<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT - AMENDMENT NO. 1
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 15, 1997
AMERICO LIFE, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
MISSOURI 33-64820 43-1627599
-------- -------- ----------
<S> <C> <C>
(State or other jurisdiction of (Commission file number) (IRS Employer Identification
incorporation) Number)
</TABLE>
1055 BROADWAY, KANSAS CITY, MISSOURI 64105
-------------------------------------------
(Address of principal executive offices)
(816) 391-2000
-------------
(Registrant's telephone number, including area code)
-------------
(Former name of former address, if changed since last report)
<PAGE> 2
ITEM 7.(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
The separate audited balance sheets of Ohio State Life Insurance Company (OSL)
and Investors Guaranty Life Insurance Company (IGL) as of December 31, 1996 and
the related statements of income, stockholder's equity, and cash flows for each
of the three years in the period ended December 31, 1996 are attached hereto as
Attachment 7(a)(i) and are incorporated herein by reference.
The separate unaudited interim balance sheets of OSL and IGL as of March 31,
1997 and the related interim statements of income and cash flows for the three
months ended March 31, 1997 are attached hereto as Attachment 7(a)(ii) and are
incorporated herein by reference.
ITEM 7.(B) PRO FORMA FINANCIAL INFORMATION
Attached hereto as Attachment 7(b) and incorporated herein by reference is
unaudited pro forma financial information which has been prepared to illustrate
the pro forma effects of (i) the acquisition of OSL and IGL by Americo Life,
Inc. (the Company) on April 15, 1997, including the sale of certain invested
assets by OSL and IGL to their former parent immediately prior to and after the
acquisition and (ii) the reinsurance of 100% of the insurance liabilities of OSL
and IGL to an unrelated reinsurer and (iii) the concurrent reinsurance of 70% of
these same insurance liabilities to Great Southern Life Insurance Company, a
wholly owned subsidiary of the Company, on April 16, 1997. These transactions
are more fully described under Item 2 of the Current Report on Form 8-K, dated
April 15, 1997. The pro forma statements of income for the year ended December
31, 1996 and for the three months ended March 31, 1997 give effect to the
foregoing transactions as though each had occurred on January 1, 1996. The pro
forma balance sheet as of March 31, 1997 gives effect to the foregoing
transactions as if each had occurred on March 31, 1997.
2
<PAGE> 3
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICO LIFE, INC.
By: /s/ Gary E. Jenkins
---------------------------
Name: Gary E. Jenkins
Title: Senior Vice President and
Chief Financial Officer
Date: June 26, 1997
3
<PAGE> 4
Attachment 7(a)(i)
THE OHIO STATE LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
FARMERS GROUP, INC.)
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994
AND INDEPENDENT AUDITORS' REPORT
<PAGE> 5
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Ohio State Life Insurance Company:
We have audited the accompanying balance sheets of The Ohio State Life Insurance
Company (a wholly-owned subsidiary of Farmers Group, Inc.) as of December 31,
1996, and 1995 and the related statements of income, stockholder's equity and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1996 and
1995, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
February 13, 1997, except for Note 16
as to which the date is April 17, 1997
Columbus, Ohio
<PAGE> 6
THE OHIO STATE LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
FARMERS GROUP, INC.)
BALANCE SHEETS, DECEMBER 31, 1996 AND 1995
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
INVESTMENTS:
Fixed maturities available for sale:
Bonds, at market (cost, 1996 - $575,684; 1995 - $555,767) $590,201 $582,514
Redeemable preferred stocks, at market (cost, 1996 - $18,743; 1995 - $21,435) 18,269 21,573
Equity securities available for sale:
Nonredeemable preferred stocks, at market (cost, 1996 - $2,292; 1995 - $5,370) 1,753 5,382
Common stocks, at market (cost, 1996 - $62,365; 1995 - $47,269) 76,423 58,847
Mortgage loans 31,982 36,672
Policy loans 37,925 34,613
Real estate, at cost (net of accumulated depreciation, 1996 - $4,851; 1995 - $4,804) 14,177 15,738
-------- --------
Total investments 770,730 755,339
CASH AND CASH EQUIVALENTS 9,512 12,613
ACCRUED INVESTMENT INCOME 8,218 8,475
DUE FROM AFFILIATED COMPANIES 1,854 3,862
DEFERRED POLICY ACQUISITION COSTS 120,450 112,491
PROPERTY AND EQUIPMENT, AT COST, NET OF ACCUMULATED DEPRECIATION 8,849 9,365
COLLATERAL HELD UNDER SECURITIES LENDING AGREEMENT 35,657 31,086
CURRENT FEDERAL INCOME TAXES RECOVERABLE FROM PARENT 1,186 889
OTHER ASSETS 8,885 10,290
-------- --------
TOTAL $965,341 $944,410
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY LIABILITIES:
Future policy benefits:
Life and annuity $602,576 $588,307
Accident and health 245 442
Policy claims payable 6,726 8,644
Policyholders' dividend accumulations 13,358 13,595
Other policyholders' funds 1,914 2,034
-------- --------
Total policy liabilities 624,819 613,022
ACCRUED EXPENSES AND OTHER LIABILITIES 10,641 12,534
OBLIGATIONS UNDER SECURITIES LENDING AGREEMENT 35,657 31,086
DEFERRED FEDERAL INCOME TAXES 17,928 19,792
-------- --------
Total liabilities 689,045 676,434
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $1 par value per share, authorized 3,000 shares;
issued and outstanding 1,998 shares 1,998 1,998
Additional paid-in capital 124 124
Retained earnings 259,923 247,462
Net unrealized investment gains on available for sale securities, net of tax 14,251 18,392
-------- --------
Total stockholder's equity 276,296 267,976
-------- --------
TOTAL $965,341 $944,410
======== ========
</TABLE>
See notes to financial statements.
-2-
<PAGE> 7
THE OHIO STATE LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
FARMERS GROUP, INC.)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
REVENUES:
Universal life and annuity policy charges $ 52,760 $ 49,994 $ 47,233
Premiums and other considerations 13,309 12,655 12,877
Net investment income 52,754 50,925 47,812
Net realized investment gains 6,855 7,680 11,692
-------- -------- --------
Total revenues 125,678 121,254 119,614
-------- -------- --------
BENEFITS AND EXPENSES:
Policy benefits 37,066 38,414 33,180
Decrease in future policy benefit reserves (2,104) (2,114) (1,712)
Interest credited to policyholders 29,058 27,886 26,827
Amortization of deferred policy acquisition costs 15,733 15,872 14,469
General expenses 17,126 16,424 15,904
-------- -------- --------
Total benefits and expenses 96,879 96,482 88,668
-------- -------- --------
INCOME BEFORE INCOME TAX PROVISION AND CUMULATIVE EFFECT 28,799 24,772 30,946
OF ACCOUNTING CHANGE (Note 1)
INCOME TAX PROVISION 16,338 8,204 10,310
-------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (Note 1) 12,461 16,568 20,636
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (Note 1) (139)
-------- -------- --------
NET INCOME $ 12,461 $ 16,568 $ 20,497
======== ======== ========
</TABLE>
See notes to financial statements.
-3-
<PAGE> 8
THE OHIO STATE LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
FARMERS GROUP, INC.)
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
NET
ADDITIONAL UNREALIZED TOTAL
COMMON PAID-IN INVESTMENT RETAINED STOCKHOLDER'S
STOCK CAPITAL GAINS (LOSSES) EARNINGS EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 $1,998 $ 124 $ 9,741 $210,397 $222,260
NET INCOME - 1994 20,497 20,497
CUMULATIVE EFFECT OF ADOPTION OF SFAS NO. 115
(net of tax of $2,407) 4,470 4,470
DECREASE IN NET UNREALIZED INVESTMENT GAINS
(NET OF TAX CREDIT OF $10,777) (20,015) (20,015)
------ ------- ------- -------- --------
BALANCE, DECEMBER 31, 1994 1,998 124 (5,804) 230,894 227,212
NET INCOME - 1995 16,568 16,568
INCREASE IN NET UNREALIZED INVESTMENT GAINS
(NET OF TAX OF $13,029) 24,196 24,196
------ ------- ------- -------- --------
BALANCE, DECEMBER 31, 1995 1,998 124 18,392 247,462 267,976
NET INCOME - 1996 12,461 12,461
DECREASE IN NET UNREALIZED INVESTMENT GAINS
(NET OF TAX OF $2,230) (4,141) (4,141)
------ ------- ------- -------- --------
BALANCE, DECEMBER 31, 1996 $1,998 $ 124 $14,251 $259,923 $276,296
====== ======= ======= ======== ========
</TABLE>
See notes to financial statements.
-4-
<PAGE> 9
THE OHIO STATE LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
FARMERS GROUP, INC.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 12,461 $ 16,568 $ 20,497
Adjustments to reconcile net income to net cash provided by operating
activities:
Increase in policy liabilities 11,797 22,334 28,014
Amortization of deferred policy acquisition costs 15,733 15,872 14,469
(Increase) decrease in current Federal income tax recoverable (297) (5,499) 2,449
Deferred Federal income tax(credit) 366 (406) (2,739)
Net realized investment gains (6,855) (7,680) (11,692)
Depreciation and other amortization 928 172 3,399
Policy acquisition costs deferred (19,098) (20,230) (19,005)
Increase (decrease) in accrued expenses and other liabilities (1,893) 1,072 975
Other - net 3,662 (1,471) (1,503)
--------- -------- --------
Total adjustments 4,343 4,164 14,367
--------- -------- --------
Net cash provided by operating activities 16,804 20,732 34,864
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments available for sale (125,747) (115,027) (132,336)
Purchases of investments held to maturity (68,376)
Proceeds from sales and maturities of investments available for sale 103,490 85,791 89,812
Proceeds from sales of investments held to maturity 45,182
Mortgage loan collections 4,672 5,150 16,152
Purchase of real estate investments (115) (135) (179)
Proceeds from sales of real estate investments 1,168 4,365 268
Other - net (3,373) (2,485) (2,280)
--------- -------- --------
Net cash used in investing activities (19,905) (22,341) (51,757)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in collateral held under securities lending agreement 4,571 4,919 8,070
(Decrease) in obligations under securities lending agreement (4,571) (4,919) (8,070)
--------- -------- --------
Net cash provided by financing activities 0 0 0
--------- -------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (3,101) (1,609) (16,893)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 12,613 14,222 31,115
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9,512 $ 12,613 $ 14,222
========= ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Transfer of mortgage loan balances on foreclosed assets to real estate assets $ 825
========
</TABLE>
See notes to financial statements.
-5-
<PAGE> 10
THE OHIO STATE LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
FARMERS GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Ohio State Life Insurance Company (the Company) is a wholly-owned
subsidiary of Farmers Group, Inc. (FGI). As such, the accompanying
financial statements are consolidated with those of FGI. The Company
principally writes a variety of universal-life, traditional life and
annuity products throughout the United States.
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles (GAAP) on a historical cost
basis and do not reflect any adjustments to recognize fair value amounts
determined in consolidation with the Company's parent (see Note 3). These
financial statements differ in certain respects from reporting practices
prescribed or permitted by the Insurance Department of Ohio (statutory
accounting practices). The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
STATUTORY ACCOUNTING - Generally accepted accounting principles differ in
certain respects from statutory insurance accounting practices in
determining financial position and results of operations. Statutory
accounting practices are prescribed or permitted by the Insurance
Department of Ohio and include, among other things, that (a) common stocks
are carried at market value with no provision for deferred income taxes
pertaining to the unrealized appreciation of such investments; (b) costs
of acquiring new business are charged to earnings at the time the policies
are written; (c) certain assets designated as "non-admitted assets" are
excluded from the balance sheet; (d) unrealized capital gains (losses) are
credited (charged) directly to unassigned surplus; (e) certain reserves
statutorily required to be maintained are included among liabilities; and
(f) no provision for deferred income taxes is required to be made for
inter-period timing differences between financial reporting income and
taxable income. All of the Company's significant statutory accounting
practices are prescribed practices.
INVESTMENTS - Investments in bonds and redeemable preferred stock (fixed
maturities), common stock, and non-redeemable preferred stock are
classified in the balance sheets as available for sale and are reported at
fair value, with unrealized gains and losses excluded from earnings and
reported, net of deferred taxes, as a component of stockholder's equity
(see Note 2). Realized gains and losses are determined by specific
identification. Mortgage loans are stated at the unpaid principal balance,
net of allowances for uncollectible amounts (see Note 5). Policy loans are
carried at the aggregate of the unpaid loan balances which do not exceed
the cash values of the related policies. Purchased real estate is carried
at cost less depreciation, generally calculated using the straight-line
method, less any required write-downs for permanent declines in value (see
Note 6). Real estate acquired in settlement of foreclosed mortgage loans
is recorded at the lower of cost or fair value less costs of disposal at
the date of acquisition.
The Company adopted SFAS No. 115 as of January 1, 1994, the effect of
which was reported as a cumulative change in accounting principle
consistent with the provisions of Accounting Principles Board (APB)
Opinion
-6-
<PAGE> 11
No. 20, "Accounting Changes". In 1994, the Company increased the
deferred policy acquisition cost asset (DAC) by $8,182,000 as a result of
the adoption of SFAS No. 115.
REVENUES - Traditional life premiums are recognized as revenues when they
become due. Revenues for universal life-type policies and investment
products consist of policy charges for the cost of insurance, policy
administration, and surrenders.
DEFERRED POLICY ACQUISITION COSTS (DAC) - The costs of acquiring new
business, principally commissions, policy issue costs, underwriting and
certain sales expenses, have been deferred. On traditional life insurance
contracts, deferred policy acquisition costs are amortized ratably over
the periods in which the related premiums are recognized. Such expected
premium revenue is estimated using actuarial assumptions consistent with
those used in calculating the liabilities for future policy benefits.
Deferred policy acquisition costs related to universal life-type policies
and investment products are amortized in relation to the present value of
expected gross profits in the contracts.
In compliance with SFAS No. 115 the Company has recorded certain
adjustments to DAC as a result of adjusting those assets and liabilities
that would have been adjusted had the unrealized investment gains or
losses from securities classified as available for sale actually been
realized with corresponding credits or charges reported directly to
stockholder's equity. In 1996, the Company increased DAC $4,594,000 to
account for the applicable DAC adjustment related to SFAS No. 115. In
1995, the Company decreased DAC $18,362,000 related to SFAS No. 115. These
entries had no effect on cash.
FUTURE POLICY BENEFITS - Future policy benefits on traditional life
insurance and paid-up annuity contracts have been computed by a net level
premium method based upon assumptions as to investment yield, mortality
and withdrawals. See Note 8 for the significant assumptions pertinent to
such liabilities.
Future policy benefits on universal life-type policies and other
investment products have been determined following a "retrospective
deposit" method and consist principally of policy values that accrue to
the benefit of policyholders which exclude surrender charges.
Future policy benefits for accident and health policies are primarily an
estimate of amounts to be paid on incurred but unreported claims based on
the Company's historical experience.
REINSURANCE CEDED - In the normal course of business, the Company seeks to
limit its exposure to loss on any single insured and to recover a portion
of benefits paid by ceding reinsurance to other insurers under excess
coverage contracts. The Company retains a maximum of $500,000 of coverage
per individual life.
The cost of reinsurance related to long-duration contracts is accounted
for over the life of the underlying reinsured policies using assumptions
consistent with those used to account for the underlying policies (see
also Note 9).
PARTICIPATING POLICIES - Participating policies represent approximately
11%, 12% and 13% of the total number of life insurance policies in-force
at December 31, 1996, 1995 and 1994, respectively. The provision for
policyholders' dividends is based on dividend scales that are approved by
the Board of Directors on an annual basis.
-7-
<PAGE> 12
FEDERAL INCOME TAXES - The Company follows the provisions of SFAS No. 109,
"Accounting for Income Taxes" (see Note 10). The Company is included in
the consolidated income tax return of FGI. Income tax assets and
liabilities are determined on a separate return basis and current amounts
due on recoverable federal income taxes are with FGI. Prior to 1995 the
Company filed a separate tax return as a member of a controlled group.
PROPERTY AND EQUIPMENT - Depreciation of property and equipment has been
provided on the straight-line method with estimated useful lives of 10 to
30 years for buildings and improvements and 5 to 10 years for furniture
and equipment.
EMPLOYEE BENEFIT PLANS - The Company is a participant, together with other
affiliated companies, in a non-contributory, defined benefit pension plan
and profit-sharing plans as described in Notes 11 and 12, respectively.
Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers'
Accounting for Post Employment Benefits." This statement requires the cost
associated with providing post employment benefits to be recognized over
the active service period of employees, rather than recording this expense
when paid, as was the Companys' practice. The cumulative effect of this
accounting change, net of $75,000 tax benefit, was to decrease 1994 net
income by $139,000.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents consist of highly
liquid investments with maturities of three months or less.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS - In June 1996, the Financial
Accounting Standards Board released SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". This Statement, effective for fiscal years beginning after
December 31, 1996, establishes accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities based on a consistent application of a financial-components
approach that focuses on the issue of control. In December 1996, the FASB
issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions
of FASB Statement No. 125," which defers for one year the effective date
of the provisions that apply to certain transactions. These transactions
include repurchase agreements, dollar-rolls, securities lending, secured
borrowings and collaterals. The Company does not expect the adoption of
these Statements to have a significant impact on its financial
statements.
2. BONDS AND EQUITY SECURITIES
The Company classifies its investments in the balance sheet in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" which requires the classification of securities into one of
three categories: held-to-maturity, available-for-sale or trading. This
statement addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all
investments in debt securities. The Company has classified all fixed
maturities (bonds, notes and redeemable preferred stocks) as available for
sale and reported such investments at fair value in the balance sheet
since the Company may not hold those securities to maturity. All equity
securities (common stocks and non-redeemable preferred stocks) have also
been classified as available for sale and reported at fair value in the
balance sheet. Held to maturity securities are defined by SFAS No. 115 as
debt securities which an enterprise has the positive intent and ability to
hold to maturity. Trading securities are defined by SFAS No. 115 as debt
and equity securities bought and held principally for the purpose of
selling in the near term. As of December 31, 1996, the Company has not
designated any securities as held to maturity or trading securities under
SFAS No. 115. The Company's
-8-
<PAGE> 13
equity in changes in unrealized appreciation (depreciation) of investments
reported at fair value, net of deferred tax effects, is excluded from
earnings and reported as a component of stockholders' equity.
On November 15, 1995, the FASB issued a special report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in
Debt and Equity Securities," in which they discussed a "fresh start"
transition provision that allowed reporting entities to reassess their
securities holdings that were classified pursuant to the provisions in
SFAS No. 115. As a result of this "fresh start," the Company decided to
reclassify all of its debt securities originally classified as held to
maturity under SFAS No. 115 to available for sale at December 31, 1995.
This resulted in the transfer of debt securities with an amortized cost of
approximately $194,864,000 and net unrealized losses of approximately
$11,664,000 from held to maturity to available for sale.
Bonds with an amortized cost of $5,114,000 and $6,011,000 were on deposit
with regulatory authorities at December 31, 1996 and 1995, respectively.
The sources of investment income on securities owned by the Company for
the years ended December 31 are (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Fixed income securities $ 43,185 $ 42,863 $ 38,414
Equity securities 2,982 3,202 3,073
Mortgage loans 3,812 3,716 4,980
Owned real estate 3,763 3,708 3,790
Policy loans 2,013 1,862 1,814
Other 1,411 689 1,073
Investment expenses (4,412) (5,115) (5,332)
-------- -------- --------
Net investment income $ 52,754 $ 50,925 $ 47,812
======== ======== ========
</TABLE>
Realized gains and losses on sales, redemptions and writedowns of
investments owned by the Company are determined based on the actual cost
of securities sold. Realized investment gains (losses) for the years ended
December 31 are (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Bonds $ 645 $ 2,372 $ 2,867
Redeemable preferred stocks 36 (21) (5)
Nonredeemable preferred stocks (518) (35) (51)
Common stocks 6,789 5,007 8,881
Real estate (97) 357
-------- -------- --------
Net realized investment gains $ 6,855 $ 7,680 $ 11,692
======== ======== ========
</TABLE>
-9-
<PAGE> 14
Gross unrealized gains (losses) of the Company pertaining to equity securities
available for sale (nonredeemable preferred stocks and common stocks) stated at
quoted market value as of December 31 are (amounts in thousands):
<TABLE>
<CAPTION>
GAINS LOSSES NET
-------- -------- --------
<S> <C> <C> <C>
1996
Nonredeemable preferred stocks $ 54 $ (593) $ (539)
Common stocks 15,506 (1,448) 14,058
-------- -------- --------
Total $ 15,560 $ (2,041) 13,519
======== ========
Less deferred federal income taxes 4,732
--------
Total $ 8,787
========
1995
Nonredeemable preferred stocks $ 473 $ (461) $ 12
Common stocks 14,794 (3,216) 11,578
-------- -------- --------
Total $ 15,267 $ (3,677) 11,590
Less deferred federal income taxes 4,057
--------
Total $ 7,533
========
</TABLE>
The amortized cost, gross unrealized gains and losses and estimated market
values of investments in debt securities (fixed maturity bonds and redeemable
preferred stocks) at December 31, 1996 and 1995 are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1996 COST GAINS LOSSES VALUE
- ----------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Debt Securities Available-for-Sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 58,513 $ 1,714 $ (823) $ 59,404
Obligations of states and political subdivisions 79,193 2,762 (287) 81,668
Debt securities issued by foreign governments 8,725 2,060 0 10,785
Corporate securities 165,981 5,603 (2,194) 169,390
Mortgage-backed securities 263,272 7,148 (1,466) 268,954
Redeemable preferred stocks 18,743 277 (751) 18,269
-------- -------- -------- --------
Total $594,427 $ 19,564 $ (5,521) $608,470
======== ======== ======== ========
</TABLE>
-10-
<PAGE> 15
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1995 COST GAINS LOSSES VALUE
- ----------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DEBT SECURITIES AVAILABLE-FOR-SALE
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 53,369 $ 3,211 $ (142) $ 56,438
Obligations of states and political subdivisions 79,704 3,242 (169) 82,777
Debt securities issued by foreign governments 8,787 1,108 (216) 9,679
Corporate securities 165,253 8,815 (1,083) 172,985
Mortgage-backed securities 248,654 12,024 (43) 260,635
Redeemable preferred stocks 21,435 819 (681) 21,573
-------- -------- -------- --------
Total $577,202 $ 29,219 $ (2,334) $604,087
======== ======== ======== ========
</TABLE>
The amortized cost and estimated market value of debt securities at December 31,
1996, by contractual maturity, are shown below (amounts in thousands). Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
DEBT SECURITIES AVAILABLE-FOR-SALE COST VALUE
- ---------------------------------- --------- ---------
<S> <C> <C>
Due in one year or less $ 9,266 $ 9,325
Due after one year through five years 68,630 71,103
Due after five years through ten years 106,037 107,061
Due after ten years 128,479 133,758
-------- --------
Total 312,412 321,247
Mortgage-backed securities 263,272 268,954
Preferred stocks with characteristics of debt 18,743 18,269
-------- --------
Total $594,427 $608,470
======== ========
</TABLE>
Proceeds from sales and maturities of available-for-sale debt securities
received by the Company were $50,512,000, $61,502,000, and $89,812,000 during
1996, 1995, and 1994 respectively. Gross gains of $1,119,000, $2,797,000 and
$14,290,000 and gross losses of $438,000, $446,000, and $2,904,000 were realized
on sales and writedowns during 1996, 1995, and 1994, respectively.
The change in the net unrealized gains on available for sale securities that
have been included in the separate component of stockholder's equity of the
Company for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities $(12,842) $ 47,452 $(20,704)
Equity securities 1,877 8,134 (11,288)
</TABLE>
To hedge against fluctuations in interest rates on certain debt securities, the
Company periodically enters into various interest rate swap agreements. As of
December 31, 1996 and 1995, the Company had no positions in interest rate swaps.
-11-
<PAGE> 16
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments (amounts in thousands)
for the years ended December 31, 1996 and 1995 have been determined using
available market information and appropriate valuation methodologies.
However, considerable judgment is required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented
may not be indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies could have a significant effect on the estimated
fair value amounts.
<TABLE>
<CAPTION>
1996 1995
-------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents $ 9,512 $ 9,512 $ 12,613 $ 12,613
Fixed maturities available-for-sale
(including redeemable preferred stocks) 608,470 608,470 604,087 604,087
Non-redeemable preferred stocks 1,753 1,753 5,382 5,382
Common stocks available-for-sale 76,423 76,423 58,847 58,847
Mortgage loans 31,982 33,636 36,672 40,034
Policy loans 37,925 35,436 34,613 33,263
LIABILITIES:
Future policy benefits - deferred annuities $ 149,797 $ 146,544 $ 153,642 $153,597
</TABLE>
The following methods and assumptions were used to estimate the fair value
of financial instruments as of December 31, 1996 and 1995.
CASH AND CASH EQUIVALENTS - The carrying amounts of these items are a
reasonable estimate of their fair value.
FIXED MATURITIES, NONREDEEMABLE PREFERRED STOCKS AND COMMON STOCKS - The
estimated fair values of bonds, redeemable and nonredeemable preferred
stocks and common stocks are based upon quoted market prices, dealer
quotes, and prices obtained from independent pricing services.
MORTGAGE LOANS - The estimated fair value of the mortgage loans portfolio
is determined by discounting the estimated future cash flows, using a
year-end market rate which is applicable to the yield, credit quality and
average maturity of the composite portfolio.
POLICY LOANS - The estimated fair value of policy loans is determined by
discounting the future cash flows using the current rates at which similar
loans would be made.
FUTURE POLICY BENEFITS - DEFERRED ANNUITIES - The estimated fair values of
flexible premium and single premium deferred annuities are based on their
cash surrender value.
-12-
<PAGE> 17
4. SECURITIES LENDING AGREEMENT
The Company participates in a securities lending agreement, administered
by a custodial agent bank, whereby certain securities are transferred to
an independent broker/dealer (borrower) in exchange for collateral equal
to no less than 102% of the market value of domestic securities or 105% of
the market value of other securities. The Company has minimized its
exposure to credit risk due to borrower default by having the custodial
agent bank determine daily that the required collateral meets the 102% or
105% requirement. The securities are marked-to-market on a daily basis and
the collateral is adjusted on the next business day. The collateral is
invested in highly liquid, fixed income assets with a maturity of less
than one year. The Company has not experienced any losses due to credit or
market risk on security lending activity since implementation of the
agreement. Securities under loan are recorded on the Company's financial
records.
5. MORTGAGE LOANS
The Company follows the principles of SFAS No. 118 (amending SFAS No.
114), "Accounting by Creditors for Impairment of a Loan". This statement
requires that an impaired loan be measured based on the present value of
expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's observable market price
or the fair value of the collateral, if the loan is collateral dependent.
The total recorded investment in impaired mortgage loans, as well as the
amount of recorded investment for which an allowance for credit losses
does and does not exist as of December 31 are (in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
The total recorded investment in impaired mortgage loans and for
which an allowance for credit losses exists $ 396 $ 1,075
The total allowance for credit losses related to impaired
mortgage loans 116 395
</TABLE>
The Company records interest income received on impaired mortgage loans on
a cash basis. The average recorded investment and interest income
recognized on impaired mortgage loans for the years ended December 31 are
(in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
The average recorded investment in impaired mortgage loans
during the period $ 400 $ 1,091 $ 1,585
Interest income recognized on the impaired mortgage loans
during the period 40 94 184
</TABLE>
The activity in the total allowance for credit losses related to impaired
mortgage loans for the years ended December 31 follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Beginning balance $ 395 $ 474 $ 1,147
Deductions credited to operations (8) (44) (673)
Direct write-downs charged against the allowance (271) (35) 0
------- ------- ---------
Ending balance $ 116 $ 395 $ 474
======= ======= =========
</TABLE>
-13-
<PAGE> 18
6. INDEMNIFICATION AGREEMENT
The Company had an agreement with FGI whereby FGI would indemnify the
Company for incurred net losses on real estate and mortgage loans held by
the Company. The agreement expired June 30, 1996. No reimbursements were
due or received from FGI in 1996. The Company was reimbursed $347,000
and $794,000 in 1995 and 1994, respectively, for loans subject to the
indemnification agreement.
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
<S> <C> <C>
Land $ 645 $ 645
Building 14,090 14,090
Furniture and equipment 4,092 4,031
--------- -----------
Total 18,827 18,766
Less accumulated depreciation 9,978 9,401
--------- -----------
Total $ 8,849 $ 9,365
========= ===========
</TABLE>
8. FUTURE POLICY BENEFITS - TRADITIONAL AND ANNUITY CONTRACTS
The actuarial assumptions for the significant traditional and paid-up
annuity contracts, which are believed to adequately provide for the
possibility of adverse deviations from expected experience, are:
o Withdrawals: Rates of persistency vary by type of product. For
traditional life policies the withdrawal rates are based upon
expected experience at issue using appropriate margins for
deviations. Withdrawal rates for paid-up annuities are based upon
Company experience.
o Interest: Rates were determined considering, among other things, the
investment experience. Interest rates on traditional life insurance
contracts range from 3% to 8.5%. Interest rates for paid-up annuities
range from 5% to 8.5%.
o Mortality: Mortality rates used in the computations of future policy
benefits are based on select and ultimate tables in common usage in
the industry and modified as necessary to conform to expected
experience.
9. REINSURANCE
In the ordinary course of business the Company assumes and cedes
reinsurance with other insurers. The arrangements provide the Company with
a greater diversification of business and generally limits the maximum
exposure on death benefits. Reinsurance is ceded primarily under yearly
renewable term contracts with an affiliate. Generally, the Company has a
retention limit of $500,000 per life.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company; consequently, allowances are established
if amounts are deemed uncollectible. The Company evaluates the financial
condition of its reinsurers and
-14-
<PAGE> 19
monitors concentrations of credit risk arising from similar geographic
regions, activities, or economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurer solvencies.
Amounts paid or deemed to have been paid for reinsurance contracts are
recorded as reinsurance receivables which total $2,144,000, and $3,020,000
at December 31, 1996, and 1995, respectively, and are included in other
assets ($714,000, and $409,000, respectively) and due from affiliates
($1,430,000, and $2,611,000, respectively).
The effect of reinsurance transactions for 1996, 1995, and 1994 is as
follows (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Direct premiums and amounts assessed
against policyholders $ 65,902 $ 62,898 $ 59,205
Reinsurance assumed:
Affiliate 984 909 728
Nonaffiliates 1,766 1,678 1,690
Reinsurance ceded:
Affiliate (1,969) (2,426) (1,211)
Nonaffiliates (614) (410) (302)
---------- ---------- ----------
Net premiums and amounts earned $ 66,069 $ 62,649 $ 60,110
========== ========== ==========
</TABLE>
Policy benefits and decrease in future policy benefit reserves are net of
reinsurance ceded recoveries (payments) of $(267,000), $1,853,000 and
$1,545,000 for 1996, 1995, and 1994, respectively.
10. FEDERAL INCOME TAXES
Deferred tax assets and deferred tax liabilities are recorded to reflect
the tax consequences in future years of differences between the tax bases
of assets and liabilities and the corresponding bases used for financial
reporting purposes. Types of differences which give rise to significant
portions of deferred tax balances are policy acquisition costs, life
policy benefits and unrealized investment gains or losses.
The components of the provision for income taxes are as follows (amounts
in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current $ 15,972 $ 8,610 $ 12,974
Deferred expense (credit) 366 (406) (2,664)
---------- --------- ----------
Total $ 16,338 $ 8,204 $ 10,310
========== ========= ==========
</TABLE>
Prior to 1996, a portion of the Company's retained earnings was designated
as "Policyholders' Surplus Account" for tax purposes, and such amount was
generally not taxable until distributed to stockholders or used for
certain other business purposes. Under the Deficit Reduction Act of 1984,
the balance of the Policyholders' Surplus Account was capped at the 1983
level of $17,070,000. In September 1996, FGI filed an amended 1994
consolidated federal income tax return which included a "deemed dividend
election" for all of its subsidiary life companies, including the Company.
The 1994 tax year was the last year the IRS allowed companies to make such
an election. This election triggered a "Phase III" tax on the previously
untaxed Policyholders' Surplus
-15-
<PAGE> 20
Account of the Company. The Company's 1996 tax provision reflects federal
income tax expense of $5,974,000 related to this Phase III tax.
The table below reconciles the provision for income taxes computed at the
U.S. statutory income tax rate of 35% to the Company's provision for
income taxes (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Expected tax expense $ 10,079 $ 8,670 $ 10,831
Tax on "Policyholders' Surplus Account" 5,974
Tax exempt investment income (376) (559) (323)
Other, net 661 93 (198)
---------- ---------- ----------
Reported income tax expense $ 16,338 $ 8,204 $ 10,310
========== ========= ==========
</TABLE>
Federal income tax balance sheet accounts are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
<S> <C> <C>
Currently recoverable from FGI $ 1,186 $ 889
========= =========
n
Deferred liability, applicable to:
Income $ 10,517 $ 9,889
Net unrealized investment gains 7,411 9,903
--------- ---------
Total deferred liability $ 17,928 $ 19,792
========= =========
</TABLE>
Federal income tax payments of $16,269,000, $14,109,000, and $10,525,000
were made to FGI in 1996, 1995, and 1994, respectively.
11. EMPLOYEES' RETIREMENT PLANS
The Company participates in FGI's two retirement plans (the Regular Plan
and the Restoration Plan). The Regular Plan covers substantially all
employees of FGI, its subsidiaries and Exchanges who have reached age 21
and rendered one year of service. Benefits are based on years of service
and the employee's compensation during the last five years of employment.
The Restoration Plan provides supplemental retirement benefits for certain
key employees of FGI and its subsidiaries.
FGI's policy is to fund the amount determined under the aggregate cost
method, provided it does not exceed funding limitations. There has been no
change in funding policy from prior years.
The assets of the Regular Plan are held by an independent Trustee.
Assets and liabilities of the Regular Plan are recorded by Farmers
New World Life Insurance Company (a wholly-owned subsidiary of FGI) in
separate accounts and are not commingled with the general assets and
liabilities of Farmers New World Life. Assets held are primarily in
fixed maturity and equity investments. The principal liability is for
annuity benefit payments of current and future retirees. Assets of the
Restoration Plan are considered corporate assets of FGI and are held
in a special fund.
-16-
<PAGE> 21
Information regarding the Regular Plan's funded status is not developed
separately for FGI, its subsidiaries and Exchanges. Information regarding
the Restoration Plan pertains to FGI and its subsidiaries only. The funded
status of both Plans at December 1, 1996 (the latest date information is
available) and 1995 is as follows (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $(520,715) $(475,831)
========= =========
Accumulated benefit obligation $(545,459) $(504,750)
========= =========
Projected benefit obligation $(695,346) $(660,708)
Assets at fair market value 744,340 709,549
--------- ---------
Plan assets in excess of projected benefit obligation 48,994 48,841
Unrecognized net transition (asset) (35,538) (40,214)
Unrecognized prior service cost 30,133 32,583
Unrecognized net (gain) (98,544) (88,011)
--------- ---------
(Accrued) pension cost $ (54,955) $ (46,801)
========= =========
</TABLE>
Components of net periodic pension expense for FGI and its subsidiaries
are as follows (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Service costs $ 15,275 $ 12,829 $ 14,774
Interest costs 27,409 25,533 24,088
Return on plan assets (35,671) (31,842) (32,246)
Net amortization and deferral (1,850) (4,084) (2,677)
-------- -------- --------
Net periodic pension expense $ 5,163 $ 2,436 $ 3,939
======== ======== ========
</TABLE>
The Company's share of pension expense was approximately $106,000,
$62,000, and $74,000 for 1996, 1995, and 1994, respectively.
FGI and its subsidiaries use the projected unit credit cost actuarial
method for attribution of expense for financial reporting purposes. The
interest cost and the actuarial present value of benefit obligations were
computed using an interest rate of 7.25% in 1996 and 1995 and 8.25% in
1994 while the expected return on Plan assets was computed using an
interest rate of 9.00% in 1996, 9.25% in 1995, and 9.00% in 1994. The rate
of increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligation was 5.00% in
1996, 4.50% in 1995, and 5.50% in 1994..
FGI and its subsidiaries' postretirement benefits plan is a contributory
defined benefit plan for current retirees and those employees who were
eligible for early retirement on January 1, 1991, and is a contributory
defined dollar plan for all other employees. Health benefits are provided
for all employees who participated in the Company's group medical benefits
plan for 15 years prior to retirement at age 55 or later. A life insurance
benefit of $5,000 is provided at no cost to retirees who maintained group
life coverage for 15 years prior to retirement at age 55 or later.
There are no assets separated and allocated to this plan.
-17-
<PAGE> 22
The funded status of the entire plan, which includes FGI, its subsidiaries
and Exchanges, at December 1, 1996 (the latest date for which information
is available), and 1995, is as follows (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 0 $ 0
======== ========
Accumulated benefit obligation:
Retirees $ 44,051 $ 39,335
Eligible active plan participants 11,564 11,801
Other active plan participants 19,527 23,055
Assets at fair market value 0 0
Unrecognized net gains 7,796 4,842
Unrecognized net transition obligation (20,976) (22,287)
-------- --------
Accrued postretirement benefit cost $ 61,962 $ 56,746
======== ========
</TABLE>
FGI and its subsidiaries' share of the accrued postretirement benefit cost
was approximately $47,948,000 in 1996, and $44,726,000 in 1995. The
unrecognized transition obligation of $20,976,000 in 1996 and $22,287,000
in 1995 represents the remaining transition obligation of the Exchanges.
Components of postretirement benefits expense for FGI and its subsidiaries
follow (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Service costs $1,016 $ 956 $1,636
Interest costs 3,018 3,308 3,172
Return on plan assets 0 0 0
------ ------ ------
Net periodic expense $4,034 $4,264 $4,808
====== ====== ======
</TABLE>
The Company's share of this amount was approximately $116,000 in 1996,
$119,000 in 1995, and $126,000 in 1994.
The interest rate used in the above benefit computations was 7.25% in 1996
and 1995, and 8.25% in 1994. Beginning in 1993, the initial medical
inflation rate was 9.0% to be graded over a 6 year period to 6.0% and
level thereafter, and contribution levels from retirees were the same as
applicable medical cost increases where defined benefits exist. The rate
of increase in future compensation levels used in determining the
actuarial present value of the accumulated benefit obligation was 5.00% in
1996, 4.50% in 1995, and 5.50% in 1994. A 1.0% increase in the medical
inflation rate assumption would have resulted in an approximate increase
of $1,231,000 in 1996, and $1,626,000 in 1995 in the accumulated benefit
obligation for FGI and its subsidiaries.
12. EMPLOYEES' PROFIT SHARING PLANS
FGI has two profit sharing plans providing for cash payments to all
eligible employees. The two plans, Cash Profit Sharing (consisting of Cash
and Cash Plus) and Deferred Profit Sharing, provide for a maximum
aggregate expense of 16.25% of FGI's consolidated annual pretax earnings,
adjusted as defined in the plans. The Deferred Profit Sharing Plan,
limited to 15% of the salaries or wages paid or accrued to the eligible
employees, provides for an annual payment by FGI to a Trust for eventual
payment to employees as provided in
-18-
<PAGE> 23
the Plan. The Cash Profit Sharing Plan provides for annual cash
distributions limited to 5% (Cash) and 1.25% (Cash Plus) of the salaries
or wages paid or accrued to eligible employees.
The Company's share of expense under these plans was $1,427,000,
$1,422,000, and $1,359,000 in 1996, 1995, and 1994, respectively.
13. TRANSACTIONS WITH AFFILIATES
FGI performs certain services such as legal, investment, data processing
and human resources for the Company and allocates the costs of these
services to the Company. Total costs allocated for 1996, 1995, and 1994
were $1,433,000, $1,724,000, and $1,474,000, respectively. An affiliated
entity performs claims processing services for the Company and allocated
costs to the Company of approximately $360,000 for 1996 and 1995, and
$250,000 for 1994. In addition, the Company performs virtually all of the
corporate office functions for Investors Guaranty Life Insurance Company
(IGL), a wholly-owned subsidiary of FGI. The Company allocates a portion
of these shared service costs to IGL. Costs allocated to IGL totaled
$5,470,000, $5,013,000 and $5,462,000 in 1996, 1995, and 1994,
respectively. Management believes these amounts in the accompanying
financial statements have been allocated in a reasonable and consistent
manner.
Included in the amount due to (from) affiliated companies at December 31,
1996, and 1995 is $80,000 and $(103,000) due to (from) IGL.
Also see Note 6 regarding an indemnification agreement with FGI, Note 9
regarding reinsurance agreements, Note 10 regarding income tax payments to
FGI, and Notes 11 and 12 regarding pension and profit sharing plans.
The Company has a revolving line of credit with its parent company for
$3,000,000 at interest rates equal to prime plus one-half percent. No
borrowings were made under this line of credit in 1996 and 1995.
14. DIVIDEND RESTRICTION
Dividend payments can be made only from statutory surplus. The maximum
dividend that may be paid in 1997 without prior approval of the Director
of Insurance of the State of Ohio is limited to the greater of the prior
year's statutory gain from operations or 10% of statutory surplus. The
Company's statutory surplus and statutory gain from operations as of and
for the year ended December 31, 1996 are $132,901,000 and $4,833,000,
respectively. Accordingly, the maximum dividend that may be paid without
prior approval during 1997 is approximately $13,290,000.
15. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various lawsuits incidental to the operation
of its business, and in the opinion of management, the ultimate outcome of
such proceedings will not materially affect the Company's financial
position.
The Company also participates in several State Insurance Guarantee Funds
which are entitled to impose assessments on insurers based on losses
incurred in those states. Management believes that the Company's
obligation for potential assessments will not have a material effect on
the Company's financial position.
-19-
<PAGE> 24
16. SUBSEQUENT EVENTS
On April 15, 1997 (the "Closing Date"), Americo Life, Inc. ("Americo"),
completed the acquisition of all of the outstanding common stock of the
Company and IGL from FGI pursuant to a stock purchase agreement dated
January 21, 1997. The acquisition was completed through one of Americo's
wholly-owned subsidiaries, Great Southern Life Insurance Company ("Great
Southern") for a total cash consideration of approximately $339,000,000.
Immediately prior to the acquisition of the Company by Great Southern, the
Company sold all of its investments in mortgage loans, real estate and
joint ventures to FGI at the March 31, 1997 book values. Immediately
following the acquisition, the Company sold of its investments in common
stock and preferred stock to FGI at market values determined as of the
Closing Date.
On April 16, 1997, the Company entered into a coinsurance agreement to
reinsure 100% of their insurance liabilities to an unaffiliated insurance
company ("the Reinsurer") in exchange for a ceding commission of
$113,000,000.
On April 17, 1997, the Company paid a dividend of $175,000,000 to Great
Southern.
* * * * * *
-20-
<PAGE> 25
INVESTORS GUARANTY LIFE
INSURANCE COMPANY
(A Wholly-Owned Subsidiary of
Farmers Group, Inc.)
Financial Statements for the Years Ended
December 31, 1996, 1995 and 1994
and Independent Auditors' Report
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Investors Guaranty Life Insurance Company:
We have audited the accompanying balance sheets of Investors Guaranty Life
Insurance Company (a wholly-owned subsidiary of Farmers Group, Inc.) as of
December 31, 1996, and 1995, and the related statements of operations,
stockholder's equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1996 and
1995, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
February 13, 1997, except for Note 13
as to which the date is April 17, 1997
Columbus, Ohio
<PAGE> 27
INVESTORS GUARANTY LIFE
INSURANCE COMPANY
(A Wholly-Owned Subsidiary of Farmers Group, Inc.)
<TABLE>
<CAPTION>
BALANCE SHEETS, DECEMBER 31, 1996 AND 1995
(AMOUNTS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS 1996 1995
-------- --------
<S> <C> <C>
INVESTMENTS:
Fixed maturities:
Bonds available for sale, at market (cost, 1996 - $55,286; 1995 - $54,581) $ 57,462 $ 57,587
Redeemable preferred stocks available for sale, at market (cost, 1996 - $3,592; 1995 - $4,619) 3,612 4,749
Equity securities available for sale:
Nonredeemable preferred stocks, at market (cost, 1996 - $292; 1995 - $1,018) 270 1,138
Common stocks, at market (cost, 1996 - $22,168; 1995 - $16,911) 27,464 20,649
Mortgage loans 3,144 3,341
Policy loans 1,283 1,186
Real estate (net of accumulated depreciation, 1996 - $53; 1995 - $49) 510 507
-------- --------
Total investments 93,745 89,157
CASH AND CASH EQUIVALENTS 1,817 3,443
ACCRUED INVESTMENT INCOME 885 960
DUE FROM AFFILIATED COMPANIES 912 2,274
DEFERRED POLICY ACQUISITION COSTS 34,488 34,692
CURRENT FEDERAL INCOME TAXES RECOVERABLE FROM PARENT 204 285
OTHER ASSETS 1,955 3,197
-------- --------
TOTAL $134,006 $134,008
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY LIABILITIES:
Future policy benefits-life and annuity $ 58,196 $ 55,757
Policy claims payable 1,701 1,927
Other policyholders' funds 5,934 5,469
-------- --------
Total policy liabilities 65,831 63,153
ACCRUED EXPENSES AND OTHER LIABILITIES 5,328 6,599
DEFERRED FEDERAL INCOME TAXES 7,207 7,504
DUE TO AFFILIATED COMPANY 0 103
-------- --------
Total liabilities 78,366 77,359
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $2 par value per share, authorized 8,500 shares;
issued and outstanding 750 shares 1,500 1,500
Additional paid-in capital 2,977 2,977
Retained earnings 46,288 47,626
Net unrealized investment gains on available for sale securities, net of tax 4,875 4,546
-------- --------
Total stockholder's equity 55,640 56,649
-------- --------
TOTAL $134,006 $134,008
======== ========
</TABLE>
See notes to financial statements.
-2-
<PAGE> 28
INVESTORS GUARANTY LIFE
INSURANCE COMPANY
(A Wholly-Owned Subsidiary of Farmers Group, Inc.)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Premiums and other considerations $ 19,211 $ 19,996 $ 21,151
Universal life and annuity policy charges 623 756 592
Net investment income 5,985 5,766 5,424
Net realized investment gains 2,362 2,656 3,807
-------- -------- --------
Total revenues 28,181 29,174 30,974
-------- -------- --------
BENEFITS AND EXPENSES:
Policy benefits 6,349 7,688 7,039
Increase in future policy benefit reserves 1,859 872 377
Interest credited to policyholders 1,821 1,793 1,693
Amortization of deferred policy acquisition costs 9,135 11,214 9,904
General expenses 7,644 7,072 6,999
-------- -------- --------
Total benefits and expenses 26,808 28,639 26,012
-------- -------- --------
INCOME BEFORE INCOME TAX PROVISION AND 1,373 535 4,962
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (Note 1)
-------- -------- --------
INCOME TAX PROVISION 2,711 67 1,596
NET (LOSS) INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE (Note 1) (1,338) 468 3,366
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
(Note 1) (46)
-------- -------- --------
NET (LOSS) INCOME $ (1,338) $ 468 $ 3,320
======== ======== ========
</TABLE>
See notes to financial statements.
-3-
<PAGE> 29
INVESTORS GUARANTY LIFE
INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
FARMERS GROUP, INC.)
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET
ADDITIONAL UNREALIZED TOTAL
COMMON PAID-IN RETAINED INVESTMENT STOCKHOLDER'S
STOCK CAPITAL EARNINGS GAINS EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 $1,500 $2,977 $43,838 $ 3,939 $52,254
Net income - 1994 3,320 3,320
Cumulative effect of adoption of SFAS No. 115 950 950
Decrease in net unrealized investment gains
(net of tax of $2,539) (4,715) (4,715)
------ ------ ------- ------- -------
BALANCE, DECEMBER 31, 1994 1,500 2,977 47,158 174 51,809
Net income - 1995 468 468
Increase in net unrealized investment gains
(net of tax of $2,354) 4,372 4,372
------ ------ ------- ------- -------
BALANCE, DECEMBER 31, 1995 1,500 2,977 47,626 4,546 56,649
Net loss - 1996 (1,338) (1,338)
Increase in net unrealized investment gains
(net of tax of $177) 329 329
------ ------ ------- ------- -------
BALANCE, DECEMBER 31, 1996 $1,500 $2,977 $46,288 $ 4,875 $55,640
====== ====== ======= ======= =======
</TABLE>
See notes to financial statements.
-4-
<PAGE> 30
INVESTORS GUARANTY LIFE
INSURANCE COMPANY
(A Wholly-Owned Subsidiary of Farmers Group, Inc.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (1,338) $ 468 $ 3,320
-------- -------- --------
Adjustments to reconcile net income to net cash used in
operating activities:
Increase in policy liabilities 2,678 3,627 1,859
Amortization of deferred policy acquisition costs 9,135 11,214 9,904
Decrease (increase) in current Federal income taxes
recoverable 81 181 (749)
Deferred Federal income tax credit (473) (176) 139
Net realized investment gains (2,362) (2,656) (3,807)
Policy acquisition costs deferred (8,931) (11,836) (12,716)
(Decrease) increase in accrued expenses and other liabilities (1,271) 223 (12)
Other - net 2,671 (875) 1,427
------- ------- -------
Total adjustments 1,528 (298) (3,955)
------- ------- -------
Net cash provided by (used in) operating activities 190 170 (635)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments available for sale (27,870) (23,338) (16,767)
Purchases of investments held to maturity (6,670)
Proceeds from sales and maturities of investments available for sale 25,961 23,376 18,794
Proceeds from sales and maturities of investments held to maturity 6,253
Mortgage loan collections 197 206 1,208
(Increase) decrease in policy loans (97) 45 20
Real estate improvements (7) (12) (2)
Proceeds from sale of real estate 0 80 421
------- ------- -------
Net cash (used by) provided by investing activities (1,816) 357 3,257
------- ------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,626) 527 2,622
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,443 2,916 294
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,817 $ 3,443 $ 2,916
======= ======= =======
</TABLE>
See notes to financial statements.
-5-
<PAGE> 31
INVESTORS GUARANTY LIFE
INSURANCE COMPANY
(A Wholly-Owned Subsidiary of
Farmers Group, Inc.)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investors Guaranty Life Insurance Company (the Company) is a wholly-owned
subsidiary of Farmers Group, Inc. (FGI). As such the accompanying
financial statements are consolidated with those of FGI. The Company
principally writes traditional life and annuity products throughout the
United States.
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles (GAAP) on a historical cost
basis and do not reflect any adjustments to recognize fair value amounts
determined in consolidation with the Company's parent (see Note 3). These
financial statements differ in certain respects from reporting practices
prescribed or permitted by the Insurance Department of California
(statutory accounting practices). The preparation of financial statements
in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Statutory Accounting - Generally accepted accounting principles differ in
certain respects from statutory insurance accounting practices in
determining financial position and results of operations. Statutory
accounting practices are prescribed or permitted by the Insurance
Department of California include, among other things, that (a) common
stocks are carried at market value with no provision for deferred income
taxes pertaining to the unrealized appreciation of such investments; (b)
costs of acquiring new business are charged to earnings at the time the
policies are written; (c) certain assets designated as "non-admitted
assets" are excluded from the balance sheet; (d) unrealized capital gains
(losses) are credited (charged) directly to unassigned surplus; (e)
certain reserves statutorily required to be maintained are included among
liabilities; and (f) no provision for deferred income taxes is required to
be made for inter-period timing differences between financial reporting
income and taxable income. All of the Company's significant statutory
accounting practices are prescribed practices.
Investments - Investments in bonds and redeemable preferred stock (fixed
maturities), common stock, and non-redeemable preferred stock are
classified in the balance sheets as available for sale and are reported at
fair value, with unrealized gains and losses excluded from earnings and
reported, net of deferred taxes, as a component of stockholder's equity
(see Note 2). Realized gains and losses are determined by specific
identification. Mortgage loans are stated at the unpaid principal balance,
net of allowances for uncollectible amounts (see Note 4). Policy loans are
carried at the aggregate of the unpaid loan balances which do not exceed
the cash values of the related policies. Purchased real estate is carried
at cost less depreciation, generally calculated using the straight-line
method, less any required write-downs for permanent declines in value.
Real estate
-6-
<PAGE> 32
acquired in settlement of foreclosed mortgage loans is recorded at the
lower of cost or fair value at the date of acquisition.
The Company adopted SFAS No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" as of January 1, 1994, the effect of which
was reported as a cumulative change in accounting principle consistent
with the provisions of Accounting Principles Board (APB) No. 20
"Accounting Changes."
Revenues - Traditional life premiums are recognized as revenues when they
become due. Revenues for universal life-type policies and investment
products consist of policy charges for the cost of insurance, policy
administration, and surrenders.
Deferred Policy Acquisition Costs (DAC) - The costs of acquiring new
business, principally commissions, policy issue costs, underwriting and
certain sales expenses, have been deferred. On traditional life insurance
contracts, deferred policy acquisition costs are amortized ratably over
the periods in which the related premiums are recognized. Such expected
premium revenue is estimated using actuarial assumptions consistent with
those used in calculating the liabilities for future policy benefits.
Deferred policy acquisition costs related to universal life-type policies
and investment products are amortized in relation to the present value of
expected gross profits in the contracts.
Future Policy Benefits - Future policy benefits on traditional life
insurance and paid-up annuity contracts have been computed by a net level
premium method based upon assumptions as to investment yield, mortality
and withdrawals. See Note 5 for the significant assumptions pertinent to
such liabilities.
Future policy benefits on universal life-type policies and other
investment products have been determined following a "retrospective
deposit" method and consist principally of policy values that accrue to
the benefit of policyholders which exclude surrender charges.
Reinsurance Ceded - In the normal course of business, the Company seeks to
limit its exposure to loss on any single insured and to recover a portion
of benefits paid by ceding reinsurance to other insurers under excess
coverage contracts. The Company retains a maximum of $100,000 of coverage
per individual life.
The cost of reinsurance related to long-duration contracts is accounted
for over the life of the underlying reinsured policies using assumptions
consistent with those used to account for the underlying policies (see
also Note 6).
Federal Income Taxes - The Company follows the provisions of SFAS No. 109,
"Accounting for Income Taxes" (see Note 7). The Company is included in the
consolidated income tax return of FGI. Income tax assets and liabilities
are determined on a separate return basis and current amounts due or
recoverable for federal income taxes are with FGI. Prior to 1995, the
Company filed a separate tax return as a member of a controlled group.
Employee Benefit Plans - The Company is a participant, together with other
affiliated companies, in a non-contributory, defined benefit pension plan
and profit-sharing plans as described in Notes 8 and 9, respectively.
Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers'
Accounting for Post-Employment Benefits." This statement requires the cost
associated with providing post-employment benefits to be recognized over
the active service period of the employees, rather than recording this
expense when paid, as was the Company's practice. The cumulative effect of
this accounting change net of a $25,000 tax benefit, was to decrease 1994
net income by $46,000.
-7-
<PAGE> 33
Cash and Cash Equivalents - Cash and cash equivalents consist of highly
liquid investments with maturities of three months or less.
Effect of New Accounting Pronouncements - In June 1996, the Financial
Accounting Standards Board released SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". This Statement, effective for fiscal years beginning after
December 31, 1996, establishes accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities based on a consistent application of a financial-components
approach that focuses on the issue of control. In December 1996, the FASB
issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions
of FASB Statement No. 125," which defers for one year the effective date
of the provisions that apply to certain transactions. These transactions
include repurchase agreements, dollar-rolls, securities lending, secured
borrowings and collaterals. The Company does not expect the adoption of
these Statements to have a significant impact on its financial statements.
2. BONDS AND EQUITY SECURITIES
The Company classifies its investments in the balance sheet in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" which requires the classification of securities into one of
three categories: held-to-maturity, available-for-sale or trading. This
statement addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all
investments in debt securities. The Company has classified all fixed
maturities (bonds, notes and redeemable preferred stocks) as available for
sale and reported at fair value in the balance sheet since the Company may
not hold those securities to maturity. All equity securities (common
stocks and non-redeemable preferred stocks) have also been classified as
available for sale and reported at fair value in the balance sheet. Held
to maturity securities are defined by SFAS No. 115 as debt securities
which an enterprise has the positive intent and ability to hold to
maturity. Trading securities are defined by SFAS No. 115 as debt and
equity securities bought and held principally for the purpose of selling
in the near term. As of December 31, 1996 and 1995, the Company has not
designated any securities as held to maturity or trading securities under
SFAS No. 115. The Company's equity in changes in unrealized appreciation
(depreciation) of investments reported at fair value, net of deferred tax
effects, is excluded from earnings and reported as a component of
stockholder's equity.
On November 15, 1995, the FASB issued a special report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in
Debt and Equity Securities," in which they discussed a "fresh start"
transition provision that allowed reporting entities to reassess their
securities holdings that were classified pursuant to the provisions in
SFAS No. 115. As a result of this "fresh start," the Company decided to
reclassify all of its debt securities originally classified as held to
maturity under SFAS No. 115 to available for sale at December 31, 1995.
This resulted in the transfer of debt securities with an amortized cost of
approximately $19,136,000 and net unrealized losses of approximately
$582,000 from held to maturity to available for sale.
Bonds with an amortized cost of $3,190,000 and $2,327,000, were on deposit
with regulatory authorities at December 31, 1996 and 1995, respectively.
-8-
<PAGE> 34
The sources of investment income on securities owned by the Company for the
years ended December 31 are (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Fixed income securities $ 4,467 $ 4,468 $ 4,113
Equity securities 841 864 899
Mortgage loans 320 334 495
Owned real estate 100 82 46
Policy loans 95 75 71
Other 341 163 69
Investment expenses (179) (220) (269)
------- ------- -------
Net investment income $ 5,985 $ 5,766 $ 5,424
======= ======= =======
</TABLE>
Realized gains and losses on sales, redemptions and writedowns of investments
owned by the Company are determined based on the actual cost of securities sold.
Realized investment gains (losses) for the years ended December 31 are (amounts
in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Bonds $ (28) $ 269 $ 121
Redeemable preferred stocks 28 (8) 16
Non redeemable preferred stock (194)
Common stocks 2,556 2,442 3,668
Real estate (47) 2
------- ------- -------
Net realized investment gains $ 2,362 $ 2,656 $ 3,807
======= ======= =======
</TABLE>
-9-
<PAGE> 35
Gross unrealized gains (losses) of the Company pertaining to equity securities
available for sale (nonredeemable preferred stocks and common stocks) stated at
quoted market value as of December 31 are (amounts in thousands):
<TABLE>
<CAPTION>
Gains Losses Net
<S> <C> <C> <C>
1996
Nonredeemable preferred stocks $ 52 $ (30) $ 22
Common stocks 5,632 (336) 5,296
------- ------- -------
Total $ 5,684 $ (366) 5,318
======= =======
Less deferred Federal income taxes 1,861
-------
Total $ 3,457
=======
1995
Nonredeemable preferred stocks $ 200 $ (80) $ 120
Common stocks 5,025 (1,287) 3,738
------- ------- -------
Total $ 5,225 $(1,367) 3,858
======= =======
Less deferred Federal income taxes 1,350
-------
Total $ 2,508
=======
</TABLE>
The amortized cost, gross unrealized gains and losses, and estimated market
values of investments in debt securities (fixed maturity bonds and redeemable
preferred stocks) at December 31, 1996 and 1995 are as follows (amounts
in thousands):
<TABLE>
<CAPTION>
Estimated
Amortized Unrealized Unrealized Market
December 31, 1996 Cost Gains Losses Value
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Debt Securities Available for Sale
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 4,996 $ 279 $ 0 $ 5,275
States and political subdivisions 4,983 273 (1) 5,255
Foreign governments 1,579 320 1,899
Corporate 17,345 503 (179) 17,669
Mortgage-backed securities 26,383 1,099 (118) 27,364
Redeemable preferred stocks 3,592 43 (23) 3,612
------- ------- ------- -------
Totals $58,878 $ 2,517 $ (321) $61,074
======= ======= ======= =======
</TABLE>
-10-
<PAGE> 36
<TABLE>
<CAPTION>
Estimated
Amortized Unrealized Unrealized Market
December 31, 1995 Cost Gains Losses Value
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Debt Securities Available for Sale
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 4,100 $ 451 $ 4,551
States and political subdivisions 5,192 231 5,423
Foreign governments 1,182 81 $ (37) 1,226
Corporate 19,049 856 (88) 19,817
Mortgage-backed securities 25,058 1,513 (1) 26,570
Redeemable preferred stocks 4,619 196 (66) 4,749
------- ------- ------- -------
Totals $59,200 $ 3,328 $ (192) $62,336
======= ======= ======= =======
</TABLE>
The amortized cost and estimated market value of debt securities at December 31,
1996, by contractual maturity, are shown below (amounts in thousands). Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
--------- ---------
<S> <C> <C>
Debt securities available for sale:
Due in one year or less $ 1,102 $ 1,204
Due after one year through five years 5,263 5,417
Due after five years through ten years 10,165 10,534
Due after ten years 12,373 12,943
------- -------
Total 28,903 30,098
Mortgage-backed securities 26,383 27,364
Preferred stocks with characteristics of debt securities 3,592 3,612
------- -------
Total $58,878 $61,074
======= =======
</TABLE>
Proceeds from sales and maturities of available for sale securities during 1996,
1995, and 1994 were $8,156,000, $14,594,000, and $18,794,000, respectively.
Gross gains of $110,000, $401,000, and $551,000 and gross losses of $110,000,
$140,000, and $378,000 were realized on sales and write-downs during 1996, 1995,
and 1994, respectively.
The change in the net unrealized gains (losses) of the Company for the years
ended December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
Amounts in thousands
<S> <C> <C> <C>
Fixed maturities $ (940) $ 4,570 (1,564)
Equity securities 1,446 2,156 (4,184)
</TABLE>
-11-
<PAGE> 37
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments disclosed (amounts are
in thousands) as of December 31, 1996 and 1995 have been determined using
available market information and appropriate valuation methodologies.
However, considerable judgment is required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented
may not be indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies could have a significant effect on the estimated
fair value amounts.
<TABLE>
<CAPTION>
1996 1995
--------------------------- --------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 1,817 $ 1,817 $ 3,443 $ 3,443
Fixed maturities available for sale
(including redeemable preferred stocks) 61,074 61,074 62,336 62,336
Non-redeemable preferred stocks 270 270 1,138 1,138
Common stocks, available for sale 27,464 27,464 20,649 20,649
Mortgage loans 3,144 3,381 3,341 3,788
Policy loans 1,283 1,375 1,186 1,208
Liabilities:
Future policy benefits - deferred annuities 26,901 25,948 26,032 25,442
</TABLE>
The following methods and assumptions were used to estimate the fair value
of financial instruments as of December 31, 1996 and 1995.
Cash and Cash Equivalents - The carrying amounts of these items are a
reasonable estimate of their fair value.
Fixed Maturities, Non-Redeemable Preferred Stocks and Common Stocks - The
estimated fair values of bonds, redeemable and non-redeemable preferred
stocks and common stocks are based upon quoted market prices, dealer
quotes, and prices obtained from independent pricing services.
Mortgage Loans - The estimated fair value of the mortgage loans portfolio
is determined by discounting the estimated future cash flows, using a
year-end market rate which is applicable to the yield, credit quality and
average maturity of the composite portfolio.
Policy Loans - The estimated fair value of policy loans is determined by
discounting the future cash flows using the current rates at which similar
loans would be made.
Future Policy Benefits - Deferred Annuities - The estimated fair values of
flexible premium and single premium deferred annuities are based on their
cash surrender values.
4. MORTGAGE LOANS
The Company follows the principles of SFAS No. 118 (amending SFAS No.
114), "Accounting by Creditors for Impairment of a Loan". This statement
requires that an impaired loan be measured based on the present value of
expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's observable market price
or the fair value of the collateral, if the loan is collateral dependent.
-12-
<PAGE> 38
The total recorded investment in impaired mortgage loans, as well as the
amount of recorded investment for which an allowance for credit losses does
and does not exist as of December 31 are (in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
The total recorded investment in impaired mortgage loans and for which an
allowance for credit losses exists $ 568 $ 597
The total allowance for credit losses related to impaired mortgage loans 88 116
</TABLE>
The Company records interest income received on impaired mortgage loans on
a cash basis. The average recorded investment and interest income
recognized on impaired mortgage loans for the years ended December 31 are
(in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
The average recorded investment in impaired mortgage loans
during the period $ 581 $ 600 $ 610
Interest income recognized on the impaired mortgage loans
during the period 0 59 61
</TABLE>
The activity in the total allowance for credit losses related to impaired
mortgage loans for the years ended December 31 are (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Beginning balance $ 116 $ 125 $ 165
Deductions credited to operations (28) (9) (40)
------ ------ -----
Ending balance $ 88 $ 116 125
====== ====== =====
</TABLE>
5. FUTURE POLICY BENEFITS - TRADITIONAL AND ANNUITY CONTRACTS
The actuarial assumptions for the significant traditional and paid-up
annuity contracts, which are believed to adequately provide for the
possibility of adverse deviations from expected experience, are:
o Withdrawals: Rates of persistency vary by type of product. For
traditional life policies the withdrawal rates are based upon
expected experience at issue using appropriate margins for
deviations. Withdrawal rates for paid-up annuities are based upon
Company experience.
o Interest: Rates were determined considering, among other things,
the investment experience. Interest rates on traditional life
insurance contracts range from 3% to 7%.
o Mortality: Mortality rates used in the computations of future policy
benefits are based on select and ultimate tables in common usage in
the industry and modified as necessary to conform to expected
experience.
-13-
<PAGE> 39
6. REINSURANCE
In the ordinary course of business, the Company assumes and cedes
reinsurance with other insurers. The arrangements provide the Company with
a greater diversification of business and generally limit the maximum
exposure on death benefits. Reinsurance is ceded primarily under yearly
renewable term contracts with an affiliate. Generally, the Company has a
retention limit of $100,000 per life.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company; consequently, allowances are established
if amounts are deemed uncollectible. 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 reinsurer solvencies.
Amounts paid or deemed to have been paid for reinsurance contracts are
recorded as reinsurance receivables which total $922,000 and $2,285,000 at
December 31, 1996, and 1995, respectively, are included in other assets
($10,000 and $11,000, respectively), and due from affiliates ($912,000 and
$2,274,000, respectively).
The effect of reinsurance transactions for 1996, 1995 and 1994 is as
follows (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Direct premiums and amounts assessed against policyholders $21,256 $21,665 $21,895
Reinsurance assumed - nonaffiliate 578 566 584
Reinsurance ceded:
Affiliate (1,979) (1,455) (721)
Nonaffiliate (21) (24) (15)
------- ------- -------
Net premiums and amounts earned $19,834 $20,752 $21,743
======= ======= =======
</TABLE>
Policy benefits and increase in future policy benefit reserves are net of
reinsurance ceded recoveries of $288,000, $516,000, and $533,000 in 1996,
1995, and 1994, respectively.
7. FEDERAL INCOME TAXES
Deferred tax assets and deferred tax liabilities are recorded to reflect
the tax consequences in future years of differences between the tax bases
of assets and liabilities and the corresponding bases used for financial
reporting purposes. Types of differences which give rise to significant
portions of deferred tax balances are policy acquisition costs, life
policy benefits and unrealized investment gains or losses.
The components of the provision for income taxes are as follows (amounts
in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current $ 3,184 $ 243 $1,432
Deferred expense (credit) (473) (176) 164
------- ------- ------
Total $ 2,711 $ 67 $1,596
======= ======= ======
</TABLE>
-14-
<PAGE> 40
Prior to 1996, a portion of the Company's retained earnings was designated
as "Policyholders' Surplus Account" for tax purposes, and such amount was
generally not taxable until distributed to stockholders or used for
certain other business purposes. Under the Deficit Reduction Act of 1984,
the balance of the Policyholders' Surplus Account was capped at the 1983
level of $6,152,000. In September 1996, FGI filed an amended 1994
consolidated federal income tax return which included a "deemed dividend
election" for all of its subsidiary life companies, including the
Company. The 1994 tax year was the last year the IRS allowed companies
to make such an election. This election triggered a "Phase III" tax on
the previously untaxed Policyholders' Surplus Account of the Company.
The Company's 1996 tax provision reflects federal income tax expense of
$2,153,000 related to this Phase III tax.
The table below reconciles the provision for income taxes computed at the
U.S. statutory income tax rate of 35% to the Company's provision for
income taxes (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Expected tax expense $ 481 $ 187 $ 1,737
Tax on "Policyholders' Surplus Account" 2,153
Tax exempt investment income (111) (121) (137)
Other, net 188 1 (4)
------ ------ -------
Reported income tax expense $2,711 $ 67 $ 1,596
====== ====== =======
</TABLE>
Federal income tax balance sheet accounts were as follows (amounts in
thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Currently recoverable from FGI $ 204 $ 285
======= ======
Deferred, applicable to:
Income $ 4,582 $5,056
Net unrealized investment gains 2,625 2,448
------- ------
Total deferred liability $ 7,207 $7,504
======= ======
</TABLE>
Federal income tax payments of $3,103,000 were made to FGI in 1996
($62,000 in 1995 and none in 1994).
8. EMPLOYEES' RETIREMENT BENEFIT PLANS
The Company participates in FGI's two retirement plans (the Regular Plan
and the Restoration Plan). The Regular Plan covers substantially all
employees of FGI, its subsidiaries and Exchanges who have reached age 21
and rendered one year of service. Benefits are based on years of service
and the employee's compensation during the last five years of employment.
The Restoration Plan provides supplemental retirement benefits for certain
key employees of FGI and its subsidiaries.
FGI's policy is to fund the amount determined under the aggregate cost
method, provided it does not exceed funding limitations. There has been no
change in funding policy from prior years.
-15-
<PAGE> 41
The assets of the Regular Plan are held by an independent Trustee. Assets
and liabilities of the Regular Plan are recorded by Farmers New World Life
Insurance Company (a wholly-owned subsidiary of FGI) in separate accounts
and are not commingled with the general assets and liabilities of Farmers
New World Life. Assets held are primarily in fixed maturity and equity
investments. The principal liability is for annuity benefit payments of
current and future retirees. Assets of the Restoration Plan are considered
corporate assets of FGI and are held in a special fund.
Information regarding the Regular Plan's funded status is not developed
separately for FGI, its subsidiaries and Exchanges. Information regarding
the Restoration Plan pertains to FGI and its subsidiaries only. The funded
status of both Plans at December 1, 1996 (the latest date information is
available) and 1995 is as follows (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $(520,715) $(475,831)
========= =========
Accumulated benefit obligation $(545,459) $(504,750)
========= =========
Projected benefit obligation $(695,346) $(660,708)
Assets at fair market value 744,340 709,549
--------- ---------
Plan assets in excess of projected benefit obligation 48,994 48,841
Unrecognized net transition (asset) (35,538) (40,214)
Unrecognized prior service cost 30,133 32,583
Unrecognized net (gain) (98,544) (88,011)
--------- ---------
(Accrued) pension cost $ (54,955) $ (46,801)
========= =========
</TABLE>
Components of net periodic pension expense for FGI and its subsidiaries
are as follows (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Service costs $ 15,275 $ 12,829 $ 14,774
Interest costs 27,409 25,533 24,088
Return of plan assets (35,671) (31,842) (32,246)
Net amortization and deferral (1,850) (4,084) (2,677)
-------- -------- --------
Net periodic pension expense $ 5,163 $ 2,436 $ 3,939
======== ======== ========
</TABLE>
The Company's share of pension expense was approximately $49,000, $30,000,
and $34,000 in 1996, 1995, and 1994 respectively.
FGI and its subsidiaries use the projected unit credit cost actuarial
method for attribution of expense for financial reporting purposes. The
interest cost and the actuarial present value of benefit obligations were
computed using an interest rate of 7.25% in 1996 and 1995, and 8.25% in
1994 while the expected return on plan assets was computed using an
interest rate of 9.00% in 1996, 9.25% in 1995 and 9.00% in 1994. The rate
of increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligation was 5.00% in
1996, 4.50% in 1995 and 5.5% in 1994.
FGI and its subsidiaries' postretirement benefits plan is a contributory
defined benefit plan for current retirees and those employees who were
eligible for early retirement on January 1, 1991, and
-16-
<PAGE> 42
is a contributory defined dollar plan for all other employees. Health
benefits are provided for all employees who participated in the Company's
group medical benefits plan for 15 years prior to retirement at age 55 or
later. A life insurance benefit of $5,000 is provided at no cost to
retirees who maintained group life coverage for 15 years prior to
retirement at age 55 or later.
There are no assets separated and allocated to this plan.
The funded status of the entire plan, which includes FGI, its subsidiaries
and Exchanges, at December 1, 1996 (the latest date for which information
is available) and 1995 is as follows (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 0 $ 0
======== ========
Accumulated benefit obligation:
Retirees $ 44,051 $ 39,335
Eligible active plan participants 11,564 11,801
Other active plan participants 19,527 23,055
Assets at fair market value 0 0
Unrecognized net gains/(losses) 7,796 4,842
Unrecognized net transition obligation (20,976) (22,287)
-------- --------
Accrued postretirement benefit cost $ 61,962 $ 56,746
======== ========
</TABLE>
FGI and its subsidiaries' share of the accrued postretirement benefit cost
was approximately $47,948,000 in 1996 and $44,726,000 in 1995. The
unrecognized transition obligation of $20,976,000 in 1996 and $22,287,000
in 1995 represents the remaining transition obligation of the Exchanges.
Components of postretirement benefits expense for FGI and its subsidiaries
follow (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Service costs $1,016 $ 956 $1,636
Interest costs 3,018 3,308 3,172
Return on plan assets 0 0 0
------ ------ ------
Net periodic expense $4,034 $4,264 $4,808
====== ====== ======
</TABLE>
The Company's share of this amount was approximately $39,000 in 1996 and
$42,000 in 1995 and 1994.
The interest rate used in the above benefit computations was 7.25% in 1996
and 1995 and 8.25% in 1994. Beginning in 1993, the initial medical
inflation rate was 9.0%, to be graded over a 6 year period to 6.0% and
level thereafter, and contribution levels from retirees were the same as
applicable medical cost increases where defined benefits exist. The rate of
increase in future compensation levels used in determining the actuarial
present value of the accumulated benefit obligation was 5.00% in 1996,
4.50% in 1995 and 5.50% in 1994. A 1.0% increase in the medical
-17-
<PAGE> 43
inflation rate assumption would have resulted in an approximate increase
of $1,231,000 in 1996, and $1,626,000 in 1995 in the accumulated benefit
obligation for FGI and its subsidiaries.
9. EMPLOYEES' PROFIT SHARING PLANS
FGI has two profit sharing plans providing for cash payments to all
eligible employees. The two plans, Cash Profit Sharing (consisting of Cash
and Cash Plus) and Deferred Profit Sharing, provide for a maximum
aggregate expense of 16.25% of FGI's consolidated annual pretax earnings,
adjusted as defined in the plans. The Deferred Profit Sharing Plan,
limited to 15% of the salaries or wages paid or accrued to eligible
employees, provides for an annual payment by FGI to a Trust for eventual
payment to employees as provided in the Plan. The Cash Profit Sharing Plan
provides for annual cash distributions limited to 5% (Cash) and 1.25%
(Cash Plus) of the salaries or wages paid or accrued to the eligible
employees.
The Company's share of expense under these plans was $663,000, $673,000
and $636,000 in 1996, 1995, and 1994, respectively.
10. TRANSACTIONS WITH AFFILIATES
Virtually all of the corporate office function is performed by the Ohio
State Life Insurance Company (OSL), a wholly-owned subsidiary of FGI.
Total costs allocated to the Company by OSL were $5,470,000, $5,013,000
and $5,462,000 in 1996, 1995, and 1994, respectively. In addition, FGI
performs certain services such as legal, investment, data processing and
human resources for the Company. Costs allocated by FGI for these
services totaled $533,000, $453,000 and $374,000 for 1996, 1995, and 1994,
respectively. Management believes these amounts in the accompanying
financial statements have been allocated in a reasonable and consistent
manner.
The amount due from affiliate at December 31, 1996, is comprised primarily
of premiums collected by OSL on behalf of the Company. The amount due to
affiliate at December 31, 1995 is comprised of expenses and commissions
paid by OSL on behalf of the Company.
See Note 6 regarding reinsurance agreements including amounts due from
affiliated companies of $912,000 and $2,274,000 at December 31, 1996 and
1995, Note 7 regarding income tax payments recoverable from FGI, and Notes
8 and 9 regarding pension and profit sharing plans.
The Company has a revolving line of credit with its parent company for
$1,500,000 at interest rates equal to prime plus one-half percent. No
borrowings were made under this line of credit in 1996 and 1995.
11. DIVIDEND RESTRICTION
Dividend payments can be made only from statutory surplus. The maximum
dividend that may be paid in 1997 without prior approval of the
Commissioner of Insurance of the State of California is limited to the
greater of the prior year's statutory gain from operations or 10% of
statutory surplus. The Company's statutory surplus and statutory loss from
operations as of and for the year ended December 31, 1996 are $30,040,000
and $(4,287,000), respectively. Accordingly, the maximum dividend that may
be paid without prior approval during 1997 is approximately $3,004,000.
-18-
<PAGE> 44
12. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various lawsuits incidental to the operation
of its business and in the opinion of management, the ultimate outcome of
such proceedings will not materially affect the Company's financial
position.
The Company also participates in several State Insurance Guarantee Funds
which are entitled to impose assessments on insurers based on losses
incurred in those states. Management believes that the Company's
obligation for potential assessments will not have a material effect on
the Company's financial position.
13. SUBSEQUENT EVENTS
On April 15, 1997 (the "Closing Date"), Americo Life, Inc. ("Americo"),
completed the acquisition of all of the outstanding common stock of the
Company and OSL from FGI pursuant to a stock purchase agreement dated
January 21, 1997. The acquisition was completed through one of Americo's
wholly-owned subsidiaries, Great Southern Life Insurance Company ("Great
Southern") for a total cash consideration of approximately $339,000,000.
Immediately prior to the acquisition of the Company by Great Southern, the
Company sold all of its investments in mortgage loans, real estate and
joint ventures to FGI at the March 31, 1997 book values. Immediately
following the acquisition, the Company sold its investments in common
stock and preferred stock to FGI at market values determined as of the
Closing Date.
On April 16, 1997, the Company entered into a coinsurance agreement to
reinsure 100% of their insurance liabilities to an unaffiliated insurance
company ("the Reinsurer") in exchange for a ceding commission of
$20,000,000.
On April 17, 1997, the Company paid a dividend of $25,000,000 to Great
Southern.
* * * * * *
-19-
<PAGE> 45
Attachment 7(a)(ii)
OHIO STATE LIFE INSURANCE COMPANY
BALANCE SHEET
(DOLLARS IN THOUSANDS)
AS OF MARCH 31, 1997 AND DECEMBER 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS MARCH 31, DECEMBER 31,
1997 1996
--------- ---------
<S> <C> <C>
Investments
Fixed maturities:
Available for sale, at market $ 583,799 $ 608,470
Equity securities, at market 78,086 78,176
Mortgage loans on real estate, net 29,575 31,982
Investment in real estate, net 14,102 14,177
Policy loans 38,100 37,925
Other invested assets 2,650 2,237
--------- ---------
Total investments 746,312 772,967
Cash and cash equivalents 26,583 9,512
Accrued investment income 8,118 8,218
Amounts receivable from reinsurers 52 713
Other receivables 4,272 4,308
Deferred policy acquisition costs 125,009 120,450
Amounts due from affiliates 521 3,040
Other assets 13,006 46,133
--------- ---------
Total assets $ 923,873 $ 965,341
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Policyholder account balances $ 490,598 $ 488,918
Reserves for future policy benefits 113,327 113,903
Unearned policy revenues 1,126 1,223
Policy and contract claims 6,273 6,726
Other policyholder funds 15,105 15,272
Deferred income taxes 16,002 17,928
Other liabilities 5,813 45,075
--------- ---------
Total liabilities 648,244 689,045
Stockholder's equity:
Common stock ($1 par value, 3,000,000 shares
authorized, 1,997,990 shares issued and outstanding) 1,998 1,998
Additional paid-in capital 124 124
Net unrealized investment gains 8,486 14,251
Retained earnings 265,021 259,923
--------- ---------
Total stockholder's equity 275,629 276,296
--------- ---------
Commitments and contingencies
Total liabilities and stockholder's equity $ 923,873 $ 965,341
========= =========
</TABLE>
See notes to financial statements.
<PAGE> 46
OHIO STATE LIFE INSURANCE COMPANY
STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1996
-------- --------
<S> <C> <C>
INCOME
Premiums and policy revenues $ 16,358 $ 16,028
Net investment income 12,944 12,533
Net realized investment gains 2,487 4,257
Other income 360 441
-------- --------
Total income 32,149 33,259
BENEFITS AND EXPENSES
Policyholder benefits:
Death benefits 6,226 6,727
Interest credited on universal life and annuity
products 7,195 6,940
Other policyholder benefits 2,465 2,288
Change in reserves for future policy benefits (619) (653)
Commissions 531 442
Amortization expense 4,512 3,985
Other operating expenses 4,244 3,565
-------- --------
Total benefits and expenses 24,554 23,294
Income before provision for income taxes 7,595 9,965
Provision for income taxes 2,499 3,332
-------- --------
Net income $ 5,096 $ 6,633
======== ========
Net income per common share $ 2.55 $ 3.32
======== ========
</TABLE>
See notes to financial statements.
<PAGE> 47
OHIO STATE LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996
-------- --------
<S> <C> <C>
Net income $ 5,096 $ 6,633
-------- --------
Adjustments to reconcile net income to net cash used
by operating activities:
Depreciation and amortization 111 258
Deferred policy acquisition costs (27) (751)
(Increase) decrease in assets:
Accrued investment income 100 (206)
Amounts receivable from reinsurers 661 (199)
Other receivables 36 1,020
Amounts receivable from affiliates (583) 832
Other assets, net of depreciation and amortization 35,043 (912)
Increase (decrease) in liabilities:
Policyholder account balances (7,341) (12,392)
Reserves for future policy benefits and unearned
policy revenues (674) 396
Policy and contract claims (453) (1,577)
Other policyholder funds (168) (908)
Federal income taxes payable (1,234) (297)
Provision for deferred income taxes 1,178 798
Other liabilities (36,840) 2,605
Net realized gains on investments sold (2,487) (4,257)
Amortization on bonds and mortgage loans 5 346
Other changes -- (816)
-------- --------
Total adjustments (12,673) (16,060)
-------- --------
Net cash used by operating activities (7,577) (9,427)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturity investments (2,795) (23,408)
Purchases of other investments (6,157) (8,762)
Sales of fixed maturity investments:
Available for sale 16,289 10,033
Sales of other investments 6,058 10,464
Repayments from mortgage loans 2,407 777
Change in policy loans (175) (592)
-------- --------
Net cash provided (used) by investing activities 15,627 (11,488)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipts on universal life-type and annuity policies
credited to policyholder account balances 21,596 26,851
Return of policyholder account balances on universal
life-type and annuity policies (12,575) (13,006)
-------- --------
Net cash provided by financing activities 9,021 13,845
-------- --------
Increase (decrease) in cash and cash equivalents 17,071 (7,070)
Cash and cash equivalents at beginning of period 9,512 12,613
-------- --------
Cash and cash and equivalents at end of period $ 26,583 $ 5,543
======== ========
</TABLE>
See notes to financial statements.
<PAGE> 48
OHIO STATE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED)
(DOLLARS IN THOUSANDS)
The following notes should be read in conjunction with the notes to the
financial statements contained in the Ohio State Life Insurance Company (the
Company) December 31, 1996 financial statements included in this Form 8-K.
1. ACCOUNTING POLICIES
The unaudited financial statements as of March 31, 1997 and for the three months
ended March 31, 1997 and 1996 reflect all adjustments, consisting of normal
recurring adjustments, which are necessary for a fair statement of financial
position and results of operations on a basis consistent with accounting
principles described fully in Note 1 of the Company's December 31, 1996
financial statements. The results of operations for the three months ended March
31, 1997 and 1996 are not necessarily indicative of the results experienced for
the full year 1996, nor the results to be expected for the full year 1997.
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to the December 31, 1996 amounts in
order to conform to the March 31, 1997 presentation.
2. STOCKHOLDER'S EQUITY
Following are the components of net unrealized investment gains:
<TABLE>
<CAPTION> CHANGE IN
THREE MONTHS
MARCH 31, DECEMBER 31, ENDED
1997 1996 MARCH 31, 1997
-------- ------------ --------------
<S> <C> <C> <C>
Investment securities:
Fixed maturities available for sale $ 2,541 $ 14,043 $(11,502)
Equity securities 11,567 13,467 (1,900)
-------- -------- --------
14,108 27,510 (13,402)
Effect on other balance sheet accounts (1,053) (5,585) 4,532
Deferred income taxes (4,569) (7,674) 3,105
-------- -------- --------
Net unrealized investment gains $ 8,486 $ 14,251 $ (5,765)
======== ======== ========
</TABLE>
<PAGE> 49
3. SUBSEQUENT EVENT
On April 15, 1997 (the "Closing Date"), Americo Life, Inc. ("Americo"),
completed the acquisition of all of the outstanding common stock of the Company
and Investors Guaranty Life Insurance Company ("IGL") from Farmers Group, Inc.
("Farmers") pursuant to a stock purchase agreement dated January 21, 1997. The
acquisition of the Company and IGL was completed through one of Americo's wholly
owned subsidiaries, Great Southern Life Insurance Company ("Great Southern") for
a total cash consideration of approximately $339,000. The acquisition of the
Company will be accounted for using the purchase method of accounting.
Immediately prior to the acquisition of the Company by Great Southern, the
Company sold for cash consideration all of its investments in mortgage loans,
real estate and joint ventures to Farmers at the March 31, 1997 statutory book
values. Immediately following the acquisition, the Company sold all of its
investment in common stock and preferred stock to Farmers at market values as of
the Closing Date.
On April 16, 1997, the Company entered into a coinsurance agreement to reinsure
100% of its insurance liabilities to an unaffiliated insurance company in
exchange for a ceding commission of $113,000.
On April 17, 1997, the Company paid a dividend of $175,000 to Great Southern.
<PAGE> 50
INVESTORS GUARANTY LIFE INSURANCE COMPANY
BALANCE SHEET
(DOLLARS IN THOUSANDS)
MARCH 31, 1997 AND DECEMBER 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS MARCH 31, DECEMBER 31,
1997 1996
-------- --------
<S> <C> <C>
Investments
Fixed maturities:
Available for sale, at market $ 57,663 $ 61,074
Equity securities, at market 27,722 27,734
Mortgage loans on real estate, net 3,048 3,144
Investment in real estate, net 508 510
Policy loans 1,287 1,283
-------- --------
Total investments 90,228 93,745
Cash and cash equivalents 5,285 1,817
Accrued investment income 942 885
Amounts receivable from reinsurers 659 698
Other receivables 1,375 1,084
Deferred policy acquisition costs 33,641 34,488
Amounts due from affiliates 832 1,116
Other assets 206 173
-------- --------
Total assets $133,168 $134,006
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Policyholder account balances $ 30,769 $ 30,535
Reserves for future policy benefits 27,863 27,661
Unearned policy revenues 21 22
Policy and contract claims 1,597 1,701
Other policyholder funds 6,104 5,934
Amounts payable to reinsurers 2,357 2,692
Deferred income taxes 6,324 7,207
Other liabilities 3,621 2,614
-------- --------
Total liabilities 78,656 78,366
Stockholder's equity:
Common stock ($2 par value, 8,500,000 shares
authorized, 750,000 shares issued and outstanding) 1,500 1,500
Additional paid-in capital 2,977 2,977
Net unrealized investment gains 3,813 4,875
Retained earnings 46,222 46,288
-------- --------
Total stockholder's equity 54,512 55,640
-------- --------
Commitments and contingencies
Total liabilities and stockholder's equity $133,168 $134,006
======== ========
</TABLE>
See notes to financial statements.
<PAGE> 51
INVESTORS GUARANTY LIFE INSURANCE COMPANY
STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1996
------------ ------------
<S> <C> <C>
INCOME
Premiums and policy revenues $ 4,660 $ 5,092
Net investment income 1,362 1,514
Net realized investment gains 686 851
---------- ---------
Total income 6,708 7,457
BENEFITS AND EXPENSES
Policyholder benefits:
Death benefits 1,177 1,237
Interest credited on universal life and annuity products 454 447
Other policyholder benefits 336 308
Change in reserves for future policy benefits 203 614
Commissions 192 245
Amortization expenses 2,662 2,413
Other operating expenses 1,825 1,690
---------- --------
Total benefits and expenses 6,849 6,954
Income (loss) before provision for income taxes (141) 503
Provision for income taxes (75) 156
---------- --------
Net income (loss) $ ( 66) $ 347
========= =======
Net income (loss) per common share $ (0.09) $ 0.46
========= =======
</TABLE>
See notes to financial statements.
<PAGE> 52
INVESTORS GUARANTY LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1996
------- -------
Cash Flows From Operating Activities:
<S> <C> <C>
Net income (loss) $ (66) $ 347
------- -------
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 4 -
Deferred policy acquisition costs 847 280
(Increase) decrease in assets:
Accrued investment income (58) (64)
Amounts receivable from reinsurers 39 1,257
Other receivables 598 379
Amounts receivable from affiliates (684) (1,150)
Other assets, net of depreciation & amortization (32) (26)
Increase (decrease) in liabilities:
Policyholder account balances 323 86
Reserves for future policy benefits and unearned policy revenues 202 987
Policy and contract claims (104) 47
Other policyholder funds 169 62
Amounts payable to reinsurers (335) (283)
Federal income taxes payable (69) 136
Provision for deferred income taxes (312) (25)
Amounts due to affiliates 1,412 573
Other liabilities (258) 151
Net realized gains on investments sold (686) (851)
Amortization on bonds and mortgage loans 19 15
Other changes - 279
------- -------
Total adjustments 1,075 1,853
------- -------
Net cash provided by operating activities 1,009 2,200
------- -------
Cash Flows From Investing Activities:
Purchases of fixed maturity investments (70) (3,749)
Purchases of other investments (2,217) (3,047)
Maturities or redemption of fixed maturity investments 1,337 996
Sales of other investments 3,404 2,909
Repayments from mortgage loans 96 69
Change in policy loans (3) (23)
------- -------
Net cash provided (used) by investing activities 2,547 (2,845)
------- -------
Cash Flows From Financing Activities:
Receipts on universal life-type and annuity policies credited
to policyholder account balances 1,022 501
Return of policyholder account balances on universal
life-type and annuity policies (1,110) (464)
------- -------
Net cash provided (used) by financing activities (88) 37
------- -------
Increase (decrease) in cash and cash equivalents 3,468 (608)
Cash and cash equivalents at beginning of period 1,817 3,443
------- -------
Cash and cash and equivalents at end of period $ 5,285 $ 2,835
======= =======
</TABLE>
See notes to financial statements.
<PAGE> 53
Investors Guaranty Life Insurance Company
Notes to Financial Statements
For Three Months Ended March 31, 1997 and 1996 (unaudited)
(Dollars in Thousands)
The following notes should be read in conjunction with the notes to the
financial statements contained in the Investors Guaranty Life Insurance Company
(the Company) December 31, 1996 financial statements included in this Form 8-K
1. ACCOUNTING POLICIES
The unaudited financial statements as of March 31, 1997 and for the three months
ended March 31, 1997 and 1996 reflect all adjustments, consisting of normal
recurring adjustments, which are necessary for a fair statement of financial
position and results of operations on a basis consistent with accounting
principles described fully in Note 1 of the Company's December 31, 1996
financial statements. The results of operations for the three months ended March
31, 1997 and 1996 are not necessarily indicative of the results experienced for
the full year 1996, nor the results to be expected for the full year 1997.
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to the December 31, 1996 amounts in
order to conform to the March 31, 1997 presentation.
2. STOCKHOLDER'S EQUITY
Following are the components of net unrealized investment gains:
<TABLE>
<CAPTION>
Change in Three
March 31, December 31, Months Ended
1997 1996 March 31, 1997
------- ------- -------
<S> <C> <C> <C>
Investment securities:
Fixed maturities available for sale $ 1,185 $ 2,195 $(1,011)
Equity securities 4,681 5,304 (622)
------- ------- -------
5,866 7,499 (1,633)
Deferred income taxes (2,053) (2,624) 571
------- ------- -------
Net unrealized investment gains $ 3,813 $ 4,875 $(1,062)
======= ======= =======
</TABLE>
<PAGE> 54
3. SUBSEQUENT EVENT
On April 15, 1997 (the "Closing Date"), Americo Life, Inc. ("Americo"),
completed the acquisition of all of the outstanding common stock of the Company
and Ohio State Life Insurance Company ( "OSL") from Farmers Group, Inc.
("Farmers") pursuant to a stock purchase agreement dated January 21, 1997. The
acquisition of the Company and OSL was completed through one of Americo's wholly
owned subsidiaries, Great Southern Life Insurance Company ("Great Southern") for
a total cash consideration of approximately $339,000. The acquisition of the
Company will be accounted for using the purchase method of accounting.
Immediately prior to the acquisition of the Company by Great Southern, the
Company sold for cash consideration all of its investments in mortgage loans,
real estate and joint ventures to Farmers at the March 31, 1997 statutory book
values. Immediately following the acquisition, the Company sold all of its
investment in common stock and preferred stock to Farmers at market values as of
the Closing Date.
On April 16, 1997, the Company entered into a coinsurance agreement to reinsure
100% of its insurance liabilities to an unaffiliated insurance company ("the
Reinsurer") in exchange for a ceding commission of $20,000.
On April 17, 1997, the Company paid a dividend of $25,000 to Great Southern.
<PAGE> 55
Attachment 7(b)
Americo Life, Inc. and Subsidiaries
Pro Forma Selected Financial Information
The following unaudited pro forma condensed financial information has been
prepared to illustrate the pro forma effects on Americo Life, Inc. (the Company)
and its subsidiaries of (i) the acquisition of Ohio State Life Insurance Company
("OSL") and Investors Guaranty Life Insurance Company ("IGL") on April 15, 1997,
including the sales of certain investments by OSL and IGL to their former parent
immediately prior to and after the acquisition, (ii) the reinsurance of 100% of
the insurance liabilities of OSL and IGL to an unrelated reinsurer on April 16,
1997 and (iii) the concurrent reinsurance of 70% of the same insurance
liabilities by Great Southern Life Insurance Company ("GSL"). These transactions
are more fully described under Item 2 of the Current Report on Form 8-K, dated
April 15, 1997.
The pro forma statements of income for the year ended December 31, 1996 and for
the three months ended March 31, 1997 give effect to the foregoing transactions
as though each had occurred on January 1, 1996. The pro forma balance sheet as
of March 31, 1997 gives effect to the acquisition of OSL and IGL and the
reinsurance transactions, as though each such transaction had occurred on March
31, 1997.
The acquisition will be accounted for using the purchase method of accounting.
The total purchase price of the acquisition will be allocated to the tangible
and intangible assets and liabilities acquired based upon their respective fair
values as of the date of acquisition. The allocation of the aggregate purchase
price reflected in the pro forma financial information is preliminary and based
upon assumed acquisition dates of January 1, 1996 and March 31, 1997 for the pro
forma statements of income and the pro forma balance sheet, respectively. The
final allocation of the purchase price is contingent upon the final valuation of
the acquired assets and liabilities; however, that allocation is not expected to
differ materially from the preliminary allocation.
The pro forma financial information is not necessarily indicative of either
future results of operations or the results that might have occurred had the
above-described transactions been consummated on the indicated dates.
The pro forma consolidated financial information is based on, and should be read
in conjunction with, the respective historical consolidated financial statements
and notes of the Company, which were previously filed on Form 10-K at December
31, 1996 and on Form 10-Q at March 31, 1997 and the audited financial statements
of OSL and IGL at December 31, 1996 and the unaudited financial statements of
OSL and IGL at March 31, 1997, both of which are filed under Item 7(a) in this
Form 8-K.
<PAGE> 56
AMERICO LIFE, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED BALANCE SHEET
(DOLLARS IN THOUSANDS)
MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
INVESTORS
AMERICO OHIO STATE GUARANTY PRO FORMA REINSURANCE PRO FORMA
LIFE, INC. LIFE LIFE ADJUSTMENTS TRANSACTIONS COMBINED
----------- ----------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Fixed maturities:
Held to maturity $ 861,841 $ - $ - $ - $ - $ 861,841
Available for sale 564,560 583,799 57,663 (16,798) 1 (494,717) 9 694,507
Equity securities 48,978 78,086 27,722 (105,808) 1 - 48,978
Investment in equity 18,971 - - - - 18,971
subsidiaries
Mortgage loans 171,321 29,575 3,048 (32,623) 1 - 171,321
Investment real estate 17,091 14,102 508 (14,610) 1 - 17,091
Policy loans 202,746 38,100 1,287 - (39,387) 9 202,746
Other invested assets 29,583 2,650 - (12,650) 1,2 - 19,583
---------- ---------- ---------- --------- --------- ------------
Total investments 1,915,091 746,312 90,228 (182,489) (534,104) 2,035,038
---------- ---------- ---------- --------- --------- ------------
Cash and cash equivalents 139,518 26,583 5,285 (148,366) 1,2 - 23,020
Accrued investment income 24,533 8,118 942 (113) 1 - 33,480
Amounts receivable from
reinsurers 389,115 52 659 - 576,407 9 966,233
Other receivables 25,666 4,272 1,375 (419) - 30,894
Deferred policy acquisition costs 77,838 125,009 33,641 (158,650) 4 - 77,838
Cost of business acquired 196,558 - - 141,010 3 (42,303) 9 295,265
Amounts due from affiliates 1,821 521 832 - - 3,174
Other assets 28,598 13,006 206 (11,370) 1 - 30,440
---------- ---------- ---------- --------- --------- ------------
Total assets $2,798,738 $ 923,873 $ 133,168 $(360,397) $ - $ 3,495,382
========== ========== ========== ========= ========= ============
Liabilities
Policyholder account balances $1,483,240 $ 490,598 $ 30,769 $ - $ - $ 2,004,607
Reserves for future policy
benefits 678,136 113,327 27,863 (8,929) 5 - 810,397
Unearned policy revenues 33,845 1,126 21 - - 34,992
Policy and contract claims 28,812 6,273 1,597 - - 36,682
Other policyholder funds 84,288 15,105 6,103 - - 105,496
Notes payable 133,358 - - - - 133,358
Amounts payable to reinsurers 64,581 - 2,357 - - 66,938
Deferred income taxes 43,235 16,002 6,324 (22,326) 6 - 43,235
Other liabilities 44,581 5,813 3,622 999 7 55,015
---------- ---------- ---------- --------- --------- ------------
Total liabilities 2,594,076 648,244 78,656 (30,256) - 3,290,720
---------- ---------- ---------- --------- --------- ------------
Stockholder's equity:
Common stock 10 1,998 1,500 (3,498) 8 - 10
Additional paid-in capital 3,745 124 2,977 (3,101) 8 - 3,745
Net unrealized investment gains 31,565 8,486 3,813 (12,299) 8 - 31,565
Retained earnings 169,342 265,021 46,222 (311,243) 8 - 169,342
---------- ---------- ---------- --------- --------- ------------
204,662 275,629 54,512 (330,141) - 204,662
---------- ---------- ---------- --------- --------- ------------
Total liabilities and
stockholder's equity $2,798,738 $ 923,873 $ 133,168 $(360,397) $ - $ 3,495,382
========== ========== ========== ========= ========= ============
</TABLE>
See notes to pro forma condensed financial statements
<PAGE> 57
AMERICO LIFE, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
INVESTORS
AMERICO OHIO GUARANTY PRO FORMA REINSURANCE PRO FORMA
LIFE INC. STATE LIFE LIFE ADJUSTMENTS TRANSACTIONS COMBINED
----------- ---------- ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME
Premiums and policy revenues $ 165,602 $ 66,069 $ 19,834 $ (742) $(27,606) 14,16 $ 223,157
Net investment income 186,725 52,754 5,985 (23,754) 10 (12,068) 15 209,642
Net realized investment gains
(losses) (120) 6,855 2,362 (9,217) 11 - (120)
Other income 19,392 - - - - 19,392
--------- --------- --------- --------- -------- ----------
371,599 125,678 28,181 (33,713) (39,674) 452,071
BENEFITS AND EXPENSES
Policyholder benefits
Death benefits 91,996 28,430 4,955 - (10,016) 14 115,365
Interest credited on
universal life and annuity
products 84,495 29,058 1,821 - (9,264) 14 106,110
Other policyholder benefits 57,088 8,636 1,394 - (3,009) 14 64,109
Change in reserves for future
policyholder benefits (14,920) (2,104) 1,859 (423) 5 74 14 (15,514)
Commissions 13,473 1,924 745 - (801) 14 15,341
Amortization expense 29,714 15,733 9,135 (6,690) 12 (5,453) 14 42,439
Interest expense 12,263 - - - - 12,263
Other operating expenses 56,703 15,202 6,899 (2,172) 13 (3,003) 17 73,629
--------- --------- --------- --------- -------- ----------
330,812 96,879 26,808 (9,285) (31,472) 413,742
Income before provision for
income taxes 40,787 28,799 1,373 (24,428) (8,202) 38,329
Provision for income taxes 13,513 16,338 2,711 (17,445) 18 (2,871) 18 12,246
--------- --------- --------- --------- -------- ----------
Net income $ 27,274 $ 12,461 $ (1,338) $ (6,983) $ (5,331) 26,083
========= ========= ========= ========= ======== ==========
Net income per common share $2,727.40 $ 2,608.30
========= ==========
</TABLE>
See notes to pro forma condensed financial statements.
<PAGE> 58
AMERICO LIFE, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
INVESTORS
AMERICO OHIO GUARANTY PRO FORMA REINSURANCE PRO FORMA
LIFE, INC. STATE LIFE LIFE ADJUSTMENTS TRANSACTIONS COMBINED
----------- ---------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME
Premiums and policy revenues $ 41,323 $ 16,358 $ 4,660 $ (37) $(6,765) 14,16 $ 55,539
Net investment income 49,608 12,944 1,362 (5,939) 10 (3,017) 15 54,958
Net realized investment gains 493 2,487 686 (3,173) 11 - 493
Other income 110 360 - - - 470
--------- --------- -------- -------- -------- ---------
91,534 32,149 6,708 (9,149) (9,782) 111,460
BENEFITS AND EXPENSES
Policyholder benefits
Death benefits 26,111 6,226 1,177 - (2,221) 14 31,293
Interest credited on universal
life and annuity products 23,120 7,195 454 - (2,295) 14 28,474
Other policyholder benefits 13,440 2,465 336 - (840) 14 15,401
Change in reserves for future
policyholder benefits (4,435) (619) 202 (78) 5 125 14 (4,805)
Commissions 2,929 531 191 - (217) 14 3,434
Amortization expense 6,660 4,512 2,662 (2,630) 12 (1,363) 14 9,841
Interest expense 3,007 - - - - 3,007
Other operating expenses 15,287 4,244 1,827 (377) 13 (751) 17 20,230
--------- --------- -------- -------- -------- ---------
86,119 24,554 6,849 (3,085) (7,562) 106,875
--------- --------- -------- -------- -------- ---------
Income before provision for
income taxes 5,415 7,595 (141) (6,064) (2,220) 4,585
Provision for income taxes 1,651 2,499 (75) (2,122) 18 (777) 18 1,176
--------- --------- -------- -------- -------- ---------
Net income $ 3,764 $ 5,096 $ (766) $ (3,942) $ (1,443) $ 3,409
========= ========= ======== ======== ======== =========
Net income per common share $ 376.40 $ 340.90
========= =========
</TABLE>
See notes to pro forma condensed financial statements.
<PAGE> 59
Americo Life, Inc. and Subsidiaries
Notes to Pro Forma Condensed Financial Statements
(Dollars in Thousands)
(1) Immediately prior to the acquisition, OSL and IGL sold all of their
investments in mortgage loans, real estate and joint ventures to Farmers
Group, Inc. ("Farmers") for cash consideration equal to their March 31,
1997 statutory book values. Immediately following the acquisition, OSL
and IGL sold all of their investments in common stock and preferred stock
to Farmers at market values as of April 15, 1997.
(2) The Company acquired the common stock of OSL and IGL for a cash purchase
price of approximately $339.3 million, subject to certain remaining
purchase price adjustments. The Company paid $10.0 million of the
purchase price in January 1997 which was recorded in its March 31, 1997
balance sheet in other invested assets. The remaining $329.3 million was
paid on the closing date of the acquisition.
(3) The excess of the purchase price over the tangible net assets acquired is
recorded as cost of business acquired.
(4) As described in Note 3 above, the Company establishes a cost of business
acquired asset as of the acquisition date. As a result of establishing
such an asset, the historical amount for deferred policy acquisition
costs is eliminated.
(5) The reserve for future policy benefits of OSL and IGL was calculated for
the pro forma balance sheet using actuarial assumptions regarding lapses,
mortality and investment yield which are current as of the acquisition
date. The change in reserves for future policy benefits is adjusted in
the pro forma statement of income accordingly.
(6) The historical deferred tax liability of OSL and IGL is eliminated. Due
to the election to use Section 338(h)(10) of the Internal Revenue Code,
no deferred tax liability or asset is required under purchase accounting.
(7) The stock purchase agreement provided that certain employee benefit
liabilities of OSL and IGL were assumed by Farmers. Employee benefit
liabilities of $2,719 as of March 31, 1997 are removed from the pro forma
balance sheet.
The Company has accrued $4,500 for expenses related to the acquisition.
(8) The historical stockholder's equity of OSL and IGL is eliminated in
consolidation with the Company after the acquisition.
(9) On April 16, 1997, OSL and IGL entered into separate coinsurance
agreements to reinsure 100% of their insurance liabilities to an
unaffiliated insurance company ("the Reinsurer"). On the same day, the
Reinsurer and Great Southern entered into a modified coinsurance
agreement under which the Reinsurer ceded certain risks on a 70% quota
share basis of the same insurance liabilities to Great Southern. Under
the coinsurance treaty, the assets supporting the insurance liabilities
are retained by the Reinsurer in an escrow account for the benefit of
Great Southern. The pro forma balance sheet has been prepared to reflect
the net 30% coinsurance of the insurance liabilities to the Reinsurer.
OSL and IGL transferred bonds and policy loans to the Reinsurer equal to
the statutory reserve liabilities less the ceding commission of $145,697.
The policy liabilities remain the direct liabilities of OSL and IGL and
therefore remain on the pro forma balance sheet as liabilities. The cost
of business acquired asset related to the acquisition has been reduced to
reflect the net 30% coinsurance.
<PAGE> 60
Americo Life, Inc. and Subsidiaries
Notes to Pro Forma Condensed Financial Statements (continued)
(Dollars in Thousands)
The adjustment to amounts receivable from reinsurers consists of the
following:
<TABLE>
<S> <C>
Assets held by Reinsurer for Company's share of insurance liabilities $ 371,252
Amounts receivable from Reinsurer for ceded future policy benefits 205,155
---------
$ 576,407
=========
</TABLE>
(10) The Company used internal funds of $339.3 million to fund the
acquisitions. Assuming a yield of 7.0% on these funds, investment income
would have been reduced by $23,754 for the year ended December 31, 1996
and $5,939 for the three months ended March 31, 1997.
(11) The net realized investment gains and losses of OSL and IGL related to
invested asset types not acquired by the Company in the acquisitions.
Therefore, the net realized investment gains were removed from the pro
forma statement of income as they are not expected to recur.
(12) Amortization of deferred policy acquisition costs and cost of business
acquired previously recorded by OSL and IGL is eliminated and replaced
with the amortization related to the cost of business acquired recorded
by the Company as a result of the acquisition. The cost of business
acquired related to traditional life products is amortized in proportion
to premium revenues over the premium-paying period of related policies
using assumptions consistent with those used in computing benefit
reserves. The cost of business acquired related to universal life,
interest-sensitive and investment products is amortized in relation to
the estimated profits on the purchased policies.
(13) Other operating expenses are reduced in the pro forma statement of income
by $1,643 for the year ended December 31, 1996 and $51 for the three
months ended March 31, 1997 to remove write-offs of agent balance
receivables recorded in these periods. In the application of purchase
accounting, these agent balance receivables are recorded at their
realizable values, therefore eliminating the need for the write-offs.
Other operating expenses are also reduced in the pro forma statement of
income by $528 for the year ended December 31, 1996 and $326 for the
three months ended March 31, 1997 to remove expenses associated with
recording a liability for employee retention bonuses in those periods. In
the application of purchase accounting, these liabilities are recorded at
the purchase date, therefore eliminating the expense.
(14) The net effect of the coinsurance agreements and the modified coinsurance
agreements is that 30% of the insurance business has been ceded to the
Reinsurer. Therefore, the pro forma statement of income reflects the
reinsurance of 30% of OSL's and IGL's premiums and benefits. Amortization
expense is also reduced to reflect the 30% reinsurance of the cost of
business acquired asset.
(15) Net investment income is adjusted to reflect the net 30% reinsurance of
the OSL and IGL insurance business. The adjustment was calculated
assuming a 7.25% yield on invested assets ceded, except for policy loans,
which were assigned a 5.5% yield.
(16) The reduction to premiums and policy revenues reflects the estimated cost
of the reinsurance to the Company.
(17) Other operating expenses is reduced to reflect the expense allowance
received from the Reinsurer.
<PAGE> 61
Americo Life, Inc. and Subsidiaries
Notes to Pro Forma Condensed Financial Statements (continued)
(Dollars in Thousands)
(18) The provision for income taxes for the year ended December 31, 1996
included tax and interest of $6,539 and $2,356 for OSL and IGL,
respectively, related to a "deemed dividend election" filed by Farmers in
1996 as an amendment to its consolidated 1994 Federal income tax return.
This election triggered a Phase III tax on the previously untaxed
Policyholders' Surplus Accounts of OSL and IGL. The provision for income
taxes related to this deemed dividend election is eliminated from the pro
forma income statement for the year ended December 31, 1996.
All pro forma adjustments resulting from the purchase or the reinsurance
transactions are tax effected at the 35% federal income tax rate.
