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
May 1, 1998
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 MAY 1,
1998.
TABLE OF CONTENTS
PAGE
COMPANY ...........................................................
EXPERTS ...........................................................
LEGAL OPINIONS ......................................................
DISTRIBUTOR .........................................................
CALCULATION OF PERFORMANCE DATA .....................................
FEDERAL TAX STATUS ..................................................
ANNUITY PROVISIONS ..................................................
MORTALITY AND EXPENSE GUARANTEE .....................................
FINANCIAL STATEMENTS ................................................
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 financial statements of BMA Variable Annuity Account A at December 31, 1997
and for the period from November 24,1997 (inception) to December 31, 1997 and
the consolidated financial statements of Business Men's Assurance Company of
America at December 31, 1997 and 1996, and for each of the three years in the
period ended December 31, 1997, appearing in this Statement of Additional
Information have been audited by Ernst & Young LLP, 1200 Main Street, Kansas
City, Missouri 64105, independent auditors, as set forth in their reports
thereon appearing elsewhere herein, and are included in reliance upon such
reports 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.
FEDERAL 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 the Contract 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.
Roth IRAs
Beginning in 1998, individuals may purchase a new type of non-deductible IRA,
known as a Roth IRA. Purchase payments for a Roth IRA are limited to a maximum
of $2,000 per year. Lower maximum limitations apply to individuals with adjusted
gross incomes between $95,000 and $110,000 in the case of single taxpayers,
between $150,000 and $160,000 in the case of married taxpayers filing joint
returns, and between $0 and $10,000 in the case of married taxpayers filing
separately. An overall $2,000 annual limitation continues to apply to all of a
taxpayer's IRA contributions, including Roth IRA and non-Roth IRAs.
Qualified distributions from Roth IRAs are free from federal income tax. A
qualified distribution requires that an individual has held the Roth IRA for at
least five years and, in addition, that the distribution is made either after
the individual reaches age 59 1/2, on the individual's death or disability, or
as a qualified first-time home purchase, subject to a $10,000 lifetime maximum,
for the individual, a spouse, child, grandchild, or ancestor. Any distribution
which is not a qualified distribution is taxable to the extent of earnings in
the distribution. Distributions are treated as made from contributions first and
therefore no distributions are taxable until distributions exceed the amount of
contributions to the Roth IRA. The 10% penalty tax and the regular IRA
exceptions to the 10% penalty tax apply to taxable distributions from a Roth
IRA.
Amounts may be rolled over from one Roth IRA to another Roth IRA. Furthermore,
an individual may make a rollover contribution from a non-Roth IRA to a Roth
IRA, unless the individual has adjusted gross income over $100,000 or the
individual is a married taxpayer filing a separate return. The individual must
pay tax on any portion of the IRA being rolled over that represents income or a
previously deductible IRA contribution. However, for rollovers in 1998, the
individual may pay that tax ratably over the four taxable year period beginning
with tax year 1998.
Purchasers of Contracts to be qualified as a Roth IRA 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 and 408A (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 Annuitant to the extent
such distributions do not exceed the amount allowable as a deduction under Code
Section 213 to the Annuitant for amounts paid during the taxable year for
medical care; (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 Annuitant and his or her spouse and dependents if the Annuitant has
received unemployment compensation for at least 12 weeks (this exception will no
longer apply after the Annuitant has been re-employed for at least 60 days); (f)
distributions from an Individual Retirement Annuity made to the Annuitant to the
extent such distributions do not exceed the qualified higher education expenses
(as defined in Section 72(t)(7) of the Code) of the Annuitant for the taxable
year; and (g) distributions from an Individual Retirement Annuity made to the
Annuitant which are qualified first-time home buyer distributions (as defined in
Section 72(t)(8) of the Code).
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 balance sheet of BMA Variable Annuity Account A as of December 31,
1997 and the related statement of operations and changes in net assets for the
period from November 24, 1997 (inception) to December 31, 1997, and the report
of Ernst & Young LLP, independent auditors with respect thereto, follow.
The audited consolidated financial statements of the Company as of December 31,
1997 and 1996 and for each of the years in the three year period ended December
31, 1997 which are also included herein should be considered only as bearing
upon the ability of the Company to meet its obligations under the Contracts.
Financial Statements
BMA Variable Annuity Account A
Period from November 24, 1997 (inception)
to December 31, 1997
With Report of Independent Auditors
BMA Variable Annuity Account A
Financial Statements
Period from November 24, 1997 (inception) to December 31, 1997
Contents
Report of Independent Auditors...............................................1
Audited Financial Statements
Statement of Assets and Liabilities..........................................2
Statement of Operations and Changes in Net Assets............................4
Notes to Financial Statements................................................5
Report of Independent Auditors
The Contract Owners of BMA Variable Annuity
Account A and The Board of Directors of
Business Men's Assurance Company of America
We have audited the accompanying statement of assets and liabilities of the
various portfolios of BMA Variable Annuity Account A (the Company) as of
December 31, 1997, and the related statement of operations and changes in net
assets for the period from November 24, 1997 (inception) to December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BMA Variable Annuity Account A
at December 31, 1997, and the results of its operations and changes in net
assets for the period from November 24, 1997 (inception) to December 31, 1997,
in conformity with generally accepted accounting principles.
Kansas City, Missouri
February 6, 1998
<TABLE>
<CAPTION>
BMA Variable Annuity Account A
Statement of Assets and Liabilities
December 31, 1997
Assets
<S> <C>
Investments (Notes 1 and 3):
Investors Mark Series Fund, Inc. (IMSF):
Balanced - 101 shares at net asset value of
$9.96 per share (cost, $1,006) $ 1,010
Growth and Income - 341 shares at net asset
value of $10.41 per share (cost, $3,501) 3,552
Large Cap Value - 364 shares at net asset value of $9.69
per share (cost, $3,503) 3,523
Small Cap Equity - 509 shares at net asset value of $9.69
per share (cost, $5,000) 4,927
Large Cap Growth - 336 shares at net asset value of $10.71
per share (cost, $3,500) 3,602
Intermediate Fixed Income - 101 shares at net asset value
of $10.06 per share (cost, $1,007) 1,012
Mid Cap Equity - 524 shares at net asset
value of $10.49 per share (cost, $5,506) 5,498
Money Market - 1,004 shares at net asset value
of $1.00 per share (cost, $1,004) 1,004
Global Fixed Income - 101 shares at net asset
value of $10.09 per share (cost, $1,008) 1,023
Berger Institutional Products Trust (Berger IPT):
Berger IPT International Fund - 513 shares at net asset
value of $9.79 per share (cost, $5,000) 5,022
===================
Total assets $30,173
===================
</TABLE>
<TABLE>
<CAPTION>
Liabilities and net assets
Mortality and expense risks payable $ 24
Net assets are represented by (Note 3):
Number Unit
of Units Value Amount
-----------------------------------------------------
IMSF Balanced:
<S> <C> <C> <C>
Accumulation units 100 $10.09 1,009
IMSF Growth and Income:
Accumulation units 353 10.06 3,550
IMSF Large Cap Value:
Accumulation units 364 9.68 3,521
IMSF Small Cap Equity:
Accumulation units 507 9.71 4,923
IMSF Large Cap Growth:
Accumulation units 345 10.43 3,600
IMSF Intermediate Fixed Income:
Accumulation units 100 10.11 1,011
IMSF Mid Cap Equity:
Accumulation units 543 10.12 5,494
IMSF Money Market:
Accumulation units 100 10.03 1,003
IMSF Global Fixed Income:
Accumulation units 100 10.21 1,021
Berger IPT International:
Accumulation units 482 10.41 5,017
-------------------
Net assets 30,149
-------------------
Total liabilities and net assets $30,173
===================
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
BMA Variable Annuity Account A
Statement of Operations and Changes in Net Assets
Period from November 24, 1997 (inception) to December 31, 1997
GROWTH LARGE SMALL LARGE INTERMEDIATE
AND CAP CAP CAP FIXED
BALANCED INCOME VALUE EQUITY GROWTH INCOME
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment income $ 6 $ 1 $ 3 $ - $ - $ 7
Expenses (Note 2):
Mortality, expense and
administrative charges 1 2 2 4 2 1
----------------------------------------------------------------------------------
Net investment income 5 (1) 1 (4) (2) 6
Capital gain distributions - - - - - -
Unrealized appreciation (depreciation)
on investments 4 51 20 (73) 102 5
----------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 4 51 20 (73) 102 5
----------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 9 50 21 (77) 100 11
Net assets at beginning of period - - - - - -
Variable annuity deposits
(Notes 2 and 3) 1,000 3,500 3,500 5,000 3,500 1,000
==================================================================================
Net assets at end of period $1,009 $3,550 $3,521 $4,923 $3,600 $1,011
==================================================================================
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
BMA Variable Annuity Account A
Statement of Operations and Changes in Net Assets
Period from November 24, 1997 (inception) to December 31, 1997
GLOBAL FIXED
MID CAP MONEY INCOME BERGER IPT
EQUITY MARKET INTERNATIONAL TOTAL
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income $ 6 $ 4 $ 8 $ - $ 35
Expenses (Note 2):
Mortality, expense and
administrative charges 4 1 2 5 24
----------------------------------------------------------------------
Net investment income 2 3 6 (5) 11
Capital gain distributions - - - - -
Unrealized appreciation (depreciation)
on investments (8) - 15 22 138
----------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (8) - 15 22 138
----------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (6) 3 21 17 149
Net assets at beginning of period - - - - -
Variable annuity deposits
(Notes 2 and 3) 5,500 1,000 1,000 5,000 30,000
======================================================================
Net assets at end of period $5,494 $1,003 $1,021 $5,017 $30,149
======================================================================
</TABLE>
See accompanying notes.
BMA Variable Annuity Account A
Notes to Financial Statements
December 31, 1997
1. Summary of Significant Accounting Policies
Organization
BMA Variable Annuity Account A (the Account) is a separate account of Business
Men's Assurance Company of America (BMA). The Account is registered as a unit
investment trust under the Investment Company Act of 1940, as amended.
Deposits received by the Account are invested in the Investors Mark Series
Funds, Inc. (IMSF) funds or the Berger Institutional Products Trust (IPT) fund
(mutual funds not otherwise available to the public). As directed by the owners,
amounts may be invested in shares of the following portfolios:
IMSF Balanced (emphasis on long-term growth and high current income) IMSF
Growth and Income (emphasis on long-term growth and income without a lot of
fluctuation in market value) IMSF Large Cap Value (emphasis on long-term
capital growth) IMSF Small Cap Equity (emphasis on long-term growth by
investing in small and medium sized companies) IMSF Large Cap Growth
(emphasis on long-term capital appreciation) IMSF Intermediate Fixed Income
(emphasis on current income with stability of principal and liquidity) IMSF
Mid Cap Equity (emphasis on long-term growth by investing in common stock
of mid-sized companies) IMSF Money Market (emphasis on current income while
preserving capital and maintaining liquidity) IMSF Global Fixed Income
(emphasis on maximizing total return and generating a market level return
while preserving both liquidity and principal)
Berger IPT International (emphasis on long-term capital appreciation
through investments in non-U.S. equity securities of well-established
companies)
Under the terms of the investment advisory contracts, portfolio investments of
the underlying mutual funds of IMSF are made by Investors Mark Series Fund, LLC
(IMSF, LLC), which is owned by Jones & Babson, Inc., a wholly-owned subsidiary
of BMA. IMSF, LLC has engaged Standish, Ayer & Wood, Inc. to provide subadvisory
services for the Intermediate Fixed Income Portfolio, the Mid Cap Equity
Portfolio and the Money Market Portfolio. IMSF, LLC has engaged Standish
International Management Company, L.P. to provide subadvisory services for the
Global Fixed Income Portfolio. IMSF, LLC has engaged Stein Roe & Farnam,
Incorporated to provide subadvisory services for the
1. Summary of Significant Accounting Policies (continued)
Small Cap Equity Portfolio and the Large Cap Growth Portfolio. IMSF, LLC has
engaged David L. Babson & Co., Inc. to provide subadvisory services for the
Large Cap Value Portfolio. IMSF, LLC has engaged Lord, Abbett & Co. to provide
subadvisory services for the Growth and Income Portfolio. IMSF, LLC has engaged
Kornitzer Capital Management, Inc. to provide subadvisory services for the
Balanced Portfolio.
Berger Institutional Products Trust is a mutual fund with multiple portfolios,
one of which, the Berger/BIAM IPT - International Fund, is managed by BBOI
Worldwide LLC. BBOI Worldwide LLC has retained Bank of Ireland Asset Management
(U.S.) Limited (BIAM) as subadvisor.
Investment Valuation
Investments in mutual fund shares are carried in the statement of assets and
liabilities at fair value (net asset value of the underlying mutual fund). The
first-in, first-out method is used to determine realized gains and losses.
Security transactions are accounted for on the trade date and dividend income
from the funds to the Account is recorded on the ex-dividend date and reinvested
upon receipt. Capital gain distributions from the mutual funds to the Account
are also reinvested upon receipt.
The cost of investments purchased was as follows:
Period from
November 24, 1997
(inception) to
December 31, 1997
---------------------------
IMSF Balanced $1,006
IMSF Growth and Income 3,501
IMSF Large Cap Value 3,503
IMSF Small Cap Equity 5,000
IMSF Large Cap Growth 3,500
IMSF Intermediate Fixed Income 1,007
IMSF Mid Cap Equity 5,506
IMSF Money Market 1,004
IMSF Global Fixed Income 1,008
Berger IPT International 5,000
1. Summary of Significant Accounting Policies (continued)
Federal Income Taxes
The operations of the Account form a part of, and are taxed with, the operations
of BMA, which is taxed as a life insurance company under the Internal Revenue
Code. As a result, the net asset values of the subaccounts are not affected by
federal income taxes on income distributions received by the subaccounts.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. Variable Annuity Contract Charges
BMA deducts an administrative fee of $35 per year for each contract, except for
certain contracts based on a minimum account value. Mortality and expense risks
assumed by BMA are compensated for by a fee equivalent to an annual rate of
1.40% annually of the average daily value of each contract.
When applicable, an amount for state premium taxes is deducted as provided by
pertinent state law, either from purchase payments or from the amount applied to
effect an annuity at the time annuity payments commence.
A contingent deferred sales charge is assessed by BMA against certain
withdrawals during the first seven years of the contract, declining from 7% in
the first year to 1% in the seventh year.
Contract charges retained by BMA from the proceeds of sales of annuity contracts
were not significant during 1997.
3. Summary of Unit Transactions
Number
of Units
Period from
November 24, 1997
(inception) to
December 31, 1997
--------------------------
Balanced:
Variable annuity deposits 100
Growth and Income:
Variable annuity deposits 353
Large Cap Value:
Variable annuity deposits 364
Small Cap Equity:
Variable annuity deposits 507
Large Cap Growth:
Variable annuity deposits 345
Intermediate Fixed Income:
Variable annuity deposits 100
Mid Cap Equity:
Variable annuity deposits 543
Money Market:
Variable annuity deposits 100
Global Fixed Income:
Variable annuity deposits 100
Berger IPT International:
Variable annuity deposits 482
CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A MEMBER OF THE GENERALI GROUP OF COMPANIES)
YEARS ENDED DECEMBER 31, 1997 AND 1996
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, 1997 and 1996
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, 1997 and 1996, 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, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Business Men's Assurance Company of America at December 31, 1997 and 1996, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
[GRAPHIC OMITTED]
Kansas City, Missouri
February 6, 1998
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------------
(In Thousands)
ASSETS
Investments (Notes 1 and 3): Securities available-for-sale, at fair value:
Fixed maturities (amortized cost - $1,308,458 in 1997
<S> <C> <C> <C> <C>
and $1,286,888 in 1996) $1,326,018 $1,288,934
Equity securities (cost - $46,807 in 1997 and $28,644 in
1996) 57,806 32,350
Mortgage loans on real estate, net of allowance for losses
of $8,435 in 1997 and $6,879 in 1996 842,149 704,356
Real estate (Note 1) - 5,498
Policy loans 62,207 65,225
Short-term investments 47,507 39,991
Other 3,424 3,830
------------------------------------
Total investments 2,339,111 2,140,184
Accrued investment income 18,520 18,539
Premium and other receivables 10,606 11,817
Deferred policy acquisition costs 125,065 131,025
Property, equipment and software (Note 6) 16,753 18,890
Reinsurance recoverables:
Paid benefits 6,588 3,948
Benefits and claim reserves ceded 72,000 58,177
Other assets (Note 1) 16,216 16,923
Assets held in separate accounts (Note 1) 76,964 -
------------------------------------
Total assets $2,681,823 $2,399,503
====================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------------
(In Thousands)
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C> <C>
Future policy benefits:
Life and annuity (Note 10) $1,259,319 $1,192,497
Health 87,883 75,914
Contract account balances 699,244 636,656
Policy and contract claims 58,381 58,617
Unearned revenues 11,284 13,813
Other policyholder funds 14,286 15,429
Outstanding checks in excess of bank balances 2,669 4,673
Current income taxes payable (Note 7) 2,158 4,345
Deferred income taxes (Note 7) 12,244 14,912
Payable to affiliate (Note 10) 799 972
Other liabilities 72,858 44,808
Liabilities related to separate accounts (Note 1) 76,964 -
------------------------------------
Total liabilities 2,298,089 2,062,636
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 40,106
Net unrealized gains (losses) on securities 14,364 3,686
Retained earnings 317,264 281,075
------------------------------------
Total stockholder's equity 383,734 336,867
------------------------------------
Total liabilities and stockholder's equity $2,681,823 $2,399,503
====================================
See accompanying notes.
</TABLE>
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------------------
(In Thousands)
Revenues:
Premiums:
<S> <C> <C> <C>
Life and annuity $154,602 $142,461 $130,360
Health 43,518 60,491 47,294
Other insurance considerations 37,928 38,780 37,183
Net investment income (Note 3) 167,346 145,629 124,605
Realized gains, net (Note 3) 5,121 5,906 4,290
Other income 35,941 26,802 23,394
---------------------------------------------------
Total revenues 444,456 420,069 367,126
Benefits and expenses:
Life and annuity benefits 126,345 122,915 111,734
Health benefits 27,812 42,224 40,132
Increase in policy liabilities including
interest credited to account balances 104,581 94,530 65,017
Real estate expense, net 932 551 649
Commissions 53,622 55,180 54,176
Increase in deferred policy acquisition costs (1,229) (5,459) (16,366)
Taxes, licenses and fees 4,654 5,229 5,251
Other operating costs and expenses 89,018 76,647 82,604
---------------------------------------------------
Total benefits and expenses 405,735 391,817 343,197
---------------------------------------------------
Earnings from continuing operations before income
tax expense 38,721 28,252 23,929
Income tax expense (Note 7) 2,532 10,168 8,503
---------------------------------------------------
Earnings from continuing operations 36,189 18,084 15,426
Discontinued operations (Note 12):
Gain on sale of discontinued operations, net of
income tax expense of $735 in 1996 and $3,352
in 1995 - 1,416 6,355
---------------------------------------------------
Earnings from discontinued operations - 1,416 6,355
---------------------------------------------------
Net earnings $ 36,189 $ 19,500 $ 21,781
===================================================
</TABLE>
See accompanying notes.
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Consolidated Statements of Stockholder's Equity
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------------------
(In Thousands)
Common stock:
<S> <C> <C> <C>
Balance at beginning and end of year $ 12,000 $ 12,000 $ 12,000
Paid-in capital:
Balance at beginning of year 40,106 25,106 25,106
Additional paid-in capital - 15,000 -
----------------------------------------------------
Balance at end of year 40,106 40,106 25,106
Net unrealized gains (losses) on securities:
Balance at beginning of year 3,686 15,297 (28,865)
Change in net unrealized gains (losses) 10,678 (11,611) 44,162
----------------------------------------------------
Balance at end of year 14,364 3,686 15,297
Retained earnings:
Balance at beginning of year 281,075 266,575 252,794
Net earnings 36,189 19,500 21,781
Dividends declared (Note 2) - (5,000) (8,000)
----------------------------------------------------
Balance at end of year 317,264 281,075 266,575
----------------------------------------------------
Total stockholder's equity $383,734 $336,867 $318,978
====================================================
</TABLE>
See accompanying notes.
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------
(In Thousands)
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net earnings $ 36,189 $ 19,500 $ 21,781
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Deferred income tax (benefit) (8,416) 4,146 7,025
Realized gains, net (5,121) (5,906) (4,290)
Gain on disposal of discontinued segment - (2,151) (7,417)
Discount accretion, net (975) (1,246) (1,090)
Policy loans lapsed in lieu of surrender benefits 1,021 2,996 3,201
Depreciation 3,778 4,153 4,817
Amortization 782 782 782
Changes in assets and liabilities:
(Increase) decrease in accrued investment income 19 (1,392) (1,719)
(Increase) decrease in receivables and reinsurance
recoverables (15,425) 2,761 (19,425)
Policy acquisition costs deferred (28,449) (31,745) (40,510)
Policy acquisition costs amortized 27,220 26,286 24,144
(Increase) decrease in income taxes recoverable (2,187) 5,518 (4,546)
Increase in accrued policy benefits, claim
reserves, unearned revenues and policyholder funds 30,777 32,331 4,574
Interest credited to policyholder accounts 79,312 69,494 56,358
Increase (decrease) in outstanding checks in excess of
bank balances (2,004) 805 3,868
Decrease in other assets and other liabilities, net 7,269 412 1,133
Decrease in net asset of discontinued operations - - 1,335
Other, net (433) (1,208) (179)
-----------------------------------------
Net cash provided by operating activities 123,357 125,536 49,842
INVESTING ACTIVITIES
Purchases of investments:
Securities available-for-sale:
Fixed maturities (464,419) (527,172) (592,373)
Equity securities (31,625) (17,586) (12,537)
Mortgage and policy loans (237,990) (259,438) (159,521)
Other - - (269)
Sales, calls or maturities of investments:
Maturities and calls of securities
available-for-sale:
Fixed maturities 167,000 117,057 108,472
Equity securities - - 2,031
Sales of securities available-for-sale:
Fixed maturities 284,124 238,051 263,650
Equity securities 14,379 12,444 6,223
Mortgage and policy loans 98,554 66,934 41,753
Real estate 5,854 2,194 502
</TABLE>
Business Men's Assurance Company of America
(A Member of the Generali Group of Companies)
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------
(In Thousands)
INVESTING ACTIVITIES (CONTINUED)
<S> <C> <C> <C>
Purchase of property, equipment and software $ (1,949) $ (290) $ (2,659)
Net (increase) decrease in short-term investments (7,516) 36,272 13,264
Proceeds from sale of discontinued operations - 632 5,426
Distributions from unconsolidated related parties 1,514 718 2
-----------------------------------------
Net cash used in investing activities (172,074) (330,184) (326,036)
FINANCING ACTIVITIES
Dividends paid - (5,000) (8,000)
Additional paid-in capital - 15,000 -
Deposits from interest sensitive and investment type contracts 323,487 381,865 401,681
Withdrawals from interest sensitive and investment type contracts (295,633) (187,217) (120,956)
Net proceeds from reverse repurchase borrowing 40,925 35,173 -
Retirement of reverse repurchase borrowing (20,062) (35,173) -
-----------------------------------------
Net cash provided by financing activities 48,717 204,648 272,725
-----------------------------------------
Net decrease in cash - - (3,469)
Cash at beginning of year - - 3,469
=========================================
Cash at end of year $ - $ -$ -
=========================================
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
Cash paid during the year for:
Income taxes $ 13,135 $ 1,239 $ 9,376
=========================================
Interest paid on reverse repurchase borrowing $ 369 $ 620 $ -
=========================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Real estate acquired through foreclosure $ 1,236 $ 3,033 $ 5,156
=========================================
</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, 1997
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, primarily distributed through general agencies, and through
reinsurance assumptions. 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's entire investment portfolio is designated 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 offset to the unrealized gains or losses
represents 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.
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, 1997,
no real estate was owned; at December 31, 1996, real estate was carried net of a
valuation allowance of $2,344,000. Profit is recognized on real estate sales
when down payment,
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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
other insurance considerations revenue 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.
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.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1997 and 1996 was $47,211,000 and $38,694,000,
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.
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 unrealized investment
gains and losses.
SEPARATE ACCOUNTS
These accounts arise from two lines of business, variable annuities and MBIA
insured guaranteed investment contracts (GIC). The separate account assets are
legally segregated and are not subject to the claims which may arise from any
other business of the Company.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The assets and liabilities of the variable line of business are reported at fair
value since the underlying investment risks are assumed by the policyowners.
Investment income and gains or losses arising from the variable line of business
accrue directly to the policy owners and are, therefore, not included in
investment earnings in the accompanying consolidated statement of operations.
Revenues to the Company from variable products consist primarily of contract
maintenance charges and administration fees. Separate account assets and
liabilities for the variable line of business totaled $30,000 on December 31,
1997.
The assets of the MBIA GIC line of business are maintained at an amount equal to
the related liabilities. These assets related to the MBIA GIC line of business
include securities available-for-sale reported at fair value and mortgage loans
carried at unpaid balances. Changes in fair values of available-for-sale
securities, net of deferred income taxes, are reported as unrealized gains or
losses directly in stockholders equity.
The liabilities are reported at the original deposit amount plus accrued
interest guaranteed to the contractholders. Investment income and gains or
losses arising from MBIA GIC investments are included in investment earnings in
the accompanying consolidated statement of operations. The guaranteed interest
payable is included in the increase in policy liabilities in the accompanying
consolidated statement of operations. Separate account assets and liabilities
for the MBIA GIC line of business totaled $76,934,000 on December 31, 1997.
INTANGIBLE ASSETS
Goodwill of $12,323,000, net of accumulated amortization of $3,325,000 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, 1997,
1996 and 1995.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 107, "Disclosures about Fair Value of Financial
Instruments," requires disclosure of fair value information about financial
instruments, whether or not
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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, 1997 DECEMBER 31, 1996
--------------------------------- ---------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------------------------- ---------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Fixed maturities (Note 3) $1,326,018 $1,326,018 $1,288,934 $1,288,934
Equity securities (Note 3) 57,806 57,806 32,350 32,350
Mortgage loans 842,149 867,552 704,356 707,915
Policy loans 62,207 57,491 65,225 60,735
Short-term investments 47,507 47,507 39,991 39,991
Reinsurance recoverables:
Paid benefits 6,588 6,588 3,948 3,948
Benefits and claim reserves 72,000 72,000 58,177 58,177
Assets held in separate accounts 76,964 77,061 - -
Mortgage loan commitments (Note 5) - 74,469 - 46,735
Investment-type insurance
contracts (Note 4) 1,277,362 1,256,129 1,097,821 1,078,326
</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.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Company becomes a party to various
financial transactions to reduce its exposure to fluctuations in interest rates.
In 1997, the Company entered into interest rate swap contracts for the purpose
of converting the variable interest
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
rate characteristics of certain investments to fixed rates to match those of the
related insurance liabilities (guaranteed investment contracts) that the
investments are supporting. The net interest effect of such swap transactions is
reported as an adjustment of interest income as incurred. The notional amount of
these contracts were $25,000,000 at December 31, 1997.
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. 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 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.
PENDING ACCOUNTING STANDARD
SFAS No. 130, "Reporting Comprehensive Income," will be adopted in 1998 and will
require disclosure of comprehensive income which includes the change in
unrealized investment gains and losses. The comprehensive income amount is
expected to be more volatile than net income.
RECLASSIFICATION
Certain amounts for 1996 and 1995 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, 1997 and 1996, the Company's statutory stockholder's equity
was $188,193,000 and $171,240,000, respectively. Statutory net gain from
operations and net income for each of the three years in the period ended
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Net gain from operations $18,545 $10,898 $8,309
Net income 14,540 10,381 9,418
</TABLE>
3. INVESTMENT OPERATIONS
The Company's investments in securities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------------
(In Thousands)
Fixed maturities:
U.S. Treasury securities and obligations
of U.S. government corporations and
<S> <C> <C> <C> <C>
agencies $ 67,406 $ 1,233 $ (46) $ 68,593
Obligations of states and political
subdivisions 36,053 1,472 (9) 37,516
Debt securities issued by foreign
governments 3,975 121 (126) 3,970
Corporate securities 427,242 8,955 (2,004) 434,193
Mortgage-backed securities 755,467 10,153 (2,330) 763,290
Redeemable preferred stocks 18,315 206 (65) 18,456
---------------------------------------------------------------
Total 1,308,458 22,140 (4,580) 1,326,018
Equity securities 46,807 12,419 (1,420) 57,806
---------------------------------------------------------------
$1,355,265 $34,559 $(6,000) $1,383,824
===============================================================
</TABLE>
3. INVESTMENT OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------------
(In Thousands)
Fixed maturities:
U.S. Treasury securities and obligations
of U.S. government corporations and
<S> <C> <C> <C> <C>
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>
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1997, 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>
AMORTIZED COST FAIR VALUE
------------------------------------
(In Thousands)
<S> <C> <C>
Due in one year or less $ 59,899 $ 59,517
Due after one year through five years 140,594 142,573
Due after five years through 10 years 266,145 271,715
Due after 10 years 86,353 88,923
------------------------------------
552,991 562,728
Mortgage-backed securities 755,467 763,290
------------------------------------
Total fixed maturity securities $1,308,458 $1,326,018
====================================
</TABLE>
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:
<TABLE>
<CAPTION>
CARRYING AMOUNT AS OF DECEMBER 31,
1997 1996
------------------------------------
(In Thousands)
State:
<S> <C> <C>
California $ 71,675 $ 68,399
Arizona 65,030 51,515
Texas 60,821 59,404
Missouri 51,839 34,400
Oklahoma 47,569 32,809
Florida 42,549 30,790
Washington 39,824 34,614
Utah 37,821 25,383
Kansas 34,267 34,069
Other 390,754 332,973
------------------------------------
$842,149 $704,356
====================================
</TABLE>
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>
1997 1996 1995
------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Impaired mortgage loans $1,069 $2,516 $5,160
Allowance for credit losses 244 691 1,651
-------------------------------------------
Net recorded investment in impaired loans $ 825 $1,825 $3,509
===========================================
Average recorded investment in impaired loans $1,325 $2,667 $2,902
===========================================
Interest income on impaired loans $ 57 $ 115 $ 403
===========================================
</TABLE>
3. INVESTMENT OPERATIONS (CONTINUED)
Bonds, mortgage loans, preferred stocks and common stocks approximating
$4,600,000 and $4,200,000 were on deposit with regulatory authorities at
December 31, 1997 and 1996, respectively.
Set forth below is a summary of consolidated net investment income for the years
ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------
(In Thousands)
Fixed maturities:
<S> <C> <C> <C>
Bonds $ 92,741 $ 86,066 $ 73,930
Redeemable preferred stocks 1,309 814 1,176
Equity securities:
Common stocks 793 579 521
Nonredeemable preferred stocks 541 438 330
Mortgage loans on real estate 66,053 52,973 41,770
Policy loans 3,906 3,953 3,952
Short-term investments 2,955 3,016 4,779
Other 1,223 269 340
-------------------------------------------------
169,521 148,108 126,798
Less:
Investment income from discontinued operations - - 211
Investment expenses 2,175 2,479 1,982
=================================================
Net investment income from continuing operations $167,346 $145,629 $124,605
=================================================
</TABLE>
3. INVESTMENT OPERATIONS (CONTINUED)
Realized gains (losses) on securities disposed of during 1997, 1996 and 1995
consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------
(In Thousands)
Fixed maturity securities:
<S> <C> <C> <C>
Gross realized gains $10,499 $7,953 $10,246
Gross realized losses (4,690) (1,622) (4,388)
Equity securities:
Gross realized gains 3,204 2,001 1,789
Gross realized losses (777) - (376)
Other investments (3,115) (2,426) (2,981)
--------------------------------------------------------
Net realized gains $ 5,121 $5,906 $ 4,290
========================================================
</TABLE>
Sales of investments in securities in 1997, 1996 and 1995, excluding maturities
and calls, resulted in gross realized gains of $8,362,000, $9,798,800 and
$11,887,000 and gross realized losses of $1,017,000, $1,290,500 and $4,564,000
respectively.
The net carrying value of nonincome-producing investments at December 31, 1996,
which were nonincome producing during the year, consisted of mortgage loans of
$1,293,000 and bonds of $1,200,000. There were no nonincome producing
investments at December 31, 1997.
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>
1997 1996
-------------------------------- --------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------------------------- --------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Guaranteed investment contracts $ 660,782 $ 662,281 $ 596,499 $ 598,241
Flexible and single premium
deferred annuities 539,616 516,343 501,322 480,085
Separate accounts 76,964 77,505 - -
-----------------------------------------------------------------
Total investment-type insurance
contracts $1,277,362 $1,256,129 $1,097,821 $1,078,326
=================================================================
</TABLE>
4. INVESTMENT CONTRACTS (CONTINUED)
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 $2,137,000, $2,117,000 and $2,742,000 for
the years ended December 31, 1997, 1996 and 1995, respectively. As of December
31, 1997, the minimum future payments under noncancelable operating leases for
each of the next five years and in the aggregate subsequent to 2002 are as
follows:
1998 $1,093,000
1999 945,000
2000 491,000
2001 386,000
2002 168,000
Subsequent to 2002 2,000
===================
Total $3,085,000
===================
Total outstanding commitments to fund mortgage loans were $74,496,000 and
$46,735,000 at December 31, 1997 and 1996, 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 1997 1996
------------------- ------------------------------------
(In Thousands)
Home office building, including land with
<S> <C> <C> <C> <C>
a cost of $425,000 2% $23,158 $23,158
Other real estate not held-for-sale or
rental 4% 973 1,126
Less accumulated depreciation (12,530) (11,963)
------------------------------------
11,601 12,321
Equipment and software 5%-33% 23,937 29,010
Less accumulated depreciation (18,785) (22,441)
------------------------------------
5,152 6,569
------------------------------------
Total property, equipment and software $16,753 $18,890
====================================
</TABLE>
7. FEDERAL INCOME TAXES
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>
1997 1996 1995
-----------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Current $10,948 $ 6,757 $ 4,830
Deferred:
Deferred policy acquisition costs 143 1,322 4,139
Future policy benefits 3,783 2,424 4,010
Accrual of discount 197 408 494
Tax on realized gains greater than book 571 (1,076) (1,034)
Recognition of tax effect previously deferred on sale of
affiliate stock in prior period (11,169) - -
Employee benefit plans (2,206) 86 (148)
Other, net 265 982 (436)
-----------------------------------------------
(8,416) 4,146 7,025
-----------------------------------------------
Total 2,532 10,903 11,855
Less taxes from discontinued operations:
Current - (149) 1,539
Deferred - 884 1,813
-----------------------------------------------
- 735 3,352
-----------------------------------------------
Total taxes from continuing operations $ 2,532 $10,168 $ 8,503
===============================================
</TABLE>
The Company did not record any valuation allowances against deferred tax assets
at December 31, 1995, 1996 or 1997.
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>
1997 1996 1995
-----------------------------------------
(In Thousands)
Application of statutory rate to earnings before taxes
<S> <C> <C> <C>
on income $13,552 $ 9,888 $8,375
Tax-exempt municipal bond interest and dividends
received deductions (361) (291) (293)
Recognition of tax effect previously deferred on sale of
affiliate stock in a prior period (11,169) - -
Other 510 571 421
-----------------------------------------
$ 2,532 $10,168 $8,503
=========================================
</TABLE>
The significant components comprising the Company's deferred tax assets and
liabilities as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------
Deferred tax liabilities:
<S> <C> <C>
Deferred acquisition costs $29,641 $27,426
Tax effect of sale of affiliates stock - 14,169
Unrealized investment gains and losses 7,735 1,987
Other 9,655 5,532
------------------------------------------
Total deferred tax liability 47,031 49,114
Deferred tax assets:
Reserve for future policy benefits 21,411 23,012
Accrued expenses 8,504 6,636
Other 4,872 4,554
------------------------------------------
Total deferred tax assets 34,787 34,202
==========================================
Net deferred tax liability $12,244 $14,912
==========================================
</TABLE>
7. FEDERAL INCOME TAXES (CONTINUED)
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 $87,000,000. 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 $30,000,000.
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 $247,000,000 at December 31, 1997.
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 1997, approximately $4.3 million of
annual benefits were covered by a group pension investment contract 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., had 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 were the same as provided in the
previous Jones & Babson, Inc. pension plan. Effective January 1, 1997, the
benefit formula for the Jones & Babson, Inc.
8. BENEFIT PLANS (CONTINUED)
employees was changed to be identical with the benefit formula used for BMA
employees. All benefits accrued prior to January 1, 1997 have been preserved.
Employees of the Company's subsidiary, BMA Financial Services, Inc., became
eligible to participate in the Company's plan effective January 1, 1995.
The following table sets forth the plan's funded status at December 31:
<TABLE>
<CAPTION>
1997 1996
------------------------------
(In Thousands)
Actuarial present value of accumulated benefit obligations:
<S> <C> <C>
Vested $ 50,968 $ 45,377
Non-vested 1,397 1,296
------------------------------
Total $ 52,365 $ 46,673
==============================
Projected benefit obligation for service rendered to date $(62,683) $(57,186)
Plan assets at fair value 85,605 79,679
------------------------------
Plan assets in excess of projected benefit obligation 22,922 22,493
Unrecognized net gain from past experience different from that assumed
and effects of changes in assumptions (23,519) (24,732)
Prior service cost not yet recognized in net periodic
pension cost 2,034 2,607
Unrecognized net asset at January 1, 1987 being recognized over
15 years (1,177) (1,471)
Adjustment to recognize minimum liability (50) (57)
------------------------------
Prepaid (accrued) pension cost $ 210 $ (1,160)
==============================
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------
Net pension cost included the following components:
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 1,767 $1,797 $ 1,758
Interest cost on projected benefit obligation 4,374 4,195 4,089
Actual return on plan assets (10,316) (9,745) (12,888)
Net amortization and deferral 2,812 3,102 7,019
--------------------------------------------
Net pension benefit $ (1,363) $ (651) $ (22)
============================================
</TABLE>
8. BENEFIT PLANS (CONTINUED)
In determining the actuarial present value of the projected benefit obligation,
the weighted-average discount rate utilized was 7.5% for 1997, 8% for 1996 and
7.5% for 1995, and the rate of increase in future compensation levels used was
5% for 1997, 5.5% for 1996 and 5% for 1995. The expected long-term rate of
return on assets was 8% in 1997, 1996 and 1995.
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.
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>
1997 1996
-----------------------------
(In Thousands)
Actuarial present value of accumulated benefit obligations:
<S> <C> <C>
Vested $ 9,964 $ 8,535
Non-vested 136 234
-----------------------------
Total $ 10,100 $ 8,769
=============================
Projected benefit obligation for service rendered to date $(11,281) $(10,178)
Unrecognized net loss from past experience different from that assumed
and effects of changes in assumptions 2,260 1,319
Prior service cost not yet recognized in net periodic pension
cost 678 856
Unrecognized net obligation at January 1, 1987 being recognized
over 15 years 729 911
Adjustment required to recognize minimum liability (2,486) (1,677)
-----------------------------
Accrued pension liability $(10,100) $ (8,769)
=============================
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------
Net pension cost included the following components:
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 190 $ 189 $ 197
Interest cost on projected benefit obligation 783 761 651
Net amortization and deferral 469 513 371
------------------------------------------
Net pension cost $1,442 $1,463 $1,219
==========================================
</TABLE>
In determining the actuarial present value of the projected benefit obligation,
the weighted-average discount rate utilized was 7.5% for 1997, 8% for 1996 and
7.5% for 1995. The rate of increase in future compensation levels used was 5%
for 1997, 5.5% for 1996 and 5% for 1995.
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 $1,099,000 in
1997, $1,284,000 in 1996 and $1,336,000 in 1995. 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
$230,000 in 1997, $225,000 in 1996 and $420,000 in 1995.
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.
8. BENEFIT PLANS (CONTINUED)
The following table presents the plan's funded status at December 31:
<TABLE>
<CAPTION>
1997 1996
---------------------------------
(In Thousands)
Accumulated postretirement benefit obligation:
<S> <C> <C>
Retirees $ 9,636 $10,199
Active plan participants 1,854 2,054
---------------------------------
11,490 12,253
Plan assets at fair value - -
---------------------------------
Accumulated postretirement benefit obligation in excess of plan
assets 11,490 12,253
Unrecognized net loss (268) (125)
Unrecognized transition obligation (4,872) (5,199)
Unrecognized prior service costs (2,808) (4,008)
---------------------------------
Accrued postretirement benefit cost $ 3,542 $ 2,921
=================================
</TABLE>
Net periodic postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------
(In Thousands)
<S> <C> <C> <C>
Service cost $ 122 $ 118 $ 153
Interest cost 878 867 771
Amortization of transition obligation over 20 years 327 327 511
Amortization of past service costs 407 407 -
-----------------------------------------
Net periodic postretirement benefit cost $1,734 $1,719 $1,435
=========================================
</TABLE>
The weighted-average annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) varies 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.
8. BENEFIT PLANS (CONTINUED)
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25%, 7.5% and 7.5% at December 31, 1997,
1996 and 1995 respectively.
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>
1997 1996 1995
----------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Direct $118,192 $124,912 $153,476
Assumed 134,541 116,154 102,212
Ceded (54,613) (38,114) (77,604)
----------------------------------------------
Total net premium 198,120 202,952 178,084
Less net premium from discontinued operations - - 430
----------------------------------------------
Total net premium from continuing operations $198,120 $202,952 $177,654
==============================================
</TABLE>
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, 1997, the Company had ceded to other life
insurance companies individual life insurance in force of approximately $24.1
billion and group life of approximately $654 million.
9. REINSURANCE (CONTINUED)
Benefits and reserves ceded to other insurers amounted to $42,069,000,
$28,132,000 and $53,672,000 during the years ended December 31, 1997, 1996 and
1995, respectively. At December 31, 1997 and 1996, policy reserves ceded to
other insurers were $55,568,000 and $43,573,000, respectively. Claim reserves
ceded amounted to $16,432,000 and $14,604,000 at December 31, 1997 and 1996,
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 1997, 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 $873,000,
$1,035,000 and $1,023,000 during 1997, 1996 and 1995, respectively. The Company
ceded no claims during 1997, 1996 or 1995.
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, $35 million, $60 million and $137 million in
account balances were ceded to Generali in 1997, 1996 and 1995, respectively,
and Generali loaned such amounts back to the Company. Account balances ceded and
loaned back at December 31, 1997 and 1996 were $213 million and $193 million,
respectively. The recoverable amount from Generali was offset against the loan.
The net expense related to this agreement was $1,895,000, $1,344,000 and
$136,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The
Company held payables to Generali of $799,000 and $972,000 at December 31, 1997
and 1996, respectively.
11. STOCKHOLDER'S EQUITY
The components of the balance sheet caption "net unrealized gain on securities"
in stockholder's equity are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------
(In Thousands)
Net unrealized gains (losses) on securities:
<S> <C> <C>
Fixed maturities $17,560 $2,046
Equity securities 10,999 3,706
Securities held in separate account 334 -
------------------------------------
Net unrealized gains (losses) 28,893 5,752
Adjustment to deferred policy acquisition costs (7,224) (35)
Adjustment to unearned revenue reserve 430 (44)
Deferred income taxes (7,735) (1,987)
------------------------------------
Net unrealized gains (losses) $14,364 $3,686
====================================
</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 was considered a
discontinued operation for the years ended 1996 and 1995, 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. The
estimated gain on disposal of this business was recorded in 1994. An additional
gain of $661,000, net of tax, was recorded in 1995 reflecting various
adjustments to initial estimates.
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
12. DISCONTINUED OPERATIONS (CONTINUED)
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. 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.
13. IMPACT OF YEAR 2000 (UNAUDITED)
Some of the Company's computer systems were written using two digits rather than
four to define the applicable year. As a result, those computer systems will not
recognize the year 2000 which, if not corrected, could cause disruptions of
operations, including, among other things, an inability to process transactions
or engage in similar normal business activities.
The Company has developed a plan to modify its information technology to be
ready for the year 2000 and has begun converting critical data processing
systems. The Company currently expects the project to be substantially complete
by late 1998 which is prior to any anticipated impact on its operating systems.
Based on this plan, the Company does not believe that the costs to complete such
system modifications or replacements will be material to the Company's financial
statements.
