UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 or
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-20882
STANDARD MANAGEMENT CORPORATION
(Exact name of registrant as specified in its charter)
Indiana35-1773567
(State or other jurisdiction of(I.R.S. employer
incorporation or organization)identification no.)
9100 Keystone Crossing, Indianapolis, Indiana 46240(317) 574-6200
(Address of principal executive offices)(Telephone)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, No
Par Value
Indicate by check mark whether the registrant: (1) has filed all 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.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on March 15,
2000 as reported on The NASDAQ Stock Market, was approximately $31.9 million.
Shares of Common Stock held by each executive officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of March 15, 2000, Registrant had outstanding 7,785,156 shares of Common
Stock.
Documents Incorporated by Reference:
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders are incorporated by reference into Part III of this Form 10-K.
<PAGE>
PART I
AS USED IN THIS REPORT, UNLESS THE CONTEXT OTHERWISE CLEARLY REQUIRES, "SMC",
OR THE "COMPANY" REFERS TO STANDARD MANAGEMENT CORPORATION AND ITS CONSOLIDATED
SUBSIDIARIES AND "STANDARD MANAGEMENT" REFERS TO STANDARD MANAGEMENT
CORPORATION ON AN UNCONSOLIDATED BASIS. ALL FINANCIAL INFORMATION CONTAINED IN
THIS REPORT IS PRESENTED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("GAAP") UNLESS OTHERWISE SPECIFIED.
ITEM 1.BUSINESS OF SMC
SMC is an international financial services holding company that directly and
through its subsidiaries develops, markets and administers profitable life
insurance, annuities and unit-linked assurance in force business and products.
A primary component of SMC's growth relates to the acquisition of selected
insurance companies and blocks of in force life insurance and annuity
businesses. Since 1993, the Company has acquired 5 insurance companies. See
"Acquisition Strategy and Recent Acquisitions" for related information.
Through its insurance subsidiaries, the Company's operating strategy is to
develop profitable products, enhance marketing distribution channels and
consolidate and streamline management and administrative functions of acquired
companies.
OPERATING SEGMENTS
The Company conducts and manages its business through the following operating
segments reflecting the geographical locations of principal insurance
subsidiaries:
DOMESTIC OPERATIONS includes the following insurance subsidiaries at December
31, 1999:
Standard Life Insurance Company of Indiana ("Standard Life"), SMC's principal
insurance subsidiary, was organized in 1934 as an Indiana domiciled life
insurer. It is licensed to write new business or service existing business in
the District of Columbia and all states except New York and New Jersey.
Standard Life offers flexible premium deferred annuities ("FPDA's"), equity-
indexed annuities, whole and universal life insurance and critical illness
products. Standard Life also generates cash flow and income from closed blocks
of in force life insurance and annuities. At December 31, 1999, Standard Life's
statutory assets were $664.7 million and the aggregate of its statutory capital
and surplus, asset valuation reserve ("AVR") and interest maintenance reserve
("IMR") (its "adjusted statutory capital") was $61.2 million. The ratio of
adjusted statutory capital to its total statutory assets was 9.2% at December
31, 1999. Standard Life has a rating of B+ (Very Good, Secure) by the rating
agency, A.M. Best Company, Inc. ("A.M. Best").
Dixie National Life Insurance Company ("Dixie Life") is a 99.4% owned
subsidiary of Standard Life, was organized in 1965 as a Mississippi domiciled
life insurer. Dixie Life is licensed in 22 states and services a variety of
life insurance products, primarily consisting of "burial expense" policies.
Effective January 1, 1999, the Company ceased selling new business through
Dixie Life. At December 31, 1999, Dixie Life's statutory assets were $35.8
million, the adjusted statutory capital was $3.9 million and the ratio of its
adjusted statutory capital to its statutory assets was 10.8%. Dixie Life has a
rating of "B" ("Adequate") by A.M. Best.
Standard Marketing Corporation ("Standard Marketing"), is a wholesale
distributor of life insurance and annuity products. Until December 31, 1998,
its network of managing general agents and independent agents distributed life
insurance and annuity products for Standard Life and for a select group of
unaffiliated insurance companies. Standard Marketing earned override commission
income from the sale of these products. Effective January 1, 1999, the
operations of Standard Marketing were merged into Standard Life.
Savers Marketing Corporation ("Savers Marketing") is the prior marketing
distributor of Savers Life Insurance Company ("Savers Life"). Refer to
"Acquisition Strategy and Recent Acquisitions". Savers Marketing markets
Standard Life's products through financial institutions and independent agents.
Savers Marketing also receives administrative, marketing and commission fees
for services provided to unaffiliated companies.
INTERNATIONAL OPERATIONS include the following holding company and its two
wholly-owned insurance subsidiaries at December 31, 1999:
Standard Management International S.A., a wholly-owned subsidiary of SMC, is a
holding company organized under Luxembourg law with its registered office in
Luxembourg. At December 31, 1999, Standard Management International, S.A. and
its subsidiaries ("SMI") had $339.3 million in assets with policies in force in
over 80 countries. The majority of its business is unit-linked assurance
products with a range of policyholder directed investment choices coupled with
a small death benefit, sold through its subsidiaries.
Premier Life (Luxembourg) S.A. ("Premier Life (Luxembourg)") primarily offers
standard unit-linked products throughout the European Union. At December 31,
1999 it had statutory capital and surplus of $6.9 million.
Premier Life (Bermuda) Ltd. ("Premier Life (Bermuda)") primarily offers tax
deferred unit-linked products in niche markets throughout the world. At
December 31, 1999 it had statutory capital and surplus of $2.2 million.
<PAGE>
ACQUISITION STRATEGY AND RECENT ACQUISITIONS
A principal component of SMC's strategy is to grow through the acquisition of
life insurance companies and blocks of in force life insurance and annuities.
SMC regularly investigates acquisition opportunities in the life insurance
industry that complement or are otherwise strategically consistent with its
existing business. Any decision to acquire a block of business or an insurance
company will depend on a favorable evaluation of various factors. SMC believes
that availability of blocks of business in the marketplace will continue in
response to ongoing industry consolidation, risk-based capital requirements and
other regulatory and rating agency concerns. In addition, SMC plans to market
annuity and life insurance products directly as it has done in the past. SMC
currently has no plans or commitments to acquire any specific insurance
business or other material assets.
SMC has the information systems and administrative capabilities necessary to
add additional blocks of business without a proportional increase in operating
expenses. In addition, SMC has developed management techniques for reducing or
eliminating the expenses of the companies it acquires through the consolidation
of their operations with those of SMC. Such techniques include reduction or
elimination of overhead, including the acquired company's management, staff and
home office, elimination of marketing expenses and, where appropriate, the
substitution of Standard Life's network for the acquired company's current
distribution system, and the conversion of the acquired company's data
processing operations to SMC's system.
SMC typically acquires companies or blocks of business through the purchase or
exchange of shares. This method is also used for assumption reinsurance
transactions. SMC's acquisitions may be subject to certain regulatory
approvals, policyholder consents and stockholder approval.
The following is a list of SMC's most recent acquisitions and the terms under
which they were purchased:
On March 12, 1998, SMC acquired Savers Life Insurance Company ("Savers Life").
Each of the 1,779,908 shares of Savers Life Common Stock outstanding was
converted into 1.2 shares of SMC Common Stock plus $1.50. Each holder of
Savers Life Common Stock could elect to receive the $1.50 per share portion of
the merger consideration in the form of additional shares of SMC Common Stock.
SMC issued approximately 2.2 million shares with a value of approximately $14.9
million, paid $2.2 million in cash and $1.5 million in acquisition costs for an
aggregate purchase price of $18.6 million. SMC increased an Amended Revolving
Line of Credit Agreement ("Amended Credit Agreement") to $20.0 million as a
result of the Savers Life acquisition. The acquisition of Savers Life included
its wholly-owned subsidiary Savers Marketing.
On October 30, 1998, SMC acquired Midwestern National Life Insurance Company of
Ohio, ("Midwestern Life"). SMC issued 696,453 shares of its common stock
valued at $4.6 million, increased its bank debt by $6.0 million on restructured
terms by increasing the Amended Credit Agreement to $26.0 million, and paid
$2.9 million in cash and $.6 million of acquisition costs for an aggregate
purchase price of $14.1 million to acquire Midwestern Life.
The acquisitions of Savers Life and Midwestern Life were accounted for using
the purchase method of accounting and accordingly, SMC's consolidated financial
statements include the results of operations of the acquired companies from the
effective dates of their respective acquisitions. Savers Life and Midwestern
Life were merged into Standard Life effective December 31, 1998. As a result
of these mergers, Standard Life remained as the surviving entity. Under
purchase accounting, SMC allocated the total purchase price of the assets and
liabilities acquired, based on a determination of their fair values and
recorded the excess of acquisition cost over net assets acquired as goodwill,
which is being amortized on a straight-line basis over 20 - 30 years.
MARKETING
DOMESTIC MARKETING
GENERAL: The Company's agency force, of approximately 4,000 independent general
agents, was organized to provide a lower cost alternative to the traditional
captive agency force. These agents distribute a full line of life insurance,
annuity and critical illness products issued by Standard Life. The Company
selectively recruits new agents from those formerly associated with companies
acquired by SMC.
SMC believes that both agents and policy owners value the service provided by
SMC. The Company i) assists agents in submitting and processing policy
applications, ii) assists with licensing applications, iii) provides marketing
support for its agents, and iv) can introduce agents to lead services.
STANDARD LIFE offers a full portfolio of life insurance and annuity products
selected on the basis of their competitive position, company profitability and
likely consumer acceptance. Such portfolio includes FPDA's, equity-indexed
annuities, whole and universal life insurance and critical illness products
issued by Standard Life.
<PAGE>
Each general agent operates his own agency and is responsible for all expenses
of the agency. The general agents are compensated directly by Standard Life,
who performs all policy issuance, underwriting and accounting functions.
Standard Life is not dependent on any one agent or agency for any substantial
amount of its business. No single agent accounted for more than 4% of Standard
Life's annual sales in 1999, and the top twenty individual agents accounted for
approximately 34% of Standard Life's volume in 1999. At December 31, 1999,
approximately 60% of Standard Life's independent agents were located in Ohio,
Indiana, California, Florida, and North Carolina with the balance distributed
across the country. Standard Life is attempting to increase the number and
geographic diversity of its agents.
Standard Life does not have exclusive agency agreements with its agents and
management believes most of these agents sell similar products for other
insurance companies. This could result in a sales decline if Standard Life's
products were to become relatively less competitive. Standard Life's 1999 FPDA
and equity indexed annuity sales increased partially due to an aggressive
marketing campaign targeted to high volume sales agents and marketing
companies. Also contributing to the increase in premiums was the continued
development of Standard Life's distribution system through an aggressive
program aimed at retention of key producers and expanded geographical
concentration.
SAVERS MARKETING distributes life and annuity products through financial
institutions and independent general agents. Savers Marketing has
approximately 2,000 active brokers and is not dependent on any one broker or
agency for any substantial amount of its business. Each broker operates
independently and is responsible for all of his or her expenses. Savers
Marketing employs three Regional Managers, who are responsible for personally
initiating and maintaining direct communications with brokers and are
responsible for the recruitment and training of all new brokers.
Savers Marketing also entered into a three-year marketing and administrative
contract with QualChoice of North Carolina ("QualChoice") effective October 1,
1998 whereby Savers Marketing is the distribution system for the small group
product offered by QualChoice. QualChoice is an HMO in a twenty-county area in
the northwestern part of North Carolina offering HMO insurance coverage.
Savers Marketing is compensated for this effort with a marketing fee,
administrative fee and commission reimbursement for the use of its brokers.
Prior to the agreement with Savers Marketing, QualChoice was under an agreement
with Savers Life that commenced in 1996.
INTERNATIONAL MARKETING
PREMIER LIFE (LUXEMBOURG) AND PREMIER LIFE (BERMUDA), produced aggregate new
premium deposits of approximately $55 million, $43 million and $22 million
during 1999, 1998 and 1997, respectively. The increases in 1998 and 1999 relate
to renewed marketing efforts in certain European countries, particularly in
Sweden, Belgium and Italy. The countries within the European Union have been
the main contributor to these sales. Although SMI expects this to be the case
in the future, it plans to increase marketing efforts in other parts of the
world as well.
Although SMI anticipates growing significantly through internal sales as part
of its long term plan, acquisitions of other European insurance companies may
be considered. It has designed and launched new single and regular premium
products in recent years. It is also in discussions with a number of
distribution companies to form alliances to produce tailored products for their
markets. It is currently expected that Premier Life (Luxembourg) will write
business within the European Union and Premier Life (Bermuda) will write
international business elsewhere in the world. The primary market for SMI's
products is considered to be medium to high net worth individuals who typically
have in excess of $75,000 to invest in a single premium policy and medium to
high earners who have in excess of $3,000 per annum to invest in a regular
premium savings product. The above individuals would come from a combination of
expatriates, residents of European Union countries and from other targeted
areas. The expatriate and European insurance markets are well established and
highly competitive with a large number of domestic and international groups
operating in, or going into, the same markets as SMI.
SMI's products are distributed via independent agents and stock brokers who
have established connections with these targeted individuals. SMI is striving
to develop into an entrepreneurial-intermediary oriented organization committed
to building long term relationships with high quality distributors, thereby
creating a niche position. SMI places the same emphasis as SMC's U.S.
insurance companies on a high level of service to intermediaries and
policyholders while striving to achieve low overhead costs.
<PAGE>
PRODUCTS
SMC primarily markets FPDA's, equity indexed annuities, whole life, universal
and interest-sensitive life insurance policies and unit-linked policies. The
following table sets forth the amounts and percentages of net premiums received
by SMC from currently marketed products for the years ended December 31, 1999,
1998 and 1997, respectively (in thousands). Because GAAP generally excludes
annuity and unit-linked product deposits, and premiums from universal and
interest-sensitive life insurance from premium income, and thus does not fully
reflect SMC's cash flow from new business, the premium information contained in
the following table is reported using statutory accounting principles which
include the aforementioned items.
<TABLE>
Year Ended December 31,
<CAPTION>
1999 1998 1997
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Currently marketed products:
FPDA's $ 98,678 44.9 $ 60,086 45.8 $41,066 55.5
Equity-indexed annuities 59,348 27.0 16,858 12.9 -- --
Unit-linked products 55,234 25.1 42,536 32.5 21,954 29.7
Single premium immediate annuities 3,162 1.4 2,545 1.9 2,704 3.7
Universal and interest-sensitive life 2,302 1.0 5,816 4.4 5,836 7.9
Traditional life 1,029 .6 3,282 2.5 2,349 3.2
$219,753 100.0 $131,123 100.0 $73,909 100.0
</TABLE>
Annuity sales increased in 1999 primarily due to the introduction of new
products and an increase in the agency base achieved through the recruitment of
high volume agents. Also attributable to the annuity sales increase were
larger managing general agencies and continued expansion of geographical
marketing efforts.
The increase in deposits from unit linked products in 1999 is primarily due to
a continuation of marketing efforts in certain European countries, particularly
in Sweden, Belgium and Italy.
CURRENTLY MARKETED PRODUCTS
The individual annuity business is a growing segment of the savings and
retirement industry, which increased in sales from $1 billion in 1970 to more
than $230 billion in 1998. The individual annuity market, which is one of SMC's
primary targets, comprises 73% of its sales. As the 76 million baby boomers
born from 1946 through 1964 grow older, demand for insurance products is
expected to grow. SMC believes that those seeking adequate retirement incomes
will become less dependent on Social Security and their employers' retirement
programs and more dependent upon their own financial resources. Annuities
currently enjoy an advantage over certain other saving mechanisms because the
annuity buyer receives a tax-deferred accrual of interest on the investment
during the accumulation period.
SMI's products are sold primarily in Western Europe. SMC's gross sales
percentages by U.S. geographical region are summarized as follows:
STATE 1999 1998 1997
Indiana 15% 17% 21%
Ohio 14 15 10
California 11 5 11
North Carolina 8 10 4
Arizona 8 9 --
Florida 8 8 10
Texas 8 3 4
Hawaii 5 7 --
All other states {(1)} 23 26 40
Total 100% 100% 100%
(1)No other state had gross sales greater than 4%.
<PAGE>
STANDARD LIFE PRODUCTS
FLEXIBLE PREMIUM DEFERRED ANNUITIES ("FPDA's") provide for an initial deposit
by an annuitant and optional additional deposits, the time and amount of which
are at the discretion of the annuitant. Standard Life credits the account of
the annuitant with earnings at interest rates that are revised periodically
until the maturity date. This accumulated value is tax deferred. Revisions to
interest rates on FPDA's are restricted by an initial crediting rate guaranteed
for a specific period of time, usually one year, and a minimum crediting rate
guaranteed for the term of the FPDA, which is typically 3%. At maturity, the
annuitant can elect a lump sum cash payment of the accumulated value or one of
the various payout options available. Standard Life's FPDA's also typically
provide for penalty-free partial withdrawals of up to 10% annually of the
accumulation value after the annuitant has held the FPDA for more than 12
months. In addition, the annuitant may surrender the FPDA at any time before
the maturity date and receive the accumulated value, less any surrender charge
then in effect for that contract. To protect holders of FPDA's from a sharp
reduction in the credited interest rate after a FPDA is issued, Standard Life
permits the FPDA holder of certain annuities to surrender the annuity during a
specified period without incurring a surrender charge if the renewal crediting
rate is below a stated level. This stated level of interest is referred to as
the "bail-out rate" and is typically below the original crediting rate, but
above the minimum guaranteed crediting rate.
As of January 1, 2000, the crediting rates available on Standard Life's
currently marketed FPDA's ranged from 6.5% to 12.3%, with new issues having an
interest rate with a one year guarantee period. After the initial period, the
crediting rate may be changed periodically, subject to minimum guaranteed rates
from 3.0% to 4.0%. As of January 1, 2000, interest crediting rates after the
initial guarantee period ranged from 3.5% to 5.5%. The surrender charge is
initially 7% to 15% of the contract value depending on the product and
decreases over the applicable surrender charge period of five to thirteen
years. As of January 1, 2000, the bail-out rate for Standard Life's FPDA's was
4.5%; certain currently marketed products carry a bail out rate for the first
two to five years after issuance. As of December 31, 1999, Standard Life had
5,197 currently marketed FPDA contracts in force.
EQUITY-INDEXED FPDA'S. In response to consumers' desire for alternative
investment products with returns linked to common stocks, Standard Life
introduced a line of equity-indexed FPDA products in May 1998. These products
accounted for $59.3 million of the total premiums collected in 1999. The
annuity's contract value is equal to the premium paid increased for returns
based upon a percentage (the "participation rate") of the change in the S&P 500
Index and/or the Dow Jones Industrial Average (DJIA) Index during each year of
its term, subject to a minimum guaranteed value. The Company has the
discretionary ability to annually change the participation rate (which
currently ranges from 65% to 70% plus a first-year "bonus"). The minimum
guaranteed values are equal to 85% of first year and 90% of renewal premiums
collected for FPDA's, plus interest credited at an annual rate of 3%. The
annuities provide for penalty-free withdrawals of up to 10% in each year after
the first year of the annuity's term. Other withdrawals from the product are
subject to a surrender charge. The Company purchases Standard & Poor's 500
Index or DJIA Index Call Options to hedge potential increases to policyholder
benefits resulting from increases in the Index to which the product's return is
linked. As of December 31, 1999, Standard Life had 2,220 equity-indexed
contracts.
SINGLE PREMIUM IMMEDIATE ANNUITIES. Standard Life offers a single premium
immediate annuity ("SPIA") whereby an annuitant purchases an immediate annuity
with a one-time premium deposit at the time of issuance. Standard Life begins a
payout stream shortly after the time of issuance consisting of principal value
plus accumulated interest credited to such annuity. This product credits
interest based on an investment portfolio earned rate assumption. As of
December 31, 1999, Standard Life had 189 SPIA contracts in force.
UNIVERSAL LIFE. Flexible premium universal life ("FPUL") policies provide for
periodic deposits, credit interest to account values and charges to the account
values for mortality and administrative costs. As of January 1, 2000, the
current interest rate on new sales of FPUL's was 5.5% with a guaranteed
interest rate of 4%. As of December 31, 1999, Standard Life had 369 FPUL
policies in force.
TRADITIONAL LIFE. Standard Life offers several types of non-participating
traditional life policies, whole life policies with face amounts up to $50,000
and a 15 year term product with a critical illness rider. Traditional life
insurance products involve fixed premium payments made over time, with the
stated death benefit paid in full upon the death of the insured. The
traditional life policy combines the death benefit with a forced savings plan.
Premiums remain level over the life of the policy, with the policyholder
prefunding during the early years of coverage when risk of death is low. Over
time, traditional life policies begin to accrue a cash value which can be made
available to the policyholder net of taxes and withdrawal penalties. The term
policy provides benefits only as long as premiums are paid. As of December 31,
1999, Standard Life had 1,663 currently marketed traditional life policies in
force.
DIXIE LIFE PRODUCTS
Life insurance policies sold by Dixie Life in the final expense, or burial
market include fixed premium interest sensitive policies that provide for
increasing death benefits, as well as traditional whole life policies. These
policies are designed to cover expenses such as funeral, last illness, monument
and cemetery lot. The policies provide for a death benefit, generally not in
excess of $10,000, and a level premium payment. The products include a cash
value which may be borrowed by the policyholder. Dixie Life's policies sold in
other markets include interest sensitive and traditional whole life policies
and forms of term policies. The interest sensitive and whole life policies
include cash values which may be borrowed by the policyholder. Dixie Life
issued policies on both a participating and non-participating basis. As of
December 31, 1999, Dixie Life had 645 and 19,743 individual annuities and life
policies in force, respectively. Effective January 1, 1999, SMC decided not to
sell new business through Dixie Life, but continues to sell final expense
policies through Standard Life.
SMI PRODUCTS
UNIT-LINKED POLICIES. SMI currently writes unit-linked life products, which
are similar to U.S. produced variable life products. Separate account assets
and liabilities are maintained primarily for the exclusive benefit of
universal life contracts and investment contracts of which the majority
represents unit-linked business, where benefits on surrender and maturity are
not guaranteed. They generally represent funds held in accounts to meet
specific investment objectives of policyholders who bear the investment risk.
Investment income and investment gains and losses within the separate accounts
accrue directly to the policyholders. The fees received by SMI for
administrative and contract holder maintenance services performed for these
separate accounts are included in SMC's statement of operations.
In the past, SMI also sold investment contracts, universal life policies, and
to a lesser extent, traditional life policies. The investment contracts are
mainly short-term single premium endowments or temporary annuities under which
fixed benefits are paid to the policyholder. The terms of these contracts are
such that SMI has relatively small morbidity or mortality risk. The universal
life contracts are mainly regular premium and single premium endowment. The
benefits payable to the policyholders are directly linked to the investment
performance of the underlying assets.
FORMER PRODUCTS ("CLOSED BLOCKS")
SMC also generates cash flow and income from its closed blocks of in force life
insurance and annuities. Closed blocks consist of in force life insurance and
annuities that are not currently being marketed by SMC. The closed block
designation does not have legal or regulatory significance and there are no
restrictions on their assets or future profits. The premiums received on the
closed blocks are primarily from the ordinary and universal life business.
Closed block premiums typically decline over extended periods of time as a
result of policy lapses, surrenders and expiries.
ANNUITIES. SMC's closed blocks of deferred annuities consist primarily of
FPDA's and a small amount of single premium deferred annuities ("SPDA's")
which, unlike FPDA's, do not provide for additional deposits. As of January 1,
2000, these deferred annuities had crediting rates ranging from 3.5% to 5.5%
and guaranteed minimum crediting rates ranging from 3.0% to 5.5%. The crediting
rate may be changed periodically. The contract owner is permitted to withdraw
all or part of the accumulation value. SMC's closed blocks of annuities include
payout annuities. Payout annuities consist of those annuities in which benefits
are being paid out over a specified time period. Payout annuities cannot be
terminated by surrender or withdrawal. SMC's crediting rates on payout
annuities range from 3.0% to 7.0% and cannot be changed. At December 31, 1999,
SMC had 16,071 annuity contracts in force for closed blocks.
ORDINARY LIFE. The ordinary life policies included in SMC's closed blocks are
composed primarily of fixed premium, cash value whole life products. In
addition, they include annually renewable term policies as well as five, ten
and fifteen year level premium term policies. At December 31, 1999, SMC had
30,709 ordinary life policies in force for closed blocks.
UNIVERSAL LIFE. Certain closed blocks include universal life business. For
this business, SMC credits deposits and interest to account values and charges
the account values for mortality and administrative costs. At December 31,
1999, SMC had 9,089 universal life policies in force for the closed block of
business.
PRODUCT PROFITABILITY
The profitability of the life insurance and annuity products depend to a
significant degree on the maintenance of profit margins between investment
results from invested assets and interest credited on insurance and annuity
products. During 1999, such margins increased slightly as a result of decreased
crediting rates on insurance and annuity products. Refer to "Investments" in
Item 1 of this report.
The long-term profitability of insurance products depends on the accuracy of
the actuarial assumptions that underlie the pricing of such products. Actuarial
calculations for such insurance products, and the ultimate profitability of
such products, are based on four major factors: i) persistency, ii) mortality,
iii) return on cash invested by the insurer during the life of the policy and
iv) expenses of acquiring and administering the policies.
The average expected remaining life of Standard Life's ordinary life business
in force at December 31, 1999 was 9.3 years. This calculation was determined
based upon SMC's actuarial models and assumptions as to expected persistency
and mortality. Persistency is the extent to which insurance policies sold are
maintained by the insured. The persistency of life insurance and annuity
products is a critical element of their profitability. However, a surrender
charge often applies in the early contract years and declines to zero over
time.
Policyholders sometimes do not pay premiums, thus causing their policies to
lapse. For the years 1999, 1998 and 1997 Standard Life experienced total policy
lapses of 6.2%, 6.1% and 6.5% of total policies in force at December 31 of each
year, respectively. The American Council of Life Insurance 1999 Fact Book
reported industry life insurance voluntary termination rates in 1998 of 14.9%
for policies in force less than two years, 4.2% for policies in force for two
years or more and 5.8% for all policies in force.
OPERATIONS
SMC emphasizes a high level of service to agents and policyholders and strives
to achieve low overhead costs. SMC's principal administrative departments are
its financial, policyholder services and management information services
("MIS") departments. The financial department provides accounting, budgeting,
tax, investment, financial reporting and actuarial services and establishes
cost control systems for SMC. The policyholder services department reviews
policy applications, issues and administers policies and authorizes
disbursements related to claims and surrenders. The MIS department oversees and
administers SMC's information processing systems.
SMC's administrative departments in the United States use a common integrated
system that permits efficiency and cost control. SMC's MIS system serviced
approximately 202,000 active and inactive policies at December 31, 1999 and is
continually being improved to provide for growth from acquisitions and sales.
SMI's administrative and MIS departments in Luxembourg are an autonomous unit
from the systems in the United States.
UNDERWRITING
Premiums charged on insurance products are based in part on assumptions about
the incidence and timing of insurance claims. SMC has adopted and follows
underwriting procedures for traditional life, universal life and critical
illness insurance policies. To implement these procedures, SMC employs a
professional underwriting staff. All underwriting decisions are made in SMC's
home office. To the extent that an applicant does not meet SMC's underwriting
standards for issuance of a policy at the standard risk classifications, SMC
may rate or decline the application. Underwriting with respect to FPDA's is
minimal.
Traditional underwriting procedures are not applied to policies acquired in
blocks. In these cases, SMC reviews the mortality experience for recent years
and compares actual experience to that assumed in the actuarial projections for
the acquired policies.
INVESTMENTS
Investment activities are an integral part of SMC's business as the investment
income of SMC's insurance subsidiaries is an important part of its total
revenues. Profitability is significantly affected by spreads between interest
earned on invested assets and rates credited on insurance liabilities.
Substantially all credited rates on FPDA's may be changed at least annually.
For the year ended December 31, 1999, the weighted average net yield of SMC's
investment portfolio was 7.15% and the weighted average interest rate credited
on SMC's interest-sensitive liability portfolio, excluding liabilities related
to separate accounts and equity indexed annuities, was approximately 4.89% per
annum for an average interest spread of 226 basis points at December 31, 1999,
compared to 223 basis points at December 31, 1998. The increase in the average
interest spread includes lower crediting rates on new and existing FPDA
business in order to meet targeted pricing spreads. Increases or decreases in
interest rates could increase or decrease the average interest rate spread
between investment yields and interest rates credited on insurance liabilities,
which in turn could have a beneficial or adverse effect on the future
profitability of SMC. Sales of fixed maturity securities that result in
investment gains may also tend to decrease future average interest rate
spreads. State insurance laws and regulations prescribe the types of permitted
investments and limit their concentration in certain classes of investments.
SMC balances the duration of its invested assets with the expected duration of
benefit payments arising from insurance liabilities. The "duration" of a
security is a measure of a security's price sensitivity to changes in market
interest rates. The option adjusted duration of fixed maturities and
short-term investments for its U.S. insurance subsidiaries was 5.3 and 5.6 at
December 31, 1999 and 1998, respectively.
SMC's investment strategy is guided by strategic objectives established by the
Investment Committee of the Board of Directors. SMC's major investment
objectives are to: i) ensure adequate safety of investments and protect and
enhance capital; ii) maximize after-tax return on investments; iii) match the
anticipated duration of investments with the anticipated duration of policy
liabilities; and iv) provide sufficient liquidity to meet cash requirements
with minimum sacrifice of investment yield. Consistent with its strategy, SMC
invests primarily in securities of the U.S. government and its agencies,
investment grade utilities and corporate debt securities and collateralized
mortgage obligations ("CMOs"). When opportunities arise below investment grade
securities may be purchased, however, protection against default risk is a
primary consideration. SMC has determined it will not invest more than 7% of
its bond portfolio in below investment grade securities.
<PAGE>
The National Association of Insurance Commissioners ("NAIC") assigns quality
ratings and uniform book values to securities called "NAIC Designations" which
are used by insurers when preparing their annual statements. The NAIC assigns
ratings to publicly traded and privately-placed securities. The ratings
assigned range from Class 1 to Class 6, with a rating in Class 1
being of the highest quality. The following table sets forth the quality of
SMC's fixed maturity securities as of December 31, 1999, classified in
accordance with the ratings assigned by the NAIC:
Percent of Fixed
NAIC RATING (1) MATURITY SECURITIES
1 54
2 42
Investment Grade 96
3-4 4
Below Investment Grade -
Total fixed maturity securities 100%
Conseco Capital Management Inc. ("CCM"), a wholly owned subsidiary of Conseco,
Inc., manages SMC's domestic invested assets (other than mortgage loans, policy
loans, real estate and other invested assets), subject to the direction of
SMC's Investment Committee. In 1999, a quarterly fee of .035% on the first $500
million and .025% on amounts in excess of $500 million of the total market
value of the assets under management was paid to CCM for investment advisory
services.
Approximately 16% of SMC's fixed maturity securities at December 31, 1999 is
comprised of mortgage-backed securities which include CMOs and mortgage-backed
pass-through securities. Approximately 18% of the book value of mortgage-backed
securities in SMC's portfolio is backed by the full faith and credit of the
U.S. government as to the full amount of both principal and interest and 59%
are backed by an agency of the U.S. government (although not by the full faith
and credit of the U.S. government). SMC closely monitors the market value of
all investments within its mortgage-backed portfolio.
The following table summarizes SMC's mortgage-backed securities at December 31,
1999 (in thousands):
<TABLE>
<CAPTION>
Estimated Avg.
% of % of Avg. Life Term
Amortized Fixed Fair Fixed of to Final
Cost Maturities Value Maturities Investment Maturity
(In Years) (In Years)
Agency CMOs:
<S> <C> <C> <C> <C> <C> <C>
Planned and target amortization $31,141 4.9% $29,896 4.9% 5.9 22.5
classes
Sequential and support classes 8,611 1.3% 8,026 1.3% 5.0 22.5
Total $39,752 6.2% $37,922 6.2% 5.7 22.5
Non-agency CMOs:
Sequential classes 1,363 0.2% 1,338 0.2% 2.0 11.1
Other 8,176 1.3% 7,775 1.3% 6.1 23.2
Total CMOs $49,291 7.7% $47,035 7.7% 5.7 22.3
Non agency CMBS 12,947 2.0% 12,581 2.1% 5.3 18.0
Agency mortgage-backed pass-through 42,175 6.5% 41,238 6.8% 4.1 23.1
securities
Total mortgage-backed securities $104,413 16.2% $100,854 16.6% 5.0 22.1
</TABLE>
<PAGE>
The market values for SMC's mortgage-backed securities were determined from
broker-dealer markets, internally developed methods and nationally
recognized statistical rating organizations.
Certain mortgage-backed securities are subject to significant prepayment
risk, since, in periods of declining interest rates, mortgages may be
repaid more rapidly than scheduled as individuals refinance higher rate
mortgages to take advantage of the lower current rates. As a result,
holders of mortgage-backed securities may receive large prepayments on
their investment which cannot be reinvested at an interest rate comparable
to the rate on the prepaying mortgages. SMC has addressed this risk of
prepayment risk by investing 30% of its mortgage-backed investment
portfolio in planned and target amortization classes. These investments are
designed to amortize in a more predictable manner by shifting the primary
risk of prepayment of the underlying collateral to investors in other
tranches ("support classes"). Mortgage-backed pass-through securities,
"sequential" and support class CMOs, which comprised the remaining 70% of
the book value of SMC's mortgage-backed securities at December 31, 1999,
are more sensitive to this prepayment risk.
SEPARATE ACCOUNTS
Separate account assets and liabilities are maintained primarily for
universal life contracts of which the majority represents unit-linked
business where benefits on surrender and maturity are not guaranteed. They
generally represent funds held in accounts to meet specific investment
objectives of policyholders who bear the investment risk. Investment income
and investment gains and losses accrue directly to such policyholders.
RESERVES
In accordance with applicable insurance laws, SMC's insurance subsidiaries
have established and carry as liabilities in their statutory financial
statements, actuarially determined reserves to satisfy their respective
annuity contract and life insurance policy obligations. Reserves, together
with premiums to be received on outstanding policies and interest thereon
at certain assumed rates, are calculated to be sufficient to satisfy policy
and contract obligations. The actuarial factors used in determining such
reserves are based on statutorily prescribed mortality tables and interest
rates.
The reserves in the consolidated financial statements in this report are
calculated based on GAAP and differ from those specified by the laws of the
various states and recorded in the statutory financial statements of SMC's
insurance subsidiaries. These differences arise from the use of different
mortality tables and interest rate assumptions, the introduction of lapse
assumptions into the reserve calculation and the use of the net level
premium reserve method on all insurance business. See note 1 to the
consolidated financial statements for reserve assumptions under GAAP.
To determine policy benefit reserves for its life insurance and annuity
products, SMC performs periodic studies to compare current experience for
mortality, interest and lapse rates with projected experience used in
calculating the reserves. Differences are reflected currently in earnings
for each period. SMC historically has not experienced significant adverse
deviations from its assumptions.
REINSURANCE
Consistent with the general practice of the life insurance industry, SMC
has reinsured portions of the coverage provided by its insurance products
with other insurance companies under agreements of indemnity reinsurance.
SMC's policy risk retention limit on the life of any one individual does
not exceed $150,000.
Indemnity reinsurance agreements are intended to limit a life insurer's
maximum loss on a particular risk or to obtain a greater diversification of
risk. Indemnity reinsurance does not discharge the primary liability of the
original insurer to the insured, but it is the practice of insurers for
statutory accounting purposes (subject to certain limitations of state
insurance statutes) to account for risks which have been reinsured with
other approved companies, to the extent of the reinsurance, as though they
are not risks for which the original insurer is liable. However, under
Statement of Financial Accounting Standards No. 113 ("SFAS 113"),
"Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts" these amounts are added back to policy reserves
and recorded as amounts due from reinsurers.
Reinsurance ceded on life insurance policies to unaffiliated companies by
SMC in 1999, 1998 and 1997 represented 50.1%, 48.9% and 51.9%,
respectively, of gross combined individual life insurance in force at the
end of such years. Reinsurance assumed in the normal course from
unaffiliated companies by SMC represented 0.0% in 1999 and .02% in 1998 and
1997, of net combined individual life insurance in force excluding
reinsurance from The Guardian Insurance and Annuity Company, Inc. ("GIAC"),
a subsidiary of The Guardian Group, New York, New York.
<PAGE>
The following is reinsurance ceded information for in force life insurance
policies at December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
% of Total
Face Value of Reinsurance Reinsurance
INSURANCE COMPANY LIFE POLICIES CEDED RECOVERABLE
<S> <C> <C> <C>
Lincoln National Life $313,755 28.4% $3,853
Insurance Company
Swiss Re Life and Health 149,238 13.5% 592
Security Life of Denver 130,577 11.8% 821
</TABLE>
Reinsured life insurance in force at December 31, 1999 is ceded to insurers
rated "A" or better by A.M. Best. SMC historically has not experienced any
material losses in collection of reinsurance receivables.
Commencing January 1, 1995, SMC began to reinsure a portion of its annuity
business. The primary purposes of the reinsurance agreement were to limit
the net loss arising from large risks, maintain SMC's exposure to loss
within capital resources and provide additional capacity for future growth.
Furthermore, these reinsurance agreements have allowed SMC to write volumes
of business that it would not otherwise have been able to write due to
restrictions based on its ratio of surplus to liabilities as determined by
regulatory authorities in the State of Florida. By reinsuring a portion of
the annuity business, the liability growth is slowed, thereby avoiding the
erosion of surplus that can occur in periods of increasing sales. If SMC's
ratio of surplus to liabilities falls below 4%, the State of Florida could
prohibit SMC from writing new business in Florida. SMC's largest annuity
reinsurer at December 31, 1999, Winterthur Life Re Insurance Company
("Winterthur"), represented $28.5 million, or 60.5% of total reinsurance
recoverable, $.1 million of premium deposits ceded in 1999 and is rated "A"
("Excellent") by A.M. Best. From January 1, 1996 to March 31, 1996,
Standard Life ceded a 50% quota-share portion of its annuity business.
Effective April 1, 1996, Standard Life reduced it to 25% and effective
October 1, 1998, discontinued ceding its annuity business. This reduction
was possible since the surplus strain experienced by Standard Life was not
as great as originally anticipated. Winterthur limits dividends and other
transfers by Standard Life to SMC or affiliated companies if adjusted
surplus is less than 5.5% of admitted assets or $36.6 million at December
31, 1999.
On March 18, 1996, Standard Life completed the sale of First International
to GIAC and received proceeds of $10.4 million including $1.5 million for
the charter and licenses. Standard Life realized a net pretax gain of $1.0
million and a tax benefit of $1.4 million on the sale. First
International, Standard Life and GIAC have entered into a series of
reinsurance and other agreements that include provisions for Standard Life
to administer First International policies in force at the date of sale,
and for Standard Life to continue to receive the profit stream from certain
First International policies in force effective January 1, 1996.
Effective January 1, 1996, GIAC entered into a modified coinsurance
indemnity reinsurance agreement with Standard Life with respect to Blocks I
(ordinary life policies issued in New York and New Jersey) and II (ordinary
life policies not issued in New York and New Jersey). Pursuant to this
agreement, Standard Life administers the policies in both Block I and
Block II. Under the terms of the agreement, Standard Life assumed
approximately $18.8 million of reserves for Block I and Block II from GIAC
as of January 1, 1996. During 1996, Standard Life incurred and paid
experience rating refunds to GIAC on Block I for profits earned in excess
of specified amounts. These refunds were calculated and paid on a quarterly
basis. As a result, the economic risks and benefits associated with Block I
remained with GIAC. Effective January 1, 1997, GIAC and Standard Life
agreed to terminate the Block I agreement.
Savers Life issued and marketed Medicare supplement policies in 1998
including the time period from March 12, 1998, the acquisition date of
Savers Life, through July 1, 1998, when the Medicare supplement business
was sold. In connection with the sale of the Medicare supplement business,
Savers Life received an initial statutory ceding allowance of $4.2 million
which was offset by a reserve reduction of $1.6 million and write off of
present value of future profits of $2.6 million and resulted in no gain or
loss for GAAP. Under the terms of the reinsurance agreement, Standard Life
administered the Medicare supplement business through October 1, 1999 in
exchange for administration fee income. The consummation of this
transaction resulted in the Company exiting from the Medicare supplement
business it acquired with the Savers Life acquisition.
Standard Life and Dixie Life have financial reinsurance agreements that
entitles them to reductions of $2.0 million and $.7 million, respectively,
to statutory reserves at December 31, 1999.
COMPETITION
The life insurance industry is highly competitive and consists of a large
number of both stock and mutual insurance companies, many of which have
substantially greater financial resources, broader and more diversified
product lines and larger staffs than those possessed by SMC. There are
approximately 2,000 life insurance companies in the United States which may
offer insurance products similar to those marketed by SMC. Competition
within the life insurance industry occurs on the basis of, among other
things, i) product features such as price and interest rates, ii) perceived
financial stability of the insurer, iii) policyholder service, iv) name
recognition and v) ratings assigned by insurance rating organizations.
Additionally, when SMC bids on companies it wishes to acquire, it typically
is in competition with other entities.
SMC must also compete with other insurers to attract and retain the
allegiance of agents. SMC believes it has been successful in attracting and
retaining agents because it has been able to offer a competitive package of
innovative products, competitive commission structures, prompt policy
issuance and responsive policyholder service. Because most annuity business
written by life companies is through agents, management believes that
competition centers more on the strength of the agent relationship rather
than on the identity of the insurer.
Competition also is encountered from the expanding number of banks,
securities brokerage firms and other financial intermediaries which are
marketing insurance products and which offer competing products such as
savings accounts and securities. The Company began distributing annuities
through financial institutions as a result of the acquisition of Savers
Marketing in March 1998. The recent passage, by Congress, of the Gramm-
Leach-Bliley Financial Services Modernization Act ("GLB Act") has expanded
competitive opportunities for non-insurance financial services companies.
The full effects of the GLB Act on our competition cannot be predicted with
certainty at this time.
The unit-linked life insurance market in Europe is highly competitive and
consists of many companies domiciled in the United Kingdom and its offshore
centers, as well as many companies in Luxembourg and Ireland which sell
products similar to those of SMI. SMI is able to develop its share of a
competitive market by developing strong relationships with high-quality
independent intermediaries and by continual innovation in the design of
niche market products.
Financial institutions, school districts, marketing companies, agents who
market insurance products and policyholders use the ratings of an insurer
as one factor in determining which insurer's annuity to market or purchase.
Standard Life and Dixie Life have a rating of "B+" and "B", respectively by
A.M. Best. A rating of "B+" is assigned by A.M. Best to companies which,
in their opinion, have achieved very good overall performance when compared
to the standards established by A.M. Best, and have a good ability to meet
their obligations to policyholders over a long period of time. A rating of
"B" is assigned by A.M. Best to companies which, in their opinion, have
achieved good overall performance when compared to the standards
established by A.M. Best. According to A.M. Best, these companies generally
have an adequate ability to meet their obligations to policyholders, but
their financial strength is vulnerable to unfavorable changes in
underwriting or economic conditions. In evaluating a company's financial
and operating performance, A.M. Best reviews the company's profitability,
leverage and liquidity as well as the company's book of business, the
adequacy and soundness of its reinsurance, the quality and estimated market
value of its assets, the adequacy of its reserves and the experience and
competence of its management. A.M. Best's ratings are based upon factors
relevant to policyholders, agents, insurance brokers and intermediaries and
are not directed to the protection of investors. Generally, rating agencies
base their ratings on information furnished to them by the issuer and on
their own investigations, studies and assumptions by the rating agencies.
There is no assurance that any particular rating will continue for any
given period of time or that it will not be changed or withdrawn entirely
if, in the judgment of the rating agency, circumstances so warrant.
Although a higher rating by A.M. Best or another insurance rating
organization could have a favorable effect on Standard Life's business,
management believes that it is able to compete on the basis of their
competitive crediting rates, asset quality, strong relations with its
independent agents and the quality of service to its policyholders.
FEDERAL INCOME TAXATION
The life insurance and annuity products marketed and issued by Standard
Life generally provide the policyholder with an income tax advantage, as
compared to other saving investments such as certificates of deposit and
bonds, in that income taxation on the increase in value of the product is
deferred until receipt by the policyholder. With other savings investments,
the increase in value is taxed as earned. Life insurance benefits which
accrue prior to the death of the policyholder, and annuity benefits, are
generally not taxable until paid, and life insurance death benefits are
generally exempt from income tax. The tax advantage for life insurance and
annuity products is provided in the Internal Revenue Code ("IRC"), and is
generally followed in all states and other United States taxing
jurisdictions. Accordingly, it is subject to change by Congress and the
legislatures of the respective taxing jurisdictions.
SMC and its U.S. non-insurance subsidiaries file a consolidated return for
federal income tax purposes and, as of December 31, 1999, have net
operating loss carryforwards of approximately $9.4 million which expire
from 2005 to 2018.
In addition, Standard Life and Dixie Life file a consolidated return for
federal income tax purposes and at December 31, 1999, have a net operating
loss carryforward of approximately $5.3 million, which expires in 2010 and
2019. This carryforward will be available to reduce future taxable income
of Standard Life.
Standard Management International is a Luxembourg 1929 holding company, and
has a preferential tax status. SMI is completely exempt from corporate
income tax, municipal business tax and net capital tax, but is subject to
"taxe d'abonnement", levied annually at a rate of 0.2% of the paid up
capital. Premier Life (Bermuda) is exempt from income tax until March 2016
pursuant to a decree from the Minister of Finance. Premier Life
(Luxembourg) is subject to Luxembourg income taxation (statutory corporate
rate of 37.45%) and a capital tax of approximately 0.5% of its net equity.
At December 31, 1999, Premier Life (Luxembourg) had accumulated corporate
income tax loss carryforwards of approximately $1.6 million, all of which
may be carried forward indefinitely. To the extent that such income is
taxable under U.S. law, it will be included in SMC's consolidated return.
<PAGE>
INFLATION
The primary direct effect on SMC of inflation is the increase in operating
expenses. A large portion of SMC's operating expenses consists of salaries
which are subject to wage increases at least partly affected by the rate of
inflation. SMC attempts to minimize the impact of inflation on operating
expenses through programs to improve productivity.
The rate of inflation also has an indirect effect on SMC. To the extent
that the government's economic policy to control the level of inflation
results in changes in interest rates, SMC's new sales of insurance products
and investment income are affected. Changes in the level of interest rates
also have an effect on interest spreads, as investment earnings are
reinvested.
FOREIGN OPERATIONS AND CURRENCY RISK
SMI policyholders invest in assets denominated in a broad range of
currencies. Policyholders effectively bear the currency risk, if any, as
these investments are matched by policyholder separate account liabilities.
Therefore, their investment and currency risk is limited to premiums they
have paid. Policyholders are not permitted to invest directly in options,
futures and derivatives.
SMI could be exposed to currency fluctuations if currencies within the
conventional investment portfolio or certain actuarial reserves are
mismatched. The assets and liabilities of this portfolio and the reserves
are continually matched by the company and at regular intervals by an
independent actuary. In addition, Premier Life (Luxembourg's) stockholder's
equity is denominated in Luxembourg francs. Premier Life (Luxembourg) does
not hedge its translation risk because its stockholder's equity will remain
in Luxembourg francs for the foreseeable future and no significant realized
foreign exchange gains or losses are anticipated. At December 31, 1999,
there is a $.9 million unrealized loss from foreign currency translation.
Due to the nature of unit-linked products issued by SMI, which represent
98% of the SMI portfolio, the investment risk rests with the policyholder.
Investment risk for SMI exists where investment decisions are made with
respect to the remaining traditional business and for the assets backing
certain actuarial and regulatory reserves. The investments underlying these
liabilities mostly represent short term investments and fixed maturity
securities which are normally bought and/or disposed of only on the advice
of independent consulting actuaries who perform an annual exercise
comparing anticipated cash flows on the insurance portfolio with the cash
flows from the fixed maturity securities. Any resulting material foreign
currency mismatches are then covered by buying and/or selling the
securities as appropriate.
REGULATORY FACTORS
SMC's insurance subsidiaries are subject to significant regulation by the
insurance regulatory authorities in the jurisdictions in which they are
domiciled and the insurance regulatory bodies in the other jurisdictions in
which they are licensed to sell insurance. The purpose of such regulation
is primarily to ensure the financial stability of insurance companies and
to provide safeguards for policyholders rather than to protect the interest
of stockholders. The insurance laws of various jurisdictions establish
regulatory agencies with broad administrative powers relating to i) the
licensing of insurers and their agents, ii) the regulation of trade
practices, iii) management agreements, iv) the types of permitted
investments and maximum concentration, v) deposits of securities, vi) the
form and content of financial statements, vii) premiums charged by
insurance companies, viii) sales literature and insurance policies, ix)
accounting practices and the maintenance of specified reserves, and x)
capital and surplus. SMC's insurance subsidiaries are required to file
detailed periodic financial reports with supervisory agencies in certain
jurisdictions.
Most states have also enacted legislation regulating insurance holding
company activities including acquisitions, extraordinary dividends, terms
of surplus debentures, terms of affiliate transactions and other related
matters. The insurance holding company laws and regulations vary by state,
but generally require an insurance holding company and its insurance
company subsidiaries licensed to do business in the state to register and
file certain reports with the regulatory authorities, including information
concerning capital structure, ownership, financial condition, certain
intercompany transactions and general business operations. State holding
company laws also require prior notice or regulatory agency approval of
certain material intercompany transfers of assets within the holding
company structure. Recently a number of state regulators have considered
or have enacted legislation proposing that change, and in many cases
increase, the authority of state agencies to regulate insurance companies
and holding companies. For additional information on state laws regulating
insurance company subsidiaries, refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources", and Note 13 to the Company's consolidated financial
statements.
Under Indiana insurance law, Standard Life may not enter into certain
transactions, including management agreements and service contracts, with
members of its insurance holding company system, including Standard
Management, unless Standard Life has notified the Indiana Department of
Insurance of its intention to enter into such transactions and the Indiana
Department of Insurance has not disapproved of them within the period
specified by Indiana law. Among other things, such transactions are subject
to the requirement that their terms and charges or fees for services
performed be fair and reasonable.
<PAGE>
The Indiana insurance laws and regulations require that the statutory
surplus of Standard Life following any dividend or distribution be
reasonable in relation to its outstanding liabilities and adequate to its
financial needs. The Indiana Department of Insurance may bring an action to
enjoin or rescind the payment of a dividend or distribution by Standard
Life that would cause its statutory surplus to be unreasonable or
inadequate under this requirement.
Most states, including Indiana, require administrative approval of the
acquisition of 10% or more of the outstanding shares of an insurance
company incorporated in the state or the acquisition of 10% or more of the
outstanding shares of an insurance holding company whose insurance
subsidiary is incorporated in the state. The request for approval must be
accompanied by detailed information concerning the acquiring parties and
the plan of acquisition. The acquisition of 10% of such shares is generally
deemed to be the acquisition of "control" for the purpose of the holding
company statutes. However, in many states the insurance authorities may
find that "control" in fact does or does not exist in circumstances in
which a person owns or controls either a lesser or a greater amount of
securities.
In some instances state regulatory authorities require deposits of assets
for the protection of either policyholders in those states or for all
policyholders. At December 31, 1999, securities of $12.5 million or
approximately 2% of the book value of SMC's U.S. insurance subsidiaries'
invested assets were on deposit with various state treasurers or
custodians. Such deposits must consist of securities that comply with the
standards that the particular state has established. Assets of SMI of $4.8
million at December 31, 1999 were held by a custodian bank approved by the
Luxembourg regulatory authorities to comply with local insurance laws.
In recent years, the NAIC and state insurance regulators have reexamined
existing laws and regulations and their application to insurance companies.
This reexamination has focused on i) insurance company investment and
solvency issues, ii) risk-based capital guidelines, iii) assumption
reinsurance, iv) interpretations of existing laws, v) the development of
new laws, vi) the interpretation of nonstatutory guidelines, vii) the
standardization of statutory accounting rules and viii) the circumstances
under which dividends may be paid. The NAIC has encouraged states to adopt
model NAIC laws on specific topics such as holding company regulations and
the definition of extraordinary dividends. It is not possible to predict
the future impact of changing state regulation on the operations of SMC.
The NAIC, as well as Indiana and Mississippi, have each adopted Risk-Based
Capital ("RBC") requirements for life and health insurance companies to
evaluate the adequacy of statutory capital and surplus in relation to
investment and insurance risks. State insurance regulators use the RBC
requirements as regulatory tools only, which aid in the identification of
insurance companies that could potentially lack sufficient capital.
Regulatory compliance is determined by a ratio (the "RBC Ratio") of the
company's regulatory total adjusted capital to its authorized control level
RBC. The two components of the RBC Ratio are defined by the NAIC. The RBC
ratios which require corrective action as follows:
<TABLE>
<CAPTION>
LEVEL RBC RATIO CORRECTIVE ACTION
<S> <C> <C>
Company Action 1.5 - 2 Company is required to submit a plan
to improve its RBC Ratio
Regulatory Action 1 - 1.5 Regulators will order corrective
actions
Authorized Control 0.7 - 1 Regulators are authorized to take
control of the company
Mandatory Control less than 0.7 Regulators must take over the company
</TABLE>
<PAGE>
At December 31, 1999, the RBC Ratios of Standard Life and Dixie Life were
both at least two and a half times greater than the levels at which company
action is required. If these RBC Ratios should decline in the future,
those subsidiaries might be subject to increased regulatory supervision and
decreased ability to pay dividends, management fees and surplus debenture
interest to SMC.
On the basis of annual statutory statements filed with state regulators,
the NAIC calculates twelve financial ratios to assist state regulators in
monitoring the financial condition of insurance companies. A "usual range"
of results for each ratio is used as a benchmark. In the past, variances
in certain ratios of our insurance subsidiaries have resulted in inquiries
from insurance departments to which we have responded. Such inquiries did
not lead to any restrictions affecting the Company's operations.
SMC attempts to manage its assets and liabilities so that income and
principal payments received from investments are adequate to meet the cash
flow requirements of its policyholder liabilities. The cash flows of SMC's
liabilities are affected by actual maturities, surrender experience and
credited interest rates. SMC periodically performs cash flow studies under
various interest rate scenarios to evaluate the adequacy of expected cash
flows from its assets to meet the expected cash requirements of its
liabilities. SMC utilizes these studies to determine if it is necessary to
lengthen or shorten the average life and duration of its investment
portfolio. Because of the significant uncertainties involved in the
estimation of asset and liability cash flows, there can be no assurance
that SMC will be able to effectively manage the relationship between its
asset and liability cash flows.
The statutory filings of SMC's insurance subsidiaries require
classifications of investments and the establishment of an Asset Valuation
Reserve ("AVR"), designed to stabilize a company's statutory surplus
against fluctuations in the market value of stocks and bonds, according to
regulations prescribed by the NAIC. The AVR consists of two main
components: a "default component" to provide for future credit-related
losses on fixed income investments and an "equity component" to provide for
losses on all types of equity investments, including real estate. The NAIC
requires an additional reserve, called the Interest Maintenance Reserve
("IMR"), which consists of the portion of realized capital gains and losses
from the sale of fixed income securities attributable to changes in
interest rates. The IMR is required to be amortized against earnings on a
basis reflecting the remaining period to maturity of the fixed income
securities sold. These regulations affect the ability of SMC's insurance
subsidiaries to reflect future investment gains and losses in current
period statutory earnings and surplus.
The amounts related to AVR and IMR for the insurance subsidiaries at
December 31, 1999 are summarized as follows (in thousands):
Maximum
AVR AVR IMR
Standard Life $4,562 $5,716 $12,860
Dixie Life 180 261 158
The annual addition to the AVR for 1999 is 20% of the maximum reserve over
the accumulated balance. If the calculated reserve with current year
additions exceeds the maximum reserve amount, the reserve is reduced to the
maximum amount. For the year ended December 31, 1999, SMC's U.S.
subsidiaries each made the required contribution to the AVR.
Most jurisdictions require insurance companies to participate in guaranty
funds designed to cover claims against insolvent insurers. Insurers
authorized to transact business in these jurisdictions are generally
subject to assessments based on annual direct premiums written in that
jurisdiction to pay such claims, if any. These assessments may be deferred
or forgiven under most guaranty laws if they would threaten an insurer's
financial strength and, in certain instances, may be offset against future
state premium taxes. The incurrence and amount of such assessments have
increased in recent years and may increase further in future years. The
likelihood and amount of all future assessments cannot be reasonably
estimated and are beyond the control of SMC.
As part of their routine regulatory oversight process, approximately once
every three to five years, state insurance departments conduct periodic
detailed examinations ("Examinations") of the books, records and accounts
of insurance companies domiciled in their states. Standard Life underwent
an Examination during 1996 for the five-year period ended December 31, 1995
and Dixie Life underwent an examination during 1998 for the five-year
period ended December 31, 1997. The final examination reports issued by the
Indiana and Mississippi Departments of Insurance did not raise significant
issues.
The federal government does not directly regulate the insurance business.
However, federal legislation and administrative policies in several areas,
including pension regulation, age and sex discrimination, financial
services regulation and federal taxation, do affect the insurance business.
In addition, legislation has been introduced from time to time in recent
years which, if enacted, could result in the federal government assuming a
more direct role in the regulation of the insurance industry. The recently
passed GLB Act has left the currently-existing regime of state insurance
regulation largely intact; however, more comprehensive Federal legislation
in this area is still being actively considered by Congress.
<PAGE>
EMPLOYEES
As of March 15, 2000, SMC had 141 employees which were comprised of the
following: Standard Life - 85 employees, SMI - 20 employees (9 of whom are
covered by a collective bargaining agreement), Standard Management - 10
employees and Savers Marketing - 26 employees. SMC believes that its
future success will depend, in part, on its ability to continue to attract
and retain highly-skilled technical, marketing, support and management
personnel. Management believes that it has excellent relations with its
employees.
ITEM 2. PROPERTIES
DOMESTIC OPERATIONS. SMC leases approximately 31,000 square feet in an
office building located at 9100 Keystone Crossing, Indianapolis, Indiana,
under the terms of a lease which expires on June 1, 2001. SMC entered into
a lease on March 31, 1997, for approximately 16,000 square feet in a
warehouse located at 2525 North Shadeland, Indianapolis, Indiana, under the
terms of a lease which expires on September 30, 2001.
Savers Marketing leases approximately 6,000 square feet in an office
building located at 8064 North Point Boulevard, Winston-Salem, North
Carolina, under the terms of a lease that expires on September 30, 2001.
INTERNATIONAL OPERATIONS. SMI entered into a lease on November 17, 1997
for approximately 4,500 square feet in an office building located at 13A,
rue de Bitbourg, L-1273 Luxembourg, Grand Duchy of Luxembourg, under the
terms of a lease which expires on November 16, 2003.
ITEM 3. LEGAL PROCEEDINGS
An officer and director of SMC resigned effective April 15, 1997. On June
19, 1997, this former office commenced an action in the Superior Court of
Marion County, Indiana against SMC claiming that his employment agreement
contained a provision to the effect that, following a termination of his
employment with SMC under certain circumstances, he would be entitled to
receive certain benefits. This former officer has asserted to SMC that he
is entitled to a lump sum termination payment of $1.7 million and
liquidated damages not exceeding $3.3 million by virtue of his voluntarily
leaving SMC's employment. SMC disputes those claims. SMC filed its Answer
and Counterclaim on September 11, 1997. SMC's investigation since the
action was filed revealed a basis for the termination of employment of the
former office for cause relative to after-acquired evidence. On October
14, 1997, the Board of Directors of SMC terminated the former officer for
cause effective March 15, 1997. Such termination will also be argued by
SMC as a complete defense to all claims asserted by the former officer. The
ultimate outcome of the action cannot presently be determined. Accordingly,
no provision for any liability that may result has been made in the
consolidated financial statements. Management believes that the conclusion
of such litigation will not have a material adverse effect on SMC's
consolidated financial condition.
In addition, SMC is involved in various legal proceedings in the normal
course of business. In most cases, such proceedings involve claims under
insurance policies or other contracts of SMC. The outcomes of these legal
proceedings are not expected to have a material adverse effect on the
consolidated financial position, liquidity, or future results of operations
of SMC based on SMC's current understanding of the relevant facts and law.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At the Company's Annual Meeting of Stockholders held on June 10, 1999, the
following individuals were elected to the Board of Directors:
Shares For Shares Withheld
Robert A. Borns 6,421,300 77,161
Jerry E. Francis 6,412,311 86,150
Raymond J. Ohlson 6,420,197 78,264
A total of 6,498,461 shares were present in person or by proxy at the
Annual Meeting of Stockholders.
EXECUTIVE OFFICERS
The following table sets forth information concerning each of SMC's
executive officers:
NAME AGE POSITION
Ronald D. Hunter 48 Chairman of the Board, Chief Executive Officer and
President
Raymond J. Ohlson 49 Executive Vice President and Chief Marketing Officer
Paul B. Pheffer 48 Executive Vice President, Chief Financial Officer
Stephen M. Coons 58 Executive Vice President, General Counsel and Secretary
Edward T. Stahl 53 Executive Vice President and Chief Administrative Officer
RONALD D. HUNTER Mr. Hunter has been the Chairman of the Board, Chief
Executive Officer and President of SMC since its formation in June 1989 and
the Chairman of the Board and Chief Executive Officer of Standard Life
since December 1987. Previously, Mr. Hunter held several management and
sales positions in the life insurance industry with a number of companies
including Conseco, Inc. (1981-1986), Aetna Life & Casualty Company
(1978-1981), United Home Life Insurance Company (1975-1977) and Prudential
Life Insurance Company (1972-1975).
RAYMOND J. OHLSON Mr. Ohlson has served as Executive Vice President and
director of SMC since December 1993. Since June 1993, Mr. Ohlson has
served as President of Standard Life. Mr. Ohlson entered the life insurance
business in 1971 and is a life member of the Million Dollar Round Table. He
earned his CLU designation in 1980.
PAUL ("PETE") B. PHEFFER Mr. Pheffer has been Executive Vice President,
Chief Financial Officer and director of SMC since June 1997. Prior to
joining SMC, Mr. Pheffer was Senior Vice President -- Chief Financial
Officer and Treasurer of Jackson National Life Insurance Company from 1994
to 1996 and prior to that was Senior Vice President -- Chief Financial
Officer at Kemper Life Insurance Companies from 1992 to 1994. Mr. Pheffer,
a CPA, received his MBA from the University of Chicago in 1988.
STEPHEN M. COONS Mr. Coons has been a director of SMC since August 1989.
Mr. Coons has been General Counsel and Executive Vice President of SMC
since March 1993 and has been Secretary of SMC since March 1994. He was of
counsel to the law firm of Coons, Maddox & Koeller from March 1993 to
December 1996. Prior to March 1993, Mr. Coons was a partner with the law
firm of Coons & Saint. He has been practicing law for 29 years. Mr. Coons
served as Indiana Securities Commissioner from 1978 to 1983.
EDWARD T. STAHL Mr. Stahl has been an Executive Vice President of SMC
since its formation, has been a director of SMC from July 1989 and was
appointed Chief Administrative Officer in November 1998. Mr. Stahl was
Secretary of SMC from June 1989 to March 1994. Mr. Stahl was President and
Chief Operations Officer of Standard Life from May 1988 to June 1993. He
has been a director of Standard Life since December 1987, and Executive
Vice President and Secretary since June 1993. Mr. Stahl has served in
various capacities in the insurance industry since 1966. He earned his FLMI
designation in 1981, and is a member of several insurance associations.
<PAGE>
PART II
ITEM 5.MARKET FOR SMC COMMON STOCK AND RELATED STOCKHOLDER MATTERS
SMC Common Stock trades on NASDAQ under the symbol "SMAN". The following
table sets forth, for the periods indicated, the range of the high and low
sales prices of SMC Common Stock as reported by NASDAQ. SMC has never paid
cash dividends on its Common Stock. At the close of business on March 15,
2000 there were approximately 3,016 holders of record of the outstanding
shares of SMC Common Stock. Although SMC Common Stock is traded on NASDAQ,
no assurance can be given as to the future price of or the markets for the
stock.
SMC
COMMON STOCK
HIGH LOW
1998
Quarter ended March 31, 1998 7.500 6.125
Quarter ended June 30, 1998 7.625 7.000
Quarter ended September 30, 1998 7.563 6.625
Quarter ended December 31, 1998 7.000 6.000
1999
Quarter ended March 31, 1999 7.125 5.375
Quarter ended June 30, 1999 6.563 5.250
Quarter ended September 30, 1999 6.938 4.656
Quarter ended December 31, 1999 6.219 4.250
<PAGE>
ITEM 6.SMC SELECTED HISTORICAL FINANCIAL DATA (A)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SHARES OUTSTANDING)
The following historical financial data of SMC was derived from its audited
consolidated financial statements. This historical financial data should
be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the SMC Consolidated
Financial Statements and related Notes.
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Premium income $ 13,090 $14,479 (e) $7,100 $10,468 (d) $ 5,504
Investment activity:
Net investment income 44,821 34,221 29,197 20,871 18,517
Net realized investment gains 78 353 396 1,302 688
Total revenues 72,963 63,275 46,855 40,205 30,238
Interest expense and financing costs 3,385 2,955 2,381 805 118
Total benefits and expenses 65,565 56,964 43,593 36,670 (d) 28,682
Income before income taxes and
extraordinary gain 7,398 6,311 3,262 3,535 1,556
Net income 5,272 4,681 2,645 4,767 1,313
Operating income (b) 5,221 4,448 2,384 1,174 461
PER SHARE DATA:
Income per share before extraordinary $.69 $.68 $.54 $.88 $.25
gain
Net income .69 .68 .54 .98 .25
Net income, assuming dilution .65 .62 .48 .91 .25
Operating income (b) .69 .65 .49 .24 .09
Operating income, assuming dilution (b) .65 .58 .43 .21 .09
Weighted average common shares 9,553,731 9,363,763 5,591,217 5,549,057 5,345,937
outstanding, assuming dilution
Book value per common share $ 6.85 $ 8.64 $ 8.88 $ 7.95 $ 7.73
Book value per common share excluding $ 8.89 $ 8.43 $ 8.44 $ 8.09 $ 7.23
unrealized gain (loss) on securities
available for sale
Common shares outstanding 7,785,156 7,641,454 4,876,490 5,024,270 5,205,425
BALANCE SHEET DATA (at year end):
Invested assets $ 648,503 $ 592,123 $ 398,782 $ 370,138 $ 280,597
Assets held in separate accounts 319,973 190,246 148,064 128,546 122,705
Total assets 1,150,977 956,150 668,992 628,413 479,598
Long-term debt, notes payable and 34,500 35,000 26,141 20,697 4,191
capital
lease obligations
Series A preferred stock 6,530 6,530 -- -- --
Class S preferred stock -- -- -- 1,757 --
Shareholders' equity 53,360 66,042 43,313 39,919 40,242
Shareholders' equity, excluding 69,219 64,382 41,142 40,665 37,660
unrealized gain (loss) on securities
available for sale
Ratio of debt to total capitalization (c) 31% 33% 39% 33% 10%
</TABLE>
<PAGE>
NOTES TO SMC SELECTED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(a)Comparison of consolidated financial information is significantly affected
by the acquisitions of Dixie Life on October 2, 1995, Shelby Life on
November 8, 1996, Savers Life on March 12, 1998, Midwestern Life on October 30,
1998 and on the disposal of First International on March 18, 1996. Refer to the
notes to the consolidated financial statements in this report for a description
of business combinations.
(b)Operating income represents income before extraordinary gains (charge),
excluding net realized investment gains (less income taxes relating to such
gains), gain on disposal of subsidiary and class action litigation and
settlements.
(c)Total capitalization is the sum of SMC's debt (long term debt, notes payable
and capital lease obligations), and redeemable preferred stock and
shareholders' equity (excluding unrealized gains and losses.)
(d)Includes recapture of premiums ceded and an increase in benefits due to an
increase in reserves of $4.2 million due to the termination and recapture of a
reinsurance agreement with National Mutual Life Insurance Company.
(e)Includes Medicare supplement premiums of $6.0 million related to the Savers
Life acquisition. This business was sold effective July 1, 1998.
<PAGE>
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion highlights the principal factors affecting the results
of operations and the significant changes in balance sheet items of SMC on a
consolidated basis for the periods listed, as well as liquidity and capital
resources. This discussion should be read in conjunction with the accompanying
Consolidated Financial Statements, related Notes and selected historical
financial data.
FORWARD-LOOKING STATEMENTS
All statements, trend analyses, and other information contained in this Annual
Report on Form 10-K or any document incorporated by reference herein relative
to markets for the Company's products and trends in the Company's operations or
financial results, as well as other statements including words such as
"anticipate", "believe", "plan", "estimate", "expect", "intend" and other
similar expressions, constitute forward-looking statements under the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
subject to known and unknown risks, uncertainties and other factors which may
cause actual results to be materially different from those contemplated by the
forward-looking statements. Such factors include, but are not limited to: (1)
general economic conditions and other factors, including prevailing interest
rate levels, stock market performance and health care inflation, which may
affect the ability of the Company to sell its products, the market value of the
Company's investments and the lapse rate and profitability of the Company's
policies; (2) the Company's ability to achieve anticipated levels of
operational efficiencies at recently acquired companies, as well as through
other cost-saving initiatives; (3) customer response to new products,
distribution channels and marketing initiatives; (4) mortality, morbidity,
usage of health care services and other factors which may affect the
profitability of the Company's insurance products; (5) changes in the Federal
income tax laws and regulation which may affect the relative tax advantages of
some of the Company's products; (6) increasing competition in the sale of the
Company's products; (7) regulatory changes or actions, including those relating
to regulation of financial services affecting bank sales and underwriting of
insurance products, regulation of the sale, underwriting and pricing of
insurance products; (8) the availability and terms of future acquisitions; and
(9) the risk factors or uncertainties listed from time to time in any document
incorporated by reference herein.
GENERAL
SMC acquired Savers Life on March 12, 1998 and Midwestern Life on October 30,
1998. These acquisitions were accounted for using the purchase method of
accounting and are included in the SMC Consolidated Financial Statements
commencing with their respective acquisition effective dates.
PRODUCT PROFITABILITY. Margins on life insurance and annuity products are
affected by interest rate fluctuations. Rising interest rates would result in a
decline in the market value of assets. However, as there are positive cash
flows from renewal premiums, investment income and maturities of existing
assets, the need for early disposition of investment assets to meet operating
cash flow requirements would be unlikely. Rising interest rates would also
result in available cash flows from maturities being invested at higher
interest rates, which would help support a gradual increase in new business and
renewal interest rates on interest-sensitive products. A sharp, sudden rise in
the interest rate environment without a concurrent increase in crediting rates
could result in higher surrenders, particularly for annuities. The effect of
surrenders would be to reduce earnings over the long term. Earnings in the
period of the surrender could increase or decrease depending on whether
surrender charges were applicable and whether such charges differed from the
write-off of related deferred acquisition costs or present value of future
profits.
When interest rates fall, SMC generally attempts to adjust the credited
interest rates subject to competitive pressures. Although SMC believes that
such strategies will continue to permit it to achieve a positive spread, a
significant decline in the yield on SMC's investments could adversely affect
the results of operations and financial condition of SMC.
PRESENT VALUE OF FUTURE PROFITS. In accordance with industry practice, when
SMC purchases additional insurance business, it assigns a portion of the
purchase price, called the present value of future profits, to the right to
receive future cash flows arising from existing insurance policies. This asset
is recorded when the business is purchased at the value of projected future
cash flows on existing policies, less a discount to present value. As future
cash flows emerge, they are treated as a recovery of this asset. Therefore, if
cash flows emerging from the purchased or recaptured business during a period
exactly equal the projections, they are offset by that period's amortization of
the cost of the policies purchased. In that event, the only income statement
effect from the purchased business is the realization of the discount that was
initially deducted from the asset to reflect its present value. Changes in the
future annual amortization of this asset are not expected to have a significant
effect on the results of operations, because the amount of amortization is
expected to be equal to the profits emerging from the purchased policies, net
of interest on the unrecovered present value of future profits balance. This
asset is amortized over the expected life of the related policies purchased.
Present value of future profits is increased for the estimated effect of
realizing unrealized investment losses and decreased for the estimated effect
of realizing unrealized investment gains.
In selecting the interest rate to calculate the discounted present value of the
projected future profits, SMC uses the risk rate of return it needs to earn in
order to invest in the business being acquired or recaptured.
<PAGE>
In determining this required risk rate of return, SMC considers the following
factors:
The magnitude of the risks associated with each of the actuarial assumptions
used in determining expected future cash flows (as described above).
The cost of the capital required to fund the acquisition or recapture.
The likelihood of changes in projected future cash flows that might occur if
there are changes in insurance regulations and tax laws.
The acquired company's compatibility with other SMC activities that may
favorably affect future cash flows.
The complexity of the acquired company or recaptured business.
Recent prices (i.e., discount rates used in determining valuations) paid by
others to acquire or recapture similar blocks of business.
The discount rate selected may affect subsequent earnings in those instances
where the purchase price of the policies exceeds the value of net assets
acquired (including the value of future profits discounted at the selected
interest rate). Selection of a lower (or higher) discount rate will increase
(or decrease) the portion of the purchase price assigned to the present value
of future cash flows and will result in an offsetting decrease (or increase) in
the amount of the purchase price assigned to goodwill. The effect on subsequent
earnings caused by this variation in purchase price allocation will depend on
the characteristics of the policies purchased. Use of a lower rate may result
in an increase in reported earnings in the early years after an acquisition
followed by a decrease in earnings in later years.
The percentage of future expected net amortization of the beginning balance of
the present value of future profits before the effect of net unrealized gains
and losses, based on the present value of future profits at December 31, 1999
and current assumptions as to future events on all policies in force, will be
between 8% and 10% in each of the years 2000 through 2004.
SMC used discount rates of 13% and 15% to calculate the present value of future
profits of the Savers Life and Midwestern Life acquisitions, respectively.
Each is being amortized over 20 years based on the mix of their respective
annuity and life business.
For more information related to Present Value of Future Profits refer to Note 4
to the Consolidated Financial Statements.
DEFERRED ACQUISITION COSTS. Insurance products generate two types of profit
streams: (i) from the excess of investment income earned over that credited to
the policyholder and (ii) from the excess of premiums received over costs
incurred for policy issuance, administration and mortality. Costs incurred in
issuing new policies are deferred and recorded as deferred acquisition costs
("DAC"), which are amortized using present value techniques so that profits are
realized in proportion to premium revenue for certain products and estimated
gross profits for certain other products. Profits from all of these elements
are recognized over the lives of the policies; no profits are recorded at the
time the policies are issued.
Amortization of DAC was $4.6 million, $3.3 million and $1.6 million for the
years ended December 31, 1999, 1998 and 1997, respectively. The increase in
current year amortization expense resulted primarily from increased
amortization of DAC as gross profits from business sold in recent years began
to emerge. DAC is generally amortized over the expected lives of the policies,
a period of approximately 20 years, in a constant relationship to the present
value of estimated future gross profits. Interest is being accreted at the
projected crediting rate on the policies. DAC is increased for the estimated
effect of realizing unrealized investment losses and decreased for the
estimated effect of realizing unrealized investment gains. The offset to these
amounts is recorded directly to shareholders' equity, net of taxes. Future
expected amortization of DAC for the next five years before the effect of net
realized and unrealized gains and losses, based on DAC at December 31, 1999 and
current assumptions, is as follows (in thousands):
2000 2001 2002 2003 2004
Gross amortization$7,737 $7,872 $7,094 $6,127 $5,254
Interest accreted 2,576 2,047 1,575 1,233 986
Net amortization $5,161 $5,825 $5,519 $4,894 $4,268
The amounts included in the foregoing table do not include any amortization of
DAC resulting from the sale of new products after December 31, 1999. Any
changes in future annual amortization of this asset are not expected to have a
significant effect on results of operations because the amount of amortization
is expected to be proportionate to the profits from the produced policies, net
of interest on DAC.
<PAGE>
VARIANCES BETWEEN ACTUAL AND EXPECTED PROFITS. Actual experience on purchased
and produced insurance may vary from projections due to differences in renewal
premiums collected, investment spreads, mortality costs, persistency,
administrative costs and other factors. Variances from original projections,
whether positive or negative, are included in net income as they occur. To the
extent that these variances indicate that future experience will differ from
the estimated profits reflected in the capitalization and amortization of the
cost of policies purchased or the cost of policies produced, current and future
amortization rates may be adjusted.
ACCOUNTING FOR ANNUITIES AND UNIVERSAL AND INTEREST-SENSITIVE LIFE PRODUCTS.
The Company primarily accounts for its annuity, universal and
interest-sensitive life policy deposits in accordance with Statement of
Financial Accounting Standards No. 97 ("SFAS No. 97"), "Accounting and
Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for
Realized Gains and Losses on the Sale of Investments". Under SFAS No. 97, a
benefit reserve is established at the time of policy issuance in an amount
equal to the deposits received. Thereafter, the benefit reserve is adjusted for
any additional deposits, interest credited and partial or complete withdrawals.
Revenues for annuities and universal and interest-sensitive life policies,
other than certain non-interest sensitive annuities, consist of policy charges
for surrenders and partial withdrawals, mortality and administration, and
investment income earned. Such revenues do not include the annuity, universal
and interest-sensitive life policy deposits. Expenses related to these products
include interest credited to policyowner account balances, operating costs for
policy administration, amortization of DAC and mortality costs in excess of
account balances.
Costs relating to the acquisition of new business, primarily commissions paid
to agents, which vary with and are directly related to the production of new
business, are deferred to the extent that such costs are recoverable from
future profit margins. At the time of issuance, the acquisition expenses,
approximately 13% of initial annuity premium deposits and 50% of premiums from
universal and interest-sensitive life products for SMC, are capitalized as DAC.
In accordance with SFAS No. 97, DAC with interest is amortized over the lives
of the policies in a constant relationship to the present value of estimated
future gross profits.
UNIT-LINKED PRODUCT ACCOUNTING. Separate account assets and liabilities are
maintained primarily for contracts of which the majority represents unit-linked
products where benefits on surrender and maturity are not guaranteed. They
generally represent funds held in accounts to meet specific investment
objectives of policyholders who bear the investment risk. Investment income and
investment gains and losses accrue directly to such policyholders. SMC earns
income from the investment management fee it charges on such unit-linked
contracts, which ranges from .8% to 1.2% of the value of the underlying
separate accounts.
<PAGE>
RESULTS OF OPERATIONS BY SEGMENT FOR THE THREE YEARS ENDED DECEMBER 31, 1999:
The following tables and narratives summarize the results of our operations by
business segment:
<TABLE>
<CAPTION>
1999 1998 1997
(Dollars in thousands)
Operating income before income taxes:
<S> <C> <C> <C>
Domestic operations $ 6,054 $ 3,700 $ 1,146
International operations 1,266 2,258 1,720
Consolidated operating income before income taxes 7,320 5,958 2,866
Applicable income taxes related to operating income 2,099 1,510 482
Consolidated operating income after taxes 5,221 4,448 2,384
Consolidated realized investment gains before 78 353 396
income taxes
Applicable income taxes related to realized investment gains 27 120 135
Consolidated realized investment gains after taxes 51 233 261
Net income $ 5,272 $ 4,681 $ 2,645
</TABLE>
CONSOLIDATED RESULTS AND ANALYSIS
SMC's 1999 operating earnings were $5.2 million, or 65 cents per diluted share,
up 17% and 12% respectively compared to 1998. Operating earnings increased as
a result of i) increased net spread revenue due to increases in weighted
average insurance liabilities caused by increased sales in recent periods and
the acquisition of Savers Life and Midwestern Life, ii) economies of scale
achieved through the acquisitions of Savers Life and Midwestern Life and iii)
increased fees from separate accounts due to increases in weighted average
separate account liabilities for the period. These increases were somewhat
offset by i) the elimination of negative goodwill amortization, a nonrecurring
item, which contributed $1.4 million or 15 cents per diluted share in the 1998
period, ii) unfavorable mortality and iii) increased amortization due to profit
realization.
SMC's 1998 operating earnings were $4.4 million, or 58 cents per diluted share,
up 87% and 35%, respectively compared to 1997. Operating earnings increased as
a result of i) increased net spread revenue due to increases in weighted
average insurance liabilities (primarily due to the inclusion of Savers Life
and Midwestern Life operations), ii) favorable mortality experience, iii) fees
from administration contracts and iv) increased fees from separate accounts.
The percentage increase in operating earnings was greater than the percentage
increase in operating earnings per diluted share primarily because of the 67%
increase in weighted average diluted common shares or equivalents outstanding
during the period. This increase in weighted average shares outstanding
resulted primarily from issued shares in connection with the acquisitions of
Savers Life and Midwestern Life.
<PAGE>
DOMESTIC OPERATIONS:
<TABLE>
<CAPTION>
1999 1998 1997
(Dollars in thousands)
Premiums and deposits collected:
<S> <C> <C> <C>
Traditional life $ 12,990 $ 8,392 $ 7,036
Medicare supplement -- 5,992 --
Subtotal - traditional and Medicare supplement premiums 12,990 14,384 7,036
Flexible premium deferred annuities ("FPDA's") 98,678 58,072 42,251
Equity-indexed annuities 59,348 16,858 --
Other annuities and deposits 5,872 3,537 2,809
Universal and interest-sensitive life 1,778 3,391 4,302
Subtotal - interest-sensitive and other financial 165,676 81,858 49,362
products
Total premiums and deposits collected $ 178,666 $ 96,242 $ 56,398
Premium income $ 12,990 $ 14,384 $ 7,036
Policy income 6,826 6,529 5,512
Total policy related income 19,816 20,913 12,548
Net investment income 44,376 33,721 28,614
Fee and other income 4,207 3,068 1,093
Total revenues (a) 68,399 57,702 42,255
Benefits and claims 14,516 13,310 8,910
Interest credited to interest sensitive annuities and
other financial products 25,728 19,775 16,281
Amortization 6,313 4,755 3,248
Other operating expenses 12,403 13,207 10,289
Interest expense and financing costs 3,385 2,955 2,381
Total benefits and expenses 62,345 54,002 41,109
Operating income before income taxes 6,054 3,700 1,146
Net realized investment gains 78 353 396
Income before income taxes $ 6,132 $ 4,053 $ 1,542
(a) Total revenues exclude net realized investment gains.
Number of annuity contracts in force 24,322 20,121 14,013
Interest-sensitive annuity and other financial $595,388 $506,749 $350,607
products reserves, net of reinsurance ceded
Number of life policies in force 61,573 66,412 68,571
Life insurance in force, net of reinsurance ceded $1,208,471 $1,289,024 $1,178,171
</TABLE>
<PAGE>
GENERAL: This segment consists of revenues earned and expenses incurred from
United States operations which includes deposits and/or income from annuity
products (primarily FPDA's), equity indexed products, universal life products
and traditional life products. This segment has been significantly impacted by
the acquisitions of Savers Life, effective March 12, 1998, and Midwestern Life,
effective October 30, 1998. The profitability for this segment is primarily a
function of its investment spread earned (i.e. the excess of investment
earnings over interest credited on annuity and universal life deposits),
persistency of the in force business, mortality experience and management of
operating expenses.
PREMIUM DEPOSITS consist of FPDA's, equity indexed annuities, interest-
sensitive annuities and other financial products that do not incorporate
significant mortality features. For GAAP these premium deposits are not shown
as premium income in the income statement. Furthermore, a change in premium
deposits in a single period does not directly cause operating income to change,
although continued increases or decreases in premiums may affect the growth
rate of total assets on which investment spreads are earned.
Premium deposits for 1999, received from the sales of FPDA's, equity indexed
annuities, interest sensitive annuities and other financial products, increased
$83.8 million or 102%, to $165.7 million. The increase relates to i) a
continued increase in the agency base achieved through the recruitment of high
volume agents and larger managing general agencies, ii) continued expansion of
geographical concentration, iii) the full year impact of an equity-indexed
product introduced in 1998, which contributed $46.6 million of deposits for the
period and iv) the introduction of three equity-indexed annuity products in
1999, which contributed $12.7 million of deposits for the period.
Premium deposits for 1998, received from the sales of FPDA's, equity indexed
annuities, interest sensitive annuities and other financial products increased
$32.5 million or 66%, to $81.9 million. The increase relates to i) an increase
in the agency base achieved through the recruitment of high volume agents and
larger managing general agencies, ii) continued expansion of geographical
concentration, iii) the introduction of an equity-indexed annuity product
in May 1998, which contributed $16.9 million of deposits for the period and
iv) deposits collected from Savers Life and Midwestern Life of $3.6 million.
PREMIUM INCOME consists of premiums earned from i) traditional life products,
ii) annuity business that incorporates significant mortality features and iii)
Medicare supplement premiums for the 1998 period.
Life premiums were up $4.6 million or 55% in 1999, to $13.0 million. The
increase is primarily the result of renewal premiums from Midwestern Life's
traditional life block of $3.5 million and first year premiums of existing
traditional life products of $.8 million.
Life premiums were up $1.4 million or 40% in 1998, to $8.4 million. Traditional
life premiums of $1.1 million were earned from Savers Life and Midwestern Life
in 1998. The remaining increase of $.3 million is due to premiums from
existing blocks of traditional life business from Standard Life and Dixie Life.
Health premiums for 1998 include $6.0 million of Medicare supplement premiums
that were earned from March 12, 1998, the acquisition date of Savers Life,
through July 1, 1998, the effective sale date of the Medicare supplement block
of business.
POLICY INCOME represents i) mortality charges and administrative fees earned on
universal life products and ii) surrender charges earned as a result of
terminated universal life and annuity policies.
During 1999 policy income increased $.3 million or 5%, to $6.8 million. The
increase is due to i) mortality charges of a new universal life product and ii)
surrender charges on certain FPDA products which is primarily the result of
lowering credited rates on those products.
During 1998 policy income increased $1.0 million or 18%, to $6.5 million. The
increase relates to $.8 million of surrender charges on certain FPDA products
which is primarily the result of lowering credited rates on those products.
NET INVESTMENT INCOME includes interest earned on invested assets and
fluctuates with changes in i) the amount of average invested assets supporting
insurance liabilities and ii) and the average yield earned on those invested
assets.
During 1999, net investment income increased $10.7 million or 32%, to $44.4
million. Average invested assets (at book value) increased by $166.2 million
or 27% due to the growth in insurance liabilities from premium sales of recent
periods and from the acquisitions of Savers Life and Midwestern Life. Net
investment income also increased due to the impact from equity indexed products
of $1.2 million.
During 1998, net investment income increased $5.1 million or 18%, to $33.7
million. Average invested assets (at book value) increased by $89.8 million or
23% due to the growth in insurance liabilities from the acquisitions of Savers
Life and Midwestern Life, which contributed $4.2 million of investment income
for the period. Net investment income also increased due to the impact from
the new equity indexed product of $.6 million.
The net investment yield earned on average invested assets was 7.15%, 7.48% and
7.77% for 1999, 1998 and 1997, respectively. Investment yields fluctuate from
period to period primarily due to changes in the general interest rate
environment.
FEE AND OTHER INCOME consists of fee income related to servicing blocks of
business for unaffiliated companies, experience refunds, and commission income.
Fee and other income increased 37% in 1999, to $4.2 million and increased 181%
in 1998, to $3.1 million. These increases are due to commission income that
relates to the Savers Marketing administration agreement and the marketing
efforts associated with the management of that business.
BENEFITS AND CLAIMS include i) paid life insurance claims, ii) benefits from
annuity policies that incorporate significant mortality features, iii) changes
in future policy reserves and iv) Medicare supplement benefits in the 1998
period. Throughout the Company's history, it has experienced both periods of
higher and lower benefit claims. Such volatility is not uncommon in the life
insurance industry and, over extended periods of time, periods of higher claim
experience tend to offset periods of lower claim experience.
Benefits and claims in 1999 increased $1.2 million, to $14.5 million. This is
due to $6.1 million of claims and benefits resulting from an increase in the
average in force life insurance business for the periods due to the acquisition
of Savers Life and Midwestern Life. This was somewhat offset by the inclusion
of $4.9 million of benefits and claims in 1998 results related to the Medicare
supplement business that was sold July, 1998.
INTEREST CREDITED TO INTEREST-SENSITIVE ANNUITIES AND OTHER FINANCIAL PRODUCTS
represents interest credited to insurance liabilities of the FPDA's, equity-
indexed annuities, interest sensitive and other financial products. This
expense fluctuates with changes in i) average interest-sensitive insurance
liabilities and ii) the average credited rate on those liabilities.
In 1999, interest credited increased $6.0 million or 30%, to $25.7 million.
This increase was due to larger average interest-sensitive insurance
liabilities of approximately $124.9 million or 33% for the period which
includes increases of i) $44.1 million from the acquisitions of Savers Life and
Midwestern Life and ii) $40.2 million from equity indexed products. The
remaining increase primarily relates to FPDA products. These increases were
somewhat offset by a decrease in the average credited rate for the period.
In 1998, interest credited on interest sensitive annuities and other financial
products increased $3.5 million or 21%, to $19.8 million due to i) interest
credited on the insurance liabilities of Savers Life and Midwestern Life of
$2.4 million, ii) the impact from the new equity indexed product of $.6 million
and iii) interest credited on the general growth of insurance liabilities from
increased FPDA sales. These increases were somewhat offset by a decrease in
the weighted average credited rate for the period.
The weighted average credited rate was 4.89%, 5.25% and 5.71 % in 1999, 1998
and 1997, respectively.
AMORTIZATION includes i) amortization related to the present value of polices
purchased from acquired insurance business, ii) amortization of deferred
acquisitions costs related to capitalized costs of insurance business sold and
iii) amortization of goodwill and organizational costs.
Amortization in 1999 increased $1.6 million or 33%, to $6.3 million. This
increase relates to additional amortization of deferred acquisition costs, due
to increased business in force, and the recognition of additional profits for
the period. Additional profits were recognized from i) the realization of
profits from increased sales of annuity products in recent periods and ii) the
realization of profits from the purchased insurance business of Savers Life and
Midwestern Life.
Amortization in 1998 increased $1.5 million or 46%, to $4.8 million. The
increase in amortization expense is primarily related to deferred policy
acquisition costs and is a result of emerging gross profits from business sold
in recent years, increased surrenders and a corresponding increase in the
amortization of costs related to purchased insurance business. Amortization
expense of $.5 million related to purchased insurance business of Savers Life
and Midwestern Life.
OTHER OPERATING EXPENSES consist of general operating expenses, including
salaries, and commission expenses, net of deferrable amounts.
In 1999 other operating expenses declined $.8 million or 6%, to $12.4 million.
The majority of this decrease relates to efficiencies achieved through the
assimilation of the former insurance operations of Savers Life, Savers
Marketing and Midwestern Life including the elimination of certain Medicare
supplement expenses in connection with the sale of that business.
In 1998, other operating expenses increased $2.9 million or 28%, to $13.2
million . This increase relates to normal operating expenses from Savers Life
and Midwestern Life, including Medicare supplement insurance commissions of $.8
million incurred from March 12, 1998, the acquisition date of Savers Life,
through July 1, 1998, the effective sale date of that business.
<PAGE>
INTEREST EXPENSE AND FINANCING COSTS represent interest expense incurred and
the amortization of related debt issuance costs.
In 1999 interest expense and financing costs increased $.4 million or 15%, to
$3.4 million primarily due to increased average borrowings for the period of
approximately $5.3 million and an increase in the average interest rate for the
period on the revolving line of credit.
Interest expense and financing costs for 1998 increased $.6 million or 24%, to
$3.0 million, due to increased average borrowings for the period of $6.4
million primarily related to the acquisitions of Savers Life and Midwestern
Life. This increase was offset somewhat by a decreased interest rate on the
revolving line of credit.
NET REALIZED INVESTMENT GAINS fluctuate from period to period and arise when
securities are sold in response to changes in the investment environment which
provide opportunities to maximize return on the investment portfolio without
adversely affecting the quality and overall yield.
Net realized investment gains were $ .1 million for 1999 and $.4 for 1998.
<PAGE>
INTERNATIONAL OPERATIONS:
<TABLE>
<CAPTION>
1999 1998 1997
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Premiums and deposits collected:
Traditional life $ 100 $ 95 $ 64
Separate account deposits 55,137 42,536 21,954
Total premiums and deposits collected $ 55,237 $ 42,631 $ 22,018
Premium income $ 100 $ 95 $ 64
Net investment income 445 500 583
Separate account fees 3,941 2,884 2,084
Amortization of negative goodwill -- 1,388 1,388
Other income -- 353 85
Total revenues 4,486 5,220 4,204
Benefits and claims (140) (40) (70)
Amortization 1,158 658 187
Other operating expenses 2,202 2,344 2,367
Total benefits and expenses 3,220 2,962 2,484
Income before income taxes and extraordinary gain $ 1,266 $ 2,258 $ 1,720
Separate account contracts{ (1)} 3,380 3,070 2,329
Separate account liabilities{ (1)} $ 319,973 $ 190,246 $ 148,064
</TABLE>
(1)primarily unit-linked products
<PAGE>
GENERAL: International operations includes revenues earned and expenses
incurred from abroad, primarily Europe, and includes fees collected on deposits
from unit-linked products. The profitability for this segment primarily
depends on the amount of separate account assets under management, the
management fee charged on those assets and management of operating expenses.
FEES FROM SEPARATE ACCOUNTS fluctuate in relationship to total separate account
assets and the fees earned on such assets.
During 1999, fees from separate accounts increased $1.1 million or 37%, to $3.9
million. This increase is primarily due to an increase in the average value of
assets held in separate accounts of 36% for the period. Actual separate
account assets increased $129.7 million or 68%, to $320.0 million. Net
deposits from SMI's sales of unit-linked products increased $12.6 million or
30%, to $55.2 million for the period. This increase is due to a continuation
of expanded marketing efforts, which have generated additional sales in Sweden
and Belgium for the period.
During 1998, fees from separate accounts increased $.8 million or 38% to $2.9
million. This increase is primarily due to an increase in the average value of
assets held in separate accounts of 22% for the period. Actual separate
account assets increased $42.2 million or 28%, to $190.2 million. Net deposits
from SMI's sales of unit-linked products increased $20.6 million or 94%, to
$42.5 million. This increase is due to marketing efforts that were initiated
in 1997.
NET INVESTMENT INCOME represents income earned on corporate assets such as
cash, short-term investments and fixed securities.
Net investment income was $.4 million and $.5 million in 1999 and 1998
respectively, on average invested assets of approximately $11.0 million.
The net yield was 4.06%, 4.74% and 4.99% for 1999, 1998 and 1997, respectively.
AMORTIZATION OF NEGATIVE GOODWILL, which is the amortization of the excess cost
of assets acquired over the purchase price paid for SMI in December, 1993 of
$6.9 million has been amortized over 5 years at $1.4 million per year and was
fully amortized at December 31, 1998.
AMORTIZATION includes the amortization of deferred acquisition costs, such as
sales commissions and other costs, directly related to selling new business.
Amortization increased $.5 million in 1999, to $1.2 million and
increased $.5 million in 1998, to $.7 million. These increases are due to
amortizing deferred acquisition costs associated with increased sales of recent
periods.
OTHER OPERATING EXPENSES consist of recurring general operating expenses and
commission expenses, net of deferred amounts.
Other operating expenses for the periods presented have remained relatively
stable. This is a result of effective expense management and due to the
majority of additional expenses incurred for the periods being directly related
to additional sales and are therefore capitalized and amortized. The number of
separate account contracts administered increased 10%, to 3380 in 1999 and 32%
to 3070 in 1998.
FOREIGN CURRENCY TRANSLATION: comparisons between 1999, 1998 and 1997 are
impacted by the strengthening and destrengthening of the U.S. dollar relative
to foreign currencies, primarily the Luxembourg franc. The impact of these
translations have not been quantified on individual components.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY OF STANDARD MANAGEMENT (PARENT COMPANY)
Standard Management is a financial services holding company whose liquidity
requirements are met through payments received from its subsidiaries. These
payments include i) interest on surplus debenture, ii) dividends, iii)
management fees and iv) rental income, which are subject to restrictions under
applicable insurance laws and are used to pay operating expenses and meet debt
service obligations. These internal sources of liquidity have been
supplemented in the past by external sources such as revolving credit
agreements and long term debt and equity financing in the capital markets.
GENERAL: On a consolidated GAAP basis SMC reported net cash provided by
operations of $2.9 million and $.2 million for 1999 and 1998, respectively.
Although deposits received on SMC's interest-sensitive annuities and other
financial products are not included in cash flow from operations under GAAP,
such funds are available for use by SMC. Cash provided by operations plus net
deposits received, less net account balances returned to policyholders on
interest sensitive annuities and other financial products, resulted in positive
cash flow of $92.6 million and $29.2 million for 1999 and 1998, respectively.
Cash generated on a consolidated basis is available to Standard Management only
to the extent that it is generated at the Standard Management level or is
available through dividends, interest, management fees or other payments from
subsidiaries.
SMC instituted a program to repurchase its common stock in order to increase
the market value of the stock. At December 31, 1999, Standard Management is
authorized to repurchase 964,790 additional shares of SMC Common Stock under
this program.
At February 29, 2000, Standard Management had "parent company only" cash and
short-term investments of $.5 million. These funds are available to Standard
Management for general corporate purposes. Standard Management's "parent
company only" operating expenses (not including interest expense) were $4.7
million and $3.1 million for 1999 and 1998, respectively.
In 1998, the Company issued convertible redeemable preferred stock with a
stated value of $6.5 million. Proceeds were used to reduce the borrowings from
the Amended Credit Agreement. Holders are entitled to receive annual dividends
of $7.75 per share. Refer to Notes 7 and 10 to the consolidated financial
statements for additional information.
Standard Management anticipates the available cash from its existing working
capital, plus anticipated 2000 dividends, management fees, rental income and
interest payments on its surplus debentures receivable will be more than
adequate to meet its anticipated "parent company only" cash requirements for
2000.
INTEREST OF SURPLUS DEBENTURES AND NOTES PAYABLE:
The following are characteristics of the Amended Credit Agreement at December
31, 1999:
$24.5 million outstanding balance
Weighted average interest rate of 9.30%
Principal payments: $2.8 million due March 2000, $4.3 million thereafter
through March 2005
Subject to certain restrictions and covenants
Interest payments required in 2000 based on December 31, 1999 balances will be
$2.1 million
The following are characteristics of the subordinated convertible debt
agreement at December 31, 1999:
$10.0 million outstanding balance
Interest rate of 10% per annum
$4.4 million due December 2003 and $5.6 million due July 2004.
Interest payments required in 2000 based on December 31, 1999 balances will be
$1.0 million
Refer to Note 5 to the consolidated financial statements for additional
information
From the funds borrowed by Standard Management pursuant to the Amended Credit
Agreement and the subordinated convertible debt agreement, $27.0 million was
loaned to Standard Life pursuant to Unsecured Surplus Debenture Agreements
("Surplus Debenture") which requires Standard Life to make quarterly interest
payments to Standard Management at a variable corporate base rate plus 2% per
annum, and annual principal payments of $1.0 million per year beginning in 2007
and concluding in 2033. The interest and principal payments are subject to
quarterly approval by the Indiana Department of Insurance, depending upon
satisfaction of certain financial tests relating to levels of Standard Life's
capital and surplus and general approval of the Commissioner of the Indiana
Department of Insurance. Standard Management currently anticipates these
quarterly approvals will be granted. Assuming the approvals are granted and
the December 31, 1999 interest rate of 10.50% continues, Standard Management
will receive interest income of $2.8 million from the Surplus Debenture in
2000.
DIVIDENDS from Standard Life to Standard Management are limited by laws
applicable to insurance companies. As an Indiana domiciled insurance company,
Standard Life may pay a dividend or distribution from its surplus profits,
without the prior approval of the Commissioner of the Indiana Department of
Insurance, if the dividend or distribution, together with all other dividends
and distributions paid within the preceding twelve months, does not exceed the
greater of (i) net gain from operations or (ii) 10% of surplus, in each case as
shown in its preceding annual statutory financial statements. In 2000,
Standard Life can pay dividends of approximately $4.4 million without
regulatory approval.
MANAGEMENT FEES. Pursuant to a management services agreement, Standard Life
paid Standard Management $3.4 million during 1999 and $2.0 million during 1998
for certain management services related to the production of business,
investment of assets and evaluation of acquisitions. Prior to its merger into
Standard Life, Savers Life paid Standard Management $.8 million during 1998 for
certain management services pursuant to a management services agreement. In
addition, Dixie Life paid Standard Life $.9 million during 1999 and $1.0
million during 1998 for certain management services provided. Both of these
agreements provide that they may be modified or terminated by the Indiana and
Mississippi Departments of Insurance in the event of financial hardship of
Standard Life or Dixie Life.
Pursuant to the management services agreement, Premier Life (Luxembourg) paid
Standard Management $.2 million during 1999 and $.1 million during 1998 for
certain management, technical support and administrative services. The
agreement provides that it may be modified or terminated by either Standard
Management or Premier Life (Luxembourg).
EQUIPMENT RENTAL FEES. In 1999 and 1998, Standard Management charged
subsidiaries $1.0 million and $.9 million, respectively, for the use of
equipment owned by Standard Management.
LIQUIDITY OF INSURANCE OPERATIONS
U.S. INSURANCE OPERATIONS. The principal liquidity requirements of Standard
Life are its contractual obligations to policyholders, dividend, rent,
management fee and Surplus Debenture payments to Standard Management and other
operating expenses. The primary source of funding for these obligations has
been cash flow from premium income, net investment income, investment sales and
maturities and sales of FPDA's and equity indexed products. These sources of
liquidity for Standard Life significantly exceed scheduled uses. Liquidity is
also affected by unscheduled benefit payments including death benefits and
policy withdrawals and surrenders. The amount of withdrawals and surrenders is
affected by a variety of factors such as renewal interest crediting rates,
interest rates for competing products, general economic conditions, Standard
Life's A.M. Best ratings (currently rated "B+") and events in the industry that
affect policyholders' confidence.
The policies and annuities issued by Standard Life contain provisions that
allow policyholders to withdraw or surrender their policies under defined
circumstances. These policies and annuities generally contain provisions which
apply penalties or otherwise restrict the ability of policyholders to make such
withdrawals or surrenders. Standard Life closely monitors the surrender and
policy loan activity of its insurance products and manages the composition of
its investment portfolios, including liquidity, in light of such activity.
Changes in interest rates may affect the incidence of policy surrenders and
other withdrawals. In addition to the potential effect on liquidity,
unanticipated withdrawals in a changing interest rate environment could
adversely affect earnings if SMC were required to sell investments at reduced
values to meet liquidity demands. SMC manages the asset and liability
portfolios in order to minimize the adverse earnings effect of changing market
interest rates. SMC seeks assets that have duration characteristics similar to
the liabilities that they support. SMC also prepares cash flow projections and
performs cash flow tests under various market interest rate scenarios to assist
in evaluating liquidity needs and adequacy. SMC's U.S. insurance subsidiaries
currently expect available liquidity sources and future cash flows to be
adequate to meet the demand for funds.
Statutory surplus is computed according to rules prescribed by the NAIC, as
modified by the Indiana Department of Insurance, or the state in which the
insurance subsidiaries do business. Statutory accounting rules are different
from GAAP and are intended to reflect a more conservative perspective. With
respect to new business, statutory accounting practices require that:
(i) acquisition costs (primarily commissions and policy issue costs) and
(ii) reserves for future guaranteed principal payments and interest in excess
of statutory rates, be expensed in the year the new business is written. These
items cause a reduction in statutory surplus ("surplus strain") in the year
written for many insurance products. SMC designs its products to minimize such
first-year losses, but certain products continue to cause a statutory loss in
the year written. For each product, SMC controls the amount of net new premiums
written to manage the effect of such surplus strain. SMC's long-term growth
goals contemplate continued growth in its insurance businesses. To achieve
these growth goals, SMC's U.S. insurance subsidiaries will need to increase
statutory surplus. Additional statutory surplus may be secured through various
sources such as internally generated statutory earnings, infusions by Standard
Management with funds generated through debt or equity offerings or mergers
with other life insurance companies. If additional capital is not available
from one or more of these sources, SMC believes that it could reduce surplus
strain through the use of reinsurance or through reduced writing of new
business.
Management believes that the operational cash flow of Standard Life will be
sufficient to meet its anticipated needs for 2000. As of December 31, 1999,
Standard Life had statutory capital and surplus for regulatory purposes of
$43.7 million compared to $43.6 million at December 31, 1998. As the life
insurance and annuity business produced by Standard Life increases, Standard
Life expects to continue to satisfy statutory capital and surplus requirements
through statutory profits, through the continued reinsurance of a portion of
its new business, and through additional capital contributions by Standard
Management. Net cash flow from operations on a statutory basis of Standard
Life, after payment of benefits and operating expenses, was $91.4 million and
$15.8 million for 1999 and 1998, respectively. If the need arises for cash
which is not readily available, additional liquidity could be obtained from the
sale of invested assets.
Effective January 1, 1999 the Company decided to no longer sell new business
through Dixie Life. All new business will instead be sold through Standard
Life. This decision is not expected to have a material effect on operations or
financial condition of the Company.
INTERNATIONAL OPERATIONS. SMI dividends are limited to its accumulated
earnings without regulatory approval. SMI and Premier Life (Luxembourg) were
not permitted to pay dividends in 1999 and 1998 due to accumulated losses.
Premier Life (Bermuda) paid a dividend of $.8 million to SMI in 1999 and no
dividends in 1998. SMC does not anticipate dividends from SMI in 2000.
FACTORS THAT MAY AFFECT FUTURE RESULTS
MERGERS, ACQUISITIONS AND CONSOLIDATIONS. The U.S. insurance industry is
experiencing an increasing number of mergers, acquisitions, consolidations and
sales of certain business lines. These consolidations are largely the result
of the following:
the need to reduce costs of distribution and overhead;
the need to maintain business in force;
increased competition;
regulatory capital requirements; and
technology costs.
SMC expects this trend to continue.
FOREIGN CURRENCY RISK. SMI policyholders invest in assets denominated in a
wide range of currencies. As policyholders are not permitted to invest
directly in options, futures and derivatives, their investment and currency
risk is limited to premiums they have paid. Although policyholders effectively
bear the currency risk, SMI could be exposed to currency fluctuations if
currencies within the conventional investment portfolio or certain actuarial
reserves are mismatched. In order to minimize this risk, SMI continually
matches the assets and liabilities of the portfolio and the reserves. In
addition, Premier Life's (Luxembourg) shareholder's equity is denominated in
Luxembourg francs. Premier Life (Luxembourg) does not hedge currency risk
because its shareholder's equity will remain in Luxembourg francs for the
foreseeable future, thus, no significant realized foreign exchange gains or
losses are anticipated. At December 31, 1999, there was a $.9 million
unrealized loss from foreign currency translation.
EURO CURRENCY. Effective January 1, 1999, eleven participating European member
union countries established fixed conversion rates between their legal
currencies and the Euro. The legal currencies in those countries will continue
to be used as legal tender through June 30, 2002. Subsequent to this date, the
legal currencies will be canceled and Euro bills and coins will be used for
cash transactions in the participating countries. During this three year dual-
currency environment, conversion rates between the legal currencies will no
longer be computed directly between one another. Instead, a special
"triangulation" procedure must be followed by first converting one legal
currency into its euro equivalent and then converting the Euro equivalent into
the other legal currency. Although the Company has not initiated an analysis
plan for the Euro conversion, SMC does not expect it to have a material impact
on its operations or financial condition.
POSSIBILITY OF FUTURE DILUTION OF OWNERSHIP AND VOTING POWER. The SMC Board of
Directors has the authority to issue up to .9 million additional shares of
preferred stock and 11.0 million additional shares of common stock. The
board's authority under SMC's charter typically does not require stockholder
approval unless it is otherwise required for a particular transaction. Although
SMC is not currently involved in any life insurance acquisitions, the Company
regularly investigates such opportunities and could issue additional shares of
SMC common or preferred stock in connection with an acquisition.
UNCERTAINTIES REGARDING INTANGIBLE ASSETS. Included in SMC's December 31, 1999
financial statements are certain assets that are primarily valued , for
financial statement purposes, on the basis of management assumptions. These
assets include items such as:
deferred acquisition costs;
present value of future profits;
costs in excess of net assets acquired; and
organization and deferred debt issuance costs.
The value of these assets reflected in the December 31, 1999 balance sheet
total $104.1 million or 9.1% of SMC's assets. SMC has established procedures to
periodically review the assumptions used to value these assets and determine
the need to make adjustments of such values in SMC's consolidated financial
statements. SMC has determined that the assumptions used in the initial
valuation of the assets are consistent with the current operations of SMC as of
December 31, 1999.
REGULATORY ENVIRONMENT. Currently, prescribed or permitted statutory
accounting principles ("SAP") may vary between states and between companies.
The NAIC has completed the process of codifying SAP to promote standardization
of methods utilized throughout the industry. Completion of this project might
result in changes in statutory accounting practices for SMC's insurance
subsidiaries; however, it is not expected that such changes would materially
affect SMC's insurance subsidiaries' statutory capital requirements.
FINANCIAL SERVICES DEREGULATION. The United States Congress is currently
considering a number of legislative proposals intended to reduce or eliminate
restrictions on affiliations among financial services organizations. The
recently passed GLB Act would allow banks to own or affiliate with insurers and
securities firms. An increased presence of banks in the life insurance and
annuity businesses may increase competition in these markets. The Company
cannot predict the impact of these proposals on the earnings of the Company.
IMPACT OF YEAR 2000. In prior years, the Company discussed the nature and
progress of its plans to become Year 2000 ready. In late 1999, the Company
completed its remediation and testing of systems. As a result of those
planning and implementation efforts, the Company experienced no significant
disruptions in mission critical information technology and non-information
technology systems and believes those systems successfully responded to the
Year 2000 date change. The company is not aware of any material problems
resulting from Year 2000 issues, either with its products, its internal
systems, or the products and services of third parties. The Company will
continue to monitor its mission critical computer applications and those of its
suppliers and vendors throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company seeks to invest available funds in a manner that will maximize
shareholder value and fund future obligations to policyholders and debtors,
subject to appropriate risk considerations. Many of the Company's products
incorporate surrender charges, market interest rate adjustments or other
features to encourage persistency. Approximately 72% of the total insurance
liabilities at December 31, 1999 had surrender penalties or other restrictions
and approximately 6% are not subject to surrender.
The Company also seeks to maximize the total return on its investments through
active investment management. Accordingly, the Company has determined that the
entire portfolio of fixed maturity securities is available to be sold in
response to: i) changes in market interest rates; ii) changes in relative
values of individual securities and asset sectors; iii) changes in prepayment
risks; iv) changes in credit quality outlook for certain securities; v)
liquidity needs; and vi) other factors.
Profitability of many of the Company's products is significantly affected by
the spreads between interest yields on investments and rates credited on
insurance liabilities. Although substantially all credited rates on annuity
products may be changed annually (subject to minimum guaranteed rates), changes
in competition and other factors, including the impact of the level of
surrenders and withdrawals, may limit the ability to adjust or to maintain
crediting rates at levels necessary to avoid narrowing of spreads under certain
market conditions. As of December 31, 1999, the average yield, computed on the
cost basis of the investment portfolio, was 7.15%, and the average interest
rate credited or accruing to total insurance liabilities was 4.89%, excluding
guaranteed interest bonuses for the first year of the annuity contract.
Computer models were used to perform simulations of the cash flows generated
from the Company's existing business under various interest rate scenarios.
These simulations measured the potential gain or loss in fair value of interest
rate-sensitive financial instruments. With such estimates, the Company seeks
to closely match the duration of assets to the duration of liabilities. When
the estimated duration of assets and liabilities are similar, exposure to
interest rate risk is minimized because a change in the value of assets should
be largely offset by a change in the value of liabilities. At December 31,
1999, the adjusted modified duration of fixed maturity securities and short-
term investments was approximately 5.3, and the duration of insurance
liabilities was approximately 4.1.
If interest rates were to increase by 10% from their December 31, 1999 levels,
the Company's fixed maturity securities and short-term investments (net of the
corresponding changes in the values of cost of policies purchased, cost of
policies produced and insurance liabilities) would decline in fair value by
approximately $7.8 million.
The calculations involved in the Company's computer simulations incorporate
numerous assumptions, require significant estimates and assume an immediate
change in interest rates without any management of the investment portfolio in
reaction to such change. Consequently, potential changes in the value of our
financial instruments indicated by the simulations will likely be different
from the actual changes experienced under given interest rate scenarios, and
the differences may be material. Because the Company's investments and
liabilities are actively managed, actual losses could be less than those
estimated above.
<PAGE>
ITEM 8.CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required with respect to this
Item 8 are listed in Item 14(a)(1) and included in a separate section of this
report.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
PART III
The Registrant will file a definitive proxy statement pursuant to Regulation
14A of the Securities Exchange Act of 1934 in connection with the Company's
2000 Annual Meeting of Shareholders, (the "Proxy Statement") not later than 120
days after the end of the fiscal year covered by this report, and certain
information included therein is incorporated herein by reference. Only those
sections of the Proxy Statements which specifically address the items set forth
herein are incorporated by reference. Such incorporation does not include the
Compensation Committee Report or the Performance Graph included in the Proxy
Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning SMC's directors required by this item is
incorporated by reference to SMC's Proxy Statement.
The information concerning SMC's executive officers required by this Item is
incorporated by reference herein to the section in Part I, entitled "Executive
Officers".
The information regarding compliance with Section 16 of the Securities and
Exchange Act of 1934 is to be set forth in the Proxy Statement and is hereby
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to SMC's
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to SMC's
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to SMC's
Proxy Statement.
<PAGE>
PART IV
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) The response to this portion of Item 14 is submitted as a
separate section of this report.
(a)(3) List of Exhibits:
Exhibit
NUMBER DESCRIPTION OF DOCUMENT
2.1 Amended and Restated Agreement and Plan of Merger dated as of December
9,1997 among SMC, SAC and Savers Life (incorporated by reference to
SMC's Registration Statement on Form S-4 (Registration No. 333-43023)).
2.2 Stock Purchase Agreement dated as of June 4, 1998 by and among SMC and
MC Equities, Inc. (incorporated by reference to SMC's Form 8-K (Registration
No. 0-20882)).
2.3 First Amendment to Stock Purchase Agreement dated as of July 1, 1998 by
and among SMC and MC Equities, Inc. (incorporated by reference to SMC's Form
8-K (Registration No. 0-20882)).
2.4 Second Amendment to Stock Purchase Agreement dated as of July 23, 1998 by
and among SMC and MC Equities, Inc. (incorporated by reference to SMC's Form 8-
K (Registration No. 0-20882)).
2.5 Third Amendment to Stock Purchase Agreement dated as of October 8, 1998 by
and among SMC and MC Equities, Inc. (incorporated by reference to SMC's Form 8-
K (Registration No. 0-20882)).
3.1 Amended and Restated Articles of Incorporation, as amended (incorporated
by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the
year ended December 31, 1996).
3.2 Amended and Restated Bylaws of SMC as amended (incorporated by reference
to SMC's Registration Statement on Form S-1 (Registration No. 33-53370) as
filed with the Commission on January 27, 1993 and to Exhibit 3 of SMC's
Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended
September 30, 1994).
4.1 Form of Senior Note Agreement Warrant (incorporated by reference to SMC's
Registration Statement on Form S-1 (Registration No. 33-53370)).
4.2 Form of Oppbridge Partners Warrant (incorporated by reference to SMC's
Registration Statement on Form S-1 (Registration No. 33-53370)).
4.3 Registration Rights Agreement, dated as of May 3, 1990 among SMC, Howard
T. Cohn and Joseph J. Piazza and the first amendment thereto, dated June 4,
1990 (incorporated by reference to SMC's Registration Statement on Form
S-1 (Registration No. 33-53370).
4.4 Amended and Restated Registration Rights Agreement dated as of April 15,
1997 by and between SMC and Fleet National Bank.
4.5 Form of Fleet National Bank Warrant.
4.6 Form of President's Club Warrant (incorporated by reference to SMC's
Annual Report on Form 10-K (File No. 0-20882)).
4.7 Registration Rights Agreement dated as of November 8, 1996 by and between
SMC and Conseco Variable Insurance Company (formerly Great American Reserve
Insurance Company) (incorporated by reference to SMC's Quarterly Report on
Form 10-Q (File No. 0-20882) for the quarter ended September 30, 1996).
4.8 Form of Sand Brothers & Company, Ltd. Warrant (incorporated by reference
to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended
December 31, 1997).
9 Voting Trust Agreement dated as of November 8, 1996 among Delta Life and
Annuity Company, Messrs. Ronald D. Hunter and Allen O. Jones, Jr., as Voting
Trustees, and SMC (incorporated by reference to SMC's Registration Statement on
Form S-4 (Registration No. 333-35447)).
Exhibit
NUMBER DESCRIPTION OF DOCUMENT
10.1 Amended Advisory Agreement, dated as of August 1, 1991, between SMC and
Conseco Capital Management, Inc., as amended, April 17, 1995 (incorporated by
reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year
ended December 31, 1996).
10.2 Third Amended and Restated Employment Contract by and between SMC and
Ronald D. Hunter, dated and effective, as amended, July 1, 1999 (incorporated
by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the
quarter ended September 30, 1999).
10.3 Third Amended and Restated Employment Contract by and between SMC and
Edward T. Stahl, dated and effective, as amended, July 1, 1999 (incorporated by
reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the
quarter ended September 30, 1999).
10.4 Third Amended and Restated Employment contract by and between SMC and
Raymond J. Ohlson, dated and effective, as amended, July 1, 1999 (incorporated
by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the
quarter ended September 30, 1999).
10.5 Second Amended and Restated Employment Contract by and between SMC and
Stephen M. Coons dated and effective, as amended, July 1, 1999 (incorporated by
reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the
quarter ended September 30, 1999).
10.6 Indemnification Agreement between SMC and Stephen M. Coons and Coons &
Saint, dated August 1, 1991 (incorporated by reference to SMC's Registration
Statement on Form S-1 (Registration No. 33-53370) as filed with the Commission
on January 27, 1993).
10.7 Standard Management Corporation Amended and Restated 1992 Stock Option
Plan (incorporated by reference to the Company's Registration Statement on
Form S-4 (Registration No. 333-35447) as filed with the Commission on
September 11, 1997.)
10.8 Lease by and between Standard Life and WRC Properties, Inc., dated
February 27, 1991 (incorporated by reference to SMC's Registration Statement on
Form S-1 (Registration No. 33-53370) as filed with the Commission on
January 27, 1993).
10.9 Management Service Agreement between Standard Life and SMC dated August 1,
1992, as amended on January 1, 1997 and as further amended on January 1, 1999.
10.10 Agreement for Assumption Reinsurance between the National Organization Of
Life and Health Insurance Guaranty Associations and Standard Life, concerning,
The Midwest Life Insurance Company In Liquidation effective June 1, 1992
(incorporated by reference to SMC's Registration Statement on Form S-1
(Registration No. 33-53370) as filed with the Commission on January 27, 1993).
10.11 Reinsurance Agreement between Standard Life and Swiss Re Life and Health
effective May 1, 1975 (incorporated by reference to SMC's Registration
Statement on Form S-1 (Registration No. 33-53370) as filed with the Commission
on January 27, 1993).
10.12 Reinsurance Agreement between Firstmark Standard Life Insurance Company
and Swiss Re Life and Health effective February 1, 1984 (incorporated by
reference to SMC's Registration Statement on Form S-1 (Registration
No. 33-53370) as filed with the Commission on January 27, 1993).
10.13 Reinsurance Contract between First International and Standard Life dated
July 10, 1992 (incorporated by reference to SMC's Registration Statement on
Form S-1 (Registration No. 33-53370) as filed with the Commission on
January 27, 1993).
10.14 Amended Reinsurance Agreement between Standard Life and Winterthur Life
Re Insurance Company effective January 1, 1995 (incorporated by reference to
SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended
December 31, 1996).
10.15 Management Service Agreement between Premier Life (Luxembourg) and SMC
dated September 30, 1994 (incorporated by reference to SMC's Annual Report on
Form 10-K (File No. 0-20882) for the year ended December 31, 1994).
Exhibit
NUMBER DESCRIPTION OF DOCUMENT
10.16 Assignment of Management Contract dated October 2, 1995 of Management
Contract dated January 1, 1987 between DNC and Dixie Life to Standard Life
(incorporated by reference to SMC's Annual Report on Form 10-K (File
No. 0-20882) for the year ended December 31, 1996).
10.17 Automatic Indemnity Reinsurance Agreement between First International and
The Guardian Insurance & Annuity Company, Inc. dated and effective January 1,
1996 (incorporated by reference to SMC's Annual Report on Form 10-K (File
No. 0-20882) for the year ended December 31, 1996).
10.18 Indemnity Retrocession Agreement between The Guardian Insurance & Annuity
Company, Inc. and Standard Life dated and effective January 1, 1996
(incorporated by reference to SMC's Annual Report on Form 10-K (File
No. 0-20882) for the year ended December 31, 1996).
10.19 Automatic Indemnity Reinsurance Agreement between The Guardian Insurance
& Annuity Company, Inc. and Standard Life dated and effective January 1, 1996
(incorporated by reference to SMC's Annual Report on Form 10-K (File
No. 0-20882) for the year ended December 31, 1996).
10.20 Administrative Services Agreement between First International and
Standard Life dated and effective March 18, 1996 (incorporated by reference
to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended
December 31, 1996).
10.21 Amendment No. 1 to Amended and Restated Revolving Line of Credit
Agreement dated as of March 10, 1998 between SMC and Fleet National Bank
(incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No.
0-20882)).
10.22 Amended and Restated Note Agreement dated as of March 10, 1998 between
SMC and Fleet National Bank in the amount of $20,000,000 (incorporated by
reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882)).
10.23 Amended and Restated Pledge Agreement dated as of March 10, 1998
between SMC and Fleet National Bank (incorporated by reference to SMC's
Quarterly Report on Form 10-Q (File No. 0-20882)).
10.24 Revised Service Contract Agreement dated as of October 16, 1995 and
effective January 1, 1995 between Standard Life and Standard Marketing
(incorporated by reference to SMC's Annual Report on Form 10-K (File
No. 0-20882) for the year ended December 31, 1996).
10.25 Note Agreement dated as of November 8, 1996, as amended and restated on
June 30, 1997, by and between SMC and Conseco Variable Insurance Company in the
amount of $4,371,573 (incorporated by reference to SMC's Quarterly Report on
Form 10-Q (File No. 0-20882) for the quarter ended June 30, 1997).
10.26 Surplus Debenture dated as of November 8, 1996 by and between SMC and
Standard Life in the amount of $13,000,000 (incorporated by reference to SMC's
Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended
September 30, 1996).
10.27 Portfolio Indemnify Reinsurance Agreement between Dixie Life and Cologne
Life Reinsurance Company dated and effective December 31, 1997 (incorporated by
reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year
ended December 31, 1996).
10.28 Note Agreement dated as of June 30, 1997 between SMC, Conseco Health
Insurance Company (formerly Capitol American Life Insurance Company) and
Conseco Senior Health Insurance Company (formerly Transport Life Insurance
Company) in the amount of $5,628,427 (incorporated by reference to SMC's
Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended June 30,
1997).
10.29 Senior Subordinated Convertible Note dated as of June 30, 1997 between
SMC and Conseco Health Insurance Company in the amount of $3,628,427
(incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No.
0-20882) for the quarter ended June 30, 1997).
10.30 Senior Subordinated Convertible Note dated as of June 30, 1997 between
SMC and Conseco Senior Health Insurance Company in the amount of
$2,000,000 (incorporated by reference to SMC's Quarterly Report on Form 10-Q
(File No. 0-20882) for the quarter ended June 30, 1997).
Exhibit
NUMBER DESCRIPTION OF DOCUMENT
10.31 Coinsurance Agreement effective as of July 1, 1997 by and between
Savers Life and World Insurance Company (incorporated by reference to
SMC's Registration Statement on Form S-4 (Registration No. 333-35447)).
10.32 Amendment I to the Guardian Indemnity Retrocession Agreement effective
as of January 1, 1996 by and between The Guardian Insurance and Annuity
Company and Standard Life (incorporated by reference to SMC's Registration
Statement on Form S-4 (Registration No. 333-35447)).
10.33 Promissory Note from Ronald D. Hunter to SMC in the amount of $775,500
executed October 28, 1997 (incorporated by reference to SMC's Quarterly Report
on Form 10-Q (File No. 0-20882) for the quarter ended September 30, 1997).
10.34 Reinsurance Agreement between Standard Life and Life Reassurance
Corporation of America effective September 1, 1997.
10.35 Reinsurance Agreement between Standard Life and Business Men's Assurance
Company of America effective September 1, 1997.
10.36 Management Services Agreement between Savers Life and SMC dated March 11,
1998 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File
No. 0-20882) for the quarter ended June 30, 1998).
10.37 Indemnity Reinsurance Agreement between Standard Life and the Mercantile
and General Life Reassurance Company of America dated March 30, 1998 and
effective June 1, 1997 (incorporated by reference to SMC's Quarterly Report on
Form 10-Q (File No. 0-20882) for the quarter ended June 30, 1998).
10.38 Certificate of Designations for Series A Convertible Redeemable Preferred
Stock (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File
No. 0-20882) for the quarter ended June 30, 1998).
10.39 Quota Share Reinsurance Agreement between Savers Life and the Oxford Life
Insurance Company dated September 24, 1998 and effective July 1, 1998
(incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-
20882) for the quarter ended September 30, 1998).
10.40 Addendum No. 5 to Reinsurance Agreement between Standard Life Insurance
Company of Indiana and Winterthur Life Re Insurance Company dated August 20,
1998 and effective October 1, 1998 (incorporated by reference to SMC's
Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended
September 30, 1998).
10.41 Employment Agreement between Robert B. Neal and Standard Management
Corporation dated October 2, 1998 and effective October 2, 1998 (incorporated
by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the
quarter ended September 30, 1998).
10.42 Articles of Merger of Savers Life into Standard Life effective as of
December 31, 1998 and approved by the Indiana Department of Insurance December
29, 1998.
10.43 Plan and Agreement of Merger of Savers Life into Standard Life effective
as of December 31, 1998 dated October 30, 1998.
10.44 Articles of Merger of Midwestern Life into Standard Life effective as of
December 31, 1998 and approved by the Indiana Department of Insurance December
29, 1998.
10.45 Plan and Agreement of Merger of Midwestern Life into Standard Life
effective as of December 31, 1998 dated October 30, 1998.
10.46 Amended and Restated note Agreement dated as of September 24, 1998
between SMC and Fleet National Bank in the amount of $26,000,000.
10.47 Amendment No. 2 to Amended and Restated Revolving Line of Credit
Agreement dated as of September 24, 1998 between SMC and Fleet National Bank.
Exhibit
NUMBER DESCRIPTION OF DOCUMENT
10.48 Amended and Restated Registration Rights Agreement dated as of August 19,
1998 between SMC and Fleet National Bank.
10.49 Amended and Restated Pledge Agreement dated as of September 23, 1998,
between SMC and Fleet National Bank.
10.50 Warrant to purchase common stock of SMC dated August 19, 1998 entitling
Fleet National Bank to purchase 20,000 shares.
10.51 Guaranty dated October 1, 1998 made by SMC in favor of Fleet National
Bank.
10.52 Surplus debenture dated as of December 31, 1998 by and between SMC and
Standard Life in the amount of $8.0 million.
10.53 Surplus debenture dated as of December 31, 1998 by and between SMC and
Standard Life in the amount of $6.0 million.
10.54 Employment Agreement between Standard Management Corporation and Paul B.
Pheffer dated and effective July 1, 1999, (incorporated by reference to SMC's
Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended
September 30, 1999).
21 List of Subsidiaries of SMC
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG Audit
24 Powers of Attorney
27 Financial Data Schedule, which is submitted electronically pursuant to
Regulation S-K to the Securities and Exchange Commission for information only
and not filed.
The following is a list of each management contract or compensatory plan or
arrangement required to be filed as an exhibit to this report.
EXHIBIT
NUMBER
None
(b) Reports on Form 8-K filed during the fourth quarter of 1999.
No reports on Form 8-K were filed with the Commission in the fourth quarter of
1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 29, 2000
STANDARD MANAGEMENT CORPORATION
Ronald D. Hunter
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 29, 2000 by the following persons on
behalf of the Registrant and in the capacities indicated.
Ronald D. Hunter Chairman, President and Chief Executive Officer
(Principal Executive Officer)
*
Paul B. Pheffer Director, Executive Vice President, and
Chief Financial Officer
(Principal Financial Officer)
*
Gerald R. Hochgesang Senior Vice President - Finance and Treasurer
(Principal Accounting Officer)
*
Raymond J. Ohlson Director
*
Edward T. Stahl Director
*
Stephen M. Coons Director
*
Martial R. Knieser Director
*
Robert A. Borns Director
*
John J. Dillon Director
*
Jerry E. Francis Director
*By: /s/RONALD D. HUNTER
Ronald D. Hunter
Attorney-in-Fact
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2),(c) AND (d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF FINANCIAL STATEMENTS
and
FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
Year Ended December 31, 1999
STANDARD MANAGEMENT CORPORATION
INDIANAPOLIS, INDIANA
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
PAGE
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-4
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 F-8
Notes to Consolidated Financial Statements F-9
FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedules are included in this
report and should be read in
conjunction with the Audited Consolidated Financial Statements.
Schedule II -- Condensed Financial Information of Registrant
(Parent Company) for the Years Ended December 31, 1999, 1998 and 1997 F-29
Schedule IV -- Reinsurance for the Years Ended December 31, 1999, 1998 and 1997
F-33
Schedules not listed above have been omitted because they are not applicable or
are not required, or because the required information is included in the
Audited Consolidated Financial Statements or related Notes.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Standard Management Corporation
We have audited the accompanying consolidated balance sheets of Standard
Management Corporation and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. Our
audits also included the financial statement schedules listed in the Index at
Item 14(a). These financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits. We did not audit the
consolidated balance sheets at September 30, 1999 and 1998 or the consolidated
statements of operations, shareholder's equity and cash flows for the three
years ended September 30, 1999 of Standard Management International S.A. and
subsidiaries, a wholly owned subsidiary group, which financial statements
reflect assets totaling approximately 29% and 21% of the Company's consolidated
assets at December 31, 1999 and 1998 and revenues totaling approximately 6%, 8%
and 9% of consolidated revenues for each of the three years in the period ended
December 31, 1999. Those financial statements, which as explained in Note 1,
are included in the Company's consolidated balance sheets at December 31, 1999
and 1998, and the Company's consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1999, were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the data included for Standard
Management International S.A., is based solely on the report of other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Standard Management
Corporation and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Ernst & Young LLP
Indianapolis, Indiana
February 18, 2000
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Standard Management International, S.A.
We have audited the consolidated balance sheets of Standard Management
International S.A. and subsidiaries as of September 30, 1999 and 1998 and the
related consolidated statements of operations, shareholder's equity and cash
flows for each of the three years in the period ended September 30, 1999 (none
of which aforementioned financial statements are separately presented herein).
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 in the United States of America. 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 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 aspects, the consolidated financial position of Standard
Management International S.A. and subsidiaries as at September 30, 1999 and
1998, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended September 30, 1999 in conformity
with generally accepted accounting principles in the United States of America.
Luxembourg City, Luxembourg
February 18, 2000
KPMG Audit
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31
1999 1998
ASSETS
Investments:
<S> <C> <C>
Securities available for sale:
Fixed maturity securities, at fair value (amortized cost: $646,284 in 1999 $ 606,907 $ 551,312
and $547,115 in 1998)
Equity securities, at fair value (cost: $565 in 1999 and $1,498 in 1998) 378 1,316
Mortgage loans on real estate 8,131 8,578
Policy loans 14,033 15,019
Real estate 3,233 3,435
Other invested assets 845 837
Short-term investments 14,976 11,626
Total investments 648,503 592,123
Cash 3,659 13,591
Accrued investment income 11,105 9,563
Amounts due and recoverable from reinsurers 58,230 76,897
Deferred acquisition costs 67,811 32,946
Present value of future profits 30,688 28,793
Goodwill 5,636 5,886
Other assets 5,372 6,105
Assets held in separate accounts 319,973 190,246
Total assets $ 1,150,977 $ 956,150
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Insurance policy liabilities $ 727,189 $ 638,435
Accounts payable and accrued expenses 9,076 12,277
Notes payable 34,500 35,000
Deferred federal income taxes 349 7,620
Liabilities related to separate accounts 319,973 190,246
Total liabilities 1,091,087 883,578
Series A convertible redeemable preferred stock, par value $100 per share:
Authorized 130,000; 65,300 issued and outstanding in 1999 and 1998 6,530 6,530
Shareholders' Equity:
Preferred stock, no par value:
Authorized 870,000 shares; none issued and outstanding -- --
Common stock, no par value:
Authorized 20,000,000 shares; issued 9,038,134 in 1999 and 8,802,313 in 1998 62,152 60,586
Treasury stock, at cost, 1,252,978 shares in 1999 and 1,160,854 shares in 1998 (6,802) (6,220)
Accumulated other comprehensive income:
Unrealized gain (loss) on securities available for sale, net taxes (benefits) of (15,859) 1,660
$(8,196) in 1999 and $765 in 1998
Unrealized gain on other investments, net taxes of $8 in 1999 and $12 in 1998 15 23
Foreign currency translation adjustment (862) 4
Retained earnings 14,716 9,989
Total shareholders' equity 53,360 66,042
Total liabilities and shareholders' equity $ 1,150,977 $ 956,150
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997
<S> <C> <C> <C> <C> <C>
Revenues:
Premium income $ 13,090 $ 14,479 $ 7,100
Net investment income 44,821 34,221 29,197
Net realized investment gains 78 353 396
Policy income 6,826 6,529 5,512
Negative goodwill amortization -- 1,388 1,388
Separate account fees 3,941 2,884 2,084
Fee and other income 4,207 3,421 1,178
Total revenues 72,963 63,275 46,855
Benefits and expenses:
Benefits and claims 14,376 13,270 8,840
Interest credited to interest-sensitive annuities and other
financial products 25,728 19,775 16,281
Amortization 7,471 5,413 3,435
Other operating expenses 14,605 15,551 12,656
Interest expense and financing costs 3,385 2,955 2,381
Total benefits and expenses 65,565 56,964 43,593
Income before federal income taxes and preferred 7,398 6,311 3,262
stock dividends
Federal income tax expense 2,126 1,630 617
Net income 5,272 4,681 2,645
Preferred stock dividends 506 180 97
Earnings available to common shareholders $ 4,766 $ 4,501 $ 2,548
Earnings per share - basic:
Net income $ .69 $ .68 $ .54
Preferred stock dividends .07 .03 .02
Earnings available to common shareholders $ .62 $ .65 $ .52
Earnings per common share - diluted:
Net income $ .65 $ .62 $ .48
Preferred stock dividends .05 .02 .01
Earnings available to common shareholders $ .60 $ .60 $ .47
</TABLE>
See accompanying notes to consolidated financial statements.
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
other
Common Treasury comprehensive Retained
Total stock stock income earnings
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ 39,919 $ 40,481 $ (3,528) $ (55) $ 3,021
Comprehensive income:
Net income 2,645 2,645
Other comprehensive income:
Change in unrealized gain on securities,
net taxes of $1,503 2,917 2,917
Change in foreign currency (1,164) (1,164)
Other comprehensive income 1,753
Comprehensive income 4,398
Issuance of common stock warrants 165 165
Treasury stock acquired (1,079) (1,079)
Reissuance of treasury stock in connection
with exercise of stock options 35 35
Loss on reissuance of treasury stock (28) (28)
Preferred stock dividends (97) (97)
Balance at December 31, 1997 43,313 40,646 (4,572) 1,698 5,541
Comprehensive income:
Net income 4,681 4,681
Other comprehensive income:
Change in unrealized gain (loss) on
securities, net taxes (benefits) of $(251) (488) (488)
Change in foreign currency 477 477
Other comprehensive income (11)
Comprehensive income 4,670
Issuance of common stock for Savers Life 15,024 15,024
acquisition
Issuance of common stock for Midwestern Life
acquisition 4,614 4,614
Issuance of common stock warrants 64 64
Issuance of common stock in connection with
exercise of stock warrants 233 234 (1)
Treasury stock acquired (1,702) (1,702)
Conversion of preferred stock into common 4 4
stock
Reissuance of treasury stock in connection
with exercise of stock options 2 54 (52)
Preferred stock dividends (180) (180)
Balance at December 31, 1998 $ 66,042 $ 60,586 $ (6,220) $ 1,687 $9,989
</TABLE>
(continued on following page)
See accompanying notes to consolidated financial statements.
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
other
Common Treasury comprehensive Retained
Total stock stock income earnings
<S> <C> <C> <C> <C> <C>
Balance December 31, 1998 (carried forward $ 66,042 $ 60,586 $ (6,220) $ 1,687 $ 9,989
from prior page)
Comprehensive income:
Net income 5,272 5,272
Other comprehensive income:
Change in unrealized gain (loss) on
securities, net taxes (benefits) (17,527) (17,527)
of $(8,961)
Change in foreign currency (866) (866)
Other comprehensive income (18,393)
Comprehensive income (loss) (13,121)
Issuance of common stock warrants 1,566 1,566
Treasury stock acquired (582) (582)
Exercise of stock options (39) (39)
Preferred stock dividends (506) (506)
Balance at December 31, 1999 $ 53,360 $ 62,152 $(6,802) $(16,706) $ 14,716
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,272 $ 4,681 $ 2,645
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred acquisition costs 4,580 2,658 1,456
Deferral of acquisition costs (27,818) (13,542) (7,005)
Deferred federal income taxes 2,005 957 1,187
Depreciation and amortization 3,889 1,209 1,085
Insurance policy liabilities 14,530 6,400 9,441
Net realized investment gains (78) (353) (396)
Accrued investment income (1,541) (1,451) (314)
Other 2,014 (352) (403)
Net cash provided by operating activities 2,853 207 7,696
INVESTING ACTIVITIES
Fixed maturity securities available for sale:
Purchases (236,969) (261,744) (205,976)
Sales 116,511 162,503 161,891
Maturities, calls and redemptions 19,006 32,570 28,380
Short-term investments, net (3,350) 44,460 (4,925)
Other investments, net 2,270 320 (2,186)
Purchase of Savers Life Insurance Company, less cash acquired of $518 -- (18,039) --
Purchase of Midwestern National Life Insurance Company of Ohio,
less cash acquired of $1,026 -- (13,104) --
Net cash used by investing activities (102,532) (53,034) (22,816)
FINANCING ACTIVITIES
Issuance of common stock, net -- 19,638 --
Borrowings, net of debt issuance costs of $206 and $70 in 1998
and 1997, respectively 300 11,794 5,558
Repayments on long-term debt and obligations under capital lease (800) (3,141) (543)
Premiums received on interest-sensitive annuities and other
financial products credited
to policyholder account balances, net of premiums ceded 165,750 81,858 49,362
Return of policyholder account balances on interest-sensitive
annuities and other financial products (75,981) (52,934) (37,477)
Issuance of Series A redeemable preferred stock -- 6,389 --
Redemption of preferred stock -- -- (1,855)
Proceeds from common and treasury stock sales -- 234 138
Issuance of common stock and warrants 1,566 297 165
Purchase of common stock for treasury (582) (1,702) (1,079)
Dividends on preferred stock (506) (180) (97)
Net cash provided by financing activities 89,747 62,253 14,172
Net increase (decrease) in cash (9,932) 9,426 (948)
Cash at beginning of year 13,591 4,165 5,113
Cash at end of year $ 3,659 $ 13,591 $ 4,165
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Standard Management Corporation ("Standard Management") is an international
financial services holding company, which directly and through its subsidiaries
i) acquires and manages in force life insurance and annuity business, ii)
issues and distributes life insurance and annuity products, and iii) offers
unit-linked assurance products through its international subsidiaries.
Standard Management's active subsidiaries at December 31, 1999 include:
(i) Standard Life Insurance Company of Indiana ("Standard Life") and its
subsidiary, Dixie National Life Insurance Company ("Dixie Life"), (ii) Standard
Management International, S.A. and its subsidiaries ("SMI"), Premier Life
(Luxembourg) S.A. ("Premier Life (Luxembourg)") and Premier Life (Bermuda) Ltd.
("Premier Life (Bermuda)"), (iii) Standard Marketing Corporation ("Standard
Marketing") and (iv) Savers Marketing Corporation ("Savers Marketing").
BASIS OF PRESENTATION
The accompanying consolidated financial statements of Standard Management and
its subsidiaries (the "Company" or "SMC") have been prepared in conformity with
generally accepted accounting principles ("GAAP") and include the accounts of
the Company since acquisition or organization. All significant intercompany
balances and transactions have been eliminated.
The fiscal year end for SMI is September 30. To facilitate reporting on the
consolidated level, the fiscal year end for SMI was not changed and the
consolidated balance sheets and statements of operations for SMI at
September 30, 1999 and 1998 and for each of the three years in the period ended
September 30, 1999, are included in the Company's consolidated balance sheets
at December 31, 1999 and 1998 and for each of the three years in the period
ended December 31, 1999.
USE OF ESTIMATES
The nature of the Company's insurance businesses requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known, which could
impact the amounts disclosed in this report.
INVESTMENTS
The Company classifies its fixed maturity and equity securities as available
for sale and, accordingly, such securities are carried at fair value. Fixed
maturity securities include bonds and redeemable preferred stocks. Changes in
fair values of securities available for sale, after adjustment for the costs of
policies produced, costs of policies purchased and deferred income taxes, are
reported as unrealized gains or losses directly in shareholders' equity and,
accordingly, have no effect on net income. The costs of policies produced and
costs of policies purchased adjustments to the unrealized gains or losses
represent valuation adjustments or reinstatements of these assets that would
have been required as a charge or credit to operations had such unrealized
amounts been realized.
The cost of fixed maturity securities is adjusted for amortization of premiums
and discounts. The amortization is provided on a constant effective yield
method over the life of the securities and is included in net investment
income.
Mortgage-backed and other collateralized securities, classified as fixed
maturity securities in the consolidated balance sheets, are comprised
principally of obligations backed by an agency of the United States government
(although generally not by the full faith and credit of the United States
government). The Company has reduced the risk normally associated with these
investments by primarily investing in highly rated securities and in those that
provide more predictable prepayment patterns. The income from these securities
is recognized using a constant effective yield based on anticipated prepayments
and the estimated economic life of the securities. When actual prepayments
differ significantly from anticipated prepayments, the income recognized is
adjusted currently to match that which would have been recorded had the
effective yield been applied since the acquisition of the security. This
adjustment is included in net investment income.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Mortgage loans on real estate and policy loans are carried at unpaid principal
balances and are generally collateralized. Real estate investments, which the
Company has the intent to hold for the production of income, are carried at
cost, less accumulated depreciation. Short-term investments are carried at
amortized cost, which approximates fair value.
NET REALIZED INVESTMENT GAINS OR LOSSES
Net realized investment gains and losses are calculated using the specific
identification method and included in the consolidated statements of income.
If the values of investments decline below their amortized cost and this
decline is considered to be other than temporary, the amortized cost of these
investments is reduced to net realizable value and the reduction is recorded as
a realized loss.
FUTURE POLICY BENEFITS
Liabilities for future policy benefits for deferred annuities and universal
life policies are equal to full account value that accrues to the policyholder
(cumulative premiums less certain charges, plus interest credited) with rates
ranging from 3.0% to 12.3% in 1999 and 3.0% to 11% in 1998.
Future policy benefits for traditional life insurance contracts are computed
using the net level premium method on the basis of assumed investment yields,
mortality and withdrawals which were appropriate at the time the policies were
issued. Assumed investment yields are based on interest rates ranging from 6.2%
to 7.5%. Mortality is based upon various actuarial tables, principally the
1965-1970 Select and Ultimate Table. Withdrawals are based upon Company
experience and vary by issue age, type of coverage, and duration.
RECOGNITION OF INSURANCE POLICY REVENUE AND RELATED BENEFITS AND EXPENSES
Revenue for interest-sensitive annuity contracts consists of policy charges for
surrenders and investment income earned. Premiums received for these annuity
contracts are reflected as premium deposits and are not recorded as revenues.
Expenses related to these annuities include interest credited to policyholder
account balances. Revenue for universal life insurance policies consists of
policy charges for the cost of insurance, policy administration charges,
surrender charges and investment income earned during the period. Expenses
related to universal life policies include interest credited to policyholder
account balances and death benefits incurred in excess of policyholder account
balances.
Traditional life insurance and immediate annuity premiums are recognized as
premium revenue when due over the premium paying period of the policies.
Benefits are charged to expense in the period when claims are incurred and are
associated with related premiums through changes in reserves for future policy
benefits which results in the recognition of profit over the premium paying
period of the policies.
REINSURANCE
Premiums, annuity policy charges, benefits and claims, interest credited and
amortization expense are reported net of reinsurance ceded and are accounted
for on a basis consistent with those used in accounting for the original
policies issued and the terms of the reinsurance contracts.
SEPARATE ACCOUNTS
The majority of the balance represents i) unit-linked business, where benefits
on surrender and maturity are not guaranteed, and ii) investment contracts
which pay fixed benefits to the policyholder and have minimal mortality risk.
Separate accounts generally represent funds maintained in accounts to meet
specific investment objectives of policyholders who bear the investment risk.
The Company records the related liabilities at amounts equal to the underlying
assets. Investment income and investment gains and losses accrue directly to
such policyholders. The assets of each account are segregated and are not
subject to claims that arise out of any other business of the Company.
Deposits, net investment income and realized gains and losses on separate
accounts assets are not reflected in the consolidated statements of income.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The Company's foreign subsidiaries' balance sheets and statements of income are
translated at the year end exchange rates and average exchange rates for the
year, respectively. The resulting unrealized gain or loss adjustment from the
translation to U.S. dollars is recorded in the foreign currency translation
adjustment as a separate component of accumulated other comprehensive income.
Foreign exchange gains or losses relating to policyholders' funds in separate
accounts are allocated to the relevant separate account.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period in which the change
is enacted.
Standard Life and Dixie Life filed a consolidated return for 1998 and plan to
file a consolidated return for 1999. SMC and other U.S. non-insurance
subsidiaries are taxed as regular corporations and file a consolidated return.
SMC and its U.S. non-insurance subsidiaries were eligible to consolidate with
Standard Life for income tax purposes beginning in 1996, but do not currently
plan to do so.
SMI is incorporated as a holding company in the Grand Duchy of Luxembourg and,
accordingly, is not currently subject to taxation on income or capital gains.
SMI is subject to an annual capital tax which is calculated on the nominal
value of the statutory shareholder's equity at an annual rate of .20%. Premier
Life (Luxembourg) is a normal commercial taxable company and is subject to
income tax at regular corporate rates (statutory corporate rate of 37.45%), and
annual capital taxes amounting to approximately 0.5% of its net equity. Premier
Life (Bermuda) is exempt from taxation on income until March 2016 pursuant to a
decree from the Minister of Finance in Bermuda. To the extent that such income
is taxable under U.S. law, such income will be included in SMC's consolidated
return.
DEFERRED ACQUISITION COSTS
Costs relating to the production of new business (primarily commissions and
certain costs of marketing, policy issuance and underwriting) are deferred and
included in the deferred acquisition cost asset to the extent that such costs
are recoverable from future related policy revenues. For interest-sensitive
annuities and other financial products, deferred acquisition costs, with
interest, are amortized over the lives of the policies and products in a
constant relationship to the present value of estimated future gross profits,
discounted using the interest rate credited to the policy. Traditional life
insurance deferred acquisition costs are being amortized over the
premium-paying period of the related policies using assumptions consistent with
those used in computing policy benefit reserves.
The Company reviews the recoverability of the carrying value of the deferred
acquisition costs each year. For interest-sensitive annuities and other
financial products, the Company considers estimated future gross profits in
determining whether the carrying value is appropriate; for other insurance
products, the Company considers estimated future premiums. In all cases, the
Company considers expected mortality, interest earned and crediting rates,
persistency and expenses. Amortization is adjusted retrospectively for
interest-sensitive annuities and other financial products when estimates of
future gross profits to be realized are revised.
PRESENT VALUE OF FUTURE PROFITS
Present value of future profits are recorded in connection with acquisitions of
insurance companies or a block of policies. The initial value is based on the
actuarially determined present value of the projected future gross profits from
the in-force business acquired. In selecting the interest rate to calculate the
discounted present value of the projected future gross profits, the Company
uses the risk rate of return believed to best reflect the characteristics of
the purchased policies, taking into account the relative risks of such
policies, the cost of funds to acquire the business and other factors. The
value of in force insurance purchased is amortized on a constant yield basis
over its estimated life from the date of acquisition in proportion to the
emergence of profits or the expected premium pattern over a period of
approximately 20 years.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For acquisitions the Company made on or before November 19, 1992, the Company
amortizes the asset with interest at the same discount rate used to determine
the present value of future profits at the date of purchase. For acquisitions
after November 19, 1992, the Company amortizes the asset using the interest
rate credited to the underlying policies.
GOODWILL
The excess of the cost to acquire purchased companies over the fair value of
net assets acquired ("goodwill") is being amortized on a straight-line basis
over periods that generally correspond with the benefits expected to be derived
from the acquisitions, usually 20 to 40 years. Accumulated amortization was $.9
million and $.6 million at December 31, 1999 and 1998, respectively. The
Company continually monitors the goodwill based on estimates of future
earnings. If it determines that goodwill has been impaired, the carrying value
is reduced with a corresponding charge to expense.
NEGATIVE GOODWILL
The excess of the net assets acquired over the cost to acquire purchased
companies ("negative goodwill"), after reducing the basis in property and
equipment and other noncurrent assets to zero, was amortized into earnings on a
straight-line basis over a five year period. Negative goodwill was fully
amortized at December 31, 1998.
STOCK OPTIONS
The Company recognizes compensation expense for its stock option plan using the
intrinsic value method of accounting. Under the terms of the intrinsic value
method, compensation cost is the excess, if any, of the quoted market price of
the stock at the grant date, or other measurement date, over the amount an
employee must pay to acquire the stock. Under the Company's stock option plans,
no expense is recognized since the exercise price equals or exceeds the market
price at the measurement date.
RECLASSIFICATIONS
Certain amounts in the 1998 and 1997 consolidated financial statements and
notes have been reclassified to conform with the 1999 presentation. These
reclassifications had no effect on previously reported shareholders' equity or
net income in the periods presented.
2.ACQUISITIONS
On March 12, 1998, SMC acquired Savers Life Insurance Company ("Savers Life").
Each of the 1.8 million shares of Savers Life Common Stock outstanding was
converted into 1.2 shares of SMC Common Stock plus $1.50. Each holder of
Savers Life Common Stock could elect to receive the $1.50 per share portion of
the merger consideration in the form of additional shares of SMC Common Stock.
SMC issued approximately 2.2 million shares with a value of approximately $14.9
million and paid $2.2 million in cash and $1.5 million in acquisition costs for
an aggregate purchase price of $18.6 million to acquire Savers Life. SMC
increased the Amended and Restated Revolving Line of Credit Agreement (the
"Amended Credit Agreement") to $20.0 million to finance the acquisition of
Savers Life.
On October 30, 1998, SMC acquired Midwestern National Life Insurance Company of
Ohio ("Midwestern Life"). SMC issued .7 million shares of its common stock
valued at $4.6 million, increased its bank debt by $6.0 million on restructured
terms by increasing the Amended Credit Agreement to $26.0 million, and paid
$2.9 million in cash and $.6 million of acquisition costs for an aggregate
purchase price of $14.1 million to acquire Midwestern Life.
The acquisitions of Savers Life and Midwestern Life were accounted for using
the purchase method of accounting and accordingly, SMC's consolidated financial
statements include the results of operations of the acquired companies from the
effective dates of their respective acquisitions. Under purchase accounting,
SMC allocated the total purchase price of the assets
and liabilities acquired, based on a determination of their fair values and
recorded the excess of acquisition cost over net assets acquired as goodwill,
which will be amortized on a straight line basis over 30 years and 20 years for
Savers Life and Midwestern Life, respectively. SMC merged Savers Life and
Midwestern Life into Standard Life effective December 31, 1998, with Standard
Life as the surviving entity.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.ACQUISITIONS (CONTINUED)
The following schedule summarizes the assets acquired and the liabilities
assumed with the Savers Life and Midwestern Life acquisitions described above
(in thousands):
Savers Midwestern
Life Life
Assets acquired:
Fixed maturity securities $ 7,055 $ 99,243
Equity securities 2,840 174
Mortgage loans on real estate 6,273 223
Real estate 1,639 --
Policy loans 9 6,480
Short term investments 42,745 --
Cash 518 1,026
Present value of future profits 5,960 6,050
Other assets 7,944 9,671
Total assets acquired 74,983 122,867
Liabilities assumed:
Policy reserves 58,680 100,497
Deferred federal income taxes -- 2,124
Other liabilities 1,386 6,141
Total liabilities assumed 60,066 108,762
Net assets acquired 14,917 14,105
Goodwill 3,640 25
Total purchase price $ 18,557 $ 14,130
The following are supplemental unaudited pro forma consolidated results of
operations of the Company as if the acquisitions of Savers Life and Midwestern
Life had occurred on January 1, 1997. The following amounts are based upon
certain assumptions and estimates which the Company believes are reasonable and
do not reflect any benefit from savings which might be achieved from combined
operations. The amounts are not necessarily indicative of the results of
operations had these transactions occurred on January 1, 1997, or the results
of future operations (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31
1998 1997
Revenues $80,710 $95,883
Earnings available to common shareholders 2,657 3,842
Earnings per share .34 .49
Earnings per share, assuming dilution .32 .46
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3.INVESTMENTS
The amortized cost, gross unrealized gains and losses and estimated fair value
of securities available for sale are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1999
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Securities available for sale:
Fixed maturity securities:
United States Treasury securities and $ 20,455 $ 7 $ 517 $ 19,945
obligations of United States government
agencies
Obligations of states and political 3,997 50 87 3,960
subdivisions
Foreign government securities 3,489 50 274 3,265
Utilities 29,068 -- 2,284 26,784
Corporate bonds 479,332 308 32,658 446,982
Mortgaged-backed securities 104,413 70 3,629 100,854
Redeemable preferred stock 5,530 -- 413 5,117
Total fixed maturity securities 646,284 485 39,862 606,907
Equity securities 565 6 193 378
Total securities available for sale $ 646,849 $ 491 $ 40,055 $ 607,285
December 31, 1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities available for sale:
Fixed maturity securities:
United States Treasury securities and
obligations of United States government
agencies $ 34,635 $ 606 $ 53 $ 35,188
Obligations of states and political
Subdivisions 3,337 141 -- 3,478
Foreign government securities 46,872 616 4,541 42,947
Utilities 23,316 662 74 23,904
Corporate bonds 366,348 10,965 4,498 372,815
Mortgaged-backed securities 66,721 716 312 67,125
Redeemable preferred stock 5,886 8 39 5,855
Total fixed maturity securities 547,115 13,714 9,517 551,312
Equity securities 1,498 9 191 1,316
Total securities available for sale $ 548,613 $13,723 $ 9,708 $ 552,628
</TABLE>
The estimated 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 by discounting expected future cash flows using a current
market rate applicable to the coupon rate, credit rating, and maturity of the
investments.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3.INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1999 by contractual maturity are shown below (in thousands).
Actual maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties and because most mortgage-backed securities provide for periodic
payments throughout their lives.
Amortized Fair
Cost Value
Due in one year or less $ 5,586 $ 5,555
Due after one year through five years 114,932 111,880
Due after five years through ten years 214,114 201,317
Due after ten years 201,709 182,184
Subtotal 536,341 500,936
Redeemable preferred stock 5,530 5,117
Mortgage-backed securities 104,413 100,854
Total fixed maturity securities $ 646,284 $ 606,907
The Company maintains a highly-diversified investment portfolio with limited
concentration of financial instruments in any given region, industry or
economic characteristic. At December 31, 1999, the Company held no investments
in any entity in excess of 10% of shareholders' equity other than asset-backed
securities and investments issued or guaranteed by the U.S. government or a
U.S. government agency, all of which were classified as fixed maturity
securities available for sale.
Net investment income was attributable to the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997
<S> <C> <C> <C>
Fixed maturity securities $ 40,432 $ 30,484 $ 26,832
Common stocks 419 46 --
Mortgage loans on real estate 947 679 123
Policy loans 960 654 618
Real estate 33 135 58
Short-term investments and other 2,602 2,932 2,098
Gross investment income 45,393 34,930 29,729
Less: investment expenses 572 709 532
Net investment income $ 44,821 $ 34,221 $ 29,197
Net realized investment gains arose from the following (in thousands):
Year Ended December 31
1999 1998 1997
Fixed maturity securities available for sale:
Gross realized gains $ 2,000 $ 2,570 $ 2,209
Gross realized losses 1,430 2,074 1,695
Net 570 496 514
Real estate 9 -- 26
Other losses (501) (143) (144)
Net realized investment gains $ 78 $ 353 $ 396
</TABLE>
3.INVESTMENTS (CONTINUED)
Life insurance companies are required to maintain certain amounts of assets
with state or other regulatory authorities. At December 31, 1999 fixed maturity
securities of $11.8 million and cash and short-term investments of $.7 million
were held on deposit by various state regulatory authorities in compliance with
statutory regulations. Additionally, fixed maturity securities of $.3 million
and short-term investments of $4.5 million of SMI were held by a custodian bank
approved by the Luxembourg regulatory authorities to comply with local
insurance laws.
Comprehensive income excludes net realized investment gains (after income
taxes) of $.4 million in 1999 and $.3 million in 1998.
4.DEFERRED ACQUISITION COSTS AND PRESENT VALUE OF FUTURE PROFITS
The activity related to the deferred acquisition costs is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997
<S> <C> <C> <C>
Balance, beginning of year $ 32,946 $ 21,435 $ 18,309
Additions 27,817 14,200 7,192
Amortization (4,580) (3,316) (1,643)
Adjustment relating to net unrealized (gain) loss
on securities available for sale 11,628 627 (2,423)
Balance, end of year $ 67,811 $ 32,946 $ 21,435
The activity related to the present value of future profits is summarized as
follows (in thousands):
Year Ended December 31
1999 1998 1997
Balance, beginning of year $ 28,793 $ 20,537 $ 23,806
Amounts and adjustments related to acquisitions (949) 10,401 (1,374)
and disposals
Interest accreted on unamortized balance 3,890 4,223 3,178
Gross amortization during the year (6,517) (6,088) (4,844)
Adjustments relating to net unrealized (gain) loss
on securities available for sale 5,471 (280) (229)
Balance, end of year $ 30,688 $ 28,793 $ 20,537
</TABLE>
The percentages of future expected net amortization of the beginning balance of
the present value of future profits, before the effect of net unrealized gains
and losses, will be between 8% and 10% in each of the years 2000 through 2004.
Future net amortization is based on the present value of future profits at
December 31, 1999 and current assumptions as to future events on all policies
in force.
The discount rate used to calculate the present value of future profits
reflected in the Company's consolidated balance sheets at December 31, 1999,
ranged from 7.5% to 18%. The Company used discount rates of 13% and 15% to
calculate the present value of future profits of the Savers Life and Midwestern
Life acquisitions, respectively.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5.NOTES PAYABLE
Notes payable were as follows (in thousands):
Interest December 31
Rate 1999 1998
Borrowings under revolving credit agreements 9.30%{(1)} $ 24,500 $ 25,000
Senior subordinated convertible notes 10.00% 10,000 10,000
$ 34,500 $ 35,000
(1)Current weighted average rate at December 31, 1999.
BORROWINGS UNDER REVOLVING CREDIT AGREEMENTS
Standard Management has outstanding borrowings at December 31, 1999 pursuant to
the Amended Credit Agreement that provides for it to borrow up to $26.0 million
in the form of a seven-year reducing revolving loan arrangement. Standard
Management has agreed to pay a non-use fee of .50% per annum on the unused
portion of the commitment. In connection with the original and Amended Credit
Agreement, SMC issued warrants to the bank to purchase 93,500 shares of Common
Stock. Borrowings under the Amended Credit Agreement may be used for
contributions to surplus of insurance subsidiaries, acquisition financing and
repurchases of Common Stock. The debt is secured by a Pledge Agreement of all
of the issued and outstanding shares of Common stock of Standard Life and
Standard Marketing. Interest on the borrowings under the Amended Credit
Agreement is determined, at the option of SMC, to be: (i) a fluctuating rate of
interest to the corporate base rate announced by the bank periodically, plus 1%
per annum, or (ii) a rate at LIBOR plus 3.25%. The repayment schedule includes
$2.8 million due March 2000 and $4.3 million each year thereafter to March
2005. Indebtedness incurred under the Amended Credit Agreement is subject to
certain restrictions and covenants including, among other things, certain
minimum financial ratios, minimum consolidated equity requirements for SMC,
positive net income, minimum statutory surplus requirements for the Company's
insurance subsidiaries and certain limitations on acquisitions, additional
indebtedness, investments, mergers, consolidations and sales of assets.
SMI has an unused line of credit of $1.6 million, with no borrowings in
connection with this line of credit in 1999 or 1998.
SENIOR SUBORDINATED CONVERTIBLE NOTES
Standard Management has outstanding borrowings under subordinated convertible
notes (collectively, the "Notes") of $4.4 million which is due December 2003,
unless previously converted, and requires interest payments in cash on January
1 and July 1 of each year at 10% per annum and $5.6 million which is due July
2004 unless previously converted, and also requires interest payments in cash
on January 1 and July 1 of each year at 10% per annum. The Notes are
convertible at any time at the option of the noteholders into SMC Common Stock
at the rate of $5.747 per share. The Notes may be prepaid in whole or in part
at the option of Standard Management commencing on July 1, 2000 at redemption
prices equal to 105% of the principal amount (plus accrued interest) and
declining to 102% of the principal amount plus accrued interest. The Notes may
be prepaid prior to July 1, 2000 at a redemption price equal to 101% of the
principal amount (plus accrued interest) under certain limited circumstances.
The Notes are subject to certain restrictions and covenants substantially
similar to those in the Amended Credit Agreement.
INTEREST PAID
Cash paid for interest was $3.4 million, $2.7 million, and $1.5 million in
1999, 1998 and 1997, respectively.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6.INCOME TAXES
The components of the federal income tax expense (benefit), applicable to pre-
tax income before extraordinary gains, were as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997
<S> <C> <C> <C>
Current taxes (benefit) $ 151 $ 673 $ (570)
Deferred taxes 1,975 957 1,187
$ 2,126 $ 1,630 $ 617
</TABLE>
The effective tax rate on pre-tax income is lower than the statutory corporate
federal income tax rate as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997
<S> <C> <C> <C>
Federal income tax expense at statutory rates (34%) $ 2,515 $ 2,146 $ 1,109
Nonrecognition of losses in SMC consolidated return and in
foreign subsidiaries -- -- 314
Operating income in SMC consolidated return offset by NOL (219) (83) --
carryforwards
Amortization of negative goodwill -- (472) (472)
Tax benefits from capital loss carryforwards not -- -- (200)
previously recognized
Other items, net (170) 39 (134)
Federal income tax expense (benefit) $ 2,126 $ 1,630 $ 617
Effective tax rate 29% 26% 19%
</TABLE>
The Company recovered $.4 million, $1.7 million and $1.3 million in federal
income taxes in 1999, 1998 and 1997, respectively, and paid federal income
taxes of $.1 million, $.7 million and $.2 million in 1999, 1998 and 1997,
respectively.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for tax return purposes. Significant temporary
differences included in the Company's deferred tax assets (liabilities) are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31
1999 1998
<S> <C> <C>
Deferred income tax assets:
Future policy benefits $ 15,867 $ 12,338
Unrealized loss on securities available for sale 12,037 --
Capital and net operating loss carryforwards 5,659 5,556
Other-net 1,435 1,567
Gross deferred tax assets 34,998 19,461
Valuation allowance for deferred tax assets (7,858) (9,023)
Deferred income tax assets, net of valuation allowance 27,140 10,438
Deferred income tax liabilities:
Unrealized gain on securities available for sale -- (2,514)
Present value of future profits (10,435) (9,791)
Deferred policy acquisition costs (17,054) (5,753)
Total deferred income tax liabilities (27,489) (18,058)
Net deferred income tax liabilities $ (349) $ (7,620)
</TABLE>
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6.INCOME TAXES (CONTINUED)
The Company is required to establish a "valuation allowance" for any portion of
its deferred tax assets which are unlikely to be realized. The valuation
allowance for deferred tax assets includes $.6 million at December 31, 1999
with respect to corporate income tax loss carryforwards of Standard Management
International, S.A. which, if recognized in the future, will result in an
addition to negative goodwill and be amortized into income over its remaining
life. The valuation allowance for deferred tax assets includes $1.8 million at
December 31, 1999 with respect to deferred tax assets at the date of
acquisition and net tax operating loss carry forwards of Dixie Life and Shelby
Life which, if recognized in the future, will result in a reduction to goodwill
and be amortized into income over its remaining life by reducing goodwill
amortization expense.
As of December 31, 1999, Standard Management and its noninsurance subsidiaries
had consolidated net operating loss carryforwards of approximately $9.4 million
for tax return purposes which expire from 2005 through 2018. These
carryforwards will only be available to reduce the taxable income of Standard
Management. At December 31, 1999, the Standard Life consolidated return had
net operating loss carryforwards of approximately $5.3 million which expire in
2010 and 2019. These carryforwards will only be available to reduce the
taxable income of the Standard Life consolidated return. At December 31, 1999,
Premier Life (Luxembourg) had accumulated corporate income tax loss
carryforwards of approximately $1.6 million, all of which may be carried
forward indefinitely.
7.SHAREHOLDERS EQUITY
REDEEMABLE PREFERRED STOCK
Shareholders have authorized 1,000,000 shares of Preferred Stock. Other terms,
including preferences, voting and conversion rights, may be established by the
Board of Directors.
In 1998, 130,000 shares of the authorized preferred stock were designated as
Series A convertible redeemable preferred stock ("Series A preferred stock").
The Company issued 65,300 shares with a stated value of $6.5 million ($100 per
share) in 1998. The following, among other things, are characteristics of the
Series A preferred stock:
The holders are entitled to cumulative annual dividends of $7.75 per share
(payable quarterly).
Conversion into 11.767 shares of SMC common stock per share of Series A
preferred stock.
Redeemable on July 1, 2003.
Redemption by the Company may occur at 105% of stated value beginning July 1,
1999 and decreasing 1% per year to 100% at July 1, 2003.
There are no voting rights attached to these shares.
COMMON STOCK
The Company repurchased 92,124, 308,465, and 154,903 shares of Common Stock for
$.6 million, $1.7 million, and $1.1 million in 1999, 1998 and 1997,
respectively under its stock repurchase program. At December 31, 1999, the
Company was authorized to purchase an additional 964,790 shares under this
program.
The following table represents outstanding warrants to purchase Common Stock as
of December 31, 1999:
Exercise Warrants
ISSUE DATE EXPIRATION DATE Price Outstanding
November 1995 November 2002 4.5238 31,500
July 1996 July 2003 4.3750 30,000
April 1997 April 2004 5.1250 12,000
July 1997 July 2000 5.7500 50,000
September 1997 September 2000 7.5000 15,000
February 1998 August 2000 8.2500 50,000
June 1998 June 2001 7.5000 25,000
October 1998 October 2001 8.0000 75,000
October 1998 October 2001 7.1250 20,000
January 1999 December 2000 7.0000 15,000
January 1999 January 2002 6.6250 89,750
413,250
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7.SHAREHOLDERS EQUITY (CONTINUED)
CHANGES IN SHARES OF COMMON STOCK AND TREASURY STOCK
The following table represents changes in the number of common and treasury
shares as of December 31:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Common Stock:
Balance, beginning of year 8,802,313 5,752,499 5,752,499
Issuance of common stock 235,821 3,049,814 --
Balance, end of year 9,038,134 8,802,313 5,752,499
Treasury Stock:
Balance, beginning of year (1,160,854) (876,009) (728,229)
Treasury stock acquired (92,124) (308,465) (154,903)
Reissuance of treasury stock in connection -- 23,620 7,123
with exercise of stock options
Balance, end of year (1,252,978) (1,160,854) (876,009)
</TABLE>
UNREALIZED GAIN ON SECURITIES
The components of the balance sheet caption "Unrealized gain on securities
available for sale" in shareholders' equity are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
December 31
1999 1998
<S> <C> <C>
Fair value of securities available for sale $ 607,285 $ 552,628
Amortized cost of securities available for sale 646,849 548,613
Gross unrealized gain (loss) on securities available for sale (39,564) 4,015
Adjustments for:
Deferred acquisition costs 10,527 (1,101)
Present value of future profits 4,982 (489)
Deferred federal income taxes 8,196 (765)
Net unrealized gain (loss) on securities available for sale $ (15,859) $ 1,660
</TABLE>
8.STOCK OPTION PLAN
SMC has a non-qualified Stock Option Plan (the "Plan") under which 2,500,000
shares of Common Stock are reserved for grants of stock options to employees
and directors. The purchase price per share specified in any Plan option must
be at least equal to the fair market value of common stock at the grant date.
Options generally become exercisable over a three-year period and have a term
of 10 years. The Plan is administered by the Board of Directors and officers of
SMC. The terms of the options, including the number of shares and the exercise
price, are subject to the sole discretion of the Board of Directors. A total
of 88,118 shares are available for future issuance for the Plan as of December
31, 1999.
The provisions of SFAS No. 123, "Accounting for Stock-Based Compensation",
allows companies to either expense the estimated fair value of stock options or
to continue their current practice and disclose the pro forma effects on net
income and earnings per share had the fair value of the options been expensed.
The Company has elected to continue its practice of recognizing compensation
expense for its Plan using the intrinsic value based method of accounting and
to provide the required pro forma information. Had compensation cost for the
Plan been determined based on the fair value at the grant date for awards under
the Plan consistent with the provisions of SFAS No. 123, the Company's pro
forma net income and pro forma earnings per share would have been the following
(in thousands, except per share amounts):
8.STOCK OPTION PLAN (CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997
<S> <C> <C> <C>
Net income $ 3,640 $ 3,094 $ 624
Earnings per share .41 .43 .11
Earnings per share, assuming dilution .41 .43 .11
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-valuation model with the following weighted-average
assumptions :
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Risk-free interest rates 5.6% 5.6% 5.7%
Volatility factors .59 .55 .37
Weighted average expected life 7 years 7 years 7 years
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not provide a reliable single measure of the
fair value of its employee stock options. Because SFAS No. 123 is effective
only for awards granted after January 1, 1995, the pro forma disclosures
provided may not be representative of the effects on reported net income for
future years.
A summary of the Company's stock option activity and related information for
the years ended December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999
1998 1997
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Price Price Price
Shares Shares Shares
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning 1,891,287 $ 6.15 1,916,820 $ 6.08 1,446,169 $ 5.98
of year
Exercised (19,163) 4.45 (97,988) 5.23 (17,300) 4.52
Granted 633,300 6.15 79,950 6.94 685,000 6.29
Expired or forfeited (93,542) 7.91 (7,495) 6.75 (197,049) 4.30
Options outstanding, end of 2,411,882 6.10 1,891,287 6.15 1,916,820 6.08
year
Options exercisable, end of 1,973,799 1,664,153 1,467,185
year
Weighted-average fair value of
options $ 3.94 $ 4.42 $ 3.10
granted during the year
</TABLE>
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.STOCK OPTION PLAN (CONTINUED)
Information with respect to stock options outstanding at December 31, 1999 is
as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Price Exercisable Price
Life
(years)
<S> <C> <C> <C> <C> <C>
$3-5 334,550 6 $4.42 334,550 $4.42
5-7 1,603,283 8 6.08 1,173,533 6.05
7-9 456,199 6 7.28 447,866 7.27
9-11 17,850 4 9.43 17,850 9.43
2,411,882 1,973,799
</TABLE>
9.REINSURANCE
The Company's insurance subsidiaries have entered into reinsurance agreements
with non-affiliated companies to limit the net loss arising from large risks,
maintain their exposure to loss within capital resources, and provide
additional capacity for future growth. The maximum amount of life insurance
retained on any one life ranges from $30,000 to $150,000. Amounts of standard
risk in excess of that limit are reinsured.
Reinsurance premiums ceded to other insurers were $25.3 million, $17.0 million
and $4.8 million in 1999, 1998 and 1997, respectively. Reinsurance ceded has
reduced benefits and claims incurred by $2.7 million, $10.5 million and $5.4
million in 1999, 1998 and 1997, respectively. A contingent liability exists to
the extent any of the reinsuring companies are unable to meet their obligations
under the reinsurance agreements. To minimize exposure to significant losses
from reinsurance insolvencies, the Company evaluates the financial condition of
its reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities or economic characteristics of the reinsurers.
Based on its periodic reviews of these companies, the Company believes the
assuming companies are able to honor all contractual commitments under the
reinsurance agreements.
At December 31, 1999 the Company's largest annuity reinsurer, which is rated
"A" (Excellent) by A.M. Best, represented $28.5 million, or 60.5% of total
reinsurance recoverable and $.1 million of premium deposits ceded. From
January 1, 1996 to March 31, 1996, approximately 50% of Standard Life's annuity
business was ceded. Effective April 1, 1996, Standard Life reduced the amount
ceded to 25% and effective October 1, 1998, discontinued ceding its annuity
business.
On July 1, 1998, Savers Life's Medicare supplement business was sold to Oxford
Life Insurance Company ("Oxford Life") through a quota share reinsurance
agreement. Under the terms of the reinsurance agreement, Standard Life
administered the Medicare supplement business through October 1, 1999 and
received administration fee income. Effective December 31, 1998, Standard Life
replaced Savers Life as a party to this reinsurance agreement and became
responsible for the administration of the Medicare supplement business.
Effective December 1, 1999, the assumption of the business was effected by
Oxford Life.
10.RELATED PARTY TRANSACTIONS
On October 28, 1997, SMC made an interest-free loan to an officer and director
of SMC, in the amount of $778,000, representing a new loan in the sum of
$438,000 and the consolidation of an existing loan. The principal balance of
the loan was $778,000 at December 31, 1999 and 1998. Repayment is due within
10 days of the officer's voluntary termination or resignation as an officer of
SMC. In the event of a termination of the officer's employment with SMC
following a change in control, the loan is deemed to be forgiven.
On September 2, 1998, SMC made a loan to a director of SMC, in the amount of
$120,000 with an interest rate of prime plus 5%. The principal balance of the
loan was $61,700 at December 31, 1999 and 1998. The director has since
resigned.
SMC entered into a covenant not to compete agreement with a former officer and
director in February 1997, effective July 1, 1996, the date his employment
agreement terminated. In accordance with the covenant not to compete agreement,
the officer and director received payments of $100,000, $125,000 and $275,000
in 1999, 1998 and 1997 respectively.
10.RELATED PARTY TRANSACTIONS (CONTINUED)
In 1998, certain officers and directors purchased 31,000 shares, or $3.1
million of the Series A preferred stock as described in Note 7. These shares
were purchased in connection with a loan agreement of $2.6 million which the
Company has guaranteed.
11.COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company rents office and storage space under noncancellable operating
leases. The Company incurred rent expense for operating leases of $1.1 million,
$1.0 million, and $.9 million in 1999, 1998 and 1997, respectively. Pursuant to
the terms of a lease agreement effective June 1, 1991, Standard Life has agreed
to lease office space for a ten year period. After the initial ten year lease
period, Standard Life may continue to lease the premises on a month to month
basis at a rental of 125% of the prevailing market rate for the leased premises
in effect at that time.
Future required minimum rental payments, by year and in the aggregate, under
operating leases as of December 31, 1999, are as follows (in thousands):
2000 $ 1,126
2001 722
2002 222
2003 192
2004 124
Thereafter 124
Total minimum lease payments $ 2,510
EMPLOYMENT AGREEMENTS
Certain officers are employed pursuant to executive employment agreements that
create certain liabilities in the event of the termination of the covered
executives following a change in control of the Company. The commitment under
these agreements is approximately three times their current annual salaries.
Additionally, following termination from the Company due to a change in
control, each executive is entitled to receive a lump sum payment equal to all
unexercised stock options granted multiplied by the highest per share fair
market value during the six month period ending on the date of termination.
There were unexercised options outstanding to these executives to buy 1,852,880
shares at December 31, 1999.
12.LITIGATION
An officer and director of SMC resigned effective April 15, 1997. On June 19,
1997, this former officer commenced an action in the Superior Court of Marion
County, Indiana against SMC claiming that his employment agreement contained a
provision to the effect that, following a termination of his employment with
SMC under certain circumstances, he would be entitled to receive certain
benefits. This former officer has asserted to SMC that he is entitled to a
lump sum termination payment of $1.7 million and liquidated damages not
exceeding $3.3 million by virtue of his voluntarily leaving SMC's employment.
SMC disputes those claims. SMC filed its Answer and Counterclaim on September
11, 1997. SMC's investigation since the action was filed revealed a basis for
the termination of employment of the former officer for cause relative to
after-acquired evidence. On October 14, 1997, the Board of Directors of SMC
terminated the former officer for cause effective March 15, 1997. Such
termination will also be argued by SMC as a complete defense to all claims
asserted by the former officer. The ultimate outcome of the action cannot
presently be determined. Accordingly, no provision for any liability that
may result has been made in the consolidated financial statements. Management
believes that the conclusion of such litigation will not have a material
adverse effect on SMC's consolidated financial condition.
In addition, the Company is involved in various legal proceedings in the normal
course of business. In most cases, such proceedings involve claims under
insurance policies or other contracts of the Company. The outcomes of these
legal proceedings are not expected to have a material adverse effect on the
consolidated financial position, liquidity or future results of operations of
the Company based on the Company's current understanding of the relevant facts
and law.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13.STATUTORY ACCOUNTING INFORMATION OF SUBSIDIARIES
The Company's U.S. life insurance subsidiaries maintain their records in
conformity with statutory accounting practices prescribed or permitted by state
insurance regulatory authorities. Statutory accounting practices differ in
certain respects from GAAP. In consolidation, adjustments have been made to
conform the Company's domestic subsidiaries' accounts with GAAP.
The Company's U.S. life insurance subsidiaries had consolidated statutory
capital and surplus of $43.7 million and $43.6 million at December 31, 1999 and
1998, respectively, after elimination of subsidiaries intercompany accounts.
Consolidated net income of the Company's life insurance subsidiaries on a
statutory basis, after elimination of subsidiaries intercompany accounts was
$.9 million, $1.7 million, and $1.8 million for the years ended December 31,
1999, 1998 and 1997, respectively. Minimum statutory capital and surplus
required by the Indiana Insurance Code was $.5 million as of December 31, 1999.
"Prescribed" statutory accounting practices include a variety of publications
of the National Association of Insurance Commissioners ("NAIC"), as well as
state laws, regulations, and general administrative rules. "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. In 1998, the
NAIC adopted codified 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 adopted by states
with an implementation date of January 1, 2001, will likely change, to some
extent, prescribed statutory accounting practices, and may result in changes to
the accounting practices that insurance enterprises use to prepare their
statutory financial statements.
Standard Life strengthened policy reserves by $.7 million in 1999 and $.3
million in 1998 pursuant to the statutory Actuarial Guideline 33. Standard
Life received permission from the Indiana Department of Insurance Commissioner
to grade in the remaining effect of Actuarial Guideline 33 over three years.
This permitted accounting practice increased statutory surplus by $.3 million
at December 31, 1999.
From the funds borrowed by SMC pursuant to the Amended Credit Agreement and the
subordinated convertible debt agreement, $27.0 million ($13.0 million at
December 31, 1997) was loaned to Standard Life pursuant to an Unsecured Surplus
Debenture Agreement ("Surplus Debenture") which requires Standard Life to make
quarterly interest payments to SMC at a variable corporate base rate plus 2%
per annum, and annual principal payments of $1.0 million per year beginning in
2007 and concluding in 2033. As required by state regulatory authorities, the
balance of the surplus debenture at December 31, 1999 and 1998 of $27.0 million
is classified as a part of capital and surplus of Standard Life. The interest
and principal payments are subject to quarterly approval by the Indiana
Department of Insurance, depending upon satisfaction of certain financial tests
relating to levels of Standard Life's capital and surplus and general approval
of the Commissioner of the Indiana Department of Insurance.
SMC's ability to pay operating expenses and meet debt service obligations is
partially dependent upon the amount of dividends received from Standard Life.
Standard Life's ability to pay cash dividends to SMC is, in turn, restricted by
law or subject to approval by the insurance regulatory authorities of Indiana.
Dividends are permitted based on, among other things, the level of the
preceding year statutory surplus and net income. In 1997 Standard Life paid
dividends of $1.6 million to SMC. During 2000, Standard Life can pay dividends
of $4.4 million without regulatory approval; Standard Life must notify the
Indiana regulatory authorities of the intent to pay dividends at least ten days
prior to payment.
State insurance regulatory authorities impose minimum risk-based capital
requirements on insurance enterprises that were developed by the NAIC. The
formulas for determining the amount of risk-based capital ("RBC") specify
various weighting factors that are applied to financial balances or various
levels of activity based on the perceived degree of investment and insurance
risks. Regulatory compliance is determined by a ratio (the "Ratio") of the
enterprise's regulatory total adjusted capital, as defined by the NAIC, to its
authorized control level RBC, as defined by the NAIC. Enterprises below
specific trigger points or ratios are classified within certain levels, each of
which requires specified corrective action. At December 31, 1999, the RBC
Ratios of Standard Life and Dixie Life were both at least two and a half times
greater than the levels at which company action is required.
The statutory capital and surplus for Premier Life (Luxembourg) was $6.9
million and $6.8 million at fiscal years ended 1999 and 1998, respectively, and
minimum capital and surplus under local insurance regulations was $2.6 million
and $2.9 million at fiscal years ended 1999 and 1998, respectively. The
statutory capital and surplus for Premier Life (Bermuda) was $2.2 million and
$2.1 million at fiscal years ended 1999 and 1998, respectively, and minimum
capital and surplus under local insurance regulations was $.3 million at fiscal
years ended 1999 and 1998. SMI dividends are limited to its accumulated
earnings without regulatory approval. SMI and Premier Life (Luxembourg) were
not permitted to pay dividends under Luxembourg law in 1999 and 1998 due to
accumulated losses.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14.OPERATIONS BY BUSINESS SEGMENT
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". Under this new pronouncement, effective
for financial statements issued for fiscal years beginning after December 15,
1997, a company must provide disclosures about operating segments on the same
basis it uses internally to evaluate the performance of its operations and
allocate its resources. The Company identified the following two operating
segments which are the primary components of its business.
DOMESTIC OPERATIONS includes revenues earned and expenses incurred from United
States operations and includes deposits and/or income from annuity products
(primarily FPDA's), equity indexed products, universal life products and
traditional life products. The profitability for this segment primarily
depends on the investment spread earned (annuities and universal life), the
persistency of the in-force business, claim experience and expense management.
INTERNATIONAL OPERATIONS includes revenues earned and expenses incurred from
abroad, primarily Europe, and includes fees collected on deposits from unit-
linked products. The profitability for this segment primarily depends on the
amount of separate account assets under management, the management fee charged
on those assets and expense management.
The accounting policies of the segments are the same as described in Note 1
(Summary of Significant Accounting Policies). The following segment
presentation contains the same operating data and results the Company uses to
evaluate the performance of the business and provides reconciliations to
consolidated totals (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997
<S> <C> <C> <C>
Revenues:
Domestic $ 68,477 $ 58,055 $ 42,651
International 4,486 5,220 4,204
Consolidated Revenues $ 72,963 $ 63,275 $ 46,855
Net Investment Income:
Domestic $ 44,376 $ 33,721 $ 28,614
International 445 500 583
Consolidated Net Investment Income $ 44,821 $ 34,221 $ 29,197
Interest Credited to Interest Sensitive Annuities
and Other Financial Products (All Domestic) $ 25,728 $ 19,775 $ 16,281
Pre-tax Income:
Domestic $ 6,132 $ 4,053 $ 1,542
International 1,266 2,258 1,720
Consolidated Pre-tax Income $ 7,398 $ 6,311 $ 3,262
Assets:
Domestic $ 811,653 $ 750,683 $ 508,476
International 339,324 205,467 160,516
Consolidated Assets $ 1,150,977 $ 956,150 $ 668,992
</TABLE>
15.DERIVATIVE FINANCIAL INSTRUMENTS
In May 1998, Standard Life began offering equity-indexed annuity products
which provide a base rate of return with a higher potential return linked to
the performance of a broad-based equity index. The Company buys Standard &
Poor's 500 Index Call Options (the "S&P 500 Call Options") in an effort to
hedge potential increases to policyholder benefits resulting from increases in
the S&P 500 Index to which the product's return is linked. The cost of the S&P
500 Call Options is included in the pricing of the equity-indexed annuity
products. The changes in the values of the S&P 500 Call Options are reflected
in net investment income and fluctuate in relation to changes in policyholder
account balances for these annuities. Premiums paid to purchase these
instruments are deferred and amortized over their term.
15.DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
Net investment income includes $1.2 million and $.6 million in 1999 and 1998,
respectively, related to changes in the fair value of the S&P 500 Call Options.
Such investment income was substantially offset by amounts credited to
policyholder account balances. The fair value of the S&P 500 Call Options was
$5.3 million and $1.8 million at December 31, 1999 and 1998, respectively.
If the counterparts of the aforementioned financial instruments do not meet
their obligations, the Company may have to recognize a loss. The Company
limits its exposure to such a loss by diversifying among several counterparties
believed to be strong and creditworthy. At December 31, 1999, all of the
counterparties were rated "A" or higher by Standard & Poor's.
16.FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methods and assumptions used by the
Company in estimating its fair value disclosures for its financial instrument
assets and liabilities. Because fair values for all balance sheet items are
not required to be disclosed pursuant to SFAS No. 107, "Disclosures about Fair
Values of Financial Instruments", the aggregate fair value amounts presented
herein do not necessarily represent the underlying value of the Company;
likewise, care should be exercised in deriving conclusions about the Company's
business or financial condition based on the fair value information presented
herein.
FIXED MATURITY SECURITIES: Fair values for fixed maturity securities are based
on quoted market prices from broker-dealers, 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, are estimated by discounting the expected future cash flows using
current market rates applicable to the coupon rate, credit rating and maturity
of the investments.
EQUITY SECURITIES: The fair values for equity securities are based on the
quoted market prices.
DERIVATIVE SECURITIES: The fair values for derivative securities are based on
internal methods developed by our investment advisor.
MORTGAGE LOANS AND POLICY LOANS: The estimated fair values for mortgage loans
and policy loans are estimated using discounted cash flow analyses and interest
rates currently being offered for similar loans to borrowers with similar
credit ratings.
ASSETS AND LIABILITIES HELD IN SEPARATE ACCOUNTS: Fair values for the assets
held in separate accounts are determined from broker-dealers or valuations
supplied by internationally recognized statistical rating organizations. The
separate account liability represents the Company's obligations to
policyholders and approximates fair value.
INSURANCE LIABILITIES FOR INVESTMENT CONTRACTS: Fair values for the Company's
liabilities under investment-type insurance contracts are estimated using
discounted cash flow calculations, based on interest rates currently being
offered for similar contracts with maturities consistent with those remaining
contracts being valued. The estimated fair value of the liabilities for
investment contracts was approximately equal to its carrying value at December
31, 1999 and 1998. This is due to i) credited rates on the vast majority of
account balances approximating current rates paid on similar investments and
ii) rates not generally being guaranteed beyond one year.
INSURANCE LIABILITIES FOR NON-INVESTMENT CONTRACTS: Fair value disclosures for
the Company's reserves for insurance contracts other than investment-type
contracts are not required and have not been determined by the Company.
However, the Company closely monitors the level of its insurance liabilities
and the fair value of reserves under all insurance contracts are taken into
consideration in the Company's overall management of interest rate risk.
NOTES PAYABLE: The Company believes the fair value of its variable rate
long-term debt was equal to its carrying value at December 31, 1999 and 1998.
The Company negotiated the terms of its Amended Credit Agreement with its
lenders in November 1996. Those negotiations were based on the financial
condition of the Company and market conditions at that time. The financial
condition of the Company has not changed significantly since the negotiations,
and although market conditions have changed, the Company pays a variable rate
of interest on the debt which reflects the change in market conditions. The
fair value of the subordinated convertible debt is based on quoted market
prices for the amount of shares convertible.
The carrying amount of all other financial instruments approximates their fair
values.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair value of the Company's financial instruments is shown below using a
summarized version of the Company's assets and liabilities at December 31, 1999
and 1998 (in thousands). Refer to Note 3 for additional information relating
to the fair value of investments.
<TABLE>
<CAPTION>
December 31
1999 1998
Fair Carrying Fair Carrying
Value Amount Value Amount
<S> <C> <C> <C> <C>
Assets:
Investments:
Securities available for sale:
Fixed maturity securities $ 606,907 $ 606,907 $ 551,312 $ 551,312
Equity securities 378 378 1,316 1,316
Mortgage loans on real estate 8,392 8,131 8,856 8,578
Policy loans 13,357 14,033 14,295 15,019
Other invested assets 845 845 837 837
Short-term investments 14,976 14,976 11,626 11,626
Cash 3,659 3,659 13,591 13,591
Assets held in separate accounts 319,973 319,973 190,246 190,246
Liabilities:
Insurance liabilities for investment 595,388 595,388 506,749 506,749
contracts
Notes payable 34,500 34,500 37,180 35,000
Liabilities related to separate accounts 319,973 319,973 190,246 190,246
</TABLE>
17.EARNINGS PER SHARE
A reconciliation of income and shares used to calculate basic and diluted
earnings per share is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
INCOME:
Net Income $ 5,272 $ 4,681 $ 2,645
Preferred stock dividends (506) (180) (97)
Income available to common shareholders for basic earnings 4,766 4,501 2,548
per share
Effect of dilutive securities:
Preferred stock dividends -- 180 97
Interest on subordinated convertible debt 1,000 1,000 --
Income available to common shareholders for diluted $ 5,766 $ 5,681 $ 2,645
earnings per share
SHARES:
Weighted average shares outstanding for basic earnings 7,583,086 6,846,335 4,948,302
per share
Effect of dilutive securities:
Stock options 136,656 263,636 182,615
Stock warrants 93,951 211,989 230,285
Class S convertible preferred stock -- -- 230,015
Subordinated convertible debt 1,740,038 1,740,038 --
Series A convertible preferred stock -- 301,765 --
Dilutive potential common shares 1,970,645 2,517,428 642,915
Weighted average shares outstanding for diluted 9,553,731 9,363,763 5,591,217
earnings per share
</TABLE>
18.QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Earnings per common and common equivalent share for each quarter are computed
independently of earnings per share for the year. Due to the transactions
affecting the weighted average number of shares outstanding in each quarter and
due to the uneven distribution of earnings during the year, the sum of the
quarterly earnings per share may not equal the earnings per share for the year.
<TABLE>
<CAPTION>
1999 Quarters
First Second Third Fourth
<S> <C> <C> <C> <C>
Total revenues $ 16,941 $ 17,341 $ 16,770 $ 21,911
Components of net income:
Operating income $ 1,275 $ 1,397 1,468 $ 1,081
Net realized investment gains (losses) 22 4 (164) 189
Net income $ 1,297 $ 1,401 $ 1,304 $ 1,270
Net income per common share $ .17 $ .19 $ .17 $ .17
Net income per common share, assuming $ .16 $ .17 $ .16 $ .16
dilution
1998 Quarters
First Second Third Fourth
Total revenues $ 11,676 $ 19,815 $ 13,987 $ 17,469
Components of net income:
Operating income $ 734 $ 1,276 $ 1,120 $ 1,317
Net realized investment gains 14 17 18 185
Net income $ 748 $ 1,293 $ 1,138 $ 1,502
Net income per common share $ .14 $ .18 $ .16 $ .20
Net income per common share, assuming
dilution $ .13 $ .16 $ .15 $ .17
</TABLE>
Reporting the results of insurance operations on a quarterly basis requires the
use of numerous estimates throughout the year, primarily in the computation of
reserves, amortization of deferred policy acquisition costs and present value
of future profits, and the effective rate for income taxes. It is the Company's
practice to review estimates at the end of each quarter and, if necessary, make
appropriate adjustments, with the effect of such adjustments being reported in
current operations. Only at year-end is the Company able to assess the accuracy
of its previous quarterly estimates. The Company's fourth quarter results
include the effect of the difference between previous estimates and actual
year-end results. Therefore, the results of an interim period may not be
indicative of the results of the entire year.
<PAGE>
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STANDARD MANAGEMENT CORPORATION
(PARENT COMPANY)
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31
1999 1998
ASSETS
Investments:
<S> <C> <C>
Investment in subsidiaries $ 64,120 $ 76,237
Surplus debenture due from Standard Life 27,000 27,000
Fixed maturity securities, at fair value (amortized cost: $680 in 1999 and 680 900
$900 in 1998)
Equity securities available for sale, at fair value (amortized cost: $35 in 35 28
1999 and $20 in 1998)
Real estate 124 122
Notes receivable from officers and directors 845 837
Total investments 92,804 105,124
Cash 641 940
Property and equipment, less accumulated depreciation of $1,033 in 1999 1,097 862
and $642 in 1998
Note receivable from affiliate 2,858 2,858
Amounts receivable from subsidiaries 2,654 2,338
Other assets 1,485 1,228
Total assets $ 101,539 $ 113,350
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 34,500 $ 35,000
Note payable to affiliate 2,858 2,858
Amounts due to subsidiaries 2,134 850
Other liabilities 2,157 2,070
Total liabilities 41,649 40,778
Class A convertible redeemable preferred stock, par value $100 per share;
Authorized 130,000; 65,300 issued and outstanding shares in 1999 and 1998 6,530 6,530
Shareholders' Equity:
Preferred stock, no par value:
Authorized 870,000 shares; none issued and outstanding -- --
Common stock and additional paid-in capital, no par value:
Authorized 20,000,000 shares; issued 9,038,134 in 1999 and 8,802,313 in 62,152 60,586
1998
Treasury stock, at cost, 1,252,978 shares in 1999 and 1,160,854 shares in (6,802) (6,220)
1998.
Accumulated other comprehensive income:
Unrealized gain (loss) on securities of subsidiaries (15,844) 1,683
Foreign currency translation adjustment of subsidiaries (862) 4
Retained earnings 14,716 9,989
Total shareholders' equity 53,360 66,042
Total liabilities and shareholders' equity $ 101,539 $ 113,350
</TABLE>
See accompanying notes to condensed financial statements.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
STANDARD MANAGEMENT CORPORATION
(PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997
<S> <C> <C> <C>
Revenues:
Net investment loss $ (23) $ (26) $ --
Interest income from subsidiaries 2,837 1,709 1,519
Net realized investment losses (250) (100) --
Other income 149 118 154
Rental income from subsidiaries 1,040 995 1,145
Management fees from subsidiaries 3,575 2,850 2,100
Total revenues 7,328 5,546 4,918
Expenses:
Other operating expenses 4,763 3,134 3,420
Interest expense and financing costs 3,380 2,850 2,367
Interest expense on note payable to affiliate 142 160 162
Total expenses 8,285 6,144 5,949
Loss before federal income taxes, equity in
earnings of consolidated subsidiaries, and preferred
stock dividends (957) (598) (1,031)
Federal income tax expense (benefit) (417) 30 (76)
Loss before equity in earnings of consolidated
subsidiaries, and preferred stock dividends (540) (628) (955)
Equity in earnings of consolidated subsidiaries 5,812 5,309 3,600
Income before preferred stock dividends 5,272 4,681 2,645
Preferred stock dividends 506 180 97
Earnings available to common shareholders $ 4,766 $ 4,501 $ 2,548
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT -(CONTINUED)
STANDARD MANAGEMENT CORPORATION
(PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,272 $ 4,681 $ 2,645
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Amortization of deferred debt issuance costs 216 97 71
Depreciation and amortization 429 439 646
Equity in earnings of subsidiaries (5,812) (5,309) (3,600)
Accrued interest payable (203) 197 435
Other liabilities -- (38) 79
Dividend from Standard Life -- -- 1,600
Other 733 (570) 138
Net cash provided (used) by operating activities 635 (503) 2,014
INVESTING ACTIVITIES
Investments, net (46) (1,685) (1,035)
Purchase of property and equipment, net (866) (385) (439)
Capital contribution to Standard Life -- -- (2,400)
Purchase of Savers Life, less cash acquired
of $518 -- (18,039) --
Purchase of Midwestern Life, less cash acquired of $1,026 -- (13,104) --
Net cash used by investing activities (912) (33,213) (3,874)
FINANCING ACTIVITIES
Issuance of common stock, net -- 19,638 --
Borrowings, net of debt issuance costs of $206 and $70
in 1998 and 1997, respectively 300 11,794 5,558
Repayments on long-term debt and obligations under (800) (3,141) (543)
capital lease
Issuance of convertible preferred stock, net of
issuance costs of $141 in 1998 -- 6,389 --
Redemption of redeemable preferred stock -- -- (1,855)
Proceeds from common and treasury stock sales -- 234 138
Issuance of common stock and warrants 1,566 297 165
Purchase of common stock for treasury (582) (1,702) (1,079)
Dividends on preferred stock (506) (180) (97)
Net cash provided (used) by financing activities (22) 33,329 2,287
Net increase (decrease) in cash (299) (387) 427
Cash at beginning of year 940 1,327 900
Cash at end of year $ 641 $ 940 $ 1,327
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
STANDARD MANAGEMENT CORPORATION
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1.BASIS OF PRESENTATION
For purposes of these condensed financial statements, Standard Management
Corporation ("SMC") carries its investments in subsidiaries at cost plus equity
in undistributed earnings of subsidiaries since date of acquisition. Net income
of its subsidiaries is included in income using the equity method. These
condensed financial statements should be read in conjunction with SMC's
consolidated financial statements included elsewhere in this document.
2.DIVIDENDS FROM SUBSIDIARIES
SMC received a cash dividend from subsidiaries of $1.6 million in 1997.
<PAGE>
SCHEDULE IV -- REINSURANCE
STANDARD MANAGEMENT CORPORATION
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Gross Other from Other Assumed
Amount Companies Companies Net Amount to Net
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Life insurance in force $ 2,204,688 $ 996,217 $ -- $ 1,208,471 0.00%
Premiums:
Life insurance and annuities $ 19,393 $ 6,908 $ -- $ 12,485
Accident and health insurance 18,710 18,365 -- 345
Supplementary contract and other 260 -- -- 260
funds on deposit
Total premiums $ 38,363 $ 25,273 $ -- $ 13,090
YEAR ENDED DECEMBER 31, 1998
Life insurance in force $ 2,520,340 $ 1,231,533 $ 217 $ 1,289,024 0.02%
Premiums:
Life insurance and annuities $ 13,160 $ 4,705 $ -- $ 8,455
Accident and health insurance 18,333 12,341 -- 5,992
Supplementary contract and other
funds on deposit 32 -- -- 32
Total premiums $ 31,525 $ 17,046 $ -- $ 14,479
YEAR ENDED DECEMBER 31, 1997
Life insurance in force $ 2,447,782 $ 1,269,848 $ 237 $ 1,178,171 0.02%
Premiums:
Life insurance and annuities $ 11,735 $ 4,821 $ -- $ 6,914
Accident and health insurance 17 -- -- 17
Supplementary contract and other
funds on deposit 169 -- -- 169
Total premiums $ 11,921 $ 4,821 $ -- $ 7,100
</TABLE>
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EXHIBIT 21
SUBSIDIARIES OF STANDARD MANAGEMENT CORPORATION
STATE
PERCENTAGE OF OR COUNTRY IN
NAME OF SUBSIDIARY OUTSTANDING WHICH ORGANIZED
Standard Life Insurance Company of Indiana 100% Indiana
Dixie National Life Insurance Company 99.4% Mississippi
Standard Marketing Corporation 100% Indiana
Savers Marketing Corporation 100% North Carolina
Standard Marketing International, Ltd. 100% Bermuda
Standard Management International S.A. 100% Luxembourg
Premier Life (Luxembourg) S.A. 100% Luxembourg
Premier Life (Bermuda) Limited 100% Bermuda
Standard Development, LLC 100% Indiana
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EXHIBIT
23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-92906) pertaining to the Second Amended and Restated Stock
Option Plan of Standard Management Corporation, the Registration Statement
(Form S-8 No. 333-41119) pertaining to the Amended and Restated Stock Option
Plan of Standard Management Corporation and the Registration Statement (Form S-
8 No. 333-41117) pertaining to the Standard Management Corporation Savings
Plan, of our report dated February 18, 2000, with respect to the consolidated
financial statements and schedules of Standard Management Corporation and
subsidiaries included in the Annual Report (Form 10-K) for the year ended
December 31, 1999.
Ernst & Young LLP
Indianapolis, Indiana
March 29, 2000
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EXHIBIT
23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-92906) pertaining to the Second Amended and Restated Stock
Option Plan of Standard Management Corporation, the Registration Statement
(Form S-8 No. 333-41119) pertaining to the Amended and Restated Stock Option
Plan of Standard Management Corporation and the Registration Statement (Form S-
8 No. 333-41117) pertaining to the Standard Management Corporation Savings
Plan, of our report dated February 18, 2000, with respect to the consolidated
financial statements of Standard Management International S. A. and
subsidiaries included in the Annual Report (Form 10-K) for the year ended
December 31, 1999 of Standard Management Corporation.
KPMG Audit
Luxembourg
March 29, 2000
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned persons whose
signature appear immediately below, does hereby constitute and appoint
Ronald D. Hunter and Stephen M. Coons, each with full power to act alone, his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign on behalf of the undersigned an Annual Report on Form 10-K
("Form 10-K") under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as the undersigned
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agent, or his substitute lawfully do or cause to be done
by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 29th day of March, 2000.
/S/ RONALD D. HUNTER /S/ PAUL B. PHEFFER
Ronald D. Hunter Paul B. Pheffer
/S/ GERALD R. HOCHGESANG /S/ RAYMOND J. OHLSON
Gerald R. Hochgesang Raymond J. Ohlson
/S/ EDWARD T. STAHL /S/ STEPHEN M. COONS
Edward T. Stahl Stephen M. Coons
/S/ MARTIAL R. KNIESER /S/ ROBERT A. BORNS
Martial R. Knieser Robert A. Borns
/S/ JOHN J. DILLON /S/ JERRY E. FRANCIS
John J. Dillon Jerry E. Francis
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 606,907
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 378
<MORTGAGE> 8,131
<REAL-ESTATE> 3,233
<TOTAL-INVEST> 648,503
<CASH> 3,659
<RECOVER-REINSURE> 58,230
<DEFERRED-ACQUISITION> 98,499<F1>
<TOTAL-ASSETS> 1,150,977
<POLICY-LOSSES> 727,189
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 34,500
6,530
0
<COMMON> 55,350
<OTHER-SE> (1,990)<F2>
<TOTAL-LIABILITY-AND-EQUITY> 1,150,977
13,090
<INVESTMENT-INCOME> 44,821
<INVESTMENT-GAINS> 78
<OTHER-INCOME> 14,974<F3>
<BENEFITS> 40,104<F4>
<UNDERWRITING-AMORTIZATION> 7,471
<UNDERWRITING-OTHER> 14,605
<INCOME-PRETAX> 7,398
<INCOME-TAX> 2,126
<INCOME-CONTINUING> 5,272
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,272
<EPS-BASIC> .69<F5>
<EPS-DILUTED> .65<F5>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Includes $30,688 of present value of future profits.
<F2>Includes retained earnings of $14,716 and other comprehensive income of
($16,706).
<F3>Includes policy charges of $6,826, fees from separate accounts of $3,941
and other income of $4,207.
<F4>Includes benefits and claims of $14,376 and interest credited on financial
products of $25,728.
<F5>Consists of net income earnings per share before preferred dividends.
</FN>
</TABLE>
