<PAGE>
May 5, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Separate Account VUL of National Integrity Life Insurance Company
("Registrant")
Rule 497(e) Filing of Financial Statements
Registration No. 33-41384
Pursuant to Rule 497(e) under the Securities Act of 1933, we are filing updated
financial statements which have been provided to policyholders of the
Registrant's Portfolio Life product. Registrant is no longer issuing the
product, and in accordance with a no-action position of the Securities and
Exchange Commission, the prospectus has been "evergreened."
Sincerely,
/s/ Sheri L. Bean
Paralegal
<PAGE>
Financial Statements
Separate Account VUL
of
National Integrity Life Insurance Company
December 31, 1996
With Report of Independent Auditors
<PAGE>
Separate Account VUL
of
National Integrity Life Insurance Company
Financial Statements
December 31, 1996
<TABLE>
<CAPTION>
Contents
<S> <C>
Report of Independent Auditors..............................................1
Audited Financial Statements
Statement of Assets and Liabilities.........................................2
Statement of Operations.....................................................3
Statements of Changes in Net Assets.........................................4
Notes to Financial Statements...............................................6
</TABLE>
<PAGE>
Report of Independent Auditors
Policyholders
Separate Account VUL of National Integrity Life Insurance Company
We have audited the accompanying statement of assets and liabilities of Separate
Account VUL of National Integrity Life Insurance Company (comprising,
respectively, the Common Stock, Money Market, Balanced, Aggressive Stock, High
Yield, and Global Divisions) as of December 31, 1996, the related statement of
operations for the year then ended and statements of changes in net assets for
the years ended December 31, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits 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 mutual fund shares owned in The Hudson River Trust (Trust) as of
December 31, 1996, by correspondence with the transfer agent of the Trust. 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 each of the respective
divisions constituting Separate Account VUL of National Integrity Life Insurance
Company at December 31, 1996, the results of their operations for the year then
ended, and changes in their net assets for the years ended December 31, 1996 and
1995, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 18, 1997
1
<PAGE>
Separate Account VUL of National Integrity Life Insurance Company
Statement of Assets and Liabilities
December 31, 1996
<TABLE>
<CAPTION>
Common Money Aggressive High
Stock Market Balanced Stock Yield Global
Division Division Division Division Division Division Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Investments in The Hudson River Trust
at value (cost of $111,672 in the aggregate) $ 4,869 $ - $ 4,680 $ 98,500 $ 1,216 $ 536 $109,801
----------------------------------------------------------------------------
Net assets $ 4,869 $ - $ 4,680 $ 98,500 $ 1,216 $ 536 $109,801
============================================================================
Unit value $ 255.64 $ - $ 190.75 $ 339.02 $ 239.92 $ 225.40
=================================================================
Units outstanding 19.045 - 24.534 290.542 5.069 2.377
=================================================================
</TABLE>
See accompanying notes.
2
<PAGE>
Separate Account VUL of National Integrity Life Insurance Company
Statement of Operations
Year ended December 31, 1996
<TABLE>
<CAPTION>
Common Money Aggressive High
Stock Market Balanced Stock Yield Global
Division Division Division Division Division Division Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income
Reinvested dividends from The Hudson
River Trust $ 772 $ - $ 682 $25,072 $228 $46 $26,800
Expenses
Mortality and expense risk and
administrative charges 30 - 31 596 8 4 669
---------------------------------------------------------------------------------
Net investment income 742 - 651 24,476 220 42 26,131
Realized and unrealized gain (loss) on
investments
Net realized gain on sales of investments 123 - 5 465 12 2 607
Net unrealized appreciation (depreciation)
of investments:
Beginning of period 544 - 17 7,030 (2) 21 7,610
End of period 688 - (86) (2,543) 27 43 (1,871)
---------------------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 144 - (103) (9,573) 29 22 (9,481)
---------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments 267 - (98) (9,108) 41 24 (8,874)
---------------------------------------------------------------------------------
Net increase in net assets resulting from
operations $ 1,009 $ - $ 553 $15,368 $261 $66 $17,257
=================================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Separate Account VUL of National Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Common Money Aggressive High
Stock Market Balanced Stock Yield Global
Division Division Division Division Division Division Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from operations
Net investment income $ 742 $ - $ 651 $24,476 $ 220 $ 42 $ 26,131
Net realized gain on sales of investments 123 - 5 465 12 2 607
Change in net unrealized appreciation/
depreciation during the period 144 - (103) (9,573) 29 22 (9,481)
----------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,009 - 553 15,368 261 66 17,257
Increase (decrease) in net assets from policy
related transactions
Contributions from policy holders 533 - 516 14,670 - - 15,719
Policy terminations and benefits (616) - (639) (1,993) (182) (7) (3,437)
----------------------------------------------------------------------------
Net increase (decrease) in net assets derived from
policy related transactions (83) - (123) 12,677 (182) (7) 12,282
----------------------------------------------------------------------------
Increase in net assets 926 - 430 28,045 79 59 29,539
Net assets, beginning of year 3,943 - 4,250 70,455 1,137 477 80,262
----------------------------------------------------------------------------
Net assets, end of year $ 4,869 $ - $ 4,680 $98,500 $ 1,216 $ 536 $109,801
============================================================================
Unit transactions
Contributions 2.347 - 2.861 43.564 - -
Terminations and benefits (2.355) - (3.059) (5.449) (0.720) (0.034)
-----------------------------------------------------------------
Net increase (decrease) in units (0.008) - (0.198) 38.115 (0.720) (0.034)
=================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Separate Account VUL of National Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1995
<TABLE>
<CAPTION>
Common Money Aggressive High
Stock Market Balanced Stock Yield Global
Division Division Division Division Division Division Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from operations
Net investment income $ 265 $ - $ 242 $ 7,771 $ 106 $ 20 $ 8,404
Net realized gain (loss) on sales of investments 274 - (54) 405 - 4 629
Change in net unrealized appreciation/
depreciation during the period 641 - 428 6,632 66 50 7,817
---------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,180 - 616 14,808 172 74 16,850
Increase (decrease) in net assets from policy
related transactions
Contributions from policy holders - - 2,000 18,367 - - 20,367
Policy terminations and benefits (1,710) (129) (1,320) (2,421) (161) (19) (5,760)
Net transfers among investment divisons 938 129 803 976 - 8 2,854
---------------------------------------------------------------------------
Net increase (decrease) in net assets derived from
policy related transactions (772) - 1,483 16,922 (161) (11) 17,461
---------------------------------------------------------------------------
Increase in net assets 408 - 2,099 31,730 11 63 34,311
Net assets, beginning of year 3,535 - 2,151 38,725 1,126 414 45,951
---------------------------------------------------------------------------
Net assets, end of year $ 3,943 - $ 4,250 $ 70,455 $ 1,137 $ 477 $80,262
===========================================================================
Unit transactions
Contributions - - 12.956 77.446 - -
Terminations and benefits (7.974) - (7.769) (10.067) (1.041) (0.059)
Net transfers 4.54 - 4.673 3.500 - -
----------------------------------------------------------------
Net increase (decrease) in units (3.434) - 9.860 70.879 (1.041) (0.059)
================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Separate Account VUL
of
National Integrity Life Insurance Company
Notes to Financial Statements
December 31, 1996
1. Organization and Significant Accounting Policies
Organization and Nature of Operations
National Integrity Life Insurance Company ("National Integrity") established
Separate Account VUL (the "Separate Account") on February 26, 1986 under the
insurance laws of the state of New York for the purpose of issuing variable life
insurance policies ("policies"). The Separate Account is a unit investment trust
registered with the Securities and Exchange Commission under the Investment
Company Act of 1940, as amended. Variable life insurance policies have not been
offered by National Integrity since 1990, but policies are still outstanding.
Net premiums may be received under existing policies.
National Integrity is a wholly owned subsidiary of Integrity Life Insurance
Company and their ultimate parent is ARM Financial Group, Inc. ("ARM"). ARM
specializes in the asset accumulation business, providing retail and
institutional customers with products and services designed to serve the growing
long-term savings and retirement markets.
Policyholders may allocate or transfer their account values to one or more of
the Separate Account's investment divisions or to a guaranteed interest division
provided by National Integrity, or both. The Separate Account divisions invest
in shares of the corresponding portfolios of The Hudson River Trust (the
"Trust"), a mutual fund managed by Alliance Capital Management, L.P. The
policyholder's account value in a Separate Account division will vary depending
on the performance of the corresponding portfolio. The Separate Account
currently has six investment divisions available. The investment objective of
each division and its corresponding portfolio are the same. Set forth below is a
summary of the investment objectives of the portfolios of the Trust.
Common Stock Portfolio seeks to obtain long term growth of capital and
increasing income. It invests primarily in common and preferred stocks and
other equity-type instruments.
6
<PAGE>
Separate Account VUL
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. Organization and Significant Accounting Policies (continued)
Money Market Portfolio seeks to obtain as high a level of current income as
is consistent with preserving capital and providing liquidity. It invests
primarily in high quality short-term money market instruments.
Balanced Portfolio seeks a high return through a combination of current
income and capital appreciation. It invests primarily in common stocks,
publicly-traded debt securities and high quality money market instruments.
Aggressive Stock Portfolio seeks to obtain long-term growth of capital. It
invests primarily in common stocks and other equity-type securities issued
by medium and smaller sized companies with strong growth potential.
High Yield Portfolio seeks a high return by maximizing current income and,
to the extent consistent with that objective, capital appreciation. It
invests primarily in a diversified mix of high yield, fixed income
securities involving greater volatility of price and risk of principal and
income than high quality fixed income securities.
Global Portfolio seeks long-term growth of capital as a fundamental
objective. It invests primarily in equity securities of non-United States
as well as United States companies.
The assets of the Separate Account are owned by National Integrity. The portion
of the Separate Account's assets supporting the policies may not be used to
satisfy liabilities arising out of any other business of National Integrity.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for unit investment trusts.
Investments
Investments in shares of the Trust are valued at the net asset values of the
respective portfolios, which approximates fair value. The difference between
cost and fair value is reflected as unrealized appreciation and depreciation of
investments.
7
<PAGE>
Separate Account VUL
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. Organization and Significant Accounting Policies (continued)
Dividends from income and capital gain distributions are recorded on the ex-
dividend date. Dividends and distributions from the Trust portfolios are
reinvested in the respective portfolios and are reflected in the unit value of
the divisions of the Separate Account.
Share transactions are recorded on the trade date. Realized gains and losses on
sales of Trust shares are determined based on the identified cost basis.
Unit Value
Unit values for the Separate Account divisions are computed at the end of each
business day. The unit value is equal to the unit value for the preceding
business day multiplied by a net investment factor. This net investment factor
is determined based on the value of the underlying mutual fund portfolios of the
Separate Account, reinvested dividends and capital gains, new premium deposits
or withdrawals, and the daily asset charge for the mortality and expense risk
and administrative charges. Unit values are adjusted daily for all activity in
the Separate Account.
Taxes
Operations of the Separate Account are included in the income tax return of
National Integrity which is taxed as a life insurance company under the Internal
Revenue Code. The Separate Account will not be taxed as a regulated investment
company under Subchapter M of the Internal Revenue Code. Under the provisions of
the policies, National Integrity has the right to charge the Separate Account
for federal income tax attributable to the Separate Account. No charge is
currently being made against the Separate Account for such tax since, under
current tax law, National Integrity pays no tax on investment income and capital
gains reflected in variable life insurance policy reserves. However, National
Integrity retains the right to charge for any federal income tax incurred which
is attributable to the Separate Account if the law is changed. Charges for state
and local taxes, if any, attributable to the Separate Account may also be made.
8
<PAGE>
Separate Account VUL
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. Organization and Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity 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. Investments
The aggregate cost of portfolio shares purchased and proceeds from portfolio
shares sold during the year ended December 31, 1996 and the cost of shares held
at December 31, 1996 for each division were as follows:
<TABLE>
<CAPTION>
Division Purchases Sales Cost
- ---------------------------------------------------
<S> <C> <C> <C>
Common Stock $ 1,216 $ 557 $ 4,181
Money Market - - -
Balanced 1,101 573 4,766
Aggressive Stock 39,322 2,169 101,043
High Yield 202 163 1,189
Global 46 11 493
</TABLE>
3. Expenses
National Integrity assumes mortality and expense risks related to the operations
of the Separate Account and deducts a charge from the assets of the Separate
Account at an annual rate of 0.60% of policyholders' net assets to cover these
risks.
National Integrity makes deductions for administrative expenses and state
premium taxes from premiums before amounts are allocated to the Separate
Account.
9
<PAGE>
Financial Statements
(Statutory Basis)
National Integrity Life
Insurance Company
Years Ended December 31, 1996 and 1995
with Report of Independent Auditors
<PAGE>
National Integrity Life Insurance Company
Financial Statements
(Statutory Basis)
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Contents
<S> <C>
Report of Independent Auditors..............................................1
Audited Financial Statements
Balance Sheets (Statutory Basis)............................................3
Statements of Operations (Statutory Basis)..................................5
Statements of Changes in Capital and Surplus (Statutory Basis)..............6
Statements of Cash Flows (Statutory Basis)..................................7
Notes to Financial Statements (Statutory Basis).............................9
</TABLE>
<PAGE>
Report of Independent Auditors
Board of Directors
National Integrity Life Insurance Company
We have audited the accompanying statutory basis balance sheets of National
Integrity Life Insurance Company as of December 31, 1996 and 1995, and the
related statutory basis statements of operations, changes in capital and
surplus, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the New York Insurance Department, which practices differ from
generally accepted accounting principles. The variances between such practices
and generally accepted accounting principles and the effects on the accompanying
financial statements are described in Note 1.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of National Integrity Life Insurance Company at December 31, 1996 and 1995, or
the results of its operations or its cash flows for the years then ended.
1
<PAGE>
Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of National Integrity Life
Insurance Company at December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting practices prescribed or permitted by the New York Insurance
Department.
/s/ Ernst & Young LLP
Louisville, Kentucky
February 12, 1997
2
<PAGE>
National Integrity Life Insurance Company
Balance Sheets (Statutory Basis)
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------
(In Thousands)
<S> <C> <C>
Admitted assets
Cash and investments:
Bonds $451,439 $635,249
Preferred stocks 50,715 14,428
Mortgage loans 3,929 5,318
Policy loans 24,981 22,606
Cash and short-term investments 14,570 20,268
Other invested assets 36 8,827
------------------
Total cash and investments 545,670 706,696
Separate accounts assets 370,988 265,264
Receivable for investments sold 4,576 -
Accrued investment income 6,513 7,959
Federal income tax recoverable 438 -
Other admitted assets 1,740 -
------------------
Total admitted assets $929,925 $979,919
==================
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------
(In Thousands)
<S> <C> <C>
Liabilities and capital and surplus
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $513,639 $671,322
Unpaid claims 124 1,813
Deposits on policies to be issued 645 -
------------------
Total policy and contract liabilities 514,408 673,135
Separate accounts liabilities 370,988 265,264
Accounts payable and accrued expenses 213 264
Transfers to separate accounts due or accrued, net (21,247) (16,329)
Reinsurance balances payable 589 98
Federal income taxes - 1,005
Asset valuation reserve 1,773 1,969
Interest maintenance reserve 8,914 6,992
Payable for investments purchased - 6,082
Other liabilities 6,016 2,300
------------------
Total liabilities 881,654 940,780
Capital and surplus:
Common stock, $10 par value, 200,000 shares
authorized, issued, and outstanding 2,000 2,000
Paid-in surplus 59,244 59,244
Special surplus funds 750 750
Unassigned surplus (13,723) (22,855)
------------------
Total capital and surplus 48,271 39,139
------------------
Total liabilities and capital and surplus $929,925 $979,919
==================
</TABLE>
See accompanying notes.
4
<PAGE>
National Integrity Life Insurance Company
Statements of Operations (Statutory Basis)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
-----------------------
(In Thousands)
<S> <C> <C>
Premiums and other revenues:
Premiums and annuity considerations $ 8,640 $ 1,262
Deposit-type funds 352,899 261,378
Net investment income 53,553 46,548
Amortization of the interest maintenance reserve 1,001 823
Other revenues 5,653 3,913
-----------------------
Total premiums and other revenues 421,746 313,924
Benefits paid or provided:
Death benefits 8,260 9,098
Annuity benefits 12,106 3,581
Surrender benefits 101,241 119,789
Payments on supplementary contracts 1,879 1,869
Increase in insurance and annuity reserves 192,985 80,945
Other benefits 7,818 1,492
-----------------------
Total benefits paid or provided 324,289 216,774
Insurance and other expenses:
Commissions 5,817 4,809
General expenses 8,051 8,150
Taxes, licenses and fees 349 301
Net transfers to separate accounts 69,158 77,166
Other expenses 3,110 -
-----------------------
Total insurance and other expenses 86,485 90,426
Gain from operations before federal income taxes
and net realized capital losses 10,972 6,724
Federal income tax expense (benefit) (444) 991
-----------------------
Gain from operations before net realized capital losses 11,416 5,733
Net realized capital losses, less capital gains
tax expense (1996-$544; 1995-$1,800)
and excluding net gains (losses) transferred
to the interest maintenance reserve
(1996-$2,923; 1995-$(2,850)| (2,500) (900)
-----------------------
Net income $ 8,916 $ 4,833
=======================
</TABLE>
See accompanying notes.
5
<PAGE>
National Integrity Life Insurance Company
Statements of Changes in Capital and Surplus (Statutory Basis)
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Special Total
Common Paid-In Surplus Unassigned Capital and
Stock Surplus Funds Surplus Surplus
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $2,000 $59,244 $ 750 $ (26,437) $ 35,557
Net income 4,833 4,833
Decrease in nonadmitted assets 20 20
Increase in asset valuation reserve (1,271) (1,271)
------------------------------------------------------------
Balance, December 31, 1995 2,000 59,244 750 (22,855) 39,139
Net income 8,916 8,916
Decrease in nonadmitted assets 19 19
Decrease in asset valuation reserve 197 197
------------------------------------------------------------
Balance, December 31, 1996 $2,000 $59,244 $ 750 $ (13,723) $ 48,271
============================================================
</TABLE>
See accompanying notes.
6
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
-----------------------
(In Thousands)
<S> <C> <C>
Operations:
Premiums, policy proceeds, and other considerations received $ 361,539 $ 262,639
Net investment income received 53,492 47,165
Commission and expense allowances received on reinsurance ceded 644 6
Benefits paid (125,238) (134,780)
Insurance expenses paid (14,170) (13,461)
Other income received net of other expenses paid 5,009 3,942
Net transfers to separate accounts (74,076) (83,932)
-----------------------
Net cash provided by operations 207,200 81,579
Investment activities:
Proceeds from sales, maturities, or repayments of investments:
Bonds 455,716 339,361
Preferred stocks 19,067 6,913
Mortgage loans 1,389 1,326
Other invested assets 8,826 -
-----------------------
Total investment proceeds 484,998 347,600
Taxes paid on capital gains (1,212) -
-----------------------
Net proceeds from sales, maturities, or repayments of investments 483,786 347,600
Cost of investments acquired:
Bonds 626,879 416,110
Preferred stocks 55,045 7,818
Other invested assets - 8,841
Miscellaneous proceeds 36 -
-----------------------
Total cost of investments acquired 681,960 432,769
Net increase in policy loans and premium notes 2,375 2,876
-----------------------
Net cash used in investment activities (200,549) (88,045)
Financing and miscellaneous activities:
Other cash provided:
Other sources 3,826 7,899
-----------------------
Total other cash provided 3,826 7,899
-----------------------
7
</TABLE>
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis) (continued)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
-----------------------
(In Thousands)
<S> <C> <C>
Other cash applied:
Other applications, net 16,175 2,236
-----------------------
Total other cash applied 16,175 2,236
-----------------------
Net cash provided by (used in) financing and miscellaneous activities (12,349) 5,663
-----------------------
Net decrease in cash and short-term investments (5,698) (803)
Cash and short-term investments at beginning of year 20,268 21,071
-----------------------
Cash and short-term investments at end of year $ 14,570 $ 20,268
=======================
See accompanying notes.
8
</TABLE>
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)
1. Organization and Accounting Policies
Organization
National Integrity Life Insurance Company ("National Integrity" or the
"Company") is a wholly owned subsidiary of Integrity Life Insurance Company
("Integrity") which is an indirect wholly owned subsidiary of ARM Financial
Group, Inc. ("ARM"). ARM acquired Integrity and the Company from The National
Mutual Life Association of Australasia Limited ("National Mutual"). The Company
is domiciled in the state of New York. The Company, currently licensed in eight
states and the District of Columbia, provides retail and institutional products
to the long-term savings and retirement marketplace.
Basis of Presentation
The accompanying financial statements of the Company have been prepared in
conformity with accounting practices prescribed or permitted by the New York
Insurance Department. Such practices vary from generally accepted accounting
principles ("GAAP"). The more significant variances from GAAP are as follows:
Investments
Investments in bonds and preferred stocks are reported at amortized cost or
market value based on the National Association of Insurance Commissioners (the
"NAIC") rating; for GAAP, such fixed maturity investments are designated at
purchase as held-to-maturity, trading or available-for-sale. Held-to-maturity
fixed investments are reported at amortized cost, and the remaining fixed
maturity investments are reported at fair value with unrealized holding gains
and losses reported in operations for those designated as trading and as a
separate component of shareholder's equity for those designated as available-
for-sale. In addition, fair values of certain investments in bonds and stock
are based on values specified by the NAIC, rather than on actual or estimated
market values used for GAAP.
Realized gains and losses are reported in income net of income tax and
transfers to the interest maintenance reserve. Changes between cost and
admitted investment asset amounts are credited or charged directly to
unassigned surplus rather than to a separate surplus account. The Asset
Valuation Reserve is determined by an NAIC prescribed formula and is reported
as a liability rather than unassigned surplus.
9
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. Organization and Accounting Policies (continued)
Under a formula prescribed by the NAIC, the Company defers the portion of
realized gains and losses on sales of fixed income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity based on the individual security sold using the seriatim method.
The net deferral is reported as the Interest Maintenance Reserve in the
accompanying balance sheets. Under GAAP, realized gains and losses are
reported in the income statement on a pretax basis in the period that the
asset giving rise to the gain or loss is sold and include provisions when
there has been a decline in asset values deemed other than temporary.
Policy Acquisition Costs
Costs of acquiring and renewing business are expensed when incurred. Under
GAAP, acquisition costs related to investment-type products, to the extent
recoverable from future gross profits, are amortized generally in proportion
to the emergence of future gross profits over the estimated term of the
underlying policies.
Nonadmitted Assets
Certain assets designated as "nonadmitted," principally receivables greater
than 90 days past due, are excluded from the accompanying balance sheets and
are charged directly to unassigned surplus.
Premiums
Revenues include premiums and deposits received and benefits include death
benefits paid and the change in policy reserves. Under GAAP, such premiums
and deposits received are accounted for as a deposit liability and therefore
not recognized as premium revenue; benefits paid equal to the policy account
value are accounted for as a return of deposit instead of benefit expense.
10
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
1.Organization and Accounting Policies (continued)
Benefit Reserves
Certain policy reserves are calculated using statutorily prescribed interest
and mortality assumptions rather than on estimated expected experience or
actual account balances as would be required under GAAP.
Federal Income Taxes
Deferred federal income taxes are not provided for differences between the
financial statement amounts and tax bases of assets and liabilities.
The effects of the foregoing variances from GAAP on the accompanying statutory
basis financial statements are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
-----------------------
(In Thousands)
<S> <C> <C>
Net income as reported in the accompanying
statutory basis financial statements $ 8,916 $ 4,833
Deferred policy acquisition costs, net of
amortization 5,187 7,614
Adjustments to customer deposits (441) (3,669)
Adjustments to invested asset carrying values
at acquisition date (160) (180)
Amortization of value of insurance in force (1,470) (2,905)
Amortization of interest maintenance reserve (1,001) (823)
Adjustments for realized investment gains (losses) 852 (747)
Adjustments for federal income tax benefit (expense) (2,185) 564
Other (200) 356
-----------------------
Net income, GAAP basis $ 9,498 $ 5,043
=======================
</TABLE>
11
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
1. Organization and Accounting Policies (continued)
<TABLE>
<CAPTION>
December 31,
1996 1995
-------------------
(In Thousands)
<S> <C> <C>
Capital and surplus as reported in the accompanying
statutory basis financial statements $ 48,271 $ 39,139
Adjustments to customer deposits (27,233) (26,792)
Adjustments to invested asset carrying values
at acquisition date (5,197) (5,889)
Asset valuation reserve and interest maintenance
reserve 19,369 20,567
Value of insurance in force 13,913 15,383
Deferred policy acquisition costs 23,728 18,541
Net unrealized gains on available-for-sale securities 1,416 5,577
Other (2,650) (246)
-------------------
Shareholder's equity, GAAP basis $ 71,617 $ 66,280
===================
</TABLE>
Other significant accounting practices are as follows:
Investments
Bonds, preferred stocks, common stocks, and short-term investments are stated at
values prescribed by the NAIC, as follows:
Bonds and short-term investments are reported at cost or amortized cost. The
discount or premium on bonds is amortized using the interest method. For
loan-backed bonds, anticipated prepayments are considered when determining
the amortization of discount or premium.
Prepayment assumptions for loan-backed bonds and structured securities are
obtained from broker-dealer survey values or internal estimates. These
assumptions are consistent with the current interest rate and economic
environment. The retrospective adjustment method is used to value all such
securities.
12
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. Organization and Accounting Policies (continued)
Preferred stocks are reported at cost.
Short-term investments include investments with maturities of less than one
year at the date of acquisition.
Mortgage loans and policy loans are reported at unpaid principal balances.
Realized capital gains and losses are determined using the specific
identification method.
Benefits
Life and annuity reserves are developed by actuarial methods and are determined
based on published tables using statutorily specified interest rates and
valuation methods that will provide, in the aggregate, reserves that are greater
than or equal to the minimum or guaranteed policy cash values or the amounts
required by the New York Insurance Department. The Company waives deduction of
deferred fractional premiums upon the death of life and annuity policy insureds
and does not return any premium beyond the date of death. Surrender values on
policies do not exceed the corresponding benefit reserves. Policies issued
subject to multiple table substandard extra premiums are valued on the standard
reserve basis which recognizes the non-level incidence of the excess mortality
costs. Additional reserves are established when the results of cash flow testing
under various interest rate scenarios indicate the need for such reserves.
Tabular interest, tabular less actual reserve released, and tabular cost have
been determined by formula as prescribed by the NAIC.
13
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. Organization and Accounting Policies (continued)
Reinsurance
Reinsurance premiums, benefits and expenses are accounted for on bases
consistent with those used in accounting for the original policies issued and
the terms of the reinsurance contracts. Premiums, benefits and expenses, and the
reserves for policy and contract liabilities are reported net, rather than
gross, of reinsured amounts.
Separate Accounts
Separate account assets and liabilities reported in the accompanying financial
statements represent funds that are separately administered, principally for
variable annuity contracts. Separate account assets are reported at market
value. Surrender charges collectible by the general account in the event of
variable policy surrenders are reported as a negative liability rather than an
asset pursuant to prescribed NAIC accounting practices. The operations of the
separate accounts are not included in the accompanying financial statements,
except for separate accounts with guarantees. Fees charged on separate account
policyholder deposits are included in other revenues.
Use of Estimates
The preparation of financial statements in compliance with statutory accounting
practices requires management to make estimates and assumptions that affect
amounts reported in the financial statements and accompanying notes. Actual
results could differ from these estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
presentation of the 1996 financial statements. These reclassifications had no
effect on previously reported net income or surplus.
2. Permitted Statutory Accounting Practices
The Company's statutory basis financial statements are prepared in accordance
with accounting practices prescribed or permitted by the New York Insurance
Department. "Prescribed" statutory accounting practices include state laws,
regulations, and general
14
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
2. Permitted Statutory Accounting Practices (continued)
administrative rules, as well as a variety of publications of the NAIC.
"Permitted" statutory accounting practices encompass all accounting practices
that are not prescribed; such practices may differ from state to state, may
differ from company to company within a state, and may change in the future. The
NAIC currently is in the process of recodifying statutory accounting practices,
the result of which is expected to constitute the only source of "prescribed"
statutory accounting practices. Accordingly, that project, which is expected to
be effective for 1999, will likely change, to some extent, prescribed statutory
accounting practices, and may result in changes to the accounting practices that
the Company uses to prepare its statutory financial statements. Although the
recodification project is meant to be surplus neutral, there is not enough
available information for the industry to assess the impact of such project.
3. Investments
The cost or amortized cost and the fair value of investments in bonds are
summarized as follows:
<TABLE>
<CAPTION>
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
At December 31, 1996:
U.S. Treasury securities and
obligations of U.S. government
agencies $ 16,243 $ 415 $ 110 $ 16,548
Foreign governments 12,363 643 - 13,006
Public utilities 40,882 379 644 40,617
Other corporate securities 127,264 396 6,534 121,126
Asset-backed securities 10,311 - - 10,311
Mortgage-backed securities 244,376 - - 244,376
--------------------------------------------
Total bonds $451,439 $1,833 $7,288 $445,984
============================================
</TABLE>
15
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. Investments (continued)
<TABLE>
<CAPTION>
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
At December 31, 1995:
U.S. Treasury securities
and obligations of U.S.
government agencies $ 51,434 $1,381 $ 22 $ 52,793
States and political
subdivisions 5,997 43 - 6,040
Foreign governments 1,898 62 - 1,960
Public utilities 19,861 190 41 20,010
Other corporate
securities 229,776 5,366 1,653 233,489
Assets-backed securities 27,695 - - 27,695
Mortgage-backed
securities 298,588 - - 298,588
-------------------------------------------
Total bonds $635,249 $7,042 $1,716 $640,575
===========================================
</TABLE>
Fair values are based on published quotations of the Securities Valuation Office
of the NAIC. Fair values generally represent quoted market value prices for
securities traded in the public marketplace, or analytically determined values
using bid or closing prices for securities not traded in the public marketplace.
However, for certain investments for which the NAIC does not provide a value,
the Company uses the amortized cost amount as a substitute for fair value in
accordance with prescribed guidance. As of December 31, 1996 and 1995, the fair
value of investments in bonds includes $312,677,000 and $426,972,000,
respectively, of bonds that were valued at amortized cost.
16
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. Investments (continued)
A summary of the cost or amortized cost and fair value of the Company's
investments in bonds at December 31, 1996, by contractual maturity, is as
follows:
<TABLE>
<CAPTION>
Cost or
Amortized Fair
Cost Value
--------------------
(In Thousands)
<S> <C> <C>
Years to maturity:
After one through five $ 20,176 $ 16,110
After five through ten 32,815 31,575
After ten 143,761 143,612
Asset-backed securities 10,311 10,311
Mortgage-backed securities 244,376 244,376
-------------------
Total $451,439 $445,984
===================
</TABLE>
The expected maturities in the foregoing table may differ from the contractual
maturities because certain borrowers have the right to call or prepay
obligations with or without call or prepayment penalties and because asset-
backed and mortgage-backed securities (including floating-rate securities)
provide for periodic payments throughout their life.
Proceeds from the sales of investments in bonds during 1996 and 1995 were
$755,711,000 and $286,601,000; gross gains of $7,901,000 and $4,404,000, and
gross losses of $4,450,000 and $5,621,000 were realized on those sales,
respectively.
At December 31, 1996 and 1995, bonds with an admitted asset value of $1,234,000
and $1,235,000, respectively, were on deposit with state insurance departments
to satisfy regulatory requirements.
17
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. Investments (continued)
The Company has made no new investments in mortgage loans since 1988. The
maximum percentage of any one loan to the value of the security at the time of
the loan exclusive of any purchase money mortgages was 75%. Fire insurance at
least equal to the excess of the loan over the maximum loan which would be
permitted by law on the land without the buildings is required on all properties
covered by mortgage loans. As of year-end, the Company held no mortgages with
interest more than one year past due. During 1996, no interest rates of
outstanding mortgage loans were reduced. No amounts have been advanced by the
Company.
In connection with the change in control of the Company during 1993, National
Mutual agreed to indemnify the Company pursuant to a Guaranty Agreement dated
November 26, 1993, with respect to (i) principal (up to 100%) of the Company's
mortgage loans' statutory book value as of December 31, 1992 and (ii)
contractual interest payments (based on the original principal amount) of all
acquired commercial and agricultural mortgage loans. In support of its
indemnification obligations, National Mutual has placed $23.0 million into
escrow in favor of the Company and Integrity until the mortgage loans have been
repaid in full.
Major categories of the Company's net investment income are summarized as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
-----------------------
(In Thousands)
<S> <C> <C>
Income:
Bonds $47,487 $43,591
Preferred stocks 4,150 1,282
Mortgage loans 610 565
Policy loans 1,886 1,751
Short-term investments and cash 1,277 773
Other investment income 3 383
------------------
Total investment income 55,413 48,345
Investment expenses (1,860) (1,797)
------------------
Net investment income $53,553 $46,548
==================
</TABLE>
18
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
4. Reinsurance
Consistent with prudent business practices and the general practice of the
insurance industry, National Integrity reinsures risks under certain of its
insurance products with other insurance companies through reinsurance
agreements. Through these reinsurance agreements substantially all mortality
risks associated with single premium endowment and variable annuity deposits and
substantially all risks associated with variable life business have been
reinsured with non-affiliated insurance companies. A contingent liability exists
with respect to insurance ceded which would become a liability should the
reinsurer be unable to meet the obligations assumed under these reinsurance
agreements. Reinsurance ceded is not significant to the Company's premiums,
benefits or policy and contract liabilities. During 1995, the Company entered
into a reinsurance agreement with General American Life Insurance Company to
assume, on a 50% coinsurance basis, guaranteed investment contracts ("GICs").
Policy and contract liabilities assumed under this agreement were zero and
$117,770,000 at December 31, 1996 and 1995, respectively.
The effect of reinsurance on premiums and amounts earned is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
-----------------------------------
(In Thousands)
<S> <C> <C>
Direct premiums and amounts assessed
against policyholders $115,547 $145,630
Reinsurance assumed 246,571 117,175
Reinsurance ceded (580) (165)
-----------------------------------
Net premiums and amounts earned $361,538 $262,640
===================================
</TABLE>
5. Federal Income Taxes
The Company files a consolidated return with Integrity. The method of allocation
between the companies is based on separate return calculations after
consolidated losses and credits.
19
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
5. Federal Income Taxes (continued)
Income before income taxes differs from taxable income principally due to value
of insurance in-force, interest maintenance reserves and differences in policy
and contract liabilities and investment income for tax and financial reporting
purposes.
The December 31, 1995 tax provision was calculated including net operating loss
carryover benefits of $4,304,000.
6. Surplus
The ability of the Company to pay dividends is limited by state insurance laws.
Under New York insurance laws, the Company may pay dividends only out of its
earnings and surplus, subject to at least thirty days prior notice to the New
York Insurance Superintendent and no disapproval from the Superintendent prior
to the date of such dividend. The Superintendent may disapprove a proposed
dividend if the Superintendent finds that the financial condition of the Company
does not warrant such distribution.
The NAIC adopted Risk-Based Capital ("RBC") requirements which became effective
December 31, 1993, that attempt to evaluate the adequacy of a life insurance
company's adjusted statutory capital and surplus in relation to investment,
insurance and other business risks. The RBC formula will be used by the states
as an early warning tool to identify possible under-capitalized companies for
the purpose of initiating regulatory action and is not designed to be a basis
for ranking the financial strength of insurance companies. In addition, the
formula defines a new minimum capital standard which supplements the previous
system of low fixed minimum capital and surplus requirements. The RBC
requirements provide for four different levels of regulatory attention depending
on the ratio of the company's adjusted capital and surplus to its RBC. As of
December 31, 1996 and 1995, the adjusted capital and surplus of the Company is
substantially in excess of the minimum level of RBC that would require
regulatory response.
20
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
7. Annuity Reserves
At December 31, 1996 and 1995, the Company's annuity reserves, including
separate accounts, and deposit fund liabilities that are subject to
discretionary withdrawal (with adjustment), subject to discretionary withdrawal
without adjustment, and not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
Amount Percent
-----------------------
(In Thousands)
<S> <C> <C>
At December 31, 1996:
Subject to discretionary withdrawal
(with adjustment):
With market value adjustment $ 89,668 11.5%
At book value less surrender charge
of 5% or more 23,208 3.0
At market value 257,419 33.0
-------------------
Total with adjustment or at market
value 370,295 47.5
Subject to discretionary withdrawal
(without adjustment) at book value
with minimal or no charge or
adjustment 347,883 44.7
Not subject to discretionary withdrawal 60,995 7.8
-------------------
Total annuity reserves and deposit
fund liabilities-before reinsurance 779,173 100.0%
=====
Less reinsurance ceded -
--------
Net annuity reserves and deposit fund
liabilities $779,173
========
At December 31, 1995:
Subject to discretionary withdrawal
(with adjustment):
With market value adjustment $ 67,407 8.1%
At book value less surrender charge
of 5% or more 190,629 22.7
At market value 180,991 21.6
-------------------
Total with adjustment or at market
value 439,027 52.4
Subject to discretionary withdrawal
(without adjustment) at book value
with minimal or no charge or
adjustment 337,299 40.2
Not subject to discretionary withdrawal 61,710 7.4
-------------------
Total annuity reserves and deposit
fund liabilities-before reinsurance 838,036 100.0%
=====
Less reinsurance ceded -
--------
Net annuity reserves and deposit fund
liabilities $838,036
========
</TABLE>
The Company sold $358,339,000 of guaranteed investment contracts, assumed by the
Company through a coinsurance agreement with General American Life Insurance
Company, to Integrity as of June 30, 1996.
21
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
8. Separate Accounts
Separate accounts assets and liabilities represent funds segregated for the
benefit of variable annuity and variable life policyholders who generally bear
the investment risk (mutual fund options), or for certain policyholders who are
guaranteed a fixed rate of return (guaranteed rate options). Assets held in
separate accounts are carried at estimated fair values.
Information regarding the separate accounts of the Company as of and for the
year ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
*Nonindexed
Guaranteed Nonguaranteed
More Separate
than 4% Accounts Total
------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Premiums, deposits and other
considerations $32,363 $ 70,537 $102,900
==========================================
Reserves for separate accounts with
assets at fair value $90,084 $257,514 $347,598
==========================================
Reserves for separate accounts by
withdrawal characteristics:
Subject to discretionary withdrawal
(with adjustment):
With market value adjustment $89,668 $ - $ 89,668
At book value without market value
adjustment and with current
surrender charge of 5% or more 416 257,514 257,930
------------------------------------------
Total with adjustment or at market
value 90,084 257,514 347,598
Not subject to discretionary
withdrawal - - -
------------------------------------------
Total separate accounts reserves $90,084 $257,514 $347,598
==========================================
</TABLE>
*Separate accounts with guarantees.
22
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
8. Separate Accounts (continued)
A reconciliation of the amounts transferred to and from the separate accounts
for the years ended December 31, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
1996 1995
--------------------
(In Thousands)
<S> <C> <C>
Transfers as reported in the Summary of Operations
of the Separate Accounts Statement:
Transfers to separate accounts $102,901 $ 96,982
Transfers from separate accounts (37,150) (21,800)
-------------------
Net transfers to separate accounts 65,751 75,182
Reconciling adjustments:
Mortality and expense charges reported as other revenues 3,194 1,928
Other revenues 213 56
-------------------
Transfers as reported in the Summary of Operations
of the Life, Accident and Health Annual Statement $ 69,158 $ 77,166
===================
</TABLE>
9. Fair Values of Financial Instruments
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosures of fair value
information about all financial instruments, including insurance liabilities
classified as investment contracts, unless specifically exempted. The fair value
of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. 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. Accordingly, the aggregate fair value amounts presented do not
necessarily represent the underlying value of such instruments. For financial
instruments not separately disclosed below, the carrying amount is a reasonable
estimate of fair value.
23
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
9. Fair Values of Financial Instruments (continued)
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
----------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Assets:
Bonds $451,439 $457,875 $635,249 $666,955
Preferred stocks 50,715 50,454 14,428 15,964
Mortgage loans 3,929 3,929 5,318 5,318
Liabilities:
Life and annuity reserves for
investment-type contracts $432,013 $426,516 $472,037 $474,465
Separate accounts annuity reserves 347,503 347,072 248,398 247,220
</TABLE>
Bonds and Preferred Stocks
Fair values for bonds and preferred stocks are based on quoted market prices
where available. For bonds and preferred stocks for which a quoted market price
is not available, fair values are estimated using internally calculated
estimates or quoted market prices of comparable investments.
Mortgage Loans on Real Estate
Pursuant to the terms of ARM's acquisition of the Company, payments of principal
and interest on mortgage loans acquired on November 26, 1993 are guaranteed by
National Mutual. Principal received in excess of statutory book value is to be
returned to National Mutual. Accordingly, book value is deemed to be fair value.
Life and Annuity Reserves for Investment-Type Contracts
The fair value of single premium immediate annuities is based on discounted
cash flow calculations using a market yield rate for assets with similar
durations. The fair value of the remaining annuities is based on the cash
surrender value of the underlying policies.
24
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
9. Fair Values of Financial Instruments (continued)
Separate Accounts Annuity Reserves
The fair value of separate accounts annuity reserves for investment-type
products equals the cash surrender values.
10. Related Party Transactions
Effective January 1, 1994, the Company entered into an Administrative Services
Agreement and an Investment Advisory Agreement with ARM. Under these agreements,
ARM performs certain administrative investment advisory and special services for
the Company to assist with its business operations. The services include
policyholder services; accounting, tax and auditing; underwriting; marketing and
product development; functional support services; payroll functions; personnel
functions; administrative support services; and investment functions. During
1996 and 1995, the Company was charged $6,008,000 and $5,641,000, respectively,
for these services in accordance with the requirements of applicable insurance
law and regulations.
25
