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
-----------------
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 DECEMBER
30, 1999.
TABLE OF CONTENTS
COMPANY ............................................................3
EXPERTS ............................................................3
LEGAL OPINIONS.......................................................3
DISTRIBUTOR..........................................................3
REDUCTION OR ELIMINATION OF THE WITHDRAWAL CHARGE....................3
CALCULATION OF PERFORMANCE DATA......................................4
FEDERAL TAX STATUS..................................................16
ANNUITY PROVISIONS..................................................23
MORTALITY AND EXPENSE GUARANTEE.....................................24
FINANCIAL STATEMENTS................................................24
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 as of and for the
year ended December 31, 1998, 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, 1998 and 1997, and
for each of the three years in the period ended December 31, 1998, have been
audited by Ernst & Young LLP, 1200 Main Street, Kansas City, Missouri 64105,
independent auditors, as set forth in their reports, and are 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.
REDUCTION OR ELIMINATION OF THE WITHDRAWAL CHARGE
The amount of the Withdrawal Charge on the Contracts may be reduced or
eliminated when sales of the Contracts are made to individuals or to a group of
individuals in a manner that results in savings of sales expenses. The
entitlement to reduction of the Withdrawal Charge will be determined by the
Company after examination of all the relevant factors such as:
1. The size and type of group to which sales are to be made will be
considered. Generally, the sales expenses for a larger group are less than for a
smaller group because of the ability to implement large numbers of Contracts
with fewer sales contacts.
2. The total amount of purchase payments to be received will be considered.
Per Contract sales expenses are likely to be less on larger purchase payments
than on smaller ones.
3. Any prior or existing relationship with the Company will be considered.
Per Contract sales expenses are likely to be less when there is a prior existing
relationship because of the likelihood of implementing the Contract with fewer
sales contacts.
4. There may be other circumstances, of which the Company is not presently
aware, which could result in reduced sales expenses.
If, after consideration of the foregoing factors, the Company determines that
there will be a reduction in sales expenses, the Company may provide for a
reduction or elimination of the Withdrawal Charge.
The Withdrawal Charge may be eliminated when the Contracts are issued to an
officer, director or employee of the Company or any of its affiliates. In no
event will any reduction or elimination of the Withdrawal Charge be permitted
where the reduction or elimination of the Withdrawal Charge will be unfairly
discriminatory to any person.
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 average annual total return figures for the
time periods indicated in the advertisement. Such total return figures will
reflect the deduction of the 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.
You 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 your 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. Performance Information
Section I - PERFORMANCE INFORMATION OF SEPARATE ACCOUNT
The following total return information reflects performance for the accumulation
units of the Separate Account investing in Investors Mark Series Fund, Inc. for
the periods shown. Charts 1A-B reflect the deduction of the coverage charge and
the operating expenses of the Portfolio. Charts 2A-B reflect the deduction of
the coverage charge, contract maintenance charge, withdrawal charge and the
operating expenses of the Portfolio. The inception dates shown below reflect the
dates the Separate Account first invested in the Portfolio. PAST PERFORMANCE
DOES NOT GUARANTEE FUTURE RESULTS.
Chart 1-A (reflects 1.45% coverage charge and Portfolio expenses) ANNUAL TOTAL
RETURN FOR PERIODS ENDING 9/30/99:
<TABLE>
<CAPTION>
Separate
Account
Inception
Date in 1 Year Since Inception
Portfolio
Investors Mark Series Fund
<S> <C> <C> <C> <C>
Intermediate Fixed Income 11/24/97 -2.13% 2.02%
Mid Cap Equity 11/24/97 9.39% 1.42%
Money Market 11/24/97 2.91% 3.57%
Fixed Income 11/24/97 -1.03% 3.19%
Small Cap Equity 11/24/97 29.70% -4.36%
Large Cap Growth 11/24/97 30.49% 20.07%
Large Cap Value 11/24/97 12.50% 0.00%
Growth & Income 11/24/97 21.91% 10.76%
Balanced 11/24/97 4.58% -4.12%
Berger/BIAM IPT-International 11/24/97 27.87% 7.41%
Dreyfus / Stock Index 2/8/99 N/A 2.34%
Dreyfus / Disciplined Stock 3/24/99 N/A 2.55%
Invesco / High Yield 3/11/99 N/A 2.66%
Invesco / Industrial Income 2/16/99 N/A 7.21%
Lazard / Small Cap 4/6/99 N/A 23.76%
American Century / VP Income & Growth 2/8/99 N/A 4.23%
American Century / VP Value 3/24/99 N/A 8.46%
</TABLE>
Chart 1-B (reflects 1.25% coverage charge and Portfolio expenses) ANNUAL TOTAL
RETURN FOR PERIODS ENDING 9/30/99:
<TABLE>
<CAPTION>
Separate
Account
Inception
Date in 1 Year Since Inception
Portfolio
Investors Mark Series Fund
<S> <C> <C> <C> <C>
Intermediate Fixed Income 11/24/97 -1.93% 2.22%
Mid Cap Equity 11/24/97 9.61% 1.62%
Money Market 11/24/97 3.11% 3.77%
Fixed Income 11/24/97 -0.83% 3.40%
Small Cap Equity 11/24/97 29.96% -4.17%
Large Cap Growth 11/24/97 30.76% 20.31%
Large Cap Value 11/24/97 12.72% 0.20%
Growth & Income 11/24/97 22.15% 10.98%
Balanced 11/24/97 4.79% -3.93%
Berger/BIAM IPT-International 11/24/97 28.13% 7.63%
Dreyfus / Stock Index 2/8/99 N/A 2.55%
Dreyfus / Disciplined Stock 3/24/99 N/A 2.76%
Invesco / High Yield 3/11/99 N/A 2.87%
Invesco / Industrial Income 2/16/99 N/A 7.43%
Lazard / Small Cap 4/6/99 N/A 24.01%
American Century / VP Income & Growth 2/8/99 N/A 4.44%
American Century / VP Value 3/24/99 N/A 8.67%
</TABLE>
Chart 2-A (reflects 1.45% coverage charge, contract maintenance charge,
withdrawal Charge and Portfolio expenses) AVERAGE ANNUAL TOTAL RETURN FOR
PERIODS ENDING 9/30/99:
<TABLE>
<CAPTION>
Separate
Account 1 Year Since Inception
Inception
Date in
Portfolio
<S> <C> <C> <C> <C>
Intermediate Fixed Income 11/24/97 -7.72% -1.07%
Mid Cap Equity 11/24/97 3.85% -1.71%
Money Market 11/24/97 -2.66% 0.52%
Fixed Income 11/24/97 -6.61% 0.14%
Small Cap Equity 11/24/97 24.24% -7.73%
Large Cap Growth 11/24/97 25.04% 17.43%
Large Cap Value 11/24/97 6.97% -3.19%
Growth & Income 11/24/97 16.42% 7.89%
Balanced 11/24/97 -0.98% -7.44%
Berger/BIAM IPT-International 11/24/97 22.41% 4.43%
Dreyfus / Stock Index 2/8/99 N/A -7.72%
Dreyfus / Disciplined Stock 3/24/99 N/A -9.74%
Invesco / High Yield 3/11/99 N/A -8.82%
Invesco / Industrial Income 2/16/99 N/A -3.33%
Lazard / Small Cap 4/6/99 N/A 9.42%
American Century / VP Income & Growth 2/8/99 N/A -5.88%
American Century / VP Value 3/24/99 N/A -4.09%
</TABLE>
Chart 2-B (reflects 1.25% coverage charge, contract maintenance charge,
withdrawal charge and Portfolio expenses) AVERAGE ANNUAL TOTAL RETURN FOR
PERIODS ENDING 9/30/99:
<TABLE>
<CAPTION>
Separate
Account I Year Since Inception
Inception
Date in
Portfolio
<S> <C> <C> <C> <C>
Intermediate Fixed Income 11/24/97 -7.52% -0.86%
Mid Cap Equity 11/24/97 4.07% -1.50%
Money Market 11/24/97 -2.45% 0.73%
Fixed Income 11/24/97 -6.41% 0.35%
Small Cap Equity 11/24/97 24.50% -7.53%
Large Cap Growth 11/24/97 25.31% 17.68%
Large Cap Value 11/24/97 7.20% -2.98%
Growth & Income 11/24/97 16.67% 8.12%
Balanced 11/24/97 -0.77% -7.24%
Berger/BIAM IPT-International 11/24/97 22.67% 4.65%
Dreyfus / Stock Index 2/8/99 N/A -7.52%
Dreyfus / Disciplined Stock 3/24/99 N/A -9.34%
Invesco / High Yield 3/11/99 N/A -8.63%
Invesco / Industrial Income 2/16/99 N/A -3.13%
Lazard / Small Cap 4/6/99 N/A 9.65%
American Century / VP Income & Growth 2/8/99 N/A -5.68%
American Century / VP Value 3/24/99 N/A -3.89%
</TABLE>
SECTION II - HISTORICAL PERFORMANCE OF CERTAIN PORTFOLIOS
Certain Portfolios have been in existence for some time and consequently have
investment performance history. In order to demonstrate how the historical
investment experience of certain Portfolios affects accumulation unit values, we
have developed the following performance information. The information is based
upon the historical experience of the Portfolios and is for the periods shown.
Charts 3A-B reflect the deduction of the coverage charge and the operating
expenses of the Portfolio. Charts 4A-B reflect the deduction of the coverage
charge, contract maintenance charge, withdrawal charge and the operating
expenses of the Portfolio. The inception dates shown below are the dates the
underlying Portfolios commenced investment operations. PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS.
Chart 3-A (reflects 1.45% coverage charge and Portfolio expenses) ANNUAL TOTAL
RETURN FOR PERIODS ENDING 9/30/99:
<TABLE>
<CAPTION>
Portfolio 10 Years/
Inception Date 1 Year 5 Years Since Inception
-------------- ------ ------- ---------------
<S> <C> <C> <C> <C> <C>
Dreyfus Stock Index 09/27/89 25.52% 22.77% 14.66%
Dreyfus Disciplined Stock 04/29/96 25.00% n/a 21.53%
Invesco High Yield 05/25/94 6.63% n/a 9.57%
Invesco Industrial Income 08/08/94 18.62% n/a 17.92%
Lazard Small Cap 11/02/97 14.71% n/a -1.96%
American Century Growth & Income 10/30/97 24.38% n/a 18.26%
American Century Value 04/29/96 10.17% n/a 10.84%
</TABLE>
Chart 3-B (reflects 1.25% coverage charge and Portfolio expenses) ANNUAL TOTAL
RETURN FOR PERIODS ENDING 9/30/99:
<TABLE>
<CAPTION>
Portfolio 10 Years/
Inception Date 1 Year 5 Years Since Inception
-------------- ------ ------- ---------------
<S> <C> <C> <C> <C> <C>
Dreyfus Stock Index 09/27/89 25.77% 23.01% 14.88%
Dreyfus Disciplined Stock 04/29/96 25.25% n/a 21.78%
Invesco High Yield 05/25/94 6.85% n/a 9.79%
Invesco Industrial Income 08/08/94 18.85% n/a 18.15%
Lazard Small Cap 11/02/97 14.94% n/a -1.77%
American Century Growth & Income 10/30/97 24.63% n/a 18.50%
American Century Value 04/29/96 10.39% n/a 11.06%
</TABLE>
Chart 4-A (reflects 1.45% coverage charge, contract maintenance charge,
withdrawal charge and Portfolio expenses) AVERAGE ANNUAL TOTAL RETURN FOR
PERIODS ENDING 9/30/99:
<TABLE>
<CAPTION>
Portfolio 10 Years/
Inception Date 1 Year 5 Years Since Inception
-------------- ------ ------- ---------------
<S> <C> <C> <C> <C> <C>
Dreyfus Stock Index 09/27/89 20.04% 22.54% 14.58%
Dreyfus Disciplined Stock 04/29/96 19.53% n/a 20.78%
Invesco High Yield 05/25/94 1.08% n/a 9.21%
Invesco Industrial Income 08/08/94 13.12% n/a 17.64%
Lazard Small Cap 11/02/97 9.20% n/a -5.12%
American Century Growth & Income 10/30/97 18.91% n/a 15.72%
American Century Value 04/29/96 4.63% n/a 9.87%
</TABLE>
Chart 4-B (reflects 1.25% coverage charge, contract maintenance charge,
withdrawal charge and Portfolio expenses AVERAGE ANNUAL TOTAL RETURN FOR PERIODS
ENDING 9/30/99:
<TABLE>
<CAPTION>
Portfolio 10 Years/
Inception Date 1 Year 5 Years Since Inception
-------------- ------ ------- ---------------
<S> <C> <C> <C> <C> <C>
Dreyfus Stock Index 09/27/89 20.30% 22.79% 14.81%
Dreyfus Disciplined Stock 04/29/96 19.78% n/a 21.03%
Invesco High Yield 05/25/94 1.30% n/a 9.44%
Invesco Industrial Income 08/08/94 13.36% n/a 17.88%
Lazard Small Cap 11/02/97 9.43% n/a -4.92%
American Century Growth & Income 10/30/97 19.16% n/a 15.96%
American Century Value 04/29/96 4.86% n/a 10.10%
</TABLE>
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. For purposes of this rule, contracts received in a
Section 1035 exchange will be considered issued in the year of the exchange.
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.
Death Benefits
Any death benefits paid under the Contract are taxable to the beneficiary. The
rules governing the taxation of payments from an annuity contract, as discussed
above, generally apply to the payment of death benefits and depend on whether
the death benefits are paid as a lump sum or as annuity payments. Estate taxes
may also apply.
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); or d) hardship withdrawals. 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.
With respect to (d) above, if the series of substantially equal periodic
payments is modified before the later of your attaining age 59 1/2 or 5 years
from the date of the first periodic payment, then the tax for the year of
modification is increased by an amount equal to the tax which would have been
imposed (the 10% penalty tax) but for the exception, plus interest for the tax
years in which the exception is used.
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.
Individual Retirement Annuities
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 taxable 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
Section 408(A) of the Code provides that 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 and are not
deductible from taxable income. 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).
With respect to (c) above, if the series of substantially equal periodic
payments is modified before the later of your attaining age 59 1/2 or 5 years
from the date of the first periodic payment, then the tax for the year of the
modification is increased by an amount equal to the tax which would have been
imposed (the 10% penalty tax) but for the exception, plus interest for the tax
years in which the exception is used.
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 unaudited balance sheet of BMA Variable Annuity Account A as of September
30,1999 and the related statement of operations and changes in net assets for
the period ended September 30, 1999 and 1998 follow.
The audited balance sheet of BMA Variable Annuity Account A as of December 31,
1998 and the related statement of operations and changes in net assets for the
year ended December 31, 1998, and for the period from November 24, 1997
(inception), to December 31, 1997, and the report of Ernst and Young LLP,
independent auditors with respect thereto, follow.
The audited consolidated financial statements of the Company as of December 31,
1998 and 1997, and for each of the years in the three year period ended December
31, 1998, which are also included herein should be considered only as bearing
upon the ability of the Company to meet its obligations under the Contracts.
BMA Variable Annuity Account A
Statement of Assets and Liabilities
Assets
<TABLE>
<CAPTION>
September 30,
1999
(Unaudited)
<S> <C>
Investments:
Investors Mark Series Fund, Inc. (IMSF):
Balanced - 39,311 shares at net asset value of $8.98 per share (cost, $377,491) $353,013
Growth and Income - 46,321 shares at net asset value of $12.18 per share (cost, $512,349) 564,191
Large Cap Value - 46,033 shares at net asset value of $9.95 per share (cost, $460,617) 458,032
Small Cap Equity - 27,155 shares at net asset value of $9.47 per share (cost, $216,676) 257,157
Large Cap Growth - 21,748 shares at net asset value of $14.25 per share (cost, $263,398) 309,911
Intermediate Fixed Income - 26,492 shares at net asset value of $9.94 per share (cost,
$268,026) 263,332
Mid Cap Equity - 32,077 shares at net asset value of $10.40 per share (cost, $331,353) 333,605
Money Market - 51,864 shares at net asset value of $1.00 per share (cost, $51,864) 51,864
Global Fixed Income - 6,436 shares at net asset value of $9.88 per share (cost, $64,162) 63,585
Berger Institutional Products Trust (Berger IBT):
Berger IPT International Fund - 33,054 shares at net asset value of $12.14 per share (cost,
$360,384) 401,274
Dreyfus Corporation:
Dreyfus Stock Index Fund - 810 shares at net asset value of $33.73 per share (cost, $27,694) 27,325
Dreyfus Disciplined Stock Portfolio - 2,569 shares at net asset value of $23.72 per share
(cost, $62,346) 60,947
INVESCO Funds Group, Inc.:
INVESCO VIF - High Yield Fund - 6,226 shares at net asset value of $11.93 per share (cost,
$73,914) 74,274
INVESCO VIF - Equity Income Fund - 782 shares at net asset value of $19.79 per share (cost,
$15,990) 15,468
Lazard Asset Management:
Lazard Retirement Small Cap Portfolio - 2,400 shares at net asset value of 9.88 per share
(cost, $24,788) 23,712
American Century Investment Management, Inc.:
VP Income & Growth - 6,122 shares at net asset value of $7.03 per share (cost, $42,839) 43,036
VP Value - 8,406 shares at net asset value of $6.04 per share (cost, $52,614) 50,770
Receivable from BMA 207
----------
Total Assets $3,351,703
==========
</TABLE>
See accompanying notes to unaudited financial statements.
Liabilities and net assets
<TABLE>
<CAPTION>
Mortality and expense risks payable $3,778
Net assets are represented by:
---------------------------------
Number Unit
Of Units Value Amount
---------------------------------
<S> <C> <C> <C>
IMSF Balanced:
Accumulation units 35,827 $ 9.8425 352,630
IMSF Growth and Income
Accumulation units 47,773 11.7966 563,558
IMSF Large Cap Value
Accumulation units 44,190 10.3538 457,538
IMSF Small Cap Equity
Accumulation units 22,083 11.6324 256,882
IMSF Large Cap Growth
Accumulation units 23,589 13.1239 309,577
IMSF Intermediate Fixed Income
Accumulation units 25,616 10.2684 263,037
IMSF Mid Cap Equity
Accumulation units 31,796 10.4808 333,249
IMSF Money Market
Accumulation units 5,009 10.3962 52,072
IMSF Global Fixed Income
Accumulation units 6,237 10.1847 63,518
Berger IPT International
Accumulation units 31,909 12.5615 400,825
Dreyfus Stock Index
Accumulation units 2,621 10.4033 27,266
Dreyfus Stock Portfolio
Accumulation units 5,949 10.2309 60,860
INVESCO VIF - High Yield Fund
Accumulation units 7,102 10.4408 74,147
INVESCO VIF - Equity Index Fund
Accumulation units 1,468 10.5233 15,450
Lazard Retirement Small Cap Portfolio
Accumulation units 2,303 10.2780 23,671
American Century VP Income & Growth
Accumulation units 4,182 10.2705 42,955
American Century VP Value
Accumulation units 5,087 9.9638 50,690
----------
Net Assets 3,347,925
----------
Total liabilities and net assets $3,351,703
==========
</TABLE>
See accompanying notes to unaudited financial statements.
BMA Variable Annuity Account A
Statement of Operations and Changes in Net Assets
Nine Months Ended September 30, 1999 (Unaudited)
<TABLE>
<CAPTION>
Growth Large Cap Small Cap Large Cap Intermediate Mid Cap
Balanced & Income Value Equity Growth Fixed Income Equity
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment Income $ 0 0 0 0 0 0 0
Mortality, expense and
administrative charges 2,662 5,080 4,382 1,714 263 2,547 3,012
-----------------------------------------------------------------------------------
Net investment income (loss) (2,662) (5,080) (4,382) (1,714) (263) (2,547) (3,012)
Capital gain distributions 0 0 0 0 0 0 0
Realized gain (loss) on investments (1,382) 1,293 1,312 (291) 3,233 (340) 432
Unrealized appreciation
(depreciation) on investments (4,999) 17,406 (3,253) 36,165 12,711 368 (19,910)
-----------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments (6,381) 18,699 (1,941) 35,874 15,944 28 (19,478)
----------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (9,043) 13,619 (6,323) 34,160 15,681 (2,519) (22,490)
Net assets at beginning of year 188,043 414,874 378,460 147,887 195,242 196,533 203,438
Variable annuity deposits 11,250 29,005 22,089 13,089 11,994 24,236 21,698
Terminations and Withdrawals (1,164) (1,940) (1,268) (3,585) (1,426) (1,058) (3,931)
Transfers* 163,544 108,000 64,580 65,331 88,086 45,845 134,534
-----------------------------------------------------------------------------------
Net assets at end of period $352,630 563,558 457,538 256,882 309,577 263,037 333,249
===================================================================================
</TABLE>
<TABLE>
<CAPTION>
Money Global Fixed Berger IPT
Market Income International Subtotal
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income 2,310 0 0 $ 2,310
Mortality, expense and
administrative charges 794 328 2,895 23,677
--------------------------------------------------------------
Net investment income (loss) 1,516 (328) (2,895) (21,367)
Capital gain distributions 0 0 0 0
Realized gain (loss) on investments 0 (47) 2,636 6,846
Unrealized appreciation
(depreciation) on investments 0 (111) 22,089 60,466
--------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments 0 (158) 24,725 67,312
--------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 1,516 (486) 21,830 45,945
Net assets at beginning of year 199,625 14,881 255,115 2,194,098
Variable annuity deposits 555,218 16,000 14,897 719,476
Terminations and Withdrawals (1,068) (1,064) (6,133) (22,637)
Transfers* (703,219) 34,187 115,116 116,004
--------------------------------------------------------------
Net assets at end of period 52,072 63,518 400,825 3,052,886
==============================================================
</TABLE>
*Includes transfer activity from (to) other subaccounts and transfers (from) to
the fixed accounts.
See accompanying notes to unaudited financial statements.
BMA Variable Annuity Account A
Statement of Operations and Changes in Net Assets (continued)
Nine Months Ended September 30, 1999 (Unaudited)
<TABLE>
<CAPTION>
Dreyfus Dreyfus INVESCO INVESCO Lazard
Stock Disciplined VIF High VIF Equity Retirement
Income Stock Yield Income Small Cap
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment Income $283 0 0 0 0
Mortality, expense and
Administrative charges 170 199 278 29 49
---------------------------------------------------------------------------------------
Net investment income (loss) 113 (199) (278) (29) (49)
Capital gain distributions 0 0 0 0 0
Realized gain (loss) on investments 9 12 4 1 269
Unrealized appreciation
(depreciation) on investments (369) (1,399) 360 (522) (1,076)
---------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments (360) (1,387) 364 (521) (807)
---------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (247) (1,586) 86 (550) (856)
Net assets at beginning of year 0 0 0 0 0
Variable annuity deposits 25,730 45,250 32,000 12,000 3,412
Terminations and Withdrawals 0 0 0 0 0
Transfers* 1,783 17,196 42,061 4,000 21,115
---------------------------------------------------------------------------------------
Net assets at end of period $27,266 60,860 74,147 15,450 23,671
=========================================================================================
</TABLE>
*Includes transfer activity from (to) other subaccounts and transfers (from) to
the fixed accounts.
See accompanying notes to unaudited financial statements.
<TABLE>
<CAPTION>
VP
Income & VP
Growth Value Subtotal Total
-------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income 3 0 286 2,596
Mortality, expense and
Administrative charges 245 205 1,175 24,256
-------------------------------------------------
Net investment income (loss) (242) (205) (889) (22,256)
Capital gain distributions 0 0 0 0
Realized gain (loss) on investments 15 31 341 7,187
Unrealized appreciation
(depreciation) on investments 197 (1,844) (4,653) 55,813
-------------------------------------------------
Net realized and unrealized gain
(loss) on investments 212 (1,813) (4,312) 63,000
-------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (30) (2,018) (5,201) 40,744
Net assets at beginning of year 0 0 0 2,194,098
Variable annuity deposits 37,200 41,250 196,842 916,318
Terminations and Withdrawals 0 0 0 (22,637)
Transfers* 5,785 11,458 103,398 219,402
-------------------------------------------------
Net assets at end of period 42,955 50,690 295,039 3,347,925
=================================================
</TABLE>
BMA Variable Annuity Account A
Statement of Operations and Changes in Net Assets
Nine Months Ended September 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Growth Large Cap Small Cap Large Cap Intermediate Mid Cap
Balanced & Income Value Equity Growth Fixed Income Equity
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment Income $0 0 0 0 0 0 0
Mortality, expense and
administrative charges 1,195 2,853 2,082 501 425 1,572 698
---------------------------------------------------------------------------------------------
Net investment income (loss) (1,195) (2,853) (2,082) (501) (425) (1,572) (698)
Capital gain distributions 0 0 0 0 0 0 0
Realized gain (loss) on investments 53 210 637 9 783 8 161
Unrealized appreciation
(depreciation) on investments (17,905) (21,713) (31,269) (17,596) (1,737) 7,556 (10,461)
---------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments (17,852) (21,503) (30,632) (17,587) (954) 7,564 (10,300)
---------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (19,047) (24,356) (32,714) (18,088) (1,379) 5,992 (10,998)
Net assets at beginning of year 1,009 3,550 3,521 4,923 3,600 1,011 5,494
Variable annuity deposits 127,795 313,553 243,257 51,897 41,800 164,279 78,807
Terminations and Withdrawals (43) (80) (89) (5) 0 0 0
Transfers* 49,230 30,322 30,215 14,477 8,393 8,902 3,385
---------------------------------------------------------------------------------------------
Net assets at end of period $158,944 322,989 244,190 53,204 52,414 180,184 76,688
=============================================================================================
</TABLE>
*Includes transfer activity from (to) other subaccounts and transfers (from) to
the fixed accounts.
See accompanying notes to unaudited financial statements.
<TABLE>
<CAPTION>
Money Global Fixed Berger IPT
Market Income International Total
------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income 888 0 0 $888
Mortality, expense and
administrative charges 243 135 1,683 11,387
------------------------------------------------------------
Net investment income (loss) 645 (135) (1,683) (10,499)
Capital gain distributions 0 0 0 0
Realized gain (loss) on investments 0 5 394 2,260
Unrealized appreciation
(depreciation) on investments 0 744 (17,110) (109,491)
------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments 0 749 (16,716) (107,231)
------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 645 614 (18,399) (117,730)
Net assets at beginning of year 1,003 1,021 5,017 30,149
Variable annuity deposits 217,958 11,779 188,334 1,439,459
Terminations and Withdrawals 0 0 0 (217)
Transfers* (157,438) 2,499 6,176 (3,839)
------------------------------------------------------------
Net assets at end of period 62,168 15,913 181,128 1,347,822
============================================================
</TABLE>
BMA Variable Annuity Account A
Notes to Unaudited Financial Statements
September 30, 1999
These financial statements are unaudited but, in management opinion, include all
adjustments necessary for a fair presentation of results.
These interim financial statements should be read in conjunction with the BMA
Variable Annuity Account A report for the year ended December 31, 1998 and the
period from November 24, 1997 (inception) to December 31, 1997.
FINANCIAL STATEMENTS
BMA VARIABLE ANNUITY ACCOUNT A
Year ended December 31, 1998 and
period from November 24, 1997 (inception)
to December 31, 1997
with Report of Independent Auditors.
1
BMA VARIABLE ANNUITY ACCOUNT A
FINANCIAL STATEMENTS
Year ended December 31, 1998 and period from
November 24, 1997 (inception) to December 31, 1997
<TABLE>
<CAPTION>
Contents Page
- - -------- ----
<S> <C>
Report of Independent Auditors............................................. 1
Audited Financial Statements
Statement of Assets and Liabilities........................................ 2
Statements of Operations and Changes in Net Assets......................... 4
Notes to Financial Statements.............................................. 6
</TABLE>
1
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 BMA
Variable Annuity Account A (the Account) as of December 31, 1998 and the related
statements of operations and changes in net assets for the year ended December
31, 1998 and for the period from November 24, 1997 (inception) to December 31,
1997. These financial statements are the responsibility of the Account's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1998, by correspondence with
the mutual funds' transfer agents. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BMA Variable Annuity Account
A at December 31, 1998, and the results of its operations and changes in net
assets for the year ended December 31, 1998 and for the period from November 24,
1997 (inception) to December 31, 1997, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
February 5, 1999
1
BMA VARIABLE ANNUITY ACCOUNT A
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<TABLE>
<S> <C>
Assets
Investments (Notes 1 and 3):
Investors Mark Series Fund, Inc. (IMSF):
Balanced--21,209 shares at net asset value of $8.88 per share
(cost, $207,813)................................................. $ 188,334
Growth and Income--36,028 shares at net asset value of $11.53 per
share (cost, $380,968)........................................... 415,404
Large Cap Value--38,357 shares at net asset value of $9.88 per
share (cost, $378,304)........................................... 378,972
Small Cap Equity--18,188 shares at net asset value of $8.14 per
(cost $143,735).................................................. 148,051
Large Cap Growth--14,603 shares at net asset value of $13.31 per
share (cost, $160,550)........................................... 194,424
Intermediate Fixed Income--19,787 shares at net asset value of
$9.95 per share (cost, $201,945)................................. 196,884
Mid Cap Equity--18,334 shares at net asset value of $11.11 per
share (cost, $181,530)........................................... 203,692
Money Market--199,432 shares at net asset value of $1.00 per share
(cost, $199,432)................................................. 199,432
Global Fixed Income--1,503 shares at net asset value of $9.92 per
share (cost, $15,377)............................................ 14,911
Berger Institutional Products Trust (Berger IBT):
Berger IPT International Fund--22,787 shares at net asset value of
$11.21 per share (cost, $236,641)................................ 255,442
Receivable from BMA................................................. 1,029
----------
Total assets.................................................. $2,196,575
==========
</TABLE>
2
Liabilities and net assets
<TABLE>
<S> <C> <C> <C>
Mortality and expense risks payable................................. $ 2,477
Net assets are represented by (Note 3):
<CAPTION>
Number
of Unit
Units Value Amount
------ ----- ----------
<S> <C> <C> <C>
Investors Mark Series Fund Inc. (IMSF):
Balanced:
Accumulation units................................. 20,112 $9.35 188,043
Growth and Income:
Accumulation units................................. 37,309 11.12 414,874
Large Cap Value:
Accumulation units................................. 37,733 10.03 378,460
Small Cap Equity:
Accumulation units................................. 18,394 8.04 147,887
Large Cap Growth:
Accumulation units................................. 15,406 12.67 195,242
Intermediate Fixed Income:
Accumulation units................................. 18,755 10.48 196,533
Mid Cap Equity:
Accumulation units................................. 19,049 10.68 203,438
Money Market:
Accumulation units................................. 19,195 10.40 199,625
Global Fixed Income:
Accumulation units................................. 1,379 10.79 14,881
Berger IPT International:
Accumulation units................................. 21,402 11.92 255,115
----------
Net assets............................................. 2,194,098
----------
Total liabilities and net assets................. $2,196,575
==========
</TABLE>
See accompanying notes.
3
BMA VARIABLE ANNUITY ACCOUNT A
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
Year ended December 31, 1998
<TABLE>
<CAPTION>
IMSF IMSF IMSF IMSF IMSF
Growth Large Small Large IMSF IMSF IMSF Global
IMSF and Cap Cap Cap Intermediate Mid Cap Money Fixed Berger IPT
Balanced Income Value Equity Growth Fixed Income Equity Market Income International
-------- -------- -------- -------- -------- ------------ -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
income........... $ 9,519 $ 4,587 $ 10,874 $ 63 $ 115 $ 11,817 $ 2,000 $ 1,351 $ 1,250 $ 3,578
Expenses (Note
2):
Mortality,
expense and
administrative
charges......... 1,876 4,791 3,644 969 1,030 2,216 1,903 401 190 2,761
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net investment
income........... 7,643 (204) 7,230 (906) (915) 9,601 97 950 1,060 817
Realized gains
(losses) on
investments...... (87) 626 712 (176) 1,020 17 190 -- 70 626
Unrealized
appreciation
(depreciation) on
investments...... (19,483) 34,385 648 4,389 33,699 (5,066) 22,170 -- (480) 18,779
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net realized and
unrealized gain
(loss) on
investments...... (19,570) 35,011 1,360 4,213 34,719 (5,049) 22,360 -- (410) 19,405
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net increase
(decrease) in net
assets resulting
from operations.. (11,927) 34,807 8,590 3,307 33,804 4,552 22,457 950 650 20,222
Variable annuity
deposits (Notes 2
and 3)........... 127,795 333,303 323,292 119,532 148,962 164,259 147,193 397,036 11,779 221,832
Terminations and
withdrawals...... (43) (80) (89) (5) -- -- -- -- -- --
Transfers*....... 71,209 43,294 43,146 20,130 8,876 26,711 28,294 (199,364) 1,431 8,044
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net increase..... 187,034 411,324 374,939 142,964 191,642 195,522 197,944 198,622 13,860 250,098
Net assets at
beginning of
year............. 1,009 3,550 3,521 4,923 3,600 1,011 5,494 1,003 1,021 5,017
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net assets at end
of year.......... $188,043 $414,874 $378,460 $147,887 $195,242 $196,533 $203,438 $199,625 $ 14,881 $255,115
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
<CAPTION>
Total
-----------
<S> <C>
Investment
income........... $ 45,154
Expenses (Note
2):
Mortality,
expense and
administrative
charges......... 19,781
-----------
Net investment
income........... 25,373
Realized gains
(losses) on
investments...... 2,998
Unrealized
appreciation
(depreciation) on
investments...... 89,041
-----------
Net realized and
unrealized gain
(loss) on
investments...... 92,039
-----------
Net increase
(decrease) in net
assets resulting
from operations.. 117,412
Variable annuity
deposits (Notes 2
and 3)........... 1,994,983
Terminations and
withdrawals...... (217)
Transfers*....... 51,771
-----------
Net increase..... 2,163,949
Net assets at
beginning of
year............. 30,149
-----------
Net assets at end
of year.......... $2,194,098
===========
</TABLE>
*Includes transfer activity from (to) other subaccounts and transfers from
(to) the fixed accounts.
See accompanying notes.
4
BMA VARIABLE ANNUITY ACCOUNT A
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
Period from November 24, 1997 (inception) to December 31, 1997
<TABLE>
<CAPTION>
IMSF
IMSF IMSF IMSF IMSF IMSF IMSF IMSF Global
IMSF Growth and Large Cap Small Cap Large Cap Intermediate Mid Cap Money Fixed Berger IPT
Balanced Income Value Equity Growth Fixed Income Equity Market Income International Total
-------- ---------- --------- --------- --------- ------------ ------- ------ ------ ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
income........... $ 6 $ 1 $ 3 $ -- $ -- $ 7 $ 6 $ 4 $ 8 $ -- $ 35
Expenses (Note
2):
Mortality,
expense and
administrative
charges......... 1 2 2 4 2 1 4 1 2 5 24
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Net investment
income........... 5 (1) 1 (4) (2) 6 2 3 6 (5) 11
Unrealized
appreciation
(depreciation) on
investments...... 4 51 20 (73) 102 5 (8) -- 15 22 138
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Net realized and
unrealized gain
(loss) on
investments...... 4 51 20 (73) 102 5 (8) -- 15 22 138
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Net increase
(decrease) in net
assets resulting
from operations.. 9 50 21 (77) 100 11 (6) 3 21 17 149
Variable annuity
deposits (Notes 2
and 3)........... 1,000 3,500 3,500 5,000 3,500 1,000 5,500 1,000 1,000 5,000 30,000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Net increase..... 1,009 3,550 3,521 4,923 3,600 1,011 5,494 1,003 1,021 5,017 30,149
Net assets at
beginning of
period........... -- -- -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Net assets at end
of period........ $1,009 $3,550 $3,521 $4,923 $3,600 $1,011 $5,494 $1,003 $1,021 $5,017 $30,149
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== =======
</TABLE>
See accompanying notes.
F-5
BMA VARIABLE ANNUITY ACCOUNT A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 and 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 various funds (mutual
funds not otherwise available to the public) as directed by the owners. Amounts
may be invested in shares of the following portfolios:
Investors Mark Series Funds, Inc. (IMSF): Balanced (emphasis on long-term
growth and high current income); Growth and Income (emphasis on long-term
growth and income without a lot of fluctuation in market value); Large Cap
Value (emphasis on long-term capital growth); Small Cap Equity (emphasis on
long-term growth by investing in small- and medium-sized companies); Large
Cap Growth (emphasis on long-term capital appreciation); Intermediate Fixed
Income (emphasis on current income with stability of principal and
liquidity); Mid Cap Equity (emphasis on long-term growth by investing in
common stock of mid-sized companies); Money Market (emphasis on current
income while preserving capital and maintaining liquidity) and 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 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.
F-6
BMA VARIABLE ANNUITY ACCOUNT A
NOTES TO FINANCIAL STATEMENTS--(Continued)
Investment Valuation
Investments in mutual fund shares are carried in the balance sheet at
market value (net asset value of the underlying mutual fund). The first-in,
first-out method is used to determine 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 also are reinvested upon
receipt.
The cost of investments purchased and proceeds from sales were as follows:
<TABLE>
<CAPTION>
Period from
November 24, 1997
Year ended (inception) to
December 31, 1998 December 31, 1997
--------------------- ------------------
Proceeds
Cost of from Cost of
Purchases Sales Purchases
----------- --------- ------------------
<S> <C> <C> <C>
IMSF Balanced.......................... $ 211,341 $ 4,447 $ 1,006
IMSF Growth and Income................. 383,734 6,893 3,501
IMSF Large Cap Value................... 382,110 8,021 3,503
IMSF Small Cap Equity.................. 140,032 1,121 5,000
IMSF Large Cap Growth.................. 161,199 5,169 3,500
IMSF Intermediate Fixed Income......... 205,008 4,087 1,007
IMSF Mid Cap Equity.................... 180,591 4,757 5,506
IMSF Money Market...................... 398,110 199,682 1,004
IMSF Global Fixed Income............... 16,104 1,805 1,008
Berger IPT International............... 235,706 4,691 5,000
----------- --------- --------
Total................................ $ 2,313,935 $ 240,673 $ 30,035
=========== ========= ========
</TABLE>
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. Initial purchase
payments (excluding amounts allocated to Fixed Account II in the general account
of BMA) in amounts of $75,000 or more made after September 8, 1998 incur a
coverage charge of 1.25% annually.
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.
F-7
BMA VARIABLE ANNUITY ACCOUNT A
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 1998 or 1997.
3. Summary of Unit Transactions
Account deposits and terminations, withdrawals and expense charges by units
follow:
<TABLE>
<CAPTION>
Number of Units Number of Units
--------------- ----------------
Period from
November 24,
Year ended 1997 (inception)
December 31, to December 31,
1998 1997
------------ ----------------
<S> <C> <C>
Balanced:
Variable annuity deposits................... 27,455 100
Terminations, withdrawals and expense
charges.................................... 7,433
Growth and Income:
Variable annuity deposits................... 48,186 353
Terminations, withdrawals and expense
charges.................................... 11,386
Large Cap Value:
Variable annuity deposits................... 51,953 364
Terminations, withdrawals and expense
charges.................................... 15,603
Small Cap Equity:
Variable annuity deposits................... 20,346 507
Terminations, withdrawals and expense
charges.................................... 5,633
Large Cap Growth:
Variable annuity deposits................... 24,279 345
Terminations, withdrawals and expense
charges.................................... 8,962
Intermediate Fixed Income:
Variable annuity deposits................... 19,058 100
Terminations, withdrawals and expense
charges.................................... 397
Mid Cap Equity:
Variable annuity deposits................... 30,935 543
Terminations, withdrawals and expense
charges.................................... 13,307
Money Market:
Variable annuity deposits................... 86,798 100
Terminations, withdrawals and expense
charges.................................... 67,189
Global Fixed Income:
Variable annuity deposits................... 1,483 100
Terminations, withdrawals and expense
charges.................................... 204
Berger IPT International:
Variable annuity deposits................... 22,698 482
Terminations, withdrawals and expense
charges.................................... 1,732
</TABLE>
F-8
BMA VARIABLE ANNUITY ACCOUNT A
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Impact of Year 2000 (Unaudited)
BMA continues to monitor the potential impact of the year 2000 on its
systems and those of its primary vendors and business partners. This assessment
extends to both informational technology systems and noninformation technology
systems. All identified modifications to BMA's critical operating systems have
been completed as of December 31, 1998, and BMA continues to validate completed
systems to ensure ongoing compliance. Contingency plans are being developed and
management estimates that these plans will be completed by mid-1999, prior to
any anticipated impact on its operating systems. Total costs of the
modifications have been immaterial to BMA's operations and have been expensed as
incurred.
BMA does risk that one or more of its critical suppliers or customers
(external relationships) will not be able to interact with BMA due to the third
parties' inability to resolve their own year 2000 issues. BMA is actively
monitoring the compliance programs of those third parties, and formal
communication has been initiated with all major outside service providers.
However, BMA is unable to predict with certainty to what extent its external
relationships will be year 2000 ready.
The forecast costs, consequences of the year 2000 problem and the dates by
which BMA believes it will complete its various year 2000 computer modifications
are based on its best estimates, which in turn were based on numerous
assumptions of future events including third-party modification and compliance
plans, continued availability of resources and other factors. BMA cannot be sure
that these estimates will be achieved or that the assumptions are accurate, and
actual results could differ materially from those anticipated.
F-9
CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A Member of the Generali Group of Companies)
Years ended December 31, 1998 and 1997
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, 1998 and 1997
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. 1
Audited Consolidated Financial Statements
Consolidated Balance Sheets................................................. 2
Consolidated Statements of Operations....................................... 3
Consolidated Statements of Comprehensive Income............................. 4
Consolidated Statements of Stockholder's Equity............................. 5
Consolidated Statements of Cash Flows....................................... 6
Notes to Consolidated Financial Statements.................................. 7
</TABLE>
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, 1998 and 1997, and the
related consolidated statements of operations, comprehensive income,
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Kansas City, Missouri
February 4, 1999
F-1
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A Member of the Generali Group of Companies)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
---------------------
1998 1997
---------- ----------
(In Thousands)
<S> <C> <C>
Assets
Investments (Notes 1 and 3):
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost--$1,257,705 in 1998
and $1,308,458 in 1997)............................. $1,277,121 $1,326,018
Equity securities (cost--$36,214 in 1998 and $46,807
in 1997)............................................ 40,373 57,806
Mortgage loans on real estate, net of allowance for
losses of $9,185 in 1998 and $8,435 in 1997........... 875,117 842,149
Policy loans........................................... 59,780 62,207
Short-term investments................................. 38,815 47,507
Other.................................................. 44,084 3,424
---------- ----------
Total investments.................................... 2,335,290 2,339,111
Cash..................................................... 2,531 --
Accrued investment income................................ 18,078 18,520
Premium and other receivables............................ 12,017 10,606
Deferred policy acquisition costs........................ 112,311 125,065
Property, equipment and software (Note 6)................ 16,276 16,753
Reinsurance recoverables:
Paid benefits.......................................... 6,549 6,588
Benefits and claim reserves ceded...................... 95,476 72,000
Other assets (Note 1).................................... 14,852 16,216
Assets held in separate accounts (Note 1)................ 300,366 76,964
---------- ----------
Total assets......................................... $2,913,746 $2,681,823
========== ==========
Liabilities and stockholder's equity
Future policy benefits:
Life and annuity (Note 10)............................. $1,253,531 $1,259,319
Health................................................. 78,527 87,883
Contract account balances................................ 677,444 699,244
Policy and contract claims............................... 62,953 58,381
Unearned revenue reserve................................. 9,924 11,284
Other policyholder funds................................. 14,671 14,286
Outstanding checks in excess of bank balances............ -- 2,669
Current income taxes payable (Note 7).................... 2,300 2,158
Deferred income taxes (Note 7)........................... 10,650 12,244
Payable to affiliate (Note 10)........................... 771 799
Other liabilities........................................ 84,183 72,858
Liabilities related to separate accounts (Note 1)........ 300,366 76,964
---------- ----------
Total liabilities........................................ 2,495,320 2,298,089
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
Accumulated other comprehensive income................. 10,730 14,364
Retained earnings...................................... 355,590 317,264
---------- ----------
Total stockholder's equity........................... 418,426 383,734
---------- ----------
Total liabilities and stockholder's equity........... $2,913,746 $2,681,823
========== ==========
</TABLE>
See accompanying notes.
F-2
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
---------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Revenues:
Premiums:
Life and annuity.............................. $170,494 $154,602 $142,461
Health........................................ 27,199 43,518 60,491
Other insurance considerations.................. 37,599 37,928 38,780
Net investment income (Note 3).................. 181,528 167,958 146,564
Realized gains, net (Note 3).................... 10,556 5,121 5,906
Other income.................................... 44,123 35,941 26,802
-------- -------- --------
Total revenues.............................. 471,499 445,068 421,004
Benefits and expenses:
Life and annuity benefits....................... 144,979 126,345 122,915
Health benefits................................. 15,547 27,812 42,224
Increase in policy liabilities including
interest credited to account balances.......... 101,650 104,581 94,530
Commissions..................................... 51,881 53,622 55,180
(Increase) decrease in deferred policy
acquisition costs.............................. 11,271 (1,229) (5,459)
Taxes, licenses and fees........................ 3,739 4,654 5,229
Other operating costs and expenses.............. 87,301 90,562 78,133
-------- -------- --------
Total benefits and expenses................. 416,368 406,347 392,752
-------- -------- --------
Income from continuing operations before income
tax expense...................................... 55,131 38,721 28,252
Income tax expense (Note 7)....................... 16,805 2,532 10,168
-------- -------- --------
Income from continuing operations................. 38,326 36,189 18,084
Discontinued operations (Note 12):
Gain on sale of discontinued operations, net of
income tax expense of $735 in 1996............. -- -- 1,416
-------- -------- --------
Income from discontinued operations............... -- -- 1,416
-------- -------- --------
Net income.................................. $ 38,326 $ 36,189 $ 19,500
======== ======== ========
</TABLE>
See accompanying notes.
F-3
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A Member of the Generali Group of Companies)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year ended December 31
-------------------------
1998 1997 1996
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Net income.......................................... $38,326 $36,189 $19,500
Other comprehensive income:
Unrealized holding gains (losses) arising during
period........................................... 2,597 25,009 (21,346)
Less realized gains included in net income........ 6,760 1,868 7,851
------- ------- -------
Net unrealized gains (losses)................... (4,163) 23,141 (29,197)
Effect on deferred policy acquisition costs......... (1,483) (7,189) 13,418
Effect on unearned revenue reserve.................. 55 474 (2,082)
Deferred income taxes............................... 1,957 (5,748) 6,250
------- ------- -------
Other comprehensive income.......................... (3,634) 10,678 (11,611)
------- ------- -------
Comprehensive income............................ $34,692 $46,867 $ 7,889
======= ======= =======
</TABLE>
See accompanying notes.
F-4
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
---------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Common stock:
Balance at beginning and end of year............. $ 12,000 $ 12,000 $ 12,000
Paid-in capital:
Balance at beginning of year..................... 40,106 40,106 25,106
Additional paid-in capital..................... -- -- 15,000
-------- -------- --------
Balance at end of year........................... 40,106 40,106 40,106
Accumulated other comprehensive income:
Balance at beginning of year..................... 14,364 3,686 15,297
Change in net unrealized gains (losses)........ (3,634) 10,678 (11,611)
-------- -------- --------
Balance at end of year........................... 10,730 14,364 3,686
Retained earnings:
Balance at beginning of year..................... 317,264 281,075 266,575
Net income..................................... 38,326 36,189 19,500
Dividends declared (Note 2).................... -- -- (5,000)
-------- -------- --------
Balance at end of year........................... 355,590 317,264 281,075
-------- -------- --------
Total stockholder's equity......................... $418,426 $383,734 $336,867
======== ======== ========
</TABLE>
See accompanying notes.
F-5
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
-------------------------------
1998 1997 1996
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Operating activities
Net income.................................... $ 38,326 $ 36,189 $ 19,500
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred income tax (benefit)............... 363 (8,416) 4,146
Realized gains, net......................... (10,556) (5,121) (5,906)
Gain on disposal of discontinued segment.... -- -- (2,151)
Discount accretion, net..................... (1,618) (975) (1,246)
Policy loans lapsed in lieu of surrender
benefits................................... 3,740 1,021 2,996
Depreciation................................ 2,524 3,778 4,153
Amortization................................ 782 782 782
Changes in assets and liabilities:
(Increase) decrease in accrued investment
income.................................... 442 19 (1,392)
(Increase) decrease in receivables and
reinsurance recoverables.................. (24,876) (15,425) 2,761
Policy acquisition costs deferred.......... (22,484) (28,449) (31,745)
Policy acquisition costs amortized......... 33,755 27,220 26,286
Increase (decrease) in income taxes
payable................................... 142 (2,187) 5,518
Increase in accrued policy benefits, claim
reserves, unearned revenues and
policyholder funds........................ 19,189 30,777 32,331
Interest credited to policyholder accounts. 77,358 79,312 69,494
Increase (decrease) in outstanding checks
in excess of bank balances................ (2,669) (2,004) 805
Decrease in other assets and other
liabilities, net.......................... 2,344 7,269 412
Other, net................................... 19 (433) (1,208)
--------- --------- ---------
Net cash provided by operating activities..... 116,781 123,357 125,536
Investing activities
Purchases of investments:
Securities available-for-sale:
Fixed maturities........................... (603,142) (464,419) (527,172)
Equity securities.......................... (12,969) (31,625) (17,586)
Mortgage and policy loans.................... (310,127) (237,990) (259,438)
Other........................................ (41,118) -- --
Sales, calls or maturities of investments:
Maturities and calls of securities
available-for-sale:
Fixed maturities........................... 305,013 167,000 117,057
Sales of securities available-for-sale:
Fixed maturities........................... 360,296 284,124 238,051
Equity securities.......................... 22,632 14,379 12,444
Mortgage and policy loans.................... 277,325 98,554 66,934
Real estate.................................. -- 5,854 2,194
Purchase of property, equipment and software.. (1,805) (1,949) (290)
Net (increase) decrease in short-term
investments.................................. 8,692 (7,516) 36,272
Proceeds from sale of discontinued operations. -- -- 632
Distributions from unconsolidated related
parties...................................... 1,466 1,514 718
--------- --------- ---------
Net cash provided by (used in) investing
activities................................... 6,263 (172,074) (330,184)
Financing activities
Dividends paid................................ -- -- (5,000)
Additional paid-in capital.................... -- -- 15,000
Deposits from interest sensitive and
investment-type contracts.................... 245,620 323,487 381,865
Withdrawals from interest sensitive and
investment-type contracts.................... (375,459) (295,633) (187,217)
Net proceeds from reverse repurchase
borrowing.................................... 30,189 40,925 35,173
Retirement of reverse repurchase borrowing.... (20,863) (20,062) (35,173)
--------- --------- ---------
Net cash provided by (used in) financing
activities................................... (120,513) 48,717 204,648
--------- --------- ---------
Net increase in cash.......................... 2,531 -- --
Cash at beginning of year..................... -- -- --
--------- --------- ---------
Cash at end of year........................... $ 2,531 $ -- $ --
========= ========= =========
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................................. $ 16,300 $ 13,135 $ 1,239
========= ========= =========
Interest paid on reverse repurchase
borrowing................................... $ 299 $ 369 $ 620
========= ========= =========
Supplemental schedule of noncash investing and
financing activities
Real estate acquired through foreclosure...... $ -- $ 1,236 $ 3,033
========= ========= =========
</TABLE>
See accompanying notes.
F-6
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A Member of the Generali Group of Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 accumulated other
comprehensive 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,
1998 and 1997, no real estate was owned. Profit is recognized on real estate
sales when down payment, continuing investment and transfer of risk criteria
have been satisfied. Property, equipment and software, and the home office
building are generally valued at cost, including development costs, less
allowances for depreciation and other than temporary decline in value.
Property, equipment and software are being depreciated over the estimated
useful lives of the assets, principally on a straight-line basis. Depreciation
rates on these assets are set forth in Note 6.
Realized gains and losses on sales of investments and declines in value
considered to be other than temporary are recognized in net earnings on the
specific identification basis.
Impairment of Loans
Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (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.
F-7
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A Member of the Generali Group of Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 policy issue 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.
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.
F-8
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A Member of the Generali Group of Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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, 1998 and 1997 was $30,262,000 and $47,211,000,
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 (See Note 7). Temporary differences are principally related to
deferred policy acquisition costs, the provision for future policy benefits,
accrual of discounts on investments, accrued expenses, accelerated depreciation
and unrealized investment gains and losses.
Separate Accounts
These accounts arise from four lines of business--variable annuities,
variable universal life, variable 401(k) 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.
The assets and liabilities of the variable lines 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 policyowners and are, therefore, not
included in investment earnings in the accompanying consolidated statements 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 lines of business totaled $3,409,000 on
December 31, 1998 and $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 accumulated other comprehensive income.
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 statements of operations. The guaranteed interest
payable
F-9
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A Member of the Generali Group of Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
is included in the increase in policy liabilities in the accompanying
consolidated statements of operations. Separate account assets and liabilities
for the MBIA GIC line of business totaled $296,957,000 on December 31, 1998 and
$76,934,000 on December 31, 1997.
Intangible Assets
At December 31, 1998, goodwill of $11,541,000 (1997--$12,323,000), net of
accumulated amortization of $4,107,000 (1997--$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, 1998, 1997 and
1996.
Fair Values of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheets, 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, 1998 December 31, 1997
--------------------- ---------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Fixed maturities (Note 3).......... $1,277,121 $1,277,121 $1,326,018 $1,326,018
Equity securities (Note 3)......... 43,373 40,373 57,806 57,806
Mortgage loans..................... 875,117 934,712 842,149 867,552
Policy loans....................... 59,780 55,579 62,207 57,491
Short-term investments............. 38,815 38,815 47,507 47,507
Cash............................... 2,531 2,531 -- --
Reinsurance recoverables:
Paid benefits.................... 6,549 6,549 6,588 6,588
Benefits and claim reserves...... 95,476 95,476 72,000 72,000
Assets held in separate accounts... 300,366 302,549 76,964 77,061
Investment-type insurance contracts
(Note 4).......................... 1,456,634 1,453,909 1,277,362 1,256,129
</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 sheets for these instruments approximate their fair values.
Investment securities: Fair values for fixed maturity securities are based
on quoted market prices, where available. For fixed maturity securities not
actively traded, fair values are estimated using values obtained from
independent pricing services or, in the case of private placements, by
discounting expected future cash flows using a current market rate applicable to
the yield, credit quality and maturity of the investments. The fair value for
equity securities is based on quoted market prices.
F-10
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A Member of the Generali Group of Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Reinsurance recoverables: The carrying values of reinsurance recoverables
approximate their fair values.
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.
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.
The Company has entered into interest rate swap contracts for the purpose of
converting either the variable interest rate characteristics of certain
investments to fixed rates or from fixed rates to variable rates. The purpose of
these swaps is to better match the invested assets of the Company with 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 was $40,000,000 at December 31, 1998 and $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.
Accounting Changes
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this statement
had no impact on the Company's net income or stockholder's equity.
SFAS No. 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in equity, to be included in other comprehensive income. Prior year consolidated
financial statements have been reclassified to conform to the requirements of
SFAS No. 130.
SFAS No. 132, "Employer's Disclosures about Pension and Other
Postretirement Benefits," enhances disclosure requirements from previously
adopted SFAS Nos. 87 and 106. This standard has no financial impact and was
adopted at year end 1998.
Reclassification
Certain amounts for 1997 and 1996 have been reclassified to conform to the
current year presentation.
F-11
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A Member of the Generali Group of Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1998 and 1997, the Company's statutory stockholder's
equity was $226,345,000 and $188,193,000, respectively. Statutory net gain from
operations and net income for each of the three years in the period ended
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------
1998 1997 1996
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Net gain from operations......................... $36,305 $18,545 $10,898
Net income....................................... 44,692 14,540 10,381
</TABLE>
3. Investment Operations
The Company's investments in securities are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Treasury securities and
obligations of U.S.
government corporations and
agencies..................... $ 83,444 $ 1,848 $ (159) $ 85,133
Obligations of states and
political subdivisions 27,093 2,160 -- 29,253
Debt securities issued by
foreign governments 4,416 82 (24) 4,474
Corporate securities.......... 411,490 12,676 (2,877) 421,289
Mortgage-backed securities.... 712,853 9,028 (3,833) 718,048
Redeemable preferred stocks... 18,409 524 (9) 18,924
---------- ------- ------- ----------
Total........................... 1,257,705 26,318 (6,902) 1,277,121
Equity securities............... 36,214 5,981 (1,822) 40,373
---------- ------- ------- ----------
$1,293,919 $32,299 $(8,724) $1,317,494
========== ======= ======= ==========
</TABLE>
F-12
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A Member of the Generali Group of Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Treasury securities and
obligations of U.S.
government corporations and
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
========== ======= ======= ==========
<CAPTION>
</TABLE>
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1998, 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............................ $ 8,022 $ 8,120
Due after one year through five years.............. 194,668 199,802
Due after five years through 10 years.............. 221,128 228,871
Due after 10 years................................. 121,034 122,280
---------- ----------
544,852 559,073
Mortgage-backed securities......................... 712,853 718,048
---------- ----------
Total fixed maturity securities.................... $1,257,705 $1,277,121
========== ==========
</TABLE>
F-13
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A Member of the Generali Group of Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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
-----------------
1998 1997
-------- --------
(In Thousands)
<S> <C> <C>
State:
California............................................ $ 69,913 $ 71,675
Arizona............................................... 65,135 65,030
Missouri.............................................. 62,462 51,839
Texas................................................. 59,900 60,821
Florida............................................... 49,789 42,549
Utah.................................................. 44,110 37,821
Kansas................................................ 38,509 34,267
Oklahoma.............................................. 38,394 47,569
Washington............................................ 38,136 39,824
Other................................................. 408,769 390,754
-------- --------
$875,117 $842,149
======== ========
</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>
1998 1997 1996
---- ------ ------
(In Thousands)
<S> <C> <C> <C>
Impaired mortgage loans............................... $-- $1,069 $2,516
Allowance for credit losses........................... -- 244 691
---- ------ ------
Net recorded investment in impaired loans............. $-- $ 825 $1,825
==== ====== ======
Average recorded investment in impaired loans......... $413 $1,325 $2,667
==== ====== ======
Interest income on impaired loans..................... $-- $ 57 $ 115
==== ====== ======
</TABLE>
Bonds, mortgage loans, preferred stocks and common stocks approximating
$4,900,000 and $4,600,000 were on deposit with regulatory authorities at
December 31, 1998 and 1997, respectively.
F-14
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A Member of the Generali Group of Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Set forth below is a summary of consolidated net investment income for the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Fixed maturities:
Bonds....................................... $ 94,975 $ 92,741 $ 86,066
Redeemable preferred stocks................. 1,603 1,309 814
Equity securities:
Common stocks............................... 702 793 579
Nonredeemable preferred stocks.............. 237 541 438
Mortgage loans on real estate................. 75,768 66,053 52,973
Real estate................................... 18 612 935
Policy loans.................................. 3,667 3,906 3,953
Short-term investments........................ 4,334 2,955 3,016
Other......................................... 2,685 1,223 269
-------- -------- --------
183,989 170,133 149,043
Less:
Investment expenses......................... 2,461 2,175 2,479
-------- -------- --------
Net investment income from continuing
operations................................... $181,528 $167,958 $146,564
======== ======== ========
</TABLE>
Realized gains (losses) on securities disposed of during 1998, 1997 and
1996 consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Fixed maturity securities:
Gross realized gains....................... $ 5,149 $10,499 $ 7,953
Gross realized losses...................... (1,420) (4,690) (1,622)
Equity securities:
Gross realized gains....................... 7,395 3,204 2,001
Gross realized losses...................... (1,636) (777) --
Other investments............................ 1,068 (3,115) (2,426)
------- ------- -------
Net realized gains........................... $10,556 $ 5,121 $ 5,906
======= ======= =======
</TABLE>
Sales of investments in securities in 1998, 1997 and 1996, excluding
maturities and calls, resulted in gross realized gains of $10,980,000,
$8,362,000 and $9,798,800 and gross realized losses of $2,304,500, $1,017,000
and $1,290,500 respectively.
There were no nonincome producing investments at December 31, 1998 and
1997.
The Company began investing in the Cypress Tree Investment Fund LLC during
1998. The Company has invested $40 million in the partnership, which primarily
invests in senior secured loans. The Company's portion of the investment is
approximately 43% of the total fund value at December 31, 1998 and has been
recorded under the guidelines of equity accounting. This investment is
classified in other investments on the balance sheets, with unrealized gains and
losses being reflected in accumulated other comprehensive income.
F-15
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A Member of the Generali Group of Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Investment Contracts
The carrying amounts and fair values of the Company's liabilities for
investment-type insurance contracts (included with future policy benefits,
contract account balances and separate accounts in the balance sheets) at
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Guaranteed investment
contracts................... $ 640,137 $ 651,809 $ 660,782 $ 662,281
Flexible and single premium
deferred annuities.......... 516,131 495,873 539,616 516,343
Separate accounts............ 300,366 306,227 76,964 77,505
---------- ---------- ---------- ----------
Total investment-type
insurance contracts......... $1,456,634 $1,453,909 $1,277,362 $1,256,129
========== ========== ========== ==========
</TABLE>
Fair values of the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
5. Commitments and Contingencies
The Company leases equipment and certain office facilities from others
under operating leases through 2003. Certain other equipment and facilities are
rented monthly. Rental expense amounted to $1,364,000, $2,137,000 and $2,117,000
for the years ended December 31, 1998, 1997 and 1996, respectively. As of
December 31, 1998, the minimum future payments under noncancelable operating
leases for each of the next five years are as follows (in thousands):
<TABLE>
<S> <C>
1999.............................. $ 901
2000.............................. 622
2001.............................. 504
2002.............................. 265
2003.............................. 58
------
Total........................... $2,350
======
</TABLE>
Total outstanding commitments to fund mortgage loans were $32,275,000 and
$74,496,000 at December 31, 1998 and 1997, 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, these matters will not have a materially adverse effect on the
operations or financial position of the Company.
F-16
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A Member of the Generali Group of Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 1998 1997
------------ -------- --------
(In Thousands)
<S> <C> <C> <C>
Home office building, including land
with a cost of $425,000............... 2% $ 23,158 $ 23,158
Other real estate not held-for-sale or
rental................................ 4% 820 973
Less accumulated depreciation.......... (13,097) (12,530)
-------- --------
10,881 11,601
Equipment and software................. 5%-33% 21,701 23,937
Less accumulated depreciation.......... (16,306) (18,785)
-------- --------
5,395 5,152
-------- --------
Total property, equipment and software. $ 16,276 $ 16,753
======== ========
</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>
1998 1997 1996
------- -------- -------
(In Thousands)
<S> <C> <C> <C>
Current............................................ $16,442 $ 10,948 $ 6,757
Deferred:
Deferred policy acquisition costs................ (3,385) 143 1,322
Future policy benefits........................... 6,620 3,783 2,424
Accrual of discount.............................. 560 197 408
Tax on realized gains greater than book.......... (1,610) 571 (1,076)
Recognition of tax effect previously deferred on
sale of affiliate stock in prior period......... (1,311) (11,169) --
Employee benefit plans........................... (2,014) (2,206) 86
Prior year taxes................................. 1,018 -- --
Other, net....................................... 485 265 982
------- -------- -------
363 (8,416) 4,146
------- -------- -------
Total.............................................. 16,805 2,532 10,903
Less taxes from discontinued operations:
Current.......................................... -- -- (149)
Deferred......................................... -- -- 884
------- -------- -------
-- -- 735
------- -------- -------
Total taxes from continuing operations............. $16,805 $ 2,532 $10,168
======= ======== =======
</TABLE>
The Company did not record any valuation allowances against deferred tax
assets at December 31, 1998, 1997 or 1996.
F-17
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A Member of the Generali Group of Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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>
1998 1997 1996
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Application of statutory rate to income before
taxes on income.............................. $19,296 $13,552 $ 9,888
Tax-exempt municipal bond interest and
dividends received deductions................ (287) (361) (291)
Recognition of tax effect previously deferred
on sale of affiliate stock in a prior period. (1,311) (11,169) --
Other......................................... (893) 510 571
------- ------- -------
$16,805 $ 2,532 $10,168
======= ======= =======
</TABLE>
The significant components comprising the Company's deferred tax assets and
liabilities as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In Thousands)
<S> <C> <C>
Deferred tax liabilities:
Deferred acquisition costs............................. $26,340 $29,641
Unrealized investment gains and losses................. 5,778 7,735
Other.................................................. 9,860 9,655
------- -------
Total deferred tax liability............................. 41,978 47,031
Deferred tax assets:
Reserve for future policy benefits..................... 15,093 21,411
Accrued expenses....................................... 10,969 8,504
Other.................................................. 5,266 4,872
------- -------
Total deferred tax assets................................ 31,328 34,787
------- -------
Net deferred tax liability............................... $10,650 $12,244
======= =======
</TABLE>
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 $278,000,000 at December 31,
1998.
F-18
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A Member of the Generali Group of Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Benefit Plans
Trusteed Employee Retirement 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 1998, approximately $3.1 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 following table sets forth the plan's funded status at December 31:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In Thousands)
<S> <C> <C>
Change in benefit obligations:
Benefit obligation at beginning of year.............. $62,683 $57,187
Service cost......................................... 1,873 1,767
Interest cost........................................ 4,557 4,374
Plan participants' contributions..................... 1 1
Amendments........................................... -- 118
Actuarial losses..................................... 1,249 3,627
Benefits paid........................................ (3,419) (4,391)
------- -------
Benefit obligation at end of year...................... 66,944 62,683
Change in plan assets:
Fair value of plan assets at beginning of year....... 85,605 79,679
Actual return on plan assets......................... 12,988 10,316
Plan participant's contributions..................... 1 1
Benefits paid........................................ (3,419) (4,391)
------- -------
Fair value of plan assets at end of year............... 95,175 85,605
------- -------
Funded status of the plan.............................. 28,231 22,922
Unrecognized net actuarial loss........................ (26,877) (23,519)
Unrecognized prior service cost........................ 1,342 2,034
Unrecognized net asset at January 1, 1987 being
recognized over 15 years.............................. (883) (1,177)
Adjustment to recognized minimum liability............. (2) (50)
------- -------
Prepaid pension cost................................... $ 1,811 $ 210
======= =======
</TABLE>
F-19
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A Member of the Generali Group of Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The additional minimum pension liability noted above results from the
pension plan for the Company's subsidiary, BMA Financial Services, Inc.
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
(In Thousands)
<S> <C> <C> <C>
Net pension cost included the following components:
Service cost--benefits earned during the period.... $ 1,873 $ 1,767 $1,797
Interest cost on projected benefit obligation...... 4,557 4,374 4,195
Actual return on plan assets....................... (12,988) (10,316) (9,745)
Net amortization and deferral...................... 5,005 2,812 3,102
------- ------- ------
Net pension benefit.................................. $(1,553) $(1,363) $ (651)
======= ======= ======
</TABLE>
In determining the actuarial present value of the projected benefit
obligation, the weighted-average discount rate utilized was 7% for 1998, 7.5%
for 1997 and 8% for 1996. The rate of increase in future compensation levels
used for 1998 was 7% for employees at the younger attained ages grading to 3%
for older employees, the rate was 5% for 1997 and 5.5% for 1996. The expected
long-term rate of return on assets was 8% in 1998, 1997 and 1996.
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.
F-20
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A Member of the Generali Group of Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the combined supplemental retirement
programs' and deferred compensation plan's funded status at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In Thousands)
<S> <C> <C>
Change in benefit obligations:
Benefit obligation at beginning of year............ $ 11,281 $ 10,179
Service cost....................................... 235 190
Interest cost...................................... 813 783
Actuarial losses................................... 1,085 1,050
Benefits paid...................................... (902) (921)
-------- --------
Benefit obligation at end of year.................... 12,512 11,281
Change in plan assets:
Fair value of plan assets at beginning and end of
year.............................................. -- --
-------- --------
Funded status of the plan (underfunded).............. (12,512) (11,281)
Unrecognized net actuarial loss...................... 3,164 2,260
Unrecognized prior service cost...................... 659 888
Unrecognized net asset at January 1, 1987 being
recognized over 15 years............................ 389 519
Adjustment to recognized minimum liability........... (2,789) (2,486)
-------- --------
Accrued pension cost................................. (11,089) (10,100)
Accrued benefit liability............................ 10,041 8,653
Intangible asset..................................... 1,048 1,447
-------- --------
Net amount recognized................................ $ -- $ --
======== ========
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Net pension cost included the following
components:
Service cost--benefits earned during the period. $ 235 $ 190 $ 189
Interest cost on projected benefit obligation... 813 783 761
Net amortization and deferral................... 541 469 513
------ ------ ------
Net pension cost.................................. $1,589 $1,442 $1,463
====== ====== ======
</TABLE>
In determining the actuarial present value of the projected benefit
obligation, the weighted-average discount rate utilized was 7% for 1998, 7.5%
for 1997 and 8% for 1996. The rate of increase in future compensation levels
used was 4.5% for 1998, 5% for 1997 and 5.5% for 1996.
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 $1,153,000 in 1998, $1,099,000 in 1997 and $1,284,000 in 1996. Participants
are fully vested in the Company match after five years of service.
F-21
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A Member of the Generali Group of Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
$33,000 in 1998, $230,000 in 1997 and $225,000 in 1996.
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.
The following table presents the plan's funded status at December 31:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In Thousands)
<S> <C> <C>
Change in benefit obligations:
Projected benefit obligation at beginning of year.... $11,490 $12,253
Service cost......................................... 108 122
Interest cost........................................ 777 878
Amendments........................................... -- (793)
Actuarial losses..................................... 260 143
Benefits paid........................................ (1,234) (1,113)
------- -------
Projected benefit obligation at end of year............ 11,401 11,490
Change in plan assets:
Fair value of plan assets at beginning and end of
year................................................ -- --
------- -------
Funded status of the plan (underfunded)................ (11,401) (11,490)
Unrecognized net actuarial loss........................ 529 268
Unrecognized prior service cost........................ 2,215 2,808
Unrecognized transition obligation..................... 4,107 4,873
------- -------
Accrued pension cost................................... (4,550) (3,541)
Accrued benefit liability.............................. 4,550 3,541
------- -------
Net amount recognized.................................. $ -- $ --
======= =======
</TABLE>
F-22
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A Member of the Generali Group of Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net periodic postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Service cost........................................ $ 108 $ 122 $ 118
Interest cost....................................... 777 878 867
Amortization of transition obligation over 20 years. 293 327 327
Amortization of past service costs.................. 295 407 407
------ ------ ------
Net periodic benefit cost........................... 1,473 1,734 1,719
Plan curtailment adjustment......................... 770 -- --
------ ------ ------
Final periodic postretirement benefit cost.......... $2,243 $1,734 $1,719
====== ====== ======
</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.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7%, 7.25% and 7.5% at December 31, 1998,
1997 and 1996, respectively.
As part of the restatement of the 1998 net periodic postretirement benefit
cost, a curtailment loss was recognized. The curtailment resulted from closing
certain field locations in March 1998.
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>
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Direct...................................... $118,315 $118,192 $124,912
Assumed..................................... 152,844 134,541 116,154
Ceded....................................... (73,466) (54,613) (38,114)
-------- -------- --------
Total net premium........................... $197,693 $198,120 $202,952
======== ======== ========
</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, $1,000,000 on individual
life insurance assumed and $200,000 on an individual life insured under a single
group life policy. As of December 31, 1998, the Company had ceded to other life
insurance companies individual life insurance in force of approximately $29.6
billion and group life of approximately $890 million.
Benefits and reserves ceded to other insurers amounted to $54,670,000,
$42,069,000 and $28,132,000 during the years ended December 31, 1998, 1997 and
1996, respectively. At December 31, 1998 and 1997, policy reserves ceded to
other insurers were $77,460,000 and $55,568,000, respectively. Claim reserves
ceded amounted to $18,016,000 and $16,432,000 at December 31, 1998 and 1997,
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.
F-23
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A Member of the Generali Group of Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 1998, 1997 or 1996.
The Company retrocedes a portion of the life insurance it assumes to Generali.
In accordance with this agreement, the Company ceded premiums of $756,000,
$873,000 and $1,035,000 during 1998, 1997 and 1996, respectively. The Company
ceded claims of $240,000 during 1998 and no claims during 1997 or 1996.
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, $8 million, $35 million and $60
million in account balances were ceded to Generali in 1998, 1997 and 1996,
respectively, and Generali loaned such amounts back to the Company. Account
balances ceded and loaned back at December 31, 1998 and 1997 were $196 million
and $213 million, respectively. The recoverable amount from Generali was offset
against the loan. The net expense related to this agreement was $1,564,000,
$1,895,000 and $1,344,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. The Company held payables to Generali of $771,000 and $799,000 at
December 31, 1998 and 1997, respectively.
11. Stockholder's Equity
The changes in net unrealized gains (losses) that have been included in the
balance sheet caption "other accumulated comprehensive income" in stockholder's
equity are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In Thousands)
<S> <C> <C>
Net unrealized gains (losses) on securities:
Fixed maturities...................................... $19,416 $17,560
Equity securities..................................... 4,159 10,999
Securities held in separate account................... 1,593 334
Other................................................. (438) --
------- -------
Net unrealized gains.................................... 24,730 28,893
Adjustment to deferred policy acquisition costs......... (8,707) (7,224)
Adjustment to unearned revenue reserve.................. 485 430
Deferred income taxes................................... (5,778) (7,735)
------- -------
Net unrealized gains.................................... $10,730 $14,364
======= =======
</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 year ended 1996 and the consolidated financial
statements reported separately the net assets and operating results of the
discontinued operations.
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
consolidated financial statements. The agreement provided for the reinsurance of
substantially all of the Company's remaining group and individual medical
business through the renewal dates of the related contracts. Under the
agreement, the Company continued to remain primarily liable for claims, billing
and receipts through the next anniversary dates of the policies reinsured. The
estimated gain on disposal of this 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.
F-24
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
(A Member of the Generali Group of Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Impact of Year 2000 (Unaudited)
The Company continues to monitor the potential impact of the year 2000 on
its systems and that of its primary vendors and business partners. This
assessment extends to both informational technology systems and noninformation
technology systems. All identified modifications to critical operating systems
have been completed as of December 31, 1998, and the Company continues to
validate completed systems to ensure ongoing compliance. Contingency plans are
being developed and management estimates that these plans will be completed by
mid 1999, which is prior to any anticipated impact on its operating systems.
Total costs of the modifications have been immaterial to the Company's
operations and have been expensed as incurred.
The Company does face the risk that one or more of its critical suppliers
or customers (external relationships) will not be able to interact with the
Company due to the third parties' inability to resolve their own year 2000
issues. The Company is actively monitoring the compliance programs of those
third parties, and formal communication has been initiated with all major
outside service providers. However, the Company is unable to predict with
certainty to what extent its external relationships will be year 2000 ready.
The forecast costs, consequences of the year 2000 problem and the dates on
which the Company believes it will complete its various year 2000 computer
modifications are based on its best estimates, which, in turn, were based on
numerous assumptions of future events, including third-party modification and
compliance plans, continued availability of resources and other factors. The
Company cannot be sure that these estimates will be achieved or that the
assumptions are accurate, and actual results could differ materially from those
anticipated.
F-25
