and intend to defend the actions vigorously.
Although plaintiffs in these actions generally are seeking indeterminate
amounts, including punitive and treble damages, such amounts could be large.
Although there can be no assurances, at the present time the Company does not
anticipate that the ultimate liability arising from such pending litigation,
after consideration of amounts provided in the consolidated financial
statements, will have a material adverse effect on the financial condition of
the Company. However, in light of the indeterminate amounts sought in such
matters and the inherent unpredictability of legal proceedings, it is possible
that an adverse outcome in any one or more of these matters could have a
material adverse effect on the Company's operating results and cash flows in
particular quarterly or annual periods.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
All of the outstanding shares of capital stock of the Company are owned by
FHC. There is no established public trading market for the Company's capital
stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The historical financial information for the five years ended December 31,
2000 and at December 31, 2000, 1999, 1998, 1997 and 1996 has been derived from
the audited Consolidated Financial Statements of the Company. The selected
consolidated financial data set forth below is qualified in its entirety by
reference to and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the Company's
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Form 10-K.
Year Ended December 31,
----------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
2000 (3) 1999 1998 (2) 1997 (1) 1996
-------- ---- -------- -------- ----
Statement of Income Data:
Premiums and policy revenues $ 220,691 $ 224,896 $ 218,582 $ 203,729 $ 165,602
Net investment income 225,517 227,622 226,534 219,267 186,725
Net realized investment gains (losses) (6,573) 4,174 8,284 2,950 (120)
Gain on disposition of partnership interest - - - - 15,825
Other income 10,792 6,147 12,163 12,331 3,567
---------- ----------- ----------- ---------- ----------
Total income 450,427 462,839 465,563 438,277 371,599
Policyholder benefits 261,195 261,342 251,506 262,940 218,659
Commissions 4,348 8,928 8,439 11,230 13,473
Amortization expense 67,998 73,643 87,189 43,694 29,714
Interest expense 10,057 11,704 12,057 12,089 12,263
Other operating expenses 84,389 91,004 94,345 77,038 56,703
---------- ----------- ----------- ---------- ----------
Income before provision for income taxes 22,440 16,218 12,027 31,286 40,787
Provision for income taxes 7,568 4,744 3,235 9,230 13,513
---------- ----------- ----------- ---------- ----------
Net income $ 14,872 $ 11,474 $ 8,792 $ 22,056 $ 27,274
=========== =========== =========== =========== ===========
Net income applicable to common stock per
common share $ 1,487.20 $ 1,147.40 $ 879.20 $ 2,205.60 $ 2,727.40
=========== =========== =========== =========== ===========
Average common shares outstanding 10,000 10,000 10,000 10,000 10,000
====== ====== ====== ====== ======
Balance Sheet Data:
Total investments $ 2,420,881 $ 2,361,019 $ 2,346,395 $ 2,125,813 $ 2,018,852
Total assets 4,241,154 4,188,162 4,105,814 4,061,236 2,769,583
Total debt 102,297 111,165 132,533 132,884 133,312
Total liabilities 3,986,492 3,962,848 3,848,634 3,814,374 2,562,561
Stockholder's equity 254,662 225,314 257,180 246,862 207,022
- ----------------------------
(1) On April 15, 1997, the Company acquired all of the outstanding common stock
of Ohio State and Investors Guaranty.
(2) On October 1, 1998, the Company acquired the 50% of College Insurance Group,
Inc. not previously owned by the Company.
(3) Effective January 1, 2000, the Company disposed of a block of payroll-
deduction life insurance business.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion analyzes significant items affecting the results
of operations and the financial condition of the Company. In connection with the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, the Company cautions readers regarding certain forward-looking statements
contained in this report and in any other statements made by, or on behalf of,
the Company, whether or not in future filings with the Securities and Exchange
Commission (the "SEC"). Forward-looking statements are statements not based on
historical information and which relate to future operations, strategies,
financial results, or other developments. Statements using verbs such as "plan",
"anticipate", "believe", "expect" or words of similar import generally involve
forward-looking statements. Without limiting the foregoing, forward-looking
statements include statements which represent the Company's beliefs concerning
future levels of sales and surrenders of the Company's products, investment
spreads and yields, or the earnings and profitability of the Company's
activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which are subject to change. These uncertainties
and contingencies could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable developments.
Some may be national in scope, such as general economic conditions, changes in
tax law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments and
industry consolidation. Others may relate to the Company specifically, such as
credit, volatility and other risks associated with the Company's investment
portfolio. Investors are also directed to consider other risks and uncertainties
discussed in documents filed by the Company with the SEC. The Company disclaims
any obligation to update forward-looking information. This discussion should be
read in conjunction with the accompanying consolidated financial statements and
the notes thereto.
General
Changes in the Company's volume of life insurance in force and annuity
policyholder account balances for the last three years is summarized in the
following table. These changes reflect the Company's shift from traditional life
insurance products to its asset accumulation business. The table below excludes
inforce of blocks of insurance business which have been permanently reinsured.
2000 1999 1998
---- ---- ----
(In billions)
Beginning of year balance $ 37.3 $ 39.2 $ 41.6
Insurance business acquired or assumed 0.6 0.6 0.3
New business written 2.7 2.8 4.0
Terminations and dispositions (7.0) (5.3) (6.7)
--------- --------- ---------
End of year balance $ 33.6 $ 37.3 $ 39.2
========= ========= =========
(In millions)
Annuity policyholder account balances $ 1,147.8 $ 1,122.4 $ 1,042.6
========= ========= =========
The following table summarizes the Company's sales in terms of collected
first year premiums over the three-year period ended December 31, 2000.
2000 1999 1998
---- ---- ----
(in millions)
Life insurance premiums $ 42.7 $ 47.7 $ 56.9
Annuity premiums 199.5 184.3 59.5
--------- --------- ---------
$ 242.2 $ 232.0 $ 116.4
========= ========= =========
Segment Results
Revenues and income before income taxes for the Company's operating
segments, as defined by Statement of Financial Accounting Standard ("SFAS") No.
131, "Financial Reporting for Segments of a Business Enterprise", is summarized
as follows (in millions) :
Life Asset Accumulation Non-Life
Insurance Products Insurance
Operations Operations Investments
------------------------------- ------------------------------ -------------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ---- ---- ---- ----
Revenues $364.1 $398.4 $417.5 $57.8 $42.6 $21.8 $4.9 $6.0 $8.0
Income (loss)
before income
taxes 46.8 43.9 54.4 10.6 0.6 3.9 1.9 4.0 6.8
Life insurance operations. Income before income taxes increased $2.9
million from 1999 to 2000. This increase in profits is due to (i) a $10.5
million decrease in death benefits, net of reserves for policy benefits released
on traditional death benefits, offset by (ii) a $4.6 million decrease in
deferred policy acquisition costs resulting from revisions made to the Company's
estimate of future gross profits from its interest-sensitive life and annuity
products in both 2000 and 1999. In addition, amortization expense of cost of
business acquired assets increased $2.9 million on a closed block of annuity
business in 2000 due to higher levels of surrenders in 2000. This increased
amortization expense was partially offset by a $1.0 million increase in
surrender charge revenue on this same block of business. Income before income
taxes decreased $10.5 million from 1998 to 1999. This decrease in profits is
primarily due to a $9.6 million increase in death benefits in 1999.
Asset accumulation products operations. Income before income taxes
increased $10.0 million from 1999 to 2000. The primary reasons for the increase
were (i) a $3.5 million increase in deferred policy acquisition costs resulting
from revisions made to the Company's estimate of future gross profits from its
interest-sensitive life and annuity products in both 2000 and 1999, (ii) a $2.7
million increase in surrender charge revenue resulting from higher levels of
surrenders in 2000, and (iii) an increase in interest margins due to higher fund
values on annuity business in 2000. Income before income taxes decreased $3.3
million from 1998 to 1999. The primary reasons for the decrease were (i)
adjustments to deferred policy acquisition costs resulting from revisions made
to the Company's estimate of future gross profits from its interest-sensitive
life and annuity products in both 1999 and 1998, and (ii) increased death
benefits in 1999.
Non-life insurance investments. Income before income taxes decreased $2.1
million from 1999 to 2000. The primary reasons for the decrease were (i) a $1.8
million decrease in income from Argus in 2000 and (ii) a $0.5 million decrease
in income from the real estate entities. Income before income taxes decreased
$2.8 million from 1998 to 1999. The primary reason for the decrease is a $3.1
million decrease in net realized investment gains on the sale of investment
properties in 1999 compared to 1998.
The difference between the segment revenues and income before income taxes
shown above and the amounts reported in the Company's consolidated financial
statements appearing elsewhere in this Form 10-K result from items not allocated
to specific segments. The significant reconciling items are interest expense and
a portion of (i) net investment income, (ii) operating expenses, (iii) net
realized investment gains or losses and (iv) certain non-recurring transactions
such as gains from the sale of subsidiaries. The reconciling items had the
effect of decreasing income before income taxes by $3.1 million from 1999 to
2000. The primary reasons for the decrease were (i) a $10.8 million increase in
net realized investment losses not allocated to segments, offset by (ii) a $3.9
million decrease in operating expenses due to cost controls implemented in 2000,
(iii) a $1.9 million increase in net investment income related to a reduction in
the unrecovered ceding commission due to the Reinsurer, and (iv) a $1.6 million
decrease in interest expense due to lower average outstanding notes payable in
2000 compared to 1999.
Similar reconciling items had the effect of increasing income before income
taxes by $20.7 million from 1998 to 1999. The primary reasons for the increase
were (i) a $14.8 million increase in net realized investment gains not allocated
to segments, (ii) a $3.7 million increase in net investment income related to a
reduction in the unrecovered ceding commission due to the Reinsurer, (iii) a
$5.9 million decrease in advisory and data processing fees paid to FHC, and (iv)
a $6.8 million decrease in expenses not allocated to specific segments, offset
by (v) a $4.9 million gain from the sale of a subsidiary in 1998 and (vi)
expenses related to costs associated with litigation in 1999.
Consolidated Year to Year Comparisons
Year Ended December 31, 2000 Compared with Year Ended December 31, 1999
In May 2000, the Company entered into an agreement to permanently reinsure
a block of payroll-deduction life insurance business to an unaffiliated company
on an indemnity coinsurance basis using an effective date of January 1, 2000.
The policy liabilities remain as direct liabilities to the Company in the
accompanying consolidated financial statements. As of the effective date,
liabilities associated with these policies totaled $138.5 million. Under the
reinsurance agreement, the Company transferred cash assets totaling $100.0
million and miscellaneous assets totaling $17.1 million to the unaffiliated
reinsurer. In addition, the Company removed deferred policy acquisition costs
totaling $20.3 million from its consolidated financial statements in conjunction
with this disposition. In order to fund the cash transfer, the Company sold
fixed maturity held to maturity investments with an amortized cost of $54.6
million and realized net investment losses of $0.3 million on those sales. The
Company will continue to service these policies for a fee paid by the reinsurer
for a period of time defined in the related servicing agreement. This
transaction has no significant effect on the Company's consolidated financial
position or results of operations.
The following table summarizes the effects of this business on components
of the Company's income statement during 1999 (in millions):
Premiums and policy revenues $ 15.2
Net investment income 8.2
Policyholder benefits 13.8
Amortization expense 4.2
Income before income taxes increased $6.2 million to $22.4 million in 2000.
The primary reasons for the increase were (i) lower death benefits, net of
reserves for policyholder's benefits released on traditional death benefits,
(ii) an increase in surrender charge revenue resulting from higher surrenders in
2000, (iii) a decrease in other operating expenses resulting from cost controls
implemented in 2000, (iv) an increase in net investment income related to a
reduction in the unrecovered ceding commission due the Reinsurer and (v) a
decrease in interest expense, partially offset by (vi) an increase in net
realized investment losses and (vii) a decrease in income from non-life
insurance subsidiaries.
Premiums and policy revenues. Premiums and policy revenues totaled $220.7
million in 2000 compared to $224.9 million in 1999. Excluding the effect of the
payroll-deduction business, premiums and policy revenues increased $11.0 million
from 1999 to 2000. Premiums from traditional life insurance business increased
$10.3 million. First year premiums on life insurance sold in the preneed market
increased $14.7 million in 2000 compared to 1999. Sales in this market began in
the 4th quarter of 1999. The increase in the preneed market was offset by a
decrease in premiums from the remainder of the Company's inforce traditional
life insurance business. Policy revenues from interest-sensitive life and
annuity products increased $0.7 million from 1999 to 2000. This increase was
primarily due to (i) a $2.7 million increase in surrender charges from the
Company's asset accumulation business, (ii) a $1.0 million increase in surrender
charges related to a closed block of annuity business, offset by (iii) a $3.9
million decrease in administration charges on the Company's universal life
insurance business.
Net investment income. Net investment income totaled $225.5 million in 2000
compared to $227.6 million in 1999. Net investment income decreased due to (i)
the transfer of the invested assets supporting the payroll-deduction business
which was reinsured effective January 1, 2000, (ii) a $7.5 million decrease in
net investment income on investments held by the Reinsurer, (iii) a $2.3 million
decrease in income from equity subsidiaries, offset by (iv) a $1.9 million
increase in net investment income related to a reduction in the unrecovered
ceding commission due to the Reinsurer, (v) a $2.6 million increase in mortgage
loan net investment income and (vi) an increase in net investment income on the
Company's remaining bond portfolio.
The increase related to the Company's remaining bond portfolio is primarily
due to an increase in assets supporting the asset accumulation business from
sales in the Company's Americo Financial Services sales division.
The increase in investment income related to the Company's mortgage loan
portfolio is due to an increase in the average mortgage loan balance from $218.1
million in 1999 to $246.2 million in 2000. This increase was offset by a
decrease in the average yield of the portfolio from 1999 to 2000.
The decrease related to investments held by the Reinsurer is due primarily
to a $5.5 million decrease in net investment income on a closed block of annuity
business. The decrease in investment income and the associated $4.5 million
decrease of interest credited on policyholder fund values resulted from lower
aggregate fund values.
Net realized investment gains (losses). Net realized investment losses
totaled $6.6 million in 2000 compared to net realized investment gains of $4.2
million in 1999. In 2000, the Company realized losses of $11.4 million on the
sale of fixed maturity investments and gains of $4.3 million on the sale of
common stocks. In 1999, the Company realized gains of $2.6 million on the sale
of common stocks and gains of $2.6 million on the sale of fixed maturity
investments.
Included in 2000 and 1999 realized investment gains and losses were $8.3
million of losses and $0.6 million of gains, respectively, on short positions
held on common stocks and fixed maturity investments by the Company. There was a
like amount of change in market value on the related long position of the common
stocks and fixed maturity investments which is included in unrealized gains in
stockholder's equity.
Other income. Other income totaled $10.8 million in 2000 compared to $6.1
million in 1999. The increase primarily relates to a service fee received during
2000 from the reinsurer of a block of payroll-deduction life insurance business.
The Company reinsured this business effective January 1, 2000; therefore, no
such fee was received during 1999.
Policyholder benefits. Policyholder benefits totaled $261.2 million in 2000
compared with $261.3 million in 1999. Excluding the effect of the
payroll-deduction business, policyholder benefits increased $13.7 million from
1999 to 2000. This increase resulted primarily from (i) a $12.7 million increase
in interest credited on universal life and annuity fund balances, (ii) a $4.3
million increase in other policyholder benefits and (iii) a $6.6 million
decrease in reserve reduction, offset by (iv) a $10.0 million decrease in death
benefits.
Interest credited on fund balances increased $12.4 million due to increased
fund values related to the asset accumulation business. This increase was
partially offset by a $4.5 million decrease in interest credited on a closed
block of annuity business resulting from lower aggregate fund values. Other
policyholder benefits increased primarily due to an increase in surrender
benefits on closed blocks of traditional life business. The reserve reduction
decrease in 2000 was due to increased traditional life premiums in the preneed
market offset by increased reserves released on higher surrender benefits in
2000 on closed blocks of traditional life insurance business.
Amortization expense. Amortization expense totaled $68.0 million in 2000
compared with $73.6 million in 1999. Excluding the effect of the
payroll-deduction business, amortization expense decreased $1.4 million from
1999 to 2000. Amortization expense related to the Company's universal life
insurance business decreased $4.8 million due primarily to decreased
administrative charges on this block of business. Offsetting this decrease was a
$2.9 million increase in amortization expense related to a closed block of
annuity business. The increase was due to higher levels of surrenders in 2000
and the related increase in surrender charge revenue on this block of business.
Other operating expenses. Other operating expenses totaled $84.4 million in
2000 compared with $91.0 million in 1999. During 2000, the Company reviewed the
levels of general expenses in all of its operating and corporate departments.
The Company identified sources of expense savings through increased cost
controls which have reduced expenses by $3.9 million. Other operating expenses
also decreased due to lower expenses related to the Company's AFS marketing
operations. In both 2000 and 1999, other operating expenses included $5.0
million of costs associated with litigation.
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Income before income taxes increased $4.2 million to $16.2 million in 1999.
The primary reasons for the increase were (i) lower advisory and data processing
fees paid to FHC in 1999 and (ii) an increase in net realized gains in 1999,
offset by (iii) a gain on the sale of Investors Guaranty in 1998, and (vi)
higher death benefits in 1999. These items and significant changes in individual
income statement components are discussed in more detail below.
Premiums and policy revenues. Premiums and policy revenues totaled $224.9
million in 1999 compared to $218.5 million in 1998. Premiums from traditional
life insurance business for the year ended December 31, 1999 were comparable to
the year ended December 31, 1998. Policy revenues increased $6.3 million from
asset accumulation business acquired in October of 1998 in conjunction with the
Company acquiring the 50% of CIG. Inc. not previously owned and the recapture of
business which was previously ceded to an unaffiliated insurance company. In
addition, administrative charges on the Company's universal life insurance
business increased $3.1 million. This increase was offset by a $2.3 million
decrease in surrender charges from a closed block of annuity business.
Net investment income. Net investment income totaled $227.6 million in 1999
compared to $226.5 million in 1998. Net investment income increased due to (i)
an increase in net investment income on the Company's bond portfolio, (ii) a
$1.3 million increase in mortgage loan net investment income, and (iii) a $3.7
million increase in net investment income related to a reduction in the
unrecovered ceding commission due to the Reinsurer, offset by an $10.3 million
decrease in net investment income on investments held by the Reinsurer.
The increased investment income related to the Company's bond portfolio is
primarily due to an increase in assets owned resulting from assets acquired as
part of the acquisition of the asset accumulation business in 1998. Assets
related to the asset accumulation business also increased due to sales in the
ARS division.
The increase related to the Company's mortgage loan portfolio is due to an
increase in the average mortgage loan balance from $189.8 million in 1998 to
$218.1 million in 1999. This increase is partially offset by a decrease in the
average yield of the portfolio from 1998 to 1999.
The decrease related to investments held by the Reinsurer is due primarily
to a $8.5 million decrease in net investment income on a closed block of annuity
business resulting from lower fund values. The associated interest credited on
policyholder fund values decreased $6.2 million.
Net realized investment gains. Net realized investment gains totaled $4.2
million in 1999 compared with $8.3 million in 1998. The Company reported $0.9
million and $16.7 million of realized gains from the sale of fixed maturity
investments held by the Reinsurer in 1999 and 1998, respectively. As described
below, the sale of fixed maturity investments held by the Reinsurer resulted in
increased amortization of cost of business acquired assets. Excluding the
effects of these gains, the Company realized gains of $3.3 million in 1999 and
realized losses of $8.4 million in 1998; this change in realized gains can be
attributed to a $16.5 million increase in gains on common stock, offset by a
$1.4 million decrease in gains on fixed maturity investments and $3.3 million of
gains in 1998 related to real estate investments.
Included in 1998 realized losses of $8.4 million was $6.0 million of
realized losses on short positions held on common stocks owned by the Company.
There was a like amount of increase in market value on the related long position
of the common stocks which was included in unrealized gains in stockholders'
equity. In 1999, the Company realized gains of $0.6 million on short positions
held on common stocks.
Other income. Other income totaled $6.1 million in 1999 compared to $12.2
million in 1998. In May 1998, the Company realized a gain of $4.9 million from
the sale of Investors Guaranty.
Policyholder benefits. Policyholder benefits totaled $261.3 million in 1999
compared with $251.5 million in 1998. This increase resulted primarily from a
$10.2 million increase in death benefits. Interest credited on universal life
and annuity funds balances remained comparable between periods: however, (i)
interest credited on the Company's closed block of annuity business decreased
$6.2 million due to reduced fund values, (ii) interest credited on asset
accumulation business increased $12.8 million, and (iii) interest credited on
other interest-sensitive products decreased due to a reduction in rates made in
response to market conditions.
Amortization expense. Amortization expense totaled $73.6 million in 1999
compared with $87.2 million in 1998. Amortization expense included $0.9 million
and $16.7 million in 1999 and 1998, respectively, as a result of realized
investment gains on the sale of fixed maturity investments held by the
Reinsurer. The sale of these fixed maturity investments at a gain will reduce
future investment income, requiring the recognition of additional amortization
expense in the year of the realized gains. Excluding the effects of the sale of
fixed maturity investments, amortization increased $2.2 million due to (i) an
increase in amortization expense related to the Company's universal life
insurance business, offset by (ii) a decrease in amortization expense related to
a closed block of annuity business due to lower surrender charges in 1999.
Included in amortization expense are adjustments to deferred policy
acquisition costs and the cost of business acquired asset which increased the
assets by $0.5 million in 1999 and decreased the assets by $0.9 million in 1998.
These adjustments result from revisions made to the Company's estimate of future
gross profits from its interest-sensitive life and annuity policies. Under GAAP,
deferred policy acquisition costs and the cost of business acquired asset on
interest-sensitive life products are amortized based on the estimated future
gross profits of the related policies.
Other operating expenses. Other operating expenses totaled $91.0 million in
1999 compared with $94.3 million in 1998. Other operating expenses decreased due
to the Company amending its advisory and data processing agreements with FHC in
June 1999. The effect of these amendments was to lower the fees paid to FHC by
$5.9 million. Also, other operating expenses decreased $2.8 million related to
the relocation of the Company's Columbus, Ohio operations to other Company
locations during 1998. In addition, other operating expenses increased in 1999
principally due to costs associated with litigation.
Financial Condition and Liquidity
Liquidity. The liquidity needs of Americo, whose principal assets are
investments in its insurance subsidiaries, are dependent upon receipt of
sufficient funds from its subsidiaries. The cash requirements of Americo consist
of debt service requirements on notes payable, amounts due to FHC under advisory
and data processing agreements and its own operating expenses. These cash
requirements are met by payments of principal and interest on surplus debentures
that Americo holds which are issued by United Fidelity and dividends from United
Fidelity. Americo also receives payments under investment advisory and data
processing agreements with the insurance subsidiaries which permit Americo to
recover a portion of the amounts paid by it under similar agreements with FHC.
On a stand-alone basis, at December 31, 2000, Americo had $33.7 million of cash
and marketable equity securities available for debt service and other corporate
requirements. During 1999, Americo repaid the $21.0 million then outstanding
under a credit facility using available cash and $12.3 million of dividends
received from the life insurance subsidiaries. This credit facility was
terminated during 1999.
Americo has outstanding $100.0 million aggregate principal amount of senior
subordinated notes that it issued in 1993. These senior subordinated notes bear
interest at 9.25% and mature in May 2005. They became redeemable at the option
of Americo beginning in 1998. The redemption prices are at par in May 2000 and
thereafter. Several of Americo's insurance subsidiaries purchased a total of
$8.5 million of the outstanding notes during 2000.
In connection with the acquisition of The Victory Life Insurance Company in
July 1995, Americo issued notes payable to the seller with face amounts
aggregating $17 million. Of the $17 million face amount of notes payable issued
to the seller, $5 million mature in 2015 and the remaining $12 million mature in
24 equal semi-annual installments, the first of which was due in 1995. The notes
are recorded in the Company's Consolidated Financial Statements at their
discounted value, which assumes an average effective rate of 11.5%.
At December 31, 2000, United Fidelity had outstanding to Americo four
surplus debentures with an aggregate unpaid balance of $121.0 million. The terms
of the surplus debentures have been established to provide for the payment of
principal and interest to Americo in amounts sufficient to make payments on
Americo's external debt obligations in accordance with their payment schedules.
The surplus debentures and their payment schedules have been approved by the
Texas Department of Insurance; therefore, no scheduled payment will require the
approval of the Texas Department of Insurance.
The surplus debentures contain restrictions which prevent United Fidelity
from making principal and interest payments if such payments reduce United
Fidelity's statutory capital and surplus below an amount specified in the
surplus debenture agreements. The most restrictive minimum surplus requirement
contained in the surplus debentures is $37.5 million; United Fidelity's capital
and surplus at December 31, 2000 was $92.0 million. Any future payment of
principal or interest on such surplus debentures will be limited by the ability
of the subsidiaries of United Fidelity to pay dividends to United Fidelity and
may be further limited by United Fidelity's RBC requirements. See "Business
Regulation". The Company does not believe that United Fidelity will have any
difficulty in meeting its obligations under these surplus debentures in the
foreseeable future.
In order to meet its obligations under the surplus debentures, United
Fidelity uses funds generated by its insurance operations and dividends from its
insurance subsidiaries. The ability of the insurance subsidiaries to pay
dividends is subject to regulatory restrictions. The insurance holding company
statutes of Texas, in which the Company's insurance subsidiaries are domiciled,
regulate payment of dividends by an insurance company to its parent. Generally,
without the consent of the state's insurance commissioner, an insurance company
may not pay dividends to its parent in excess of the greater of (i) the
insurer's prior year statutory net gain from operations, or (ii) 10% of its
prior year ending statutory capital and surplus, subject in either case to
sufficient earned statutory surplus from which such dividends may be paid.
Additionally, an insurance company is required to notify the respective
insurance department prior to the payment of ordinary dividends.
The principal sources of liquidity for the Company's insurance subsidiaries
are premium receipts, net investment income received and net proceeds from
investments that have been sold or matured or from mortgage loans that have been
repaid. Cash flows from premiums received and investment income are generally
sufficient to meet the subsidiaries' obligations, which consist of the payment
of claims and benefits on insurance policies, purchases of investments and the
payment of operating expenses. Although there is no intent to dispose of
investments at this time, the Company's investments are predominantly in readily
marketable securities.
The Company believes that its investment portfolio will allow it to satisfy
all existing contractual obligations to policyholders. At December 31, 2000, the
Company's investment portfolio included cash and short-term investments totaling
$110.3 million, marketable equity securities totaling $104.8 million as well as
$339.9 million in U.S. Treasury and government securities, mortgage-backed
securities and asset-backed securities and $586.0 million of corporate bonds
classified as available for sale, the vast majority of which management believes
could be readily converted to cash.
Financial condition. Stockholder's equity increased to $254.7 million at
December 31, 2000 from $225.3 million at December 31, 1999. The increase was the
result of net income of $14.9 million and an increase in net unrealized
investment gains of $16.5 million, offset by $2.0 million of dividends to FHC.
Net unrealized investment gains in 2000 were recorded due to an increase in the
market value of the Company's available for sale fixed maturities and equity
securities. See Note 4 to the Company's Consolidated Financial Statements
included elsewhere in this Form 10-K for further discussion of the components of
the change in net unrealized investment gains.
The changes occurring in the Company's consolidated balance sheet between
December 31, 2000 and December 31, 1999 primarily reflect the normal operations
of the Company's life insurance subsidiaries.
Statutory capital and surplus of the Company's insurance subsidiaries at
December 31, 2000 includes $12.1 million relating to financial reinsurance
agreements which is not included in stockholder's equity on a GAAP basis.
Investment Portfolio. The Company has what it believes to be a conservative
investment philosophy. The credit quality of its portfolio is high with limited
amounts of securities below investment grade. The Company's policy is to have a
substantial portion of its investment portfolio in fixed income securities with
call protection.
The following table sets forth the composition of the Company's fixed
maturity securities according to NAIC designations and S&P and Moody's ratings
at December 31, 2000:
Equivalent Total
S&P Moody's NAIC Held to Available Carrying
Rating (1) Rating (1) Rating Maturity for Amount Percentage
- -- ----------- -- ----------- --------- ----------- -- ------ ----------
(1) (2) Sale (3)
--- --- -- --------
(in thousands)
Investment grade:
AAA Aaa 1 $ 218,408 $ 289,943 $ 508,351 28.6%
AA Aa1,Aa2, Aa3 1 80,941 120,693 201,634 11.4
A A1, A2, A3 1 295,966 347,747 643,713 36.3
BBB Baa1, Baa2, Baa3 2 128,551 230,939 359,490 20.2
----------- ----------- ----------- ---------
Subtotal 723,866 989,322 1,713,188 96.5
Non-investment grade:
BB or below Ba1 or below 3, 4 18,752 43,615 62,367 3.5
----------- ----------- ----------- ---------
Total fixed maturity
investments $ 742,618 $ 1,032,937 $1,775,555 100.0
=========== =========== ========== =========
(1) The ratings set forth above are based on the ratings assigned by S&P and
Moody's Investors Service, Inc. ("Moody's"). If S&P's ratings were
unavailable, ratings assigned by Moody's were used. If ratings assigned S&P
and Moody's were not equivalent, securities were categorized in this table
based upon the rating assigned by S&P. Bonds not rated by S&P or Moody's
are classified for the purpose of the table according to the rating
assigned to them by the NAIC as follows: NAIC class 1 is included in the
"A" rating; class 2 in "BBB" and class 3 and 4, "BB or below".
(2) Carrying amount is amortized cost. The market value of held to maturity
securities at December 31, 2000 was $737.5 million.
(3) Carrying amount is market value. The amortized cost of available for sale
securities at December 31, 2000 was $1,050.4 million.
The Company continually reviews its non-investment grade debt securities
(NAIC designations 3 through 6) for evidence of declines in value which are
other than temporary. The Company does not anticipate any material increase in
its investments in non-investment grade debt securities. At December 31, 2000,
the Company's investment portfolio contained no securities which were in default
as to principal or interest.
The Company maintains a mortgage-backed securities ("MBS") portfolio, which
consists of "pass-through" obligations and collateralized mortgage obligations
("CMOs"). Approximately 90% of the MBS portfolio consists of securities or pools
of securities either guaranteed by the U.S. government (including those issued
by Government National Mortgage Association), or those issued by Federal
National Mortgage Association and Federal Home Loan Mortgage Corporation.
The primary risk associated with MBS is that a changing interest rate
environment might cause prepayment of the underlying mortgages at prepayment
rates different than anticipated at the time of their purchase. The degree to
which a security is at risk to either increases or reductions in yield is
influenced by (i) the difference between its carrying value and par value, (ii)
the relative sensitivity of the underlying mortgages to prepayment in a changing
interest rate environment and (iii) the repayment priority of the securities in
each securitization structure.
The Company manages the yield and cash flow variability of its MBS
portfolio by (i) purchasing securities backed by collateral with lower
prepayment sensitivity (such as mortgages priced at a discount to par value),
(ii) avoiding securities whose values are heavily influenced by changes in
prepayments (such as interest-only and principal-only securities) and (iii)
concentrating on securities with prepayment protected structures (such as
planned amortization class CMO's). See Note 4 to the Company's Consolidated
Financial Statements included elsewhere in this Form 10-K for a summary of the
Company's investments in CMO's.
At December 31, 2000, the Company's investment portfolio included $268.9
million of mortgage loans, which were collateralized primarily by multi-family
apartments, office buildings and retail properties located in 30 states.
Approximately 28% of the portfolio was multi-family apartments, 20% was office
buildings, 28% was industrial properties and 24% was other types of properties.
At December 31, 2000, approximately 20% of the mortgage loan portfolio was
secured by properties in Texas, 14% in Missouri and 11% in Kansas. No more than
10% of the remaining portfolio was secured by properties in any one state.
At December 31, 2000, 0.7% of the mortgage loan portfolio consisted of
loans with balloon payments that mature before January 1, 2002. At December 31,
2000, mortgage loans delinquent by more than 90 days, as determined on a
contract delinquency basis, totaled approximately $0.3 million, which
constituted 0.2% of mortgage loans and was 0.01% of cash and invested assets.
There were no loans foreclosed upon and transferred to real estate owned in the
Company's consolidated balance at December 31, 2000. The favorable default
experience is principally attributed to the Company's selectivity in the
purchase of mortgages in connection with acquisitions of its life insurance
subsidiaries and its origination of new mortgage loans. In light of the current
market interest rate environment, the Company may experience prepayments on its
mortgage loan portfolio, thus reducing its yield on such portfolio. The Company
plans to continue applying its historical underwriting standards to future
investments in mortgage loans.
Real estate investments made up 1.2% of the carrying value of the Company's
cash and invested assets at December 31, 2000.
The Company sells equity-indexed life insurance and annuity products. These
products include an interest credit component, which is based on changes in the
Standard and Poor's 500 Index ("S&P Index"). In order to hedge its exposure to
changes in the S&P Index, the Company purchases call options and futures
contracts on the S&P Index.
All derivatives are recognized on the balance sheet at their fair value.
Realized or unrealized gains and losses on derivative instruments are recognized
as current income. At December 31, 2000, the fair value of derivatives totaled
$0.9 million. The Company recognized $1.3 million in realized and unrealized
losses in 2000. These losses were offset by a like decrease in the market value
of the policyholder account balance.
Litigation. The Company and its subsidiaries are named in numerous pending
actions as more fully described in "Legal Proceedings". Although plaintiffs in
these actions generally are seeking indeterminate amounts, including punitive
and treble damages, such amounts could be large. Although there can be no
assurances, at the present time the Company does not anticipate that the
ultimate liability arising from such pending litigation, after consideration of
amounts provided in the consolidated financial statements, will have a material
adverse effect on the financial condition of the Company. However, in light of
the indeterminate amounts sought in such matters and the inherent
unpredictability of legal proceedings, it is possible that an adverse outcome in
any one or more of these matters could have a material adverse effect on the
Company's operating results and cash flows in particular quarterly or annual
periods.
Because of the restrictions described above under "Financial Condition and
Liquidity-Liquidity" in surplus debentures and holding company statutes, an
adverse outcome in the litigation referred to above could affect the ability of
one or more of the Company's insurance subsidiaries to pay dividends or, in the
case of United Fidelity, make payments under its surplus debentures to the
Company. Further, were a subsidiary to suffer an adverse outcome, the Company
might need to contribute capital to such subsidiary so that it could continue to
maintain applicable statutory surplus and risk-based capital requirements. See
"Business-Regulation-General Regulation and Risk-Based Capital Requirements".
Because the Company is a holding company whose own cash and cash equivalents are
limited, the Company might have to dispose of some of its assets in order to
address a significant judgment suffered by it or one of its subsidiaries. Also,
an adverse outcome could affect ratings which the Company's subsidiaries receive
from rating agencies, which could affect their ability to compete. See "Business
- -Competition and Ratings".
Asset-Liability Management
Management is aware that prevailing interest rates may shift significantly
and has strategies in place to manage either an increase or decrease in interest
rates. In a rising interest rate environment, the Company's cost of funds would
increase over time as it prices its new and existing interest-sensitive and
investment products to maintain generally competitive market rates. Management
would seek to invest new and renewal premiums in investments which are high
yielding and generally correspond to the duration of its liabilities. Management
believes that liquidity to fund withdrawals would be available through a
combination of incoming cash flow, the sale of short-term or floating-rate
instruments, and maturing short-duration assets thereby avoiding the sale of
significant amounts of longer duration fixed-rate assets in an unfavorable bond
market. In a declining rate environment, the Company's cost of funds would
decrease over time, reflecting lower interest crediting rates on its
interest-sensitive liabilities. The Company's interest-sensitive liabilities
carry minimum interest guarantees, which may cause the reduction in the
Company's cost of funds to be less than the overall decrease in market interest
rates. In addition, redemptions of callable fixed-rate investments would likely
increase in this environment, causing the Company to reinvest funds at lower
yields. In order to mitigate this risk, the Company has reduced its investment
in callable securities. Should increased liquidity be required for withdrawals,
management believes that a significant portion of its investments could be sold
without adverse consequences in light of the general strengthening which would
be expected in the bond market.
Asset-liability management is utilized by the Company to reduce the risks
to the Company for interest rate fluctuations and disintermediation. The Company
believes that its fixed-rate liabilities should be backed by a portfolio
principally composed of fixed-rate investments that generate predictable yields
in a variety of interest rate environments. The Company does not have a specific
target rate of return. Instead, its rates of return vary over time depending on
the current interest rate environment, the slope of the yield curve, the spread
at which fixed-rate investments are priced over the yield curve, and general
economic conditions. The Company's portfolio strategy is constructed with a view
to achieving adequate risk-adjusted returns consistent with its investment
objectives of effective asset-liability management, liquidity and safety. The
Company has structured its investment portfolio to reduce changes in the value
of the assets under various rate environments. In that regard, the percentage of
the Company's fixed-rate investment portfolio which is non-callable has
increased from 44% in 1995 to 69% in 2000. In addition, the portfolio's
concentration in mortgage-backed securities, which are subject to cash flow
variability in changing interest rate environments, has decreased from 38% in
1995 to 17% in 2000. See "Investment Portfolio" section included elsewhere in
Management's Discussion and Analysis of Financial Condition and Results of
Operations for additional information related to the Company's investments.
In order to reduce the probability of unexpected increases in policy or
contract surrenders, which would create a need for increased liquidity, the
Company has structured its interest-sensitive life insurance and annuity
products to include substantial surrender charges. At December 31, 2000,
approximately 87% and 94% of the reserves for interest-sensitive life insurance
and annuity products, respectively, were for policies with surrender charges or
otherwise not subject to discretionary withdrawal by the policyholder. Also at
December 31, 2000, the aggregate cash surrender values of the Company's
interest-sensitive life insurance and annuity products were approximately 87%
and 90%, respectively, of the aggregate policyholder fund value.
As part of its asset-liability management, the Company conducts detailed
computer simulations that model its fixed-rate assets and liabilities under
various interest rate scenarios. With the results of these computer simulations,
the Company can measure the potential gain or loss in fair value of its
interest-rate sensitive instruments and seek to protect its economic value and
achieve a predictable spread between what it earns on its invested assets and
what it pays on its liabilities. At December 31, 2000, the Company's assets had
effective duration of 5.0 and its liabilities had an effective duration of 5.4.
If interest rates were to decrease 10% from December 31, 2000 levels, the
increase in the value of the Company's liabilities would exceed the increase in
the value of the Company's assets by approximately $20 million. Because the
Company actively manages its assets and liabilities and has developed strategies
to reduce its exposure to loss as interest rate changes occur, it expects that
actual losses would be less than the estimated potential loss.
Effects of Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133, as amended by SFAS
No. 138, "Accounting for Certain Derivative Investments and Certain Hedging
Activities an Amendment of FASB Statement No. 133", provides guidance related to
the accounting for derivative instruments and hedging activities focusing on the
recognition and measurement of derivative instruments. This statement is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. Adoption of this statement will not have a significant impact on the
consolidated financial statements of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The quantitative and qualitative disclosures about market risk are
contained in the "Asset-Liability Management" section of Management's Discussion
and Analysis of Financial Condition and Results of Operations included elsewhere
in this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited consolidated financial statements for the three years
ended December 31, 2000 and the related report of independent accountants
thereon are set forth at pages F-2 to F-28 hereof and are incorporated herein by
reference. Reference is made to the Index to Financial Statements on page F-1
herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's Directors and Executive Officers are as follows:
Name Age Position
Michael A. Merriman 43 Chairman of the Board and Director
Gary L. Muller 54 President, Chief Executive Officer and Director
Timothy S. Sotos 52 Director
Gary E. Jenkins 43 Executive Vice President
Mark K. Fallon 46 Senior Vice President of Investments, Chief
Financial Officer and Treasurer
Americo's current Board of Directors consists of three directors. The
executive officers of Americo are elected by the Board of Directors from time to
time as it deems necessary or advisable, and are subject to removal by the
Board.
All executive decisions, including decisions concerning executive officer
compensation, are made by the Board of Directors. No member of the Board
receives any compensation, other than reimbursement for travel expenses, for
services as such.
Certain Information About Officers
Michael A. Merriman was elected Chairman of the Board, effective November
1, 1995, of Americo, FHC and several of its subsidiaries, including all of
Americo's insurance subsidiaries. Previously, Mr. Merriman served as a director
and officer of all these same entities.
Gary L. Muller is President and Chief Executive Officer and a director of
Americo. Mr. Muller is also a director and officer of FHC and of several of its
subsidiaries, including all of Americo's insurance subsidiaries.
Timothy S. Sotos was elected as a director of Americo on November 1, 1995.
He also serves as a director of all of the insurance subsidiaries. He is the
Chairman of the Board and Executive Vice President of Clinical Reference
Laboratory, which is 80% owned by the Merriman family. He is the brother-in-law
of Michael A. Merriman.
Gary E. Jenkins became Executive Vice President of Americo on September 20,
2000 and all of its insurance subsidiaries effective October 2, 2000. He served
as the Chief Financial Officer of Americo until February 14, 2001, having been
elected to that position in July 1994, and as Treasurer of Americo and the
insurance subsidiaries having been elected to that position in November 1995.
From July 1994 to September 20, 2000, he served as Senior Vice President of
Americo and from July 1994 to October 2, 2000, he served as Senior Vice
President of the insurance subsidiaries.
Mark K. Fallon became Senior Vice President, Chief Financial Officer and
Treasurer effective February 14, 2001. He continues to serve as Senior Vice
President and Assistant Secretary - Investments of Americo and all of the
insurance subsidiaries. Previously, he served as Vice President of Americo and
all of the insurance subsidiaries since 1993.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation paid to (i) the Chief
Executive Officer of the Company and (ii) the other four most highly compensated
Executive Officers of the Company for the three years ended December 31, 2000.
Summary Compensation Table
Name and
Principal Occupation Annual Compensation All Other
Year Salary Bonus Compensation (1)
Gary L. Muller 2000 $ 462,000 $ 275,000 $ 6,610
President, Chief Executive Officer and 1999 462,000 350,000 4,990
Director 1998 462,000 350,000 4,887
Michael A. Merriman 2000 363,000 -- 6,680
Chairman of the Board 1999 363,000 -- 4,990
1998 363,000 -- 4,887
Gary E. Jenkins 2000 200,000 150,000 6,451
Executive Vice President 1999 200,000 175,000 4,992
1998 200,000 175,000 4,925
Donna H. Kinnaird (2) 2000 200,000 75,000 6,939
Senior Vice President and 1999 200,000 175,000 4,990
Chief Operating Officer-Kansas City and Dallas 1998 200,000 175,000 4,923
David F. Hill 2000 200,000 100,000 6,481
Senior Vice President 1999 200,000 150,000 4,991
1998 200,000 175,000 4,927
- ------------------------------------------------------
(1) Includes amounts contributed by the Company for the benefit of the person
identified under the Company's Saving Plan (as hereinafter defined) and
Supplemental Accidental Death and Dismemberment coverage.
(2) Effective February 14, 2001, Donna H. Kinnaird resigned as Senior Vice
President of Americo and its insurance subsidiaries.
Supplemental Accidental Death and Dismemberment coverage in the amount of
$500,000 is provided for all senior officers of Americo and its subsidiaries
that hold the following named positions: Vice President, Senior Vice President,
Executive Vice President, President, Chief Executive Officer and Chairman of the
Board. Currently, this policy covers approximately 30 employees of Americo and
its subsidiaries.
Executive officers hold no outstanding options to purchase the Company's
stock.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company has 10,000 shares of Common Stock outstanding at March 26, 2001
all of which were beneficially owned by FHC, whose principal executive offices
are located at 300 West 11th Street, Kansas City, Missouri 64105 and whose phone
number is (816) 391-2000. The Company has no other outstanding shares of capital
stock.
The following table sets forth certain information with respect to
beneficial ownership by Directors and Executive Officers of Americo, named in
Item 11 "Summary Compensation Table" above, of FHC's Common Stock.
Amount and Nature
of Beneficial
Ownership Actual Percent
Title of Class Names of Beneficial Owners of Class
-------------- --------------------------
------------------- ---------------
Common Stock Michael A. Merriman 112,000 (1) 30.6%
Gary L. Muller 43,500 (2) 11.9%
Timothy S. Sotos 49,800 (3) 13.6%
All directors and executive officers as a group 205,300 56.1%
- ------------------------------
(1) Includes (i) 40,000 shares held in irrevocable trust of Elaine A.
Merriman for the benefit of Michael A. Merriman and Marybeth Merriman
Sotos (the wife of Timothy S. Sotos), of which trust Michael A. Merriman
is the sole Trustee with sole voting and investment power and (ii) 9,000
shares held as Custodian for Jack D. Merriman, II, over which shares
Michael A. Merriman has sole voting and investment power.
(2) FHC has an option to acquire 17,301 of these shares at a per share price
of $188.
(3) Includes (i) 40,500 shares owned by Marybeth Merriman Sotos and (ii)
9,300 shares held as Custodian for Maryelaine Sotos, Timothy J. Sotos and
James P. Sotos, over which shares Timothy S. Sotos has sole voting and
investment power.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Agreements with FHC
Americo or one of its subsidiaries have the following agreements with FHC
or its affiliates, none of which may be deemed the result of arm's length
negotiations between independent parties.
Advisory Agreement. The Company appointed FHC to act as investment advisor
on a non-exclusive basis to the Company and its wholly-owned insurance
subsidiaries pursuant to an advisory agreement between the Company and FHC
("Advisory Agreement"). Under the Advisory Agreement, as amended in 1999, FHC
supervises and directs the composition of the investment portfolios of the
Company and its insurance subsidiaries in accordance with their respective
objectives and policies. For its services under the Advisory Agreement FHC is
paid in advance a quarterly fee based on the aggregate statutory book value of
the investable assets of the Company and its subsidiaries as of the end of the
prior fiscal quarter. Under this formula the fee paid for the year ended
December 31, 2000 was $3.2 million. FHC also is entitled to receive
reimbursement for certain commissions, brokerage and other expenses incurred by
it in the performance of its duties. The Company recovers amounts paid to FHC
under the Advisory Agreement from the insurance subsidiaries, subject to
regulatory limitations. The Advisory Agreement provides that FHC shall not be
liable for any losses except for those resulting from willful misfeasance, bad
faith or gross negligence, or from reckless disregard by FHC of its duties.
Data Processing Agreement. Pursuant to a data processing services agreement
("Data Processing Agreement") between FHC and the Company, as amended in 1999,
FHC provides the Company and its insurance subsidiaries with record-keeping
services for certain life insurance and annuity products. FHC is party to an
agreement with CSC, a third-party vendor, which provides these services. The
Company pays FHC an amount equal to (i) the amount FHC pays to CSC plus (ii)
amortization of FHC's development costs. The aggregate fee paid for the year
ended December 31, 2000 under the Data Processing Agreement was $8.8 million.
FHC also is entitled to reimbursement for its reasonable out-of-pocket expenses
incurred in performing the Data Processing Agreement. The Company is also a
party to a separate data processing services agreement with its wholly-owned
insurance subsidiaries wherein the subsidiaries agree to use such services and
to pay for them pursuant to a separate data processing services agreement (the
"Subsidiary Data Processing Agreement"). Under the Data Processing Agreement,
Americo agrees to indemnify FHC against liabilities arising out of, among other
matters, actions taken by FHC under the agreement in good faith and due
diligence. Americo's subsidiaries have similar indemnification agreements with
Americo under the Subsidiary Data Processing Agreement.
Reimbursement of Expense Agreement. The Company and its subsidiaries have
entered into a cost sharing agreement with FHC respecting air transportation
expenses arising from the use of an airplane owned by a subsidiary of FHC. Under
this agreement, each party pays the cost of any air transportation expenses
which can be identified as incurred for its sole benefit and expenses which
cannot be so identified are allocated based on utilization. Americo and its
subsidiaries incurred approximately $0.4 million of expense under this agreement
for the year ended December 31, 2000.
FHC Lease. The Company's subsidiary, United Fidelity, owns a building in
Kansas City which is leased to and occupied by FHC. Under the terms of the
lease, FHC pays $8,500 per month in rent and has an option to purchase the
building for $1.2 million, an amount equal to its statutory book value and which
approximates its current fair market value. The exercise price of the option
will be revised annually to the greater of fair market value or statutory
carrying value. Management believes that the rentals under the lease are
comparable to market rental values for comparable space and footage in the local
market.
Other Transactions
FHC and certain of its non-life insurance subsidiaries, including the
Company, are parties to a tax sharing agreement under which (i) tax savings and
tax detriments inure to the benefit or detriment, respectively, of the party
contributing the expense or other item that reduces or increases, respectively,
the consolidated group's taxes from what they would have been had each member
filed separately, and (ii) losses arising from filing the consolidated return
are equitably divided among the parties in the same manner that they benefited
from savings caused by filing a consolidated return.
The Company leases office space (and related parking facilities) in
buildings owned by Broadway Square Partners, a general partnership in which one
of the partners is SCOL, Inc. ("SCOL"), a Missouri corporation, owned by members
of the Merriman family. The aggregate amount paid (including rentals and expense
reimbursement) under the lease to Broadway Square Partners in 2000 was
approximately $1.4 million. The terms of the lease are as favorable to the
Company as those offered other unaffiliated tenants of the building.
Subsidiaries of the Company paid an aggregate of approximately $0.3 million
in 2000 to Clinical Reference Laboratory, Inc., a Kansas corporation
("Clinical"), which is 80% owned by the Merriman family and of which Timothy S.
Sotos is Chairman of the Board. The amounts paid were for medical testing
services performed for the Company's subsidiaries. The rates paid were
competitive with those charged by Clinical to similarly situated unaffiliated
insurance companies for similar services.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules:
Reference is made to the indexes set forth on pages F-1 and S-1 of this
report.
Financial statements of the Company's 50% owned subsidiaries have been
omitted because the Company's proportionate share of the income from continuing
operations before income taxes of such subsidiaries is less than 20% of
consolidated income from continuing operations before income taxes, and the
Company's investment in and advances to such subsidiaries is less than 20% of
consolidated total assets of the Company.
(b) Exhibits:
2.1(a)(1) Stock Purchase Agreement dated January 21, 1997 between Great
Southern Life Insurance Company and Farmers Group, Inc.
(incorporated by reference from Exhibit 2.3(a) to
Registrant's Form 10-K (File No. 33-64820) for the year ended
December 31, 1996).
2.1(a)(2) Amendment No. 1 dated April 15, 1997 to Stock Purchase
Agreement by and between Farmers Group, Inc. and Great
Southern Life Insurance Company (incorporated by reference
from Exhibit 2.1(b) to Registrant's Form 10-Q (File No.
33-64820) for the quarter ended March 31, 1997).
2.1(b) Automatic Coinsurance Reinsurance Agreement entered into
between The Ohio State Life Insurance Company and Employers
Reassurance Corporation (incorporated by reference from
Exhibit 2.3(b) to Registrant's Form 10-K (File No. 33-64820)
for the year ended December 31, 1996).
2.1(c) Automatic Coinsurance Reinsurance Agreement entered into
between Investors Guaranty Life Insurance Company and
Employers Reassurance Corporation (incorporated by reference
from Exhibit 2.3(c) to Registrant's Form 10-K (File No.
33-64820) for the year ended December 31, 1996).
2.1(d) Modified Coinsurance Retrocession Agreement (Ohio State Life
Business) entered into between Great Southern Life Insurance
Company and Employers Reassurance Corporation (incorporated
by reference from Exhibit 2.3(d) to Registrant's Form 10-K
(File No. 33-64820) for the year ended December 31, 1996).
2.1(e) Modified Coinsurance Retrocession Agreement (Investors
Guaranty Life Business) to be entered into between Great
Southern Life Insurance Company and Employers Reassurance
Corporation (incorporated by reference from Exhibit 2.3(e) to
Registrant's Form 10-K (File No. 33-64820) for the year ended
December 31, 1996).
2.1(f) Escrow Agreement (Ohio State Life/Investors Guaranty Life
Business) entered into between Great Southern Life Insurance
Company and Employers Reassurance Corporation (incorporated
by reference from Exhibit 2.3(f) to Registrant's Form 10-K
(File No. 33-64820) for the year ended December 31, 1996).
2.1(g) Investment Management Agreement (Ohio State Life Business)
entered into between Americo Life, Inc. and Employers
Reassurance Corporation (incorporated by reference from
Exhibit 2.3(g) to Registrant's Form 10-K (File No. 33-64820)
for the year ended December 31, 1996).
2.1(h) Investment Management Agreement (Investors Guaranty Life
Business) entered into between Americo Life, Inc. and
Employers Reassurance Corporation (incorporated by reference
from Exhibit 2.3(h) to Registrant's Form 10-K (File No.
33-64820) for the year ended December 31, 1996).
2.2 Stock Purchase Agreement dated February 27, 1998 between Great
Southern Life Insurance Company and John Hancock Mutual Life
Insurance Company related to the sale of Investors Guaranty
Life Insurance Company (incorporated by reference from Exhibit
2.4 to Registrant's Form 10-Q (File No. 33-64820) for the
quarter ended March 31, 1998).
2.3 Purchase Agreement dated October 1, 1998 between the
Registrant, Robert L. Myer, Great Southern Group, Inc.,
Marketing Services Group, Inc., NAP Partners, Inc.,
and Pension Consultants & Administrators, Inc.
(incorporated by reference from Exhibit 25 to Registrant's
Form 10-Q (File No. 33-64820) for the quarter ended
September 30, 1998).
3.1 Restated Articles of Incorporation, as amended, of the
Registrant (incorporated by reference from Exhibit 3.1 to
Registrant's Form S-4 (File No.33-64820) filed June 22, 1993).
3.2 Bylaws, as amended, of the Registrant (incorporated by
reference from Exhibit 3.2 to Registrant's Form S-4 (File No.
33-64820) filed June 22, 1993).
4.1(a) Conformed copy of Indenture, dated as of May 25, 1993, between
Registrant and Commerce Bank of Kansas City, N.A., as trustee
(incorporated by reference from Exhibit 4.1 to Registrant's
Form S-4 (File No.33-64820) filed June 22, 1993).
4.1(b) Form of 9 1/4% Senior Subordinated Note Due 2005 (included in
the Indenture filed as Exhibit 4.1(a) hereto) (incorporated by
reference from Exhibit 4.2 to Registrant's Form S-4 (File No.
33-64820) filed June 22, 1993).
4.3(a) Form of Registrant's $5,000,000 5 1/2% Senior Subordinated
Set-off Note due 2015. (Incorporated by reference from
Exhibit 4.1 (c) to Registrant's Form 8-K report (File No.
33-64820) dated as of July 10, 1995).
4.3(b) Form of Registrant's $6,000,000, 6 1/2% Senior Subordinated
Note (No. VNO-1-R) due 2010. (Two identical notes (No.
VNO-1-R and No. VNO-2-R) were issued in 1998 as
replacements for notes originally issued on July 10, 1995.
Pursuant to instruction 2 to Item 601 of Regulation S-K,
only VNO-1-R is filed).
4.4 Amended and Restated Surplus Debenture No. 004, dated December
31, 1993, as amended, in the amount of $57,760,000 made by
United Fidelity Life Insurance Company (successor by merger to
FHC Life Insurance Company) to the Registrant (incorporated by
reference from Exhibit 4.3 to Registrant's Form 10-Q (File No.
33-64820) for the quarter ended March 31, 1994).
4.5 Amended and Restated Surplus Debenture No. 005, dated December
1, 1999, in the amount of $18,000,000 made by United Fidelity
Life Insurance Company (successor by merger to FHC Life
Insurance Company) to the Registrant (incorporated by
reference from Exhibit 4.5 to Registrant's Form 10-K report
(File No. 33-64820) for the year ended December 31, 1999).
4.6 Amended and Restated Surplus Debenture No. 006, dated December
1, 1995, as amended, in the amount of $16,125,753 made by
United Fidelity Life Insurance Company to Registrant
(incorporated by reference from Exhibit 4.6 to
Registrant's Form 10-K (File No. 33-64820) for the year ended
December 31, 1995).
4.7 Amended and Restated Surplus Debenture No. 007 dated January
1, 1999 in the amount of $38,000,000 made by United
Fidelity Life Insurance Company payable to the
Registrant (incorporated by reference from Exhibit 4.7 to
Registrant's Form 10-Q report (File No. 33-64820) for the
quarter ended June 30, 1999).
4.8 In accordance with Item 601(b)(4)(iii)(A) of Regulation S-K,
certain instruments respecting long term debt of the
Registrant and its subsidiaries have been omitted but will be
furnished to the Commission upon request.
10.1 Senior Officer Accidental Death and Dismemberment Policy
(incorporated by reference from Exhibit 10.1 to Registrant's
Form S-4 (File No. 33-64820) filed June 22, 1993).
10.2(a) Tax Sharing Agreement dated as of December 1, 1994, among the
Registrant, Financial Holding Corporation, Cidat Aviation
Incorporated, Assured Leasing Corporation, Landmark Mortgage
Company, First Consulting & Administration, Inc., Hanover
Financial Corporation, United Fidelity Life Insurance Company,
PFS Holding Company, Premium Finance Specialists, Inc.,
Premium Financing Specialists of California and PFS Financing
Corporation (incorporated by reference from Exhibit 10.2 to
Registrant's Form 10-K (File No. 33-64820) for the year ended
December 31, 1994).
10.2(b) Amendment, effective as of January 1, 1996, to Tax Sharing
Agreement, adding the Victory Life Insurance Company as a
party (incorporated by reference from Exhibit 10.2(b) to
Registrant's Form 10-K (File No. 33-64820) for the year ended
December 31, 1997).
10.2(c)* Amendment, effective as of December 31, 1999, to Tax Sharing
Agreement, adding Americo Retirement Services, Inc., CAPCO
Holdings, L.C., GSSW LM, Inc., GSSW WR, Inc., and GSSW WWA,
Inc. as parties.
10.2(d)* Amendment, effective January 1, 1998, to Tax Sharing
Agreement, adding The Ohio State Life Insurance Company as a
party.
10.3(a) Reimbursement of Expense Agreement dated January 1, 1993,
among the Registrant, Financial Holding Corporation, United
Fidelity Life Insurance Company, The College Life Insurance
Company of America, Loyalty Life Insurance Company, National
Farmers Union Life Insurance Company, Great Southern Life
Insurance Company, PFS Holding Company and Premium Financing
Specialists, Inc. (incorporated by reference from Exhibit 10.5
to Registrant's Form S-4 (File No. 33-64820) filed June 22,
1993).
10.3(b) Amendment dated August 29, 1997, to Reimbursement of Expense
Agreement removing Loyalty Life Insurance Company as a party
(incorporated by reference from Exhibit 10.3(b) to
Registrant's Form 10-K (File No. 33-64820) for the year ended
December 31, 1997).
10.3(c) Amendment dated October 1, 1997, to Reimbursement of Expense
Agreement adding Americo Services, Inc. and The Ohio State
Life Insurance Company as parties and removing Argus Health
Systems, Inc. as a party (incorporated by reference from
Exhibit 10.3(c) to Registrant's Form 10-K (File No.
33-64820) for the year ended December 31, 1997).
10.4(a) Cost Sharing Agreement dated as of January 1, 1993, among the
Registrant, United Fidelity Life Insurance Company, The
College Life Insurance Company of America, Premium Financing
Specialists, Inc., PFS Holding Company, Financial Assurance
Marketing Corporation, Great Southern Life Insurance Company,
Loyalty Life Insurance Company and National Farmers Union Life
Insurance Company (incorporated by reference from Exhibit 10.8
to Registrant's Form S-4 (File No. 33-64820) filed June 22,
1993).
10.4(b) Amendment dated August 29, 1997, to Cost Sharing Agreement,
removing Loyalty Life Insurance Company as a party
(incorporated by reference from Exhibit 10.4(b) to
Registrant's Form 10-K (File No. 33-64820) for the year ended
December 31, 1997).
10.4(c) Amendment dated October 1, 1997, to Cost Sharing Agreement
adding Americo Services, Inc. and The Ohio State Life
Insurance Company as parties and removing PFS Holding
Company and Premium Financing Specialists, Inc. as
parties (incorporated by reference from Exhibit 10.4(c)
to Registrant's Form 10-K (File No. 33-64820) for the year
ended December 31, 1997).
10.5 Data Processing Services Agreement dated as of January 1,
1993, between the Registrant and Financial Holding Corporation
(incorporated by reference from Exhibit 10.9 to Registrant's
Form S-4 (File No.33-64820) filed June 22, 1993).
10.5(a) Amendment, effective January 1, 1999, to the Data Processing
Agreement dated January 1, 1993, between the Registrant and
Financial Holding Corporation (incorporated by reference from
Exhibit 10.5(a) to Registrant's Form 10-Q (File No. 33-64820)
for the quarter ended September 30, 1999).
10.6(a) Subsidiary Data Processing Services Agreement dated as of
January 1, 1993, among the Registrant, FHC Life Insurance
Company, United Fidelity Life Insurance Company, Great
Southern Life Insurance Company, The College Life Insurance
Company of America, Loyalty Life Insurance Company and
National Farmers Union Life Insurance Company (incorporated by
reference from Exhibit 10.10 to Registrant's Form S-4 (File
No. 33-64820) filed June 22, 1993).
10.6(b) Amendment dated August 29, 1997, to Subsidiary Data Processing
Services Agreement removing Loyalty Life as a party
(incorporated by reference from Exhibit 10.6(b) to
Registrant's Form 10-K (File No. 33-64820) for the year ended
December 31, 1997).
10.6(c) Amendment dated October 1, 1997, to Subsidiary Data Processing
Services Agreement adding Americo Services, Inc. and The
Ohio State Life Insurance Company as parties (incorporated
by reference from Exhibit 10.6(c) to Registrant's Form 10-K
(File No. 33-64820) for the year ended December 31, 1997).
10.7(a) Advisory Agreement dated as of January 1, 1993, between the
Registrant and Financial Holding Corporation (incorporated
by reference from Exhibit 10.11 to Registrant's Form S-4
(File No. 33-64820) filed June 22, 1993).
10.7(b) First Amendment to Advisory Agreement dated September 17, 1993
by and between the Registrant and Financial Holding
Corporation (incorporated by reference from Exhibit 10.8(b) to
Registrant's Form 10-Q (File No. 33-64820) for the quarter
ended March 31, 1994).
10.7(c) Third Amendment, effective January 1, 1999, to the Advisory
Agreement dated September 17, 1993 by and between the
Registrant and Financial Holding Corporation (incorporated by
reference from Exhibit 10.7(c) to Registrant's Form 10-Q (File
No. 33-64820) for the quarter ended September 30, 1999).
10.8 Office Building Lease dated as of January 1, 1993, between
Financial Holding Corporation and United Fidelity Life
Insurance Company (incorporated by reference from Exhibit
10.12 to Registrant's Form S-4 (File No. 33-64820) filed June
22, 1993).
10.9 Lease Agreement dated February 24, 1988, between Broadway
Square Partners and United Fidelity Life Insurance Company
(incorporated by reference from Exhibit 10.13 to Registrant's
Form S-4 (File No. 33-64820) filed June 22, 1993).
10.9(a) First Amendment to Lease Agreement dated October 10, 1998,
between Broadway Square Partners and United Fidelity Life
Insurance Company (incorporated by reference from Exhibit
10.9(a) to Registrant's Form 10-K (File No. 33-64820) for the
year ended December 31, 1998).
10.10 Lease dated November 1, 1990, between United Fidelity Life
Insurance Company and First Consulting & Administration, Inc.,
a subsidiary of Financial Holding Corporation (included as
Exhibit A to Exhibit 10.11) (incorporated by reference from
Exhibit 10.14 to Registrant's Form S-4 (File No. 33-64820)
filed June 22, 1993).
10.11 Assignment of Lease dated as of April 1, 1993 between United
Fidelity Life Insurance Company and Finance Holding
Corporation respecting the First Consulting & Administration
Lease described in Exhibit 10.10 (incorporated by reference
from Exhibit 10.15 to Registrant's Form S-4 (File No.
33-64820) filed June 22, 1993).
10.12 Office Lease Agreement dated February 19, 1997, between
Metropolitan Life Insurance Company and Great Southern Life
Insurance (incorporated by reference from Exhibit 10.12 to
Registrant's Form 10-K (File No. 33-64820) for the year ended
December 31, 1997).
10.13 Stock Transfer Restriction and Option Agreement dated
June 30, 1989 among DST Systems, Inc., Argus Health Systems,
Inc. and Financial Holding Corporation (incorporated by
reference from Exhibit 10.22 to Registrant's Form S-4 (File
No. 33-64820) filed June 22, 1993).
10.14 Supplemental Tax Sharing Agreements dated December 31, 1993
among Financial Holding Corporation, the Registrant and United
Fidelity Life Insurance Company (incorporated by reference
from Exhibit 10.20 to Registrant's Form 10-Q (File No.
33-64820) for the quarter ended March 31, 1994).
10.15(a)(1) Master Agreement dated as of July 31, 1995, among The Ohio
Life Insurance Company, The Ohio Casualty Insurance Company,
the Registrant and Great Southern Life Insurance Company
(incorporated by reference from Exhibit 10.21 to Registrant's
Form 10-Q (File No. 33-64820) for the quarter ended June 30,
1995).
10.15(a)(2) First Amendment to Master Agreement between The Ohio Life
Insurance Company, The Ohio Casualty Insurance Company and
Great Southern Life Insurance Company dated as of October 2,
1995 (incorporated by reference from Exhibit 10.21(b) to
Registrant's Form 10-Q (File No. 33-64820) for the quarter
ended September 30, 1995).
10.15(a)(3) Second Amendment to Master Agreement between The Ohio Life
Insurance Company, The Ohio Casualty Insurance Company and
Great Southern Life Insurance Company dated as of November 17,
1997 (incorporated by reference from Exhibit 10.20(a)(3) to
Registrant's Form 10-K (File No. 33-64820) for the year ended
December 31, 1997).
10.15(b) Assignment and Assumption Agreement between The Ohio Life
Insurance Company and Great Southern Life Insurance Company
dated as of October 2, 1995 (incorporated by reference from
Exhibit 10.21(c) to Registrant's Form 10-Q (File No. 33-64820)
for the quarter ended September 30, 1995).
10.15(c) Custodian Agreement between State Street Bank and Trust
Company of Boston, Massachusetts, Employers Reassurance
Corporation of Overland Park, Kansas and Great Southern Life
Insurance Company dated as of January 14, 2000 (incorporated
by reference from Exhibit 10.15(c) to Registrant's Form 10-K
(File No. 33-64820) for the year ended December 31, 1999).
10.15(e) Investment Management Agreement between the Registrant and
Employers Reassurance Corporation of Overland Park, Kansas
dated as of October 2, 1995 (incorporated by reference from
Exhibit 10.21(g) to Registrant's Form 10-Q (File No. 33-64820)
for the quarter ended September 30, 1995).
10.15(f) Assumption Reinsurance Agreement between The Ohio Life
Insurance Company and Great Southern Life Insurance Company
dated as of October 2, 1995 (incorporated by reference from
Exhibit 10.21(i) to Registrant's Form 10-Q (File No. 33-64820)
for the quarter ended September 30, 1995).
10.15(g)(1) Reinsurance Agreement between Employers Reassurance Company of
Overland Park, Kansas and The Ohio Life Insurance Company,
effective January 1, 1995 (transfer date October 2, 1995) and
amendments thereto (incorporated by reference from Exhibit
10.21(k) to Registrant's Form 10-Q (File No. 33-64820) for the
quarter ended September 30, 1995).
10.15(g)(2) Amendment No. 4 to the Reinsurance Agreement between
Employers Reassurance Company of Overland Park, Kansas
and The Ohio Life Insurance Company effective April 1,
1996 (incorporated by reference from Exhibit 10.20(g)(2)
to Registrant's Form 10-K (File No. 33-64820) for the year
ended December 31, 1997).
10.15(h) Retrocession Agreement between Great Southern Life Insurance
Company and Employers Reassurance Company of Overland Park,
Kansas, effective January 1, 1995 and amendments thereto
(incorporated by reference from Exhibit 10.21(l) to
Registrant's Form 10-Q (File No. 33-64820) for the quarter
ended September 30, 1995).
10.15(i)(1) Services Agreement between the Registrant, The Ohio Life
Insurance Company and The Ohio Casualty Insurance Company
dated as of October 2, 1995 (incorporated by reference from
Exhibit 10.21(m) to Registrant's Form 10-Q (File No. 33-64820)
for the quarter ended September 30, 1995).
10.15(i)(2) First Amendment to Services Agreement between the Registrant,
The Ohio Life Insurance Company and The Ohio Casualty
Insurance Company dated as of March 27, 1997 (incorporated by
reference from Exhibit 10.20(i)(2) to Registrant's Form 10-K
(File No. 33-64820) for the year ended December 31, 1997).
10.15(i)(3) Amendment to Services Agreement between the Registrant, The
Ohio Life Insurance Company and The Ohio Casualty Insurance
Company dated as of November 17, 1997 (incorporated by
reference from Exhibit 10.20(i)(3) to Registrant's Form 10-K
(File No. 33-64820) for the year ended December 31, 1997).
10.16(a) Master Agreement dated February 26, 1996 among Fremont Life
Insurance Company, Fremont General Corp., the Registrant
and Great Southern Life Insurance Company (incorporated by
reference from Exhibit 10 to Registrant's Form 10-Q (File No.
33-64820) for the quarter ended March 31, 1996).
10.16(b) First Amendment to Master Agreement dated as of July 1, 1996,
among Fremont Life Insurance Company, Fremont General Corp.,
Registrant and Great Southern Life Insurance Company
(incorporated by reference from Exhibit 10.1(b) to
Registrant's Form 10-Q (File No. 33-64820) for the quarter
ended June 30, 1996).
10.16(c) Letter Agreement dated as of July 1, 1996, among Fremont
General Corp., Fremont Life Insurance Company, Registrant and
Great Southern Life Insurance Company (incorporated by
reference from Exhibit 10.1(c) to Registrant's Form 10-Q (File
No. 33-64820) for the quarter ended June 30, 1996).
10.16(d) Services Agreement dated as of July 1, 1996, between
Registrant and Fremont Life Insurance Company (incorporated by
reference from Exhibit 10.1(d) to Registrant's Form 10-Q (File
No. 33-64820) for the quarter ended June 30, 1996).
10.16(e) Assumption Reinsurance and Coinsurance Agreement (Universal
Life) dated as of July 1, 1996, between Fremont Life Insurance
Company and Great Southern Life Insurance Company
(incorporated by reference from Exhibit 10.1(e) to
Registrant's Form 10-Q (File No. 33-64820) for the quarter
ended June 30, 1996).
10.16(f) Assumption Reinsurance and Coinsurance Agreement (Annuities)
dated as of July 1, 1996, between Fremont Life Insurance
Company and Great Southern Life Insurance Company
(incorporated by reference from Exhibit 10.1(f) to
Registrant's Form 10-Q (File No. 33-64820) for the quarter
ended June 30, 1996).
10.16(g) Assignment and Assumption Agreement dated as of July 1, 1996,
between Fremont Life Insurance Company and Great Southern Life
Insurance Company (incorporated by reference from Exhibit
10.1(g) to Registrant's Form 10-Q (File No. 33-64820) for the
quarter ended June 30, 1996).
10.16(h) Automatic Coinsurance Universal Life Reinsurance Agreement
dated as of December 31, 1995, between Fremont Life Insurance
Company and Employers Reassurance Corporation (incorporated by
reference from Exhibit 10.1(h) to Registrant's Form 10-Q (File
No. 33-64820) for the quarter ended June 30, 1996).
10.16(i) Amendment No. 1 to the Automatic Coinsurance Universal Life
Reinsurance Agreement dated as of December 31, 1995,
between Employers Reassurance Corporation and Fremont Life
Insurance Company (incorporated by reference from Exhibit
10.1(i) to Registrant's Form 10-Q (File No. 33-64820) for
the quarter ended June 30, 1996).
10.16(j) Automatic Coinsurance Annuity Reinsurance Agreement dated as
of January 1, 1996, between Employers Reassurance Corporation
and Fremont Life Insurance Company (incorporated by reference
from Exhibit 10.1(j) to Registrant's Form 10-Q (File No.
33-64820) for the quarter ended June 30, 1996).
10.16(k) Amendment No. 1 to the Automatic Coinsurance Annuity
Reinsurance Agreement dated as of January 1, 1996, between
Employers Reassurance Corporation and Fremont Life Insurance
Company (incorporated by reference from Exhibit 10.1(k) to
Registrant's Form 10-Q (File No. 33-64820) for the quarter
ended June 30, 1996).
10.16(l) Custodian Agreement dated as of January 14, 2000, among State
Street Bank and Trust Company, Employers Reassurance
Corporation and Great Southern Life Insurance Company
(incorporated by reference from Exhibit 10.16(l) to
Registrant's Form 10-K (File No. 33-64820) for the year ended
December 31, 1999).
10.16(m) Modified Coinsurance Annuity Retrocession Agreement dated as
of January 1, 1996, between Employers Reassurance Corporation
and Great Southern Life Insurance Company (incorporated by
reference from Exhibit 10.1(m) to Registrant's Form 10-Q (File
No. 33-64820) for the quarter ended June 30, 1996).
10.16(n) Modified Coinsurance Universal Life and Annuity Retrocession
Agreement dated as of December 31, 1995, between Employers
Reassurance Corporation and Great Southern Life Insurance
Company (incorporated by reference from Exhibit 10.1(n) to
Registrant's Form 10-Q (File No. 33-64820) for the quarter
ended June 30, 1996).
10.16(o) Amendment No. 1 to the Investment Management Agreement
dated as of December 31, 1995, between Registrant and
Employers Reassurance Corporation (incorporated by reference
from Exhibit 10.1(o) to Registrant's Form 10-Q (File No.
33-64820) for the quarter ended June 30, 1996).
*21. Subsidiaries of the Registrant
- ----------------------------
(c) Reports on Form 8-K.
There were no reports on Form 8-K filed for the three months ended
December 31, 2000.
SIGNATURES
Pursuant to the requirements 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, in the City of Kansas
City and the State of Missouri, on the 27th day of March, 2001.
AMERICO LIFE, INC.
By: /s/ Gary L. Muller
------------------------------------------------------
Name: Gary L. Muller
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Title Date
/s/ Michael A. Merriman Chairman of the Board of March 27, 2001
- --------------------------------------- Directors
Michael A. Merriman
/s/ Gary L. Muller President, Chief Executive March 27, 2001
- -----------------------------------------Officer and Director
Gary L. Muller
/s/ Mark K. Fallon Senior Vice President, Chief March 27, 2001
- ------------------------------------------ Financial Officer and Treasurer
Mark K. Fallon (Principal Financial Officer and
Principal Accounting Officer)
AMERICO LIFE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
Audited Financial Statements for the Three Years Ended December 31, 2000:
Report of Independent Accountants F-2
Consolidated Balance Sheet at December 31, 2000 and 1999 F-3
Consolidated Statement of Income for the Years Ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statement of Stockholder's Equity for the Years Ended December 31, 2000, 1999 and 1998 F-5
Consolidated Statement of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-8
Report of Independent Accountants
To the Board of Directors and
Stockholder of Americo Life, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of stockholder's equity and of cash
flows present fairly, in all materials respects, the financial position of
Americo Life, Inc. and its subsidiaries at December 31, 2000, and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. 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 of these statements in accordance with auditing standards
generally accepted in the United States of America which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion.
PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri
March 27, 2001
Americo Life, Inc. and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)
December 31, 2000 and 1999
2000 1999
---- ----
Assets
Investments:
Fixed Maturities:
Held to maturity, at amortized cost (market: $737,496 and $821,335) $ 742,618 $ 852,908
Available for sale, at market (amortized cost: $1,050,421 and $985,854) 1,032,937 925,997
Equity securities, at market (cost: $57,920 and $33,467) 104,771 73,448
Investment in equity subsidiaries 14,259 12,141
Mortgage loans on real estate, net 268,902 227,601
Investment real estate, net 30,398 28,516
Policy loans 194,651 209,979
Other invested assets 32,345 30,429
------------- -------------
Total investments 2,420,881 2,361,019
Cash and cash equivalents 110,260 122,788
Accrued investment income 31,730 31,764
Amounts receivable from reinsurers 1,139,673 1,140,206
Other receivables 101,148 42,596
Deferred policy acquisition costs 228,679 212,860
Cost of business acquired 166,458 219,490
Amounts due from affiliates - 7,710
Other assets 42,325 49,729
------------- -------------
Total assets $ 4,241,154 $ 4,188,162
============= =============
Liabilities and Stockholder's Equity
Policyholder account balances $ 2,623,747 $ 2,599,627
Reserves for future policy benefits 819,943 822,940
Unearned policy revenues 54,599 60,279
Policy and contract claims 32,612 37,821
Other policyholder funds 113,496 119,664
Notes payable 102,297 111,165
Amounts payable to reinsurers 39,056 48,749
Deferred income taxes 56,897 40,531
Due to broker 66,899 53,810
Amounts due to affiliates 2,744 -
Other liabilities 74,202 68,262
------------- -------------
Total liabilities 3,986,492 3,962,848
Stockholder's equity:
Common stock ($1 par value, 30,000 shares authorized, 10,000 shares issued and ..
outstanding) 10 10
Additional paid-in capital 3,745 3,745
Accumulated other comprehensive income 35,635 19,159
Retained earnings 215,272 202,400
------------- -------------
Total stockholder's equity 254,662 225,314
------------- -------------
Commitments and contingencies
Total liabilities and stockholder's equity $ 4,241,154 $ 4,188,162
============= =============
See accompanying notes to consolidated financial statements
Americo Life, Inc. and Subsidiaries
Consolidated Statement of Income
(Dollars in thousands, except per share amounts)
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
Income
Premiums and policy revenues $ 220,691 $ 224,896 $ 218,582
Net investment income 225,517 227,622 226,534
Net realized investment gains (losses) (6,573) 4,174 8,284
Other income 10,792 6,147 12,163
------------ ------------ ------------
Total income 450,427 462,839 465,563
------------ ------------ ------------
Benefits and expenses Policyholder benefits:
Death benefits 105,940 123,644 113,552
Interest credited on universal life and annuity products 114,709 108,088 108,664
Other policyholder benefits 56,970 52,675 53,135
Change in reserves for future policy benefits (16,424) (23,065) (23,845)
Commissions 4,348 8,928 8,439
Amortization expense 67,998 73,643 87,189
Interest expense 10,057 11,704 12,057
Other operating expenses 84,389 91,004 94,345
------------ ------------ ------------
Total benefits and expenses 427,987 446,621 453,536
------------ ------------ ------------
Income before provision for income taxes 22,440 16,218 12,027
Provision for income taxes 7,568 4,744 3,235
------------ ------------ ------------
Net income $ 14,872 $ 11,474 $ 8,792
============ ============ ============
Net income per common share $ 1,487.20 $ 1,147.40 $ 879.20
=========== =========== ===========
See accompanying notes to consolidated financial statements
Americo Life, Inc. and Subsidiaries
Consolidated Statement of Stockholder's Equity
(Dollars in thousands)
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
Common stock
Balance at beginning and end of year $ 10 $ 10 $ 10
--------- --------- ---------
Additional paid-in capital
Balance at beginning and end of year 3,745 3,745 3,745
--------- --------- ---------
Accumulated other comprehensive income
Balance at beginning of year 19,159 60,499 56,973
Change during year 16,476 $ 16,476 (41,340) $ (41,340) 3,526 $ 3,526
--------- --------- ---------
Balance at end of year 35,635 19,159 60,499
--------- --------- ---------
Retained earnings
Balance at beginning of year 202,400 192,926 186,134
Net income 14,872 14,872 11,474 11,474 8,792 8,792
--------- --------- ---------
Comprehensive income (loss) $ 31,348 $ (29,866) $ 12,318
========= ========= =========
Dividends (2,000) (2,000) (2,000)
--------- --------- ---------
Balance at end of year 215,272 202,400 192,926
--------- --------- ---------
Total stockholder's equity $ 254,662 $ 225,314 $ 257,180
========= ========= =========
See accompanying notes to consolidated financial statements
Americo Life, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(Dollars in thousands)
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
Cash flows from operating activities
Net income $ 14,872 $ 11,474 $ 8,792
----------- ----------- -----------
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization 73,338 79,033 86,679
Deferred policy acquisition costs (74,481) (63,511) (61,179)
Undistributed earnings of equity subsidiaries (568) (2,728) (2,581)
Distributed earnings of equity subsidiaries - 240 9,943
Amortization of unrealized investment gains (6,768) (2,826) (14,407)
Provision for deferred income taxes 7,494 (1,002) 3,757
(Increase) decrease in assets net of effects from business
acquisitions:
Accrued investment income 33 99 (3,277)
Amounts receivable from reinsurers 130,553 60,215 64,438
Other receivables 2,487 1,057 (14,483)
Other assets, net of amortization 4,773 (17,615) 6,586
Increase (decrease) in liabilities net of effects from business acquisitions:
Reserves for future policy benefits and unearned policy revenues 7,350 (12,124) (49,315)
Policyholder account balances (89,471) (90,370) 5,747
Policy and contract claims (5,209) (7,646) 8,857
Other policyholder funds (6,169) 13,424 30,279
Amounts payable to reinsurers (9,693) 20,550 15,999
Federal income taxes payable 125 - (164)
Affiliate balances 10,455 (10,795) (3,362)
Other liabilities 6,547 6,388 1,104
Change in trading securities 1,879 - -
Net realized (gains) losses on investments 6,573 (4,174) (8,284)
Gain on sale of subsidiary - - (4,855)
Amortization on bonds and mortgage loans 3,214 1,351 3,425
Other changes (2,824) (1,347) (4,902)
----------- ----------- ------------
Total adjustments 59,638 (31,781) 70,005
----------- ----------- -----------
Net cash provided (used) by operating activities 74,510 (20,307) 78,797
----------- ----------- -----------
(Continued)
See accompanying notes to consolidated financial statements
Americo Life, Inc. and Subsidiaries
Consolidated Statement of Cash Flows (Continued)
(Dollars in thousands)
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
Cash flows from investing activities
Purchases of fixed maturity investments $ (532,177) $ (425,122) $ (338,645)
Purchases of equity securities (146,223) (106,290) (107,983)
Purchases of other investments (11,607) (13,766) (7,972)
Mortgage loans originated (58,086) (58,299) (51,461)
Maturities or redemptions of fixed maturity investments 53,166 10,319 32,110
Sales of fixed maturity available for sale investments 455,265 346,488 257,910
Sales of fixed maturity held to maturity investments 58,574 - -
Sales of equity securities 130,339 125,627 108,383
Sales of other investments 1,684 - 11,494
Sale of subsidiary, net of cash sold - - 13,779
Payment for subsidiaries acquired, net of cash acquired - - (15,377)
Transfer of cash on disposition of block of insurance business (100,000) - -
Repayments from mortgage loans 17,066 20,892 27,818
Change in due to broker (60,358) 1,608 3,151
Change in policy loans 2,884 193 4,723
----------- ----------- -----------
Net cash used by investing activities (189,473) (98,350) (62,070)
----------- ----------- -----------
Cash flows from financing activities
Repayments of notes payable (9,155) (21,318) (283)
Receipts credited to policyholder account balances 439,199 454,864 284,251
Return of policyholder account balances (325,608) (258,320) (267,335)
Dividends paid (2,000) (2,000) (2,000)
------------ ------------ ------------
Net cash provided by financing activities 102,436 173,226 14,633
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (12,527) 54,569 31,360
Cash and cash equivalents at beginning of year 122,787 68,219 36,859
----------- ----------- -----------
Cash and cash equivalents at end of year $ 110,260 $ 122,788 $ 68,219
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during year for:
Interest $ 10,197 $ 11,647 $ 12,084
Income taxes 1,142 3,515 (359)
Supplemental schedule of non-cash investing and financing activities
Acquisition of subsidiaries:
Fair value of assets acquired, net of cash acquired $ - $ - $ 19,733
Liabilities - - (4,356)
---------- ---------- ------------
Payment for subsidiaries acquired, net of cash acquired $ - $ - $ 15,377
========== ========== ============
See accompanying notes to consolidated financial statements
Americo Life, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
1. Organization and Summary of Significant Accounting Policies
Americo Life, Inc. ("the Company") is a holding company for the following
stock life insurance companies, all of which are 100% owned: Americo Financial
Life and Annuity Insurance Company (formerly The College Life Insurance Company
of America) ("Americo Financial"), United Fidelity Life Insurance Company
("United Fidelity"), Great Southern Life Insurance Company ("Great Southern"),
National Farmers Union Life Insurance Company ("National Farmers"), Financial
Assurance Life Insurance Company ("Financial Assurance") and The Ohio State Life
Insurance Company ("Ohio State"), collectively referred to as the Insurance
Companies. In May 1998, the Company sold Investors Guaranty Life Insurance
Company ("Investors Guaranty") to an unrelated party. Americo Financial owns
100% of Americo Financial Services Inc. and Pension Consultants and
Administrators, Inc. which are agency and third-party administration operations.
The Company also has a 50% interest in Argus Health Systems, Inc. ("Argus"),
which processes prescription drug claims. The Company is a wholly-owned
subsidiary of Financial Holding Corporation ("FHC").
All of the Insurance Companies are domiciled in Texas. One or more of the
Insurance Companies is licensed in the District of Columbia and all states
except New York. The above companies comprise an Insurance Company Holding Group
as defined by the laws of the State of Texas and are bound by certain
regulations thereof in the conduct of their business.
Principles of consolidation and basis of presentation
The consolidated financial statements include the accounts of the Company
and its direct and indirect wholly-owned subsidiaries. The Insurance Companies
maintain their accounts in conformity with accounting practices prescribed or
permitted by state insurance regulatory authorities. In the accompanying
financial statements, such accounts have been adjusted to conform with generally
accepted accounting principles ("GAAP"). All significant intercompany accounts
and transactions have been eliminated in consolidation.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Investments
Fixed maturity investments classified as held to maturity are debt
securities for which the Company has the positive intent and ability to hold to
maturity and are stated at amortized cost with premiums amortized to call dates
and discounts amortized to maturity dates. Fixed maturity investments classified
as trading are stated at market value and the resulting unrealized gains and
losses are recorded in earnings. Marketable equity securities and fixed
maturities available for sale are reported at market value and the resulting
unrealized gains or losses, net of applicable income taxes, are credited or
charged to stockholder's equity. If a decline in the market value of an
individual investment is considered to be other than temporary, the loss is
recorded as a realized investment loss. Gains or losses on sales of securities
are computed using the specific identification method.
Americo Life, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
When the Company recognizes changes in conditions that cause a fixed
maturity investment to be transferred to a different category (e.g. held to
maturity or available for sale), the security is transferred at market value. If
the security is transferred from available for sale to held to maturity, the
related unrealized gain or loss is amortized to investment income over the
remaining life of the security. If the security is transferred from held to
maturity to available for sale, the unrealized gain or loss is included in
stockholder's equity.
For mortgage-backed securities, the Company anticipates prepayments
utilizing published data when applying the interest method. Periodic adjustments
to securities' carrying values as a result of changes in actual and anticipated
prepayments are credited or charged to net investment income.
Equity securities, consisting of marketable common and nonredeemable
preferred stocks, are carried at market value. The Company's 50% or less owned
subsidiaries are accounted for using the equity method, under which the
Company's proportionate share of earnings is recorded as a component of net
investment income.
Mortgage loans on real estate are stated at aggregate unpaid principal
balances, net of unamortized purchase premiums or discounts and less allowances
for estimated losses. Unamortized purchase premiums or discounts are amortized
using the effective yield method over the life of the related loan.
Policy loans are stated at aggregate unpaid principal balances.
Investment real estate is stated at cost, less allowances for depreciation
and, as appropriate, provisions for possible losses.
The Company utilizes futures contracts and call options to manage risks
related to its policyholder liabilities, fixed maturities and equity securities
portfolio. For those contracts which qualify for hedge accounting, gains or
losses on open contracts are recorded as an adjustment to the basis of the
assets hedged and are included in net unrealized investment gains. Deferred
gains or losses on terminated hedges on fixed maturities are amortized into
income over the remaining life of the asset. Deferred gains or losses on
terminated hedges on equity securities remain until the equity security is sold.
For those contracts which do not qualify for hedge accounting, gains or losses
are recorded as realized investment gains or losses.
New Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133, as amended by SFAS
No. 138, "Accounting for Certain Derivative Investments and Certain Hedging
Activities an Amendment of FASB Statement No. 133", provides guidance related to
the accounting for derivative instruments and hedging activities focusing on the
recognition and measurement of derivative instruments. This statement is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. Adoption of this statement will not have a significant impact on the
consolidated financial statements of the Company.
Cash equivalents
The Company considers all highly liquid financial instruments with an
original maturity of three months or less to be cash equivalents.
Deferred policy acquisition costs and cost of business acquired
The costs of new business produced, principally commissions, certain policy
issue and underwriting expenses and certain variable agency expenses, are
deferred. The cost of business acquired represents the amount of purchase price
assigned to the value of the policies at acquisition. The cost of business
acquired asset is no greater than the actuarially determined present value of
future profits of the policies purchased. For traditional life products, these
costs are amortized in proportion to premium revenues over the premium-paying
period of related policies using assumptions consistent with those used in
computing benefit reserves. For universal life, interest-sensitive and
investment products, these costs are amortized in relation to the present value,
using the current and projected credited interest rate, of expected gross
profits of the policies over the anticipated coverage period.
Retrospective adjustment of these amounts are made annually upon the
revision of estimates of current or future gross profits on universal life-type
and annuity products to be realized from a group of policies. Recoverability of
deferred policy acquisition costs and the cost of business acquired is evaluated
annually by comparing the current estimate of future profits to the unamortized
asset balances. The revision of estimates of future gross profits increased
income related to deferred policy acquisition costs before provision for income
taxes by $13,677, $985 and $6,203 for the years ended December 31, 2000, 1999
and 1998, respectively. The revision of estimates of future gross profits
decreased income related to the cost of business acquired before provision for
income taxes by $12,653, $457 and $7,105 for the years ended December 31, 2000,
1999 and 1998, respectively.
Anticipated investment returns, including realized gains and losses, from
the investment of policyholder balances are considered in determining the
amortization of deferred policy acquisition costs, the cost of business acquired
and unearned policy revenues. When fixed maturities are stated at market value
an adjustment is made to the deferred policy acquisition costs, the cost of
business acquired and unearned policy revenues equal to the change in
amortization that would have been recorded if those fixed maturities had been
sold at their fair value and the proceeds reinvested at current yields. This
adjustment is recorded net of income taxes directly to the accumulated other
comprehensive income component of stockholder's equity.
Universal life-type and annuity products
Policyholder account balances of universal life-type, interest-sensitive
and annuity products represent accumulated contract values, without reduction
for potential surrender charges and deferred front-end contract charges which
are amortized over the term of the policies. Revenue for universal life-type and
other interest-sensitive products is principally comprised of insurance and
policy administration fees and surrender charges, as well as amortization of
deferred front-end contract charges. Benefits and claims are charged to expense
in the period incurred, net of related accumulated contract values released.
Interest on accumulated contract values is credited to contracts as earned.
Crediting rates for universal life-type and annuity products ranged from 3% to
6% at December 31, 2000. The Company also issues universal life-type and annuity
products for which interest credited is based upon a participation rate, load
and change in value of a stated equity-based index.
Traditional life insurance products
Traditional life insurance products include whole life insurance and term
life insurance. Reserves for future policy benefits are estimated using a net
level premium method based upon historical experience of investment yields,
mortality and withdrawals, including provisions for possible adverse deviation.
Investment yield assumptions are based on historical rates ranging from 7.0% to
9.0%. Mortality assumptions are based on the 1975-1980 Select and Ultimate Basic
Table with certain modifications including underwriting classifications and year
of issue. Withdrawal assumptions for all products are estimated based on the
Insurance Companies' experience. Additions to these reserves are required when
their balances, in addition to future net cash flows including investment
income, are insufficient to cover future benefits and expenses. Premiums for
these products are recognized as revenue when due. Traditional life insurance
benefits and claims are charged to expense in the period incurred.
Reinsurance
Premiums and expenses include amounts related to reinsurance assumed and
are stated net of amounts ceded. Reinsurance receivables and prepaid reinsurance
premiums are reported as assets and are recognized in a manner consistent with
the liabilities related to the underlying reinsured contracts.
Participating policies
Participating life insurance policies represent approximately 1.4%, 1.2%
and 1.3% of the ordinary life insurance in force at December 31, 2000, 1999 and
1998, respectively. Premium income related to participating life insurance
policies represents 4.0%, 3.8% and 3.3% of premiums and policy revenues for the
years 2000, 1999 and 1998, respectively. The dividends paid and accrued are
calculated in accordance with the terms of the individual policy provisions and
the dividend schedule as reviewed and approved annually by the Board of
Directors.
Property and equipment
Company-occupied property, data processing equipment and furniture and
office equipment, included in other assets, are stated at cost less accumulated
depreciation of $10,307 and $10,814 at December 31, 2000 and 1999, respectively.
Depreciation is computed on a straight-line basis for financial reporting
purposes using estimated useful lives of three to 30 years. Depreciation expense
was $5,339, $5,358 and $5,492 for the years ended December 31, 2000, 1999 and
1998, respectively.
Income taxes
Provision for income taxes includes deferred taxes arising from temporary
differences between the tax and financial reporting basis of assets and
liabilities. This liability method of accounting for income taxes also requires
the Company to reflect the effect of a tax rate change on accumulated deferred
income taxes in income for the period in which the change is enacted.
Net income per common share
Net income per common share is calculated by dividing the appropriate
income item by the average number of shares of common stock outstanding during
the period. There were no common share equivalents outstanding during 2000, 1999
or 1998.
Reclassifications
Previously reported amounts for prior years have in some instances been
reclassified to conform to the current year presentation.
2. Fair values of financial instruments
The following estimated fair value disclosures are limited to the
reasonable estimates of the fair value of only the Company's financial
instruments. The Company does not anticipate that any significant assets will be
disposed of or that any significant liabilities would be settled at these
estimated fair values.
Investment securities: The estimated fair values of fixed maturity
securities are based on quoted market prices where available. For fixed maturity
securities not actively traded, fair values are estimated using values obtained
from independent pricing services. In the case of private placements, fair
values are determined using market values of comparable securities. The
estimated fair values of equity securities are based on quoted market prices.
Mortgage loans: The fair values of mortgage loans are estimated using
discounted cash flow analyses and interest rates being offered for similar loans
to borrowers with similar credit ratings.
Policy loans: Policy loans are generally issued with coupon rates below
market rates and are considered early payment of the life benefit. As such, the
carrying amount of these financial instruments is a reasonable estimate of their
fair value.
Other invested assets: The fair value of the note receivable from PFS
Holding Company ("PFSH"), a wholly-owned subsidiary of FHC, is estimated by
discounting future cash flows at current market rates.
Cash and cash equivalents: The carrying value of these instruments
approximates fair value.
Annuities: The fair values of the Company's annuities are estimated
using the current cash surrender value for the Company's annuity contracts.
Notes payable: The fair value of the Company's senior subordinated notes
equals the quoted market price at the reporting date. The fair value of the
Company's other notes payable was calculated using a discounted interest rate
which reflects prevailing market rates.
The estimated fair values of the Company's financial instruments at
December 31, are as follows:
2000 1999
------------------------------ -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets:
Fixed maturities held to maturity $ 742,618 $ 737,496 $ 852,908 $ 821,335
Fixed maturities available for sale 1,032,937 1,032,937 925,997 925,997
Equity securities 104,771 104,771 73,448 73,448
Mortgage loans 268,902 269,979 227,601 229,538
Policy loans 194,651 194,651 209,979 209,979
Other invested assets 10,000 10,052 10,000 9,775
Cash and cash equivalents 110,262 110,262 122,788 122,788
Financial liabilities:
Annuities 1,147,750 1,037,566 1,122,400 1,021,384
Notes payable 102,297 99,552 111,165 111,165
3. Change in Subsidiaries
On May 8, 1998, Great Southern sold all of the outstanding common stock of
Investors Guaranty, a wholly-owned subsidiary, for $14,793, resulting in a gain
included in other income of $4,855. All of the insurance business of Investors
Guaranty is reinsured to an unaffiliated insurance company under a coinsurance
agreement and subsequently reinsured to Great Southern under a modified
coinsurance agreement on a 70% quota share basis. These reinsurance agreements
are unaffected by the sale. As of the date of sale, Investors Guaranty had
assets totaling $10.3 million and liabilities totaling $0.4 million.
In October 1998, the Company entered into a series of transactions with the
individual owning the 50% of College Insurance Group, Inc. ("CIG") not owned by
the Company. The purpose of the transactions was to consolidate all of the
activities in the asset accumulation markets conducted by CIG and other entities
owned 100% by the individual with those of the Company. Specifically, the
Company acquired the other 50% of CIG for $6,236 and acquired the stock or
assets of various marketing entities wholly-owned by the individual for $9,518
plus contingent consideration of up to an additional $5,000 plus interest based
on achieving certain sales production levels. Of this amount, $1,000 plus
interest was paid during 2000. In addition, the Company recaptured all of the
insurance liabilities that were previously ceded to an entity owned by the
individual. The Company paid $2,580, $2,624 and $3,945 in 2000, 1999 and 1998,
respectively, to recapture these liabilities.
4. Investments
Fixed Maturities
The amortized cost of investments in fixed maturities, the cost of equity
securities and the estimated market values of such investments by category of
securities, are as follows:
December 31, 2000
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Held to maturity:
U.S. Treasury and government securities $ 2,333 $ 104 $ - $ 2,437
Public utility securities 16,616 212 (217) 16,611
Corporate securities 505,393 8,392 (13,969) 499,816
Asset-backed securities 15,388 261 - 15,649
Mortgage-backed pass-through securities 28,648 614 (168) 29,094
Collateralized mortgage obligations 174,240 1,511 (1,862) 173,889
------------ ------------ ------------ ------------
742,618 11,094 (16,216) 737,496
------------ ------------ ------------ ------------
Available for sale:
U.S. Treasury and government securities 23,808 838 - 24,646
Public utility securities 7,068 - (451) 6,617
Corporate securities 737,813 9,389 (33,745) 713,457
Asset-backed securities 128,573 2,991 (1,260) 130,304
Mortgage-backed pass-through securities 111,503 3,896 (104) 115,295
Collateralized mortgage obligations 41,656 1,235 (273) 42,618
------------ ------------ ------------ ------------
1,050,421 18,349 (35,833) 1,032,937
------------ ------------ ------------ ------------
Subtotal, all fixed maturities 1,793,039 29,443 (52,049) 1,770,433
------------ ------------ ------------ ------------
Equity securities 57,920 49,515 (2,664) 104,771
------------ ------------ ------------ ------------
Total fixed maturities and equity securities $ 1,850,959 $ 78,958 $ (54,713) $ 1,875,204
============ ============ ============ ============
December 31, 1999
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Held to maturity:
U.S. Treasury and government securities $ 2,366 $ 29 $ (95) $ 2,300
Public utility securities 52,323 521 (2,336) 50,508
Corporate securities 516,098 3,609 (25,661) 494,046
Asset-backed securities 29,305 - (1,674) 27,631
Mortgage-backed pass-through securities 26,463 419 (606) 26,276
Collateralized mortgage obligations 226,353 643 (6,422) 220,574
------------- ------------- ------------- -------------
852,908 5,221 (36,794) 821,335
------------- ------------- ------------- -------------
Available for sale:
U.S. Treasury and government securities 27,360 277 (108) 27,529
Public utility securities 42,300 32 (1,861) 40,471
Corporate securities 636,371 373 (50,677) 586,067
Asset-backed securities 88,857 182 (5,142) 83,897
Mortgage-backed pass-through securities 83,560 238 (1,482) 82,316
Collateralized mortgage obligations 107,406 1,234 (2,923) 105,717
------------- ------------- ------------- -------------
985,854 2,336 (62,193) 925,997
------------- ------------- ------------- -------------
Subtotal, all fixed maturities 1,838,762 7,557 (98,987) 1,747,332
------------- ------------- ------------- -------------
Equity securities 33,467 41,319 (1,338) 73,448
------------- ------------- -------------- -------------
Total fixed maturities and equity securities $ 1,872,229 $ 48,876 $ (100,325) $ 1,820,780
============= ============= =============- =============
The amortized cost and estimated market value of mortgage-backed securities
by category at December 31, 2000 are as follows:
Held to Maturity Available for Sale
--------------------------- ---------------------------
Estimated Estimated
Amortized Market Value Amortized Market Value
Cost Cost
Pass-through agency securities $ 28,648 $ 29,094 $ 111,503 $ 115,295
Collateralized mortgage obligations:
Sequential class 39,611 39,564 27,463 28,145
Planned amortization class 56,293 55,861 144 143
Very accurately defined maturity 70,105 70,079 7,010 6,789
Other 8,231 8,385 7,039 7,541
---------- ---------- ---------- ----------
174,240 173,889 41,656 42,618
---------- ---------- ---------- ----------
Total securities $ 202,888 $ 202,983 $ 153,159 $ 157,913
========== ========== ========== ==========
The amortized cost and estimated market value of fixed maturities which are
held to maturity and available for sale at December 31, 2000, by contractual
maturity, are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without penalties.
Fixed Maturities Fixed Maturities
Held to Maturity Available for Sale
----------------------------------- ----------------------------------
Estimated Estimated
Amortized Cost Market Value Amortized Cost Market Value
Due in one year or less $ 5,405 $ 5,390 $ 12,437 $ 12,491
Due after one year through five years 143,751 143,686 58,549 57,748
Due after five years through ten years 213,281 208,226 288,189 283,284
Due after ten years 177,293 177,211 538,087 521,501
Mortgage-backed securities 202,888 202,983 153,159 157,913
------------ ------------ ------------ ------------
$ 742,618 $ 737,496 $ 1,050,421 $ 1,032,937
============ ============ ============ ============
At December 31, 2000, the Company held below investment grade (S&P rating
below BBB-) corporate debt securities with an aggregate carrying value of
$62,367 and market value of $59,201. At December 31, 1999, the Company held
below investment grade corporate debt securities with an aggregate carrying
value of $34,098 and market value of $33,045. These holdings amounted to 1.5%
and 0.8% of the Company's total assets at December 31, 2000 and 1999,
respectively.
Fixed maturities with an amortized book value of $32,179 and $30,198 were
on deposit with insurance regulatory agencies of certain states at December 31,
2000 and 1999, respectively.
The Company owns a $10,000, 9.25% senior subordinated note ("the note")
issued by PFSH which matures in September 2004. The note is included in other
invested assets on the Company's consolidated balance sheet.
Mortgage loans on real estate
At December 31, mortgage loans on real estate consisted of:
2000 1999
---- ----
Mortgage loan principal $ 269,352 $ 227,976
Net unamortized purchase discount (150) (75)
Allowance for losses (300) (300)
------------ ------------
Net mortgage loans $ 268,902 $ 227,601
============ ============
The Company's mortgage loans on real estate are diversified by property
type, location and loan size and are collateralized by the related properties.
At December 31, 2000, mortgage loans on real estate were concentrated in the
following property types:
% of
2000 Portfolio
Property type:
Commercial
Multi-family apartments $ 76,490 28.4
Industrial/Warehouses 72,568 27.0
Office buildings 53,168 19.8
Retail space 37,252 13.9
Other 27,887 10.4
Residential 1,537 0.5
---------- -------
Total $ 268,902 100.0
========== =====
At December 31, 2000, the following states had a concentration of mortgage
loans aggregating more than 10% of the Company's mortgage loans: Texas -
$53,605; Missouri - $37,374; and Kansas - $29,648.
Investment in equity subsidiaries
The following table presents summarized financial information on a combined
proportionate basis of the Company's equity affiliates. Amounts presented
include the accounts of the Company's equity subsidiaries, CIG, Argus, Hereford
LLP and a hotel joint venture. The Company acquired the remaining 50% of CIG in
1998. Subsequent to the acquisition date, the operations of CIG are consolidated
in the Company's financial statements.
2000 1999 1998
---- ---- ----
Current assets $ 7,854 $ 7,382 $ 5,471
Noncurrent assets 21,291 17,466 17,547
Current liabilities 4,236 3,324 3,353
Noncurrent liabilities 12,362 9,383 9,996
Net revenues 26,815 27,864 32,124
Expenses applicable to net revenues 25,912 23,688 26,560
Income from continuing operations 903 4,176 3,740
Net income 411 2,776 2,581
In 1999, the Company received a cash distribution from Hereford LLP of
$240. In 1998, the Company received cash dividends from Argus and Hereford LLP
of $9,500 and $443, respectively.
Net investment income
Net investment income for the years ended December 31, is comprised of the
following:
2000 1999 1998
---- ---- ----
Fixed maturities $ 136,618 $ 126,739 $ 124,157
Equity securities 844 1,328 1,484
Equity in earnings of equity subsidiaries 507 2,776 2,581
Mortgage loans on real estate 19,434 16,883 16,518
Policy loans 11,610 12,572 12,671
Reinsurance funds held by reinsurer 54,732 60,342 66,895
Cash, short-term investments and other 7,852 12,431 8,005
----------- ----------- -----------
Total investment income 231,597 233,071 232,311
Less investment expenses (6,080) (5,449) (5,777)
----------- ----------- -----------
Net investment income $ 225,517 $ 227,622 $ 226,534
=========== =========== ===========
Realized gains and losses
Realized gains and losses from the sales and other redemptions of
investments for the years ended December 31, are as follows:
2000 1999 1998
---- ---- ----
Fixed maturity securities:
Held to maturity:
Realized gains $ 457 $ - $ -
Realized losses (7,909) - -
Available for sale:
Realized gains 7,419 3,199 23,193
Realized losses (11,385) (592) (1,212)
Equity securities:
Realized gains 24,404 14,391 6,018
Realized losses (20,095) (13,032) (21,642)
Other investments:
Realized gains 1,480 276 4,929
Realized losses (944) (68) (3,002)
----------- ----------- -----------
Total net realized investment gains $ (6,573) $ 4,174 $ 8,284
============ =========== ===========
Certain circumstances during 2000 caused the Company to change its intent to
hold specific securities to maturity. Due to evidence of a significant
deterioration in an issuer's creditworthiness, $9,256 of held-to-maturity
securities were sold, resulting in a realized loss of $7,256. Also, the
disposition of a block of life insurance business resulted in the sale of
held-to-maturity securities to maintain the Company's existing interest rate
risk position. Securities totaling $58,141 were sold resulting in a realized
loss of $196.
Following are the components of net unrealized investment gains as of
December 31:
2000 1999
---- ----
Investments carried at amortized cost:
Fixed maturities available for sale $ (19,347) $ (62,186)
Fixed maturities reclassified from available for sale to held to maturity 26,712 33,482
Investments carried at estimated fair value:
Equity securities 46,752 39,981
Effect on other balance sheet accounts (509) 16,984
Deferred income taxes (17,973) (9,102)
----------- -----------
Net unrealized investment gains $ 35,635 $ 19,159
=========== ===========
In November 1995, the FASB issued "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities" ("the
Guide") which, among other things, provided entities with a one-time opportunity
to transfer some or all securities from held to maturity. In December 1995, the
Company transferred fixed maturity securities with an amortized book value of
$195,207 and a market value of $198,329 out of the held to maturity category
into the available for sale category. Additionally, the Company transferred
fixed maturity securities with an amortized book value of $169,439 and a market
value of $178,883 out of the available for sale category into the held to
maturity category. In 1993, the Company transferred securities from the
available for sale category to the held to maturity category. The net unrealized
gains of $26,712 and $33,482 at December 31, 2000 and 1999, respectively,
relating to these investments transferred to held to maturity are being
amortized into income using the effective yield method over the lives of the
related securities.
The components of other comprehensive income are as follows:
Amounts Income Amounts Net of
Before Tax Taxes Tax
2000
Unrealized holding gains arising during period $ 25,555 $ (8,944) $ 16,611
Reclassification adjustments for gains realized
in net income (207) 72 (135)
----------- ----------- -----------
Other comprehensive income $ 25,348 $ (8,872) $ 16,476
=========== =========== ===========
1999
Unrealized holding losses arising during period $ (60,535) $ 21,188 $ (39,347)
Reclassification adjustments for gains realized
in net income (3,066) 1,073 (1,993)
----------- ----------- -----------
Other comprehensive income $ (63,601) $ 22,261 $ (41,340)
=========== =========== ===========
1998
Unrealized holding gains arising during period $ 15,689 $ (5,470) $ 10,219
Reclassification adjustments for gains realized
in net income (10,297) 3,604 (6,693)
----------- ----------- -----------
Other comprehensive income $ 5,392 $ (1,866) $ 3,526
=========== =========== ===========
The carrying value of investments that were non-income producing during the
three year period ended December 31, 2000 was not material to the Company's
consolidated financial position.
5. Deferred Policy Acquisition Costs and Cost of Business Acquired
The balances of and changes in deferred policy acquisition costs and the
cost of business acquired as of and for the three years ended December 31, are
as follows:
2000 1999 1998
---- ---- ----
Deferred policy acquisition costs:
Balance, beginning of year $ 212,860 $ 131,574 $ 87,840
Capitalization of expenses 76,032 64,813 44,548
Other additions - - 30,645
Disposition of insurance business (22,893) - -
Interest accretion 11,062 9,290 7,286
Amortization (25,241) (44,667) (19,868)
Amounts related to fair value adjustment of fixed maturity securities (23,141) 51,850 (18,877)
------------ ----------- -----------
Balance, end of year $ 228,679 $ 212,860 $ 131,574
=========== =========== ===========
Cost of business acquired:
Balance, beginning of year $ 219,490 $ 247,125 $ 300,180
Additions - 425 9,497
Interest accretion 10,361 12,356 15,453
Amortization (59,014) (50,283) (77,524)
Amounts related to fair value adjustment of fixed maturity securities (4,379) 9,867 (481)
------------ ----------- -----------
Balance, end of year $ 166,458 $ 219,490 $ 247,125
=========== =========== ===========
The estimated amortization and interest accretion of the cost of business
acquired for the five years ending December 31, 2005 are as follows:
Interest Estimated
Amortization Accretion Net Decrease
2001 $ 33,320 $ 8,328 $ 24,992
2002 27,923 7,045 20,878
2003 23,691 5,968 17,723
2004 19,488 5,075 14,413
2005 16,403 4,327 12,076
6. Insurance Liabilities and Reinsurance
Insurance liabilities at December 31, consist of the following:
2000 1999
---- ----
Policyholder account balances:
Universal life $ 1,475,997 $ 1,477,227
Annuities 1,147,750 1,122,400
------------ ------------
$ 2,623,747 $ 2,599,627
============ ============
Reserves for future policy benefits:
Traditional life $ 804,105 $ 807,391
Accident and health 2,433 2,524
Supplementary contracts 13,405 13,025
------------ ------------
$ 819,943 $ 822,940
============ ============
At December 31, 2000, approximately 94% of the annuity account balances of
the Insurance Companies are subject to surrender charges upon early withdrawal.
The Insurance Companies cede and assume reinsurance with unaffiliated
companies. The maximum portion of the risk retained on the life of any
individual is $350.
The Company is party to agreements which coinsure 100% of the Ohio State
and Investors Guaranty policies and the policies of two other blocks of business
to unaffiliated reinsurers (Reinsurers). The Company is also party to agreements
with the Reinsurers to reinsure certain risks on the same insurance policies to
Americo Financial. These agreements effectively transfer 30% of the profits of
the Ohio State and Investors Guaranty policies to the Reinsurers. The agreements
provide that the assets and insurance liabilities related to the reinsured
policies are to be retained by the Reinsurers. The assets retained by the
Reinsurers are held in an escrow account for the benefit of Americo Financial.
These various agreements are collectively referred to as the "Reinsurance
Agreements". The Company accounts for the Reinsurance Agreements by recording
the direct and assumed insurance liabilities and amounts receivable from
Reinsurers equal to the assets held by the Reinsurers. Premiums and policy
revenues and policyholder benefits from the reinsured policies are included in
the Company's statement of income. Interest income earned on the assets held by
the Reinsurers is recorded as investment income.
At December 31, the amounts receivable from reinsurers, the cost of
business acquired and the insurance liabilities related to the Reinsurance
Agreements included on the Company's consolidated balance sheet are as follows:
2000 1999
---- ----
Amounts receivable from reinsurers $ 912,166 $ 1,028,385
Cost of business acquired 95,771 127,397
Insurance liabilities 991,352 1,143,645
The Reinsurers will receive a portion of statutory profits from the
reinsured policies until the Reinsurers has recovered the initial ceding
commission. Upon termination of the reinsurance agreements, Americo Financial is
required to reimburse the Reinsurers for the amount of the unrecovered ceding
commission.
Amounts receivable from reinsurers consists of the following at December 31:
2000 1999
---- ----
Amounts recoverable for ceded future policy benefits $ 1,139,684 $ 1,172,898
Unrecovered ceding commission (79,186) (115,260)
Amounts recoverable on ceded policy and contract claims 14,709 16,277
Amounts recoverable on paid losses 2,883 6,110
Other 61,583 60,181
------------- -------------
$ 1,139,673 $ 1,140,206
============= =============
Amounts receivable from reinsurers include $16,375 and $13,221 from another
unrelated insurance company at December 31, 2000 and 1999, respectively.
Reinsurance contracts do not relieve the Company from its obligation to
policyholders. Failure of reinsurers to honor their obligations would result in
losses to the Company. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from activities or
economic characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. At December 31, 2000, no
allowance has been established as all amounts are deemed collectible.
Premiums ceded under reinsurance agreements were $68,124, $49,905 and
$50,283 for the years ended December 31, 2000, 1999 and 1998, respectively.
Reinsurance recoveries netted against other policyholder benefits totaled
$57,307, $55,494 and $52,738 for the years ended December 31, 2000, 1999 and
1998, respectively. The Insurance Companies are liable for reinsurance ceded to
other companies in the event the reinsurers are unable to pay their portion of
the policy benefits.
Certain of the Insurance Companies have ceded blocks of insurance under
financial reinsurance treaties to provide funds for acquisitions and other
purposes. These reinsurance transactions represent financial arrangements under
generally accepted accounting principles, and accordingly, are not reflected in
the accompanying financial statements, except for the associated risk fees. For
statutory accounting purposes, these financial reinsurance transactions provide
a reserve credit which increases statutory surplus.
In May 2000, the Company entered into an agreement to permanently reinsure
a block of payroll-deduction life insurance business to an unaffiliated company
on an indemnity coinsurance basis using an effective date of January 1, 2000.
However, the policy liabilities remain as direct liabilities to the Company in
the accompanying consolidated financial statements. As of the effective date,
liabilities associated with these policies totaled $138.5 million. Under the
reinsurance agreement, the Company transferred cash assets totaling $100.0
million and miscellaneous assets totaling $17.1 million to the unaffiliated
reinsurer. In addition, the Company removed deferred policy acquisition costs
totaling $20.3 million from its consolidated financial statements in conjunction
with this disposition. In order to fund the cash transfer, the Company sold
fixed maturity held to maturity investments with an amortized cost of $54.6
million and realized net investment losses of $0.3 million on those sales. For a
period of at least three years, the Company will continue to service these
policies for a fee paid by the reinsurer. This transaction has no significant
effect on the Company's consolidated financial position or results of
operations. Amounts receivable from this reinsurer related to this agreement
totaled $134.7 million at December 31, 2000.
7. Notes Payable
Notes payable at December 31, are comprised of the following:
2000 1999
---- ----
Senior subordinated notes bearing interest at 9.25%, due 2005 $ 91,500 $ 100,000
Unsecured discounted $12,000 notes, bearing interest at an effective interest rate
of 11.5%, payable in semi-annual equal installments due 2010 7,216 7,616
Unsecured discounted $5,000 note, bearing interest at an effective interest rate of
12.0% due 2015 3,143 3,094
Other 438 455
----------- -----------
$ 102,297 $ 111,165
=========== ===========
The senior subordinated notes (the Notes) are redeemable at the option of
the Company, in whole or in part, at 100% of the principal amount on January 1,
2000 and thereafter. Several of the Company's insurance subsidiaries purchased a
total of $8,500 of outstanding notes during 2000.
The unsecured discounted notes bear interest at 6.5% per annum payable
semi-annually and rank pari passu with the Notes. The Company recorded the notes
at their fair value at the date of issuance using effective interest rates of
11.5% and 12.0%. The unamortized discount at December 31, 2000 was $3,501. The
$5,000 note is subject to contractual set-off rights and is held under a pledge
and escrow agreement to secure certain indemnification obligations to the
Company.
In 1995, the Company entered into a $70,000 Credit Agreement which was
provided by a syndicate of lenders with The Chase Manhattan Bank as the
administrative agent. The Credit Agreement was amended and restated in December
1996 and subsequently amended in 1997 and 1998. The Company repaid all amounts
outstanding under the Credit Agreement during 1999. The Credit Agreement
operated as a revolving credit facility until December 31, 1999, at which time
it was terminated. Amounts outstanding under the Credit Agreement accrued
interest at a variable rate or the prime rate. The Company paid 0.2% per year on
the unused portion of the Credit Agreement.
The Notes contain certain covenants including, but not limited to,
limitations on indebtedness, liens securing indebtedness, sale or issuance of
capital stock of the Company's subsidiaries, restricted payments, issuance of
other subordinated indebtedness, investments, dividends and other distributions
by the Company's subsidiaries and transactions with affiliates. The Company was
in compliance with all debt covenants at December 31, 2000.
The aggregate principal payments due during each of the next five years are
as follows:
2001 $ 421
2002 443
2003 496
2004 551
2005 92,118
Later years 8,268
----------
$ 102,297
8. Stockholder's Equity and Statutory Surplus
The Insurance Companies are required by the applicable state's department
of insurance to maintain minimum levels of statutory capital and surplus. The
reported statutory capital and surplus of each company at December 31, 2000 was:
Reported Statutory
Company Capital and Surplus
United Fidelity $ 92,039
Great Southern 174,204
Americo Financial 56,320
National Farmers 22,660
Ohio State 124,797
Financial Assurance 6,112
Dividend distributions of the Insurance Companies to their respective
stockholder exceeding the greater of statutory net gain from operations during
the preceding year or 10% of capital and surplus at the end of the preceding
year are subject to the prior approval of the Texas Department of Insurance.
Dividends from the Insurance Companies may be paid only from statutory earned
surplus as determined in accordance with accounting practices prescribed or
permitted by the Texas Department of Insurance. In addition, the National
Association of Insurance Commissioners ("NAIC") has minimum risk-based capital
requirements which effectively restrict the payment of dividends by the
Insurance Companies. At December 31, 2000 the Insurance Companies had statutory
capital and surplus in excess of the levels required by the NAIC risk-based
capital guidelines.
SOP 94-5 "Disclosure of Certain Matters in the Financial Statements of
Insurance Enterprises" requires insurance enterprises to disclose permitted
statutory accounting practices which have a material effect on capital and
surplus or RBC. Permitted practices encompass those practices not prescribed by
state laws, regulations and administrative rules or by existing NAIC
authoritative literature. The Company does not have any statutory accounting
practices which are required to be disclosed under SOP 94-5.
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ from GAAP. The
following table summarizes capital stock and surplus and net income of the
Insurance Companies determined in accordance with accounting practices
prescribed or permitted by the state insurance departments. Included in these
amounts are amounts recorded in accordance with GAAP for non-insurance
subsidiaries.
2000 1999 1998
---- ---- ----
Capital and common stock $ 136,216 $ 128,370 $ 129,204
Net income (loss) 2,288 16,573 (13,422)
9. Income Taxes
Americo Life, Inc. will file a consolidated federal life and non-life
income tax return with FHC and FHC's eligible life and non-life subsidiaries. As
Financial Assurance is ineligible to join in the filing of the consolidated
return, it will file separately. The Company and its subsidiaries are charged or
credited an amount of federal income tax equal to the tax that would have been
due for each entity on a separate return basis in accordance with a written tax
allocation agreement. Net operating losses of members in each consolidated
return are utilized on a first-in, first-out basis.
The provision for U.S. federal income taxes for the years ended December
31, is comprised of the following:
2000 1999 1998
---- ---- ----
Current tax provision $ 74 $ 5,746 $ (522)
Deferred tax provision 7,494 (1,002) 3,757
----------- ----------- -----------
Provision for income taxes $ 7,568 $ 4,744 $ 3,235
=========== =========== ===========
The provision for income taxes differed from the amounts computed by
applying the applicable U.S. statutory federal income tax rate of 35% to pretax
income from continuing operations as a result of the following differences:
2000 1999 1998
---- ---- ----
Computed tax at statutory rate $ 7,854 $ 5,676 $ 4,209
Change in tax resulting from:
Availability of dividends received deduction to offset taxable
temporary differences (347) (725) (785)
Other 61 (207) (189)
----------- ----------- -----------
Provision for income taxes $ 7,568 $ 4,744 $ 3,235
=========== =========== ===========
The Company's net deferred federal tax liabilities are comprised of the tax
cost or benefit associated with the following items based on the 35% tax rate in
effect:
2000 1999
---- ----
Deferred tax liability:
Agent balances $ 131 $ 7,387
Cost of business acquired 144,263 137,881
Investments 1,256 5,290
Net unrealized investment gains 19,301 10,430
----------- -----------
Total deferred tax liability 164,951 160,988
----------- -----------
Deferred tax asset:
Policy reserves 63,550 75,706
Deferred policy acquisition costs 26,529 26,613
Utilization of net operating losses 1,008 1,289
Unearned policy revenues 19,522 16,733
Other 427 3,098
----------- -----------
Deferred income tax assets before valuation allowances 111,036 123,439
Less: valuation allowance (2,982) (2,982)
----------- -----------
Total deferred tax asset 108,054 120,457
----------- -----------
Net deferred tax liability $ 56,897 $ 40,531
=========== ===========
A valuation allowance is provided related to the tax benefit of loss
carryovers and deductible differences because it is more likely than not that
such benefits will not be realized.
Under the provision of the pre-1984 life insurance company income tax
regulations, a portion of "gain from operations" of a life insurance company was
not subject to current taxation but was accumulated, for tax purposes, in a
special tax memorandum account designated as "Policyholders' Surplus Account"
(PSA). Federal income taxes will become payable on this account at the then
current tax rate when and to the extent the account exceeds a specific maximum,
or when and if distributions to stockholders, other than stock dividends and
other limited exceptions, are made in excess of the accumulated previously-taxed
income. At December 31, 2000, the Insurance Companies had aggregate balances in
their PSA of approximately $11,549. Federal income tax of $4,043 would be due if
the entire balance is distributed at the current income tax rate of 35%. No
provision has been recorded relating to any potential distributions from the PSA
subsequent to 2000.
At December 31, 2000, the Insurance Companies with balances in their PSA
had aggregate balances in their Shareholder Surplus Accounts of approximately
$80,749 from which distributions could be made without incurring any federal tax
liability with respect to the PSA accounts.
Certain subsidiaries have net operating loss carryovers totaling
approximately $3,487 which will begin to expire in 2009 if unutilized.
Utilization of these losses is limited to income generated on a separate return
basis.
10. Commitments and Contingencies
The Company leases certain data processing equipment and office space, some
of which are leased from related parties under operating leases. Rental expense
was $4,811, $4,835 and $3,678 in 2000, 1999 and 1998, respectively, and is
included in other operating expenses. Approximate future minimum lease
commitments for leases whose terms are greater than one year at December 31,
2000 are as follows:
2001 $ 3,721
2002 3,378
2003 2,921
2004 2,673
2005 and thereafter 12,199
----------
$ 24,892
Great Southern is a defendant in four purported class action lawsuits that
were consolidated in May 1998 for multidistrict litigation pretrial proceedings
in the U.S. District Court for the Northern District of Texas (In re Great
Southern Life Insurance Company Sales Practice Litigation). These lawsuits
allege deceptive sales practices in the marketing of Great Southern's whole life
and universal life insurance policies and seek unspecified compensatory,
punitive and/or treble damages. On March 14, 2000, the court filed an order
certifying a class of all current and former owners of excess interest whole
life and/or universal life policies issued from 1982 through 1997. Additionally,
on August 13, 1998, a fifth purported class action lawsuit also alleging
deceptive sales practices was filed against Great Southern in state court in
Dallas, Texas (Ebling v. Great Southern Life Insurance Co., 68th District Court,
Dallas County, Texas.) In December 2000, the Ebling action was dismissed without
prejudice for want of prosecution. The dismissal order became final in January
2001.
On July 16, 1998, Great Southern, Fremont Life Insurance Company and
Fremont General Corporation (collectively "Fremont") were named as defendants in
a purported class action lawsuit arising out of the sale of, and imposition of
surrender charges under, deferred annuity contracts (Gularte v. Fremont Life
Ins. Co., et al., Los Angeles Superior Court, Los Angeles, California). On April
2, 1999, the court entered judgment dismissing with prejudice the action against
Great Southern and all other defendants. On May 31, 2000, the California Court
of Appeals affirmed the dismissal of plaintiff's fraud and reformation claims,
but reversed the dismissal of claims alleging unconscionability, breach of
covenant of good faith and fair dealing, and statutory unfair business
practices. The California Supreme Court denied defendants' petition for review,
and the case has been remanded to the trial court for further proceedings.
Great Southern and the Company, together with one of Great Southern's
general agents, Great American Life Underwriters ("GALU"), Entrepreneur
Corporation, Mercantile Life Insurance Company, American Planning Corporation
and various individuals, including certain officers of Great Southern and the
Company, are named defendants in an action that was certified as a class action
on April 28, 1998 (Thibodeau et al. v. Great American Life Underwriters, et al.,
District Court, Dallas County, Texas). The class members, who were life
insurance agents for GALU, allege that they were defrauded by defendants into
surrendering renewal commissions in return for the promise of stock ownership in
an unrelated company (Entrepreneur Corporation) to be made public at some point
in the future. On July 26, 2000, the Court approved a class action settlement
pursuant to which Great Southern paid $1.1 million to settle the claims asserted
by the plaintiff class. The costs of implementing the settlement, after
consideration of amounts provided in the consolidated financial statements, did
not have a material adverse effect on the financial condition of the Company.
Some members of the class appealed the trial court's approval of the settlement,
which appeal is pending. Shortly before the settlement was approved by the
Court, a co-defendant named in the lawsuit, Norman T. Faircloth, filed a
cross-claim against several of the other defendants, including the Company,
Great Southern, Great American Life Underwriters, Inc., Entrepreneur Corp., and
certain officers of Great Southern and the Company. The cross-claim asserts
claims similar to those asserted by the plaintiffs in the underlying lawsuit,
and seeks similar relief including actual damages, treble and punitive damages,
emotional distress damages and an accounting. The cross-claim is brought by a
single individual and does not seek relief on behalf of a class or any other
persons. The Court has severed this cross-claim.
On July 2, 1999, a purported class action lawsuit (Notzon v. The College
Life Insurance Company of America, et al., 111th District Court, Webb County,
Texas) was filed against the Company, The College Life Insurance Company of
America and several of its officers, directors and other affiliated parties,
several other subsidiaries of the Company and several other defendants.
Plaintiff's claims against the various defendants include allegations of various
misrepresentations, deceptive trade practices and statutory violations in
connection with the marketing and administration of deferred annuity and life
insurance products sold to school teachers and others. The suit seeks actual,
rescissory, treble and punitive damages, as well as injunctive and declaratory
relief. The suit initially was removed to federal court but was remanded to
state court.
On October 21, 1999, a purported class action lawsuit was filed against
Great Southern in Orange County Superior Court, California (Alexander v. Fremont
General Corporation, Fremont Life Insurance Co., and Great Southern Life
Insurance Co.). Plaintiff alleges misrepresentations and other wrongful conduct
in connection with the imposition of increased cost of insurance charges under
certain universal life policies assumed or issued by Fremont Life Insurance
Company, and which were subsequently assumed by Great Southern. The suit seeks
actual and punitive damages, as well as injunctive and restitutionary relief and
an accounting.
On August 16, 1999, a purported class action lawsuit (Pritzker v. The
College Life Insurance Company of America, and Loyalty Life Insurance Company,
U.S. District Court for the District of Massachusetts) was filed against the
Company's subsidiary, The College Life Insurance Company of America, and former
subsidiary, Loyalty Life Insurance Company. Plaintiff alleges
misrepresentations, breach of contract, and other wrongful conduct in connection
with the imposition of increased cost of insurance charges under certain
universal life policies assumed by defendants. Plaintiff also alleges defendants
paid less than the minimum guaranteed interest due under such policies.
Plaintiff also has sought leave to add a claim that defendants misrepresented
the amount of interest paid in excess of the guaranteed amounts. The suit seeks
actual and punitive damages, restitutionary and injunctive relief and an
accounting.
On November 22, 1999, a purported class action lawsuit (Knauer v. Ohio
State Life Insurance Company) was filed in the Court of Common Pleas, Erie
County, Ohio, and subsequently was removed by defendant to the U.S. District
Court for the Northern District of Ohio, Western Division. The suit alleged
misrepresentations and other wrongful conduct wherein defendant allegedly
collected premiums for life insurance policies prior to being bound to provide
coverage and allegedly misrepresented that premiums would "vanish" after a
certain time period. The suit sought actual and punitive damages, and
declaratory, restitutionary and injunctive relief. The suit was settled in
January 2001 by a payment of a nominal amount to the individual named
plaintiffs. Plaintiffs' class allegations were withdrawn and their individual
claims were dismissed with prejudice.
A purported class action lawsuit (Elizabeth Lukens v. Ohio State Life
Insurance Company) was filed in the U.S. District Court for the Eastern District
of California in November, 2000. The suit alleges that on or before June 25,
1990, defendant breached the terms of its universal life policies by increasing
its insurance rates without justification. The suit alleges that the increased
rates were improperly motivated by defendant's desire to pass on to
policyholders its increased tax liabilities under federal legislation passed in
1990 governing the tax accounting for deferred policy acquisition costs. The
suit asserts claims for breach of contract, breach of duty of good faith and
fair dealing, and acts of unfair competition under the California Business and
Professions Code. The suit seeks compensatory and exemplary damages in
unspecified amounts, in addition to injunctive and restitutionary relief.
The Company and its subsidiaries named in the above pending actions deny
any allegations of wrongdoing and intend to defend the actions vigorously.
Although plaintiffs in these actions generally are seeking indeterminate
amounts, including punitive and treble damages, such amounts could be large.
Although there can be no assurances, at the present time the Company does not
anticipate that the ultimate liability arising from such pending litigation,
after consideration of amounts provided in the consolidated financial
statements, will have a material adverse effect on the financial condition of
the Company.
The Company is also named as defendant in a number of other lawsuits
arising from the normal course of business, however, management does not expect
that these will result in a material loss to the Company.
11. Employee Benefit Plans
Great Southern is a sponsor of several contributory postretirement benefit
plans which provide life and medical insurance to participating retired
employees and agents. Great Southern's former parent assumed responsibility for
employees and agents who retired on or after August 1, 1984. Future costs of
benefits for employees and agents who retired prior to August 1, 1984, are the
responsibility of the Company. A liability for these postretirement benefits of
$1,180 is included in other liabilities at both December 31, 2000 and 1999.
12. Segment Information
The Company has determined that its reportable segments are those that are
based on the Company's method of internal reporting, which disaggregates its
business by product type. The Company's reportable segments are: life insurance
operations, asset accumulation products operations and non-life insurance
operations. The life insurance segment includes traditional term, whole life
insurance, universal-life insurance and annuity products. This segment primarily
consists of insurance business acquired by the Company. The accumulation
products segment includes primarily annuity products sold to public school
teachers and administrators and to the senior market. The non-life insurance
segment includes the Company's 50% investment in Argus and its investments in
real estate. The Company's business is conducted primarily in the United States.
The financial results of the Company's segments are presented on a GAAP
basis. Net investment income and operating expenses are allocated to its life
insurance and accumulation products segments based on the Company's internal
projections. The Company evaluates the performance of its segments and allocates
resources to them based on income before provision for income taxes. All
intersegment revenues have been eliminated.
The table below presents information about the reported revenues and income
before provision for income taxes. Asset information by reportable segment is
not reported, since the Company does not produce such information internally.
Accumulation Non-Life
Life Insurance Products Insurance Reconciling Consolidated
-
Operations Operations Operations Items Totals
Revenues
2000 $ 364,051 $ 57,845 $ 4,950 $ 23,581 $ 450,427
1999 398,423 42,568 6,019 15,829 462,839
1998 417,586 21,762 8,053 18,162 465,563
Amortization expense
2000 64,388 (1,383) - 4,993 67,998
1999 67,364 3,179 - 3,100 73,643
1998 73,874 (1,582) - 14,897 87,189
Income (loss) before provision
for income taxes
2000 46,751 10,610 1,929 (36,850) 22,440
1999 43,950 642 4,034 (32,408) 16,218
1998 54,421 3,887 6,837 (53,118) 12,027
Significant reconciling items to amounts reported in the Company's
consolidated financial statements which are not allocated to specific segments
include interest expense and a portion of (i) net investment income, (ii)
operating expenses (iii) net realized investment gains (losses) and (iv) certain
non-recurring transactions such as gains from the sale of subsidiaries.
13. Related Parties
The Company and FHC are parties to advisory and data processing services
agreements. Under the advisory agreement, FHC supervises and directs the
composition of the investment portfolios of the Company and its subsidiaries in
accordance with their respective objectives and policies. For these services,
FHC is compensated based on the aggregate statutory book value of the
investments of the Insurance Companies. Under the data processing agreement, FHC
provides the Company and its subsidiaries with record-keeping services for
certain life insurance and annuity products. The Company pays FHC an amount
equal to (i) the amount FHC pays its data processing vendor plus (ii)
amortization of FHC's development costs. The Company and its subsidiaries are
also involved in a cost-sharing agreement with FHC respecting air transportation
expenses arising from the use of an airplane owned by FHC.
United Fidelity leases office space from a partnership in which a related
party has a 50% interest. The Company leases to FHC a building which is occupied
by FHC. In addition, the Company utilizes a laboratory for underwriting purposes
which is partially-owned by several stockholders of FHC.
Amounts due from (to) affiliates at December 31, 2000 and 1999 include
$(698) and $1,611, respectively, due from (to) FHC arising from intercompany tax
allocation.
The following table summarizes the related party transactions for the three
years ended December 31:
2000 1999 1998
---- ---- ----
Data processing agreement between the Company and FHC $ 8,811 $ 11,413 $ 14,536
Advisory agreement between the Company and FHC 4,864 5,035 8,066
Air transportation cost sharing agreement 440 343 321
Rental expense 1,474 1,396 1,051
Laboratory services 337 406 343
AMERICO LIFE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
Report of Independent Accountants on Financial Statement Schedules S-2
Schedule II Condensed Financial Information of Registrant S-3
Schedule IV Reinsurance S-7
Schedule V Valuation and Qualifying Accounts S-8
All other financial statement schedules for which provision is made in
the applicable accounting regulation of the Securities and Exchange Commission
are not required under the related instructions or are inapplicable, and
therefore have been omitted.
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors and
Stockholder of Americo Life, Inc.
Our audits of the consolidated financial statements referred to in our
report dated March 27, 2001, appearing on page F-2 of this Form 10-K also
included an audit of the Financial Statement Schedules listed in Item 14(a) of
this Form 10-K. In our opinion, these Financial Statement Schedules present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri
March 27, 2001
Schedule II
Americo Life, Inc. and Subsidiaries
Condensed Financial Information of Registrant
Balance Sheet
(Dollars in thousands)
December 31, 2000 and 1999
2000 1999
---- ----
Assets
Equity securities, at market (cost: $9,082 and $9,821) $ 33,639 $ 20,712
Investment in subsidiaries 221,882 197,622
Cash and cash equivalents 80 3,569
Surplus debentures receivable 121,668 122,571
Property and equipment, net 974 1,345
Other assets 31,841 14,207
----------- -----------
Total assets $ 410,084 $ 360,026
=========== ===========
Liabilities and Stockholder's Equity
Notes payable $ 110,359 $ 110,712
Accrued interest payable 842 980
Amounts due to affiliates 311 4,785
Deferred income taxes 9,259 5,423
Other liabilities 34,651 12,812
----------- -----------
Total liabilities 155,422 134,712
----------- -----------
Stockholder's equity:
Common stock ($1 par value, 30,000 shares authorized, 10,000 issued and
outstanding) 10 10
Additional paid-in capital 3,745 3,745
Accumulated other comprehensive income 35,635 19,159
Retained earnings 215,272 202,400
----------- -----------
Total stockholder's equity 254,662 225,314
----------- -----------
Total liabilities and stockholder's equity $ 410,084 $ 360,026
=========== ===========
See notes to condensed financial information
Schedule II
Americo Life, Inc. and Subsidiaries
Condensed Financial Information of Registrant
Statement of Income
(Dollars in thousands)
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
Income
Management and data processing fees from subsidiaries $ 12,301 $ 14,840 $ 16,570
Interest income on surplus debentures receivable 11,306 11,427 12,237
Net investment income 143 624 686
Net realized investment losses (1,644) (196) (264)
Other income 1,627 1,978 2,149
----------- ----------- -----------
Total income 23,733 28,673 31,378
----------- ----------- -----------
Expenses
Management and advisory fees to parent 13,675 16,448 22,601
Interest expense 10,515 11,647 12,057
Other operating expenses 1,423 6,563 1,762
Amortization expense 923 1,193 850
----------- ----------- -----------
Total expenses 26,536 35,851 37,270
----------- ----------- -----------
Loss before provision for income taxes and equity in income of
subsidiaries (2,803) (7,178) (5,892)
Provision for income taxes (1,008) (2,341) (1,461)
----------- ----------- -----------
Loss before equity in income of subsidiaries (1,795) (4,837) (4,431)
Equity in income of subsidiaries 16,667 16,311 13,223
----------- ----------- -----------
Net income $ 14,872 $ 11,474 $ 8,792
=========== =========== ===========
See notes to condensed financial information
Schedule II
Americo Life, Inc. and Subsidiaries
Condensed Financial Information of Registrant
Statement of Cash Flows
(Dollars in thousands)
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
Cash flows from operating activities
Net income $ 14,872 $ 11,474 $ 8,792
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation and amortization 1,561 1,866 1,575
Undistributed equity in earnings of subsidiaries (16,667) (16,311) (13,223)
Dividends received from subsidiaries - 12,616 9,943
Increase in other assets, net of amortization (18,763) (4,459) (1,711)
Increase (decrease) in other liabilities 17,878 7,387 (2,033)
Provision for current income taxes - 1,597 (1,597)
Provision for deferred income taxes (948) (1,883) 136
Increase (decrease) in amounts due to/from affiliates (4,474) 6,436 (1,983)
Net realized losses on investments 1,644 196 264
Other changes 299 338 273
---------- ---------- ----------
Total adjustments (19,470) 7,783 (3,356)
---------- ---------- ----------
Net cash provided (used) by operating activities (4,598) 19,257 436
---------- ---------- ----------
Cash flows from investing activities
Purchases of equity securities (264) (2,991) (10,218)
Sales of equity securities 3,182 5,881 5,733
Principal collected on surplus debentures receivable 906 866 13,828
Change in other invested assets 206 (4,007) 1,496
Purchases of property and equipment, net (266) (254) (362)
---------- ---------- ----------
Net cash provided (used) by investing activities 3,764 (505) 10,477
---------- ---------- ----------
Cash flows from financing activities
Repayments of notes payable (655) (21,615) (577)
Dividends paid (2,000) (2,000) (2,000)
---------- ---------- ----------
Net cash used by financing activities (2,655) (23,615) (2,577)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (3,489) (4,863) 8,336
Cash and cash equivalents at beginning of year 3,569 8,432 96
---------- ---------- ----------
Cash and cash equivalents at end of year $ 80 $ 3,569 $ 8,432
========== ========== ==========
Supplemental disclosure of cash flow information
Cash paid during year for interest $ 10,349 $ 11,251 $ 11,790
See notes to condensed financial information
Schedule II
Americo Life, Inc. and Subsidiaries
Condensed Financial Information of Registrant
Notes to Condensed Financial Information
(Dollars in thousands)
For the Years Ended December 31, 2000, 1999 and 1998
In 1999, the Company received dividends totaling $12,376 from United
Fidelity and cash distributions totaling $240 from Hereford LLP. In 1998, the
Company received cash dividends totaling $9,500 from Argus and cash
distributions totaling $443 from Hereford LLP.
The accompanying condensed financial information should be read in
conjunction with the Consolidated Financial Statements and the accompanying
notes thereto in this Form 10-K.
Schedule IV
Americo Life, Inc. and Subsidiaries
Reinsurance
(Dollars in thousands)
For the Years Ended December 31, 2000, 1999 and 1998
Percentage
Assumed of Amount
Year Ended Gross Ceded to Other From Other Net Assumed
December 31, Amount Companies Companies Amount to Net
2000
Insurance in force $ 43,537,028 $ 14,512,268 $ 300,465 $ 29,325,225 1.0%
============== ============== ============== ============== ====
Premiums $ 281,055 $ 68,124 $ 7,760 $ 220,691 3.5%
============== ============== ============== ============== ====
1999
Insurance in force $ 43,802,144 $ 11,134,535 $ 602,028 $ 33,269,637 1.8%
============== ============== ============== ============== ====
Premiums $ 265,134 $ 49,905 $ 9,667 $ 224,896 4.3%
============== ============== ============== ============== ====
1998
Insurance in force $ 45,695,670 $ 12,612,790 $ 1,179,946 $ 34,262,826 3.4%
============== ============== ============== ============== ====
Premiums $ 252,133 $ 50,283 $ 16,732 $ 218,582 7.6%
============== ============== ============== ============== ====
Schedule V
Americo Life, Inc. and Subsidiaries
Valuation and Qualifying Accounts
(Dollars in thousands)
For the Years Ended December 31, 2000, 1999 and 1998
Additions
---------------------------
Balance at Charged to Charged to Balance at
Year Ended Beginning Cost and Other End of
December 31, of Period Expenses Accounts Deductions Period
------------ ------ -------- --------- ---------- ------
(1)
2000
Reserve for impairment of mortgage loans
on real estate $ 300 $ - $ - $ - $ 300
Write-down for impairment of real estate 68 - - 68 -
Allowance for receivables from agents 4,242 709 - - 4,951
----------- ----------- ----------- ----------- -----------
Total $ 4,610 $ 709 $ - $ 68 $ 5,251
=========== =========== =========== =========== ===========
1999
Reserve for impairment of mortgage loans
on real estate $ 300 $ - $ - $ - $ 300
Write-down for impairment of real estate 107 - - 39 68
Allowance for receivables from agents 3,580 662 - - 4,242
----------- ----------- ----------- ----------- -----------
Total $ 3,987 $ 662 $ - $ 39 $ 4,610
=========== =========== =========== =========== ===========
1998
Reserve for impairment of mortgage loans
on real estate $ 300 $ - $ - $ - $ 300
Write-down for impairment of real estate 107 - - - 107
Allowance for receivables from agents 3,468 112 - - 3,580
----------- ----------- ----------- ----------- -----------
Total $ 3,875 $ 112 $ - $ - $ 3,987
=========== =========== =========== =========== ===========
(1) Amounts transferred from other allowance accounts.