<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
---------------------
Securities and Exchange Commission File No. 812-06037
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
22-2265014
(I.R.S. Employer Identification No.)
116 Huntington Avenue
Boston, Massachusetts 02116
(Address of principal executive offices)
(617) 266-6008
(Registrant's telephone number, including area code)
---------------------
Indicated by check market whether the registrant (1) has filed reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's sole class of common stock, as
of April 15, 1997 was 2,600.
<PAGE> 2
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
Quarterly Report on Form 10-Q
For the period ended March 31, 1997
Table of Contents
- --------------------------------------------------------------------------------
Page
Part I Financial Information 3
Item 1. Financial Statements 3
Balance Sheets as of March 31, 1997 and December 31, 1996 3
Statements of Operations for the three months ended 4
March 31, 1997 and 1996
Statement of Changes in Capital and Deficit for the 5
three months ended March 31, 1997
Statements of Cash Flows for the three months ended 6
March 31, 1997 and 1996
Notes to the Financial Statements 7
Item 2. Management Discussion and Analysis of Results of 9
Operations and Financial Condition
Part II Other Information 10
Item 1. Legal Proceedings 10
Item 2. Change in Securities 10
Item 3. Default upon Senior Securities 10
Item 4. Submission of matters to a vote of Security Holders 10
Item 5. Other Information 10
Item 6A. Exhibits 10
Item 6B. Reports on Form 8-K 12
2
<PAGE> 3
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NAWL HOLDING COMPANY, INC.)
Balance Sheets - Statutory Basis
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Investments
Bonds $ 13,778,692 $ 13,848,316
Real estate -- 2,268,120
Common stock 31,344,381 30,305,498
Policy loans 628,406 454,026
Cash and short-term investments 3,299,929 7,321,515
-------------- --------------
Total investments 49,051,408 54,197,475
Accrued investment income 309,135 278,106
Other assets 3,167,246 4,008,003
Separate account assets 6,626,114,054 6,459,289,860
-------------- --------------
Total assets 6,678,641,843 6,517,773,444
============== ==============
LIABILITIES
Aggregate reserves 4,079,501 3,674,617
Transfers from separate account, net (188,422,611) (188,238,440)
Borrowed money 138,593,399 138,200,680
Accrued interest on surplus note 1,991,232 1,591,232
Payable to Parent 828,933 405,711
Funds held account from reinsurers 6,000,000 6,000,000
Asset valuation reserve 2,340,723 2,089,490
Bank overdraft 6,213,687 7,598,444
Amounts payable on reinsurance ceded 2,834,352 8,122,060
Other liabilities 12,061,746 9,486,084
Separate account liabilities 6,626,114,054 6,459,289,860
-------------- --------------
Total liabilities 6,612,635,016 6,448,219,738
============== ==============
Capital and deficit:
Surplus note payable to Parent 20,000,000 20,000,000
Common stock (Shares authorized: 3,000;
issued and outstanding 2,600;
par value $1,000) 2,600,000 2,600,000
Paid-in capital in excess of par value 128,633,000 128,633,000
Unassigned deficit (85,226,173) (81,679,294)
-------------- --------------
Total capital and deficit 66,006,827 69,553,706
Total liabilities, capital -------------- --------------
and deficit $6,678,641,843 $6,517,773,444
============== ==============
</TABLE>
3
<PAGE> 4
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NAWL HOLDING COMPANY, INC.)
Statements of Operations - Statutory Basis
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
---- ----
<S> <C> <C>
Revenues:
Annuity considerations and deposits $320,426,572 $249,185,414
Net investment income 1,344,502 1,478,132
Commissions and expense allowances on reinsurance ceded 5,662,810 5,852,743
Experience refund on reinsurance ceded 414,607 821,735
Reserve adjustments on reinsurance (15,134,972) (3,929,600)
------------ ------------
Total revenues 312,713,519 253,408,424
Expenses:
Annuity benefits 124,998,402 86,700,819
Increase in reserves 407,947 145,854
Increase in separate account liability 154,171,446 133,464,396
Commissions 22,077,955 19,281,917
General expenses 8,287,709 6,325,585
Interest expense 2,446,896 2,195,612
Recapture fee on reinsurance ceded 1,836,364 6,123,157
Reinsurance premium 1,071,212 392,810
------------ ------------
Total expenses 315,297,931 254,630,150
Loss before realized capital losses (2,584,412) (1,221,726)
Realized capital (gain) losses (2,136,679) 104,554
------------ ------------
Net loss $ (4,721,091) $ (1,117,172)
============ ============
</TABLE>
4
<PAGE> 5
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NAWL HOLDING COMPANY, INC.)
Statement of Changes in Capital and Deficit - Statutory Basis
(Unaudited)
<TABLE>
<CAPTION>
Paid-In Capital
Common in Excess of Unassigned Total Capital
Surplus Note Stock Par Value Deficit and Deficit
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at - January 1, 1996 $20,000,000 $2,600,000 $128,633,000 $(81,679,294) $69,553,706
Net loss (4,721,091) (4,721,091)
Change in net unrealized
capital losses 2,136,679 2,136,679
Change in asset valuation reserve (251,233) (251,233)
Increase in non-admitted assets 108,766 108,766
Initial commission allowance on
reinsurance ceded (820,000) (820,000)
--------------------------------------------------------------------------
Balances at March 31, 1997 $20,000,000 $2,600,000 $128,633,000 $(85,226,173) $66,006,827
==========================================================================
</TABLE>
5
<PAGE> 6
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
NAWL HOLDING COMPANY INC.)
Statements of Cash Flows - Statutory Basis
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31,
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Annuity considerations and deposits $ 320,426,572 $ 249,185,414
Allowances & reserve adjustments on reinsurance ceded (9,472,162) 1,923,143
Net investment income 283,127 185,066
Experience refund on reinsurance ceded 414,607 821,735
Surrender benefits and other fund withdrawals paid (109,924,414) (77,742,951)
Other benefits paid to policyholders (13,284,809) (9,508,315)
Commissions, other expenses & taxes paid (29,783,116) (26,091,766)
Net transfers to separate account (154,831,351) (141,586,241)
Other operating expenses paid (4,878,738) (8,711,579)
------------- -------------
Net cash used by operating activities (1,050,284) (11,525,494)
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Bonds 52,018 6,964,889
Stocks -- 5,292,561
Real estate 2,268,120 961,565
Cost of investments acquired:
Bonds -- (552,406)
Stocks -- (5,006,983)
Policy loans (174,380) --
------------- -------------
Net cash provided by investing activities 2,145,758 7,659,626
------------- -------------
OTHER CASH PROVIDED (APPLIED):
Borrowed money 635,498 15,845,617
Other sources 2,101,387 1,422,738
Other applications (7,853,945) (11,173,202)
------------- -------------
Net other cash provided (used) (5,117,060) 6,095,153
------------- -------------
Net change in cash and short-term investments (4,021,586) 2,229,285
Cash and short-term investments, beginning of period 7,321,515 1,797,230
------------- -------------
Cash and short-term investments, end of period $ 3,299,929 $ 4,026,515
============= =============
</TABLE>
6
<PAGE> 7
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
UNAUDITED
---------
The accompanying unaudited financial statements of North American Security Life
Insurance Company (the "Company"), include all adjustments, consisting of normal
recurring accruals, that the Company's management considers necessary for a fair
presentation of the Company's financial position and results of operations as of
and for the interim periods presented. The Company believes the disclosures in
these financials are adequate to present fairly the information contained
herein. These financial statements should be read in conjunction with the
audited financial statements contained in the Company's annual report on Form
10-K. The results of operations for the three months ended March 31, 1997 are
not necessarily indicative of the results to be expected for the full year.
Financial results have been prepared on the basis of statutory accounting
practices which until December 31, 1995, were considered by the insurance
industry to be in accordance with generally accepted accounting principles
(GAAP) for mutual life insurance companies and their wholly-owned subsidiaries.
Commencing January 1, 1996, financial statements prepared on the basis of
statutory accounting practices will no longer be considered in accordance with
GAAP. Since the Company has yet to complete its conversion to GAAP, the
accompanying statements were prepared on the statutory basis of accounting.
Subsequent event
- ----------------
NASL Financial Services, Inc. ("NASL Financial"), the investment adviser to the
North American Funds (the "Fund"), and its parent, North American Security Life
Insurance Company, have signed a binding letter of intent with CypressTree
Investments, Inc. ("Cypress") pursuant to which it is expected that Cypress will
purchase a portion of NASL Financial's business relating to the rendering of
investment advisory and distribution services to the Fund. The completion of the
transaction is subject to several conditions including (i) the signing of a
definitive agreement regarding the sale, (ii) the approval of an advisory
agreement between the Fund and CypressTree Asset Management Corporation, Inc.
("CAM"), an affiliate of Cypress, by the Board of Trustees of the Fund and
shareholders of each Fund portfolio, (iii) the approval of a subadvisory
agreement between CAM and the current subadviser to each Fund portfolio by the
Board of Trustees of the Fund and the shareholders of the applicable Fund
portfolio and (iv) the requirement that the aggregate net asset value of the
Fund at the closing be not less than $750 million. Cypress does not currently
intend to recommend any changes to the existing subadvisers to the Fund or any
fees or expense limitations applicable to the Fund. The closing for the
transaction is expected to occur on or before September 30, 1997. Cypress,
located in Boston, Massachusetts. was formed in 1996 to acquire, advise and
distribute mutual funds through broker-dealers, banks and other intermediaries.
Management believes divestiture of the retail mutual fund business will not have
a material effect on the Company's financial condition.
7
<PAGE> 8
Investments
- -----------
The Company has a coinsurance agreement that reinsures 100% of all products
fixed investment option. Hence, the general account investments held by the
Company support the surplus account and specific state requirements for
securities held on account for the benefit of policyholders.
The amortized and estimated fair value of investments in debt securities at
March 31, 1997 is as follows:
<TABLE>
<CAPTION>
Gross Gross
(in thousands) Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------------------------------------------
<S> <C> <C> <C> <C>
US Treasury securities
and obligations of US
Government agencies $ 6,907 $68 $ 40 $ 6,935
Corporate debt securities 6,001 1 86 5,916
Mortgage-backed securities 871 19 4 886
------- --- ---- -------
Totals $13,779 $88 $130 $13,737
======= === ==== =======
</TABLE>
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Results of Operations
- ---------------------
Net loss was $4.7 million in the first quarter of 1997 compared to a loss of
$1.1 million in the first quarter of 1996. Included in the current years net
loss is $2.1 million of realized capital losses on the disposition of real
estate. The Company had previously reflected this loss as an unrealized loss
directly against surplus, hence current realization had no effect on surplus.
Total annuity deposits increased from $249.2 million to $320.4 million, a 28.6%
increase primarily as a result of the Company's Strategic change in its separate
account investment platform. The loss for the first quarter was attributable to
the favorable increase in annuity deposits as there is an initial strain of
writing new business, on a statutory basis, which initially exceeds the profits
that emerge from the inforce. This is do to the conservative nature of statutory
accounting.
Financial Condition
- -------------------
Total assets increased from $6,517.8 million at December 31, 1996 to $6,678.6
million at March 31, 1997 an increase of $160.8 million. Separate account assets
of $6,626.1 million represent 99.2% of total assets as the Company continued to
focus on its variable option insurance products.
Total capital and deficit declined from $69.6 million at December 31, 1996 to
$66.0 million at March 31, 1997, a reduction of $3.6 million principally the
result of the net loss from operations.
Since 100% of the variable option annuity deposits are invested in the separate
account the Company must finance acquisition costs through internally generated
cashflows or external borrowing. For the three months ended March 31, 1997
internal cashflows were sufficient to finance the cost of writing new business,
hence the Company's debt remained unchanged from December 31, 1996.
9
<PAGE> 10
ITEM 1 - LEGAL PROCEEDINGS
No reportable events
ITEM 2 - CHANGES IN SECURITIES
(a) and (b) No reportable events
(c)
The Company currently sells Venture Group Annuity, a flexible premium payment
deferred variable unallocated group annuity, to retirement plans that qualify
for special tax treatment under Section 401(a) of the Internal Revenue Code.
Sales of these securities are not required to be registered under the Securities
Act of 1933 (Section 3(a)(2) of this Act). NASL Financial Services, Inc., a
wholly owned subsidiary of the Company is the principal underwriter of the
contracts and Wood Logan Associates, Inc., an affiliate of the Company, is the
promotional agent. There are no maximum or minimum purchase payments required to
establish a contract. The value of a contract will vary according to the
investment performance, charges and expenses of the subaccounts in which the
contract is invested. As of March 31, 1997, the total variable assets in the
Venture Group Annuity was $53,977,365.
ITEMS 3 - DEFAULTS UPON SENIOR SECURITIES
No reportable events
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An action by unanimous consent of the sole stockholder of the Company, NAWL
Holding Company, Inc. with regard to elect and appoint John D. DesPrez III,
Peter S. Hutchinson and John D. Richardson as the Board of Directors of the
Company was approved on March 27, 1997.
ITEM 5 - OTHER INFORMATION
No reportable events
ITEM 6A - EXHIBITS
(3) Exhibits (the Registrant is also referred to as the "Company")
Exhibit No. Description
- ----------- -----------
1(a) Underwriting Agreement between the Company
and NASL Financial Services, Inc.
(Underwriter) - 1/
1(b) Promotional Agent Agreement between NASL
Financial Services, Inc. (Underwriter), the
Company and Wood Logan Associates, Inc.
(Promotional Agent) - 2/
2 Not Applicable
3(i) Article of Incorporation of the Company - 3/
3(ii) By-Laws of the Company - 4/
4(i) Form of Individual Single Payment Deferred
Fixed Annuity Non-Participating Contract
- 10/
4(ii) Form of Group Single Payment Deferred Fixed
Annuity Non-Participating Contract - 10/
10
<PAGE> 11
4(iii) Individual Retirement Annuity
Endorsement - 10/
4(iv) ERISA Tax-Sheltered Annuity
Endorsement - 10/
4(v) Tax-Sheltered Annuity Endorsement - 10/
4(vi) Section 401 Plans Endorsement - 10/
5 Opinion and Consent of
James D. Gallagher, Esq. - 11/
6 Not Applicable
7 Not Applicable
8 Not Applicable
9 Not Applicable
10(i) Form of broker-dealer agreement between
the Company, NASL Financial Services,
Inc. (underwriter), Wood Logan
Associates, Inc. (Promotional Agent) and
broker-dealers - 5/
(10)(ii) Reinsurance and Guaranteed Death
Benefits Agreement between NASL and
Connecticut General Life Insurance
Company - 8/
(10)(iii) Reinsurance Agreement between NASL and
PaineWebber Life Insurance Company - 9/
(10)(iv) Coinsurance Agreement between NASL and
Peoples Security Life Insurance Company
- 12/
(10)(v) Reinsurance and Accounts Receivable
Agreements between NASL and ITT Lyndon
Life - 12/
(10)(vi) Automatic Modified-Coinsurance
Reinsurance Agreement between NASL and
Transamerica Occidental Life Insurance
Company - 12/
(10)(vii) Automatic Yearly Renewable Term
Reinsurance Agreement between NASL and
Transamerica Occidental Life Insurance
Company - 12/
(10)(viii) Amendment No. 1 to the Variable Annuity
Guaranteed Death Benefit Reinsurance
Agreement between NASL and Connecticut
General Life Insurance Company - 12/
11 Not Applicable
12 Not Applicable
13 Not Applicable
14 Not Applicable
15 Not Applicable
16 Not Applicable
17 Not Applicable
18 Not Applicable
19 Not Applicable
20 Not Applicable
21 The Company has the following wholly
owned subsidiaries: NASL Financial
Services, Inc. and First North American
Life Assurance Company
22 Not Applicable
23(i) Consent of Coopers & Lybrand L.L.P.-
Not Applicable
23(ii) Consent of Ernst & Young LLP - Not Applicable
24 (i) Power of Attorney (Principal Financial and
Accounting Officer of the Company) - 13/
24(ii) Power of Attorney (Directors of the
Company) - 13/
11
<PAGE> 12
25 Not Applicable
26 Not Applicable
27 Financial Data Schedule - 14/
28 Not Applicable
1/ Incorporated by reference to Exhibit (A)(3)(a) to Form S-6, file number
2-93435, filed September 24, 1984 on behalf of the NASL Variable Account
of the Company
2/ Incorporated by reference to Exhibit 3(ii) to Form N-4, file number
33-28455, filed February 15, 1991 on behalf of the NASL Variable Account
of the Company
3/ Incorporated by reference to Exhibit (A)(6) to Form S-6, file number
2-93435, filed September 24, 1984 on behalf of the NASL Variable Account
of the Company
4/ Incorporated by reference to Exhibit (b)(6)(ii) to Form N-4, file number
33-9960, filed November 4, 1986 on behalf of the NASL Variable Account of
the Company
5/ Incorporated by reference to Exhibit (b)(3)(iii) to pre-effective
amendment no. 1 to Form N-4, file number 33-9960, filed February 2, 1987
on behalf of the NASL Variable Account of the Company
6/ not applicable
7/ not applicable
8/ Incorporated by reference to Exhibit (b)(7)(i) to Registration Statement
on Form N-4, file number 33-76162, filed March 1, 1996
9/ Incorporated by reference to Exhibit (b)(7)(iii) to Registration Statement
on Form N-4, file number 33-76162, filed March 1, 1996
10/ Incorporated by reference to Exhibit 4 to Registration Statement on Form
S-1, file number 33-6011, filed June 14, 1996
11/ Incorporated by reference to Exhibit 5 to Pre-Effective Amendment No. 1 to
the Registration Statement on Form S-1, file number 33-6011, filed January
29, 1997
12/ Incorporated by reference to Exhibits (10)(iv) through (10)(viii) to
Pre-Effective Amendment No. 1 to the Registration Statement on Form S-1,
file number 33-6011, filed January 29, 1997
13/ Incorporated by reference to Exhibit 24(i) to Form 10-K file number
33-6011, of the Company filed May 5, 1997
14/ Filed herewith
ITEM 6B - REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(Registrant)
By: /s/ Richard C. Hirtle
-----------------------------------------------------------------------
Richard C. Hirtle, Vice President, Treasurer and Chief Financial
Officer (Principal Financial Officer and Duly Authorized Officer)
Date: May 13, 1997
13
<PAGE> 14
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
14
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENTS
OF FINANCIAL POSITION STATEMENTS OF OPERATIONS AND UNASSIGNED DEFICIT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 13,778,692
<DEBT-CARRYING-VALUE> 13,778,692
<DEBT-MARKET-VALUE> 13,778,692
<EQUITIES> 31,344,381
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 45,123,073
<CASH> 3,299,929
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 6,678,641,843
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 3,370,005
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 138,593,399
0
0
<COMMON> 2,600,000
<OTHER-SE> 66,066,827
<TOTAL-LIABILITY-AND-EQUITY> 6,678,641,843
320,426,572
<INVESTMENT-INCOME> 1,344,502
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 124,998,402
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (4,721,091)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,721,091)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,721,091)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
