STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FLEXIBLE PAYMENT
VARIABLE ANNUITY CONTRACTS
ISSUED BY
BMA VARIABLE ANNUITY ACCOUNT A
AND
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
November 14, 1997
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS FOR THE INDIVIDUAL FLEXIBLE PAYMENT
VARIABLE ANNUITY CONTRACTS WHICH ARE REFERRED TO HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR
OUGHT TO KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS, CALL OR WRITE THE
COMPANY AT: 1-888-262-8131, 9735 Landmark Parkway Drive, St. Louis, MO
63127-1690.
THIS STATEMENT OF ADDITIONAL INFORMATION AND THE PROSPECTUS ARE DATED NOVEMBER
14, 1997.
TABLE OF CONTENTS
PAGE
COMPANY ........................................................... 1
EXPERTS ........................................................... 1
LEGAL OPINIONS ...................................................... 1
DISTRIBUTOR ......................................................... 1
CALCULATION OF PERFORMANCE DATA ..................................... 1
TAX STATUS .......................................................... 5
ANNUITY PROVISIONS ..................................................10
MORTALITY AND EXPENSE GUARANTEE .....................................11
FINANCIAL STATEMENTS ................................................11
COMPANY
Business Men's Assurance Company of America ("BMA" or the "Company"), BMA Tower,
700 Karnes Blvd., Kansas City, Missouri, 64108 was incorporated in 1909 under
the laws of the state of Missouri. BMA is licensed in the District of Columbia,
Puerto Rico and all states except New York. BMA is a wholly owned subsidiary of
Assicurazioni Generali S.p.A., which is the largest insurance organization in
Italy.
EXPERTS
The consolidated financial statements of Business Men's Assurance Company of
America at December 31, 1996 and 1995, and for each of the three years in the
period ended December 31, 1996, appearing in this Statement of Additional
Information have been audited by Ernst & Young LLP, 1200 Main Street, Kansas
City, Missouri 64106, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
LEGAL OPINIONS
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut, has provided advice on
certain matters relating to the federal securities and income tax laws in
connection with the contracts.
DISTRIBUTOR
Jones & Babson, Inc., acts as the distributor. The offering is on a continuous
basis.
CALCULATION OF PERFORMANCE DATA
TOTAL RETURN
From time to time, the Company may advertise performance data. Such data will
show the percentage change in the value of an accumulation unit based on the
performance of an investment portfolio over a period of time, usually a calendar
year, determined by dividing the increase (decrease) in value for that unit by
the accumulation unit value at the beginning of the period.
Any such advertisement will include total return figures for the time periods
indicated in the advertisement. Such total return figures will reflect the
deduction of a 1.40% coverage charge, the expenses for the underlying investment
portfolio being advertised and any applicable contract maintenance charges and
withdrawal charges.
The hypothetical value of a Contract purchased for the time periods described in
the advertisement will be determined by using the actual accumulation unit
values for an initial $1,000 purchase payment, and deducting any applicable
contract maintenance charges and any applicable withdrawal charges to arrive at
the ending hypothetical value. The average annual total return is then
determined by computing the fixed interest rate that a $1,000 purchase payment
would have to earn annually, compounded annually, to grow to the hypothetical
value at the end of the time periods described.
The formula used in these calculations is:
n
P ( 1 + T) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the time periods used
(or fractional portion thereof) of a hypothetical $1,000 payment
made at the beginning of the time periods used.
The Company may also advertise performance data which will be calculated in the
same manner as described above but which will not reflect the deduction of any
withdrawal charge and contract maintenance charge. The deduction of any
withdrawal charge and contract maintenance charge would reduce any percentage
increase or make greater any percentage decrease.
Owners should note that the investment results of each investment portfolio will
fluctuate over time, and any presentation of the investment portfolio's total
return for any period should not be considered as a representation of what an
investment may earn or what an Owner's total return may be in any future period.
YIELD
THE MONEY MARKET PORTFOLIO. The Company may advertise yield and effective
information for the Money Market Portfolio. Both yield figures are based on
historical earnings and are not intended to indicate future performance. The
"yield" of the subaccount refers to the income generated by an investment in the
subaccount over a seven-day period (which period will be stated in the
advertisement). This income is then "annualized." That is, the amount of income
generated by the investment during that week is assumed to be generated each
week over a 52-week period and is shown as a percentage of the investment. The
"effective yield" is calculated similarly but, when annualized, the income
earned by an investment in the subaccount is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment.
The Money Market Portfolio's current yield is computed on a base period return
of a hypothetical Contract having a beginning balance of one accumulation unit
for a particular period of time (generally seven days). The return is determined
by dividing the net change (exclusive of any capital changes) in such
accumulation unit by its beginning value, and then multiplying it by 365/7 to
get the annualized current yield. The calculation of net change reflects the
value of additional shares purchased with the dividends paid by the Portfolio,
and the deduction of the coverage charge and contract maintenance charge. The
effective yield reflects the effects of compounding and represents an
annualization of the current return with all dividends reinvested.
(Effective yield = [(Base Period Return + 1)365/7]-1.)
The Company does not currently advertise any yield information for the Money
Market Portfolio.
OTHER PORTFOLIOS. The Company may also quote current yield in sales literature,
advertisements and Owner communications for the other Portfolios. Each Portfolio
(other than the Money Market Portfolio) will publish standardized total return
information with any quotation of current yield.
The yield computation is determined by dividing the net investment income per
accumulation unit earned during the period (minus the deduction for the coverage
charge and the contract maintenance charge) by the accumulation unit value on
the last day of the period, according to the following formula:
6
Yield = 2 [[(a-b) + 1] - 1]
-----
cd
Where:
a = net investment income earned during the period by the Portfolio
attributable to shares owned by the subaccount.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of accumulation units outstanding during
the period.
d = the maximum offering price per accumulation unit on the last day of
the period.
The above formula will be used in calculating quotations of yield, based on
specified 30-day periods identified in the advertisement or communication. Yield
calculations assume no withdrawal charge. The Company does not currently
advertise any yield information for any Portfolio.
HISTORICAL UNIT VALUES
The Company may also show historical accumulation unit values in certain
advertisements containing illustrations. These illustrations will be based on
actual accumulation unit values.
In addition, the Company may distribute sales literature which compares the
percentage change in accumulation unit values for any of the investment
portfolios against established market indices such as the Standard & Poor's 500
Composite Stock Price Index, the Dow Jones Industrial Average or other
management investment companies which have investment objectives similar to the
investment portfolio being compared. The Standard & Poor's 500 Composite Stock
Price Index is an unmanaged, unweighted average of 500 stocks, the majority of
which are listed on the New York Stock Exchange. The Dow Jones Industrial
Average is an unmanaged, weighted average of thirty blue chip industrial
corporations listed on the New York Stock Exchange. Both the Standard & Poor's
500 Composite Stock Price Index and the Dow Jones Industrial Average assume
quarterly reinvestment of dividends.
REPORTING AGENCIES
The Company may also distribute sales literature which compares the performance
of the accumulation unit values of the Contracts with the unit values of
variable annuities issued by other insurance companies. Such information will be
derived from the Lipper Variable Insurance Products Performance Analysis
Service, the VARDS Report or from Morningstar.
The Lipper Variable Insurance Products Performance Analysis Service is published
by Lipper Analytical Services, Inc., a publisher of statistical data which
currently tracks the performance of almost 4,000 investment companies. The
rankings compiled by Lipper may or may not reflect the deduction of asset-based
insurance charges. The Company's sales literature utilizing these rankings will
indicate whether or not such charges have been deducted. Where the charges have
not been deducted, the sales literature will indicate that if the charges had
been deducted, the ranking might have been lower.
The VARDS Report is a monthly variable annuity industry analysis compiled by
Variable Annuity Research & Data Service of Roswell, Georgia and published by
Financial Planning Resources, Inc. The VARDS rankings may or may not reflect the
deduction of asset-based insurance charges. In addition, VARDS prepares risk
adjusted rankings, which consider the effects of market risk on total return
performance. This type of ranking may address the question as to which funds
provide the highest total return with the least amount of risk. Other ranking
services may be used as sources of performance comparison, such as
CDA/Weisenberger.
Morningstar rates a variable annuity against its peers with similar investment
objectives. Morningstar does not rate any variable annuity that has less than
three years of performance data.
TAX STATUS
GENERAL
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING OF
CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE COMPANY
CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE MADE.
PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE POSSIBILITY
OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF THE CONTRACTS.
PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE TREATED AS
"ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS. IT SHOULD BE FURTHER
UNDERSTOOD THAT THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE AND THAT SPECIAL
RULES NOT DESCRIBED HEREIN MAY BE APPLICABLE IN CERTAIN SITUATIONS. MOREOVER, NO
ATTEMPT HAS BEEN MADE TO CONSIDER ANY APPLICABLE STATE OR OTHER TAX LAWS.
Section 72 of the Code governs taxation of annuities in general. An Owner is not
taxed on increases in the value of a Contract until distribution occurs, either
in the form of a lump sum payment or as annuity payments under the Annuity
Option selected. For a lump sum payment received as a total withdrawal (total
surrender), the recipient is taxed on the portion of the payment that exceeds
the cost basis of the Contract. For Non-Qualified Contracts, this cost basis is
generally the purchase payments, while for Qualified Contracts there may be no
cost basis. The taxable portion of the lump sum payment is taxed at ordinary
income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion amount
is includible in taxable income. The exclusion amount for payments based on a
fixed annuity option is determined by multiplying the payment by the ratio that
the cost basis of the Contract (adjusted for any period or refund feature) bears
to the expected return under the Contract. The exclusion amount for payments
based on a variable annuity option is determined by dividing the cost basis of
the Contract (adjusted for any period certain or refund guarantee) by the number
of years over which the annuity is expected to be paid. Payments received after
the investment in the Contract has been recovered (i.e. when the total of the
excludable amount equals the investment in the Contract) are fully taxable. The
taxable portion is taxed at ordinary income tax rates. For certain types of
Qualified Plans there may be no cost basis in the Contract within the meaning of
Section 72 of the Code. Owners, Annuitants and Beneficiaries under the Contracts
should seek competent financial advice about the tax consequences of any
distributions. The Company is taxed as a life insurance company under the Code.
For federal income tax purposes, the Separate Account is not a separate entity
from the Company, and its operations form a part of the Company.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the United States Treasury Department
("Treasury Department"), adequately diversified. Disqualification of the
Contract as an annuity contract would result in the imposition of federal income
tax to the Owner with respect to earnings allocable to the Contract prior to the
receipt of payments under the Contract. The Code contains a safe harbor
provision which provides that annuity contracts such as theContract meet the
diversification requirements if, as of the end of each quarter, the underlying
assets meet the diversification standards for a regulated investment company and
no more than fifty-five percent (55%) of the total assets consist of cash, cash
items, U.S. Government securities and securities of other regulated investment
companies.
On March 2, 1989, the Treasury Department issued Regulations (Treas.
Reg.1.817-5), which established diversification requirements for the investment
portfolios underlying variable contracts such as the Contract. The Regulations
amplify the diversification requirements for variable contracts set forth in the
Code and provide an alternative to the safe harbor provision described above.
Under the Regulations, an investment portfolio will be deemed adequately
diversified if: (1) no more than 55% of the value of the total assets of the
portfolio is represented by any one investment; (2) no more than 70% of the
value of the total assets of the portfolio is represented by any two
investments; (3) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
by Section 817(h) of the Code have been met, "each United States government
agency or instrumentality shall be treated as a separate issuer."
The Company intends that all investment portfolios underlying the Contracts will
be managed in such a manner as to comply with these diversification
requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which Owner control of the
investments of the Separate Account will cause the Owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Contract. At this time it cannot be determined
whether additional guidance will be provided and what standards may be contained
in such guidance.
The amount of Owner control which may be exercised under the Contract is
different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the policy
owner was not the owner of the assets of the separate account. It is unknown
whether these differences, such as the Owner's ability to transfer among
investment choices or the number and type of investment choices available, would
cause the Owner to be considered as the owner of the assets of the Separate
Account resulting in the imposition of federal income tax to the Owner with
respect to earnings allocable to the Contract prior to receipt of payments under
the Contract.
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance was not considered to set forth a new
position, it may be applied retroactively resulting in the Owners being
retroactively determined to be the owners of the assets of the Separate Account.
Due to the uncertainty in this area, the Company reserves the right to modify
the Contract in an attempt to maintain favorable tax treatment.
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity contracts which are issued
within a calendar year to the same contract owner by one company or its
affiliates are treated as one annuity contract for purposes of determining the
tax consequences of any distribution. Such treatment may result in adverse tax
consequences including more rapid taxation of the distributed amounts from such
combination of contracts. Owners should consult a tax adviser prior to
purchasing more than one non-qualified annuity contract in any calendar year.
CONTRACTS OWNED BY OTHER THAN NATURAL PERSONS
Under Section 72(u) of the Code, the investment earnings on premiums for the
Contracts will be taxed currently to the Owner if the Owner is a non-natural
person, e.g., a corporation or certain other entities. Such Contracts generally
will not be treated as annuities for federal income tax purposes. However, this
treatment is not applied to a Contract held by a trust or other entity as an
agent for a natural person nor to Contracts held by Qualified Plans. Purchasers
should consult their own tax counsel or other tax adviser before purchasing a
Contract to be owned by a non-natural person.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable event. Owners should
therefore consult competent tax advisers should they wish to assign or pledge
their Contracts.
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includible in the gross income
of the Owner are subject to federal income tax withholding. Generally, amounts
are withheld from periodic payments at the same rate as wages and at the rate of
10% from non-periodic payments. However, the Owner, in most cases, may elect not
to have taxes withheld or to have withholding done at a different rate.
Effective January 1, 1993, certain distributions from retirement plans qualified
under Section 401 or Section 403(b) of the Code, which are not directly rolled
over to another eligible retirement plan or individual retirement account or
individual retirement annuity, are subject to a mandatory 20% withholding for
federal income tax. The 20% withholding requirement generally does not apply to:
a) a series of substantially equal payments made at least annually for the life
or life expectancy of the participant or joint and last survivor expectancy of
the participant and a designated beneficiary, or for a specified period of 10
years or more; or b) distributions which are required minimum distributions; or
c) the portion of the distributions not includible in gross income (i.e. returns
of after-tax contributions). Participants should consult their own tax counsel
or other tax adviser regarding withholding requirements.
TAX TREATMENT OF WITHDRAWALS - NON-QUALIFIED CONTRACTS
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the Contract Value exceeds the aggregate purchase
payments made, any amount withdrawn will be treated as coming first from the
earnings and then, only after the income portion is exhausted, as coming from
the principal. Withdrawn earnings are includible in gross income. It further
provides that a ten percent (10%) penalty will apply to the income portion of
any premature distribution. However, the penalty is not imposed on amounts
received: (a) after the taxpayer reaches age 59 1/2; (b) after the death of the
Owner; (c) if the taxpayer is totally disabled (for this purpose disability is
as defined in Section 72(m)(7) of the Code); (d) in a series of substantially
equal periodic payments made not less frequently than annually for the life (or
life expectancy) of the taxpayer or for the joint lives (or joint life
expectancies) of the taxpayer and his or her Beneficiary; (e) under an immediate
annuity; or (f) which are allocable to purchase payments made prior to August
14, 1982.
The above information does not apply to Qualified Contracts. However, separate
tax withdrawal penalties and restrictions may apply to such Qualified Contracts.
(See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
QUALIFIED PLANS
The Contracts offered herein may also be used as Qualified Contracts. Owners,
Annuitants and Beneficiaries are cautioned that benefits under a Qualified
Contract may be subject to the terms and conditions of the plan regardless of
the terms and conditions of the Contracts issued pursuant to the plan. The
following discussion of Qualified Contracts is not exhaustive and is for general
informational purposes only. The tax rules regarding Qualified Contracts are
very complex and will have differing applications depending on individual facts
and circumstances. Each purchaser should obtain competent tax advice prior to
purchasing Qualified Contracts.
Qualified Contracts include special provisions restricting Contract provisions
that may otherwise be available as described herein. Generally, Qualified
Contracts are not transferable except upon surrender or annuitization.
On July 6, 1983, the Supreme Court decided in ARIZONA GOVERNING COMMITTEE V.
NORRIS that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women. Qualified Contracts will utilize annuity tables
which do not differentiate on the basis of sex. Such annuity tables will also be
available for use in connection with certain non-qualified deferred compensation
plans.
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an Individual Retirement Annuity (IRA).
Under applicable limitations, certain amounts may be contributed to an IRA which
will be deductible from the individual's gross income. These IRAs are subject to
limitations on eligibility, contributions, transferability and distributions.
(See "Tax Treatment of Withdrawals - Qualified Contracts" below.) Under certain
conditions, distributions from other IRAs and other Qualified Plans may be
rolled over or transferred on a tax-deferred basis into an IRA. Sales of
Contracts for use with IRAs are subject to special requirements imposed by the
Code, including the requirement that certain informational disclosure be given
to persons desiring to establish an IRA. Purchasers of Contracts to be qualified
as Individual Retirement Annuities should obtain competent tax advice as to the
tax treatment and suitability of such an investment.
TAX TREATMENT OF WITHDRAWALS - QUALIFIED CONTRACTS
Section 72(t) of the Code imposes a 10% penalty tax on the taxable portion of
any distribution from qualified retirement plans, including Contracts issued and
qualified under Code Section 408(b) (Individual Retirement Annuities). To the
extent amounts are not includible in gross income because they have been rolled
over to an IRA or to another eligible Qualified Plan, no tax penalty will be
imposed. The tax penalty will not apply to the following distributions: (a) if
distribution is made on or after the date on which the Annuitant reaches age 59
1/2; (b) distributions following the death or disability of the Annuitant (for
this purpose disability is as defined in Section 72(m)(7) of the Code); (c)
distributions that are part of substantially equal periodic payments made not
less frequently than annually for the life (or life expectancy) of the Annuitant
or the joint lives (or joint life expectancies) of the Annuitant and his or her
designated Beneficiary; (d) distributions made to the Owner or Annuitant (as
applicable) to the extent such distributions do not exceed the amount allowable
as a deduction under Code Section 213 to the Owner or Annuitant (as applicable)
for amounts paid during the taxable year for medical care; or (e) distributions
from an Individual Retirement Annuity for the purchase of medical insurance (as
described in Section 213(d)(1)(D) of the Code) for the Owner or Annuitant (as
applicable) and his or her spouse and dependents if the Owner or Annuitant (as
applicable) has received unemployment compensation for at least 12 weeks. This
exception will no longer apply after the Owner or Annuitant (as applicable) has
been re-employed for at least 60 days.
Generally, distributions from a qualified plan must commence no later than April
1 of the calendar year following the year in which the employee attains age 70
1/2. Required distributions must be over a period not exceeding the life
expectancy of the individual or the joint lives or life expectancies of the
individual and his or her designated beneficiary. If the required minimum
distributions are not made, a 50% penalty tax is imposed as to the amount not
distributed.
ANNUITY PROVISIONS
FIXED ANNUITY
A fixed annuity is an annuity with payments which are guaranteed as to dollar
amount by the Company and do not vary with the investment experience of the
Separate Account. The dollar amount of each fixed annuity will be determined in
accordance with annuity tables contained in the contract.
VARIABLE ANNUITY
A variable annuity is an annuity with payments which: (1) are not predetermined
as to dollar amount; and (2) will vary in amount with the net investment results
of the applicable investment portfolio(s) of the Separate Account.
ANNUITY UNIT VALUE
On the Annuity Date a fixed number of Annuity Units will be purchased as
follows:
For each Subaccount the fixed number of Annuity Units is equal to the Adjusted
Contract Value for all Subaccounts, divided first by $1000, then multiplied by
the appropriate Annuity Payment amount from the Annuity Table contained in the
Contract for each $1000 of value for the Annuity Option selected, and then
divided by the Annuity Unit value for that Subaccount on the Annuity Date. After
that, the number of Annuity Units in each Subaccount remains unchanged unless
you elect to transfer between Subaccounts. All calculations will appropriately
reflect the Annuity Payment frequency selected.
On each Annuity Payment date, the total Variable Annuity Payment is the sum of
the Annuity Payments for each Subaccount. The Variable Annuity Payment in each
Subaccount is determined by multiplying the number of Annuity Units then
allocated to such Subaccount by the Annuity Unit value for that Subaccount.
On each subsequent business day, the value of an Annuity Unit is determined in
the following way:
First: The net Investment Factor is determined as described in the Prospectus
under "Accumulation Units".
Second: The value of an Annuity Unit for a business day is equal to:
a. the value of the Annuity Unit for the immediately preceding business
day;
b. multiplied by the Net Investment Factor for current business day;
c. divided by the Assumed Net Investment Factor (see below) for the
business day.
The Assumed Net Investment Factor is equal to one plus the Assumed Investment
Return which is used in determining the basis for the purchase of an Annuity,
adjusted to reflect the particular business day. The Assumed Investment Return
that we will use is 3 1/2%. However, we may agree with you to use a different
value.
BMA may elect to determine the amount of each annuity payment up to 10 business
days prior to the elected payment date. The value of your contract less any
applicable premium tax is applied to the applicable annuity table to determine
the initial annuity payment.
MORTALITY AND EXPENSE GUARANTEE
We guarantee that the dollar amount of each Annuity Payment after the first will
not be affected by variations in mortality or expense experience.
FINANCIAL STATEMENTS
The audited consolidated financial statements of the Company as of December 31,
1996 included herein should be considered only as bearing upon the ability of
the Company to meet its obligations under the Contracts.
CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A MEMBER OF THE GENERALI GROUP OF COMPANIES)
YEARS ENDED DECEMBER 31, 1996 AND 1995
WITH REPORT OF INDEPENDENT AUDITORS
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Consolidated Financial Statements
Years ended December 31, 1996 and 1995
CONTENTS
Report of Independent Auditors.................................................1
Audited Consolidated Financial Statements
Consolidated Balance Sheets....................................................2
Consolidated Statements of Operations..........................................4
Consolidated Statements of Stockholder's Equity................................5
Consolidated Statements of Cash Flows..........................................6
Notes to Consolidated Financial Statements.....................................8
Report of Independent Auditors
The Board of Directors
Business Men's Assurance Company of America
We have audited the accompanying consolidated balance sheets of Business Men's
Assurance Company of America (an ultimate subsidiary of Assicurazioni Generali,
S.p.A.) (the Company) as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholder's equity and cash flows for
each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Business Men's
Assurance Company of America at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, in 1994, the Company changed
its method of accounting for investments.
Ernst & Young LLP
Kansas City, Missouri
February 7, 1997
<TABLE>
<CAPTION>
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Consolidated Balance Sheets
DECEMBER 31
1996 1995
------------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Investments (Notes 1 and 3): Securities available-for-sale, at fair value:
Fixed maturities (amortized cost - $1,286,888 in 1996
and $1,107,356 in 1995) $1,288,934 $1,141,017
Equity securities (cost - $28,644 in 1996 and $21,501 in
1995) 32,350 22,789
Mortgage loans on real estate, net of allowance for losses
of $6,879 in 1996 and $6,082 in 1995 704,356 519,172
Real estate (Note 1) 5,498 5,412
Policy loans 65,225 65,262
Short-term investments 39,991 76,263
Other 3,830 4,315
---------- ---------
Total investments 2,140,184 1,834,230
Accrued investment income 18,539 17,147
Premium and other receivables 11,817 14,344
Current income taxes recoverable (Note 7) - 1,173
Deferred policy acquisition costs 131,025 112,148
Property, equipment and software (Note 6) 18,890 22,496
Reinsurance recoverables:
Paid benefits 3,948 4,776
Benefits and claim reserves ceded 58,177 50,243
Receivable from affiliate (Note 10) - 6,368
Other assets (Note 1) 16,923 20,790
---------- ----------
Total assets $2,399,503 $2,083,715
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
------------------------------------
(In Thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY:
Future policy benefits:
Life and annuity (Note 10) $1,192,497 $1,056,831
Health 75,914 65,835
Contract account balances 636,656 494,091
Policy and contract claims 58,617 48,010
Unearned revenues 13,813 13,658
Other policyholder funds 15,429 15,948
Outstanding checks in excess of bank balances 4,673 3,868
Current income taxes payable (Note 7) 4,345 -
Deferred income taxes (Note 7) 14,912 17,016
Payable to affiliate (Note 10) 972 -
Other liabilities 44,808 49,480
--------- ---------
Total liabilities 2,062,636 1,764,737
Commitments and contingencies (Note 5)
Stockholder's equity (Notes 2 and 11):
Preferred stock of $1 par value; authorized 3,000,000
shares, none issued and outstanding - -
Common stock of $1 par value; authorized 24,000,000
shares, 12,000,000 shares issued and outstanding
12,000 12,000
Paid-in capital 40,106 25,106
Net unrealized gains (losses) on securities 3,686 15,297
Retained earnings 281,075 266,575
--------- --------
Total stockholder's equity 336,867 318,978
---------- --------
Total liabilities and stockholder's equity $2,399,503 $2,083,715
=========== ==========
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Consolidated Statements of Operations
YEAR ENDED DECEMBER 31
1996 1995 1994
-----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Revenues:
Premiums:
Life and annuity $142,461 $130,360 $116,976
Health 60,491 47,294 40,898
Other insurance considerations 38,780 37,183 36,162
Net investment income (Note 3) 145,629 124,605 102,094
Realized gains, net (Note 3) 5,906 4,290 1,319
Other income 26,802 23,394 19,083
------ ------ ------
Total revenues 420,069 367,126 316,532
Benefits and expenses:
Life and annuity benefits 122,915 111,734 107,589
Health benefits 42,224 40,132 23,774
Increase in policy liabilities including
interest credited to account balances 94,530 65,017 56,047
Real estate expense, net 551 649 746
Commissions 55,180 54,176 31,049
Increase in deferred policy acquisition costs (5,459) (16,366) (6,477)
Taxes, licenses and fees 5,229 5,251 4,196
Other operating costs and expenses 76,647 82,604 79,050
------ ------ ------
Total benefits and expenses 391,817 343,197 295,974
------- ------- -------
Earnings from continuing operations, before
income tax expense 28,252 23,929 20,558
Income tax expense (Note 7) 10,168 8,503 7,374
------ ----- -----
Earnings from continuing operations 18,084 15,426 13,184
Discontinued operations (Note 12):
Earnings from discontinued operations, net of
income tax expense of $2,058 in 1994 - - 3,822
Gain on sale of discontinued operations, net of
income tax expense of $735 in 1996, $3,352 in
1995 and $2,437 in 1994 1,416 6,355 4,526
----- ----- -----
Earnings from discontinued operations 1,416 6,355 8,348
----- ----- -----
Net earnings $ 19,500 $ 21,781 $ 21,532
========= ========= =========
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Consolidated Statements of Stockholder's Equity
YEAR ENDED DECEMBER 31
1996 1995 1994
-----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Common stock:
Balance at beginning and end of year $ 12,000 $ 12,000 $ 12,000
Paid-in capital:
Balance at beginning of year 25,106 25,106 25,106
Additional paid-in capital 15,000 - -
------ ------ ------
Balance at end of year 40,106 25,106 25,106
Net unrealized gains (losses) on securities:
Balance at beginning of year 15,297 (28,865) 596
Cumulative effect of change in
accounting principle (Note 1) - - 20,469
Change in net unrealized gains (losses) (11,611) 44,162 (49,930)
------- ------ -------
Balance at end of year 3,686 15,297 (28,865)
Retained earnings:
Balance at beginning of year 266,575 252,794 239,262
Net earnings 19,500 21,781 21,532
Dividends declared (Note 2) (5,000) (8,000) (8,000)
- ------ ------ ------
Balance at end of year 281,075 266,575 252,794
------- ------- -------
Total stockholder's equity $336,867 $318,978 $261,035
======== ======== ========
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
1996 1995 1994
-----------------------------------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 19,500 $ 21,781 $ 21,532
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Deferred income tax (benefit) 4,146 7,025 (875)
Realized gains, net (5,906) (4,290) (1,319)
Gain on disposal of discontinued segment (2,151) (7,417) (6,963)
Premium amortization (discount accretion), net (1,246) (1,090) 787
Policy loans lapsed in lieu of surrender benefits 2,996 3,201 4,063
Depreciation 4,153 4,817 5,454
Amortization 782 782 782
Changes in assets and liabilities:
Increase in accrued investment income (1,392) (1,719) (1,182)
(Increase) decrease in receivables and reinsurance
recoverables 2,761 (19,425) 1,674
Policy acquisition costs deferred (31,745) (40,510) (28,471)
Policy acquisition costs amortized 26,286 24,144 21,994
(Increase) decrease in income taxes recoverable 5,518 (4,546) 5,609
Increase in accrued policy benefits, claim
reserves, unearned revenues and policyholder funds 32,331 4,574 19,464
Interest credited to policyholder accounts 69,494 56,358 43,420
Increase in outstanding checks in excess of bank balances 805 3,868 -
(Increase) decrease in other assets and other 412 1,133 (1,910)
liabilities, net
Decrease in net asset of discontinued operations - 1,335 678
Other, net (1,208) (179) 423
------ ---- ---
Net cash provided by operating activities 125,536 49,842 85,160
INVESTING ACTIVITIES Purchases of investments:
Securities available-for-sale:
Fixed maturities (527,172) (592,373) (372,680)
Equity (17,586) (12,537) (5,175)
Mortgage and policy loans (259,438) (159,521) (123,264)
Other - (269) (3,316)
Sales, calls or maturities of investments: Maturities and calls
of securities available-for-sale:
Fixed maturities 117,057 108,472 148,436
Equity - 2,031 4,474
Sales of securities available-for-sale:
Fixed maturities 238,051 263,650 137,018
Equity 12,444 6,223 5,614
Mortgage and policy loans 66,934 41,753 77,045
Real estate 2,194 502 3,437
</TABLE>
<TABLE>
<CAPTION>
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Consolidated Statements of Cash Flows (continued)
YEAR ENDED DECEMBER 31
1996 1995 1994
-----------------------------------------
(In Thousands)
<S> <C> <C> <C>
INVESTING ACTIVITIES (CONTINUED)
Purchase of property, equipment and software $ (290) $ (2,659) $ (2,418)
Net (increase) decrease in short-term investments 36,272 13,264 (58,838)
Proceeds from sale of discontinued operations 632 5,426 10,593
Distributions from unconsolidated related parties 718 2 25
--- ----- ------
Net cash used in investing activities (330,184) (326,036) (179,049)
FINANCING ACTIVITIES
Dividends paid (5,000) (8,000) (8,000)
Additional paid-in capital 15,000 - -
Net proceeds of interest sensitive and investment type contracts 194,648 280,725 101,894
Net proceeds from reverse repurchase borrowing 35,173 - -
Retirement of reverse repurchase borrowing (35,173) - -
------- ------- -------
Net cash provided by financing activities 204,648 272,725 93,894
------- ------- ------
Net increase (decrease) in cash - (3,469) 5
Cash at beginning of year - 3,469 3,464
======= ===== =====
Cash at end of year $ - $ - $ 3,469
========== ====== ========
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
For purposes of the statements
of cash flows, Business Men's Assurance
Company of America considers only cash
on hand and demand deposits to be cash
<S> <C> <C> <C>
Cash paid during the year for:
Income taxes $ 1,239 $ 9,376 $ 7,135
Interest paid on reverse repurchase borrowing 620 - -
--- ---- ----
$ 1,859 $ 9,376 $ 7,135
========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Real estate acquired through foreclosure $ 3,033 $ 5,156 $ 1,525
========== ========== ==========
Mortgage loans extended from sale of real estate $ - $ - $ 2,720
============ ============ ==========
Accrual of direct costs of disposal of discontinued operations $ - $ - $ 3,631
============ ============ ==========
</TABLE>
See accompanying notes.
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements
December 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Business Men's Assurance Company of America (the Company) is a
Missouri-domiciled life insurance company licensed to sell insurance products in
49 states and the District of Columbia. The Company offers a diversified
portfolio of individual and group insurance and investment products both
directly and through reinsurance assumptions, distributed primarily through
general agencies. Assicurazioni Generali S.p.A. (Generali), an Italian insurer,
is the ultimate parent company.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company and all majority-owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.
INVESTMENTS
The Company adopted Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," as of January 1, 1994, with no
effect on income and a $20,469,000 increase in stockholder's equity (net of a
$2,475,000 allowance against deferred policy acquisition costs and unearned
revenue reserve and net deferred taxes of $11,022,000) to reflect the net
unrealized gains on fixed maturity securities classified as available-for-sale
that were previously carried at amortized cost.
The Company has designated its entire investment portfolio as
available-for-sale. Changes in fair values of available-for-sale securities,
after adjustment of deferred policy acquisition costs (DPAC) and deferred income
taxes, are reported as unrealized gains or losses directly in stockholder's
equity and, accordingly, have no effect on net income. The DPAC offsets to the
unrealized gains or losses represent valuation adjustments or reinstatements of
DPAC that would have been required as a charge or credit to operations had such
unrealized amounts been realized.
The amortized cost of fixed maturity investments classified as
available-for-sale is adjusted for amortization of premiums and accretion of
discounts. That amortization or accretion is included in net investment income.
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Mortgage loans and mortgage-backed securities are carried at unpaid balances
adjusted for accrual of discount and allowances for other than temporary decline
in value. Policy loans are carried at unpaid balances.
Real estate is stated at the lower of cost or fair value. At December 31, 1996
and 1995, real estate was carried net of a valuation allowance of $2,344,000 and
$3,515,000, respectively. Profit is recognized on real estate sales when down
payment, continuing investment and transfer of risk criteria have been
satisfied. Property, equipment and software, and the home office building are
generally valued at cost, including development costs, less allowances for
depreciation and other than temporary decline in value.
Property, equipment and software are being depreciated over the estimated useful
lives of the assets, principally on a straight-line basis. Depreciation rates on
these assets are set forth in Note 6.
Realized gains and losses on sales of investments and declines in value
considered to be other than temporary are recognized in net earnings on the
specific identification basis.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
DEFERRED POLICY ACQUISITION COSTS
Certain commissions, expenses of the policy issue and underwriting departments
and other variable expenses have been deferred. For limited payment and other
traditional life insurance policies, these deferred acquisition costs are being
amortized over a period of not more than 25 years in proportion to the ratio of
the expected annual premium revenue to the expected total premium revenue.
Expected premium revenue was estimated with the same assumptions used for
computing liabilities for future policy benefits for these policies.
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For universal life-type insurance and investment-type products, the deferred
policy acquisition costs are amortized over a period of not more than 25 years
in relation to the present value of estimated gross profits arising from
estimates of mortality, interest, expense and surrender experience. The
estimates of expected gross profits are evaluated regularly and are revised if
actual experience or other evidence indicates that revision is appropriate. Upon
revision, total amortization recorded to date is adjusted by a charge or credit
to current earnings.
Deferred policy acquisition costs are evaluated to determine that the
unamortized portion of such costs does not exceed recoverable amounts, after
considering anticipated investment income.
RECOGNITION OF INSURANCE PREMIUM REVENUE AND RELATED EXPENSES
For limited payment and other traditional life insurance policies, premium
income is reported as earned when due, with past-due premiums being reserved.
Profits are recognized over the life of these contracts by associating benefits
and expenses with insurance in force for limited payment policies and with
earned premiums for other traditional life policies. This association is
accomplished by a provision for liability for future policy benefits and the
amortization of policy acquisition costs. Accident and health premium revenue is
recognized on a pro rata basis over the terms of the policies.
For universal life and investment-type policies, contract charges for mortality,
surrender and expense, other than front-end expense charges, are reported as
income when charged to policyholders' accounts. Expenses consist primarily of
benefit payments in excess of policyholder account values and interest credited
to policyholder accounts. Profits are recognized over the life of universal
life-type contracts through the amortization of policy acquisition costs and
deferred front-end expense charges with estimated gross profits from mortality,
interest, surrender and expense.
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
POLICY LIABILITIES AND CONTRACT VALUES
The liability for future policy benefits for limited payment and other
traditional life insurance contracts has been computed primarily by a net level
premium reserve method based on estimates of future investment yield, mortality
and withdrawals made at the time gross premiums were calculated. Assumptions
used in computing future policy benefits are as follows: interest rates range
from 3.25% to 8.50%, depending on the year of issue; withdrawal rates for
individual life policies issued in 1966 and after are based on Company
experience, and policies issued prior to 1966 are based on industry tables; and
mortality rates are based on mortality tables that consider Company experience.
The liability for future policy benefits is graded to reserves stipulated by the
policy over a period of 20 to 25 years or the end of the premium paying period,
if less.
For universal life and investment-type contracts, the account value before
deduction of any surrender charges is held as the policy liability. An
additional liability is established for deferred front-end expense charges on
universal life-type policies. These expense charges are recognized in income as
insurance considerations, using the same assumptions as are used to amortize
deferred policy acquisition costs.
Claims and benefits payable for reported disability income claims have been
computed as the present value of expected future benefit payments based on
estimates of future investment yields and claim termination rates. The amount of
benefits payable included in the future policy benefit reserves and policy and
contract claims for December 31, 1996 and 1995 was $40,392,000 and $36,164,000,
respectively. Interest rates used in the calculation of future investment yields
vary based on the year the claim was incurred and range from 3% to 8.75%. Claim
termination rates are based on industry tables.
Other accident and health claims and benefits payable for reported claims and
incurred but not reported claims are estimated using prior experience. The
methods of calculating such estimates and establishing the related liabilities
are periodically reviewed and updated. Any adjustments needed as a result of
periodic reviews are reflected in current operations.
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES
Deferred federal income taxes have been provided in the consolidated financial
statements to recognize temporary differences between the financial reporting
and tax bases of assets and liabilities measured using enacted tax rates and
laws (Note 7). Temporary differences are principally related to deferred policy
acquisition costs, the provision for future policy benefits, accrual of
discounts on investments, accelerated depreciation and allowance for investment
losses.
INTANGIBLE ASSETS
Goodwill of $13,106,000, net of accumulated amortization of $2,542,000 resulting
from the acquisition of a subsidiary, is included in other assets. Goodwill is
being amortized over a period of 20 years on a straight-line basis, and
amortization amounted to $782,000 for each of the years ended December 31, 1996,
1995 and 1994.
FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of the instruments. SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------------- --------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------------------------- --------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Fixed maturities (Note 3) $1,288,934 $1,288,934 $1,141,017 $1,141,017
Equity securities (Note 3) 32,350 32,350 22,789 22,789
Mortgage loans 704,356 707,915 519,172 550,455
Policy loans 65,225 60,735 65,262 60,733
Short-term investments 39,991 39,991 76,263 76,263
Investment-type insurance
contracts (Note 4) 1,097,821 1,078,326 841,954 833,370
</TABLE>
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and short-term investments: The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Investment securities: Fair values for 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 or, in the case of private placements, by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the investments.
The fair value for equity securities is based on quoted market prices.
Off-balance-sheet instruments: The fair value for outstanding loan
commitments approximates the amount committed, as all loan commitments were
made within the last 60 days of the year.
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Mortgage loans and policy loans: The fair value for mortgage loans and
policy loans is estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Loans with similar characteristics are
aggregated for purposes of the calculations. The carrying amount of accrued
interest approximates its fair value.
Flexible and single premium deferred annuities: The cash surrender value of
flexible and single premium deferred annuities approximates their fair
value.
Guaranteed investment contracts: The fair value for the Company's
liabilities under guaranteed investment contracts is estimated using
discounted cash flow analyses, using interest rates currently being offered
for similar contracts with maturities consistent with those remaining for
the contracts being valued.
Supplemental contracts without life contingencies: The carrying amounts of
supplemental contracts without life contingencies approximate their fair
values.
Reinsurance recoverables: The carrying values of reinsurance recoverables
approximate their fair values.
POSTRETIREMENT BENEFITS
The projected future cost of providing postretirement benefits, such as health
care and life insurance, is recognized as an expense as employees render service
instead of when the benefits are paid. See Note 8 for further disclosures with
respect to postretirement benefits other than pensions.
IMPAIRMENT OF LOANS
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures," require that an impaired mortgage loan's fair value be measured
based on the present value of future cash flows discounted at the loan's
effective interest rate, at the loan's observable market price or at the fair
value of the collateral if the loan is
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
collateral dependent. If the fair value of a mortgage loan is less than the
recorded investment in the loan, the difference is recorded as an allowance for
mortgage loan losses. The change in the allowance for mortgage loan losses is
reported with realized gains or losses on investments. Interest income on
impaired loans is recognized on a cash basis.
RECLASSIFICATION
Certain amounts for 1995 and 1994 have been reclassified to conform to the
current year presentation.
2. DIVIDEND LIMITATIONS
Missouri has legislation that requires prior reporting of all dividends to the
Director of Insurance. The Company, as a regulated life insurance company, may
pay a dividend from unassigned surplus without the approval of the Missouri
Department of Insurance, if the aggregate of all dividends paid during the
preceding 12-month period does not exceed the greater of 10% of statutory
stockholder's equity at the end of the preceding calendar year or the statutory
net gain from operations for the preceding calendar year. A portion of the
statutory equity of the Company that is available for dividends would be subject
to additional federal income taxes should distribution be made from
"policyholders' surplus" (see Note 7).
As of December 31, 1996 and 1995, the Company's statutory stockholder's equity
was $171,240,000 and $155,465,000, respectively. Statutory net gain from
operations and net income for each of the three years in the period ended
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
-----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Net gain from operations $10,898 $8,309 $12,764
Net income 10,381 9,418 13,447
</TABLE>
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT OPERATIONS
The Company's investments in available-for-sale securities are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
Fixed maturities:
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $ 119,125 $ 1,571 $ (802) $ 119,894
Obligations of states and political
subdivisions 40,052 773 (93) 40,732
Debt securities issued by foreign
governments 4,471 166 (267) 4,370
Corporate securities 426,286 6,472 (3,786) 428,972
Mortgage-backed securities 687,455 6,031 (8,147) 685,339
Redeemable preferred stocks 9,499 157 (29) 9,627
----- --- --- -----
Total 1,286,888 15,170 (13,124) 1,288,934
Equity securities 28,644 4,875 (1,169) 32,350
------ ----- ------ ------
$1,315,532 $20,045 $(14,293) $1,321,284
========== ======= ======== ==========
</TABLE>
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
3. INVESTMENT OPERATIONS (CONTINUED)
DECEMBER 31, 1995
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
Fixed maturities:
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $ 123,483 $ 5,483 $ (84) $ 128,882
Obligations of states and political
subdivisions 34,480 1,694 - 36,174
Debt securities issued by foreign
governments 4,243 195 - 4,438
Corporate securities 393,852 15,992 (2,205) 407,639
Mortgage-backed securities 538,692 13,833 (1,323) 551,202
Redeemable preferred stocks 12,606 170 (94) 12,682
------ --- --- ------
Total 1,107,356 37,367 (3,706) 1,141,017
Equity securities 21,501 2,293 (1,005) 22,789
------ ----- ------ ------
$1,128,857 $39,660 $(4,711) $1,163,806
========== ======= ======= ==========
</TABLE>
The amortized cost and estimated fair value of available-for-sale fixed maturity
securities at December 31, 1996, by contractual maturity, are as follows.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Maturities of mortgage-backed securities have not been set
forth in the following table, as such securities are not due at a single
maturity date:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------
AMORTIZED COST FAIR VALUE
------------------------------------
(In Thousands)
<S> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
Due in one year or less $ 54,645 $ 54,700
Due after one year through five years 209,733 210,833
Due after five years through 10 years 268,002 269,095
Due after 10 years 67,053 68,967
------ ------
599,433 603,595
Mortgage-backed securities 687,455 685,339
------- -------
Total fixed maturity securities $1,286,888 $1,288,934
========== ==========
</TABLE>
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT OPERATIONS (CONTINUED)
The majority of the Company's mortgage loan portfolio is secured by real estate.
The following table presents information about the location of the real estate
that secures mortgage loans in the Company's portfolio:
CARRYING AMOUNT AS OF DECEMBER 31
1996 1995
------------------------------------
(In Thousands)
State:
California $ 68,399 $ 62,462
Texas 59,404 41,883
Arizona 51,515 32,460
Washington 34,614 30,189
Missouri 34,400 25,328
Kansas 34,069 33,494
Massachusetts 33,420 14,503
Oklahoma 32,809 32,506
Florida 30,790 30,440
Other 324,936 215,907
------- -------
$704,356 $519,172
======== ========
The following table lists the Company's investment in impaired mortgage loans
and related allowance for credit losses at December 31. The table also includes
the average recorded investment in impaired loans and interest income on
impaired loans.
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Impaired mortgage loans $2,516 $5,160 $3,218
Allowance for credit losses 691 1,651 922
--- ----- ---
Net recorded investment in impaired loans $1,825 $3,509 $2,296
====== ====== ======
Average recorded investment in impaired loans $2,667 $2,902 $2,757
====== ====== ======
Interest income on impaired loans $ 115 $ 403 $ 46
======= ======= ========
</TABLE>
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT OPERATIONS (CONTINUED)
Bonds, mortgage loans, preferred stocks and common stocks approximating
$4,200,000 and $9,000,000 were on deposit with regulatory authorities at
December 31, 1996 and 1995, respectively.
Set forth below is a summary of consolidated net investment income for the years
ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Fixed maturities:
Bonds $ 86,066 $ 73,930 $ 59,458
Redeemable preferred stocks 814 1,176 2,862
Equity securities:
Common stocks 579 521 463
Nonredeemable preferred stocks 438 330 531
Mortgage loans on real estate 52,973 41,770 37,475
Policy loans 3,953 3,952 3,971
Short-term investments 3,016 4,779 2,225
Other 269 340 137
--- --- ---
148,108 126,798 107,122
Less:
Investment income from discontinued operations - 211 2,718
Investment expenses 2,479 1,982 2,310
----- ----- -----
Net investment income from continuing operations
$145,629 $124,605 $102,094
======== ======== ========
</TABLE>
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT OPERATIONS (CONTINUED)
Realized gains (losses) on available-for-sale securities disposed of during 1996
and 1995 consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Available-for-sale:
Fixed maturity securities:
Gross realized gains $7,953 $10,246 $6,911
Gross realized losses (1,622) (4,388) (4,118)
Equity securities:
Gross realized gains 2,001 1,789 329
Gross realized losses - (376) (108)
Other investments (2,426) (2,981) (1,695)
------ ------ ------
Net realized gains $5,906 $ 4,290 $1,319
====== ======== ======
</TABLE>
Sales of investments in securities available-for-sale in 1996, 1995 and 1994,
excluding maturities and calls, resulted in gross realized gains of $9,798,800,
$11,887,000 and $5,443,000 and gross realized losses of $1,290,500, $4,564,000
and $3,926,000, respectively.
The net carrying value of non-income-producing investments at December 31, 1996
and 1995, which were non-income-producing during the year, consisted of mortgage
loans of $1,293,000 and $1,270,000 and bonds of $1,200,000 and $-0-,
respectively.
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
4. INVESTMENT CONTRACTS
The carrying amounts and fair values of the Company's liabilities for
investment-type insurance contracts (included with future policy benefits and
contract account balances in the balance sheet) at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Guaranteed investment contracts $ 596,499 $ 598,241 $451,809 $461,858
Flexible and single premium
deferred annuities 501,322 480,085 390,145 371,512
------- ------- ------- -------
Total investment-type insurance contracts $1,097,821 $1,078,326 $841,954 $833,370
========== ========== ======== ========
</TABLE>
Fair values of the Company's insurance contracts other than investment contracts
are not required to be disclosed. However, the fair values of liabilities under
all insurance contracts are taken into consideration in the Company's overall
management of interest rate risk, which minimizes exposure to changing interest
rates through the matching of investment maturities with amounts due under
insurance contracts.
5. COMMITMENTS AND CONTINGENCIES
The Company leases equipment and certain office facilities from others under
operating leases through 2003. Certain other equipment and facilities are rented
monthly. Rental expense amounted to $2,117,000, $2,742,000 and $2,861,000 for
the years ended December 31, 1996, 1995 and 1994, respectively. As of December
31, 1996, the minimum future payments under noncancelable operating leases for
each of the next five years and in the aggregate subsequent to 2001 are as
follows:
1997 $1,403,000
1998 881,000
1999 739,000
2000 404,000
2001 276,000
Subsequent to 2001 120,000
=======
Total $3,823,000
==========
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Total outstanding commitments to fund mortgage loans were $46,735,000 and
$36,620,000 at December 31, 1996 and 1995, respectively.
The Company and its subsidiaries are parties to certain claims and legal actions
arising during the ordinary course of business. In the opinion of management,
after consulting with legal counsel, these matters will not have a materially
adverse effect on the operations or financial position of the Company.
6. PROPERTY, EQUIPMENT AND SOFTWARE
A summary of property, equipment and software at December 31 and their
respective depreciation rates is as follows:
<TABLE>
<CAPTION>
RATE OF
DEPRECIATION 1996 1995
------------------- ------------------------------------
(In Thousands)
<S> <C> <C> <C>
Home office building, including land with
a cost of $425,000 2% $23,158 $23,155
Other real estate not held-for-sale or
rental 4% 1,126 2,044
Less accumulated depreciation (11,963) (11,390)
------- -------
12,321 13,809
Equipment and software 5%-33% 29,010 29,662
Less accumulated depreciation (22,441) (20,975)
------- -------
6,569 8,687
----- -----
Total property, equipment and software $18,890 $22,496
======= =======
</TABLE>
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
7. FEDERAL INCOME TAXES
Certain amounts that were not currently taxed under pre-1984 tax law were
credited to a "policyholders' surplus" account. This account is frozen under the
1984 Tax Act and is taxable only when distributed to stockholders, at which time
it is taxed at regular corporate rates. The "policyholders' surplus" of the
Company approximates $88 million. The Company has no present plan for
distributing the amount in "policyholders' surplus." Consequently, no provision
has been made in the consolidated financial statements for the taxes thereon.
However, if such taxes were assessed, the amount of taxes payable would be
approximately $31 million.
Earnings taxed on a current basis are accumulated in a "shareholder's surplus"
account and can be distributed to the shareholder without tax. The shareholder's
surplus amounted to approximately $219 million, $212 million and $213 million at
December 31, 1996, 1995 and 1994, respectively.
The significant components comprising the Company's deferred tax assets and
liabilities as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Deferred acquisition costs $27,426 $26,104
Sale of BMA Corporation stock 14,169 14,169
Unrealized investment gains and losses 1,987 8,237
Other 5,532 6,164
----- -----
Total deferred tax liability 49,114 54,674
Deferred tax assets:
Reserve for future contractowner benefits 23,012 25,436
Accrued expenses 6,636 7,794
Other 4,554 4,428
----- -----
Total deferred tax assets 34,202 37,658
====== ======
Net deferred tax liability $14,912 $17,016
======= =======
</TABLE>
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
7. FEDERAL INCOME TAXES (CONTINUED)
The components of the provision for income taxes and the temporary differences
generating deferred income taxes for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Current $ 6,757 $ 4,830 $12,744
Deferred:
Deferred policy acquisition costs 1,322 4,139 16
Future policy benefits 2,424 4,010 587
Accrual of discount 408 494 497
Tax on realized gains greater than book (1,076) (1,034) (2,474)
Employee benefit plans 86 (148) 440
Other, net 982 (436) 59
--- ---- --
4,146 7,025 (875)
----- ----- ----
Total 10,903 11,855 11,869
Less taxes from discontinued operations:
Current (149) 1,539 6,858
Deferred 884 1,813 (2,363)
--- ----- ------
735 3,352 4,495
--- ----- -----
Total taxes from continuing operations $10,168 $ 8,503 $ 7,374
======= ======== ========
</TABLE>
At December 31, 1994, the Company recorded a $3,000,000 valuation allowance
against deferred tax assets resulting from cumulative unrealized losses on
available-for-sale securities. The Company did not record any valuation
allowances against deferred tax assets at December 31, 1995 or December 31,
1996.
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
7. FEDERAL INCOME TAXES (CONTINUED)
Total taxes vary from the amounts computed by applying the federal income tax
rate of 35% to earnings from continuing operations for the following reasons:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------
(In Thousands)
<S> <C> <C> <C>
Application of statutory rate to earnings before taxes
on income $ 9,888 $8,375 $7,195
Tax-exempt municipal bond interest and dividends
received deductions (291) (293) (437)
Other 571 421 616
--- --- ---
$10,168 $8,503 $7,374
======= ====== ======
</TABLE>
8. BENEFIT PLANS
TRUSTEED EMPLOYEE RETIREMENT PLAN AND JONES & BABSON, INC. PENSION PLAN
The Company has a trusteed employee retirement plan for the benefit of salaried
employees who have reached age 21 and who have completed one year of service.
The plan, which is administered by an Employees' Retirement Committee consisting
of at least three officers appointed by the Board of Directors of the Company,
provides for normal retirement at age 65, or earlier retirement based on minimum
age and service requirements. Retirement may be deferred to age 70. Upon
retirement, the retirees receive monthly benefit payments from the plan's BMA
group pension investment contract. During 1996, approximately $3.0 million of
annual benefits were covered by group pension investment contracts issued by the
Company. Assets of the plan, primarily equities, are held by three trustees
appointed by the Board of Directors.
The Company's subsidiary, Jones & Babson, Inc., has a pension plan covering
substantially all employees. As of January 5, 1995, that plan was merged into
the trusteed plan for BMA salaried employees. The benefits for the Jones &
Babson, Inc. employees in the merged plan are the same as provided in the
previous Jones & Babson, Inc. pension plan.
Employees of the Company's subsidiary, BMA Financial Services, Inc., became
eligible to participate in the Company's plan effective January 1, 1995.
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
8. BENEFIT PLANS (CONTINUED)
The following table sets forth the plan's funded status at December 31:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Actuarial present value of accumulated benefit obligations:
Vested $ 45,377 $ 46,983 $ 41,757
Non-vested 1,296 2,403 2,357
----- ----- -----
Total $ 46,673 $ 49,386 $ 44,114
======== ======== ========
Projected benefit obligation for service rendered to date
$(57,186) $(57,359) $(54,385)
Plan assets at fair value 79,679 72,926 62,539
------ ------ ------
Plan assets in excess of projected benefit obligation 22,493 15,567 8,154
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions
(24,732) (18,717) (14,380)
Prior service cost not yet recognized in net periodic
pension cost 2,607 3,161 5,365
Unrecognized net asset at January 1, 1987 being recognized
over 15 years (1,471) (1,765) (2,058)
------ ------ ------
Accrued pension cost $ (1,103) $ (1,754) $ (2,919)
========= ========= =========
Net pension cost included the following components:
Service cost - benefits earned during the period $ 1,797 $ 1,758 $ 2,368
Interest cost on projected benefit obligation 4,195 4,089 3,938
Actual return on plan assets (9,745) (12,888) (574)
Net amortization and deferral 3,102 7,019 (5,194)
----- ----- ------
Net pension cost (benefit) $ (651) $ (22) $ 538
========= =========== ==========
</TABLE>
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
8. BENEFIT PLANS (CONTINUED)
In determining the actuarial present value of the projected benefit obligation,
the weighted-average discount rate utilized was 8% for 1996, 7.5% for 1995 and
8% for 1994 (6.5% for the Jones & Babson plan in 1994), and the rate of increase
in future compensation levels used was 5.5% for 1996, 5.0% for 1995 and 5.5% for
1994 (5.26% for the Jones and Babson plan in 1994). The expected long-term rate
of return on assets was 8% in 1996, 1995 and 1994 (7.75% for the Jones and
Babson plan in 1994).
SUPPLEMENTAL RETIREMENT PROGRAMS AND DEFERRED COMPENSATION PLAN
The Company has supplemental retirement programs for senior executive officers
and for group sales managers and group sales persons who are participants in the
trusteed retirement plan. These programs are not qualified under Section 401(a)
of the Internal Revenue Code and are not prefunded. Benefits are paid directly
by the Company as they become due. Benefits are equal to an amount computed on
the same basis as under the trusteed retirement plan (except incentive
compensation is included and limitations under Sections 401 and 415 of the
Internal Revenue Code are not considered) less the actual benefit payable under
the trusteed plan.
The Company also has a deferred compensation plan for the Company's managers
that provides retirement benefits based on renewal premium income at retirement
resulting from the sales unit developed by the manager. This program is not
qualified under Section 401(a) of the Internal Revenue Code and is not
prefunded. As of January 1, 1987, the plan was frozen with respect to new
entrants. Currently, there are two managers who have not retired and will be
entitled to future benefits under the program. The actuarial present value of
benefits shown below includes these active managers, as well as all managers who
have retired and are entitled to benefits under the program.
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
8. BENEFIT PLANS (CONTINUED)
The following table sets forth the combined supplemental retirement programs'
and deferred compensation plan's funded status at December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Actuarial present value of accumulated benefit obligations:
Vested $ 8,535 $ 8,773 $ 6,418
Non-vested 234 294 188
--- --- ---
Total $ 8,769 $ 9,067 $ 6,606
========= ========= =======
Projected benefit obligation for service rendered to
date $(10,178) $(10,583) $(8,405)
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions
1,319 2,037 160
Prior service cost not yet recognized in net
periodic pension cost 856 1,034 1,210
Unrecognized net obligation at January 1, 1987
being recognized over 15 years 911 1,093 1,276
Adjustment required to recognize minimum liability (1,677) (2,648) (870)
------ ------ ----
Accrued pension liability $ (8,769) $ (9,067) $(6,629)
========= ========= =======
Net pension cost included the following components:
Service cost - benefits earned during the period $ 189 $ 197 $ 178
Interest cost on projected benefit obligation 761 651 592
Net amortization and deferral 513 371 367
--- --- ---
Net pension cost $ 1,463 $ 1,219 $ 1,137
========= ========= =======
</TABLE>
In determining the actuarial present value of the projected benefit obligation,
the weighted-average discount rate utilized was 8% for 1996, 7.5% for 1995 and
8% for 1994. The rate of increase in future compensation levels used was 5.5%
for 1996, 5.0% for 1995 and 5.5% for 1994.
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
8. BENEFIT PLANS (CONTINUED)
SAVINGS AND INVESTMENT PLANS
The Company has savings and investment plans qualifying under Section 401(k) of
the Internal Revenue Code. Employees and sales representatives are eligible to
participate after one year of service. Participant contributions are invested by
the trustees for the plans at the direction of the participant in any one or
more of four investment funds. The Company makes matching contributions in
varying amounts. The Company's matching contributions amounted to $1,284,000 in
1996, $1,336,000 in 1995 and $1,586,000 in 1994. Participants are fully vested
in the company match after five years of service.
The Company has a field force retirement plan for the benefit of agents and
managers. The plan is a defined contribution plan with contributions made
entirely by the Company. Each agent or manager under a standard contract with
one year of service with the Company is eligible to participate. The Company
makes an annual contribution for each participant equal to 3% of eligible
earnings up to the Social Security wage base and 6% of eligible earnings which
are in excess of the Social Security wage base. Each participant is fully vested
in his retirement account after five years of service. Assets of the plan are
deposited in a retirement trust fund and maintained by the plan trustees who are
appointed by the Company. The Company incurred costs related to this plan of
$225,000 in 1996, $420,000 in 1995 and $270,000 in 1994.
DEFINED BENEFIT HEALTH CARE PLAN
In addition to the Company's other benefit plans, the Company sponsors an
unfunded defined benefit health care plan that provides postretirement medical
benefits to full-time employees for whom the sum of the employee's age and years
of service equals or exceeds 75, with a minimum age requirement of 50 and at
least 10 years of service. The plan is contributory, with retiree contributions
adjusted annually, and contains other cost-sharing features such as deductibles
and coinsurance. The accounting for the plan anticipates a future cost-sharing
arrangement with retirees that is consistent with the Company's past practices.
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
8. BENEFIT PLANS (CONTINUED)
The following table presents the plan's funded status at December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $10,199 $ 9,843 $ 6,906
Active plan participants 2,054 2,222 3,800
----- ----- -----
12,253 12,065 10,706
Plan assets at fair value - - -
------- ------ ------
Accumulated postretirement benefit obligation in
excess of plan assets 12,253 12,065 10,706
Unrecognized net gain (125) 464 499
Unrecognized transition obligation (5,199) (5,526) (9,202)
Unrecognized prior service costs (4,008) (4,415) -
------ ------ ------
Accrued postretirement benefit cost $ 2,921 $ 2,588 $ 2,003
======== ======== ========
</TABLE>
Net periodic postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------
(In Thousands)
<S> <C> <C> <C>
Service cost $ 118 $ 153 $ 176
Interest cost 867 771 744
Amortization of transition obligation over 20 years 327 511 511
Amortization of past service costs 407 - -
---- ---- -----
Net periodic postretirement benefit cost $1,719 $1,435 $1,431
====== ====== ======
</TABLE>
The weighted-average annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 4% per year, equal to
the maximum contractual increase of the Company's contribution. Because the
Company's future contributions are contractually limited as discussed above, an
increase in the health care cost trend rate has a minimal impact on expected
benefit payments.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% at December 31, 1996, 1995 and 1994.
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
8. BENEFIT PLANS (CONTINUED)
During the year ended December 31, 1994, the Company adopted material plan
amendments that resulted in a reduction of the accumulated postretirement
benefit obligation of approximately $3,309,000. The most significant amendments
were transfer of coverage for Medicare-eligible retirees to a fully insured
program provided by another independent insurance company and limitation of the
increase of the Company's contribution for other retirees to 4% each year. These
changes are considered "negative" plan amendments under SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," and,
accordingly, have been reflected as a reduction of the remaining transition
obligation.
During the year ended December 31, 1995, the Company recognized a reduction in
the accumulated postretirement benefit obligation of approximately $3,165,000
from a curtailment of the plan due to the disposal of its medical line of
business. The decrease in the accumulated postretirement benefit obligation has
been directly offset by a reduction of the remaining unrecognized transition
obligation. The Company also adopted certain plan amendments during 1995 that
resulted in an increase to the accumulated postretirement benefit obligation of
approximately $4,415,000 related to prior service rendered by plan participants.
This amount has been deferred and will be amortized over the remaining service
period of active plan participants.
9. REINSURANCE
The Company actively solicits reinsurance from other companies. The Company also
cedes portions of the insurance it writes as described in the next paragraph.
The effect of reinsurance on premiums earned from continuing operations was as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Direct $124,912 $153,476 $223,957
Assumed 116,154 102,212 88,279
Ceded (38,114) (77,604) (29,297)
------- ------- -------
Total net premium 202,952 178,084 282,939
Less net premium from discontinued operations - 430 125,065
------ --- -------
Total net premium from continuing operations $202,952 $177,654 $157,874
======== ======== ========
</TABLE>
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
9. REINSURANCE (CONTINUED)
The Company reinsures with other companies portions of the insurance it writes,
thereby limiting its exposure on larger risks. Normal retentions without
reinsurance are $750,000 on an individual life policy, $750,000 on individual
life insurance assumed and $200,000 on an individual life insured under a single
group life policy. As of December 31, 1996, the Company had ceded to other life
insurance companies individual life insurance in force of approximately $18.3
billion and group life of approximately $588 million. Benefits and reserves
ceded to other insurers amounted to $28,132,000, $53,672,000 and $19,088,000
during the years ended December 31, 1996, 1995 and 1994, respectively. At
December 31, 1996 and 1995, policy reserves ceded to other insurers were
$43,573,000 and $41,171,000, respectively. Claim reserves ceded amounted to
$14,604,000 and $9,072,000 at December 31, 1996 and 1995, respectively. The
Company remains contingently liable on all reinsurance ceded by it to others.
This contingent liability would become an actual liability in the event an
assuming reinsurer should fail to perform its obligations under its reinsurance
agreement with the Company.
10. RELATED-PARTY TRANSACTIONS
The Company reimburses Generali's U.S. branch for certain expenses incurred on
the Company's behalf. These expenses were not material in either 1996 or 1995.
The Company retrocedes a portion of the life insurance it assumes to Generali.
In accordance with this agreement, the Company ceded premiums of $1,035,000,
$1,023,000 and $472,000 during 1996, 1995 and 1994, respectively. The Company
ceded no claims during 1996 and 1995 and ceded claims of $300,000 during 1994.
In 1995, the Company entered into a modified coinsurance agreement with Generali
to cede 50% of certain single-premium deferred annuity contracts issued. In
accordance with this agreement, $60 million and $137 million in account balances
were ceded to Generali in 1996 and 1995, respectively, and Generali loaned such
amounts back to the Company. The recoverable amount from Generali was offset
against the loan. The net expense related to this agreement was $1,344,000 and
$136,000 for the years ended December 31, 1996 and 1995, respectively. The
Company held a payable to Generali of $972,000 at December 31, 1996 and a
receivable from Generali of $6,368,000 at December 31, 1995 related to this
agreement.
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
11. STOCKHOLDER'S EQUITY
The components of the balance sheet caption "net unrealized gain (loss) on
securities" in stockholder's equity are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Net unrealized gain (loss) on securities:
Fixed maturities $2,046 $33,661 $(45,797)
Equity securities 3,706 1,288 (2,099)
----- ----- ------
Net unrealized gain (loss) 5,752 34,949 (47,896)
Adjustment to deferred policy acquisition
costs (35) (13,453) 11,204
Adjustment to unearned revenue reserve (44) 2,038 (3,100)
Deferred income taxes (1,987) (8,237) 10,927
------ ------ ------
Net unrealized gain (loss) $3,686 $15,297 $(28,865)
====== ======= ========
</TABLE>
12. DISCONTINUED OPERATIONS
In June of 1994, the Company adopted a plan to dispose of its medical line of
business. Accordingly, the medical line of business is considered to be a
discontinued operation at December 31, 1996, 1995 and 1994, and the consolidated
financial statements report separately the net assets and operating results of
the discontinued operations.
During 1994, the Company entered into an agreement to dispose of the Company's
Kansas and Missouri group medical business and sell the Company's wholly-owned
HMO, BMA Selectcare. The transaction closed on December 31, 1994. The agreement
provided for the full reinsurance of the Company's Kansas and Missouri group
medical business through the renewal dates of the related group contracts. Under
the agreement, the Company continued to remain primarily liable for claims,
billing and receipts through the next anniversary dates of the policies
reinsured. Accordingly, all related assets and liabilities of this business are
reflected in the Company's balance sheet with the net amount of cash paid
related to the transfer of the assets and liabilities reflected as "funds held"
of $1,990,000 included in other assets in the December 31, 1995 balance sheet.
The estimated gain on disposal of this business of $4,526,000, net of income
taxes, was recorded in 1994. An additional gain of $661,000, net of tax, was
recorded in 1995, reflecting various adjustments to initial estimates.
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Notes to Consolidated Financial Statements (continued)
12. DISCONTINUED OPERATIONS (CONTINUED)
The Company also entered into an agreement during 1994 to dispose of the
remainder of its medical line of business, effective January 1, 1995. This
transaction closed January 31, 1995 and, accordingly, was reflected in the 1995
financial statements. The agreement provided for the reinsurance of
substantially all of the Company's remaining group and individual medical
business through the renewal dates of the related contracts. Under the
agreement, the Company continued to remain primarily liable for claims, billing
and receipts through the next anniversary dates of the policies reinsured.
Accordingly, all related assets and liabilities of this business are reflected
in the Company's balance sheet. The estimated gain on disposal of this business
of $5,694,000, net of income taxes, was recorded in 1995. An additional gain of
$1,416,000, net of income taxes, was recorded in 1996, reflecting various
adjustments to initial estimates.
A summary of operating results of the discontinued operations for the year ended
December 31, 1994 is as follows:
1994
--------------------
(In Thousands)
Premium revenues $125,065
Total revenues 128,779
Income before tax 5,880
Tax expense 2,058
Net income 3,822
