3
===============================================================================
UNITED STATES
SECURITIES 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, 2001 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, 2002: 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 10
3. Legal Proceedings 11
4. Submission of Matters to a Vote of Security Holders 13
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 14
6. Selected Consolidated Financial Data 14
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
7A. Quantitative and Qualitative Disclosure about Market Risk 28
8. Financial Statements and Supplementary Data 28
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 28
PART III
10. Directors and Executive Officers of the Registrant 29
11. Executive Compensation 30
12. Security Ownership of Certain Beneficial Owners and Management 31
13. Certain Relationships and Related Transactions 31
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 33
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, 2001, the Company had approximately $3.6 billion of
invested assets under management and $43.2 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 ("Americo Financial") (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").
Prior to 1998, the majority of the Company's growth resulted from
acquisitions of life insurance companies or blocks of in-force policies. This
strategy significantly increased the Company's size and provided it with a
large, stable block of in force business. The Company's current business
strategy is to develop innovative and competitive products and increase the
number of distribution sources in its existing markets and other selected
markets. Americo Financial is the primary company through which the Company
distributes its products. The Company's current sales focus and strategy are
more fully described in the "Life Insurance and Annuity Business" section. The
Company will continue to pursue selected acquisitions that fit its overall
business strategy.
In addition to the operations described above, the Company occasionally
makes financial investments in other businesses. Prior to December 2001, the
Company had 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 dividended its interest in Argus to FHC in December 2001. The
Company also owns several real estate investments.
During 2001, the Company evaluated its operations in Austin, Texas. This
evaluation resulted in the decision to cease the operations of Pension
Consultants and Administrators, Inc. ("PCA"), a third party administrator which
provided administration for retirement and cafeteria plans to school districts
and other clients. The Company determined that providing these services was no
longer an integral part of its overall business strategy. Subsequent to this
decision, the Company announced that it would relocate the remaining operations
in Austin to the Company's Kansas City, Missouri or Dallas, Texas locations.
This relocation will be completed by May 2002.
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 consists of insurance and annuity business acquired by the Company or
sold directly by one of the Company's life insurance subsidiaries. The life
insurance operations generated $362.4 million of revenues, or 85% of total
Company revenues, in 2001. The Company's asset accumulation operations consist
of annuity products sold by the Company to either public school teachers and
administrators or to the senior market. The asset accumulation operations
generated $63.0 million, or 15% of total Company revenues, in 2001 and have
grown at a compound annual growth rate of 52% over the last five years. Policy
liabilities and the number of policies in force as of December 31, 2001 for the
Company's segments are summarized below.
Life Insurance Asset Accumulation
Operations Operations Total
-------------- ------------------ ----------
(Dollars in thousands)
Policyholder account balances:
Universal life $ 1,456,181 $ 53,640 $ 1,509,821
Annuities 373,553 846,491 1,220,044
------------- ------------- -------------
$ 1,829,734 $ 900,131 $ 2,729,865
============= ============= =============
Reserves for future policy benefits $ 805,238 $ 6,117 $ 811,355
============= ============= =============
Policies in force 814,812 91,488 906,300
============= ============= =============
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 2001,
2000 and 1999 by product category. The table below excludes from direct and
assumed premiums any premiums of blocks of insurance policies 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, 2001
Traditional 26,958 67,078 94,036 43 47 90
Interest-sensitive 19,769 135,307 155,076 2,424 14,202 16,626
----------- ----------- ----------- ----------- ----------- -----------
Total life 46,727 202,385 249,112 2,467 14,249 16,716
Annuities 19,737 4,822 24,559 138,388 55,273 193,661
----------- ----------- ----------- ----------- ----------- -----------
Direct and assumed premiums 66,464 207,207 273,671 140,855 69,522 210,377
----------- ----------- ----------- -----------
Less ceded premiums (41,736) (66)
------------ ------------
Total 231,935 210,311
=========== ===========
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
=========== ===========
General Sales and Marketing
The Company's strategy is to be a product-driven company which develops,
delivers and services life insurance and annuity products in selected markets.
The Company is continually seeking new markets in which to deliver its products.
The Company seeks to deliver its products in partnership with independent
marketing organizations ("IMO's"). IMO's are responsible for positioning the
Company's products with independent agents who are representatives of the IMO's.
The IMO's recruit, train, manage and provide other support functions to the
independent agents. The Company believes that by utilizing IMO's, the Company
can focus on product development and customer service, while leaving the product
delivery to the IMO's. The Company has existing relationships with IMO's in each
of the markets it has currently targeted.
Historically, several of the Company's life insurance subsidiaries issued
their own products. In order to maximize the effectiveness of its marketing
efforts, the Company began an initiative in 2000 to conduct all of its sales and
marketing efforts through Americo Financial. The advantages of using a single
entity 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 only one of its life insurance companies. By the end of 2001,
virtually all of the Company's sales were being made by Americo Financial.
Life Insurance Operations
The Company delivers its products 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 directly or through IMO's.
The Company 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 in
the general insurance market. The Company sells preneed insurance products
focused on providing benefits for funeral expenses of the insured. The Company
also offers a range of level term and decreasing term products to the mortgage
life insurance market. The Company also offers equity-indexed annuities and
single premium and flexible premium annuities. Sales of life insurance and
annuity products in this segment totaled $66.1 million during 2001. The Company
measures sales as the sum of annualized first year life premiums and annuity
premiums.
Asset Accumulation Operations
The Company's asset accumulation operations include life insurance and
annuity products offered to public school teachers and administrators and to the
senior market. The Company utilizes specialized IMO's with captive sales agents
to market tax-qualified life and annuity products sold under Sections 403(b),
401(a) and 457 of the Internal Revenue Code to public school teachers and
administrators. Sales from these agents totaled $107 million in 2001. The
Company also offers annuity products to individuals in the senior market through
IMO's. 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 $45 million in 2001.
The Company offers a variety of life and annuity products in its asset
accumulation segment. The Company's life insurance products consist of
interest-sensitive whole life and universal life products. The Company's annuity
products include equity-indexed annuities, single premium and flexible premium
deferred annuities, and single premium immediate annuities. Sales from
equity-indexed products, introduced in 1999, accounted for $105 million and $121
million of sales in this segment in 2001 and 2000, respectively. The
equity-indexed products include an interest credit component which is based on
changes in external stock market indices.
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 (i) invested in productivity enhancing
technology, (ii) centralized certain functions and (iii) outsourced 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. A component of the imaging technology is a third party
system called Automated Work Distributor, which controls workflow and performs
other functions designed to increase efficiency. Because the investment in this
technology is relatively fixed, the Company has been able to leverage its
investment by increasing the number of policies administered.
In order to manage more effectively 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 its business and, by eliminating duplicative functions,
reduce operating costs and improve returns on acquired business.
During 2001, the Company formed a group of employees dedicated to the
promotion of quality initiatives. This group is responsible for developing a
culture within the organization focused on customer satisfaction and internal
productivity. The Company believes this increased focus on quality will
strengthen relationships with its policyholders and agents as well as reduce the
Company's operating costs.
The Company's decision to relocate the remaining operations located in
Austin to either Kansas City or Dallas will reduce operating expenses. The
Company expects to benefit from this change beginning in the second half of
2002. In addition, the Company expects its decision to consolidate its sales and
marketing efforts into Americo Financial will also result in further operating
expense reductions in 2002. These reductions should result from eliminating
duplicate costs for items such as regulatory product filings, marketing
materials and other agent materials and should also improve the efficiency of
processing new policies.
The Company has outsourced the major portion of its data processing
requirements through contracts entered into by FHC with Computer Sciences
Corporation ("CSC"). 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 cost-effectively
employ on its own.
Recognizing the possible productivity benefits of the Internet, the Company
is pursuing opportunities to integrate "e-business" strategies 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. The Company has also introduced
electronic policy application forms which can be automatically processed by its
administration systems.
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 invested in 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, 2001,
96.0% 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 in managing
the duration of its asset portfolio to correspond 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 are 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.
The carrying amounts of the Company's investments at December 31, 2001 were
as follows:
Total
Held to Available for Carrying
Investment Category Maturity (1) Sale (2) Trading (3) Amount Percentage
------------------- ------------ -------- ----------- ------ ----------
(in thousands)
Fixed maturities:
U.S. Treasury and government securities $ 2,297 $ 19,729 $ - $ 22,026 0.8
Mortgage-backed securities:
Collateralized mortgage obligations 163,303 111,852 - 275,155 10.0
Pass-through certificates 25,503 122,520 - 148,023 5.4
Other asset-backed securities 12,590 166,389 - 178,979 6.6
Corporate bonds 491,196 900,550 57,760 1,449,506 52.8
----------- ----------- ----------- ----------- ----------
Total fixed maturities $ 694,889 $ 1,321,040 $ 57,760 2,073,689 75.6
=========== =========== =========== ----------- ----------
Equity securities 74,531 2.7
Investment in equity subsidiaries 7,518 0.3
Mortgage loans on real estate 269,910 9.8
Investment real estate 28,196 1.0
Policy loans 189,683 6.9
Cash and cash equivalents 59,714 2.2
Other invested assets 41,602 1.5
----------- ----------
Total cash and invested assets $2,744,843 100.0
========== ==========
- -------------------------------------------------
(1) Carrying amount is amortized cost. The market value of held to maturity
securities at December 31, 2001 was $712.3 million.
(2) Carrying amount is market value. The amortized cost of available for sale
securities at December 31, 2001 was $1,308.8 million.
(3) Carrying amount is market value. The amortized cost of trading securities
at December 31, 2001 was $57.7 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 an unaffiliated reinsurer ("the Reinsurer") in escrow for the benefit of
the Company. These investments are managed by FHC. The carrying amounts, at
amortized cost, of these investments at December 31, 2001 were as follows:
Total Carrying
Amount Percentage
(in thousands)
Fixed maturities:
U.S. Treasury and government securities $ 40,463 5.1
Mortgage-backed securities 201,872 25.4
Other asset-backed securities 84,249 10.5
Corporate bonds 456,583 57.4
------------ -------
Total fixed maturities 783,167 98.4
------------ -------
Cash 12,771 1.6
------------ -------
Total cash and invested assets $ 795,938 100.0
============ =======
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, 2001 were real estate investments. Until December 1, 2001, the
Company also had a 50% ownership interest in Argus, which is accounted for using
the equity method. At December 31, 2001, the Company's non-insurance operations
segment consisted of the real estate investments.
Argus: The Company and an unrelated third party each owned a 50% equity
interest in Argus until December 1, 2001, when the Company dividended its 50%
interest in Argus to its parent. 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 2001, Argus generated revenues of $39.5 million
and processed over 158 million claims, approximately the same number as in 2000.
Real Estate Investments: The Company manages eleven investment properties
with a carrying value of $26.0 million including office space and apartments
principally located in Texas and Missouri. In 2001, the Company sold several of
the properties for no gain. The Company sold properties in 2000 for a $0.4
million gain. 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 make these products more competitive with
those offered by other carriers. Indemnity reinsurance does not fully discharge
the Company's obligation to pay claims on the reinsured policies, and the
Company remains responsible to the extent the reinsurer fails to pay such
claims. At December 31, 2001, the Company had ceded to reinsurers approximately
$10.5 billion (24%) of life insurance in force, of which 98% was reinsured with
insurance companies rated "A (Excellent)" or better by A.M. Best. Approximately
$5.3 billion of the insurance in force was ceded to two reinsurers, both of
which were 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 $0.9
billion at December 31, 2001. 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.
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 $19.8 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 $0.6 million and $0.4 million for the
years ended December 31, 2001 and 2000, 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.
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 a
single holding company. 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 sales of 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 the level of service
provided by the Company to the policyholder and the agent. The Company believes
that its ability to compete with other insurance companies is dependent upon its
ability to develop competitive products that are profitable and to develop and
maintain relationships with IMO's and agents to market its products. The Company
also competes with other companies in acquiring life insurance companies and
blocks of insurance business. 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 and annuity products and the acquisition of life insurance companies
is the ratings it receives from various rating agencies. Americo Financial and
Great Southern, 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 and National Farmers Union are rated "A- (Excellent)" and "B+ (Very
Good)", respectively, 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 an important consideration 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 and its subsidiaries are subject to
comprehensive regulation in the various states in which they are 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.
State governments have placed increased scrutiny 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, which permitted 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. The implementation of these standardized accounting principles, which
increased the amount of statutory surplus reported by the Company's life
insurance subsidiaries by approximately $11.0 million, did not adversely impact
the ability of the subsidiaries to make payments on the surplus debentures or to
pay dividends to the Company. 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 to limit or prohibit new issuances of business to policyholders within
their jurisdiction when, in their judgement, they 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 and (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.
Based upon Americo Financial's level of sales in California, it is
considered commercially-domiciled in California. As a result, Americo Financial
is subject to the California holding company regulations, which are
substantially the same as those of Texas.
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 further 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, 2001.
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 February 28, 2002, Americo and its wholly-owned subsidiaries employed
approximately 550 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, LLP, a Missouri limited liability
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 2002 and May 2003, respectively.
ITEM 3. LEGAL PROCEEDINGS
The Company has reached settlements in two large class actions. The class
actions and the settlements are described below, as are other cases in which the
Company or its subsidiaries are still defendants. The Company has fully
reflected the anticipated effects of the settlements in its December 31, 2001
consolidated financial statements.
On December 31, 2001, Great Southern Life Insurance Company ("Great
Southern") was a defendant in the following certified class action: In re Great
Southern Life Insurance Company Sales Practices Litigation, MDL 1214, in the
United States District Court for the Northern District of Texas. The class
consists of certain present and former policyholders who purchased
interest-sensitive whole life and universal life insurance policies issued or
acquired by Great Southern between January 1, 1982 and December 31, 1999. By
orders entered on January 15, 2002, the Court approved a class-wide settlement
and dismissed with prejudice the claims of the class members. The orders
approving the settlement are now final, as no appeals were timely filed. Under
the terms of the settlement, Great Southern has agreed, among other things: (1)
to issue certificates to class members for premium discounts on future purchases
of certain life insurance policies and annuities from Great Southern and its
affiliates; (2) to pay class members at least 50% of Great Southern's future
earnings on the class members' policies for either 10 years or until a specified
amount, ranging between $21 million and $26 million, has been paid, whichever
takes longer; (3) to pay the plaintiffs' attorneys an initial payment of
$750,000, and, thereafter, periodic payments equal to 22.38% of all amounts paid
to the class members under (2) above; and (4) to pay the administrative costs of
the settlement. Both the settlement and the Court's order approving the
settlement acknowledge that Great Southern has denied, and continues to deny,
all the allegations of misconduct.
Under the terms of the settlement, potential class members were given an
opportunity to exclude themselves from the class by sending a written exclusion
notice to the settlement administrator. Over 1,300 present and former
policyholders who sent in such exclusion notices have notified Great Southern
that they have retained an attorney to represent them. In early February 2002,
Great Southern filed actions in 12 states against substantially all of these
policyholders seeking, among other things, a declaration of nonliability.
Pursuant to Great Southern's request, the Judicial Panel on Multidistrict
Litigation issued an order on March 27, 2002 conditionally transferring the
actions filed outside of Texas to the United States District Court for the
Northern District of Texas for consolidated pretrial proceedings. Great Southern
is unable to estimate the costs it might incur as a result of the exclusion
notices or if the outcomes of its declaratory judgment actions are adverse to
it.
On December 31, 2001, Americo Financial, formerly named The College Life
Insurance Company of America ("College Life"), as well as certain affiliates of
the Company, were defendants in the following certified class action: Notzon, et
al. v. The College Life Insurance Company of America, et al.; No. 99-CVF-00697;
In the 111th District Court of Webb County, Texas. The class consists of certain
present and former owners of certain annuities and interest-sensitive life
insurance policies issued or acquired by Americo Financial between January 1,
1993 and October 1, 2001. By orders dated January 25, 2002, the Court approved a
class-wide settlement and dismissed with prejudice the claims of the class
members. The orders approving the settlement are now final, as no appeals were
timely filed. Under the terms of the settlement, Americo Financial has agreed,
among other things: (1) to provide three years of free accidental death benefit
coverage to most of the class members; (2) to create a claim resolution process
to resolve claims of individual class members; (3) to pay the named plaintiffs
and their attorneys a cash payment of $1,945,000; and (4) to pay the
administrative costs of the settlement. In the claim resolution process, the
relief to be provided will consist of cash awards and credits, premium vouchers,
policy modifications, accidental death benefit coverage, and interest.
Additionally, Americo Financial and certain of its codefendants have agreed to
arbitrate among themselves how the costs associated with the settlement will be
allocated. Both the settlement and the order approving the settlement
acknowledge that Americo Financial and its codefendants have denied, and
continue to deny, all allegations of wrongdoing.
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 Americo, 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 Americo, were
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 Texas Court of Appeals affirmed the trial court's approval
of the settlement on November 9, 2001 and denied appellant's motion for
rehearing on January 15, 2002. No petition for review by the Texas Supreme Court
was filed, and the order approving the settlement is now final. Shortly before
the settlement was approved by the trial court, a co-defendant named in the
lawsuit, Norman T. Faircloth, filed a cross-claim against several of the other
defendants, including Americo, Great Southern, Great American Life Underwriters,
Inc., Entrepreneur Corp., and certain officers of Great Southern and Americo.
The cross claim asserted claims similar to those asserted by the plaintiffs in
the underlying lawsuit and sought similar relief including actual damages,
treble and punitive damages, emotional distress damages and an accounting. On
April 13, 2001, the court granted summary judgment in favor of Great Southern
and other affiliated defendants on such cross-claim.
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 sought
actual and punitive damages, as well as injunctive and restitutionary relief and
an accounting. On February 20, 2002, the court approved a class-wide settlement,
which became final on March 25, 2002. The settlement terms require Great
Southern to pay $50,000 into a settlement fund.
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 (now Americo
Financial), 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 December 13, 2001, a purported class action lawsuit (Lukens, et al. v.
Ohio State Life Insurance Company) was filed against The Ohio State Life
Insurance Company (Ohio State) in California's Los Angeles County Superior
Court. The suit alleges that, on or before June 25, 1990, Ohio State breached
the terms of certain of its universal life policies by increasing its cost of
insurance rates without justification. The suit alleges that the increased rates
were improperly motivated by Ohio State's desire to increase its revenues by,
among other things, passing on to policyholders its increased tax liabilities
under 1990 federal legislation governing the tax accounting for deferred policy
acquisition costs. The suit asserts claims for breach of contract; breach of the
covenant of good faith and fair dealing; and acts of unfair competition under
California's Business and Professions Code. The suit seeks compensatory and
exemplary damages in unspecified amounts, as well as injunctive relief and
restitution.
On March 13, 2001, a purported class action lawsuit (Ernesto Cortes v. Ohio
State Life Insurance Company, 11th Judicial Circuit Court, Dade County, Florida)
was filed against Ohio State. The suit alleges that Ohio State breached its
obligations under a term life insurance policy purchased by plaintiff by failing
to observe the guaranteed features of the policy. The suit seeks damages in an
unspecified amount, prejudgment interest and attorney's fees on behalf of
plaintiff and a purported national class of others similarly situated.
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 common stock of the Company are owned by
FHC. There is no established public trading market for the Company's common
stock.
On December 31, 2001, the Company issued 1,350,000 shares of cumulative
Series A Preferred Stock to FHC in exchange for an equal number of shares of FHC
cumulative preferred stock in a private transaction exempt from registration
under Section 4(2) of the Securities Act. The Company authorized a total of
2,000,000 shares of Series A Preferred Stock. The Company's preferred stock and
the FHC preferred stock each have a par value of $1.00 per share and a total
stated value of $135.0 million. The Company has accounted for its investment in
the FHC preferred stock as an offset to its own preferred stock in stockholder's
equity.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The historical financial information for the five years ended December 31,
2001 and at December 31, 2001, 2000, 1999, 1998 and 1997 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)
2001 2000 (3) 1999 1998 (2) 1997 (1)
---- -------- ---- -------- --------
Statement of Income Data:
Premiums and policy revenues $ 206,883 $ 220,691 $ 224,896 $ 218,582 $ 203,729
Net investment income 211,081 225,517 227,622 226,534 219,267
Net realized investment gains (losses) (1,095) (6,573) 4,174 8,284 2,950
Other income 7,149 10,792 6,147 12,163 12,331
---------- ---------- ----------- ----------- ----------
Total income 424,018 450,427 462,839 465,563 438,277
Policyholder benefits 257,437 261,195 261,342 251,506 262,940
Commissions 8,715 4,348 8,928 8,439 11,230
Amortization expense 42,909 67,998 73,643 87,189 43,694
Interest expense 9,612 10,057 11,704 12,057 12,089
Other operating expenses 78,481 84,389 91,004 94,345 77,038
Restructuring expenses 9,914 - - - -
---------- ---------- ---------- ---------- ----------
Income before provision for income taxes and
cumulative effect of a change in accounting
principle 16,950 22,440 16,218 12,027 31,286
Provision for income taxes 5,657 7,568 4,744 3,235 9,230
---------- ---------- ----------- ----------- ----------
Income before cumulative effect of a change
in accounting principle 11,293 14,872 11,474 8,792 22,056
Cumulative effect of a change in accounting
principle 832 - - - -
---------- ---------- ---------- ---------- ----------
Net income $ 12,125 $ 14,872 $ 11,474 $ 8,792 $ 22,056
=========== =========== =========== =========== ===========
Net income applicable to common stock per
common share $ 1,212.51 $ 1,487.20 $ 1,147.40 $ 879.20 $ 2,205.60
=========== =========== =========== =========== ===========
Average common shares outstanding 10,000 10,000 10,000 10,000 10,000
====== ====== ====== ====== ======
Balance Sheet Data:
Total investments $ 2,685,129 $ 2,420,881 $ 2,361,019 $ 2,346,395 $ 2,125,813
Total assets 4,379,036 4,241,154 4,188,162 4,105,814 4,061,236
Total debt 101,547 102,297 111,165 132,533 132,884
Total liabilities 4,126,728 3,986,492 3,962,848 3,848,634 3,814,374
Stockholder's equity 252,308 254,662 225,314 257,180 246,862
(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
The Company's amounts of life insurance and annuities in force have
experienced changes over the last two years. These changes can be measured by
the changes in the Company's liabilities over this period. The liabilities as of
December 31 of the last three years are summarized in the following table (in
millions):
2001 2000 1999
---- ---- ----
Life Insurance Operations
Policyholder account balances:
Universal life $ 1,456.2 $ 1,433.7 $ 1,445.9
Annuities 373.6 424.6 588.7
Reserves for future policy benefits 805.2 819.9 822.9
--------- --------- ---------
$ 2,635.0 $ 2,678.2 $ 2,857.5
========= ========= =========
2001 2000 1999
---- ---- ----
Asset Accumulation Operations
Policyholder account balances:
Universal life $ 53.6 $ 42.3 $ 31.3
Annuities 846.5 723.1 533.7
Reserves for future policy benefits 6.1 - -
--------- --------- ---------
$ 906.2 $ 765.4 $ 565.0
========= ========= =========
The following table summarizes the Company's sales in terms of collected
first year premiums over the three-year period ended December 31, 2001.
2001 2000 1999
---- ---- ----
(in millions)
Life insurance premiums $ 49.2 $ 42.7 $ 47.7
Annuity premiums 158.1 199.5 184.3
--------- --------- ---------
$ 207.3 $ 242.2 $ 232.0
========= ========= =========
As shown in the above tables, the Company's growth over the last two years
has primarily occurred in the annuity balances of the asset accumulation
operations. This growth has been derived from a combination of new sales and
renewal premiums, primarily associated with the Company's equity-indexed annuity
products. The reserve balances in the Company's life insurance operations, with
the exception of the annuities, have remained fairly constant during the last
two years. The Company has been able to issue sufficient new business to offset
the surrenders and lapses in its older blocks of business.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and
results of operations are based on its consolidated financial statements, which
have been prepared in accordance with generally accepted accounting principles.
The preparation of these financial statements requires the Company to make
certain judgements and estimates that affect the amounts reported in the
financial statements and in the notes thereto. These judgements and estimates
are based on the best information available to the Company at the time and are
often based on historical experience of the Company. However, actual results
will often differ from these estimates. The revision of estimates can have a
significant impact on the reported results of operations for a period.
The Company's reserves for future policy benefits of $811.4 million at
December 31, 2001 on term life insurance and whole life insurance policies are
calculated using estimates of investment yields, mortality and withdrawals.
These estimates are based upon the Company's historical experience and
historical experience of the life insurance industry. Policyholder account
balances of universal life-type and annuity products of $2,729.9 million at
December 31, 2001 represent accumulated contract values, without reduction for
potential surrender charges and deferred front-end contract charges that are
amortized over the term of the policies. Additions to the reserves for universal
life-type policies are required when their balances, in addition to anticipated
future net cash flows, including investment income, are insufficient to cover
future benefits and expenses.
The costs of new business produced, principally commissions, certain policy
issue and underwriting expenses and certain variable agency expenses, are
deferred. The Company's deferred policy acquisition cost asset was $242.2
million at December 31, 2001. The cost of business acquired asset of $149.7
million at December 31, 2001 represents the amount of purchase price assigned to
the value of the policies at acquisition. 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. 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.
Retrospective adjustment of deferred policy acquisition costs and the cost
of business acquired are made annually upon the revision of estimates of current
or future gross profits on universal life-type and annuity products.
Recoverability of these assets is evaluated annually by comparing the current
estimate of future profits to the unamortized asset balances. The Company
recorded retrospective adjustments to these asset balances during both 2001 and
2000 as more fully discussed in the "Segment Results" and "Consolidated Year to
Year Comparisons" which follow.
Impairment of investment securities owned by the Company results in a
realized investment loss when a market decline below cost is deemed to be other
than temporary. Management regularly reviews each investment security against
criteria that include the extent of the decline in the market value of the
security, the duration of the decline and the financial health and prospects of
the issuer of the security. The Company recorded a realized loss of $2.1 million
on an individual security in its December 31, 2001 income statement as a result
of its review process.
Other significant accounting policies do not involve the same level of
estimation and management judgement as those described above. These accounting
policies are described in Note 1 to the consolidated financial statements
included elsewhere in this Form 10-K.
Adoption of SFAS No. 133
The Company adopted Statement of Financial Accounting Standards ("SFAS')
No. 133, "Accounting for Derivative Instruments and Hedging Activities", as
amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an Amendment of FASB Statement No. 133", on
January 1, 2001. In accordance with the transition provisions of SFAS No. 133,
the Company recorded a net-of-tax cumulative-effect-type gain of $0.8 million
in earnings to record all of its derivatives on the balance sheet at fair value.
The Company's equity-indexed annuity (EIA) products credit interest to the
policyholder's account balance based on a percentage (the "participation rate")
of the change in external indices over a two year period (the "index period").
At the end of each index period, a new index period begins using the
then-current account balance and external index value. The Company has the
discretion to change the participation rate at the beginning of each index
period, subject to contractually-guaranteed minimums. SFAS No. 133 requires that
each premium deposit be bifurcated between the embedded derivative component and
the host contract component. The embedded derivative component of the Company's
EIA products includes the options issued to the policyholder for the current
index period and for forward-starting periods. The Company records the changes
in the values of the embedded derivatives in current earnings as a component of
policyholder benefits. The host contract accretes interest to a maturity value
over a projected term. The interest accretion of the host contract is included
in interest credited on policyholder funds on the consolidated statement of
income.
The Company manages its exposure to changes in the fair value of EIA
embedded derivatives by purchasing exchange-traded and over-the-counter indexed
call options and futures contracts on the same external index. Neither these
assets nor the related EIA embedded derivatives are eligible for hedge
accounting treatment under SFAS No. 133. The Company recognizes the change in
fair values of these assets as a component of net investment income.
The adoption of SFAS No. 133 during 2001 has a significant impact on the
comparability of income statement components versus 2000. The impact on
individual income statement components is addressed in the discussion of the
results for the year ended December 31, 2001 below.
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", are summarized
as follows (in millions):
Life Insurance Asset Accumulation Non-Insurance
Operations Operations Operations
------------------------------- ------------------------------ -------------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ---- ---- ---- ----
Revenues $362.4 $380.3 $398.4 $63.0 $57.8 $42.6 $6.4 $4.9 $6.0
Income (loss)
before income
taxes 51.0 46.8 43.9 (1.4) 10.6 0.6 1.3 1.9 4.0
Life insurance operations. Income before income taxes increased $4.2
million from 2000 to 2001. The profits in both 2001 and 2000 were significantly
affected by changes in amortization expense and changes in the Company's policy
reserves. Revisions to estimates of future gross profits resulted in a decrease
in amortization expense of $21.9 million in 2001 and an increase in amortization
expense of $6.6 million in 2000. The most significant revision to estimated
gross profits in 2001 occurred as a result of changes in estimated policy
revenues and in policy benefits, including revisions made to reflect the
anticipated impact of the settlement of litigation in which the Company was the
defendant. The increase in reserves in 2001 was $13.0 million higher, primarily
associated with the same policies subject to the litigation settlements.
Excluding the changes in amortization and the increases in policy reserves
discussed above, income before income taxes decreased $11.3 million from 2000 to
2001. This decrease in profits was primarily the result of (i) a $7.0 million
increase in death benefits from 2000 to 2001 and (ii) lower profits on the
Company's preneed business in 2001 due to adverse lapse experience.
Income before income taxes increased $2.9 million from 1999 to 2000. This
increase in profits is due primarily 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.
Asset accumulation operations. Income before income taxes decreased $12.0
million from 2000 to 2001. The profits in both 2001 and 2000 were significantly
affected by changes in amortization expense. Revisions to estimates of future
gross profits resulted in an increase in amortization expense of $3.1 million in
2001 and a decrease in amortization expense of $5.5 million in 2000. The most
significant revision to estimated gross profits in 2001 occurred as a result of
changes in estimated policy benefits, including revisions made pursuant to the
anticipated impact of the settlement of litigation in which the Company was the
defendant. Excluding the changes in amortization expense discussed above, income
before income taxes decreased $3.4 million from 2000 to 2001. This decrease in
profits was primarily the result of (i) lower surrender charge income in 2001
and (ii) an additional $1.4 million of expense accrued for commission bonus
plans in 2001.
Income before income taxes increased $10.0 million from 1999 to 2000. The
primary reasons for the increase were (i) a $3.5 million reduction in
amortization of 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.
Non insurance operations. Income before income taxes decreased $0.6 million
from 2000 to 2001. The primary reason for the decrease was a $0.6 million
decrease in income from Argus in 2001 compared to 2000. 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. The Company
dividended its interest in Argus to FHC in December 2001.
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 report result from items not allocated to
specific segments. The significant reconciling items which are not allocable to
a segment are interest expense and a portion of (i) net investment income, (ii)
operating expenses, (iii) net realized investment gains and losses and (iv)
certain non-recurring transactions such as gains from the sale of subsidiaries.
The net loss from reconciling items was $3.0 million less in 2001 than in 2000.
The improvement from 2000 to 2001 resulted from (i) net realized investment
losses of $1.1 million in 2001 compared to net realized investment losses of
$6.6 million in 2000, (ii) $4.0 million of trading gains from the Company's
trading portfolio in 2001, (iii) lower litigation settlement costs in 2001 and
(iii) continued improvement in the reduction of operating expenses from 2000 to
2001. The positive factors in 2001 were partially offset by $9.9 million of
losses related to the Company's decision in 2001 to exit certain business and
relocate certain operations.
Similar 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.
Consolidated Year to Year Comparisons
Year Ended December 31, 2001 Compared with Year Ended December 31, 2000
Income before income taxes and cumulative effect of a change in accounting
principle in 2001 was $17.0 million compared to $22.4 million in 2000. Excluding
the effects of net realized investment gains and losses, income before income
taxes decreased $11.0 million for this same period from $29.0 million to $18.0
million. The primary reasons for the decrease in profits in 2001 compared to
2000 were (i) a $8.4 million increase in death benefits, net of reserves
released on traditional death benefits, (ii) a $7.0 million decrease in
surrender charge income on closed blocks of universal life and annuity business,
and (iii) a $9.9 million restructuring loss in 2001 related to the Company's
decision to terminate certain operations and relocate other operations. These
decreases in profits were partially offset by (i) lower amortization expense in
2001 resulting from the revisions of estimates of the future gross profits on
certain of its universal life-type and annuity products and (ii) a decrease in
amortization expense resulting from lower surrender charge income in 2001.
Premiums and policy revenues. Premiums and policy revenues totaled $206.9
million in 2001 compared to $220.7 million in 2000. Premiums from traditional
life insurance and preneed policies decreased $4.9 million during 2001 compared
to 2000. A $12.4 million decrease in premiums from the Company's inforce
traditional life insurance business was partially offset by a $7.5 million
increase in preneed premiums. Policy revenues from interest-sensitive life and
annuity products decreased $8.0 million from 2000 to 2001. This decrease was
primarily due to a $7.0 million reduction in surrender charge revenue in 2001 as
a result of lower surrenders in closed blocks of annuities and the asset
accumulation business.
Net investment income. Net investment income totaled $211.1 million in 2001
compared to $225.5 million in 2000. Net investment income for the years ended
December 31, 2001 and 2000 was comprised of the following (in millions):
2001 2000
---- ----
Fixed maturities $ 148.4 $ 136.6
Mortgage loans 20.7 19.4
Policy loans 10.2 11.6
Reinsurance funds held by reinsurer 48.7 54.7
Derivatives (19.1) -
Other, net of investment expenses 2.2 3.2
---------- ----------
Net investment income $ 211.1 $ 225.5
========== ==========
The reduction in net investment income in 2001 was primarily due to a $19.1
million decrease in fair value of call options and futures contracts owned by
the Company. The decrease in the fair value of these call options and futures
contracts was offset by the decline in value of the options embedded in the
Company's equity-indexed annuity liabilities. Excluding the decrease in the fair
value of derivative assets, investment income for 2001 increased $4.7 million
compared to 2000. Investment income on fixed maturity securities increased $11.8
million in 2001 based upon the increased amount of fixed maturity securities
owned by the Company in 2001 versus 2000. Investment income earned on
reinsurance funds held by reinsurer decreased $6.0 million from 2000 to 2001
because these funds decreased in 2001. The liabilities related to these
reinsurance funds experienced similar reductions in 2000.
Net realized investment losses. Net realized investment losses totaled $1.1
million in 2001 compared to net realized investment losses of $6.6 million for
2000. During the years ended December 31, 2001 and 2000, the Company recorded
realized gains on common stock of $5.5 million and $4.3 million, respectively.
The Company also recorded realized losses on fixed maturity investments of $6.9
million and $11.4 million, respectively, during the years ended December 31,
2001 and 2000.
Other income. Other income totaled $7.1 million for 2001 compared to $10.8
million for 2000. The primary reason for this decrease was a reduction in
servicing revenue on blocks of business which have been permanently coinsured to
other insurance companies.
Policyholder benefits. Policyholder benefits totaled $257.4 million for
2001 compared to $261.2 million for 2000. As discussed above, included in
policyholder benefits in 2001 is a $22.2 million reduction related to the
decline in value of the issued options embedded in the Company's equity-indexed
annuity liabilities. Excluding the decrease in the value of the issued options,
policyholder benefits increased $18.4 million from 2000 to 2001. Death benefits,
net of reserves released on traditional death benefits, during 2001 were $8.6
million higher than 2000. The remaining increase in policyholder benefits from
2000 to 2001 was attributable to higher increases in reserves for future policy
benefits in 2001.
Commissions. Commission expense totaled $8.7 million for 2001 compared to
$4.3 million in 2000. The increase in commission expense in 2001 included an
additional $1.4 million of expense accrued for commission bonus plans. The
receipt of approximately $1.5 million of nonrecurring reimbursements had reduced
commission expense in 2000. These reimbursements were offset by higher ceded
premiums on the same reinsurance agreement in 2000.
Amortization expense. Amortization expense totaled $42.9 million for 2001
compared to $68.0 million for 2000. The decrease resulted from (i) a revision of
estimated future gross profits on blocks of universal life and annuity business
and (ii) lower amortization expense in closed blocks of universal life and
annuity business.
During 2001, the Company revised its estimates of the future gross profits
on certain of its universal life-type and annuity products. The revisions
primarily consisted of changes in estimated policy revenues and benefits paid to
policyholder account balances. Certain of these revisions resulted from the
anticipated impact of settling litigation in which the Company was the
defendant. As a result of these changes in estimates, the Company recorded
retrospective adjustments during 2001 which increased the cost of business
acquired asset by $21.4 million and which decreased the deferred policy
acquisition cost asset by $3.0 million.
The Company's closed blocks of universal life and annuity business
experienced significantly lower levels of withdrawals during 2001 than during
2000. The decrease of $5.0 million in amortization expense related to these
blocks was partially offset by the lower surrender charge revenue during 2001,
as discussed above.
Other operating expenses. Other operating expenses totaled $78.5 million
for 2001 compared to $84.4 million for 2000. Included in other operating
expenses for 2001 was a $3.5 million increase in the allowance for receivables
from agents which the Company has estimated to be uncollectible, $1.5 million of
litigation costs and $0.8 million related to the costs of mailing notices to
policyholders to comply with recently-issued federal privacy regulations. The
majority of the agent receivables deemed uncollectible were older balances on
which related litigation was settled during 2001. Other operating expenses for
the year ended December 31, 2000 included $3.1 million of costs associated with
the settlement of lawsuits. The remaining net reduction in other operating
expenses from 2000 to 2001 reflects the Company's continued efforts to reduce
expenses and improve the efficiency of its operations.
Restructuring expenses. During 2001, the Company made certain changes to
its administrative and sales operations involved in the sale of insurance
products to the tax-qualified market. Among other matters, the Company decided
to relocate operations located in Austin to existing operations located
elsewhere. Additionally, the Company decided to cease operations of an entity
that previously provided administration for retirement and cafeteria plans to
school districts and other clients. Among the factors leading to these decisions
was the settlement of litigation in which the Company had been a defendant. The
relocation of the remaining Austin operations will be completed in May 2002. In
connection with these business decisions, the Company recorded a restructuring
loss of $9.9 million consisting of several components. The Company determined
that a portion of the goodwill related to these entities had become impaired.
Based upon the Company's best estimate of the future results of operations of
these entities, the goodwill asset was reduced by $4.7 million. The
restructuring loss includes $1.5 million representing the unamortized cost of
software developed for use by these entities and exit costs of $0.9 million for
expected severance payments and for lease payments on the Austin office space
beyond the date of the relocation. The remaining portion of the loss consists of
the operating expenses of the third party administrator.
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 fourth 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 from 1999 to 2000. 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.
Financial Condition and Liquidity
Liquidity. Americo has no operations of its own and relies on its
subsidiaries for funds. Americo's cash requirements 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 dividends from United Fidelity and by payments of principal and
interest on surplus debentures that Americo holds which were issued to it by
United Fidelity. Americo also receives payments under investment advisory and
data processing agreements with its 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, 2001, Americo had a total of $28.8
million of cash, marketable equity securities and fixed maturity 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 its 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 $17.0 million. Of the $17.0 million face amount of notes payable
issued to the seller, $5.0 million mature in 2015 and the remaining $12.0
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 of $10.0 million, which assumes an average
effective rate of 11.5%.
At December 31, 2001, Americo held four United Fidelity surplus debentures
with an aggregate unpaid balance of $120.0 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 timely 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
further 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, 2001 was $100.6 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, and (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, 2001, the
Company's investment portfolio included $59.7 million of cash and short-term
investments, $74.5 million of marketable equity securities, $228.9 million of
U.S. Treasury and government securities, mortgage-backed securities and
asset-backed securities and $892.8 million of corporate bonds classified as
available for sale, the vast majority of which management believes could be
readily converted to cash.
On December 31, 2001, the Company issued 1,350,000 shares of cumulative
Series A Preferred Stock to FHC in exchange for an equal number of shares of FHC
cumulative preferred stock. The Company authorized a total of 2,000,000 shares
of Series A Preferred Stock, which ranks senior to the Company's common stock as
to dividends and liquidation rights. The Company's preferred stock and the FHC
preferred stock each have a par value of $1.00 per share and a total stated
value of $135.0 million. Cumulative annual dividends on the Company's preferred
stock of 3.38% plus the LIBOR rate are payable quarterly, either in cash or in
additional shares of preferred stock. The Company will receive a quarterly
dividend on the FHC preferred stock of 3.11% plus the LIBOR rate per annum,
either in cash or in additional shares of FHC preferred stock. The Company is
required to redeem any outstanding shares of the Series A Preferred Stock on
December 31, 2016 for $100 per share plus any unpaid dividends.
The Company has accounted for its investment in the FHC preferred stock as
an offset to its own preferred stock in stockholder's equity. Dividends on the
Company's preferred stock, when payable, will also be substantially offset by
the dividends payable on the FHC preferred stock.
On December 31, 2001, Americo Retirement Services, Inc. (ARS), a
wholly-owned subsidiary of Americo Life, Inc., established a grantor trust (the
Trust) for the purpose of paying certain amounts due under a litigation
settlement agreement. The Trust was funded with a contribution of the FHC
preferred stock received by Americo in exchange for Americo's own preferred
stock. In order to fund its obligations, the Trust is authorized to sell shares
of the FHC preferred stock as necessary. FHC has a right of first refusal on any
shares the Trust offers for sale. The Trust will exist until all such
obligations for which it has been made responsible have been paid or expired. At
such time, any assets remaining in the Trust will revert back to ARS. The
accounts of the Trust are included in the consolidated financial statements of
the Company. The Company's December 31, 2001 consolidated financial statements
reflect the Company's best estimate of its liability under the settlement.
Financial condition. Stockholder's equity decreased to $252.3 million at
December 31, 2001 from $254.7 million at December 31, 2000. The decrease was the
result of a decrease in net unrealized investment gains of $4.9 million and $9.6
million of dividends to FHC, partially offset by net income of $12.1 million.
The dividends consisted of the Company's ownership interest in Argus and $2.0
million of cash. Net unrealized investment losses in 2001 were recorded due to a
decrease 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.
Statutory capital and surplus of the Company's insurance subsidiaries at
December 31, 2001 includes $19.8 million arising from financial reinsurance
agreements, which amount 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, 2001:
Equivalent Total
S&P Moody's NAIC Held to Available Carrying
Rating (1) Rating (1) Rating (1) Maturity (2) for Sale (3) Trading (4) Amount Percentage
----------- ----------- --------- ----------- ----------- ---------- -------- ----------
Investment grade:
AAA Aaa 1 $ 253,128 $ 465,776 $ - $ 718,904 34.7
AA Aa1,Aa2, Aa3 1 70,829 139,472 - 210,301 10.1
A A1, A2, A3 1 217,680 263,371 25,771 506,822 24.4
BBB Baa1, Baa2, Baa3 2 130,948 391,653 31,989 554,590 26.8
----------- ----------- ----------- ----------- ---------
Subtotal 672,585 1,260,272 57,760 1,990,617 96.0
Non-investment grade:
BB or below Ba1 or below 22,304 60,768 - 83,072 4.0
----------- ----------- ----------- ----------- ---------
Total fixed maturity
investments $ 694,889 $ 1,321,040 $ 57,760 $2,073,689 100.0
=========== =========== =========== ========== =========
(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 through 6, "BB or below".
(2) Carrying amount is amortized cost. The market value of held to maturity
securities at December 31, 2001 was $712.3 million.
(3) Carrying amount is market value. The amortized cost of available for sale
securities at December 31, 2001 was $1,308.8 million.
(4) Carrying amount is market value. The amortized cost of trading securities
at December 31, 2001 was $57.7 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, 2001,
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 the MBS portfolio 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 the purchase of securities whose values are heavily influenced by
changes in prepayments (such as interest-only and principal-only securities) and
(iii) purchasing 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, 2001, the Company's investment portfolio included $269.9
million of mortgage loans, which were collateralized primarily by multi-family
apartments, office buildings and retail properties located in 27 states.
Approximately 24% of the portfolio consisted of multi-family apartments, 26%
consisted of office buildings, 28% consisted of industrial properties and 22%
consisted of other types of properties. At December 31, 2001, approximately 13%
of the mortgage loan portfolio was secured by properties in Texas, 18% by
properties in Missouri, 9% by properties in Connecticut and 8% by properties in
California and Florida. No more than 8% of the remaining portfolio was secured
by properties in any one state.
At December 31, 2001, 0.2% of the mortgage loan portfolio consisted of
loans with balloon payments that mature before January 1, 2003. At December 31,
2001, the Company had no mortgage loans delinquent by more than 90 days. There
were no loans foreclosed upon and transferred to real estate owned in the
Company's consolidated balance sheet at December 31, 2001. The favorable default
experience is principally attributable to the Company's selectivity in the
purchase of mortgages in connection with acquisitions of its life insurance
subsidiaries and in its origination of new mortgage loans. In light of the
current 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 1.0% of the carrying value of the Company's
cash and invested assets at December 31, 2001.
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" which are applicable to surplus debentures and the
restrictions imposed by 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 and that therefore the Company
could avoid 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 a declining rate 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 reasonably
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 73%
in 2001. In addition, the portfolio's concentration in mortgage-backed
securities and asset-backed securities, which are subject to cash flow
variability in changing interest rate environments, has decreased from 38% in
1995 to 29% in 2001. 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, 2001,
approximately 60% and 92% 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.
Similarly, at December 31, 2001, the aggregate cash surrender values of the
Company's interest-sensitive life insurance and annuity products were
approximately 88% and 90%, respectively, of the aggregate policyholder fund
value.
As part of its asset-liability management process, 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-generated 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, 2001, the Company's assets had an effective duration of 5.2 and its
liabilities had an effective duration of 5.5. If interest rates were to decrease
10% from December 31, 2001 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.
Equity-Indexed Annuities and Derivatives
The Company's equity-indexed annuity (EIA) products credit interest to
the policyholder's account balance based on a percentage (the "participation
rate") of the change in external indices over a two year period (the "index
period"). At the end of each index period, a new index period begins using the
then-current account balance and external index value. The Company has the
discretion to change the participation rate at the beginning of each index
period, subject to contractually-guaranteed minimums. SFAS No. 133 requires that
each premium deposit be bifurcated between the embedded derivative component and
the host contract component. The embedded derivative component of the Company's
EIA products includes the options issued to the policyholder for the current
index period and for forward-starting periods. The Company records the changes
in the values of the embedded derivatives in current earnings as a component of
policyholder benefits. The host contract accretes interest to a maturity value
over a projected term. The interest accretion of the host contract is included
in interest credited on policyholder funds on the consolidated statement of
income.
The Company manages its exposure to changes in the fair value of EIA
embedded derivatives by purchasing exchange-traded and over-the-counter indexed
call options and futures contracts on the same external indices. Neither these
assets nor the related EIA embedded derivatives are eligible for hedge
accounting treatment under SFAS No. 133. The Company recognizes the change in
fair values of these assets as a component of net investment income.
The Company also uses computer-generated simulations to evaluate how
effectively it has managed the risk associated with these derivatives. The
Company periodically generates 500 different interest rate and equity return
scenarios to measure the present value of its equity-indexed annuity block of
business. Over 95% of these scenarios returned a positive present value using a
9% discount rate. The standard deviation of the resulting present values was
approximately $11.0 million.
Effects of Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets."
SFAS No. 141 supersedes previously issued guidance on accounting for business
combinations. SFAS No. 141 eliminates the pooling-of-interests method of
accounting for business combinations initiated after July 1, 2001 and also
changes the criteria used to recognize intangible assets apart from goodwill.
SFAS No. 142 supersedes the current accounting guidance for goodwill and
intangible assets. Under SFAS No. 142, goodwill and indefinite-lived intangible
assets will no longer be amortized but will be reviewed for impairment.
Intangible assets with finite lives will continue to be amortized over their
useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and
intangible assets acquired after June 30, 2001. For all other goodwill and
intangible assets, the amortization provisions are effective upon adoption of
SFAS No. 142. The impairment provisions of SFAS No. 142 are effective upon
adoption of the statement. Adoption of SFAS No. 142 is required as of the
beginning of fiscal years beginning after December 15, 2001. The Company does
not expect that adoption of SFAS No. 142 will have a significant effect on its
consolidated financial position or results of operations.
The FASB has also recently issued SFAS No. 143 "Accounting for Asset
Retirement Obligations" and SFAS No. 144 "Accounting for Impairment or Disposal
of Long-Lived Assets." SFAS No. 143 requires that obligations associated with
the retirement of a tangible long-lived asset be recorded as a liability when
those obligations are incurred. The liability is initially measured at fair
value and the cost is capitalized by increasing the carrying amount of the
related long-lived asset. SFAS No. 143 will be effective for financial
statements for fiscal years beginning after June 15, 2002. The Company does not
own long-lived assets of the type that will generally create retirement
obligations. Therefore, adoption of SFAS No. 143 will not affect the Company's
consolidated financial statements.
SFAS No. 144 provides guidance on the accounting for the impairment or
disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" and amends Accounting Principles Board Opinion No. 30 ("APB No. 30")
Reporting Results of Operations - Reporting the Effects of Disposal of a Segment
of a Business." SFAS No. 144 requires that long-lived assets that are to be
disposed of by sale be measured at the lower of book value or fair value less
cost to sell. Additionally, entities are no longer required to include under
"discontinued operations" operating losses that have not yet occurred. SFAS No.
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, its provisions are to be applied
prospectively. The Company does not expect that adoption of SFAS No. 144 will
have a significant effect on its consolidated financial position or results of
operations.
The American Institute of Certified Public Accountants ("AICPA") recently
issued Statement of Position No. 01-05 ("SOP 01-05") "Amendments to Specific
AICPA Pronouncements for Changes Related to the NAIC Codification." SOP 01-05
amends SOP 94-5 "Disclosures of Certain Matters in the Financial Statements of
Insurance Enterprises" in response to the completion of the codification of
statutory accounting principles. SOP 01-05 requires the disclosure of prescribed
or permitted statutory accounting practice and the related effect on statutory
surplus of using an accounting practice that differs from either state
prescribed statutory accounting practices or NAIC codified statutory accounting
principles. These disclosures are required beginning with financial statements
issued for fiscal years ending after December 15, 2001. The Company has adopted
the disclosure requirements of SOP 01-05 in its December 31, 2001 consolidated
financial statements.
The AICPA also recently issued Statement of Position No. 01-06 ("SOP
01-06") "Accounting by Certain Entities (Including Entities with Trade
Receivables) That Lend to or Finance the Activities of Others." The guidance in
SOP 01-06 relating to financing and lending activities is explicitly applicable
to insurance companies. SOP 01-06 reconciles and conforms the accounting and
financial reporting guidance presently contained in other accounting guidance.
SOP 01-06 is effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company's accounting practices for its
lending activities are already consistent with the guidance contained in SOP
01-06. Therefore, adoption of SOP 01-06 will not have a significant effect on
the Company's financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The quantitative and qualitative disclosures about market risk are
contained in the "Asset-Liability Management" and "Derivatives" sections 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, 2001 and the related report of independent accountants
thereon are set forth at pages F-2 to F-29 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 44 Chairman of the Board and Director
Gary L. Muller 55 President, Chief Executive Officer and Director
Timothy S. Sotos 53 Director
Gary E. Jenkins 44 Executive Vice President and Treasurer
Mark K. Fallon 47 Senior Vice President of Investments and Chief
Financial Officer
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 of all of its insurance subsidiaries effective October 2, 2000. He has
served as Treasurer of Americo and the insurance subsidiaries since November
1995. He served as the Chief Financial Officer of Americo until February 14,
2001, having been elected to that position in July 1994. 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 and Chief Financial Officer
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, 2001.
Summary Compensation Table
Name and
Principal Occupation Annual Compensation All Other
-------------------- Year Salary Bonus Compensation (1)
---- ------ ----- ---------------
Gary L. Muller 2001 $ 462,000 $ 250,000 $ 5,561
President, Chief Executive Officer and 2000 462,000 275,000 6,610
Director 1999 462,000 350,000 4,990
Michael A. Merriman 2001 363,000 - 5,561
Chairman of the Board 2000 363,000 - 6,680
1999 363,000 - 4,990
Gary E. Jenkins (2) 2001 300,000 200,000 56,222
Executive Vice President 2000 200,000 150,000 6,451
1999 200,000 175,000 4,992
James L. Anderson 2001 250,000 125,000 6,215
Senior Vice President 2000 250,000 125,000 6,268
1999 250,000 125,000 5,148
Mark K. Fallon (3) 2001 225,000 125,000 6,221
Senior Vice President of Investments and 2000 - - -
Chief Financial Officer 1999 - - -
- ------------------------------------------------------
(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) Amount includes $50,000 of compensation for a retroactive salary adjustment
back to 2000.
(3) Mark Fallon received compensation from Financial Holding Corporation in
2000 and 1999.
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 and 1,350,000 shares of
Series A Preferred Stock outstanding at March 26, 2002 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's common stock is the only capital stock with voting
powers.
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 Actual Percent
Title of Class Names of Beneficial Owners Ownership 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 has 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, 2001 was $3.9 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, 2001 under the Data Processing Agreement was $8.6 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 the services FHC
provides 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 with 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 $0.3 million of expense under this agreement
for the year ended December 31, 2001.
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 is
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 party contributing the expense or other item that
reduces or increases, as the case may be, 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, LLP, a limited liability
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 2001 was approximately $1.4 million. The terms of the lease are as
favorable to the Company as those offered to other unaffiliated tenants of the
building.
Subsidiaries of the Company paid an aggregate of approximately $0.3 million
in 2001 to Clinical Reference Laboratory, Inc., a Kansas corporation
("Clinical"), which is controlled 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 life insurance subsidiaries. The rates paid
were competitive with those charged by Clinical to similarly situated
unaffiliated insurance companies for similar services.
On December 31, 2001, the Company issued 1,350,000 shares of cumulative
Series A Preferred Stock with a stated value of $135.0 million to FHC in
exchange for an equal number of shares of FHC cumulative preferred stock. This
transaction is more fully described in Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein.
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 December 28,
2001, of the Registrant.
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).
3.3* Certificate of Designations of Series A Preferred Stock of
Americo Life, Inc. dated December 21, 2001.
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
1, 2001, 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.
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
Corporation 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 Corporation 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 Corporation 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).
10.17* Stipulation of Settlement in re Great Southern Life Insurance
Company Sales Practices Litigation
10.18* Settlement Agreement between The College Life Insurance
Company of America and plaintiffs in re Notzon, et al v. The
College Life Insurance Company of America, et al.
10.19* Irrevocable Grantor Trust Agreement dated as of December 31,
2001, between Commerce Bank, N.A.,
as Trustee, and Americo Retirement Services, Inc., as Grantor
21* Subsidiaries of the Registrant
* Filed herewith.
- -------------------------
(c) Reports on Form 8-K.
There were no reports on Form 8-K filed for the three months ended
December 31, 2001.
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, 2002.
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, 2002
- ---------------------------- Directors
Michael A. Merriman
/s/ Gary L. Muller President, Chief Executive March 27, 2002
- ---------------------------- Officer and Director
Gary L. Muller
/s/ Mark K. Fallon Senior Vice President and March 27, 2002
- ---------------------------- Chief Financial Officer
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, 2001:
Report of Independent Accountants F-2
Consolidated Balance Sheet at December 31, 2001 and 2000 F-3
Consolidated Statement of Income for the Years Ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statement of Stockholder's Equity for the Years Ended December 31, 2001, 2000 and 1999 F-5
Consolidated Statement of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999 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, 2001, and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, 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 25, 2002
Americo Life, Inc. and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)
December 31, 2001 and 2000
2001 2000
---- ----
Assets
Investments:
Fixed Maturities:
Held to maturity, at amortized cost (market: $712,314 and $737,496) $ 694,889 $ 742,618
Available for sale, at market (amortized cost: $1,308,773 and $1,050,421) 1,321,040 1,032,937
Trading, at market (amortized cost: $57,747 and $0) 57,760 -
Equity securities, at market (cost: $48,598 and $57,920) 74,531 104,771
Investment in equity subsidiaries 7,518 14,259
Mortgage loans on real estate, net 269,910 268,902
Investment real estate, net 28,196 30,398
Policy loans 189,683 194,651
Other invested assets 41,602 32,345
------------- -------------
Total investments 2,685,129 2,420,881
Cash and cash equivalents 59,714 110,260
Accrued investment income 34,050 31,730
Amounts receivable from reinsurers 1,125,586 1,139,673
Other receivables 55,353 101,148
Deferred policy acquisition costs 242,170 228,679
Cost of business acquired 149,679 166,458
Amounts due from affiliates 7,980 -
Other assets 19,375 42,325
------------- -------------
Total assets $ 4,379,036 $ 4,241,154
============= =============
Liabilities and Stockholder's Equity
Policyholder account balances $ 2,729,865 $ 2,623,747
Reserves for future policy benefits 811,355 819,943
Unearned policy revenues 50,907 54,599
Policy and contract claims 38,068 32,612
Other policyholder funds 151,946 113,496
Notes payable 101,547 102,297
Amounts payable to reinsurers 39,489 39,056
Deferred income taxes 65,825 56,897
Due to broker 70,588 66,899
Amounts due to affiliates - 2,744
Other liabilities 67,138 74,202
------------- -------------
Total liabilities 4,126,728 3,986,492
Stockholder's equity:
Common stock ($1 par value, 30,000 shares authorized, 10,000 shares
issued and outstanding) 10 10
Preferred stock, net of investment in parent company preferred stock (Note 8) - -
Additional paid-in capital 3,745 3,745
Accumulated other comprehensive income 30,757 35,635
Retained earnings 217,796 215,272
------------- -------------
Total stockholder's equity 252,308 254,662
------------- -------------
Commitments and contingencies
Total liabilities and stockholder's equity $ 4,379,036 $ 4,241,154
============= =============
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, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
Income
Premiums and policy revenues $ 206,883 $ 220,691 $ 224,896
Net investment income 211,081 225,517 227,622
Net realized investment gains (losses) (1,095) (6,573) 4,174
Other income 7,149 10,792 6,147
------------ ------------ ------------
Total income 424,018 450,427 462,839
------------ ------------ ------------
Benefits and expenses
Policyholder benefits:
Death benefits 116,475 105,940 123,644
Interest credited on universal life and annuity products 112,013 114,709 108,088
Other policyholder benefits 29,665 56,970 52,675
Change in reserves for future policy benefits (716) (16,424) (23,065)
Commissions 8,715 4,348 8,928
Amortization expense 42,909 67,998 73,643
Interest expense 9,612 10,057 11,704
Other operating expenses 78,481 84,389 91,004
Restructuring expenses 9,914 - -
------------ ------------ ------------
Total benefits and expenses 407,068 427,987 446,621
------------ ------------ ------------
Income before provision for income taxes and
cumulative effect of a change in accounting principle 16,950 22,440 16,218
Provision for income taxes 5,657 7,568 4,744
------------ ------------ ------------
Income before cumulative effect of a change in
accounting principle 11,293 14,872 11,474
Cumulative effect of a change in accounting
principle, net of income tax 832 - -
------------ ------------ ------------
Net income $ 12,125 $ 14,872 $ 11,474
============ ============ ============
Net income per common share:
Income before cumulative effect of a change in
accounting principle $ 1,129.29 $ 1,487.20 $ 1,147.40
Cumulative effect of a change in accounting
principle 83.22 - -
------------ ------------ ------------
Net income $ 1,212.51 $ 1,487.20 $ 1,147.40
============ =========== ===========
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, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
Common stock
Balance at beginning and end of year $ 10 $ 10 $ 10
--------- --------- ---------
Preferred stock
Balance at beginning of year - - -
Issuance of shares 135,000 - -
--------- --------- --------
Balance at end of year 135,000 - -
--------- --------- ---------
Investment in parent company preferred
stock
Balance at beginning of year - - -
Purchase of parent company preferred
stock ( 135,000) - -
---------- --------- ---------
Balance at end of year (135,000) - -
---------- --------- ---------
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 35,635 19,159 60,499
Change during year (4,878) $ (4,878) 16,476 $ 16,476 (41,340) $ (41,340)
---------- --------- ---------
Balance at end of year 30,757 35,635 19,159
--------- --------- ---------
Retained earnings
Balance at beginning of year 215,272 202,400 192,926
Net income 12,125 12,125 14,872 14,872 11,474 11,474
--------- --------- ---------
Comprehensive income (loss) $ 7,247 $ 31,348 $ (29,866)
========= ========= =========
Dividends (9,601) (2,000) (2,000)
--------- --------- ---------
Balance at end of year 217,796 215,272 202,400
--------- --------- ---------
Total stockholder's equity $ 252,308 $ 254,662 $ 225,314
========= ========= =========
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, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
Cash flows from operating activities
Net income $ 12,125 $ 14,872 $ 11,474
----------- ----------- -----------
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation and amortization 53,923 73,338 79,033
Deferred policy acquisition costs (63,432) (74,481) (63,511)
Undistributed earnings of equity subsidiaries 882 (568) (2,728)
Distributed earnings of equity subsidiaries - - 240
Amortization of unrealized investment gains (4,122) (6,768) (2,826)
Provision for deferred income taxes 11,107 7,494 (1,002)
(Increase) decrease in assets:
Accrued investment income (2,320) 33 99
Amounts receivable from reinsurers 14,723 130,553 60,215
Other receivables 5,272 2,487 1,057
Other assets, net of amortization (2,905) 4,773 (17,615)
Increase (decrease) in liabilities:
Reserves for future policy benefits and unearned policy revenues (1,325) 7,350 (12,124)
Policyholder account balances (56,152) (89,471) (90,370)
Policy and contract claims 5,457 (5,209) (7,646)
Other policyholder funds 38,450 (6,169) 13,424
Amounts payable to reinsurers 433 (9,693) 20,550
Federal income taxes payable (72) 125 -
Affiliate balances (10,724) 10,455 (10,795)
Other liabilities (1,964) 6,547 6,388
Change in trading securities (57,760) 1,879 -
Net realized (gains) losses on investments 1,095 6,573 (4,174)
Amortization on bonds and mortgage loans 1,396 3,214 1,351
Other changes (1,098) (2,824) (1,347)
------------ ----------- -----------
Total adjustments (69,136) 59,638 (31,781)
------------ ----------- -----------
Net cash provided (used) by operating activities (57,011) 74,510 (20,307)
------------ ----------- -----------
(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, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
Cash flows from investing activities
Purchases of fixed maturity investments $(1,129,312) $ (532,177) $ (425,122)
Purchases of equity securities (53,598) (146,223) (106,290)
Purchases of other investments (14,679) (11,607) (13,766)
Mortgage loans originated (37,644) (58,086) (58,299)
Maturities or redemptions of fixed maturity investments 257,048 53,166 10,319
Sales of fixed maturity available for sale investments 667,924 455,265 346,488
Sales of fixed maturity held to maturity investments 4,750 58,574 -
Sales of equity securities 61,368 130,339 125,627
Sales of other investments 3,925 1,684 -
Payment for subsidiaries acquired (182) - -
Transfer of cash on disposition of block of insurance business - (100,000) -
Repayments from mortgage loans 19,777 17,066 20,892
Change in due to broker 42,504 (60,358) 1,608
Change in policy loans 4,967 2,884 193
------------ ----------- -----------
Net cash used by investing activities (173,152) (189,473) (98,350)
------------- ----------- -----------
Cash flows from financing activities
Repayments of notes payable (1,053) (9,155) (21,318)
Receipts credited to policyholder account balances 407,526 439,199 454,864
Return of policyholder account balances (224,856) (325,609) (258,320)
Dividends paid (2,000) (2,000) (2,000)
------------- ------------ ------------
Net cash provided by financing activities 179,617 102,435 173,226
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents (50,546) (12,528) 54,569
Cash and cash equivalents at beginning of year 110,260 122,788 68,219
------------ ----------- -----------
Cash and cash equivalents at end of year $ 59,714 $ 110,260 $ 122,788
============ =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during year for:
Interest $ 9,301 $ 10,197 $ 11,647
Income taxes 6,899 1,142 3,515
Supplemental schedule of non-cash investing and financing activities:
Dividend of equity subsidiary to parent $ 7,601 - -
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. 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 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.
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.
Derivatives
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities", as
amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an Amendment of FASB Statement No. 133", on
January 1, 2001. In accordance with the transition provisions of SFAS No. 133,
the Company recorded a net-of-tax cumulative-effect-type gain of $832 in
earnings to record all of its derivatives on the balance sheet at fair value.
The Company's equity-indexed annuity ("EIA") products credit interest
to the policyholder's account balance based on a percentage (the "participation
rate") of the change in external indices over a two year period (the "index
period"). At the end of each index period, a new index period begins using the
then-current account balance and external index value. The Company has the
discretion to change the participation rate at the beginning of each index
period, subject to contractually guaranteed minimums. SFAS No. 133 requires that
each premium deposit be bifurcated between the embedded derivative component and
the host contract component. The embedded derivative component of the Company's
EIA products includes the options issued to the policyholder for the current
index period and for forward-starting periods. The Company records the changes
in the values of the embedded derivatives in current earnings as a component of
policyholder benefits. The host contract accretes interest to a maturity value
over a projected term. The interest accretion of the host contract is included
in interest credited on policyholder funds on the consolidated statement of
income.
The Company manages its exposure to changes in the fair value of EIA
embedded derivatives by purchasing exchange-traded and over-the-counter indexed
call options and futures contracts on the same external index. Neither these
assets nor the related EIA embedded derivatives are eligible for hedge
accounting treatment under SFAS No. 133. The Company recognizes the change in
fair values of these assets as a component of net investment income.
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/(decreased) income related to deferred policy acquisition costs before
provision for income taxes by $(2,998), $13,677 and $985 for the years ended
December 31, 2001, 2000 and 1999, respectively. The revision of estimates of
future gross profits increased (decreased) income related to the cost of
business acquired before provision for income taxes by $21,410, $(12,653) and
$(457) for the years ended December 31, 2001, 2000 and 1999, respectively. The
revisions made in 2001 to estimated gross profits primarily consisted of changes
in estimated policy revenues and benefits paid to policyholder account balances.
Certain of these revisions resulted from the anticipated impact of settling
litigation in which the Company is the defendant.
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 that 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
6.05% at December 31, 2001. 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 6.5% 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 1.3%, 1.4%
and 1.2% of the ordinary life insurance in force at December 31, 2001, 2000 and
1999, respectively. Premium income related to participating life insurance
policies represents 4.3%, 4.0% and 3.8% of premiums and policy revenues for the
years 2001, 2000 and 1999, 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 $6,426 and $10,307 at December 31, 2001 and 2000, 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 $4,430, $5,339 and $5,358 for the years ended December 31, 2001, 2000 and
1999, respectively.
Restructuring Expenses
During 2001, the Company made certain changes to its administrative and
sales operations involved in the sale of insurance products to the tax-qualified
market. Included in these changes was the Company's decision to relocate
operations located in Austin to existing operations located elsewhere.
Additionally, the Company decided to cease operations of an entity that
previously provided administration for retirement and cafeteria plans to school
districts and other clients. Among the factors leading to these decisions was
the settlement of litigation in which the Company had been a defendant. The
relocation of the remaining Austin operations will be completed in May 2002. In
connection with these business decisions, the Company recorded a restructuring
loss of $9,914 consisting of several components. The Company determined that a
portion of the goodwill related to these entities had become impaired. Based
upon the Company's best estimate of the future results of operations of these
entities, the goodwill asset was reduced by $4,696. The restructuring loss
includes $1,457 representing the unamortized cost of software developed for use
by these entities and exit costs of $889 for expected severance payments and for
lease payments on the Austin office space beyond the date of the relocation. The
remaining portion of the loss consists of the operating expenses of the third
party administrator.
Income taxes
The 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 2001, 2000
or 1999.
Reclassifications
Previously reported amounts for prior years have in some instances been
reclassified to conform to the current year presentation.
New Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other
Intangible Assets." SFAS No. 141 supersedes previously issued guidance on
accounting for business combinations. SFAS No. 141 eliminates the pooling-of-
interests method of accounting for business combinations initiated after July
1, 2001 and also changes the criteria used to recognize intangible assets apart
from goodwill.
SFAS No. 142 supersedes the current accounting guidance for goodwill and
intangible assets. Under SFAS No. 142, goodwill and indefinite-lived
intangible assets will no longer be amortized but will be reviewed for
impairment. Intangible assets with finite lives will continue to be amortized
over their useful lives. The amortization provisions of SFAS No. 142 apply
to goodwill and intangible assets acquired after June 30, 2001. For all
other goodwill and intangible assets, the amortization provisions are
effective upon adoption of SFAS No. 142. The impairment provisions of SFAS
No. 142 are effective upon adoption of the statement. Adoption of SFAS No.
142 is required as of the beginning of fiscal years beginning after December
15, 2001. The Company does not expect that adoption of SFAS No. 142 will have
a significant effect on its consolidated financial position or results of
operations.
The FASB has also recently issued SFAS No. 143 "Accounting for Asset
Retirement Obligations" and SFAS No. 144 "Accounting for Impairment or Disposal
of Long-Lived Assets." SFAS No. 143 requires that obligations associated with
the retirement of a tangible long-lived asset be recorded as a liability when
those obligations are incurred. The liability is initially measured at fair
value and the cost is capitalized by increasing the carrying amount of the
related long-lived asset. SFAS No. 143 will be effective for financial
statements for fiscal years beginning after June 15, 2002. The Company does not
own long-lived assets of the type that will generally create retirement
obligations. Therefore, adoption of SFAS No. 143 will not affect the Company's
consolidated financial statements.
SFAS No. 144 provides guidance on the accounting for the impairment or
disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" and amends Accounting Principles Board Opinion No. 30 (APB No. 30)
"Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business." SFAS No. 144 requires that long-lived assets that are to
be disposed of by sale be measured at the lower of book value or fair value less
cost to sell. Additionally, entities are no longer required to include under
"discontinued operations" operating losses that have not yet occurred. SFAS No.
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, its provisions are to be applied
prospectively. The Company does not expect that adoption of SFAS No. 144 will
have a significant effect on its consolidated financial position or results of
operations.
The American Institute of Certified Public Accountants (AICPA) recently
issued Statement of Position No. 01-06 (SOP 01-06) "Accounting by Certain
Entities (Including Entities with Trade Receivables) That Lend to or Finance the
Activities of Others." The guidance in SOP 01-06 relating to financing and
lending activities is explicitly applicable to insurance companies. SOP 01-06
reconciles and conforms the accounting and financial reporting guidance
presently contained in other accounting guidance. SOP 01-06 is effective for
financial statements issued for fiscal years beginning after December 15, 2001.
The Company's accounting practices for its lending activities are already
consistent with the guidance contained in SOP 01-06. Therefore, adoption of SOP
01-06 will not have a significant effect on the Company's financial statements.
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.
Derivative instruments: The estimated fair values of derivative instruments
are based on quoted market prices where available.
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
that reflects prevailing market rates.
The estimated fair values of the Company's financial instruments at
December 31 are as follows:
2001 2000
------------------------------ -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets:
Fixed maturities held to maturity $ 694,889 $ 712,314 $ 742,618 $ 737,496
Fixed maturities available for sale 1,321,040 1,321,040 1,032,937 1,032,937
Fixed maturities trading 57,760 57,760 - -
Equity securities 74,531 74,531 104,771 104,771
Mortgage loans 269,910 268,409 268,902 269,979
Policy loans 189,683 189,683 194,651 194,651
Derivative instruments 10,947 10,947 2,214 2,214
Other invested assets 20,000 20,325 10,000 10,052
Cash and cash equivalents 59,714 59,714 110,262 110,262
Financial liabilities:
Annuities 1,220,044 1,095,879 1,147,750 1,037,566
Notes payable 101,547 98,802 102,297 99,552
3. Change in Subsidiaries
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. Contingent consideration of $1,000
plus interest was paid during both 2001 and 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 and $2,624 in 2000 and
1999, 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, 2001
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Held to maturity:
U.S. Treasury and government securities $ 2,297 $ 119 $ (3) $ 2,413
Public utility securities 14,590 841 - 15,431
Corporate securities 476,606 15,463 (4,875) 487,194
Asset-backed securities 12,590 359 - 12,949
Mortgage-backed pass-through securities 25,503 793 (17) 26,279
Collateralized mortgage obligations 163,303 5,099 (354) 168,048
------------- ------------- -------------- -------------
694,889 22,674 (5,249) 712,314
------------- ------------- -------------- -------------
Available for sale:
U.S. Treasury and government securities 18,785 944 - 19,729
Public utility securities 6,927 - (386) 6,541
Corporate securities 886,862 23,306 (16,159) 894,009
Asset-backed securities 167,528 2,912 (4,051) 166,389
Mortgage-backed pass-through securities 117,150 5,390 (20) 122,520
Collateralized mortgage obligations 111,521 1,882 (1,551) 111,852
------------- ------------- -------------- -------------
1,308,773 34,434 (22,167) 1,321,040
------------- ------------- -------------- -------------
Trading:
Corporate securities 57,747 588 (575) 57,760
------------- ------------- -------------- -------------
57,747 588 (575) 57,760
------------- ------------- -------------- -------------
Subtotal, all fixed maturities 2,061,409 57,696 (27,991) 2,091,114
------------- ------------- -------------- -------------
Equity securities 48,598 29,727 (3,794) 74,531
------------- ------------- -------------- -------------
Total fixed maturities and equity securities $ 2,110,007 $ 87,423 $ (31,785) $ 2,165,645
============= ============= ============== =============
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
============ ============ ============ ============
The amortized cost and estimated market value of mortgage-backed securities
by category at December 31, 2001 are as follows:
Held to Maturity Available for Sale
--------------------------- ---------------------------
Estimated Estimated
Amortized Market Value Amortized Market Value
Cost Cost
Pass-through agency securities $ 25,503 $ 26,279 $ 117,150 $ 122,520
Collateralized mortgage obligations:
Sequential class 54,107 55,639 96,721 96,726
Planned amortization class 33,708 34,613 - -
Very accurately defined maturity 68,068 70,156 6,805 6,792
Other 7,420 7,640 7,995 8,334
---------- ---------- ---------- ----------
163,303 168,048 111,521 111,852
---------- ---------- ---------- ----------
Total securities $ 188,806 $ 194,327 $ 228,671 $ 234,372
========== ========== ========== ==========
The amortized cost and estimated market value of fixed maturities which are
held to maturity and available for sale at December 31, 2001, 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 Market Amortized Market
Cost Value Cost Value
Due in one year or less $ 30,496 $ 31,117 $ 22,645 $ 22,597
Due after one year through five years 167,506 172,954 73,390 74,075
Due after five years through ten years 182,162 186,391 320,487 325,166
Due after ten years 125,919 127,525 663,580 664,830
Mortgage-backed securities 188,806 194,327 228,671 234,372
---------- ---------- ---------- ----------
$ 694,889 $ 712,314 $1,308,773 $ 1,321,040
=========== =========== ========== ===========
At December 31, 2001, the Company held below investment grade (S&P rating
below BBB-) corporate debt securities with an aggregate carrying value of
$83,072 and market value of $82,819. At December 31, 2000, the Company held
below investment grade corporate debt securities with an aggregate carrying
value of $62,367 and market value of $59,201. These holdings amounted to 1.9%
and 1.5% of the Company's total assets at December 31, 2001 and 2000,
respectively.
Fixed maturities with an amortized book value of $30,523 and $32,179 were
on deposit with insurance regulatory agencies of certain states at December 31,
2001 and 2000, respectively.
The Company owns two $10,000, senior subordinated notes ("the notes")
issued by PFSH, with interest rates of 9.25% and 9.35% which mature in September
2004 and March 2006, respectively. The notes are included in other invested
assets on the Company's consolidated balance sheet.
At December 31, 2001, the Company owned equity securities of DST, Inc. with
an aggregate carrying value and market value of $34,646, which exceeded 10% of
the Company's total stockholder's equity.
Mortgage loans on real estate
At December 31, mortgage loans on real estate consisted of:
2001 2000
---- ----
Mortgage loan principal $ 269,910 $ 269,352
Net unamortized purchase discount - (150)
Allowance for losses - (300)
---------- ----------
Net mortgage loans $ 269,910 $ 268,902
========== ==========
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, 2001, mortgage loans on real estate were concentrated in the
following property types:
% of
2001 Portfolio
Property type:
Commercial
Multi-family apartments $ 63,990 23.7
Industrial/Warehouses 75,716 28.1
Office buildings 70,086 26.0
Retail space 28,698 10.6
Other 30,111 11.1
Residential 1,309 0.5
---------- -----
Total $ 269,910 100.0
========== =====
At December 31, 2001, the following states had a concentration of mortgage
loans aggregating more than 10% of the Company's mortgage loans: Missouri -
$49,893 and Texas - $36,200.
Investment in equity subsidiaries
The following table presents combined summarized financial information on a
proportionate basis of the Company's equity affiliates. Amounts presented
include the accounts of the Company's equity subsidiaries, Argus Health Systems
(Argus), Hereford LLP and a hotel joint venture. The Company dividended its 50%
interest in Argus to FHC on December 1, 2001. The dividend consisted of the
carrying value of Argus of $6,911 and unamortized goodwill of $690. The results
of operations of Argus are included in the amounts below through the date of the
dividend.
2001 2000 1999
---- ---- ----
Current assets $ 1,803 $ 7,854 $ 7,382
Noncurrent assets 23,080 21,291 17,466
Current liabilities 870 4,236 3,324
Noncurrent liabilities 18,552 12,362 9,383
Net revenues 28,522 26,815 27,864
Expenses applicable to net revenues 28,789 25,912 23,688
Income from continuing operations (267) 903 4,176
Net income (115) 411 2,776
In 1999, the Company received a cash distribution from Hereford LLP of
$240.
Net investment income
Net investment income for the years ended December 31 is comprised of the
following:
2001 2000 1999
---- ---- ----
Fixed maturities $ 148,399 $ 136,618 $ 126,739
Equity securities 558 844 1,328
Equity in earnings of equity subsidiaries (920) 507 2,776
Mortgage loans on real estate 20,702 19,434 16,883
Policy loans 10,172 11,610 12,572
Reinsurance funds held by reinsurer 48,699 54,732 60,342
Derivatives (19,142) - -
Cash, short-term investments and other 8,319 7,852 12,431
----------- ----------- -----------
Total investment income 216,787 231,597 233,071
Less investment expenses (5,706) (6,080) (5,449)
----------- ----------- -----------
Net investment income $ 211,081 $ 225,517 $ 227,622
=========== =========== ===========
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:
2001 2000 1999
---- ---- ----
Fixed maturity securities:
Held to maturity:
Realized gains $ - $ 457 $ -
Realized losses (469) (7,909) -
Available for sale:
Realized gains 42,011 7,419 3,199
Realized losses (48,402) (11,385) (592)
Equity securities:
Realized gains 17,548 24,404 14,391
Realized losses (12,068) (20,095) (13,032)
Other investments:
Realized gains 2,147 1,480 276
Realized losses (1,862) (944) (68)
----------- ----------- -----------
Net realized investment gains (losses) $ (1,095) $ (6,573) $ 4,174
============ ============ ===========
Certain circumstances during 2001 and 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, $5,219 and $9,256 of
held-to-maturity securities were sold in 2001 and 2000, respectively. These
sales resulted in realized losses of $469 and $7,256, respectively. Also, the
2000 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:
2001 2000
---- ----
Investments carried at amortized cost:
Fixed maturities available for sale $ 9,966 $ (19,347)
Fixed maturities reclassified from available for sale to held to maturity 22,590 26,712
Investments carried at estimated fair value:
Equity securities 25,939 46,752
Effect on other balance sheet accounts (12,391) (509)
Deferred income taxes (15,347) (17,973)
------------ -----------
Net unrealized investment gains $ 30,757 $ 35,635
=========== ===========
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 $22,590 and $26,712 at December 31, 2001 and 2000, 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
2001
Unrealized holding losses arising during period $ (9,052) $ 3,168 $ (5,884)
Reclassification adjustments for losses realized
in net income 1,548 (542) 1,006
----------- ------------ -----------
Other comprehensive income $ (7,504) $ 2,626 $ (4,878)
============ =========== ============
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)
=========== =========== ===========
The carrying value of investments that were non-income producing during
the three year period ended December 31, 2001 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:
2001 2000 1999
---- ---- ----
Deferred policy acquisition costs:
Balance, beginning of year $ 228,679 $ 212,860 $ 131,574
Capitalization of expenses 63,407 76,032 64,813
Disposition of insurance business - (22,893) -
Interest accretion 12,824 11,062 9,290
Amortization (46,290) (25,241) (44,667)
Amounts related to fair value adjustment of fixed maturity securities (16,450) (23,141) 51,850
------------ ------------ -----------
Balance, end of year $ 242,170 $ 228,679 $ 212,860
=========== =========== ===========
Cost of business acquired:
Balance, beginning of year $ 166,458 $ 219,490 $ 247,125
Additions - - 425
Interest accretion 8,461 10,361 12,356
Amortization (23,633) (59,014) (50,283)
Amounts related to fair value adjustment of fixed maturity securities (1,607) (4,379) 9,867
------------ ------------ -----------
Balance, end of year $ 149,679 $ 166,458 $ 219,490
=========== =========== ===========
The estimated amortization and interest accretion of the cost of business
acquired for the five years ending December 31, 2006 are as follows:
Interest Estimated
Amortization Accretion Net Decrease
2002 $ 29,800 $ 7,657 $ 22,143
2003 25,829 6,586 19,243
2004 20,215 5,703 14,512
2005 16,713 5,005 11,708
2006 14,352 4,427 9,925
6. Insurance Liabilities and Reinsurance
Insurance liabilities at December 31, consist of the following:
2001 2000
---- ----
Policyholder account balances:
Universal life $ 1,509,821 $ 1,475,997
Annuities 1,220,044 1,147,750
------------ ------------
$ 2,729,865 $ 2,623,747
============ ============
Reserves for future policy benefits:
Traditional life $ 794,064 $ 804,105
Accident and health 2,295 2,433
Supplementary contracts 14,996 13,405
------------ ------------
$ 811,355 $ 819,943
============ ============
At December 31, 2001, approximately 92% of the annuity account balances of
the Insurance Companies are subject to surrender charges upon early withdrawal.
At December 31, 2001, the total liability for EIA products, included in
policyholder account balances on the consolidated balance sheet, was $354,957.
The change in fair value of the derivatives embedded in the equity-indexed
annuities was a decrease of $22,245 for the year ended December 31, 2001.
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:
2001 2000
---- ----
Amounts receivable from reinsurers $ 878,431 $ 912,166
Cost of business acquired 77,628 95,771
Insurance liabilities 936,432 991,352
The Reinsurers will receive a portion of statutory profits from the
reinsured policies until the Reinsurers have 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:
2001 2000
---- ----
Amounts recoverable for ceded future policy benefits $ 1,094,041 $ 1,139,684
Unrecovered ceding commission (58,001) (79,186)
Amounts recoverable on ceded policy and contract claims 21,477 14,709
Amounts recoverable on paid losses 3,428 2,883
Other 64,641 61,583
------------- -------------
$ 1,125,586 $ 1,139,673
============= =============
Amounts receivable from reinsurers includes $16,585 and $16,375 from
another unrelated insurance company at December 31, 2001 and 2000, 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, 2001, no
allowance has been established as all amounts are deemed collectible.
Premiums ceded under reinsurance agreements were $60,443, $68,124 and
$49,905 for the years ended December 31, 2001, 2000 and 1999, respectively.
Reinsurance recoveries netted against other policyholder benefits totaled
$46,551, $57,307 and $55,494 for the years ended December 31, 2001, 2000 and
1999, 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 $138.2 million and $134.7 million at December 31, 2001 and 2000,
respectively.
7. Notes Payable
Notes payable at December 31, are comprised of the following:
2001 2000
---- ----
Senior subordinated notes bearing interest at 9.25%, due 2005 $ 91,500 $ 91,500
Unsecured discounted $12,000 notes, bearing interest at an effective interest rate
of 11.5%, payable in semi-annual equal installments due 2010 6,766 7,216
Unsecured discounted $5,000 note, bearing interest at an effective interest rate of
12.0%, due 2015 3,197 3,143
Other 84 438
----------- -----------
$ 101,547 $ 102,297
=========== ===========
The senior subordinated notes (the Notes) of $91,500 are net of $8,500 of
Notes owned by the Company's insurance subsidiaries at December 31, 2001 and
2000. The Notes are redeemable at the option of the Company, in whole or in
part, at 100% of the principal amount on January 1, 2001 and thereafter.
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, 2001 was $3,198. The
$5,000 note is subject to contractual set-off rights 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, 2001.
The aggregate principal payments due during each of the next five years are
as follows:
2002 $ 552
2003 496
2004 551
2005 92,118
2006 691
Later years 7,139
----------
$ 101,547
==========
8. Stockholder's Equity and Statutory Surplus
On December 31, 2001, the Company issued 1,350,000 shares of cumulative
Series A Preferred Stock to FHC in exchange for an equal number of shares of FHC
cumulative preferred stock. The Company authorized a total of 2,000,000 shares
of Series A Preferred Stock, which ranks senior to the Company's common stock as
to dividends and liquidation rights. The Company's preferred stock and the FHC
preferred stock each have a par value of $1.00 per share and a total stated
value of $135.0 million. Cumulative annual dividends on the Company's preferred
stock of 3.38% plus the LIBOR rate are payable quarterly, either in cash or in
additional shares of preferred stock. The Company will receive a quarterly
dividend on the FHC preferred stock at a rate of 3.11% plus the LIBOR rate per
annum, either in cash or in additional shares of FHC preferred stock. The
Company is required to redeem any outstanding shares of the Series A Preferred
Stock on December 31, 2016 for $100 per share plus any unpaid dividends. The
FHC preferred stock is discussed further in Note 10 herein.
The Company has accounted for its investment in the FHC preferred stock as
an offset to its own preferred stock in stockholder's equity. Dividends on the
Company's preferred stock, when payable, will also be substantially offset by
the dividends payable on the FHC preferred stock
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, 2001 was:
Reported Statutory
Company Capital and Surplus
United Fidelity $ 100,563
Great Southern 72,871
Americo Financial 132,594
National Farmers 27,895
Ohio State 16,747
Financial Assurance 6,420
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, 2001 the Insurance Companies had statutory
capital and surplus in excess of the levels required by the NAIC risk-based
capital guidelines.
The AICPA recently issued Statement of Position No. 01-05 ("SOP 01-05")
"Amendments to Specific AICPA Pronouncements for Changes Related to the NAIC
Codification." SOP 01-05 amends SOP 94-5 "Disclosures of Certain Matters in the
Financial Statements of Insurance Enterprises" in response to the completion of
the codification of statutory accounting principles. SOP 01-05 requires the
disclosure of prescribed or permitted statutory accounting practice and the
related effect on statutory surplus of using an accounting practice that differs
from either state prescribed statutory accounting practices or NAIC codified
statutory accounting principles. These disclosures are required beginning with
financial statements issued for fiscal years ending after December 15, 2001.
Texas insurance accounting regulations allow insurance companies to admit
certain furniture and equipment in excess of the levels allowed by NAIC
statutory accounting principles. As a result, the consolidated statutory surplus
of the Company's life insurance subsidiaries was $1,204 greater than under NAIC
statutory accounting principles at December 31, 2001.
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.
2001 2000 1999
---- ---- ----
Capital stock and surplus $ 137,274 $ 136,216 $ 128,370
Net income 12,361 2,288 16,573
Effective January 1, 2001, the state of Texas, in which all the Company's
insurance subsidiaries are domiciled, adopted the Codification of Statutory
Accounting Principles for life insurers. The implementation of these
standardized accounting principles, which increased the statutory surplus of the
Company's life insurance subsidiaries by approximately $11.0 million, did not
adversely impact the ability of the subsidiaries to make payments on the surplus
debentures or to pay dividends to the Company.
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:
2001 2000 1999
---- ---- ----
Current tax provision $ (5,450) $ 74 $ 5,746
Deferred tax provision 11,107 7,494 (1,002)
----------- ----------- -----------
Provision for income taxes $ 5,657 $ 7,568 $ 4,744
=========== =========== ===========
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:
2001 2000 1999
---- ---- ----
Computed tax at statutory rate $ 5,932 $ 7,854 $ 5,676
Change in tax resulting from:
Availability of dividends received deduction to offset taxable
temporary differences (325) (347) (725)
Other 50 61 (207)
----------- ----------- -----------
Provision for income taxes $ 5,657 $ 7,568 $ 4,744
=========== =========== ===========
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:
2001 2000
---- ----
Agent balances $ - $ 131
Cost of business acquired 153,155 144,263
Investments - 1,256
Deferred income 47,250 -
Net unrealized investment gains 16,676 19,301
----------- -----------
Total deferred tax liability 217,081 164,951
----------- -----------
Deferred tax asset:
Policy reserves 64,541 63,550
Investments 249 -
Agent balances 3,195 -
Deferred policy acquisition costs 28,758 26,529
Utilization of net operating losses 35,852 1,008
Unearned policy revenues 19,296 19,522
Other 2,347 427
----------- -----------
Deferred income tax assets before valuation allowances 154,238 111,036
Less: valuation allowance (2,982) (2,982)
----------- -----------
Total deferred tax asset 151,256 108,054
----------- -----------
Net deferred tax liability $ 65,825 $ 56,897
=========== ===========
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, 2001, 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 were distributed at the current income tax rate of 35%. No
provision has been recorded relating to any potential distributions from the PSA
subsequent to 2001.
At December 31, 2001, the Insurance Companies with balances in their PSA
had aggregate balances in their Shareholder Surplus Accounts of approximately
$88,219 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 $102,432 which will begin to expire in 2009 if unutilized.
Utilization of $2,716 of the 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 $4,540, $4,811 and $4,835 in 2001, 2000 and 1999, 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,
2001 are as follows:
2002 $ 3,307
2003 2,614
2004 2,298
2005 2,297
2006 and thereafter 7,637
----------
$ 18,153
==========
On December 31, 2001, Great Southern Life Insurance Company ("Great
Southern") was a defendant in the following certified class action: In re Great
Southern Life Insurance Company Sales Practices Litigation, MDL 1214, In the
United States District Court for the Northern District of Texas. The class
consists of certain present and former policyholders who purchased
interest-sensitive whole life and universal life insurance policies issued or
acquired by Great Southern between January 1, 1982 and December 31, 1999. By
orders entered on January 15, 2002, the Court approved a class-wide settlement
and dismissed with prejudice the claims of the class members. The orders
approving the settlement are now final, as no appeals were filed. Under the
terms of the settlement, Great Southern has agreed, among other things: (1) to
issue certificates to class members for premium discounts on future purchases of
certain life insurance policies and annuities from Great Southern and its
affiliates; (2) to pay class members at least 50% of Great Southern's future
earnings on the class members' policies for either 10 years or until a specified
amount, ranging between $21 million and $26 million, has been paid, whichever
takes longer; (3) to pay the plaintiffs' attorneys an initial payment $750,000,
and, thereafter, periodic payments equal to 22.38% of all amounts paid to the
class members under (2) above; and (4) to pay the administrative costs of the
settlement. Both the settlement and the Court's order approving the settlement
acknowledge that Great Southern has denied, and continues to deny, all the
allegations of misconduct.
The Company has accounted for the terms of the settlement in the December
31, 2001 financial statements. If any contingent payments are made pursuant to
the above settlement, the Company will account for the payments as additional
policyholder benefits. Accordingly, the Company has included an estimate of such
payments in its estimate of future gross profits used to calculate the
amortization of deferred policy acquisition costs and the cost of business
acquired.
Under the terms of the settlement, potential class members were given an
opportunity to exclude themselves from the class by sending a written exclusion
notice to the settlement administrator. Over 1,300 present and former
policyholders who sent in such exclusion notices have notified Great Southern
that they have retained an attorney to represent them. In early February 2002,
Great Southern filed actions in 12 states against substantially all of these
policyholders seeking, among other things, a declaration of nonliability.
Pursuant to Great Southern's request the Judicial Panel on Multidistrict
Litigation issued an order on March 27, 2002 conditionally transferring the
actions to the United States District Court for the Northern District of Texas
for consolidated pretrial proceedings. Great Southern is unable to estimate the
costs it might incur as a result of the exclusion notices or if the outcomes of
its declaratory judgment actions are adverse to it.
On December 31, 2001, Americo Financial, as well as certain affiliates of
the Company, were defendants in the following certified class action: Notzon, et
al. v. The College Life Insurance Company of America, et al.; No. 99-CVF-00697;
In the 111th District Court of Webb County, Texas. The class consists of certain
present and former owners of certain annuities and interest-sensitive life
insurance policies issued or acquired by Americo Financial between January 1,
1993 and October 1, 2001. By orders dated January 25, 2002, the Court approved a
class-wide settlement and dismissed with prejudice the claims of the class
members. The orders approving the settlement are now final, as no appeals were
filed. Under the terms of the settlement, Americo Financial has agreed, among
other things: (1) to provide three years of free accidental death benefit
coverage to most of the class members; (2) to allow certain class members to
transfer the cash values of their life insurance policies to a new annuity
issued by Americo Financial without incurring a surrender charge on the
transfer; (3) to modify certain of its marketing practices and policy terms; (4)
to create a claim resolution process to resolve claims of individual class
members; (5) to pay the named plaintiffs and their attorneys a cash payment of
$1,945,000; and (6) to pay the administrative costs of the settlement. In the
claim resolution process, the relief to be provided will consist of cash awards
and credits, premium vouchers, policy modifications, accidental death benefit
coverage, and interest. Additionally, Americo Financial and certain of its
codefendants have agreed to arbitrate among themselves how the costs associated
with the settlement will be allocated. Both the settlement and the order
approving the settlement acknowledge that Americo Financial and its codefendants
have denied, and continue to deny, all allegations of wrongdoing. The Company
has accounted for the anticipated costs of the settlement in the December 31,
2001 financial statements.
On December 31, 2001, Americo Retirement Services, Inc. (ARS), a
wholly-owned subsidiary of Americo Life, Inc., established a grantor trust (the
Trust) for the purpose of paying certain amounts due under the Americo Financial
litigation settlement agreement. The Trust was funded with a contribution of the
FHC preferred stock received by Americo in exchange for Americo's own preferred
stock. In order to fund its obligations, the Trust is authorized to sell shares
of the FHC preferred stock as necessary. FHC has the right of first refusal on
any shares the Trust offers for sale. The Trust will exist until all such
obligations for which it has been made responsible have been paid or expired. At
such time, any assets remaining in the Trust will revert back to ARS. The
accounts of the Trust are included in the consolidated financial statements of
the Company.
Great Southern and Americo, 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 Americo, were
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 Texas Court of Appeals affirmed the trial court's approval
of the settlement on November 9, 2001 and denied appellant's motion for
rehearing on January 15, 2002. No petition for review by the Texas Supreme Court
was filed, and the order approving the settlement is now final. Shortly before
the settlement was approved by the trial court, a co-defendant named in the
lawsuit, Norman T. Faircloth, filed a cross-claim against several of the other
defendants, including Americo, Great Southern, Great American Life Underwriters,
Inc., Entrepreneur Corp., and certain officers of Great Southern and Americo.
The cross claim asserted claims similar to those asserted by the plaintiffs in
the underlying lawsuit and sought similar relief including actual damages,
treble and punitive damages, emotional distress damages and an accounting. On
April 13, 2001, the court granted summary judgment in favor of Great Southern
and other affiliated defendants on such cross-claim.
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.
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, AFL, 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 December 13, 2001, a purported class action lawsuit (Lukens, et al. v.
Ohio State Life Insurance Company) was filed against Ohio State in California's
Los Angeles County Superior Court. The suit alleges that, on or before June 25,
1990, Ohio State breached the terms of certain of its universal life policies by
increasing its cost of insurance rates without justification. The suit alleges
that the increased rates were improperly motivated by Ohio State's desire to
increase its revenues by, among other things, passing on to policyholders its
increased tax liabilities under 1990 federal legislation governing the tax
accounting for deferred policy acquisition costs. The suit asserts claims for
breach of contract; breach of the covenant of good faith and fair dealing; and
acts of unfair competition under California's Business and Professions Code. The
suit seeks compensatory and exemplary damages in unspecified amounts, as well as
injunctive relief and restitution.
On March 13, 2001, a purported class action lawsuit (Ernesto Cortes v. Ohio
State Life Insurance Company, 11th Judicial Circuit Court, Dade County, Florida)
was filed against Ohio State. The suit alleges that Ohio State breached its
obligations under a term life insurance policy purchased by plaintiff by failing
to observe the guaranteed features of the policy. The suit seeks damages in an
unspecified amount, prejudgment interest and attorney's fees on behalf of
plaintiff and a purported national class of others similarly situated.
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
$1,557 and $1,180 is included in other liabilities at December 31, 2001 and
2000, respectively.
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 investments in real estate and its 50% investment
in Argus prior to dividending Argus to FHC on December 1, 2001. 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
2001 $ 362,363 $ 62,992 $ 6,397 $ (5,683) $ 426,069
2000 380,255 57,845 4,950 7,377 450,427
1999 398,423 42,568 6,019 15,829 462,839
Amortization expense
2001 $ 27,301 $ 14,099 $ - $ 1,509 $ 42,909
2000 68,854 (1,383) - 527 67,998
1999 67,364 3,179 - 3,100 73,643
Income (loss) before provision
for income taxes
2001 $ 50,955 $ (1,357) $ 1,348 $ (33,996) $ 16,950
2000 46,853 10,610 1,929 (36,952) 22,440
1999 43,950 642 4,034 (32,408) 16,218
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, 2001 and 2000 include
$1,807 and $(698), 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:
2001 2000 1999
---- ---- ----
Data processing agreement between the Company and FHC $ 8,552 $ 8,811 $ 11,413
Advisory agreement between the Company and FHC 3,935 4,864 5,035
Air transportation cost sharing agreement 328 440 343
Rental expense 1,445 1,474 1,396
Laboratory services 341 337 406
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 25, 2002 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 25, 2002
Schedule II
Americo Life, Inc. and Subsidiaries
Condensed Financial Information of Registrant
Balance Sheet
(Dollars in thousands)
December 31, 2001 and 2000
2001 2000
---- ----
Assets
Fixed maturity securities, available for sale, at market (cost: $1,006 and $0) $ 1,030 $ -
Equity securities, at market (cost: $9,187 and $9,082) 27,155 33,639
Investment in subsidiaries 221,080 221,882
Cash and cash equivalents 643 80
Surplus debentures receivable 122,222 121,668
Property and equipment, net 594 974
Other assets 6,967 31,841
----------- -----------
Total assets $ 379,691 $ 410,084
=========== ===========
Liabilities and Stockholder's Equity
Notes payable $ 109,963 $ 110,359
Accrued interest payable 839 842
Amounts due to affiliates 3,252 311
Deferred income taxes 10,012 9,259
Other liabilities 3,317 34,651
----------- -----------
Total liabilities 127,383 155,422
----------- -----------
Stockholder's equity:
Common stock ($1 par value, 30,000 shares authorized, 10,000 issued and
outstanding) 10 10
Preferred stock, net of investment in parent company preferred stock - -
Additional paid-in capital 3,745 3,745
Accumulated other comprehensive income 30,757 35,635
Retained earnings 217,796 215,272
----------- -----------
Total stockholder's equity 252,308 254,662
----------- -----------
Total liabilities and stockholder's equity $ 379,691 $ 410,084
=========== ===========
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, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
Income
Management and data processing fees from subsidiaries $ 11,916 $ 12,301 $ 14,840
Interest income on surplus debentures receivable 10,817 11,306 11,427
Net investment income 564 143 624
Net realized investment gains (losses) 1,179 (1,644) (196)
Other income 119 1,627 1,978
----------- ----------- -----------
Total income 24,595 23,733 28,673
----------- ----------- -----------
Expenses
Management and advisory fees to parent 12,487 13,675 16,448
Interest expense 10,440 10,515 11,647
Other operating expenses (5,226) 1,423 6,563
Amortization expense 691 923 1,193
----------- ----------- -----------
Total expenses 18,392 26,536 35,851
----------- ----------- -----------
Income (loss) before provision for income taxes and equity in income
of subsidiaries 6,203 (2,803) (7,178)
Provision for income taxes 1,847 (1,008) (2,341)
----------- ----------- -----------
Loss before equity in income of subsidiaries 4,356 (1,795) (4,837)
Equity in income of subsidiaries 7,769 16,667 16,311
----------- ----------- -----------
Net income $ 12,125 $ 14,872 $ 11,474
=========== =========== ===========
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, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
Cash flows from operating activities
Net income $ 12,125 $ 14,872 $ 11,474
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation and amortization 1,258 1,561 1,866
Undistributed equity in earnings of subsidiaries (7,769) (16,667) (16,311)
Dividends received from subsidiaries - - 12,616
Decrease (increase) in other assets, net of amortization 22,086 (18,763) (4,459)
Increase (decrease) in other liabilities (27,934) 17,878 7,387
Provision for current income taxes - - 1,597
Provision for deferred income taxes 2,272 (948) (1,883)
Increase (decrease) in amounts due to/from affiliates 2,941 (4,474) 6,436
Net realized (gains) losses on investments (1,179) 1,644 196
Other changes 300 299 338
---------- ---------- ----------
Total adjustments (9,358) (19,470) 7,783
----------- ---------- ----------
Net cash provided (used) by operating activities 4,100 (4,598) 19,257
---------- ---------- ----------
Cash flows from investing activities
Purchases of equity securities (105) (264) (2,991)
Sales of equity securities - 3,182 5,881
Purchases of fixed maturity investments (1,007) - -
Investment in subsidiary (1) - -
Principal collected on surplus debentures receivable 950 906 866
Change in other invested assets (488) 206 (4,007)
Purchases of property and equipment, net (186) (266) (254)
----------- ---------- ----------
Net cash provided (used) by investing activities (837) 3,764 (505)
----------- ---------- ----------
Cash flows from financing activities
Repayments of notes payable (700) (655) (21,615)
Dividends paid (2,000) (2,000) (2,000)
----------- ---------- ----------
Net cash used by financing activities (2,700) (2,655) (23,615)
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 563 (3,489) (4,863)
Cash and cash equivalents at beginning of year 80 3,569 8,432
---------- ---------- ----------
Cash and cash equivalents at end of year $ 643 $ 80 $ 3,569
========== ========== ==========
Supplemental disclosure of cash flow information
Cash paid during year for interest $ 10,165 $ 10,349 $ 11,251
Supplemental schedule of noncash investing and financing
activities
Dividend of equity subsidiary to parent $ 7,601 $ - $ -
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, 2001, 2000 and 1999
In 1999, the Company received dividends totaling $12,376 from United
Fidelity and cash distributions totaling $240 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, 2001, 2000 and 1999
Percentage
Assumed of Amount
Year Ended Gross Ceded to Other From Other Net Assumed
December 31, Amount Companies Companies Amount to Net
2001
Insurance in force $ 41,730,003 $ 13,926,057 $ 396,337 $ 28,200,283 1.4%
============== ============== ============== ============== ====
Premiums $ 262,427 $ 60,443 $ 4,899 $ 206,883 2.4%
============== ============== ============== ============== ====
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%
============== ============== ============== ============== ====
Schedule V
Americo Life, Inc. and Subsidiaries
Valuation and Qualifying Accounts
(Dollars in thousands)
For the Years Ended December 31, 2001, 2000 and 1999
Additions
---------------------------
Balance at Charged to Charged to Balance at
Year Ended Beginning Cost and Other End of
December 31, of Period Expenses Accounts (1) Deductions Period
------------ --------- -------- --------- ---------- ------
2001
Reserve for impairment of mortgage loans
on real estate $ 300 $ - $ - $ 300 $ -
Write-down for impairment of real estate - - - - -
Allowance for receivables from agents 4,951 4,017 2,215 11,183
----------- ----------- ----------- ----------- -----------
Total $ 5,251 $ 4,017 $ 2,215 $ 300 $ 11,183
=========== =========== =========== =========== ===========
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
=========== =========== =========== =========== ===========
(1) Amounts transferred from other allowance accounts.
<