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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to _______________
Commission file number: 33-64820
AMERICO LIFE, INC.
(Exact Name of Registrant as Specified in its Charter)
Missouri No. 43-1627599
(State of Incorporation) (I.R.S. Employer Identification No.)
1055 Broadway 64105
Kansas City, Missouri (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number including area code: (816) 391-2000
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicated by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Shares of common stock outstanding as of March 25, 1999: 10,000, none
of which is held by non-affiliates.
Documents Incorporated by Reference: None
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<PAGE>
TABLE OF CONTENTS
<TABLE>
Item Page
PART I
<S> <C>
1. Business 2
2. Properties 12
3. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders 13
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 14
6. Selected Consolidated Financial Data 14
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
7A. Quantitative and Qualitative Disclosure about Market Risk 25
8. Financial Statements and Supplementary Data 25
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 25
PART III
10. Directors and Executive Officers of the Registrant 26
11. Executive Compensation 27
12. Security Ownership of Certain Beneficial Owners and Management 28
13. Certain Relationships and Related Transactions 28
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 30
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
General
Americo Life, Inc. ("Americo" or the "Company") is a financial services
holding company whose subsidiaries are engaged in the life insurance and asset
accumulation business. Americo is wholly-owned by Financial Holding Corporation
("FHC"), a privately-owned corporation.
The Company's wholly-owned insurance subsidiaries are: Great Southern Life
Insurance Company ("Great Southern"), United Fidelity Life Insurance Company
("United Fidelity"), The College Life Insurance Company of America ("College
Life"), National Farmers Union Life Insurance Company ("National Farmers
Union"), The Ohio State Life Insurance Company ("Ohio State") and Financial
Assurance Life Insurance Company ("Financial Assurance" or "FAL").
The Company develops, markets and administers life insurance and asset
accumulation products which it distributes principally through two different
channels. One channel sells life insurance and annuity products through Personal
Producing General Agents ("PPGAs"), Independent Marketing Organizations ("IMOs")
and payroll deduction programs. The administration of closed blocks of life
insurance and annuity business with which no significant marketing operations
are associated is handled by the support staff which is responsible for the sale
of traditional business. The second channel, referred to as Americo Retirement
Services ("ARS"), sells various asset accumulation products, consisting
primarily of tax-qualified annuities.
In addition to the operations described above, the Company occasionally
makes financial investments in other businesses. The Company has an investment,
in the form of a 50% interest, in Argus Health Systems, Inc. ("Argus"), which is
engaged in prescription drug claim processing. The Company also wholly-owns
several real estate partnerships formerly-owned by GSSW, Limited Partnerships
("GSSW"). The Company's investments in Argus and the real estate partnerships
collectively comprise the Company's non-life insurance operating segment.
At December 31, 1998, the Company has approximately $3.3 billion of
invested assets under management. In addition to expanding the range of its
product offerings, the Company's operating strategy contemplates pursuing
selected acquisitions of in-force blocks of life insurance or of insurance
companies. The Company will also pursue opportunities to enter other
arrangements, including acquisitions, which can complement its current marketing
and distribution channels and increase its asset and policy base. The following
section describes certain transactions which have contributed to the Company's
past growth.
Acquisitions and Reinsurance Transactions
Along with the development of new business, acquisitions and reinsurance
transactions have added significantly to the Company's growth. Since 1988, the
Company has acquired seven companies or blocks of insurance policies and
continues to investigate acquisition opportunities in the insurance industry.
The principal additions were College Life in 1988, Great Southern in 1989,
Loyalty Life Insurance Company ("Loyalty Life") and National Farmers Union in
1991, The Victory Life Insurance Company in 1995 and Ohio State and Investors
Guaranty Life Insurance Company ("Investors Guaranty") in 1997, and two
significant reinsurance transactions in 1996 and 1995.
In October 1998, the Company entered into a series of transactions to acquire
the 50% interest in College Insurance Group, Inc. ("CIG") not previously owned
by the Company. Through the formation of CIG in 1993, the Company entered into a
joint venture with an unrelated individual to promote the sale of life insurance
and annuity products in tax-qualified markets. By acquiring the other 50% of the
joint venture and the related marketing entities previously wholly-owned by the
individual, the Company believes it can expand its presence in the asset
accumulation market, particularly the tax-qualified market.
<PAGE>
In certain transactions, the Company has used an unaffiliated reinsurer
("the Reinsurer") to reinsure substantial blocks of insurance business that it
has acquired. Such transactions result in the policy liabilities and related
assets being transferred to the Reinsurer in exchange for a ceding commission
and subsequently being reinsured to the Company on a modified coinsurance basis.
In these transactions, the assets supporting the insurance liabilities are held
in trust for the benefit of the Company.
In 1995 and 1996, the Company entered into separate agreements with The
Ohio Casualty Insurance Company ("Ohio Casualty"), Fremont General Corporation
and the Reinsurer under which the direct liabilities of The Ohio Life Insurance
Company ("Ohio Life") and Fremont Life Insurance Company ("Fremont Life"),
respectively, were reinsured on a coinsurance basis. Pursuant to these
agreements, the Company services life insurance and annuity policies of Ohio
Life and Fremont Life. At December 31, 1998, these agreements covered 81,170
policies with associated liabilities totaling $584.2 million.
On April 15, 1997, the Company acquired all of the outstanding stock of
Ohio State and Investors Guaranty from Farmers Group, Inc. for a purchase price
of $345.4 million. On April 16, 1997, Ohio State and Investors Guaranty entered
into coinsurance agreements to reinsure all of their insurance liabilities to
the Reinsurer. The Company also entered into agreements to service the policies
of Ohio State and Investors Guaranty. At December 31, 1998, the policy
liabilities associated with the 234,217 policies administered totaled $667.6
million.
The Company and the Reinsurer entered into modified coinsurance agreements
to reinsure certain risks on the Ohio Life, Fremont Life, Ohio State and
Investors Guaranty insurance policies. The risks associated with the Ohio State
and Investors Guaranty policies are reinsured on a 70% quota share basis. The
modified coinsurance agreements provide that the assets related to the reinsured
policies are to be retained by the Reinsurer. The Company began directly
assuming certain of the policies of Fremont Life and Ohio Life in 1996 and 1997,
respectively, and intends to begin directly assuming the Investors Guaranty
policies in 1999.
In August 1997, Great Southern sold the stock of Loyalty Life for $12.2
million resulting in a $4.8 million gain before income taxes. Prior to this
sale, several of the Company's insurance subsidiaries entered into agreements
with Loyalty Life for the assumption of Loyalty Life's insurance liabilities. As
of the date of sale, Loyalty Life has assets totaling $32.4 million and
liabilities totaling $20.0 million.
In May 1998, Great Southern sold the stock of Investors Guaranty for $14.8
million, resulting in a $4.9 million gain before income taxes. The reinsurance
agreements with the Reinsurer are unaffected by the sale. As of the date of
sale, Investors Guaranty had assets totaling $10.3 million and liabilities
totaling $0.4 million.
Life Insurance and Annuity Business
The Company's insurance business operations are divided into two segments:
life insurance operations and asset accumulation operations. The Company's life
insurance operations consist primarily of selling and servicing universal life
insurance products as well as traditional term and whole life insurance. This
segment consists primarily of insurance business acquired by the Company and is
supplemented by new life insurance business sold through individual and payroll
deduction markets. The Company's asset accumulation operations include annuity
products sold through the Company's ARS operations. Policy liabilities as of
December 31, 1998 for the Company's segments are summarized below. Information
concerning reported revenues and income before provision for income taxes from
the Company's operating segments is set forth in Item 7 under "Results of
Operations-Segment Results" and in Note 12 of the Company's Notes to
Consolidated Financial Statements.
<PAGE>
<TABLE>
Asset Accumulation
Life Insurance Operations
Operations Total
(in thousands)
<S> <C> <C> <C>
Policyholder account balances:
Universal life $ 1,436,120 $ 22,371 $ 1,458,491
Annuities 680,828 361,794 1,042,622
------------- ------------- -------------
$ 2,116,948 $ 384,165 $ 2,501,113
============= ============= =============
Future policy benefits $ 833,917 $ - $ 833,917
============= ============= =============
</TABLE>
The following table shows the Company's collected premiums during 1998,
1997 and 1996 by product category.
<TABLE>
Premiums Collected
for periods indicated
--------------------------------------------------------------------------------
First Year Renewal Total
------------------------ ------------------------ ------------------------
Product Category $ % $ % $ %
- ---------------- - - - - - -
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Year ended
December 31, 1998
Traditional 14,326 12.3 84,929 25.5 99,255 22.1
Interest-sensitive 42,607 36.6 195,214 58.7 237,821 53.0
---------- ------- ---------- ------- ---------- -------
Total life 56,933 48.9 280,143 84.2 337,076 75.1
Annuities 59,470 51.1 52,352 15.8 111,822 24.9
---------- ------- ---------- ------- ---------- -------
Direct and assumed premiums 116,403 100.0 332,495 100.0 448,898 100.0
========== ======= ========== ======= =======
Less ceded premiums (126,538)
---------
Total 322,360
==========
Year ended
December 31, 1997
Traditional 11,184 8.5 87,607 28.7 98,791 22.6
Interest-sensitive 44,524 33.7 173,384 56.7 217,908 49.7
---------- ------- ---------- ------- ---------- -------
Total life 55,708 42.2 260,991 85.4 316,699 72.3
Annuities 76,500 57.8 44,693 14.6 121,193 27.7
---------- ------- ---------- ------- ---------- -------
Direct and assumed premiums 132,208 100.0 305,684 100.0 437,892 100.0
========== ======= ========== ======= =======
Less ceded premiums (137,159)
---------
Total 300,733
==========
Year ended
December 31, 1996
Traditional 4,048 4.5 61,475 23.4 65,523 18.6
Interest-sensitive 34,888 38.6 132,266 50.4 167,154 47.4
---------- ------- ---------- ------- ---------- -------
Total life 38,936 43.1 193,741 73.8 232,677 66.0
Annuities 51,419 56.9 68,734 26.2 120,153 34.0
---------- ------- ---------- ------- ---------- -------
Direct and assumed premiums 90,355 100.0 262,475 100.0 352,830 100.0
========== ======= ========== ======= =======
Less ceded premiums (91,711)
----------
Total 261,119
==========
</TABLE>
Life Insurance Operations: The Company's life insurance operations consist
of traditional and interest-sensitive life insurance and annuities. At December
31, 1998, the life insurance in force on interest-sensitive contracts was $28.1
billion, the insurance in force on traditional life insurance contracts was
$14.0 billion and annuity liabilities totaled $0.7 billion. The Company's life
insurance subsidiaries offer a portfolio of individual interest sensitive life
insurance products, including interest-sensitive whole life and universal life
insurance and customary riders. The Company also offers equity-indexed products,
specifically life insurance, single premium annuities and flexible premium
annuities. In addition, the Company offers single premium and flexible premium
annuity products. The principal differences among the types of these products
offered by the Company relate to policy provisions affecting the amount and
timing of premium payments.
The Company delivers its life insurance products to individuals using two
methods of distribution, PPGA ("Personal Producing General Agents") and IMOs
("Independent Marketing Organizations").
The Company's PPGA marketing system utilizes approximately 800 independent
agents who market the Company's products. The Company employs none of such
agents, but each is a party to a general agency agreement which governs the
terms of his/her relationship with the Company. PPGAs who represent the Company
are free to represent other insurers. Of the $39 million total annualized first
year life insurance premiums generated by the Company during 1998, approximately
$16 million, or 41%, was derived from sales through the Company's PPGA system.
Approximately $18 million, or 46%, of the Company's annualized first year
life insurance premiums in 1998 were derived from sales through IMOs comprised
of nonexclusive independent agents with an aggregate membership of approximately
2,000 at December 31, 1998.
Since 1995, the Company has employed its Career Partners(TM) program to
increase the production from individual agents and reduce the Company's reliance
on large marketing organizations and/or brokers. The Career Partners(TM) program
attempts to build a long-term relationship between the Company and individual
agents by providing benefits in addition to commissions to reward production and
longevity in the program. As a result of this program, the Company has
experienced improved retention, consistency of production and stronger
relationships with participating agents. Growth of the Career Partners(TM)
program has been significant from September 1, 1995, when it was introduced, to
December 31, 1998. Currently, 560 agents participate in the Career Partners(TM)
program. Sales by Career Partners(TM) represented 72% of the new business
produced in 1998.
The Company also offers products in the payroll deduction market. These
products consist of voluntary payroll deduction, interest sensitive universal
life insurance offered to employees of large and medium size companies. Sales in
the payroll deduction market accounted for $5.0 million, or 13%, of the
Company's annualized first year life insurance premiums in 1998. This effort is
conducted through agents focused on the payroll deduction market. The agency
force, which consists of approximately 75 general agents, primarily contacts
companies that have a minimum of 100 eligible employees.
Asset Accumulation Product Operations: The Company's asset accumulation
operations consist of selling and servicing life insurance and annuity products.
At December 31, 1998, the liabilities related to interest-sensitive contracts
and annuity contracts totaled $22.4 million and $0.4 billion, respectively. The
Company's life insurance subsidiaries offer a portfolio of life insurance
products and single premium and flexible premium annuity products, including
equity-indexed products. The significant portion of these products are
tax-qualified.
In 1998, the Company expanded its marketing of asset accumulation products
by purchasing the interests owned by its joint venture partner as described
above under "Acquisitions and Reinsurance Transactions". This transaction allows
the Company to expand its marketing capabilities in the asset accumulation
market with the primary focus on tax qualified annuity products, specifically,
products qualified under Section 403(b) of the Internal Revenue Code. These
products are marketed to public school teachers and administrators through a
specialized field force of managed agents and independent producers who
specialize in tax-qualified sales. The managed agent program has experienced
significant growth since its introduction in 1995. In 1998, sales from this
program represented 53% of the life insurance and annuity production from this
market. Total sales generated by the managed program and independent
distribution systems specializing in the tax-qualified markets, expressed in
terms of first year collected premiums, increased from $14.6 million in 1993 to
$43.7 million in 1998.
The Company's ARS operations also offer products to the senior annuity
markets. The senior market, generally considered to include individuals over age
55, is expected to experience double-digit annual growth resulting from a number
of factors, including consumer concerns over the adequacy of Social Security and
pension plans and the aging of the consumer population. The Company competes in
this market by offering fixed annuity products with riders and benefits tailored
to the needs of seniors. Sales generated through IMOs, expressed in terms of
first year collected premiums, were $18.0 million in 1998.
Operations
The Company has made strategic decisions over the last several years to
achieve its goal of operating at the lowest achievable cost level consistent
with providing good service. These decisions include (i) investments in
technology, (ii) centralization of certain functions and (iii) outsourcing data
processing.
The Company has made significant investments in technology to lower its
operating costs. Its use of digital imaging technology has substantially
eliminated the typical paper intensive life insurance processing procedures,
resulting in lower operating costs, improved customer service and an improved
working environment. As part of the imaging technology, the Company uses a third
party system called Automated Work Distributor to control workflow and perform
other functions designed to increase efficiency. As the investment in this
technology is relatively fixed, the Company has been able to leverage this
investment by increasing the number of policies administered.
In order to more effectively manage its various insurance operations, the
Company has consolidated certain common functions into its Kansas City, Missouri
offices. These centralized functions include product development, marketing,
finance, investment management, data processing, personnel and regulatory
compliance. The Company believes that this approach allows it to more
effectively manage the business and, by eliminating duplicative functions,
reduce operating costs and improve returns on acquired business.
The Company has outsourced its data processing requirements with the
exception of local area networks through contracts entered into by its parent,
FHC. The principal such contract is with Computer Sciences Corporation ("CSC"),
which provides all of the Company's data processing needs. By outsourcing these
functions, the Company believes that it has reduced operating costs by
eliminating the fixed costs associated with a data processing function and
improved its ability to increase its policyholder base without significant
investment. In addition, the use of a vendor such as CSC provides the Company
access to current technology and a higher caliber of staff than it might be able
to employ on its own.
Investments
A significant factor contributing to the Company's profitability is its
ability to earn investment income sufficient to provide for its insurance
liabilities and generate a profit. The Company's insurance liabilities are
backed by a portfolio composed principally of fixed rate investments that
generate predictable rates of return. The rates of return on the Company's
investments vary over time depending on the current interest rate environment,
the spread at which fixed rate investments are priced over the yield curve and
other factors. FHC manages the Company's invested assets as described under the
heading "Agreements with FHC" in Item 13 appearing elsewhere in this Form 10-K.
The Company's investment philosophy is conservative with an emphasis on
balancing credit and interest rate risk and is influenced by regulatory and
asset-liability matching requirements.
The Company's insurance subsidiaries are governed by insurance statutes and
regulations which restrict the type of investments they are permitted to make
and the amount of funds that may be used for any one type of investment. In
compliance with these regulations and consistent with the Company's investment
philosophy, the Company invests principally in investment grade securities (as
rated by nationally recognized rating organizations). At December 31, 1998, 0.8%
of the Company's fixed rate investments were non-investment grade. There were no
securities which were in default as to principal or interest.
A goal of the Company's investment strategy is to provide liquidity for its
insurance liabilities. Through computer-based models, the Company conducts
studies of the cash flow characteristics of its liabilities using common
interest rate scenarios. The Company uses this information to assist it in
managing the duration of its asset portfolio so that it closely matches the
duration of its liabilities.
The Company's general investment philosophy is to hold fixed-rate
securities for long-term investment. Thus, the Company does not have a trading
portfolio. However, its fixed-rate portfolio is divided into those securities
being held to maturity and those available for sale. The primary factor which
influences the Company's decision to characterize its investments as held to
maturity is the cash flow requirements of the Company's liabilities. Securities
have been categorized as available for sale except for those securities that the
Company has the intent and the ability to hold until maturity. Securities
designated as available for sale include those that may be sold in response to
changes in interest rates, changes in prepayment risk, liquidity needs,
management of taxable income and similar economic factors.
The carrying amounts of the Company's investments at December 31, 1998 were
as follows:
<TABLE>
Total
Held to Available Carrying
Investment Category Maturity (1) for Sale (2) Amount Percentage
------------------- ------------ --------- ------ ----------
(in thousands)
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Treasury and government securities $ 3,402 $ 42,920 $ 46,322 1.9%
Mortgage-backed securities:
Collateralized mortgage obligations 255,950 87,147 343,097 14.2
Pass-through certificates:
GNMA 20,013 81,413 101,426 4.2
FHLMC 1,855 383 2,238 0.1
FNMA 1,052 6,890 7,942 0.3
Other pass-through securities 6,043 23,300 29,343 1.2
Other asset-backed securities 29,961 82,132 112,093 4.6
Corporate bonds 558,318 601,006 1,159,324 48.0
----------- ----------- ----------- --------
Total fixed maturities $ 876,594 $ 925,191 $ 1,801,785 74.5%
=========== =========== -----------
Equity securities 89,022 3.7
Investment in equity subsidiaries 9,669 0.4
Mortgage loans on real estate 190,074 7.9
Investment real estate 28,606 1.2
Policy loans 210,173 8.7
Cash and cash equivalents 68,219 2.8
Other invested assets 17,066 0.8
----------- --------
Total cash and invested assets $ 2,414,614 100.0%
=========== ========
</TABLE>
- ------------------------------------------------------------
(1) Carrying amount is amortized cost. The market value of held to maturity
securities at December 31, 1998 was $914.7 million.
(2) Carrying amount is market value. The amortized cost of available for sale
securities at December 31, 1998 was $893.7 million.
See Note 4 of the Notes to Consolidated Financial Statements, and the
discussion under the heading "Investment Portfolio" in Item 7 appearing
elsewhere in this Form 10-K for information about the composition and
performance of the Company's investment portfolio and the risks inherent in such
investments.
<PAGE>
In addition to the investments owned by the Company which are described
above, certain investments supporting the Company's insurance liabilities are
held by the Reinsurer. These investments are managed by FHC. The carrying
amounts of these investments at December 31, 1998 were as follows:
<TABLE>
Total Carrying
Amount Percentage
<S> <C> <C>
Fixed maturities:
U.S. Treasury and government securities $ 95,294 9.2%
Mortgage-backed securities 170,972 16.6
Other asset-backed securities 141,594 13.7
Corporate bonds 591,842 57.3
-------------- -------
Total fixed maturities $ 999,702 96.8%
-------------- -------
Cash 32,926 3.2
-------------- -------
Total cash and invested assets $ 1,032,628 100.0%
============== =======
</TABLE>
Non-Insurance Operations
From time to time, the Company makes selective investments in businesses
outside of the life insurance industry. The primary investments of this nature
owned at December 31, 1998 were the investments in Argus, which was accounted
for using the equity method, and in wholly-owned real estate partnerships.
Argus: The Company and an unrelated third party each own a 50% equity
interest in Argus. Argus is principally engaged in the business of
electronically processing prescription drug claims, including providing services
in connection with the point-of-sale adjudication, processing and payment of
these claims. Argus' principal customers include health maintenance
organizations, preferred provider organizations, health insurance companies and
managed health companies. For 1998, Argus generated revenues of $35.7 million
and processed over 134 million claims compared with 145 million claims processed
in 1997, a decrease of 8%. At December 31, 1998, Argus had approximately 256
full-time employees and maintains its corporate headquarters in Kansas City,
Missouri. Currently, there are less than 10 prescription drug claim processors
in the managed care business. Argus faces increasing competition from other drug
claim processors and customers choosing to perform their own drug claim
processing.
Real Estate Partnerships: In 1992, the Company and an unrelated third party
formed a limited partnership, GSSW, for the purpose of purchasing real estate
and mortgage loans from the Resolution Trust Corporation. In December 1996, the
Company liquidated its 50% interest in GSSW in exchange for cash of $22.6
million and 100% interests in several real estate partnerships then owned by
GSSW. In 1998 and 1997, the Company disposed of several of the properties in the
retained partnerships for gains of $3.1 million and $5.1 million, respectively.
The proceeds from these sales have been reinvested in similar properties.
Currently the Company manages ten properties including office space, retail
space and apartments.
Reinsurance
In keeping with industry practices, the Company reinsures portions of its
life insurance exposure with unaffiliated reinsurance companies under
traditional indemnity reinsurance agreements. Generally, the Company enters into
indemnity reinsurance arrangements to diversify its risk and to limit its
maximum loss on risks that exceed the Company's policy retention limits,
currently ranging from $50,000 to $350,000 per life. Indemnity reinsurance does
not fully discharge the Company's obligation to pay policy claims on the
reinsured business. The Company remains responsible for policy claims to the
extent the reinsurer fails to pay such claims. At December 31, 1998, the Company
had ceded to reinsurers approximately $5.9 billion (15%) of life insurance in
force, of which 97% was reinsured with insurance companies rated "A (Excellent)"
or better by A.M. Best. Approximately $2.1 billion of the insurance in force was
ceded to a single reinsurer, which was rated "A+" by A.M. Best. The Company
evaluates the financial strength of its reinsurers upon inception of a
reinsurance treaty and on an annual basis thereafter.
The Company has entered into several coinsurance and modified coinsurance
agreements with a single unaffiliated reinsurer with related insurance
liabilities totaling $1.2 billion at December 31, 1998. See "Business:
Acquisitions and Reinsurance Transactions" described above.
Certain of the insurance subsidiaries of the Company have ceded blocks of
insurance under financial reinsurance treaties which have the effect of
increasing the statutory surplus of the Company. As a result of such reinsurance
transactions, the Company has increased its statutory surplus after the effect
of income taxes by approximately $14.8 million; however, the effect of these
reinsurance treaties is not included in stockholder's equity of the Company
presented in accordance with generally accepted accounting principles ("GAAP").
Financial reinsurance increases the ceding insurer's statutory surplus with the
expectation that such increased surplus will be returned to the reinsurer out of
future earnings, if any, and guarantees the reinsured against any future
statutory losses, if any, on the policies reinsured. The ability of an insurance
subsidiary to pay dividends to Americo may be adversely affected by the
reduction in statutory earnings caused by reductions in the outstanding levels
of financial reinsurance. The risk fees paid to the reinsurers under these
financial reinsurance treaties totaled $0.5 million and $0.8 million for the
years ended December 31, 1998 and 1997, respectively. See Note 6 of the Notes to
the Consolidated Financial Statements of the Company included in Item 8
appearing elsewhere in this Form 10-K.
Competition and Ratings
The financial services industry in which the Company operates is highly
competitive. The Company competes with a large number of other insurers as well
as non-insurance financial services companies, such as banks, investment
advisors, mutual fund companies and other financial institutions, some of which
have greater financial resources, offer alternative products and, with respect
to other insurers, have higher ratings than the Company. National banks, with
their preexisting customer bases for financial services products, may pose
increasing competition in the future to insurers who sell annuities, including
the Company, as a result of the U.S. Supreme Court's 1994 decision in
NationsBank of North Carolina v. Variable Annuity Life Insurance Company, which
permits national banks to sell annuity products of life insurance companies in
certain circumstances.
The Company believes that the principal competitive factors in the sale of
life insurance and asset accumulation products are product features, product
flexibility, product pricing and crediting rates, commission structure, high
credit standing and perceived stability of insurer, and service provided to the
policyholder. The Company believes that its ability to compete with other
insurance companies is dependent upon its ability to attract and retain agents
to market its insurance products and its ability to develop competitive products
that are also profitable. The Company believes that it has good relationships
with its agents and marketing groups, has an adequate variety of policies
approved for issuance, and is generally competitive within the industry. The
Company also competes with other entities in acquiring life insurance companies
and blocks of insurance business. The acquisition of insurance companies or
blocks of business is extremely competitive. Many of the companies with which
the Company competes have a stronger capital position as well as better access
to the capital markets.
A primary factor in a company's ability to compete in the sales of life
insurance business and the acquisition of life insurance companies is the
ratings it receives from various rating agencies. Two of the Company's primary
marketing subsidiaries, Great Southern and College Life, are rated "A
(Excellent)" by A.M. Best and have a claims paying ability rating of "A (Good)"
from Standard and Poor's Corporation ("S&P"). Ohio State is rated
"A-(Excellent)" by A.M. Best and has a claims paying ability rating of "BBBpi
(Good)" from S&P. National Farmers Union is rated "B+ (Very Good)" by A.M. Best.
While ratings do not constitute recommendations to buy or sell a company's
insurance products, and are subject to change or withdrawal at any time, they
are considered an important measurement in some markets.
Regulation
All of the Company's life insurance company subsidiaries are domiciled in
Texas. One or more of the life insurance subsidiaries is licensed to sell
insurance in the District of Columbia and all states, except New York.
General Regulation. The Company is subject to comprehensive regulation in
the various states in which it is authorized to conduct business. The laws of
these states establish supervisory agencies with broad regulatory authority to,
among other matters, grant and revoke licenses for transacting business,
regulate trade practices, establish reserve requirements, regulate the form and
content of policies, and prescribe the type and amount of investments permitted.
These supervisory agencies periodically examine the business and accounts of the
Company's insurance subsidiaries and require them to file detailed annual
statements prepared in accordance with statutory accounting practices.
Increased scrutiny has been placed upon the insurance regulatory framework,
and a number of state legislatures have considered or enacted legislative
proposals that alter, and in many cases increase, state authority to regulate
insurance companies and their holding company systems. In addition, legislation
has been introduced periodically in Congress which could result in the federal
government assuming some role in the regulation of the insurance industry. In
recent years, the NAIC has taken initiatives to reduce insurance company
insolvencies and market conduct violations. These initiatives include investment
reserve requirements, risk-based capital standards, codification of insurance
accounting principles, new investment standards and restrictions on an insurance
company's ability to pay dividends to its stockholders. The NAIC has also
approved and recommended to states for adoption model laws related to product
design and illustrations. The Company has evaluated its current product
portfolio in response to these initiatives. It is not possible to predict the
future impact of changing state and federal regulation on the operations of the
Company and its insurance subsidiaries.
Under applicable state insurance laws, all of the Company's insurance
subsidiaries are required to maintain minimum levels of capital stock and
statutory surplus. The capital and surplus of each of the Company's insurance
subsidiaries exceeds the minimum requirements. In addition, each of the
Company's insurance subsidiaries is subject to the supervision of the regulators
of each state in which it is licensed. Such regulators have the discretionary
authority, in connection with the continual licensing of any such subsidiary, to
limit or prohibit new issuances of business to policyholders within their
jurisdiction when, in their judgement, such regulators determine that such
subsidiary is not maintaining adequate statutory surplus or capital. The Company
does not believe the current or anticipated levels of statutory surplus of its
insurance subsidiaries present a material risk that any such regulator would
limit the amount of new insurance business that an insurance subsidiary intends
to issue.
Holding Company Regulations. Substantially all states also regulate members
of insurance holding company systems. FHC is registered as a holding company
system pursuant to such legislation in Texas. The insurance holding company
statutes regulate certain transactions among affiliates, including the payment
of dividends by an insurance company to its parent. Generally, without the
consent of the domiciliary state's insurance commissioner, an insurance company
may not pay dividends to its parent in excess of the greater of (i) the
insurer's prior year statutory net gain from operations, or (ii) 10% of its
prior year ending statutory capital and surplus. Dividends may be paid only from
statutory earned surplus as determined by the Texas Department of Insurance.
Generally, state laws require an insurance company to file a dividend
notification prior to payment of ordinary dividends.
Under Texas regulations, interest and principal on any newly-issued surplus
debentures may be paid only with prior approval of the Texas Department of
Insurance. Surplus debentures issued by United Fidelity contain payment
schedules which have been approved by the Texas Department of Insurance.
Therefore, United Fidelity does not require approval from the Texas Department
of Insurance for each payment of principal and interest unless such payments
differ from the approved schedule.
Risk-Based Capital Requirements. The NAIC's risk-based capital ("RBC")
rules are used to evaluate the adequacy of statutory capital and surplus in
relation to a company's investment and insurance risks. The RBC formula is used
by the states as an early warning tool to identify under-capitalized companies
for the purpose of initiating regulatory action. Generally, action will be
triggered when the ratio of a company's total adjusted capital (defined as the
total of its statutory capital, surplus and asset valuation reserve ("AVR")) to
its Authorized Control Level RBC (the "RBC Ratio") falls below 200%. Based upon
the Company's calculations, all of its insurance subsidiaries had RBC ratios
exceeding 200% at December 31, 1998.
<PAGE>
Texas has its own RBC requirements, the stated purpose of which is to
require a minimum level of capital and surplus to absorb the financial,
underwriting and investment risks assumed by an insurer. The Commissioner of the
Texas Department of Insurance has the power to take corrective actions similar
to those in the NAIC's model act if a company does not maintain the required
minimum level of capital and surplus. At December 31, 1998, the Company's Texas
insurance subsidiaries' exceeded these requirements.
There can be no assurance that insurance-related laws and regulations will
not become more restrictive in the future and thereby have a material adverse
effect on the operations of the Company or on the ability of the Company's
subsidiaries to make payments on the surplus debentures or to pay dividends and
thus on the Company's ability to service its debt.
Employees
At March 1, 1999, Americo and its wholly-owned subsidiaries employed
approximately 766 persons.
<PAGE>
ITEM 2. PROPERTIES
The principal executive offices of the Company are located at 1055
Broadway, Kansas City, Missouri 64105 and the Company's telephone number is
(816) 391-2000.
The principal operations of the insurance subsidiaries are conducted from
Kansas City, Missouri and Dallas, and Austin, Texas. The Company's locations
include leased office space located at 1055 Broadway, Kansas City, Missouri
64105 and 333 West 11th Street, Kansas City, Missouri 64105. These properties
are leased from Broadway Square Partners, a Missouri limited partnership of
which a corporation controlled by the Merriman family is a 50% partner. The
leases expire on August 31, 2010 and August 31, 2013, respectively.
The Company occupies leased office space located at 500 N. Akard, Dallas,
Texas 75221. The lease expires in June 2007.
The Company also occupies leased office space located at 3755 Capitol of
Texas Highway South, Austin, Texas 78704. The two leases related to this office
space expire in May 2001 and 2003.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is party to litigation and arbitration
proceedings in the ordinary course of its business, none of which is expected to
have a material adverse effect on the Company.
Great Southern and the Company are defendants in four purported class
action lawsuits that were consolidated in May 1998 for multidistrict litigation
pretrial proceedings in the U.S. District Court for the Northern District of
Texas (In re Great Southern Life Insurance Company Sales Practice Litigation).
These lawsuits allege deceptive sales practices in the marketing of Great
Southern's whole life and universal life insurance policies and seek unspecified
compensatory, punitive and/or treble damages. Additionally, on August 13, 1998,
a fifth purported class action lawsuit also alleging deceptive sales practices
was filed against Great Southern in state court in Dallas, Texas (Ebling v.
Great Southern Life Insurance Co., 68th District Court, Dallas County, Texas).
Another previously reported purported class action making similar allegations
(Marroquin v. Great Southern Life Insurance Co., filed February 11, 1998, in
Cameron County District Court, Texas) was settled on an individual basis for an
amount that was not material to the Company.
On July 16, 1998, Great Southern, Fremont Life Insurance Company and
Fremont General Corporation (collectively "Fremont") were named as defendants in
a purported class action lawsuit arising out of the sale of, and imposition of
surrender charges under, deferred annuity contracts (Gularte v. Fremont Life
Ins. Co., et al., Los Angeles Superior Court, Los Angeles, California). Fremont
subsequently assumed the defense of Great Southern, the effect of which has been
to limit the case to a claim for declaratory relief as to the amount of the
surrender charge.
Great Southern and the Company, together with one of Great Southern's
general agents, Great American Life Underwriters ("GALU"), Entrepreneur
Corporation, Mercantile Life Insurance Company, American Planning Corporation
and various individuals, including certain officers of Great Southern and the
Company, are named defendants in an action that was certified as a class action
on April 28, 1998 (Thibodeau et al. v. Great American Life Underwriters, et.
al., District Court, Dallas County, Texas). Plaintiffs, who were life insurance
agents for GALU, allege that they were defrauded by defendants into surrendering
renewal commissions in return for the promise of stock ownership in a company
(Entrepreneur Corporation) to be made public at some point in the future.
Plaintiffs claim actual and exemplary damages in an unspecified amount.
Defendants have appealed the ruling certifying a class.
<PAGE>
On October 20, 1998, a purported class action lawsuit was filed against
Great Southern, Credit Card Services, Inc., First Madison Bank and certain other
defendants (McCulley v. Great Southern Life Insurance Company, et. al., U.S.
District Court for the Northern District of Texas), alleging various
misrepresentations in connection with the marketing of credit cards secured by
universal life insurance policies issued by Great Southern. The suit seeks
actual, exemplary and treble damages in an unspecified amount.
The Company intends to defend all of the above pending actions vigorously.
There can be no assurance that the foregoing or any future litigation relating
to pricing and sales practices will not have a material adverse effect on the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
All of the outstanding shares of capital stock of the Company are owned by
FHC. There is no established public trading market for the Company's capital
stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The historical financial information for the five years ended December 31,
1998 and at December 31, 1998, 1997, 1996, 1995 and 1994 has been derived from
the audited Consolidated Financial Statements of the Company. The selected
consolidated financial data set forth below is qualified in its entirety by
reference to and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the Company's
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Form 10-K. <TABLE>
Year Ended December 31,
----------------------------------------------------------------------
1998 (4) 1997 (3) 1996 1995 (2) 1994(1)
-------- -------- ---- -------- -------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Premiums and policy revenues $ 218,582 $ 203,729 $ 165,602 $ 140,130 $ 134,225
Net investment income 226,534 219,267 186,725 152,047 130,149
Net realized investment gains (losses) 8,284 2,950 (120) (282) (3,529)
Gain on disposition of partnership interest -- -- 15,825 -- --
Other income 12,163 12,331 3,567 2,168 117
----------- ---------- ---------- ---------- ----------
Total income 465,563 438,277 371,599 294,063 260,962
Policyholder benefits 251,506 262,940 218,659 169,162 151,835
Commissions 13,390 11,230 13,473 9,662 8,711
Amortization expense 87,189 43,694 29,714 26,666 23,534
Interest expense 12,057 12,089 12,263 10,593 9,254
Other operating expenses 89,394 77,038 56,703 47,124 45,110
----------- ---------- ---------- ---------- ----------
Income before provision for income taxes 12,027 31,286 40,787 30,856 22,518
Provision for income taxes 3,235 9,230 13,513 11,126 9,159
----------- ---------- ---------- ---------- ----------
Net Income $ 8,792 $ 22,056 $ 27,274 $ 19,730 $ 13,359
=========== =========== =========== =========== ===========
Net income applicable to common stock per common share:
Net income $ 879.20 $ 2,205.60 $ 2,727.40 $ 1,973.00 $ 1,335.90
========== ========== ========== ========== ==========
Average common shares outstanding 10 10 10 10 10
== == == == ==
Balance Sheet Data:
Total investments $2,346,395 $ 2,125,813 $ 2,018,852 $ 2,014,634 $ 1,582,592
Total assets 4,105,814 4,061,236 2,769,583 2,459,805 1,994,628
Total debt 132,533 132,884 133,312 133,451 100,702
Total liabilities 3,848,634 3,814,374 2,562,561 2,269,042 1,844,632
Stockholder's equity 257,180 246,862 207,022 190,763 149,996
</TABLE>
- ---------------------------
(1) On February 28, 1994, the Company sold its investment in 100% of the
common stock of PFS Holding Company ("PFSH") and its wholly-owned
subsidiary, Premium Financing Specialists, Inc., to FHC.
(2) On July 10, 1995, the Company acquired all of the outstanding common
stock of Victory Life.
(3) On April 15, 1997, the Company acquired all of the outstanding common
stock of Ohio State and Investors Guaranty.
(4) On October 1, 1998, the Company acquired the 50% of College Insurance
Group, Inc. not previously owned by the Company.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion analyzes significant items affecting the results
of operations and the financial condition of the Company. In connection with the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, the Company cautions readers regarding certain forward-looking statements
contained in this report and in any other statements made by, or on behalf of,
the Company, whether or not in future filings with the Securities and Exchange
Commission (the "SEC"). Forward-looking statements are statements not based on
historical information and which relate to future operations, strategies,
financial results, or other developments. Statements using verbs such as "plan",
"anticipate", "believe" or words of similar import generally involve
forward-looking statements. Without limiting the foregoing, forward-looking
statements include statements which represent the Company's beliefs concerning
future levels of sales and surrenders of the Company's products, investment
spreads and yields, or the earnings and profitability of the Company's
activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which are subject to change. These uncertainties
and contingencies could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable developments.
Some may be national in scope, such as general economic conditions, changes in
tax law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments and
industry consolidation. Others may relate to the Company specifically, such as
credit, volatility and other risks associated with the Company's investment
portfolio. Investors are also directed to consider other risks and uncertainties
discussed in documents filed by the Company with the SEC. The Company disclaims
any obligation to update forward-looking information. This discussion should be
read in conjunction with the accompanying consolidated financial statements and
the notes thereto.
General
The volume of the Company's life insurance in force has increased 134% from
$18.5 billion in 1989 to $43.3 billion in 1998. This growth has been the result
of a combination of acquisitions, reinsurance assumed and new business written.
Changes in the Company's volume of life insurance inforce for the last three
years is summarized in the following table. <TABLE>
1998 1997 1996
---- ---- ----
(in billions)
<S> <C> <C> <C>
Beginning of year balance $ 47.2 $ 27.6 $ 26.9
Insurance business acquired or assumed 1.6 18.9 2.0
New business written 3.4 2.6 2.1
Terminations and other (5.3) (1.9) (3.4)
------- ------- -------
End of year balance $ 46.9 $ 47.2 $ 27.6
======= ======= =======
</TABLE>
The following table summarizes the Company's sales in terms of annualized
premiums over the three year period ended December 31, 1998:
<TABLE>
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Life insurance premiums $ 39.3 $ 40.2 $ 23.1
Annuity premiums 56.2 75.8 52.6
------- ------- -------
$ 95.5 $ 116.0 $ 75.7
======= ======= =======
</TABLE>
The Company intends to continue its focus on the sale of life insurance and
annuity products through its marketing and distribution systems. In addition,
the Company may also pursue selected acquisitions of blocks of life insurance
policies and life insurance companies.
<PAGE>
Segment Results
Revenues and income before provision for income taxes for the Company's
operating segments, as defined by Financial Accounting Standard No. 131,
"Financial Reporting for Segments of a Business Enterprise", is summarized as
follows:
<TABLE>
Life Asset Accumulation Non-Life
Insurance Products Insurance
Operations Operations Investments
------------------------------- ------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
Revenues $417.5 $414.6 $347.3 $24.1 $7.7 $6.8 $8.0 $11.6 $1.1
Income (loss)
before income taxes 54.4 53.7 45.2 6.2 (3.0) (1.1) 6.8 10.6 1.1
</TABLE>
Life insurance operations. Income before income taxes increased only
slightly from 1998 and 1997. Income before income taxes increased $8.5 million
from 1996 to 1997 due to certain acquisitions completed in 1997 as more fully
described in the "Consolidated Year to Year Comparisons" section included
elsewhere in this Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Asset accumulation products operations. Income before income taxes
increased $9.2 million from 1997 to 1998. The primary reasons for the increase
were (i) adjustments to deferred policy acquisition costs resulting from
revisions made to the Company's estimate of future gross profits from its
interest sensitive and annuity products, and (ii) the addition in 1998 of the
results of operations from business which was previously ceded to an affiliated
insurance company and recaptured in 1998 in conjunction with the Company's
consolidation of its asset accumulation operations.
Non-life insurance investments. Income before income taxes decreased $3.8
million from 1997 to 1998. The primary reasons for the decrease were (i) a
decrease in income from Argus and (ii) a decrease in net realized investment
gains on the sale of investment properties in 1998 compared with 1997. Income
before income taxes increased between 1996 and 1997. The primary reasons for the
increase were (i) an increase in income from Argus and (ii) an increase in net
realized investment gains on the sale of investment properties in 1997 compared
with 1996.
Significant reconciling items of the segment revenues and income before
income taxes shown above to amounts reported in the Company's consolidated
financial statements appearing elsewhere in this Form 10-K include net
investment income and operating expenses not allocated to segments, net
realized investment gains (losses) not allocated to segments, interest expense
and certain non-recurring transactions such as gains from the sale of
subsidiaries. These reconciling items had the effect of decreasing income before
income taxes, by $25.4 million from 1997 to 1998. The primary reasons for the
decrease were (i) net realized investment losses in 1998 and (ii) an increase in
operating expenses not allocated to segments in 1998. These reconciling items
had the effect of decreasing income before income taxes by $25.8 million from
1996 to 1997. The primary reasons for the decrease were (i) a gain on
dispostion of a partnership interest in 1996 and (ii) an increase in operating
expenses not allocated to segments in 1997.
Consolidated Year to Year Comparisons
The Company entered into two transactions during the period 1996 through
1998 which affect the comparability of its results of operations between
periods.
In July 1996, in connection with administrative agreements entered into
with Fremont Life, an unaffiliated company (the "Reinsurer") reinsured 100% of
the insurance business of Fremont Life on a coinsurance basis. The Reinsurer
then reinsured certain risks on these same liabilities to Great Southern on a
modified coinsurance basis. The associated policy liabilities were approximately
$335.4 million at December 31, 1998.
On April 15, 1997, Great Southern acquired all of the outstanding common
stock of Ohio State Life and Investors Guaranty ("Ohio State Acquisition") from
Farmers Group, Inc. On the acquisition date, Ohio State and Investors Guaranty
had combined assets of $1,039 million and combined liabilities of $694 million.
The acquisition was accounted for as a purchase. On April 16, 1997, Ohio State
and Investors Guaranty entered into separate coinsurance agreements to reinsure
100% of their insurance liabilities to the Reinsurer in exchange for a ceding
commission of $145.7 million. Concurrently, the Reinsurer and Great Southern
entered into a modified coinsurance agreement under which the Reinsurer ceded
certain risks on a 70% quota share basis on the same insurance liabilities to
Great Southern. The results of operations of these acquired policies from the
date of acquisition, less the net 30% coinsurance, are included in the Company's
results of operations. The Reinsurer will receive 100% of the statutory profits
from the reinsured policies until the Reinsurer has recovered the initial ceding
commission.
<PAGE>
In each of the above transactions with the Reinsurer, the invested assets
related to the reinsured businesses are owned by the Reinsurer. At December 31,
1998, the insurance liabilities associated with these reinsurance transactions
totaled $1.0 billion. Results from this reinsurance transaction and the Ohio
State Acquisition are included in the Company's results of operations from the
respective dates of the transactions.
The effects of the above transactions, collectively referred to herein as
the Acquisitions, on the individual income statement components, excluding the
costs of financing, are set forth in the table below (in millions).
<TABLE>
1998 and 1997 1997 and 1996
Acquisitions Effects on Acquisitions Effects on
1998 and 1997 Results 1997 and 1996 Results
(1) (2)
------------------------- -------------------------
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Premiums and policy revenues $ 53.6 $ 42.0 $ 56.8 $ 6.9
Net investment income 27.2 18.9 43.7 14.3
Net realized investment gains 6.7 - - -
Other income 3.8 3.4 3.4 -
Policyholder benefits 49.4 37.5 66.8 17.5
Commissions 2.5 1.3 1.5 2.4
Amortization expense 25.1 11.1 18.4 -
</TABLE>
(1) Includes the results from the Ohio State Acquisition in 1997.
(2) Includes the results from the Ohio State Acquisition in 1997 and
the agreements with the Reinsurer in 1997 and 1996.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Income before provision for income taxes decreased $19.3 million to $12.0
million in 1998. The primary reasons for the decrease were (i) realized
investment losses, (ii) an increase in amortization expense and (iii) an
increase in other operating expenses, partially offset by (iv) lower death
benefits. The Company recorded $2.8 million of expense for the relocation of its
Columbus, Ohio operations during 1998. These items and significant changes in
individual income statement components are discussed in more detail below.
Premiums and policy revenues. Premiums and policy revenues totaled $218.6
million in 1998 compared to $203.7 million in 1997. Excluding the Acquisitions,
premiums and policy revenues increased $3.3 million from 1997 to 1998.
Traditional life insurance premiums decreased $5.1 million because lapses of the
Company's traditional policies exceeded the premium volume from newly-issued
traditional policies. This decrease was offset by an increase in policy revenues
of $4.0 million resulting from policy charges on increased interest-sensitive
life and annuity policy fund values and increased surrender charges of $2.7
million from a closed block of annuity business.
Net investment income. Net investment income totaled $226.5 million in 1998
compared to $219.3 million in 1997. Excluding the effect of the Acquisitions,
net investment income decreased $1.1 million, which includes a $1.6 million
decrease in income from equity subsidiaries.
Net realized investment gains. Net realized investment gains totaled $8.3
million in 1998 compared with $3.0 million in 1997. Excluding the effect of the
Acquisitions, net realized investment gains decreased $1.4 million. In 1998, the
Company reported $8.3 million of realized gains including $16.7 million of gains
from the sale of fixed maturity investments held by the Reinsurer. As described
below, the sale of fixed maturity investments held by the Reinsurer resulted in
increased amortization of cost of business acquired assets. Excluding the $16.7
million of gains described above, the Company realized losses of $8.4 million in
1998 compared to gains of $3.0 million in 1997. There were no sales of
investments held by the Reinsurer in 1997 and no impact on amortization from
other gains realized in 1997. The difference between realized losses in 1998 and
realized gains in 1997 resulted in an $11.4 million reduction in income before
provision for income taxes in 1998 compared with 1997.
Included in 1998 realized losses of $8.4 million is $6.0 million of
realized losses on short positions held on common stocks owned by the Company.
There was a like amount of increase in market value on the related long position
of the common stocks which is included in unrealized gains in stockholder's
equity.
Other income. Other income totaled $12.2 million in 1998 compared to $12.3
million in 1997. Other income includes an administrative service fee paid to the
Company associated with the reinsurance of 30% of the Ohio State and Investors
Guaranty policies, which amounts are included in the effects of the
Acquisitions. Excluding these amounts, other income decreased $0.5 million from
1997 to 1998. The Company recorded a gain of $4.9 million from the sale of
Investors Guaranty in May 1998 and a gain of $4.8 million from the sale of
Loyalty Life Insurance Company ("Loyalty") in 1997.
Policyholder benefits. Policyholder benefits totaled $251.5 million in 1998
compared with $262.9 million in 1997. Excluding the effect of the Acquisitions,
policyholder benefits decreased $23.3 million from 1997 to 1998. This decrease
resulted primarily from (i) an $8.9 million decrease in death benefits, (ii) a
$4.3 million decrease in interest credited on universal life and annuity fund
balances, and (iii) a $5.5 million increase in the amount of benefit reserves
released from 1997 to 1998 associated with the lower traditional premiums
referred to above. The decrease in interest credited is comprised of an $8.8
million decrease resulting from reduced fund values in a closed block of annuity
business, offset by a $5.9 million increase related to increased fund values of
the Company's asset accumulation products. The balance of the decrease results
from a reduction, made in response to market conditions, in the rate of interest
credited on interest-sensitive products.
Amortization expense. Amortization expense totaled $87.2 million in 1998
compared with $43.7 million in 1997. Amortization expense in 1998 increased
$16.7 million as a result of realized investment gains on the sale of fixed
maturity investments, including $6.7 million related to the Acquisitions. The
sale of these fixed maturity investments at a gain will reduce future investment
income, requiring the recognition of additional amortization expense in 1998.
Excluding the Acquisitions, amortization expense increased $29.5 million from
1997 to 1998. This increase resulted from (i) $10.0 million of realized
investment gains as discussed above, (ii) increased surrenders in a closed block
of annuity business and (iii) increased amortization of deferred policy
acquisition costs on Great Southern's universal life insurance business.
Included in amortization expense are adjustments to decrease deferred policy
acquisition costs and the cost of business acquired assets of $0.9 million in
1998 and $2.5 million in 1997. These adjustments result from revisions made to
the Company's estimate of future gross profits from its interest-sensitive life
and annuity policies. Under GAAP, deferred policy acquisition costs and the cost
of business acquired assets on interest-sensitive life products are amortized
based on the estimated future gross profits of the related policies.
Other operating expenses. Other operating expenses totaled $89.4 million in
1998 compared with $77.0 million in 1997. The increase in other operating
expenses resulted from (i) the inclusion of twelve months of operating expenses
related to Ohio State and Investors Guaranty in 1998 compared with nine months
of operating expenses for these entities in 1997 following their April 1997
acquisition by the Company, (ii) $2.8 million of expenses related to the
relocation of the Company's Columbus, Ohio operations to other Company locations
during 1998, (iii) the operating expenses of marketing operations purchased by
the Company in October 1998 and (iv) increased expenses associated with the
continued development and expansion of the Company's product offerings and
marketing capabilities. Increased expenses in these areas included both
product development expenses and expenses incurred on the Company's
administrative systems.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Income before provision for income taxes decreased $9.5 million to $31.3
million in 1997 from $40.8 million in 1996. The primary reasons for the net
decrease were (i) the gain from the disposition of the Company's interest in
GSSW in 1996, (ii) an increase in death benefits and (iii) an increase in other
operating expenses, partially offset by (iv) a gain from the disposition of
Loyalty Life in 1997 and (v) income resulting from the Acquisitions. The items
and significant changes in individual income statement components are discussed
in more detail below.
Premiums and policy revenues. Premiums and policy revenues totaled $203.7
million in 1997 compared to $165.6 million in 1996. Excluding the Acquisitions,
premiums and policy revenues decreased $11.8 million from 1996 to 1997. The
decrease is primarily due to the Company currently writing small amounts of new
traditional life insurance products and, therefore, traditional life insurance
premiums are decreasing as the amount of in-force business decreases. Also, the
1996 results included $2.5 million of traditional premiums on supplementary
contracts and $3.4 million of accident and health premiums which did not recur
in 1997.
<PAGE>
Collected premiums on interest sensitive and annuity products including the
Acquisitions increased by $51.8 million from $287.3 million 1996 to $339.1
million in 1997. This increase in collected premiums is not reflected in
premiums and policy revenues because generally accepted accounting principles
require that premiums collected on these types of products be treated as deposit
liabilities rather than revenues.
Net investment income. Net investment income increased $32.6 million to
$219.3 million in 1997 from $186.7 million in 1996. Excluding the net investment
income from invested assets associated with the Acquisitions, net investment
income increased $3.1 million, primarily attributable to (i) changes in expected
prepayments on mortgage-backed securities and (ii) an increase in income of the
Company's equity subsidiaries.
Management continually evaluates the expected prepayments of the
mortgage-backed securities portfolio to more accurately reflect expected
paydowns on the securities as market interest rates change. In 1997, interest
rates decreased, accelerating expected prepayment rates. In 1996, interest rates
increased, reducing the expected prepayment rate. As a result of the changes in
expected prepayments, amortization of premiums and accretion of discounts were
accelerated in 1997, causing an increase in net investment income of $1.4
million in 1997. The decrease in net investment income in 1996 of $1.8 million
resulting from the reduced expected prepayment rate was partially offset by
discounts of $0.5 million recognized upon the early repayment of certain of the
Company's mortgage loans.
The Company's share of earnings from its equity subsidiaries decreased from
$5.5 million in 1996 to $3.6 million in 1997. Equity earnings in GSSW of $4.5
million in 1996 did not recur in 1997 as the Company disposed of GSSW in 1996 in
exchange for 100% interests in several real estate limited partnerships formerly
owned by GSSW. These limited partnerships added $1.9 million to net investment
income in 1997. This decrease in earnings from GSSW was offset by an increase in
the income from the Company's other equity subsidiaries.
Net realized investment gains. The Company recorded net realized investment
gains of $3.0 million in 1997. During 1997, the Company recorded gains of $5.1
million from the sale of three real estate investment properties, which were
offset by various other investment losses.
Other Income. Other income increased $8.7 million from $3.6 million in 1996
to $12.3 in 1997. Excluding other income related to the Acquisitions, other
income increased $5.4 million from 1996 to 1997. The Company realized a gain of
$4.8 million in 1997 from the sale of Loyalty Life Insurance Company
("Loyalty"), a former wholly-owned subsidiary of the Company. Prior to this
sale, several of the Company's insurance subsidiaries entered into agreements
with Loyalty for the assumption of Loyalty's insurance liabilities. Other income
in 1997 includes a servicing fee paid to the Company associated with the
reinsurance of 30% of the Ohio State and Investors Guaranty policies.
Policyholder benefits. Policyholder benefits increased $44.2 million from
$218.7 million in 1996 to $262.9 million in 1997. Excluding the effects of the
Acquisitions, policyholder benefits decreased $5.1 million from 1996 to 1997.
The decrease in policyholder benefits primarily resulted from lower benefit
reserve increases in 1997 resulting from the decreasing traditional premiums,
partially offset by a $5.1 million increase in death benefits.
Amortization expense. Amortization expense increased $14.0 million from
$29.7 million in 1996 to $43.7 million in 1997. Excluding the effects of the
Acquisitions, amortization expense decreased $4.4 million from 1996 to 1997.
Included in amortization expense are adjustments to decrease deferred policy
acquisition costs and the cost of business acquired assets of $2.5 million in
1997 and $3.2 million in 1996. These adjustments result from revisions made to
the Company's estimate of future gross profits from its interest sensitive life
and annuity policies. Under GAAP, deferred policy acquisitions costs and the
cost of business acquired assets on interest-sensitive life products are
amortized based on the estimated future gross profits of the related policies.
Other operating expenses. Other operating expenses increased $20.3 million
to $77.0 million in 1997 from $56.7 million in 1996. Excluding the effects of
the Acquisitions, other operating expenses increased $6.1 million from 1996 to
1997. The primary reasons for the increase in operating expenses from 1996 to
1997 are expenses associated with a marketing office opening in California in
September 1996, increased depreciation expense in 1997 resulting from purchases
of computer equipment in 1996 and 1997, and increased legal and professional
fees in 1997. Financial Condition and Liquidity
Liquidity. The liquidity needs of Americo, whose principal assets are
investments in its insurance subsidiaries, are dependent upon receipt of
sufficient funds from its subsidiaries. The cash requirements of Americo consist
of debt service requirements on notes payable, amounts due to FHC under advisory
and data processing agreements and its own operating expenses. These cash
requirements are met by payments of principal and interest on surplus debentures
that Americo holds which are issued by United Fidelity and dividends from United
Fidelity. Americo also receives payments under investment advisory and data
processing agreements with the insurance subsidiaries which permit Americo to
recover a portion of the amounts paid by it under similar agreements with FHC.
On a stand-alone basis, at December 31, 1998, Americo had $33.2 million of cash
and cash equivalents and marketable equity securities available for debt service
and other corporate requirements.
Americo has outstanding $100.0 million aggregate principal amount of senior
subordinated notes that it issued in 1993. These senior subordinated notes bear
interest at 9.25% and mature in May 2005. They are redeemable at the option of
Americo beginning in 1998. The redemption prices are in excess of par in 1999.
In connection with the acquisition of The Victory Life Insurance Company in
July 1995, Americo issued notes payable to the seller with face amounts
aggregating $17 million and borrowed $21 million under a $70 million credit
agreement with a syndicate of banks. Of the $17 million face amount of notes
payable issued to the seller, $5 million mature in 2015 and the remaining $12
million mature in 24 equal semi-annual installments the first of which was due
in 1995. The notes are carried at their discounted value, which assumes an
average effective rate of 11.6%.
Americo's bank credit agreement, which was last amended in 1998, is a
revolving credit facility until December 1999, at which time amounts then
outstanding convert into a term loan repayable in six, equal semi-annual
installments commencing July 1, 2000. Amounts outstanding under the credit
facility bear interest at either a bank prime rate or 7/8% over LIBOR.
At December 31, 1998, United Fidelity had outstanding to Americo four
surplus debentures with an aggregate unpaid balance of $122.8 million. The terms
of the surplus debentures have been established to provide for the payment of
principal and interest to Americo in amounts sufficient to make payments on the
Company's external debt obligations in accordance with their payment schedules.
The surplus debentures and their payment schedules have been approved by the
Texas Department of Insurance; therefore, no scheduled payment will require the
approval of the Texas Department of Insurance.
The surplus debentures contain restrictions which prevent United Fidelity
from making principal and interest payments if such payments reduce United
Fidelity's statutory capital and surplus below an amount specified in the
surplus debenture agreements. The most restrictive minimum surplus requirement
contained in the surplus debentures is $37.5 million; United Fidelity's capital
and surplus at December 31, 1998 was $96.9 million. Any future payment of
principal or interest on such surplus debentures will be limited by the ability
of the subsidiaries of United Fidelity to pay dividends to United Fidelity and
may be further limited by United Fidelity's RBC requirements. See "Business:
Regulation". The Company does not believe that United Fidelity will have any
difficulty in meeting its obligations under these surplus debentures in the
foreseeable future.
In order to meet its obligations under the surplus debentures, United
Fidelity uses funds generated by its insurance operations and dividends from its
insurance subsidiaries. The ability of the insurance subsidiaries to pay
dividends is subject to regulatory restrictions. The insurance holding company
statues of Texas in which the Company's insurance subsidiaries are domiciled
regulate payment of dividends by an insurance company to its parent. Generally,
without the consent of the state's insurance commissioner, an insurance company
may not pay dividends to its parent in excess of the greater of (i) the
insurer's prior year statutory net gain from operations, or (ii) 10% of its
prior year ending statutory capital and surplus, subject in either case to
sufficient earned statutory surplus from which such dividends may be paid.
Additionally, an insurance company is required to notify the respective
insurance department prior to the payment of ordinary dividends.
The ability of life insurance subsidiaries to pay dividends also may be
affected by reinsurance treaties. Under reinsurance treaties with an unrelated
reinsurer, National Farmers Union is restricted from declaring dividends if
adjusted surplus is less than $27.5 million. Adjusted surplus is defined in the
treaties as statutory capital and surplus, plus AVR, less the admitted asset
value of all affiliated investments. At December 31, 1998, National Farmers
Union had adjusted surplus of $52.2 million.
<PAGE>
The principal sources of liquidity for the Company's insurance subsidiaries
are premium receipts, net investment income received and net proceeds from
investments that have been sold or matured or from mortgage loans that have been
repaid. Cash flows from premiums received and investment income are generally
sufficient to meet the subsidiaries' obligations, which consist of the payment
of claims and benefits on insurance policies, purchases of investments and the
payment of operating expenses. Although there is no intent to dispose of
investments at this time, the Company's investments are substantially in readily
marketable securities.
The Company believes that its investment portfolio will allow it to satisfy
all existing contractual obligations to policyholders. At December 31, 1998, the
Company's investment portfolio included cash and short-term investments totaling
$68.2 million, marketable equity securities totaling $89.0 million as well as
$324.2 million in U.S. Treasury and government securities, mortgage-backed
securities and asset-backed securities and $601.0 million of corporate bonds
classified as available for sale, all of which management believes could be
readily converted to cash.
Financial condition. Stockholder's equity increased to $257.2 million at
December 31, 1998 from $246.9 million at December 31, 1997. The increase was the
result of net income of $8.8 million and an increase in net unrealized
investment gains of $3.5 million, less a $2.0 million dividend to FHC. Net
unrealized investment gains in 1998 were recorded due to an increase in the
market value of the Company's marketable equity securities offset by a decrease
in its available for sale fixed maturities. See Note 4 to the Company's
Consolidated Financial Statements included elsewhere in this Form 10-K for
further discussion of the components of the change in net unrealized investment
gains.
The changes occurring in the Company's consolidated balance sheet from
December 31, 1998 to December 31, 1997 primarily reflect the normal operations
of the Company's life insurance subsidiaries.
Statutory capital and surplus of the Company's insurance subsidiaries at
December 31, 1998 includes $14.8 million relating to financial reinsurance
agreements which is not included in stockholder's equity on a GAAP basis.
Financial reinsurance treaties between National Farmers Union and unrelated
parties contain minimum statutory surplus requirements and require National
Farmers Union to place securities in an escrow account ($75.2 million at
December 31, 1998) to secure National Farmers Union's obligations to the third
party reinsurer.
Investment Portfolio. The Company has what it believes to be a conservative
investment philosophy. The Company's investment portfolio is designed to match
investment maturities as closely as possible to the projected cash flow
requirements of the Company's outstanding liabilities. The Company's policy is
to have a substantial portion of its investment portfolio in fixed income
securities with call protection.
The following table sets forth the composition of the Company's fixed
maturity securities according to NAIC designations and S&P and Moody's ratings
at December 31, 1998:
<PAGE>
<TABLE>
Equivalent Total
S&P Moody's NAIC Held to Available Carrying
Rating (1) Rating (1) Rating Maturity for Amount Percentage
- -- ----------- -- ----------- --------- ----------- -- ------ ----------
(1) (2) Sale (3)
--- --- -- --------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Investment grade:
AAA Aaa 1 $ 328,689 $ 329,527 $ 658,216 36.5%
AA Aa1,Aa2, Aa3 1 93,297 95,094 188,391 10.5
A A1, A2, A3 1 331,993 307,662 639,655 35.5
BBB Baa1, Baa2, Baa3 2 122,493 178,089 300,582 16.7
----------- ----------- ----------- ---------
Subtotal 876,472 910,372 1,786,844 99.2
Non-investment grade:
BB or below Ba1 or below 3, 4 122 14,819 14,941 0.8
----------- ----------- ----------- ---------
Total fixed maturity
investments $ 876,594 $ 925,191 $1,801,785 100.0%
=========== =========== ========== =========
</TABLE>
(1) The ratings set forth above are based on the ratings assigned by S&P and
Moody's Investors Service, Inc. ("Moody's"). If S&P's ratings were
unavailable, ratings assigned by Moody's were used. If ratings assigned S&P
and Moody's were not equivalent, securities were categorized in this table
based upon the rating assigned by S&P. Bonds not rated by S&P or Moody's
are classified for the purpose of the table according to the rating
assigned to them by the NAIC as follows: NAIC class 1 is included in the
"A" rating; class 2 in "BBB" and class 3, "BB or below".
(2) Carrying amount is amortized cost. The market value of held to maturity
securities as December 31, 1998 was $914.7 million.
(3) Carrying amount is market value. The amortized cost of available for sale
securities at December 31, 1998 was $893.7 million.
The Company continually reviews its non-investment grade debt securities
(NAIC designations 3 through 6) for evidence of declines in value which are
other than temporary. The Company does not anticipate any material increase in
its investments in non-investment grade debt securities. At December 31, 1998,
the Company's investment portfolio contained no securities which were in default
as to principal or interest.
The Company maintains a mortgage-backed securities ("MBS") portfolio, which
consists of "pass-through" obligations and collateralized mortgage obligations
("CMOs"). Approximately 90% of the MBS portfolio consists of securities or pools
of securities guaranteed by the U.S. government, including those issued by
Government National Mortgage Association, or those issued by Federal National
Mortgage Association and Federal Home Loan Mortgage Corporation.
The primary risk associated with MBS is that a changing interest rate
environment might cause prepayment of the underlying mortgages at speeds
different than anticipated at the time of their purchase. The degree to which a
security is at risk to either increases or reductions in yield is influenced by
the difference between its carrying value and par value, the relative
sensitivity of the underlying mortgages to prepayment in a changing interest
rate environment and the repayment priority of the securities in each
securitization structure.
The Company manages the yield and cash flow variability of its MBS
portfolio by (i) purchasing securities backed by collateral with lower
prepayment sensitivity (such as mortgages priced at a discount to par value),
(ii) avoiding securities whose values are heavily influenced by changes in
prepayments (such as interest-only and principal-only securities) and (iii)
concentrating on securities with prepayment protected structures (such as
planned amortization class CMO's). See Note 4 to the Company's Consolidated
Financial Statements included elsewhere in this Form 10-K for a summary of the
Company's investments in CMO's.
At December 31, 1998, approximately $190.1 million in carrying value of the
Company's investment portfolio consisted of mortgage loans, which were
collateralized primarily by multi-family apartments, office buildings and retail
properties located in 30 states. Approximately 34% of the portfolio was
multi-family apartments, 18% was office buildings, 27% was retail space and 21%
was other types of properties. At December 31, 1998, approximately 16% of the
mortgage loan portfolio was secured by properties in Texas, 15% in Missouri, 11%
in Connecticut and 10% in Kansas. No more than 10% of the remaining portfolio
was secured by properties in any one state.
At December 31, 1998, 1.11% of the mortgage loan portfolio consisted of
loans with balloon payments that mature before January 1, 2000. At December 31,
1998, mortgage loans delinquent by more than 90 days, as determined on a
contract delinquency basis, totaled approximately $0.9 million, which
constituted 0.5% of mortgage loans and was 0.04% of cash and invested assets.
There were no loans foreclosed upon and transferred to real estate owned in the
Company's consolidated balance at December 31, 1998. The favorable default
experience is principally attributed to the Company's selectivity in the
purchase of mortgages in connection with acquisitions of its life insurance
subsidiaries. In light of the current market interest rate environment, the
Company may experience prepayments on its mortgage loan portfolio, thus reducing
its yield on such portfolio. The Company plans to continue applying its
historical underwriting standards to future investments in mortgage loans.
Real estate investments were only 1.2% of the carrying value of the
Company's cash and invested assets at December 31, 1998.
Non-Insurance Subsidiaries. During 1998, Americo received dividends from
Argus consisting of $9.5 million of cash and received a $0.4 million cash
distribution from Hereford, LLP.
Asset-Liability Management
Management is aware that prevailing interest rates may shift significantly
and has strategies in place to manage either an increase or decrease in interest
rates. In a rising interest rate environment, the Company's cost of funds would
increase over time as it prices its new and existing interest-sensitive and
investment products to maintain generally competitive market rates. Management
would seek to invest new and renewal premiums in investments which are generally
matched in duration to, and higher yielding than, its liabilities. Management
believes that liquidity to fund withdrawals would be available through a
combination of incoming cash flow, the sale of short-term or floating rate
instruments, and maturing short-duration assets thereby avoiding the sale of
significant amounts of longer duration fixed-rate assets in an unfavorable bond
market. In a declining rate environment, the Company's cost of funds would
decrease over time, reflecting lower interest crediting rates on its fixed-rate
liabilities. Should increased liquidity be required for withdrawals, management
believes that a significant portion of its investments could be sold without
adverse consequences in light of the general strengthening which would be
expected in the bond market.
Asset-liability management is utilized by the Company to reduce the risks
to the Company for interest rate fluctuations and disintermediation. The Company
believes that its fixed-rate liabilities should be backed by a portfolio
principally composed of fixed-rate investments that generate predictable rates
of return in a variety of interest rate environments. The Company does not have
a specific target rate of return. Instead, its rates of return vary over time
depending on the current interest rate environment, the slope of the yield
curve, the spread at which fixed-rate investments are priced over the yield
curve, and general economic conditions. The Company's portfolio strategy is
constructed with a view to achieving adequate risk-adjusted returns consistent
with its investment objectives of effective asset-liability management,
liquidity and safety. The Company has structured its investment portfolio to
reduce changes in the value of the assets under various rate environments. In
that regard, the percentage of the Company's fixed-rate investment portfolio
which is non-callable has increased from 44% in 1995 to 62% in 1998. In
addition, the portfolio's concentration in mortgage-backed securities, which
are subject to cash flow variability in changing interest rate environments, has
decreased from 38% in 1995 to 24% in 1998. See "Investment Portfolio" section
included elsewhere in Management's Discussion and Analysis of Financial
Condition and Results of Operations for additional information related to the
Company's investments.
In order to reduce the probability of unexpected increases in policy or
contract surrenders, which would create a need for increased liquidity, the
Company has structured its interest-sensitive life insurance and annuity
products to include substantial surrender charges. At December 31, 1998,
approximately 81% and 83% of the reserves for interest-sensitive life insurance
and annuity products, respectively, were for policies with surrender charges or
otherwise not subject to discretionary withdrawal by the policyholder. Also at
December 31, 1998, the aggregate cash surrender values of the Company's
interest-sensitive life insurance and annuity products were approximately 87%
and 93%, respectively, of the aggregate policyholder fund value.
<PAGE>
As part of its asset-liability management, the Company conducts detailed
computer simulations that model its fixed-rate assets and liabilities under
commonly used stress-test interest rate scenarios. With the results of these
computer simulations, the Company can measure the potential gain or loss in fair
value of its interest-rate sensitive instruments and seek to protect its
economic value and achieve a predictable spread between what it earns on its
invested assets and what it pays on its liabilities. At December 31, 1998, the
Company's assets had an effective duration of 5.1 and its liabilities had an
effective duration of 6.8. If interest rates were to decrease 10% from December
31, 1998 levels, the increase in the value of the Company's liabilities would
exceed the increase in the value of the Company's assets by approximately $23
million. Because the Company actively manages its assets and liabilities and has
developed strategies to reduce its exposure to loss as interest rate changes
occur, it expects that actual losses would be less than the estimated potential
loss.
Effects of Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standard No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income includes all changes in stockholder's
equity during a period except those resulting from investments by owners and
distributions to owners. The adoption of SFAS 130 resulted in revised and
additional disclosures but had no effect on the financial position, results of
operations, or liquidity of the Company.
Also in June 1997, FASB issued Statement of Financial Accounting Standard
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). This statement specifies revised guidelines for determination of
an entity's operating segments and the type and level of financial information
to be disclosed. The adoption of this statement resulted in revised and
additional disclosures but had no effect on the financial position, results of
operations, or liquidity of the Company.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") approved Statement of Position ("SOP") 97-3, "Accounting by Insurance
and Other Enterprises for Insurance-Related Assessments." SOP 97-3 provides
guidance for determining when an entity should recognize a liability for
guaranty-fund and other insurance-related assessments and a related asset for
assessments which may be recovered through future premium tax offsets. The SOP
is effective for financial statements for fiscal years beginning after December
15, 1998 with early adoption encouraged. Adoption of this accounting standard
will not have a significant impact on the consolidated financial statements of
the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 provides guidance related to
the accounting for derivative instruments and hedging activities focusing on the
recognition and measurement of derivative instruments. This statement is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. Adoption of this accounting standard will not have a significant impact on
the consolidated financial statements of the Company.
Year 2000 Readiness
Many existing computer programs were designed and developed without regard
to the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000.
The Company has developed a comprehensive Year 2000 plan that management
believes will identify potential processing issues and allow the Company to take
any necessary corrective actions before problems arise. A committee, comprised
of a cross section of key employees from all business areas, has been formed to
execute, test and implement the remediation plan. The Company's remediation plan
is comprised of six phases. These phases are (i) a complete inventory of systems
which the Company utilizes, (ii) an initial assessment of Year 2000 preparedness
for each identified system, (iii) the development of a plan to remediate
appropriate systems, (iv) the remediation of systems, (v) the testing of
systems, and (vi) the implementation into production of systems. Because the
Company's administration systems are outsourced to a third party vendor, the
Company is coordinating the Year 2000 plan with its outsource provider. This
provider has contractual responsibility for the Year 2000 remediations of the
Company's administration systems.
The Company had met its milestone of having all administration systems
prepared for Year 2000 processing by December 31, 1998. These systems are used
by the Company to process its insurance business, including premium receipts and
claim payments. Currently, all administrative systems have been renovated and
the Company, working with its outsource provider, has tested all Year 2000
remediations and has placed these tested systems into production use. All
internal and corporate systems, such as file servers and desktop systems, are
scheduled to be Year 2000 ready by June 30, 1999. Approximately 95% of these
systems have been assessed for Year 2000 readiness and substantially all of
these are believed to be Year 2000 ready. The Company's imbedded systems, such
as phone switches, will be upgraded, as necessary, during 1999. The affected
systems have been identified. If the Company fails to successfully complete a
significant portion of the Year 2000 plan such failure may have a material
adverse impact on the Company's financial condition. Currently, management
considers the possibility of such a failure to be unlikely; however, in the
event management's assessment changes in the future, an appropriate contingency
plan will be developed.
A major part of the Company's Year 2000 plan relates to other business
entities on which the Company is reliant to conduct its operations. The
aforementioned Year 2000 committee has identified key business partners,
customers, vendors and suppliers to participate in a survey program. These
business entities are comprised of entities which impact many companies across
the country in varied industries, as well as entities with more limited
customers. Entities serving customers nationwide include the federal government,
the banking system, the postal service, national brokerage firms, stock
exchanges, and national overnight delivery providers. Local entities include the
Company's reinsurers, banks, computer hardware vendors, payroll processor,
public utilities and phone companies. After identifying the entities, the
Company sent surveys to each requesting information related to Year 2000
readiness. Management has developed a database to track survey responses and
will send any necessary second requests by April 15, 1999. If further requests
do not result in a response, a determination will be made at that time whether
further contact should be made. The responses to these surveys are being
evaluated by Company management to determine whether potential Year 2000
problems exist. If the Company believes a problem may exist, an appropriate
contingency plan will be developed to minimize any effect on the Company. The
Company is specifically reliant upon the federal government for various
functions including mail delivery of customer correspondence, national banking
activities and electronic list bill premium processing for government employees.
The federal government's policy is to not respond to Year 2000 surveys, so the
Company, like most organizations, has assumed the operations of the federal
government will not be significantly affected by Year 2000 problems. If problems
do arise, the operations of the Company may be materially adversely impacted.
The Company incurred expense through December 1998 related to this project
is $160,000. It is expected additional expenses will total $250,000 during 1999.
As these expenses are not significant to the Company's overall information
technology budget, this remediation plan will be funded from the Company's
normal operating cash flows. The remediation costs are nominal due to the
Company's service agreement with its third party provider. At this point in
time, other information systems projects have not suffered due to Year 2000
compliance efforts so as not to have an adverse effect on the Company's
operations.
The estimates and conclusions herein contain forward-looking statements and
are based on management's best estimates of future events. Risks to completing
the plan include the availability of trained personnel, management's ability to
discover and correct the potential Year 2000 sensitive problems which could have
a serious impact on specific facilities, and the ability of suppliers and
customers to bring their systems into Year 2000 compliance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The quantitative and qualitative disclosures about market risk are
contained in the "Asset-Liability Management" section of Management's Discussion
and Analysis of Financial Condition and Results of Operations included elsewhere
in this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited consolidated financial statements for the three years
ended December 31, 1998 and the related report of independent accountants
thereon are set forth at pages F-2 to F-28 hereof and are incorporated herein by
reference. Reference is made to the Index to Financial Statements on page F-1
herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's Directors and Executive Officers are as follows:
Name Age Position
Michael A. Merriman 41 Chairman of the Board and Director
Gary L. Muller 52 President, Chief Executive Officer and Director
Timothy S. Sotos 50 Director
Mark K. Fallon 44 Senior Vice President and
Assistant Secretary-Investments
David F. Hill 44 Senior Vice President and Chief Marketing Officer
Gary E. Jenkins 41 Senior Vice President, Chief Financial Officer
and Treasurer
Donna H. Kinnaird 47 Senior Vice President,
Chief Operating Officer-Kansas City
Americo's current Board of Directors consists of three directors. The
executive officers of Americo are elected by the Board of Directors from time to
time as it deems necessary or advisable, and are subject to removal by the
Board.
All executive decisions, including decisions concerning executive officer
compensation, are made by the Board of Directors. No member of the Board
receives any compensation, other than reimbursement for travel expenses, for
services as such.
Certain Information About Officers
Michael A. Merriman was elected Chairman of the Board, effective November
1, 1995, of Americo, FHC and several of its subsidiaries, including all of
Americo's insurance subsidiaries. Previously, Mr. Merriman served as a director
and officer of all these same entities.
Gary L. Muller is President and Chief Executive Officer and a director
of Americo. Mr. Muller is also a director and officer of FHC and of several
of its subsidiaries, including all of Americo's insurance subsidiaries.
Timothy S. Sotos was elected as a director of Americo on November 1, 1995.
He also serves as a director of all of the insurance subsidiaries. He is the
Chairman of the Board and Executive Vice President of Clinical Reference
Laboratory, which is 80% owned by the Merriman family. He is the brother-in-law
of Michael A. Merriman.
Mark K. Fallon became Senior Vice President and Assistant Secretary
Investments of Americo and all of the life subsidiaries on November 1, 1995.
Previously, he served as Vice President of Americo and all of the life
subsidiaries since 1993.
David F. Hill became Senior Vice President and Chief Marketing Officer of
Americo and all of the life insurance subsidiaries on July 1, 1996. Previously,
he was Senior Vice President of ReliaStar Financial Corporation from September
1993 to March 1996.
Gary E. Jenkins has served as Senior Vice President and Chief Financial
Officer of Americo since July 1994. He became Treasurer of Americo and the
insurance subsidiaries on November 1, 1995. From June 1993 to July 1994,
Mr. Jenkins provided financial consulting services to Aachen Holdings Inc.
(former shareholder of Academy Life Insurance Company).
Donna H. Kinnaird is Senior Vice President and Chief Operating Officer
Kansas City of Americo and has been Senior Vice President of its insurance
subsidiaries since August 1989. In 1994, she assumed the position of Chief
Operating Officer of the Kansas City-based insurance companies. She served as
Chief Financial Officer from 1989 to 1994.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation paid to (i) the Chief
Executive Officer of the Company and (ii) the other four most highly compensated
Executive Officers of the Company for the three years ended December 31, 1998.
Summary Compensation Table
<TABLE>
Name and
Principal Occupation Annual Compensation All Other
Year Salary Bonus Compensation (1)
<S> <C> <C> <C> <C>
Gary L. Muller 1998 $ 462,000 $ 350,000 $ 4,887
President, Chief Executive Officer and 1997 462,000 350,000 3,220
Director 1996 462,000 350,000 3,203
Michael A. Merriman 1998 363,000 -- 4,887
Chairman of the Board 1997 363,000 -- 3,220
1996 363,000 -- 3,203
Donna H. Kinnaird 1998 200,000 175,000 4,923
Senior Vice President and 1997 200,000 175,000 3,168
Chief Operating Officer-Kansas City 1996 190,000 175,000 3,203
Gary E. Jenkins 1998 200,000 175,000 4,925
Senior Vice President and, 1997 200,000 175,000 3,165
Chief Financial Officer and Treasurer 1996 175,000 175,000 3,203
David F. Hill 1998 200,000 175,000 4,927
Senior Vice President and 1997 200,000 175,000 103,308
Chief Marketing Officer 1996 100,000 75,000 31,000
</TABLE>
- ------------------------------------------------------
(1) Includes amounts contributed by the Company for the benefit of the person
identified under the Company's Saving Plan (as hereinafter defined) and
Supplemental Accidental Death and Dismemberment coverage. Includes
relocation and tax reimbursement in 1996 and 1997 for David F. Hill.
Supplemental Accidental Death and Dismemberment coverage in the amount of
$500,000 is provided for all senior officers of Americo and its subsidiaries
that hold the following named positions: Vice President, Senior Vice President,
Executive Vice President, President, Chief Executive Officer and Chairman of the
Board. Currently, this policy covers approximately 35 employees of Americo and
its subsidiaries.
Executive officers hold no outstanding options to purchase the Company's
stock.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company has 10,000 shares of Common Stock outstanding at March 25, 1999
all of which were beneficially owned by FHC, whose principal executive offices
are located at 300 West 11th Street, Kansas City, Missouri 64105 and whose phone
number is (816) 391-2000. The Company has no other outstanding shares of capital
stock.
The following table sets forth certain information with respect to
beneficial ownership by Directors and Executive Officers of Americo, named in
Item 11 "Summary Compensation Table" above, of FHC's Common Stock.
<TABLE>
Amount and Nature
of Beneficial
Ownership Actual Percent
Title of Class Names of Beneficial Owners of Class
------------------ ---------------
<S> <C> <C> <C>
Common Stock Michael A. Merriman 112,000 (1) 29.8%
Gary L. Muller 52,500 (2) 14.0%
Timothy S. Sotos 49,800 (3) 13.3%
All directors and executive officers as a group 214,300 57.1%
</TABLE>
- -----------------------------
(1) Includes (i) 40,000 shares held in irrevocable trust of Elaine A.
Merriman for the benefit of Michael A. Merriman and Marybeth Merriman
Sotos (the wife of Timothy S. Sotos), of which trust Michael A. Merriman
is the sole Trustee with sole voting and investment power and (ii) 9,000
shares held as Custodian for Jack D. Merriman, II, over which shares
Michael A. Merriman has sole voting and investment power.
(2) FHC has an option to acquire 17,301 of these shares at a per share price
of $188.
(3) Includes (i) 40,500 shares owned by Marybeth Merriman Sotos and (ii)
9,300 shares held as Custodian for Maryelaine Sotos, Timothy J. Sotos and
James P. Sotos, over which shares Timothy S. Sotos has sole voting and
investment power.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Agreements with FHC
Americo or one of its subsidiaries have the following agreements with FHC
or its affiliates, none of which may be deemed the result of arm's length
negotiations between independent parties.
Advisory Agreement. The Company appointed FHC to act as investment advisor
on a non-exclusive basis to the Company and its wholly-owned insurance
subsidiaries pursuant to an advisory agreement between the Company and FHC
("Advisory Agreement"). Under the Advisory Agreement, FHC supervises and directs
the composition of the investment portfolios of the Company and its insurance
subsidiaries in accordance with their respective objectives and policies. For
its services under the Advisory Agreement, FHC is paid in advance a quarterly
fee based on the aggregate statutory book value of the investable assets of the
Company and its subsidiaries as of the end of the prior fiscal quarter. Under
this formula the fee paid for the year ended December 31, 1998 was $8.1 million.
FHC also is entitled to receive reimbursement for certain commissions, brokerage
and other expenses incurred by it in the performance of its duties. The Company
recovers amounts paid to FHC under the Advisory Agreement from the insurance
subsidiaries, subject to regulatory limitations. The Advisory Agreement provides
that FHC shall not be liable for any losses except for those resulting from
willful misfeasance, bad faith or gross negligence, or from reckless disregard
by FHC of its duties.
<PAGE>
Data Processing Agreement. Pursuant to a data processing services agreement
("Data Processing Agreement") between FHC and the Company, FHC provides the
Company and its insurance subsidiaries with record-keeping services for certain
life insurance and annuity products. In providing these services, FHC utilizes
contract personnel and computerized data processing systems. For its services,
FHC is paid a fee of $15.87 for each policy serviced per year, subject to
renegotiation and annual adjustments based on changes in the consumer price
index. This amount generally represents FHC's cost of providing such services
plus amortization of FHC's development costs. The aggregate fee paid for the
year ended December 31, 1998 under the Data Processing Agreement was $14.5
million. FHC also is entitled to reimbursement for its reasonable out-of-pocket
expenses incurred in performing the Data Processing Agreement. The Company is
also a party to a separate data processing services agreement with its
wholly-owned insurance subsidiaries wherein the subsidiaries agree to use such
services and to pay for them pursuant to a separate data processing services
agreement (the "Subsidiary Data Processing Agreement"). Under the Data
Processing Agreement, Americo agrees to indemnify FHC against liabilities
arising out of, among other matters, actions taken by FHC under the agreement in
good faith and due diligence. Americo's subsidiaries made similar
indemnification agreements with Americo under the Subsidiary Data Processing
Agreement.
Reimbursement of Expense Agreement. The Company and its subsidiaries have
entered into a cost sharing agreement with FHC respecting air transportation
expenses arising from the use of an airplane owned by FHC. Under this agreement,
each party pays the cost of any air transportation expenses which can be
identified as incurred for its sole benefit and expenses which cannot be so
identified are allocated based on utilization. Americo and its subsidiaries
incurred approximately $0.3 million of expense under this agreement for the year
ended December 31, 1998.
FHC Lease. The Company's subsidiary, United Fidelity, owns a building in
Kansas City which is leased to and occupied by FHC. Under the terms of the
lease, FHC pays $8,500 per month in rent and has an option to purchase the
building for $1.2 million, an amount equal to its statutory book value and which
approximates its current fair market value. The exercise price of the option
will be revised annually to the greater of fair market value or statutory
carrying value. Management believes that the rentals under the lease are
comparable to market rental values for comparable space and footage in the local
market.
Other Transactions
In connection with the Joint Venture, referred to under "Marketing and
Distribution" contained in Item 1 herein, FHC and Annuity Service Corporation
("ASC") each entered into separate services agreements with FAL in 1993,
pursuant to which FHC and ASC provided certain administrative functions to FAL
with respect to certain tax-qualified insurance and annuity products ("403(b)
Business"). For these services, FAL paid a fixed fee (on a per policy basis) for
all 403(b) Business existing at December 31, 1992 and a percentage fee (based on
first year premiums) for all 403(b) Business written or reinsured by FAL after
December 31, 1992. FAL paid $1.4 million and $2.0 million to FHC and ASC,
respectively, under these service agreements during 1998. These services
agreements were terminated October 1, 1998, concurrent with the Company's
purchase of the 50% of CIG not previously owned by the Company.
FHC and certain of its non-life insurance subsidiaries, including the
Company, are parties to a tax sharing agreement under which (i) tax savings and
tax detriments inure to the benefit or detriment, respectively, of the party
contributing the expense or other item that reduces or increases, respectively,
the consolidated group's taxes from what they would have been had each member
filed separately, and (ii) losses arising from filing the consolidated return
and rights to average income by carryforwards and carrybacks are equitably
divided among the parties in the same manner that they benefited from savings
caused by filing a consolidated return.
United Fidelity leases office space (and related parking facilities) in
buildings owned by Broadway Square Partners, a general partnership in which one
of the partners is SCOL, Inc. ("SCOL"), a Missouri corporation, owned by members
of the Merriman family. The aggregate amount paid (including rentals and expense
reimbursement) under the lease to Broadway Square Partners in 1998 was
approximately $1,051,000. The terms of the lease are as favorable to the
Company's subsidiary as those offered other unaffiliated tenants of the
building.
Subsidiaries of the Company paid an aggregate of approximately $343,000 in
1998 to Clinical Reference Laboratory, Inc., a Kansas corporation ("Clinical
Laboratory"), which is 80% owned by the Merriman family and of which Timothy S.
Sotos is Chairman of the Board. The amounts paid were for medical testing
services performed for the Company's subsidiaries. The rates paid were
competitive with those charged by Clinical Laboratory to similarly situated
unaffiliated insurance companies for similar services.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules:
Reference is made to the indexes set forth on pages F-1 and S-1 of this
report.
Financial statements of the Company's 50% owned subsidiaries have been
omitted because the Company's proportionate share of the income from continuing
operations before income taxes of such subsidiaries is less than 20% of
consolidated income from continuing operations before income taxes, and the
Company's investment in and advances to such subsidiaries is less than 20% of
consolidated total assets of the Company.
(b) Exhibits:
<TABLE>
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
<S> <C>
2.1(a)(1) Stock Purchase Agreement dated January 21,
1997 between Great Southern Life Insurance
Company and Farmers Group, Inc.
(incorporated by reference from Exhibit
2.3(a) to Registrant's Form 10-K (File No.
33-64820)for the year ended December 31,
1996).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
2.1(a)(2) Amendment No. 1 dated April 15, 1997 to Stock
Purchase Agreement by and between Farmers
Group, Inc. and Great Southern Life Insurance
Company (incorporated by reference from
Exhibit 2.1(b) to Registrant's Form 10-Q
(File No. 33-64820) for the quarter ended
March 31, 1997).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
2.1(b) Automatic Coinsurance Reassurance Agreement
entered into between The Ohio State Life
Insurance Company and Employers Reassurance
Corporation (incorporated by reference from
Exhibit 2.3(b) to Registrant's Form 10-K
(File No. 33-64820) for the year ended
December 31, 1996).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
2.1(c) Automatic Coinsurance Reassurance Agreement
entered into between Investors Guaranty Life
Insurance Company and Employers Reassurance
Corporation (incorporated by reference from
Exhibit 2.3(c) to Registrant's Form 10-K (File
No. 33-64820) for the year ended December 31,
1996).
- ---------------- ----------------
- ---------------- ----------------
2.1(d) Modified Coinsurance Retrocession Agreement
(Ohio State Life Business) entered into
between Great Southern Life Insurance Company
and Employers Reassurance Corporation
(incorporated by reference from Exhibit 2.3(d)
to Registrant's Form 10-K (File No. 33-64820)
for the year ended December 31, 1996).
- ---------------- ----------------
- ---------------- ----------------
2.1(e) Modified Coinsurance Retrocession Agreement
(Investors Guaranty Life Business) to be
entered into between Great Southern Life
Insurance Company and Employers Reassurance
Corporation (incorporated by reference from
Exhibit 2.3(e) to Registrant's Form 10-K (File
No. 33-64820) for the year ended December 31,
1996).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
2.1(f) Escrow Agreement (Ohio State Life/Investors
Guaranty Life Business) entered into between
Great Southern Life Insurance Company and
Employers Reinsurance Corporation
(incorporated by reference from Exhibit 2.3(f)
to Registrant's Form 10-K (File No. 33-64820)
for the year ended December 31, 1996).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
2.1(g) Investment Management Agreement (Ohio State
Life Business) entered into between Americo
Life, Inc. and Employers Reassurance
Corporation (incorporated by reference from
Exhibit 2.3(g) to Registrant's Form 10-K
(File No. 33-64820) for the year ended
December 31, 1996).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
2.1(h) Investment Management Agreement (Investors
Guaranty Life Business) entered into between
Americo Life, Inc. and Employers Reassurance
Corporation (incorporated by reference from
Exhibit 2.3(h) to Registrant's Form 10-K
(File No. 33-64820)for the year ended
December 31, 1996).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
2.2 Stock Purchase Agreement dated February 27,
1998 between Great Southern Life Insurance
Company and John Hancock Mutual Life Insurance
Company related to the sale of Investors
Guaranty Life Insurance Company (incorporated
by reference from Exhibit 2.4 to Registrant's
Form 10-Q [File No. 33-64820] for the quarter
ended March 31, 1998).
- ---------------- ---------------- ----------------------------------------------
- ---------------- ---------------- ----------------------------------------------
2.3 Purchase Agreement dated October 1, 1998
between the Registrant, Robert L. Myer, Great
Southern Group, Inc., Marketing Services
Group, Inc., NAP Partners, Inc., and Pension
Consultants & Administrators, Inc.
(incorporated by reference from Exhibit 25 to
Registrant's Form 10-Q [File No. 33-64820]for
the quarter ended September 30, 1998).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
3.1 Restated Articles of Incorporation, as
amended, of the Registrant (incorporated by
reference from Exhibit 3.1 to Registrant's
Form S-4 (File No. 33-64820) filed June 22,
1993).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
3.2 Bylaws, as amended, of the Registrant
(incorporated by reference from Exhibit 3.2 to
Registrant's Form S-4 (File No. 33-64820)
filed June 22, 1993).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
4.1(a) Conformed copy of Indenture, dated as of May
25, 1993, between Registrant and Commerce
Bank of Kansas City, N.A., as trustee
(incorporated by reference from Exhibit 4.1
to Registrant's Form S-4 (File No. 33-64820)
filed June 22, 1993).
- ---------------- ---------------- ----------------------------------------------
- ---------------- ---------------- ---------------------------------------------
4.1(b) Form of 9 1/4% Senior Subordinated Note
Due 2005 (included in the Indenture filed as
Exhibit 4.1(a) hereto) (incorporated by
reference from Exhibit 4.2 to Registrant's
Form S-4 (File No.33-64820)filed June 22,
1993).
- ---------------- ---------------- ----------------------------------------------
- ---------------- ---------------- ----------------------------------------------
4.2(a) Credit Agreement dated as of July 6, 1995
between Registrant and The Chase Manhattan
Bank as administrative agent (incorporated by
reference from Exhibit 4.1(a) to Registrant's
Form 8-K (File No. 33-64820) dated as of July
10, 1995).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
4.2(b) Security Agreement dated as of July 5, 1995
between Registrant and The Chase Manhattan
Bank as administrative agent (incorporated by
reference from Exhibit 4.1(b) to Registrant's
Form 8-K report (File No. 33-64820) dated as
of July 10, 1995).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
4.2(c)(1) Amended and restated credit agreement
dated as of December 27, 1996 between
Registrant and The Chase Manhattan Bank as
administrative agent (incorporated by
reference from Exhibit 4.2(c) to Registrant's
Form 10-K (File No. 33-64820) for
the year ended December 31, 1996).
- ---------------- ---------------- ---------------------------------------------
<PAGE>
- ---------------- ---------------- ---------------------------------------------
4.2(c)(2) Amendment No. 1 to the amended and restated
credit agreement dated as of February 27,
1997, between the Registrant and The Chase
Manhattan Bank as administrative agent
(incorporated by reference from Exhibit 4.2(d)
to Registrant's Form 10-K (File No. 33-64820)
for the year ended December 31, 1996).
- ---------------- ---------------- ----------------------------------------------
- ---------------- ---------------- ----------------------------------------------
4.2(c)(3) Amendment No. 2 dated April 6, 1998 to the
amended and restated credit agreement dated
as of February 27, 1997, between the
Registrant and The Chase Manhattan Bank as
administrative agent (incorporated by
reference from Exhibit 4.2(c)(3) to
Registrant's Form 10-Q [File No. 33-64820]
for the quarter ended March 31, 1998).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
4.2(c)(4) Amendment No. 3 dated April 30, 1998 to
the amended and restated credit agreement
dated as of February 27, 1997, between the
Registrant and The Chase Manhattan Bank as
administrative agent (incorporated by
reference from Exhibit 4.2(c)(4) to
Registrant's Form 10-Q [File No.33-64820]
for the quarter ended March 31, 1998).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
4.3(a) Form of Registrant's $5,000,000 5 1/2%
Senior Subordinated Set-off Note due 2015
(Incorporated by reference from Exhibit 4.1
(c) to Registrant's From 8-K report [file
No. 33-64820] dated as of July 10, 1995).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
4.3(b)* Form of Registrant's $6,000,000, 6 1/2% Senior
Subordinated Note (No. VNO-1-R) due 2010. (Two
identical notes (No. VNO-1-R and No. VNO-2-R)
were issued in 1998 as replacements for notes
originally issued on July 10, 1995. Pursuant
to instruction 2 to Item 601 of Regulation
S-K, only VNO-1-R is filed.
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
4.4 Amended and Restated Surplus Debenture No.
004, dated December 31, 1993, as amended, in
the amount of $57,760,000 made by United
Fidelity Life Insurance Company (successor by
merger to FHC Life Insurance Company) to the
Registrant (incorporated by reference from
Exhibit 4.3 to Registrant's Form 10-Q (File
No. 33-64820) for the quarter ended March 31,
1994).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
4.5 Amended and Restated Surplus Debenture No.
005, dated December 31, 1993, in the amount of
$26,000,000 made by United Fidelity Life
Insurance Company (successor by merger to FHC
Life Insurance Company) to the Registrant
(incorporated by reference from Exhibit 4.4 to
Registrant's Form 10-Q (File No. 33-64820) for
the quarter ended March 31, 1994).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
4.6 Amended and Restated Surplus Debenture No.
006, dated December 1, 1995, as amended, in
the amount of $16,125,753 made by United
Fidelity Life Insurance Company to Registrant
(incorporated by reference from Exhibit 4.6
to Registrant's Form 10-K (File No. 33-64820)
for the year ended December 31, 1995).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
4.7 Surplus Debenture No.007 dated July 10, 1995,
in the amount of $38,000,000 made by United
Fidelity Life Insurance Company to the
Registrant (incorporated by reference from
Exhibit 4.3 to Registrant's Form 8-K report
(File No. 33-64820)dated as of July 10, 1995).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
4.8 In accordance with Item 601(b)(4)(iii)(A) of
Regulation S-K, certain instruments respecting
long term debt of the Registrant and its
subsidiaries have been omitted but will be
furnished to the Commission upon request.
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.1 Senior Officer Accidental Death and
Dismemberment Policy (incorporated by
reference from Exhibit 10.1 to Registrant's
Form S-4 (File No. 33-64820) filed
June 22, 1993).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.2(a) Tax Sharing Agreement dated as of December
1, 1994, among the Registrant, Financial
Holding Corporation, Cidat Aviation
Incorporated, Assured Leasing Corporation,
Landmark Mortgage Company, First Consulting &
Administration, Inc., Hanover Financial
Corporation, United Fidelity Life Insurance
Company, PFS Holding Company, Premium Finance
Specialists, Inc., Premium Financing
Specialists of California and PFS Financing
Corporation (incorporated by reference
from Exhibit 10.2 to Registrant's Form 10-K
(File No. 33-64820) for the year ended
December 31, 1994).
- ---------------- ---------------- ----------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.2(b) Amendment, effective as of January 1, 1996,
to Tax Sharing Agreement, adding the Victory
Life Insurance Company as a party
(incorporated by reference from Exhibit
10.2(b) to Registrant's Form 10-K [File No.
33-64820] for the year ended December 31,
1997).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.3(a) Reimbursement of Expense Agreement dated
January 1, 1993, among the Registrant,
Financial Holding Corporation, United Fidelity
Life Insurance Company, The College Life
Insurance Company of America, Loyalty Life
Insurance Company, National Farmers Union Life
Insurance Company, Great Southern Life
Insurance Company, PFS Holding Company and
Premium Financing Specialists, Inc.
(incorporated by reference from Exhibit 10.5
to Registrant's Form S-4 (File No. 33-64820)
filed June 22, 1993).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ----------------------------------------------
10.3(b) Amendment dated August 29, 1997, to
Reimbursement of Expense Agreement removing
Loyalty Life Insurance Company as a party
(incorporated by reference from Exhibit
10.3(b) to Registrant's Form 10-K [File No.
33-64820] for the year ended December 31,
1997).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.3(c) Amendment dated October 1, 1997, to
Reimbursement of Expense Agreement adding
Americo Services, Inc. and The Ohio State
Life Insurance Company as parties and
removing Argus Health Systems, Inc. as a
party (incorporated by reference from
Exhibit 10.3(c) to Registrant's Form 10-K
[File No. 33-64820] for the year ended
December 31, 1997).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.4(a) Cost Sharing Agreement dated as of January 1,
1993, among the Registrant, United Fidelity
Life Insurance Company, The College Life
Insurance Company of America, Premium
Financing Specialists, Inc., PFS Holding
Company, Financial Assurance Marketing
Corporation, Great Southern Life Insurance
Company, Loyalty Life Insurance Company and
National Farmers Union Life Insurance Company
(incorporated by reference from Exhibit 10.8
to Registrant's Form S-4 (File No. 33-64820)
filed June 22, 1993).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.4(b) Amendment dated August 29, 1997, to Cost
Sharing Agreement, removing Loyalty Life
Insurance Company as a party (incorporated
by reference from Exhibit 10.4(b) to
Registrant's Form 10-K [File No.33-64820] for
the year ended December 31, 1997).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.4(c) Amendment dated October 1, 1997, to Cost
Sharing Agreement adding Americo Services,
Inc. and The Ohio State Life Insurance Company
as parties and removing PFS Holding Company
and Premium Financing Specialists, Inc. as
parties (incorporated by reference from
Exhibit 10.4(c) to Registrant's Form 10-K
[File No. 33-64820] for the year ended
December 31, 1997).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.5 Data Processing Services Agreement dated as
of January 1, 1993, between the Registrant
and Financial Holding Corporation
(incorporated by reference from Exhibit 10.9
to Registrant's Form S-4 (File No. 33-64820)
filed June 22, 1993).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.6(a) Subsidiary Data Processing Services Agreement
dated as of January 1, 1993, among the
Registrant, FHC Life Insurance Company, United
Fidelity Life Insurance Company, Great
Southern Life Insurance Company, The College
Life Insurance Company of America, Loyalty
Life Insurance Company and National Farmers
Union Life Insurance Company (incorporated by
reference from Exhibit 10.10 to Registrant's
Form S-4 (File No. 33-64820) filed June 22,
1993).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.6(b) Amendment dated August 29, 1997, to Subsidiary
Data Processing Services Agreement removing
Loyalty Life as a party (incorporated by
reference from Exhibit 10.6(b) to Registrant's
Form 10-K [File No. 33-64820] for the year
ended December 31, 1997).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.6(c) Amendment dated October 1, 1997, to Subsidiary
Data Processing Services Agreement adding
Americo Services, Inc. and The Ohio State Life
Insurance Company as parties (incorporated by
reference from Exhibit 10.6(c) to Registrant's
Form 10-K [File No. 33-64820] for the year
ended December 31, 1997).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.7(a) Advisory Agreement dated as of January 1,
1993, between the Registrant and Financial
Holding Corporation (incorporated by reference
from Exhibit 10.11 to Registrant's Form S-4
(File No. 33-64820) filed June 22, 1993).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.7(b) First Amendment to Advisory Agreement dated
September 17, 1993 by and between the
Registrant and Financial Holding Corporation
(incorporated by reference from Exhibit
10.8(b) to Registrant's Form 10-Q (File No.
33-64820) for the quarter ended
March 31, 1994).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.8 Office Building Lease dated as of January 1,
1993, between Financial Holding Corporation
and United Fidelity Life Insurance Company
(incorporated by reference from Exhibit 10.12
to Registrant's Form S-4 (File No. 33-64820)
filed June 22, 1993).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.9 Lease Agreement dated February 24, 1988,
between Broadway Square partners and United
Fidelity Life Insurance Company (incorporated
by reference from Exhibit 10.13 to
Registrant's Form S-4 (File No. 33-64820)
filed June 22, 1993).
- ---------------- ---------------- ----------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.9(a)* First Amendment to Lease Agreement dated
October 10, 1998, between Broadway Square
Partners and United Fidelity Life Insurance
Company.
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.10 Lease dated November 1, 1990, between United
Fidelity Life Insurance Company and First
Consulting & Administration, Inc., a
subsidiary of Financial Holding Corporation
(included as Exhibit A to Exhibit 10.11)
(incorporated by reference from Exhibit 10.14
to Registrant's Form S-4 (File No. 33-64820)
filed June 22, 1993).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.11 Assignment of Lease dated as of April 1,
1993 between United Fidelity Life Insurance
Company and Finance Holding Corporation
respecting the First Consulting &
Administration Lease described in Exhibit
10.10 (incorporated by reference from Exhibit
10.15 to Registrant's Form S-4 (File No.
33-64820) filed June 22, 1993).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.12 Office Lease Agreement dated February 19,
1997, between Metropolitan Life Insurance
Company and Great Southern Life Insurance
(incorporated by reference from Exhibit
10.12 to Registrant's Form 10-K [File No.
33-64820]for the year ended December
31, 1997).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.13 Stock Transfer Restriction and Option
Agreement dated June 30, 1989 among DST
Systems, Inc., Argus Health Systems,
Inc. and Financial Holding Corporation
(incorporated by reference from Exhibit 10.22
to Registrant's Form S-4 (File No. 33-64820)
filed June 22, 1993).
- ---------------- ---------------- ----------------------------------------------
- ---------------- ---------------- ----------------------------------------------
10.14 Supplemental Tax Sharing Agreements dated
December 31, 1993 among Financial Holding
Corporation, the Registrant and United
Fidelity Life Insurance Company (incorporated
by reference from Exhibit 10.20 to
Registrant's Form 10-Q (File No. 33-64820) for
the Quarter Ended March 31, 1994).
- ---------------- ---------------- ----------------------------------------------
- ---------------- ---------------- ----------------------------------------------
10.15(a)(1) Master Agreement dated as of July 31, 1995,
among The Ohio Life Insurance Company, The
Ohio Casualty Insurance Company, the
Registrant and Great Southern Life Insurance
Company (incorporated by reference from
Exhibit 10.21 to Registrant's Form 10-Q (File
No. 33-64820) for the quarter ended June 30,
1995).
- ---------------- ---------------- ----------------------------------------------
10.15(a)(2) First Amendment to Master Agreement between
The Ohio Life Insurance Company, The Ohio
Casualty Insurance Company and Great
Southern Life Insurance Company dated as of
October 2, 1995 (incorporated by reference
from Exhibit 10.21(b) to Registrant's
Form 10-Q (File No. 33-64820) for the quarter
ended September 30, 1995).
- ---------------- ---------------- ---------------------------------------------
- ----------------- --------------- ---------------------------------------------
10.15(a)(3) Second Amendment to Master Agreement between
The Ohio Life Insurance Company, The Ohio
Casualty Insurance Company and Great
Southern Life Insurance Company dated as of
November 17, 1997 (incorporated by
reference from Exhibit 10.20(a)(3) to
Registrant's Form 10-K [File No. 33-64820]
for the year ended December 31, 1997).
- ----------------- --------------- ---------------------------------------------
- ---------------- ---------------- ----------------------------------------------
10.15(b) Assignment and Assumption Agreement between
The Ohio Life Insurance Company and Great
Southern Life Insurance Company dated as of
October 2, 1995 (incorporated by reference
from Exhibit 10.21(c) to Registrant's Form
10-Q (File No. 33-64820) for the quarter
ended September 30, 1995).
- ---------------- ---------------- ---------------------------------------------
<PAGE>
- ---------------- ---------------- ---------------------------------------------
10.15(c) Escrow Agreement between Commerce Bank, N.A.
of Kansas City, Missouri, Employers
Reassurance Corporation of Overland Park,
Kansas and Great Southern Life Insurance
Company dated as of October 2, 1995
(incorporated by reference from Exhibit
10.21(e) to Registrant's Form 10-Q (File No.
33-64820) for the quarter ended September 30,
1995).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.15(d) Escrow Agreement between Commerce Bank, N.A.
of Kansas City, Missouri, Employers
Reassurance Corporation of Overland Park,
Kansas and The Ohio Casualty Insurance
Company dated as of October 2, 1995
(incorporated by reference from Exhibit
10.21(f) to Registrant's Form 10-Q (File No.
33-64820) for the quarter ended September 30,
1995).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.15(e) Investment Management Agreement between the
Registrant and Employers Reassurance
Corporation of Overland Park, Kansas dated
as of October 2, 1995 (incorporated by
reference from Exhibit 10.21(g) to
Registrant's Form 10-Q (File No. 33-64820)
for the quarter ended September 30, 1995).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.15(f) Assumption Reinsurance Agreement between
The Ohio Life Insurance Company and Great
Southern Life Insurance Company dated as of
October 2, 1995 (incorporated by reference
from Exhibit 10.21(i) to Registrant's Form
10-Q (File No. 33-64820)for the quarter ended
September 30, 1995).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ----------------------------------------------
10.15(g)(1) Reinsurance Agreement between Employers
Reassurance Company of Overland Park,
Kansas and The Ohio Life Insurance Company,
effective January 1, 1995 (transfer date
October 2, 1995) and amendments thereto
(incorporated by reference from Exhibit
10.21(k) to Registrant's Form 10-Q (File No.
33-64820) for the quarter ended September 30,
1995).
- ---------------- ---------------- ----------------------------------------------
- ----------------- --------------- ----------------------------------------------
10.15(g)(2) Amendment No. 4 to the Reinsurance Agreement
between Employers Reassurance Company of
Overland Park, Kansas and The Ohio Life
Insurance Company effective April 1, 1996
(incorporated by reference from Exhibit
10.20(g)(2) to Registrant's Form 10-K [File
No. 33-64820] for the year ended December 31,
1997).
- ----------------- --------------- ----------------------------------------------
- ---------------- ---------------- ----------------------------------------------
10.15(h) Retrocession Agreement between Great
Southern Life Insurance Company and
Employers Reassurance Company of Overland
Park, Kansas, effective January 1, 1995
and amendments thereto (incorporated by
reference from Exhibit 10.21(l) to
Registrant's Form 10-Q (File No. 33-64820)
for the quarter ended September 30, 1995).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.15(i)(1) Services Agreement between the Registrant,
The Ohio Life Insurance Company and The Ohio
Casualty Insurance Company dated as of October
2, 1995 (incorporated by reference from
Exhibit 10.21(m) to Registrant's Form 10-Q
(File No. 33-64820)for the quarter ended
September 30, 1995).
- ---------------- ---------------- ---------------------------------------------
- ----------------- --------------- ---------------------------------------------
10.15(i)(2) First Amendment to Services Agreement between
the Registrant, The Ohio Life Insurance
Company and The Ohio Casualty Insurance
Company dated as of March 27, 1997
(incorporated by reference from Exhibit
10.20(i)(2) to Registrant's Form 10-K [File
No. 33-64820] for the year ended December 31,
1997).
- ----------------- --------------- ----------------------------------------------
- ----------------- --------------- ---------------------------------------------
10.15(i)(3) Amendment to Services Agreement between the
Registrant, The Ohio Life Insurance Company
and The Ohio Casualty Insurance Company dated
as of November 17, 1997 (incorporated by
reference from Exhibit 10.20(i)(3) to
Registrant's Form 10-K [File No. 33-64820] for
the year ended December 31, 1997).
- ----------------- --------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.16(a) Master Agreement dated February 26, 1996 among
Fremont Life Insurance Company, Fremont
General Corp., the Registrant and Great
Southern Life Insurance Company (incorporated
by reference from Exhibit 10 to Registrant's
Form 10-Q (File No. 33-64820) for the quarter
ended March 31, 1996).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.16(b) First Amendment to Master Agreement dated as
of July 1, 1996, among Fremont Life Insurance
Company, Fremont General Corp., Registrant and
Great Southern Life Insurance Company
(incorporated by reference from Exhibit
10.1(b) to Registrant's Form 10-Q (File No.
33-64820) for the quarter ended June 30,
1996).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.16(c) Letter Agreement dated as of July 1, 1996,
among Fremont General Corp., Fremont Life
Insurance Company, Registrant and Great
Southern Life Insurance Company (incorporated
by reference from Exhibit 10.1(c) to
Registrant's Form 10-Q (File No. 33-64820) for
the quarter ended June 30, 1996).
- ---------------- ---------------- ---------------------------------------------
<PAGE>
- ---------------- ---------------- ---------------------------------------------
10.16(d) Services Agreement dated as of July 1, 1996,
between Registrant and Fremont Life Insurance
Company (incorporated by reference from
Exhibit 10.1(d) to Registrant's Form 10-Q
(File No. 33-64820) for the quarter ended June
30, 1996).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.16(e) Assumption Reinsurance and Coinsurance
Agreement (Universal Life) dated as of July 1,
1996, between Fremont Life Insurance Company
and Great Southern Life Insurance Company
(incorporated by reference from Exhibit
10.1(e) to Registrant's Form 10-Q (File No.
33-64820) for the quarter ended June 30,
1996).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.16(f) Assumption Reinsurance and Coinsurance
Agreement (Annuities) dated as of July 1,
1996, between Fremont Life Insurance Company
and Great Southern Life Insurance Company
(incorporated by reference from Exhibit
10.1(f) to Registrant's Form 10-Q (File No.
33-64820) for the quarter ended June 30,
1996).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.16(g) Assignment and Assumption Agreement dated as
of July 1, 1996, between Fremont Life
Insurance Company and Great Southern Life
Insurance Company (incorporated by reference
from Exhibit 10.1(g) to Registrant's Form 10-Q
(File No. 33-64820)for the quarter ended June
30, 1996).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.16(h) Automatic Coinsurance Universal Life
Reinsurance Agreement dated as of December 31,
1995, between Fremont Life Insurance Company
and Employers Reassurance Corporation
(incorporated by reference from Exhibit
10.1(h) to Registrant's Form 10-Q (File No.
33-64820) for the quarter ended June 30,
1996).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.16(i) Amendment No. 1 to the Automatic Coinsurance
Universal Life Reinsurance Agreement dated
as of December 31, 1995, between
Employers Reassurance Corporation and
Fremont Life Insurance Company (incorporated
by reference from Exhibit 10.1(i) to
Registrant's Form 10-Q (File No. 33-64820)
for the quarter ended June 30, 1996).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.16(j) Automatic Coinsurance Annuity Reinsurance
Agreement dated as of January 1, 1996, between
Employers Reassurance Corporation and Fremont
Life Insurance Company (incorporated by
reference from Exhibit 10.1(j) to Registrant's
Form 10-Q (File No. 33-64820) for the quarter
ended June 30, 1996).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.16(k) Amendment No. 1 to the Automatic Coinsurance
Annuity Reinsurance Agreement dated as of
January 1, 1996, between Employers Reassurance
Corporation and Fremont Life Insurance Company
(incorporated by reference from Exhibit
10.1(k) to Registrant's Form 10-Q (File No.
33-64820) for the quarter ended June 30,
1996).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.16(l) Escrow Agreement dated as of July 1, 1996,
among Commerce Bank, Employers Reassurance
Corporation and Great Southern Life Insurance
Company (incorporated by reference from
Exhibit 10.1(l) to Registrant's Form 10-Q
(File No. 33-64820)for the quarter ended
June 30, 1996).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.16(m) Modified Coinsurance Annuity Retrocession
Agreement dated as of January 1, 1996, between
Employers Reassurance Corporation and Great
Southern Life Insurance Company (incorporated
by reference from Exhibit 10.1(m) to
Registrant's Form 10-Q (File No. 33-64820) for
the quarter ended June 30, 1996).
- ---------------- ---------------- ----------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.16(n) Modified Coinsurance Universal Life and
Annuity Retrocession Agreement dated as
of December 31, 1995, between Employers
Reassurance Corporation and Great Southern
Life Insurance Company (incorporated by
reference from Exhibit 10.1(n) to
Registrant's Form 10-Q (File No. 33-64820)
for the quarter ended June 30, 1996).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.16(o) Amendment No. 1 to the Investment Management
Agreement dated as of December 31, 1995,
between Registrant and Employers Reassurance
Corporation (incorporated by reference from
Exhibit 10.1(o) to Registrant's Form 10-Q
(File No. 33-64820) for the quarter ended
June 30, 1996).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.17(a) Agreement to Redeem Partnership Interest
among Great Southern Life Insurance
Company, GSSW Limited Partnership, BGFRTS,
L.C., and Southwestern Life Insurance Company
dated December 30, 1996 (incorporated by
reference from Exhibit 10.22(a) to
Registrant's Form 10-K (File No. 33-64820)
for the year ended December 31, 1996).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.17(b) Agreement Regarding Purchase, Sale, and
Assignment of Membership Interest among Great
Southern Life Insurance Company, Southwestern
Financial Services Corporation, and
Southwestern Life Insurance Company dated
December 30, 1996 (incorporated by reference
from Exhibit 10.22(b) to Registrant's Form
10-K (File No. 33-64820) for the year ended
December 31, 1996).
- ---------------- ---------------- ---------------------------------------------
- ---------------- ---------------- ---------------------------------------------
10.17(c) Agreement Regarding Purchase and Sale of
General Partner Interests between Americo
Services, Inc. and GSSW -- REO Ownership
Corporation dated December 30, 1996
(incorporated by reference from Exhibit
10.22(c) to Registrant's Form 10-K (File No.
33-64820) for the year ended December 31,
1996).
- ---------------- ---------------- ----------------------------------------------
- ---------------- ---------------- ----------------------------------------------
*21. Subsidiaries of the Registrant
- ---------------- ---------------- ----------------------------------------------
- ---------------- ---------------- -----------------------------------------------
*27. Financial Data Schedule
- ---------------- ---------------- ----------------------------------------------
- ----------------------------
</TABLE>
(c) Reports on Form 8-K.
There were no reports on Form 8-K filed for the three months ended
December 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Kansas
City and the State of Missouri, on the 30st day of March, 1999.
AMERICO LIFE, INC.
By: /s/ Gary L. Muller
-----------------------------------------------------
Name: Gary L. Muller
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated: <TABLE>
Title Date
<S> <C> <C>
/s/ Michael A. Merriman Chairman of the Board of March 30, 1999
- --------------------------------------------- Directors
Michael A. Merriman
/s/ Gary L. Muller President, Chief Executive March 30, 1999
- ---------------------------------------------- Officer and Director
Gary L. Muller
/s/ Gary E. Jenkins Senior Vice President, Chief March 30, 1999
- ---------------------------------------------- Financial Officer and Treasurer
Gary E. Jenkins (Principal Financial Officer and
Principal Accounting Officer)
</TABLE>
<PAGE>
F-2
AMERICO LIFE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Page
Audited Financial Statements for the Three Years Ended December 31, 1998:
Report of Independent Accountants F-2
Consolidated Balance Sheet at December 31, 1998 and 1997 F-3
Consolidated Statement of Income for the Years Ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statement of Stockholder's Equity for the Years Ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statement of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Stockholder of Americo Life, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholder's equity and of cash flows
present fairly, in all materials respects, the financial position of Americo
Life, Inc. and its subsidiaries at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri
March 29, 1999
<PAGE>
See accompanying notes to consolidated financial statements
F-7
Americo Life, Inc. and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)
December 31, 1998 and 1997
<TABLE>
1998 1997
---- ----
Assets
<S> <C> <C>
Investments:
Fixed Maturities:
Held to maturity, at amortized cost (market: $914,672 and $873,935) $ 876,594 $ 851,823
Available for sale, at market (amortized cost: $893,664 and $735,955) 925,191 761,084
Equity securities, at market (cost: $42,201 and $50,837) 89,022 78,949
Investment in equity subsidiaries 9,669 21,670
Mortgage loans on real estate, net 190,074 165,630
Investment real estate, net 28,606 27,630
Policy loans 210,173 200,137
Other invested assets 17,066 18,890
------------- -------------
Total investments 2,346,395 2,125,813
Cash and cash equivalents 68,219 36,859
Accrued investment income 31,862 27,620
Amounts receivable from reinsurers 1,207,197 1,429,679
Other receivables 36,529 23,875
Deferred policy acquisition costs 131,574 87,840
Cost of business acquired 247,125 300,180
Other assets 36,913 29,370
------------- -------------
Total assets $ 4,105,814 $ 4,061,236
============= =============
Liabilities and Stockholder's Equity
Policyholder account balances $ 2,501,113 $ 2,486,436
Reserves for future policy benefits 833,917 881,583
Unearned policy revenues 36,332 36,063
Policy and contract claims 45,467 36,570
Other policyholder funds 106,241 75,960
Notes payable 132,533 132,884
Amounts payable to reinsurers 28,199 12,200
Federal income taxes payable -- 164
Deferred income taxes 63,600 58,126
Due to broker 36,275 31,836
Amounts due to affiliates 3,085 3,137
Other liabilities 61,872 59,415
------------- -------------
Total liabilities 3,848,634 3,814,374
Stockholder's equity:
Common stock ($1 par value, 30,000 shares authorized, 10,000 shares issued
and ..
outstanding) 10 10
Additional paid-in capital 3,745 3,745
Accumulated other comprehensive income 60,499 56,973
Retained earnings 192,926 186,134
------------- -------------
Total stockholder's equity 257,180 246,862
------------- -------------
Commitments and contingencies
Total liabilities and stockholder's equity $ 4,105,814 $ 4,061,236
============= =============
</TABLE>
Americo Life, Inc. and Subsidiaries
Consolidated Statement of Income
(Dollars in thousands, except per share amounts)
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income
Premiums and policy revenues $ 218,582 $ 203,729 $ 165,602
Net investment income 226,534 219,267 186,725
Net realized investment gains (losses) 8,284 2,950 (120)
Gain on disposition of partnership interest -- -- 15,825
Other income 12,163 12,331 3,567
----------- ----------- -----------
Total income 465,563 438,277 371,599
----------- ----------- -----------
Benefits and expenses
Policyholder benefits:
Death benefits 113,552 116,196 91,996
Interest credited on universal life and annuity products 108,664 109,392 84,495
Other policyholder benefits 53,135 55,790 57,088
Change in reserves for future policy benefits (23,845) (18,438) (14,920)
Commissions 13,390 11,230 13,473
Amortization expense 87,189 43,694 29,714
Interest expense 12,057 12,089 12,263
Other operating expenses 89,394 77,038 56,703
----------- ----------- -----------
Total benefits and expenses 453,536 406,991 330,812
----------- ----------- -----------
Income before provision for income taxes 12,027 31,286 40,787
Provision for income taxes 3,235 9,230 13,513
----------- ----------- -----------
Net income $ 8,792 $ 22,056 $ 27,274
=========== =========== ===========
Net income per common share $ 879.20 $ 2,205.60 $ 2,727.40
=========== =========== ===========
</TABLE>
<PAGE>
Americo Life, Inc. and Subsidiaries
Consolidated Statement of Stockholder's Equity
(Dollars in thousands)
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Common stock
Balance at beginning and end of year $ 10 $ 10 $ 10
--------- --------- ---------
Additional paid-in capital
Balance at beginning and end of year 3,745 3,745 3,745
--------- --------- ---------
Accumulated other comprehensive income
Balance at beginning of year 56,973 37,189 46,204
Change during year 3,526 $ 3,526 19,784 $19,784 (9,015) $ (9,015)
--------- --------- ---------
Balance at end of year 60,499 56,973 37,189
--------- --------- ---------
Retained earnings
Balance at beginning of year 186,134 166,078 140,804
Net income 8,792 8,792 22,056 22,056 27,274 27,274
--------- --------- ---------
Comprehensive income $ 12,318 $ 41,840 $ 18,259
========= ========= =========
Dividends (2,000) (2,000) (2,000)
--------- --------- ---------
Balance at end of year 192,926 186,134 166,078
--------- --------- ---------
Total stockholder's equity $ 257,180 $ 246,862 $ 207,022
========= ========= =========
</TABLE>
<PAGE>
Americo Life, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(Dollars in thousands)
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 8,792 $ 22,056 $ 27,274
----------- ---------- --------
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization 86,679 47,305 30,103
Deferred policy acquisition costs (61,179) (34,220) (19,337)
Undistributed earnings of equity subsidiaries (2,581) (3,622) (5,458)
Distributed earnings of equity subsidiaries 9,943 -- 14,000
Amortization of unrealized investment gains (14,407) (6,973) (6,059)
(Increase) decrease in assets net of effects from business acquisitions:
Accrued investment income (3,277) (797) (1,398)
Other invested assets -- -- (1,596)
Amounts receivable from reinsurers 64,438 (162,334) (54,942)
Other receivables (14,483) (9,824) (2,527)
Other assets, net of amortization 6,586 10,462 (2,274)
Increase (decrease) in liabilities net of effects from business acquisitions:
Reserves for future policy benefits and unearned policy revenues (49,315) 371 (7,489)
Policyholder account balances 5,747 72,899 10,573
Policy and contract claims 8,857 (2,258) 7,654
Other policyholder funds 30,279 (5,482) (11,265)
Amounts payable to reinsurers 15,999 (2,053) (6,734)
Federal income taxes payable (164) 164 --
Provision for deferred income taxes 3,757 4,277 5,576
Other liabilities 1,104 7,207 (5,775)
Amounts due to/due from affiliates (3,362) (4,100) 10,739
Net realized (gains) losses on investments (8,284) (2,950) 120
Gain on disposition of partnership interest -- -- (15,825)
Gain on sale of subsidiary (4,855) (4,848) --
Amortization on bonds and mortgage loans 3,425 1,722 2,244
Other changes (4,902) (4,564) (4,470)
------------ ---------- -----------
Total adjustments 70,005 (99,618) (64,140)
----------- ---------- -----------
Net cash provided (used) by operating activities 78,797 (77,562) (36,866)
----------- ---------- -----------
(Continued)
</TABLE>
<PAGE>
Americo Life, Inc. and Subsidiaries
Consolidated Statement of Cash Flows (Continued)
(Dollars in thousands)
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Purchases of fixed maturity investments $ (338,645) $ (421,408) $ (304,743)
Purchases of equity securities (107,983) (67,815) (24,072)
Purchases of other investments (7,972) (21,944) (6)
Mortgage loans originated (51,461) (24,777) (1,323)
Maturities or redemptions of fixed maturity investments 32,110 89,206 45,791
Sales of fixed maturity investments 257,910 380,251 190,368
Sales of equity securities 108,383 173,455 --
Sales of other investments 11,494 13,257 19,738
Sale of subsidiary, net of cash sold 13,779 10,911 --
Redemption of partnership interest -- -- 22,440
Payment for subsidiaries acquired, net of cash acquired (15,377) (248,581) --
Repayments from mortgage loans 27,818 45,287 40,401
Change in due to broker 3,151 (18,662) 5,014
Acquisition of equity subsidiary -- -- (4,550)
Change in policy loans 4,723 4,470 6,459
----------- ----------- -----------
Net cash used by investing activities (62,070) (86,350) (4,483)
------------ ----------- -----------
Cash flows from financing activities
Repayments of notes payable (283) (542) (545)
Receipts credited to policyholder account balances 284,251 192,648 176,845
Return of policyholder account balances (267,335) (85,404) (95,878)
Dividends paid (2,000) (2,000) (2,000)
------------ ----------- -----------
Net cash provided by financing activities 14,633 104,702 78,422
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 31,360 (59,210) 37,073
Cash and cash equivalents at beginning of year 36,859 96,069 58,996
----------- ----------- -----------
Cash and cash equivalents at end of year $ 68,219 $ 36,859 $ 96,069
=========== =========== ========
Supplemental disclosures of cash flow information Cash paid during year for:
Interest $ 12,084 $ 12,095 $ 12,280
Income taxes (359) 4,789 5,226
Supplemental schedule of non-cash investing and financing activities Acquisition
of subsidiaries:
Fair value of assets acquired, net of cash acquired $ 19,733 948,724 $ --
Liabilities (4,356) (700,143) --
------------ ------------ ------------
Payment for subsidiaries acquired, net of cash acquired $ 15,377 $ 248,581 $ --
======== =========== ====
</TABLE>
<PAGE>
F-29
Americo Life, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
1. Organization and Summary of Significant Accounting Policies
Americo Life, Inc. ("the Company") is a holding company for the following
stock life insurance companies, all of which are 100% owned: United Fidelity
Life Insurance Company ("United Fidelity"), Great Southern Life Insurance
Company ("Great Southern"), The College Life Insurance Company of America
("College Life"), National Farmers Union Life Insurance Company ("National
Farmers") and The Ohio State Life Insurance Company ("Ohio State"), collectively
referred to as the Insurance Companies. In May 1998, the Company sold Investors
Guaranty Life Insurance Company ("Investors Guaranty") to an unrelated party
and, in August 1997, the Company sold Loyalty Life Insurance Company ("Loyalty
Life") to an unrelated party. College Life owns 100% of College Insurance Group,
Inc. ("CIG"), a holding company which owns 100% of Financial Assurance Life
Insurance Company ("Financial Assurance"), a stock life insurance company, NAP
Partners, Inc., Pension Consultants and Administrators, Inc. and Annuity Service
Corp. The Company also has a 50% interest in Argus Health Systems, Inc.
("Argus"), which processes prescription drug claims. In December 1996, the
Company acquired a 50% interest in Hereford LLP, which owns and manages the
building leased by Argus. Also, in December 1996, Great Southern disposed of its
interest in GSSW Limited Partnership ("GSSW"), a real estate holding company.
The Company is a wholly-owned subsidiary of Financial Holding Corporation
("FHC").
All of the Insurance Companies are domiciled in Texas. One or more of the
Insurance Companies is licensed in the District of Columbia and all states
except New York. The above companies comprise an Insurance Company Holding Group
as defined by the laws of the State of Texas and are bound by certain
regulations thereof in the conduct of their business.
Principles of consolidation and basis of presentation
The consolidated financial statements include the accounts of the Company
and its direct and indirect wholly-owned subsidiaries. The Insurance Companies
maintain their accounts in conformity with accounting practices prescribed or
permitted by state insurance regulatory authorities. In the accompanying
financial statements, such accounts have been adjusted to conform with generally
accepted accounting principles (GAAP). All significant intercompany accounts and
transactions have been eliminated in consolidation.
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.
Investments
Fixed maturity investments classified as held to maturity are debt
securities for which the Company has the positive intent and ability to hold to
maturity and are stated at amortized cost with premiums amortized to call dates
and discounts amortized to maturity dates. Marketable equity securities and
fixed maturities available for sale are reported at market value and the
resulting unrealized gains or losses, net of applicable income taxes, are
credited or charged to stockholder's equity. If a decline in the market value of
an individual investment is considered to be other than temporary, the loss is
recorded as a realized investment loss. Gains or losses on sales of securities
are computed using the specific identification method.
<PAGE>
Americo Life, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
When the Company recognizes changes in conditions that cause a fixed
maturity investment to be transferred to a different category (e.g. held to
maturity or available for sale), the security is transferred at market value. If
the security is transferred from available for sale to held to maturity, the
related unrealized gain or loss is amortized to investment income over the
remaining life of the security. If the security is transferred from held to
maturity to available for sale, the unrealized gain or loss is included in
stockholder's equity.
For mortgage-backed securities, the Company anticipates prepayments
utilizing published data when applying the interest method. Periodic adjustments
to securities' carrying values as a result of changes in actual and anticipated
prepayments are credited or charged to net investment income.
Equity securities, consisting of marketable common and nonredeemable
preferred stocks, are carried at market value. The Company's 50% or less owned
subsidiaries are accounted for using the equity method, under which the
Company's proportionate share of earnings is recorded as a component of net
investment income.
Mortgage loans on real estate are stated at aggregate unpaid principal
balances, net of unamortized purchase premiums or discounts and less allowances
for estimated losses. Unamortized purchase premiums or discounts are amortized
using the effective yield method over the life of the related loan.
Policy loans are stated at aggregate unpaid principal balances.
Investment real estate is stated at cost, less allowances for depreciation
and, as appropriate, provisions for possible losses.
The Company utilizes futures contracts to manage risks related to its fixed
maturities and equity securities portfolio. For those contracts which qualify
for hedge accounting, gains or losses on open contracts are recorded as an
adjustment to the basis of the assets hedged and are included in net unrealized
investment gains. Deferred gains or losses on terminated hedges on fixed
maturities are amortized into income over the remaining life of the asset.
Deferred gains or losses on terminated hedges on equity securities remain until
the equity security is sold. For those contracts which do not qualify for hedge
accounting, gains or losses are recorded as realized investment gains or losses.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and
displaying comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income includes all changes
in stockholder's equity during a period except those resulting from investments
by owners and distributions to owners. The adoption of SFAS 130 resulted in
revised and additional disclosures but had no effect on the financial position,
results of operations, or liquidity of the Company.
Also in June 1997, the FASB issued Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). This statement specifies revised guidelines for
determination of an entity's operating segments and the type and level of
financial information to be disclosed. The adoption of this statement resulted
in revised and additional disclosures but had no effect on the financial
position, results of operations, or liquidity of the Company.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") approved Statement of Position ("SOP") 97-3, "Accounting by Insurance
and Other Enterprises for Insurance-Related Assessments." SOP 97-3 provides
guidance for determining when an entity should recognize a liability for
guaranty-fund and other insurance-related assessments and a related asset for
assessments which may be recovered through future premium tax offsets. The SOP
is effective for financial statements for fiscal years beginning after December
15, 1998 with early adoption encouraged. Adoption of this accounting standard
will not have a significant impact on the consolidated financial statements of
the Company.
<PAGE>
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 provides guidance related to
the accounting for derivative instruments and hedging activities focusing on the
recognition and measurement of derivative instruments. This statement is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. Adoption of this accounting standard will not have a significant impact on
the consolidated financial statements of the Company.
Cash equivalents
The Company considers all highly liquid financial instruments with an
original maturity of three months or less to be cash equivalents.
Deferred policy acquisition costs and cost of business acquired
The costs of new business produced, principally commissions, certain policy
issue and underwriting expenses and certain variable agency expenses, are
deferred. The cost of business acquired represents the amount of purchase price
assigned to the value of the policies at acquisition. The cost of business
acquired asset is no greater than the actuarially determined present value of
future profits of the policies purchased. For traditional life products, these
costs are amortized in proportion to premium revenues over the premium-paying
period of related policies using assumptions consistent with those used in
computing benefit reserves. For universal life, interest-sensitive and
investment products, these costs are amortized in relation to the present value,
using the current credited interest rate, of expected gross profits of the
policies over the anticipated coverage period.
Retrospective adjustment of these amounts are made annually upon the
revision of estimates of current or future gross profits on universal life-type
and annuity products to be realized from a group of policies. Recoverability of
deferred policy acquisition costs and the cost of business acquired is evaluated
annually by comparing the current estimate of future profits to the unamortized
asset balances. The revision of estimates of future gross profits increased
(decreased) income related to deferred policy acquisition costs before provision
for income taxes by $6,203, $(4,131) and $1,446 for the years ended December 31,
1998, 1997 and 1996, respectively. The revision of estimates of future gross
profits increased (decreased) income related to the cost of business acquired
before provision for income taxes by $(7,105), $1,617 and $(4,673) for the years
ended December 31, 1998, 1997 and 1996, respectively.
Anticipated investment returns, including realized gains and losses, from
the investment of policyholder balances are considered in determining the
amortization of deferred policy acquisition costs, the cost of business acquired
and unearned policy revenues. When fixed maturities are stated at market value
an adjustment is made to the deferred policy acquisition costs, the cost of
business acquired and unearned policy revenues equal to the change in
amortization that would have been recorded if those fixed maturities had been
sold at their fair value and the proceeds reinvested at current yields. This
adjustment is recorded net of income tax directly to the accumulated other
comprehensive income component of stockholder's equity.
Universal life-type and annuity products
Policyholder account balances of universal life-type, interest-sensitive
and annuity products represent accumulated contract values, without reduction
for potential surrender charges and deferred front-end contract charges which
are amortized over the term of the policies. Revenue for universal life-type and
other interest-sensitive products are principally comprised of insurance and
policy administration fees and surrender charges, as well as amortization of
deferred front-end contract charges. Benefits and claims are charged to expense
in the period incurred, net of related accumulated contract values released.
Interest on accumulated contract values is credited to contracts as earned.
Crediting rates for universal life-type and annuity products ranged from 3.0% to
6.0% at December 31, 1998.
Traditional life insurance products
Traditional life insurance products include whole life insurance and term
life insurance. Reserves for future policy benefits are estimated using a net
level premium method based upon historical experience of investment yields,
mortality and withdrawals including provisions for possible adverse deviation.
Investment yield assumptions are based on historical rates ranging from 7.0% to
9.0%. Mortality assumptions are based on the 1975-1980 Select and Ultimate Basic
Table with certain modifications including underwriting classifications and year
of issue. Withdrawal assumptions for all products are estimated based on the
Insurance Companies' experience. Additions to these reserves are required when
their balances, in addition to future net cash flows including investment
income, are insufficient to cover future benefits and expenses. Premiums for
these products are recognized as revenue when due. Traditional life insurance
benefits and claims are charged to expense in the period incurred.
Reinsurance
Premiums and expenses include amounts related to reinsurance assumed and
are stated net of amounts ceded. Reinsurance receivables and prepaid reinsurance
premiums are reported as assets and are recognized in a manner consistent with
the liabilities related to the underlying reinsured contracts.
Participating policies
Participating life insurance policies represent approximately 1.3%, 1.7%
and 2.9% of the ordinary life insurance in force at December 31, 1998, 1997 and
1996, respectively. Premium income related to participating life insurance
policies represents 3.3%, 3.3% and 4.4% of premiums and policy revenues for the
years 1998, 1997 and 1996, respectively. The dividends paid and accrued are
calculated in accordance with the terms of the individual policy provisions and
the dividend schedule as reviewed and approved annually by the Board of
Directors.
Property and equipment
Company-occupied property, data processing equipment and furniture and
office equipment, included in other assets, are stated at cost less accumulated
depreciation of $12,434 and $10,036 at December 31, 1998 and 1997, respectively.
Depreciation is computed on a straight-line basis for financial reporting
purposes using estimated useful lives of three to 30 years. Depreciation expense
was $5,492, $3,436 and $3,051 for the years ended December 31, 1998, 1997 and
1996, respectively.
Income taxes
Provision for income taxes includes deferred taxes arising from temporary
differences between the tax and financial reporting basis of assets and
liabilities. This liability method of accounting for income taxes also requires
the Company to reflect the effect of a tax rate change on accumulated deferred
income taxes in income for the period in which the change is enacted.
Net income per common share
Net income per common share is calculated by dividing the appropriate
income item by the average number of shares of common stock outstanding during
the period. There were no common share equivalents outstanding during 1998, 1997
or 1996.
Reclassifications
Previously reported amounts for prior years have in some instances been
reclassified to conform to the current year presentation.
<PAGE>
2. Fair values of financial instruments
The following estimated fair value disclosures are limited to the
reasonable estimates of the fair value of only the Company's financial
instruments. The Company does not anticipate that any significant assets will be
disposed of or that any significant liabilities would be settled at these
estimated fair values.
Investment securities: The estimated fair values of fixed maturity
securities are based on quoted market prices where available. For fixed maturity
securities not actively traded, fair values are estimated using values obtained
from independent pricing services. In the case of private placements, fair
values are determined using market values of comparable securities. The
estimated fair values of equity securities are based on quoted market prices.
Mortgage loans: The fair values of mortgage loans are estimated using
discounted cash flow analyses and interest rates being offered for similar loans
to borrowers with similar credit ratings.
Policy loans: Policy loans are generally issued with coupon rates below
market rates and are considered early payment of the life benefit. As such, the
carrying amount of these financial instruments is a reasonable estimate of their
fair value.
Other invested assets: The fair value of the note receivable from PFS
Holding Company ("PFSH"), a wholly-owned subsidiary of FHC, is estimated by
discounting future cash flows at current market rates.
Cash and cash equivalents: The carrying value of these instruments
approximates fair value.
Annuities: The fair values of the Company's annuities are estimated
using the current cash surrender value for the Company's annuity contracts.
Notes payable: The fair value of the Company's senior subordinated notes
equals the quoted market price at the reporting date. The carrying value of the
Company's senior bank debt approximates fair value since the current interest
rate reprices every thirty to ninety days. The fair value of the Company's other
notes payable was calculated using a discounted interest rate which reflects
prevailing market rates.
The estimated fair values of the Company's financial instruments at
December 31, are as follows:
<TABLE>
1998 1997
------------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Fixed maturities held to maturity $ 876,594 $ 914,672 $ 851,823 $ 873,935
Fixed maturities available for sale 925,191 925,191 761,084 761,084
Equity securities 89,022 89,022 78,949 78,949
Mortgage loans 190,074 203,135 165,630 166,634
Policy loans 210,173 210,173 200,137 200,137
Other invested assets 10,000 10,515 10,000 10,032
Cash and cash equivalents 68,219 68,219 36,859 36,859
Financial liabilities:
Annuities 1,042,622 963,911 1,072,062 1,039,463
Notes payable 132,533 134,283 132,884 137,794
</TABLE>
<PAGE>
3. Changes in Subsidiaries
On April 15, 1997, the Company acquired all of the outstanding common stock
of Ohio State and Investors Guaranty from Farmers Group, Inc. pursuant to a
stock purchase agreement dated January 21, 1997. The purchase price was
$345,387. The acquisition of Ohio State and Investors Guaranty was accounted for
using the purchase method of accounting. The operating results of Ohio State and
Investors Guaranty after the date of acquisition are included in the Company's
statement of income.
The assets acquired and liabilities assumed related to the acquisition of
Ohio State and Investors Guaranty were as follows:
<TABLE>
<S> <C>
Assets acquired:
Fixed maturities $ 623,790
Equity securities 123,418
Cash and cash equivalents 90,219
Cost of business acquired 141,919
Other assets 59,597
-------------
$ 1,038,943
Liabilities assumed:
Policyholder account balances $ 521,355
Reserves for future policy benefits 153,482
Other liabilities 18,719
-------------
$ 693,556
</TABLE>
On April 16, 1997, Ohio State and Investors Guaranty entered into separate
coinsurance agreements to reinsure 100% of their insurance liabilities to an
unaffiliated insurance company (the "Reinsurer") in exchange for a ceding
commission of approximately $146,000. On the same day, the Reinsurer and the
Company entered into a modified coinsurance agreement under which the Reinsurer
ceded certain risks on a 70% quota share basis on the same insurance liabilities
to the Company. The reinsurance agreements have the net effect of transferring
30% of the profits on the Ohio State and Investors Guaranty policies to the
Reinsurer. Under the coinsurance treaty, the assets supporting the insurance
liabilities are retained by the Reinsurer in an escrow account for the benefit
and protection of the Company. The Reinsurer will receive 100% of the statutory
profits from the reinsured policies until the Reinsurer has recovered the
initial ceding commission.
Ohio State and Investors Guaranty transferred bonds and policy loans to the
Reinsurer equal to the statutory reserve liabilities less the ceding commission.
The policy liabilities remain the direct liabilities of Ohio State and Investors
Guaranty and therefore remain on the Company's consolidated balance sheet. The
assets retained by the Reinsurer are included on the Company's consolidated
balance sheet as a receivable from the Reinsurer. The cost of business acquired
asset related to the acquired business has been reduced to reflect the net 30%
coinsurance.
The acquisition of Ohio State and Investors Guaranty was funded by internal
funds and the proceeds of a $240,000 repurchase agreement. Upon receipt of the
$146,000 ceding commission from the Reinsurer, Ohio State and Investors Guaranty
paid dividends totaling $200,000 to the Company. The repurchase agreement was
closed out in 1997.
<PAGE>
Summarized unaudited pro forma consolidated financial information of the
Company is set forth in the following table. This financial information is
presented assuming the acquisition of Ohio State and Investors Guaranty occurred
on January 1, 1996. <TABLE>
1997 1996
---- ----
<S> <C> <C>
Total revenue $ 458,203 $ 452,071
Net income 21,701 26,083
Net income per common share 2,170.10 2,608.30
</TABLE>
On May 8, 1998, Great Southern sold all of the outstanding common stock of
Investors Guaranty, a wholly-owned subsidiary, for $14,793, resulting in a gain
included in other income of $4,855. All of the insurance business of Investors
Guaranty is reinsured to an unaffiliated insurance company under a coinsurance
agreement and subsequently reinsured to Great Southern under a modified
coinsurance agreement on a 70% quota share basis. These reinsurance agreements
are unaffected by the sale. As of the date of sale, Investors Guaranty had
assets totaling $10.3 million and liabilities totaling $0.4 million.
In October 1998, the Company entered into a series of transactions with the
individual owning the 50% of CIG not owned by the Company. The purpose of the
transactions was to consolidate all of the activities in the asset accumulation
markets conducted by CIG and other entities owned 100% by the individual with
those of the Company. Specifically, the Company acquired the other 50% of CIG
for $6,236 and acquired the stock or assets of various marketing entities
wholly-owned by the individual for $9,518 plus contingent consideration of up to
an additional $5.0 million based on achieving certain sales production levels.
In addition, the Company recaptured all of the insurance liabilities that were
previously ceded to an entity owned by the individual. The Company paid $3,945
in 1998 and will pay $2,624 and $2,580 in 1999 and 2000, respectively, to
recapture these liabilities.
In 1997, Great Southern sold the stock of Loyalty Life for $12,280
resulting in a $4,848 gain. Prior to this sale, several of the Company's
insurance subsidiaries entered into agreements with Loyalty Life for the
assumption of Loyalty Life insurance liabilities. As of the date of sale,
Loyalty Life has assets totaling $32.4 million and liabilities totaling $20.0
million.
<PAGE>
4. Investments
Fixed Maturities
The amortized cost of investments in fixed maturities, the cost of equity
securities and the estimated market values of such investments by category of
securities, are as follows: <TABLE>
December 31, 1998
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury and government securities $ 3,402 $ 191 $ - $ 3,593
Public utility securities 47,290 2,871 (1) 50,160
Corporate securities 511,028 28,672 (1,316) 538,384
Asset-backed securities 29,961 991 (24) 30,928
Mortgage-backed pass-through securities 28,963 1,185 (8) 30,140
Collateralized mortgage obligations 255,950 6,146 (629) 261,467
------------ ------------ ------------ ------------
876,594 40,056 (1,978) 914,672
------------ ------------ ------------ ------------
Available for sale:
U.S. Treasury and government securities 40,858 2,063 (1) 42,920
Public utility securities 33,338 1,695 - 35,033
Corporate securities 546,654 25,081 (5,762) 565,973
Asset-backed securities 78,778 3,469 (115) 82,132
Mortgage-backed pass-through securities 109,375 2,673 (62) 111,986
Collateralized mortgage obligations 84,661 2,713 (227) 87,147
------------ ------------ -------------- ------------
893,664 37,694 (6,167) 925,191
------------ ------------ -------------- ------------
Subtotal, all fixed maturities 1,770,258 77,750 (8,145) 1,839,863
------------ ------------ ------------ ------------
Equity securities 42,201 47,043 (222) 89,022
------------ ------------ ------------ ------------
Total fixed maturities and equity securities $ 1,812,459 $ 124,793 $ (8,367) $ 1,928,885
============ ============ ============ ============
</TABLE>
<TABLE>
December 31, 1997
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury and government securities $ 2,427 $ 82 $ (20) $ 2,489
Public utility securities 46,984 1,609 (154) 48,439
Corporate securities 467,288 18,420 (1,591) 484,117
Asset-backed securities 30,152 180 (131) 30,201
Mortgage-backed pass-through securities 28,467 967 (33) 29,401
Collateralized mortgage obligations 276,505 4,188 (1,405) 279,288
----------- ----------- ----------- -----------
851,823 25,446 (3,334) 873,935
----------- ----------- ----------- -----------
Available for sale:
U.S. Treasury and government securities 62,094 2,913 (21) 64,986
Public utility securities 29,732 1,073 (28) 30,777
Corporate securities 355,660 16,408 (1,439) 370,629
Asset-backed securities 56,314 1,289 -- 57,603
Mortgage-backed pass-through securities 137,328 3,108 (114) 140,322
Collateralized mortgage obligations 94,827 2,419 (479) 96,767
----------- ----------- ----------- -----------
735,955 27,210 (2,081) 761,084
----------- ----------- ----------- -----------
Subtotal, all fixed maturities 1,587,778 52,656 (5,415) 1,635,019
----------- ----------- ----------- -----------
Equity securities 50,837 28,753 (641) 78,949
----------- ----------- ----------- -----------
Total fixed maturities and equity securities $ 1,638,615 $ 81,409 $ (6,056) $1,713,968
=========== =========== =========== ==========
</TABLE>
The amortized cost and estimated market value of mortgage-backed securities
by category at December 31, 1998 are as follows:
<TABLE>
Held to Maturity Available for Sale
--------------------------- ---------------------------
Estimated Estimated
Amortized Market Value Amortized Market Value
Cost Cost
<S> <C> <C> <C> <C>
Pass-through agency securities $ 28,963 $ 30,140 $ 109,375 $ 111,986
Collateralized mortgage obligations:
Sequential class 101,417 102,514 64,911 66,216
Planned amortization class 45,552 46,993 6,043 6,122
Very accurately defined maturity 102,074 105,396 7,361 7,457
Accrual class -- -- 2,727 2,809
Other 6,907 6,564 3,619 4,543
---------- ---------- ---------- ----------
255,950 261,467 84,661 87,147
---------- ---------- ---------- ----------
Total securities $ 284,913 $ 291,607 $ 194,036 $ 199,133
========== ========== ========== ==========
</TABLE>
The amortized cost and estimated market value of fixed maturities which are
held to maturity and available for sale at December 31, 1998, by contractual
maturity, are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without penalties. <TABLE>
Fixed Maturities Fixed Maturities
Held to Maturity Available for Sale
--------------------------- ---------------------------
Estimated Estimated
Amortized Market Value Amortized Market Value
Cost Cost
<S> <C> <C> <C> <C>
Due in one year or less $ 3,471 $ 3,466 $ 6,918 $ 7,005
Due after one year through five years 91,959 93,706 104,952 106,331
Due after five years through ten years 236,028 244,779 171,122 176,153
Due after ten years 230,262 250,187 337,858 354,436
Mortgage-backed securities 314,874 322,534 272,814 281,266
---------- ---------- ---------- ----------
$ 876,594 $ 914,672 $ 893,664 $ 925,191
========== ========== ========== ==========
</TABLE>
At December 31, 1998, the Company held below investment grade (S&P rating
below BBB-) corporate debt securities with an aggregate carrying value of
$14,941 and market value of $14,950. At December 31, 1997, the Company held
below investment grade corporate debt securities with an aggregate carrying
value of $23,195 and market value of $23,349. These holdings amounted to 0.5%
and 0.6% of the Company's total assets at December 31, 1998 and 1997,
respectively.
<PAGE>
Fixed maturities with an amortized book value of $29,223 and $38,205 were
on deposit with insurance regulatory agencies of certain states at December 31,
1998 and 1997, respectively.
The Company owns a $10,000, 9.25% senior subordinated note ("the note")
issued by PFSH which matures in September 2004. The note is included in other
invested assets on the Company's consolidated balance sheet.
Mortgage loans on real estate
At December 31, mortgage loans on real estate consisted of:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Mortgage loan principal $ 190,838 $ 167,188
Net unamortized purchase discount (464) (1,258)
Allowance for losses (300) (300)
----------- -----------
Net mortgage loans $ 190,074 $ 165,630
=========== ===========
</TABLE>
The Company's mortgage loans on real estate are diversified by property
type, location and loan size and are collateralized by the related properties.
At December 31, 1998, mortgage loans on real estate were concentrated in the
following property types: <TABLE>
% of
1998 Portfolio
<S> <C> <C>
Property type:
Commercial
Multi-family apartments $ 65,332 34.4%
Retail space 51,270 27.0
Industrial/Warehouses 37,725 19.8
Office buildings 33,727 17.7
Residential 2,020 1.1
---------- -------
Total $ 190,074 100.0%
========== =====
</TABLE>
At December 31, 1998, the following states had a concentration of mortgage
loans aggregating more than 10% of the Company's mortgage loans: Texas -
$31,344; Missouri - $28,487; Connecticut - $21,731 and Kansas - $19,825.
Investment in equity subsidiaries
The following table presents summarized financial information on a combined
proportionate basis of the Company's equity affiliates. Amounts presented
included the accounts of the Company's equity subsidiaries, CIG, Argus, Hereford
LLP (acquired in 1996), a hotel joint venture and GSSW (disposed of in 1996).
The Company acquired the remaining 50% of CIG in 1998. Subsequent to the
acquisition date, the operations of CIG are consolidated in the Company's
financial statements. <TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current assets $ 5,471 $ 16,630 $ 12,952
Noncurrent assets 17,547 96,494 67,358
Current liabilities 3,353 4,883 2,829
Noncurrent liabilities 9,996 86,571 59,403
Net revenues 32,124 28,910 32,401
Expenses applicable to net revenues 26,560 23,521 26,307
Income from continuing operations 3,740 5,083 6,505
Net income 2,581 3,244 5,458
</TABLE>
In 1996, GSSW distributed cash of $6,000 to the Company. In December 1996,
the Company liquidated its interest in GSSW in exchange for cash of $22,629 and
100% interests in several real estate limited partnerships which were then owned
by GSSW resulting in a gain of $15,825. The limited partnerships, with assets
consisting primarily of investment real estate, are included in the consolidated
financial statements of the Company at December 31, 1998 and 1997.
In 1998, the Company received cash dividends from Argus consisting of
$9,500 and a cash distribution from Hereford LLP of $443.
Net investment income
Net investment income for the years ended December 31, is comprised of the
following:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Fixed maturities $ 124,157 $ 117,197 $ 104,442
Equity securities 1,484 1,437 1,101
Equity in earnings of equity subsidiaries 2,581 3,622 5,458
Mortgage loans on real estate 16,518 16,712 21,344
Policy loans 12,671 12,420 13,719
Reinsurance funds held by reinsurer 66,895 65,747 37,425
Cash, short-term investments and other 8,005 8,770 7,452
----------- ----------- -----------
Total investment income 232,311 225,905 190,941
Less investment expenses (5,777) (6,638) (4,216)
----------- ----------- -----------
Net investment income $ 226,534 $ 219,267 $ 186,725
=========== =========== ===========
</TABLE>
Realized gains and losses
Realized gains and losses from the sales and other redemptions of
investments for the years ended December 31, are as follows:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Fixed maturity securities:
Held to maturity:
Realized gains $ -- $ -- $ 93
Realized losses -- -- (124)
Available for sale:
Realized gains 23,193 4,688 2,162
Realized losses (1,212) (4,097) (3,524)
Equity securities:
Realized gains 6,018 4,582 2,340
Realized losses (21,642) (5,349) (1,851)
Other investments:
Realized gains 4,929 5,339 788
Realized losses (3,002) (2,213) (4)
----------- ----------- -----------
Total net realized investment gains (losses) $ 8,284 $ 2,950 $ (120)
=========== =========== ===========
</TABLE>
<PAGE>
Following are the components of net unrealized investment gains as of
December 31:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Investments carried at amortized cost:
Fixed maturities available for sale $ 29,200 $ 25,129
Fixed maturities reclassified from available for sale to held to maturity 36,509 44,550
Investments carried at estimated fair value:
Equity securities 47,172 28,112
Effect on other balance sheet accounts (21,019) (11,321)
Deferred income taxes (31,363) (29,497)
----------- -----------
Net unrealized investment gains $ 60,499 $ 56,973
=========== ===========
</TABLE>
In November 1995, the FASB issued "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities" ("the
Guide") which, among other things, provided entities with a one time opportunity
to transfer some or all securities from held to maturity. In December 1995, the
Company transferred fixed maturity securities with an amortized book value of
$195,207 and a market value of $198,329 out of the held to maturity category
into the available for sale category. Additionally, the Company transferred
fixed maturity securities with an amortized book value of $169,439 and a market
value of $178,883 out of the available for sale category into the held to
maturity category. In 1993, the Company also transferred securities from the
available for sale category to the held to maturity category. The net unrealized
gains of $36,509 and $44,550 at December 31, 1998 and 1997, respectively,
relating to these investments transferred to held to maturity are being
amortized into income using the effective yield method over the lives of the
related securities.
The components of other comprehensive income are as follows:
<TABLE>
Amounts Income Amounts Net of
Before Tax Taxes Tax
1998
<S> <C> <C> <C>
Unrealized holding gains arising during period $ 15,689 $ (5,470) $ 10,219
Reclassification adjustments for losses realized
in net income (10,297) 3,604 (6,693)
----------- ----------- -----------
Other comprehensive income $ 5,392 $ (1,866) $ 3,526
=========== =========== ===========
1997
Unrealized holding losses arising during period $ 30,939 $ (11,041) $ 19,898
Reclassification adjustments for losses realized
in net income (176) 62 (114)
----------- ----------- -----------
Other comprehensive income $ 30,763 $ (10,979) $ 19,784
=========== =========== ===========
1996
Unrealized holding losses arising during period $ (12,996) $ 4,549 $ (8,447)
Reclassification adjustments for losses realized
in net income (873) 305 (568)
----------- ----------- -----------
Other comprehensive income $ (13,869) $ 4,854 $ (9,015)
=========== =========== ===========
</TABLE>
The carrying value of investments that were non-income producing during the
three year period ended December 31, 1998 was not material to the Company's
consolidated financial position.
<PAGE>
5. Deferred Policy Acquisition Costs and Cost of Business Acquired
The balances of and changes in deferred policy acquisition costs and the
cost of business acquired as of and for the three years ended December 31, are
as follows:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Deferred policy acquisition costs:
Balance, beginning of year $ 87,840 $ 72,438 $ 56,568
Capitalization of expenses 44,548 34,220 19,337
Other additions 30,645 - -
Interest accretion 7,286 5,802 4,075
Amortization (19,868) (27,207) (7,401)
Amounts related to fair value adjustment of fixed maturity securities (18,877) 2,587 (141)
----------- ----------- -----------
Balance, end of year $ 131,574 $ 87,840 $ 72,438
=========== =========== ===========
Cost of business acquired:
Balance, beginning of year $ 300,180 $ 200,710 $ 163,660
Additions 9,497 124,052 60,181
Interest accretion 15,453 18,157 12,210
Amortization (78,175) (47,741) (34,908)
Amounts related to fair value adjustment of fixed maturity securities (481) 4,165 1,658
Impact of realization of acquired tax benefits 651 837 (2,091)
----------- ----------- -----------
Balance, end of year $ 247,125 $ 300,180 $ 200,710
=========== =========== ===========
</TABLE>
The estimated amortization and interest accretion of the cost of business
acquired for the five years ending December 31, 2003 are as follows:
<TABLE>
Interest Estimated
Amortization Accretion Net Decrease
<S> <C> <C> <C>
1999 $ 44,817 $ 13,027 $ 31,790
2000 39,400 11,393 28,006
2001 34,502 10,013 24,489
2002 29,047 8,827 20,219
2003 25,137 7,820 17,317
</TABLE>
6. Insurance Liabilities and Reinsurance
Insurance liabilities at December 31, consist of the following:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Policyholder account balances:
Universal life $ 1,458,491 $ 1,414,374
Annuities 1,042,622 1,072,062
------------ ------------
$ 2,501,113 $ 2,486,436
============ ============
Future policy benefits:
Traditional life $ 818,312 $ 866,585
Accident and health 2,458 2,605
Supplementary contracts 13,147 12,393
------------ ------------
$ 833,917 $ 881,583
============ ============
</TABLE>
At December 31, 1998, approximately 83% of the annuity account balances of
the Insurance Companies are subject to surrender charges upon early withdrawal.
The Insurance Companies cede and assume reinsurance with unaffiliated
companies. The maximum portion of the risk retained on the life of any
individual is $350.
As more fully described in Note 3, the Company entered into separate
coinsurance agreements during 1997 to reinsure 100% of the insurance liabilities
of Ohio State and Investors Guaranty to the Reinsurer. On the same day, the
Reinsurer and Great Southern entered into a modified coinsurance agreement.
These agreements effectively transfer 30% of the profits of Ohio State and
Investors Guaranty policies to the Reinsurer.
In October 1995, the Company entered into several agreements with an
unaffiliated insurance company and the Reinsurer. One of the agreements calls
for the direct insurer to reinsure substantially all of its insurance policies
and contracts to the Reinsurer on a coinsurance basis. The direct insurer
transferred approximately $348,000 of assets to the Reinsurer and received a
ceding commission of $37,328. On July 2, 1996, the Company entered into similar
agreements with another unaffiliated insurance company. The direct insurer
transferred approximately $405,000 of assets to the Reinsurer and received a
ceding commission of $34,745. The Reinsurer entered into modified coinsurance
agreements to reinsure certain risks on the same insurance policies to Great
Southern. The modified coinsurance agreements provide that the assets and
insurance liabilities related to the reinsured policies are to be retained by
the Reinsurer. The assets retained by the Reinsurer are held in an escrow
account for the benefit of Great Southern.
Great Southern also entered into reinsurance agreements with the direct
insurers which provide for Great Southern to reinsure the life insurance
policies and contracts of the direct insurers on either a coinsurance or an
assumption basis subject to the existing coinsurance agreements with the
Reinsurers. The completion of the assumption of the policies will be subject to
necessary insurance department and policyholder approvals.
These various agreements are collectively referred to as the "Reinsurance
Agreements". The Company accounted for the Reinsurance Agreements by recording
the direct and assumed insurance liabilities and amounts receivable from
Reinsurer equal to the assets held by the Reinsurer. Premiums and policy
revenues and policyholder benefits assumed under the modified coinsurance
agreements are included in the Company's statement of income. Interest income
earned on the assets held by the Reinsurer is recorded as investment income.
At December 31, the amounts receivable from reinsurers, the cost of
business acquired and the insurance liabilities related to the Reinsurance
Agreements included on the Company's consolidated balance sheet are as follows:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Amounts receivable from reinsurers $ 1,101,255 $ 1,175,922
Cost of business acquired 151,234 193,708
Insurance liabilities 1,249,689 1,364,453
</TABLE>
The Reinsurer will receive all statutory profits from the reinsured
policies until the Reinsurer has recovered the initial ceding commission. Upon
termination of the modified coinsurance agreements, Great Southern is required
to reimburse the Reinsurer for the amount of the unrecovered ceding commission.
<PAGE>
Amounts receivable from reinsurers consists of the following at December
31:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Amounts recoverable for ceded future policy benefits $ 1,274,931 $ 1,576,502
Unrecovered ceding commission (148,435) (188,531)
Amounts recoverable on ceded policy and contract claims 17,996 15,362
Amounts recoverable on paid losses 3,901 5,971
Other 58,804 20,375
------------- -------------
$ 1,207,197 $ 1,429,679
============= =============
</TABLE>
Amounts receivable from reinsurers include $13,721 and $14,713 from another
unrelated insurance company at December 31, 1998 and 1997, respectively. Also
included in amounts receivable from reinsurers is $149,141 from Financial
Assurance at December 31, 1997.
Reinsurance contracts do not relieve the Company from its obligation to
policyholders. Failure of reinsurers to honor their obligations would result in
losses to the Company. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from activities or
economic characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. At December 31, 1998, no
allowance has been established as all amounts are deemed collectible.
Premiums ceded under reinsurance agreements were $50,283, $48,279 and
$35,050 for the years ended December 31, 1998, 1997 and 1996, respectively.
Reinsurance recoveries netted against other policyholder benefits totaled
$52,738, $55,825 and $50,678 for the years ended December 31, 1998, 1997 and
1996, respectively. The Insurance Companies are liable for reinsurance ceded to
other companies in the event the reinsurers are unable to pay their portion of
the policy benefits.
Certain of the Insurance Companies have ceded blocks of insurance under
financial reinsurance treaties to provide funds for acquisitions and other
purposes. These reinsurance transactions represent financial arrangements under
generally accepted accounting principles, and accordingly, are not reflected in
the accompanying financial statements except for the associated risk fees. For
statutory accounting purposes, these financial reinsurance transactions provide
a reserve credit which increases statutory surplus.
Certain financial reinsurance treaties entered into by the Insurance
Companies contain minimum statutory surplus requirements and require the
Insurance Companies to place securities in an escrow account ($75,184 at
December 31, 1998) to secure obligations to the reinsurer. The Insurance
Companies are in compliance with all requirements at December 31, 1998.
<PAGE>
7. Notes Payable
Notes payable at December 31, are comprised of the following:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Senior subordinated notes bearing interest at 9.25%, due 2005 $ 100,000 $ 100,000
Borrowing under $70,000 amended and restated credit agreement, bearing interest at
7/8% over LIBOR rate (6 3/8% at December 31, 1998), due in six equal semi-annual
installments of $3,500 beginning in 2000 21,000 21,000
Unsecured discounted $12,000 notes, bearing interest at an effective interest rate of
11.5%, payable in semi-annual equal installments due 2010 7,976 8,297
Unsecured discounted $5,000 note, bearing interest at an effective interest rate of
12.0% due 2015 3,053 3,015
Other 504 572
----------- -----------
$ 132,533 $ 132,884
=========== ===========
</TABLE>
On or after June 1, 1998, the senior subordinated notes (the Notes) are
redeemable at the option of the Company, in whole or in part, at the redemption
prices (expressed as percentages of principal amount) set forth below:
1999 102.3125%
2000 and thereafter 100.0000%
In 1995, the Company entered into a $70,000 Credit Agreement which was
provided by a syndicate of lenders with The Chase Manhattan Bank as the
administrative agent. The Credit Agreement was amended and restated in December
1996 and subsequently amended in 1997 and 1998. The Credit Agreement operates as
a revolving credit facility until December 31, 1999. The amount of loans then
outstanding will convert into a term loan and amortized in six equal semi-annual
installments commencing July 1, 2000. Amounts outstanding under the Credit
Agreement accrue interest at a variable rate or the prime rate. Amounts
outstanding under the Credit Agreement rank senior to the Company's other
currently outstanding debt and are secured by a pledge of the common stock of
the Company's subsidiaries, United Fidelity and by the surplus debentures of
United Fidelity. The Company pays 0.2% per year on the unused portion of the
Credit Agreement.
The unsecured discounted notes bear interest at 6.5% per annum payable
semi-annually and rank pari passu with the Notes. The Company recorded the notes
at their fair value at the date of issuance using effective interest rates of
11.5% and 12.0%. The unamortized discount at December 31, 1998 was $4,102. The
$5,000 note is subject to contractual set-off rights and is held under a pledge
and escrow agreement to secure the certain indemnification obligations to the
Company.
The Notes and the Credit Agreement contain certain covenants including, but
not limited to, limitations on indebtedness, liens securing indebtedness, sale
or issuance of capital stock of the Company's subsidiaries, restricted payments,
issuance of other subordinated indebtedness, financial reinsurance, investments,
dividends and other distributions by the Company's subsidiaries, dividends by
the Company, transactions with affiliates, the sale of assets and repayment of
subordinated indebtedness by the Company. The Company was in compliance with all
debt covenants at December 31, 1998.
<PAGE>
The aggregate principal payments due during each of the next five years are
as follows:
<TABLE>
<S> <C>
1999 $ 616
2000 4,155
2001 7,700
2002 7,746
2003 4,295
Later years 108,021
----------
$ 132,533
</TABLE>
8. Stockholder's Equity and Statutory Surplus
The Insurance Companies are required by the applicable state's department
of insurance to maintain minimum levels of statutory capital and surplus. The
reported statutory capital and surplus of each company at December 31, 1998 was:
<TABLE>
Reported Statutory
Company Capital and Surplus
<S> <C>
United Fidelity $ 96,949
Great Southern 140,777
College Life 41,462
National Farmers 48,477
Ohio State 121,044
Financial Assurance 5,375
</TABLE>
Dividend distributions of the Insurance Companies to their respective
stockholder exceeding the greater of statutory net gain from operations during
the preceding year or 10% of capital and surplus at the end of the preceding
year are subject to the prior approval of the applicable state department of
insurance. Dividends from the Insurance Companies may be paid only from
statutory earned surplus as determined in accordance with accounting practices
prescribed or permitted by the applicable state insurance regulatory
authorities. In addition, the National Association of Insurance Commissioners
(NAIC) and Texas each have minimum risk-based capital requirements which
effectively restrict the payment of dividends by the Insurance Companies. At
December 31, 1998 the Insurance Companies had statutory capital and surplus in
excess of the levels required by the NAIC and Texas risk-based capital
guidelines.
The American Institute of Certified Public Accountants Statement of
Position (SOP) 94-5 "Disclosure of Certain Matters in the Financial Statements
of Insurance Enterprises" requires insurance enterprises to disclose permitted
statutory accounting practices which have a material effect on capital and
surplus or RBC. Permitted practices encompass those practices not prescribed by
state laws, regulations and administrative rules or by existing NAIC
authoritative literature. The Company does not have any statutory accounting
practices which are required to be disclosed under SOP 94-5.
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ from GAAP. The
following tables reconcile capital stock and surplus and net income of the
Insurance Companies determined in accordance with accounting practices
prescribed or permitted by the state insurance departments with consolidated
stockholder's equity and net income of the Company on a GAAP basis. Included in
the amounts stated in accordance with statutory accounting practice are amounts
recorded in accordance with GAAP for non-insurance subsidiaries.
Stockholder's Equity
<TABLE>
December 31,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Capital stock and surplus, on basis of statutory accounting practices, as filed with
insurance regulatory authorities $ 129,204 $ 124,600
Cost of business acquired 76,776 129,831
Deferred policy acquisition costs 131,574 87,840
Invested assets adjustments 65,175 67,630
Reserves for future policy benefits 34,126 29,510
Asset valuation reserve and interest maintenance reserve 31,359 31,766
Surplus debentures (123,343) (137,130)
Reserve credits on financial reinsurance treaties (22,788) (30,735)
Deferred income taxes (63,600) (58,127)
Other (1,303) 1,677
----------- -----------
Stockholder's equity, on basis of GAAP $ 257,180 $ 246,862
=========== ===========
</TABLE>
Net Income
<TABLE>
Year Ended December 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income, on basis of statutory accounting practices, as filed with
insurance regulatory authorities $ (13,422) $ 163,927 $ 47,124
Amortization of cost of business acquired (61,844) (29,584) (22,698)
Net change in deferred policy acquisition costs 36,900 10,464 13,191
Change in realized gains (losses) 42,074 3,020 895
Adjustment of policy and claim liabilities (569) 18,347 6,242
Adjustment of reserves and premiums on financial reinsurance (12,096) (12,164) (9,188)
Deferred income tax provision (2,634) (1,909) (5,576)
Interest expense on notes payable (9,368) (9,368) (12,263)
Adjustment of fixed maturity securities amortization 3,476 2,347 2,064
Effects of reinsurance transaction 30,205 (124,585) 6,048
Amortization of debt acquisition costs (91) (73) (336)
Other (3,839) 1,634 1,771
----------- ----------- -----------
Net income, on basis of GAAP $ 8,792 $ 22,056 $ 27,274
=========== =========== ===========
</TABLE>
9. Income Taxes
Americo Life, Inc. will file a consolidated federal life and non-life
income tax return with FHC and FHC's eligible life and non-life subsidiaries for
1998. As Financial Assurance is ineligible to join in the filing of the
consolidated 1998 return, it will file separately. The Company and its
subsidiaries are charged or credited an amount of federal income tax equal to
the tax that would have been due for each entity on a separate return basis in
accordance with a written tax allocation agreement. Net operating losses of
members in each consolidated return are utilized on a first-in, first-out basis.
The provision for U.S. federal income taxes for the years ended December 31,
is comprised of the following:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current tax provision $ (522) $ 4,953 $ 7,937
Deferred tax provision 3,757 4,277 5,576
----------- ----------- -----------
Provision for income taxes $ 3,235 $ 9,230 $ 13,513
=========== =========== ===========
</TABLE>
The provision for income taxes differed from the amounts computed by
applying the applicable U.S. statutory federal income tax rate of 35% to pretax
income from continuing operations as a result of the following differences:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Computed tax at statutory rate $ 4,209 $ 10,950 $ 14,275
Decrease in tax resulting from:
Availability of dividends received deduction to offset taxable
temporary differences (785) (1,376) (503)
Other (189) (344) (259)
----------- ----------- -----------
Provision for income taxes $ 3,235 $ 9,230 $ 13,513
=========== =========== ===========
</TABLE>
The Company's net deferred federal tax liabilities are comprised of the tax
cost or benefit associated with the following items based on the 35% tax rate in
effect:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Deferred tax liability:
Cost of business acquired $ 51,543 $ 47,184
Investments 5,499 7,910
Deferred policy acquisition costs 12,316 12,779
Reinsurance 2,645 2,645
Net unrealized investment gains 32,777 30,156
Other 793 201
----------- -----------
Total deferred tax liability 105,573 100,875
----------- -----------
Deferred tax asset:
Policy reserves 43,533 44,847
Utilization of net operating losses 1,422 455
----------- -----------
Deferred income tax assets before valuation allowances 44,955 45,302
Less: valuation allowance (2,982) (2,553)
----------- -----------
Total deferred tax asset 41,973 42,749
----------- -----------
Net deferred tax liability $ 63,600 $ 58,126
=========== ===========
</TABLE>
A valuation allowance is provided at December 31, 1998 and 1997 related to
the tax benefit of loss carryovers and deductible differences because it is more
likely than not that such benefits will not be realized.
Under the provision of the pre-1984 life insurance company income tax
regulations, a portion of "gain from operations" of a life insurance company was
not subject to current taxation but was accumulated, for tax purposes, in a
special tax memorandum account designated as "Policyholders' Surplus Account"
(PSA). Federal income taxes will become payable on this account at the then
current tax rate when and to the extent the account exceeds a specific maximum,
or when and if distributions to stockholders, other than stock dividends and
other limited exceptions, are made in excess of the accumulated previously-taxed
income. At December 31, 1998, the Insurance Companies had aggregate balances in
their PSA of approximately $11,549. Federal income tax of $4,043 would be due if
the entire balance is distributed at the current income tax rate of 35%. No
provision has been recorded relating to any potential distributions from the PSA
subsequent to 1998.
At December 31, 1998, the Insurance Companies with balances in their PSA
had aggregate balances in their Shareholder Surplus Accounts of approximately
$94,432 from which distributions could be made without incurring any federal tax
liability with respect to the PSA accounts.
<PAGE>
Certain subsidiaries have net operating loss carryovers totaling
approximately $4,221 which will begin to expire in 2009 if unutilized.
Utilization of these loses is limited to income generated on a separate return
basis.
10. Commitments and Contingencies
The Company leases certain data processing equipment and office space, some
of which are from related parties, under operating leases. Rental expense was
$3,678, $3,216 and $1,931 in 1998, 1997 and 1996, respectively, and is included
in other operating expenses. Approximate future minimum lease commitments for
leases whose terms are greater than one year at December 31, 1998 are as
follows: <TABLE>
<S> <C>
1999 $ 4,573
2000 3,610
2001 3,206
2002 2,956
2003 and thereafter 14,751
----------
$ 29,096
</TABLE>
Great Southern and the Company are defendants in four purported class
action lawsuits that were consolidated in May 1998 for multidistrict litigation
pretrial proceedings in the U.S. District Court for the Northern District of
Texas (In re Great Southern Life Insurance Company Sales Practice Litigation).
These lawsuits allege deceptive sales practices in the marketing of Great
Southern's whole life and universal life insurance policies and seek unspecified
compensatory, punitive and/or treble damages. Additionally, on August 13, 1998,
a fifth purported class action lawsuit also alleging deceptive sales practices
was filed against Great Southern in state court in Dallas, Texas (Ebling v.
Great Southern Life Insurance Co., 68th District Court, Dallas County, Texas).
Another previously reported purported class action making similar allegations
(Marroquin v. Great Southern Life Insurance Co., filed February 11, 1998, in
Cameron County District Court, Texas) was settled on an individual basis for an
amount that was not material to the Company.
Great Southern and the Company, together with one of Great Southern's
general agents, Great American Life Underwriters ("GALU"), Entrepreneur
Corporation, Mercantile Life Insurance Company, American Planning Corporation
and various individuals, including certain officers of Great Southern and the
Company, are named defendants in an action that was certified as a class action
on April 28, 1998 (Thibodeau et al. v. Great American Life Underwriters, et.
al., District Court, Dallas County, Texas). Plaintiffs, who were life insurance
agents for GALU, allege that they were defrauded by defendants into surrendering
renewal commissions in return for the promise of stock ownership in a company
(Entrepreneur Corporation) to be made public at some point in the future.
Plaintiffs claim actual and exemplary damages in an unspecified amount.
Defendants have appealed the ruling certifying a class.
On October 20, 1998, a purported class action lawsuit was filed against
Great Southern, Credit Card Services, Inc., First Madison Bank and certain other
defendants (McCulley v. Great Southern Life Insurance Company, et. al., U.S.
District Court for the Northern District of Texas), alleging various
misrepresentations in connection with the marketing of credit cards secured by
universal life insurance policies issued by Great Southern. The suit seeks
actual, exemplary and treble damages in an unspecified amount.
The Company is also named as defendant in a number of other lawsuits
arising from the normal course of business, however, management does not
expect that these will result in a material loss to the Company.
<PAGE>
11. Employee Benefit Plans
Great Southern is a sponsor of several contributory postretirement benefit
plans which provide life and medical insurance to participating retired
employees and agents. Pursuant to the purchase agreement, Great Southern's
former parent assumed responsibility for employees and agents who retired on or
after August 1, 1984. Future costs of benefits for employees and agents who
retired prior to August 1, 1984, are the responsibility of the Company. A
liability for these postretirement benefits of $2,680 is included in other
liabilities at both December 31, 1998 and 1997.
12. Segment Information
The Company has determined that its reportable segments are those that are
based on the Company's method of internal reporting, which disaggregates its
business by product type. The Company's reportable segments are: life insurance
operations, asset accumulation products operations and non-life insurance
operations. The life insurance segment includes traditional term and whole life
insurance as well as universal-life insurance products. The segment consists
primarily of insurance business acquired by the Company. The accumulation
products segment includes annuity products sold through the Company's
Austin-based operations. The non-life insurance segment includes the Company's
50% investment in Argus and its investments in limited partnerships, with assets
consisting primarily of investment real estate. The Company's business is
conducted primarily in the United States.
The financial results of the Company's segments are presented on a GAAP
basis. Net investment income and operating expenses are allocated to its life
insurance and accumulation products segments based on the Company's internal
projections. The Company evaluates the performance of its segments and allocates
resources to them based on income before provision for income taxes. All
intersegment revenues have been eliminated.
The table below presents information about the reported revenues and income
before provision for income taxes. Asset information by reportable segment is
not reported, since the Company does not produce such information internally.
<PAGE>
<TABLE>
Accumulation Non-Life
Life Insurance Products Insurance Reconciling Consolidated
Operations Operations Operations Items Totals
<S> <C> <C> <C> <C> <C>
Revenues
1998 $ 417,586 $ 24,112 $ 8,053 $ 15,812 $ 465,563
1997 414,673 7,742 11,642 4,220 438,277
1996 347,313 6,821 1,054 16,411 371,599
Amortization expense
1998 73,874 (1,582) -- 14,897 87,189
1997 40,238 2,292 -- 1,164 43,694
1996 28,977 73 -- 664 29,714
Income (loss) before
provision for income
taxes
1998 54,421 6,237 6,837 (55,468) 12,027
1997 53,716 (3,025) 10,694 (30,099) 31,286
1996 45,175 (1,129) 1,054 (4,313) 40,787
</TABLE>
Significant reconciling items to amounts reported in the Company's
consolidated financial statements include net investment and operating expenses
not allocated to segments, net realized investment gains (losses) not allocated
to segments, interest expense and certain non-recurring transactions such as
gains from the sale of subsidiaries.
13. Related Parties
The Company and FHC are involved in advisory and data processing services
agreements. Under the advisory agreement, FHC supervises and directs the
composition of the investment portfolios of the Company and its subsidiaries in
accordance with their respective objectives and policies. For these services,
FHC is compensated based on the aggregate statutory book value of the investable
assets of the Insurance Companies. Under the data processing agreement, FHC
provides the Company and its subsidiaries with record-keeping services for
certain life insurance and annuity products. For its services, FHC is paid a fee
per policy serviced. The Company and its subsidiaries are also involved in a
cost-sharing agreement with FHC respecting air transportation expenses arising
from the use of an airplane owned by FHC.
United Fidelity leases office space from a partnership in which a related
party has a 50% interest. The Company leases to FHC a building which is occupied
by FHC. In addition, the Company utilizes a laboratory for underwriting purposes
which is partially-owned by several stockholders of FHC.
Amounts due from (to) affiliates at December 31, 1998 and 1997 include
$3,707 and $(2,036) due from (to) FHC arising from intercompany tax allocation.
The following table summarizes the related party transactions for the three
years ended December 31:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Data processing agreement between the Company and FHC $ 14,536 $ 11,802 $ 9,778
Advisory agreement between the Company and FHC 8,066 7,180 6,143
Air transportation cost sharing agreement 321 667 765
Rental expense 1,051 906 913
Laboratory services 343 312 178
</TABLE>
<PAGE>
S-8
AMERICO LIFE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
Page
<S> <C>
Report of Independent Accountants on Financial Statement Schedules S-2
Schedule II Condensed Financial Information of Registrant S-3
Schedule IV Reinsurance S-7
Schedule V Valuation and Qualifying Accounts S-8
</TABLE>
All other financial statement schedules for which provision is made in
the applicable accounting regulation of the Securities and Exchange Commission
are not required under the related instructions or are inapplicable, and
therefore have been omitted.
<PAGE>
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors and
Stockholder of Americo Life, Inc.
Our audits of the consolidated financial statements referred to in our
report dated March 29, 1999, appearing on page F-2 of this Form 10-K also
included an audit of the Financial Statement Schedules listed in Item 14(a) of
this Form 10-K. In our opinion, these Financial Statement Schedules present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri
March 29, 1999
<PAGE>
Schedule II
Americo Life, Inc. and Subsidiaries
Condensed Financial Information of Registrant
Balance Sheet
(Dollars in thousands)
December 31, 1998 and 1997
<TABLE>
1998 1997
---- ----
Assets
<S> <C> <C>
Equity securities, at market (cost: $11,566 and $6,855) $ 24,763 $ 12,368
Investment in subsidiaries 229,596 227,784
Cash and cash equivalents 8,432 96
Surplus debentures receivable 123,498 137,305
Amounts due from affiliates 1,651 --
Property and equipment, net 1,764 2,127
Federal income taxes receivable 1,597 --
Other assets 10,686 10,506
----------- -----------
Total assets $ 401,987 $ 390,186
=========== ===========
Liabilities and Stockholder's Equity
Notes payable $ 132,029 $ 132,312
Accrued interest payable 881 908
Amounts due to affiliates -- 332
Deferred income taxes 8,113 5,288
Other liabilities 3,784 4,484
----------- -----------
Total liabilities 144,807 143,324
----------- -----------
Stockholder's equity:
Common stock ($1 par value, 30,000 shares authorized, 10,000 issued and
outstanding) 10 10
Additional paid-in capital 3,745 3,745
Accumulated other comprehensive income 60,499 56,973
Retained earnings 192,926 186,134
----------- -----------
Total stockholder's equity 257,180 246,862
----------- -----------
Total liabilities and stockholder's equity 401,987 $ 390,186
=========== ===========
</TABLE>
See notes to condensed financial information
Schedule II
Americo Life, Inc. and Subsidiaries
Condensed Financial Information of Registrant
Statement of Income
(Dollars in thousands)
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income
Management and data processing fees from subsidiaries $ 16,570 $ 13,602 $ 12,055
Interest income on surplus debentures receivable 12,237 12,757 12,842
Net investment income 686 428 415
Net realized investment gains (losses) (264) (430) 107
Other income 2,149 4,936 6,673
----------- ----------- -----------
Total income 31,378 31,293 32,092
----------- ----------- -----------
Expenses
Management and advisory fees to parent 22,602 18,982 15,921
Interest expense 12,057 12,089 12,263
Other operating expenses 1,761 2,092 2,958
Amortization expense 850 941 664
----------- ----------- -----------
Total expenses 37,270 34,104 31,806
----------- ----------- -----------
Income (loss) before provision for (benefit from) income taxes and
equity in income of subsidiaries (5,892) (2,811) 286
Provision for (benefit from) income taxes (1,461) 614 1,418
----------- ----------- -----------
Loss before equity in income of subsidiaries (4,431) (3,425) (1,132)
Equity in income of subsidiaries 13,223 25,481 28,406
----------- ----------- -----------
Net income $ 8,792 $ 22,056 $ 27,274
=========== =========== ===========
</TABLE>
See notes to condensed financial information
<PAGE>
Schedule II
Americo Life, Inc. and Subsidiaries
Condensed Financial Information of Registrant
Statement of Cash Flows
(Dollars in thousands)
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 8,792 $ 22,056 $ 27,274
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Undistributed equity in earnings of subsidiaries (13,223) (25,481) (28,406)
Dividends received from subsidiaries 9,943 -- 8,000
Depreciation and amortization 1,575 1,572 943
(Increase) decrease in other assets, net of amortization expense (215) 328 (545)
Decrease in other liabilities (2,033) (96) (1,220)
Provision for current income taxes (1,597) -- --
Provision for deferred income taxes 136 1,564 408
Increase (decrease) in amounts due to/from affiliates (1,983) (1,183) 4,541
Other changes 537 613 (535)
---------- ---------- ----------
Total adjustments (6,860) (22,683) (16,814)
---------- ---------- ----------
Net cash provided (used) by operating activities 1,932 (627) 10,460
---------- ---------- ----------
Cash flows from investing activities
Amounts collected on surplus debentures receivable 13,828 524 750
Capital contribution to subsidiary acquired -- -- (261)
Payment for equity subsidiary acquired -- -- (4,550)
Purchases of equity securities (10,218) (5,393) (663)
Proceeds from sales of equity securities 5,733 3,507 3,368
Mortgage loans originated -- -- (71)
Purchases of property and equipment, net (362) (633) (1,814)
---------- ---------- ----------
Net cash provided (used) by investing activities 8,981 (1,995) (3,241)
---------- ---------- ----------
Cash flows from financing activities
Repayments of notes payable (577) (541) (506)
Dividends paid (2,000) (2,000) (2,000)
---------- ---------- ----------
Net cash used by financing activities (2,577) (2,541) (2,506)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 8,336 (5,163) 4,713
Cash and cash equivalents at beginning of year 96 5,259 546
---------- ---------- ----------
Cash and cash equivalents at end of year $ 8,432 $ 96 $ 5,259
========== ========== ==========
Supplemental disclosure of cash flow information
Cash paid during year for interest $ 12,057 $ 12,095 $ 12,280
</TABLE>
See notes to condensed financial information
Schedule II
Americo Life, Inc. and Subsidiaries
Condensed Financial Information of Registrant
Notes to Condensed Financial Information
(Dollars in thousands)
For the Years Ended December 31, 1998, 1997 and 1996
In 1998, the Company received cash dividends totaling $9,500 from Argus and
a cash dividend totaling $443 from Hereford LLP. In 1996, the Company received a
dividend totaling $15,673 representing a 50% interest in Argus. Subsequently,
the Company received a dividend from Argus consisting of $8,000 cash and a
$1,500 note receivable from a related party.
The accompanying condensed financial information should be read in
conjunction with the Consolidated Financial Statements and the accompanying
notes thereto in this Form 10-K.
<PAGE>
Schedule IV
Americo Life, Inc. and Subsidiaries
Reinsurance
(Dollars in thousands)
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
Percentage
Assumed of Amount
Year Ended Gross Ceded to Other From Other Net Assumed
December 31, Amount Companies Companies Amount to Net
<S> <C> <C> <C> <C> <C>
1998
Insurance in force $ 45,695,670 $ 12,612,790 $ 1,179,946 $ 34,262,826 3.4%
============== ============== ============== ============== ====
Premiums $ 252,133 $ 50,283 $ 16,732 $ 218,582 7.6%
============== ============== ============== ============== ====
1997
Insurance in force $ 44,310,608 $ 13,844,254 $ 5,283,041 $ 35,749,395 14.7%
============== ============== ============== ============== =====
Premiums $ 244,647 $ 48,279 $ 7,361 $ 203,729 3.6%
============== ============== ============== ============== ====
1996
Insurance in force $ 23,125,887 $ 5,189,238 $ 4,804,462 $ 22,741,111 21.1%
============== ============== ============== ============== =====
Premiums $ 174,910 $ 35,050 $ 25,742 $ 165,602 15.5%
============== ============== ============== ============== =====
</TABLE>
<PAGE>
Schedule V
Americo Life, Inc. and Subsidiaries
Valuation and Qualifying Accounts
(Dollars in thousands)
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
Additions
---------------------------
Balance at Charged to Charged to Balance at
Year Ended Beginning Cost and Other End of
December 31, of Period Expenses Accounts Deductions Period
(1)
<S> <C> <C> <C> <C> <C>
1998
Reserve for impairment of mortgage loans
on real estate $ 300 $ -- $ -- $ -- $ 300
Write-down for impairment of real estate 107 -- -- -- 107
Allowance for receivables from agents 3,468 112 -- -- 3,580
----------- ----------- ----------- ----------- -----------
Total $ 3,875 $ 112 $ -- $ -- $ 3,987
=========== =========== =========== =========== ===========
1997
Reserve for impairment of mortgage loans
on real estate $ 300 $ -- $ -- $ -- $ 300
Write-down for impairment of real estate 107 -- -- -- 107
Allowance for receivables from agents 2,123 1,345 -- -- 3,468
----------- ----------- ----------- ----------- -----------
Total $ 2,530 $ 1,345 $ -- $ -- $ 3,875
=========== =========== =========== =========== ===========
1996
Reserve for impairment of mortgage loans
on real estate $ 300 $ -- $ -- $ -- $ 300
Write-down for impairment of real estate 120 -- -- 13 107
Allowance for receivables from agents 2,450 250 -- 577 2,123
----------- ----------- ----------- ----------- -----------
Total $ 2,870 $ 250 $ -- $ 590 $ 2,530
=========== =========== =========== =========== ===========
</TABLE>
(1) Amounts transferred from other allowance accounts.
THIS NOTE WAS ISSUED WITH ORIGINAL ISSUE DISCOUNT. THE ISSUE PRICE AND
DATE, AMOUNT OF ORIGINAL ISSUE DISCOUNT AND YIELD TO MATURITY OF THIS NOTE MAY
BE OBTAINED UPON WRITTEN REQUEST DIRECTED TO GARY JENKINS, VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER, AMERICO LIFE, INC., 1055 BROADWAY, KANSAS CITY,
MISSOURI 64105.
AMERICO LIFE, INC.
NO. VNO-1-R $5,211,805
6 1/2% SENIOR SUBORDINATED NOTE DUE 2010
For value received, AMERICO LIFE, INC., a Missouri corporation (the
"Company"), hereby promises to pay to VICTORY FINANCIAL GROUP, INC., a Nevada
corporation ("Seller"), or its registered assigns, the principal sum of FIVE
MILLION TWO HUNDRED ELEVEN THOUSAND EIGHT HUNDRED FIVE ($5,211,805) together
with interest on the unpaid principal portion thereof, at the rate of 6 1/2% per
annum from June 1, 1998, in twenty-four (24) semi-annual installments of
principal and interest, commencing December 1, 1998 and thereafter on each June
1 and December 1 until June 1, 2010, each of such semi-annual installments of
principal and interest being in an aggregate amount of $316,090.30.
Interest hereunder shall be calculated for the actual number of days
elapsed on the basis of a year consisting of 365 days.
Such principal and interest payments shall be made to the person in
whose name this Note is registered (the "Holder") on the register maintained by
the Secretary of the Company ("Note Register") at the close of business on the
"Regular Record Date" for such principal and interest installment. Such Regular
Record Date shall be May 15 or November 15 (whether or not a business day), as
the case may be, next preceding such principal and interest payment date.
Payment of the principal of and interest on this Note will be made to
the Holder at the principal executive office of the Company in Kansas City,
Missouri, in such coin or currency of the United States of America as at the
time of payment is legal tender for payment of public and private debts;
provided, however, that at the option of the Company payment may be made by
check mailed to the address of the Holder as such address shall appear in the
Company's Note Register.
<PAGE>
-17-
598933.2
This Note is designated as the Company's 6 1/2% Senior Subordinated
Note, No. VNO-1-R, Due 2010 (the "Note"). As provided in Section 10 hereof, this
Note is subordinated to "Senior Indebtedness" as defined in Section 1 and is
pari passu in right of payment with the Company's "Senior Subordinated Notes",
"6 1/2% Senior Subordinated Set-Off Note" and "6 1/2% Senior Subordinated Note
No. VNO-2" as such terms are defined in Section 1, and with any other
indebtedness that the Company may create, incur, assume or guarantee after the
date of this Note, which Indebtedness by its terms is pari passu in right of
payment with this Note.
The Company issued this Note to replace its 6 1/2% Senior Subordinated
Note No. VNO-1 (the "Original Note"). The Original Note was issued pursuant to a
Stock Purchase Agreement dated March 3, 1995, as amended (the "Stock Purchase
Agreement") between the Company and the Seller, who is the initial Holder
hereof. A copy of the Stock Purchase Agreement is available to a Holder upon
written application to the Secretary of the Company.
The initial principal amount of the Original Note was $6,000,000. The
initial principal amount of this Note is the same as the unpaid principal amount
of the Original Note on the date the Holder surrendered it, as contemplated by
the Stock Purchase Agreement, for reissue without a legend referring to transfer
restrictions.
Section 1Certain Definitions.
As used in this Note:
"Affiliate" means (i) with respect to any specified Person,
any Person directly or indirectly controlling or controlled by or under direct
or indirect common control with such specified Person (except in cases where
substantially all of the control that would ordinarily be exercisable by virtue
of ownership of stock, other than the election of directors, has been eliminated
by applicable regulatory authorities). For purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting stock, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the foregoing.
Notwithstanding the foregoing, none of Argus Health Systems, Inc., a Delaware
corporation, GSSW Limited Partnership, a Texas limited partnership, or College
Insurance Group, Inc., a Missouri corporation, will be deemed an Affiliate of
the Company so long as (i) it is not a Subsidiary of the Company and (ii) the
Company and its Affiliates do not have the right or power to elect or name more
than 50% of such entity's governing body.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday
and Friday which is not a day on which banking institutions in the City of New
York, New York are authorized or obligated by law or executive order to close.
<PAGE>
"Capital Lease" means any lease of property, real or personal,
in respect of which the present value of the minimum rental commitment would be
capitalized on a balance sheet of the lessee in accordance with generally
accepted accounting principles.
"Capital Stock" of any Person means any and all shares,
interests, participations or other equivalents (however designated) of corporate
stock of such Person.
"Cash Equivalents" shall mean (i) securities issued or
directly and fully guaranteed or insured by the United States or any agency or
instrumentally thereof, (ii) U.S. dollar denominated time deposits, certificates
of deposit, eurodollar time deposits, eurodollar certificates of deposit, and
bankers acceptances of any domestic commercial bank of recognized standing
having capital and surplus in excess of $100,000,000 (iii) commercial paper
having a rating from S&P of at least A-2 or the equivalent thereof or from
Moody's of at least P-2 or the equivalent thereof or from Duff & Phelps of at
least D-2 or the equivalent thereof, with maturities of not more than nine
months from the date of acquisition, (iv) repurchase agreements relating to
securities described in (i) with issuers of securities described in (ii) or
(iii), and (v) tax-exempt commercial paper of United States municipal, state or
local governments rated at least A-2 or the equivalent thereof by S&P or at
least P-2 or the equivalent thereof by Moody's or at least D-2 or the equivalent
thereof by Duff & Phelps and maturing within nine months after the date of
acquisition.
"Duff & Phelps" means Duff & Phelps Inc.
"Indebtedness" of any Person means (i) any liability of such Person (a)
for borrowed money, (b) evidenced by a note, debenture or similar instrument
(including a purchase money obligation or deferred payment obligation) given in
connection with the acquisition of any property or assets (other than inventory,
other accrued current liabilities or similar property acquired in the ordinary
course of business), including securities (but excluding reverse repurchase
agreements entered into in the ordinary course of business), (c) for the payment
of a Capital Lease obligation of such person or (d) with respect to the
reimbursement of any letter of credit, banker's acceptance or similar credit
transaction (other than trade letters of credit issued in the ordinary course of
business; provided, that failure to make prompt reimbursement of any trade
letter of credit shall be deemed to be the incurrence of Indebtedness); (ii) any
guarantee by such Person of any liability of others described in clause (i)
above or any obligation of such Person with respect to any liability of others
described in clause (i) above; and (iii) all Interest Rate Protection
Obligations of such Person. Indebtedness shall not include operating leases,
trade accounts payable or agent accounts payable, or obligations under
insurance, reinsurance or retrocession contracts entered into the ordinary
course of business or any guaranty of any of the foregoing.
<PAGE>
"Indenture" means the Indenture dated as of May 26, 1993 among the
Company and Commerce Bank of Kansas City, N.A., as Trustee, respecting the
Company's Senior Subordinated Notes, as originally executed or as it may from
time to time be supplemented or amended by one or more indentures supplemental
thereto entered into pursuant to the applicable provisions thereof, including,
for all purposes of such instrument and any such supplemental indenture, the
provisions of the Trust Indenture Act of 1939, as amended, that are deemed to be
part of and govern such instrument and any such supplemental indenture,
respectively.
"Interest Rate Protection Obligations" means the obligations of any
Person pursuant to any arrangement with any other Person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such Person
calculated by applying a fixed or a floating rate of interest on the same
notional amount and shall include without limitation, interest rate swaps, caps,
floors, collars and similar agreements.
"Moody's" means Moody's Investors Service, Inc.
"pari passu," when used with respect to the ranking of any indebtedness
of any Person in relation to other Indebtedness of such Person, means that each
such indebtedness (a) either (i) is not subordinated in right of payment to any
other Indebtedness of such Person or (ii) is subordinate in right of payment to
the same Indebtedness of such Person as is the other and is so subordinate to
the same extent, and (b) is not subordinate in right of payment to the other or
to any Indebtedness of such Person as to which the other is not so subordinate.
"Person" means an individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or agency or political
subdivision thereof.
"S&P" means the Standard & Poor's Corporation.
"Senior Indebtedness" means the principal of, premium, if any, interest
on (including interest that, but for the filing of a petition initiating any
proceeding pursuant to any bankruptcy law with respect to such Person, would
accrue on such obligations, whether or not such claim is allowed in such
bankruptcy proceeding), and fees and other amounts owing in respect of any
Indebtedness of the Company (other than as otherwise provided in this
definition), whether outstanding on the date hereof or thereafter created,
incurred or assumed, unless, in the case of any particular Indebtedness, the
instrument creating or evidencing the same or pursuant to which the same is
outstanding expressly provides that such Indebtedness shall not be senior in
right of payment to this Note. Notwithstanding the foregoing, "Senior
Indebtedness" shall not include (i) Indebtedness evidenced by this Note or the
Company's Senior Subordinated Notes, 6 1/2% Senior Subordinated Set-Off Note or
6 1/2% Senior Subordinated Note No. VNO-2, (ii) Indebtedness that is expressly
subordinate or junior in right of payment to any Indebtedness of the Company,
(iii) Indebtedness that is represented by redeemable Capital Stock, (iv)
Indebtedness of the Company to an Affiliate of the Company and (v) any
Indebtedness that is incurred in violation of the Indenture.
<PAGE>
"Senior Non-Payment Default" means any event or condition (other than a
Senior Payment Default) the occurrence of which entitles one or more Persons to
accelerate the maturity of any Senior Indebtedness. For purposes of this
definition, a Senior Non-Payment Default shall be deemed to exist on the date of
occurrence of such event or condition and any required notice shall be deemed to
have been given and any applicable grace period shall be deemed to have expired
on such date.
"Senior Payment Default" means any failure to pay when due, whether by
acceleration or otherwise, any principal of, premium or interest on, or fees or
other amounts in respect to any Senior Indebtedness.
"Senior Subordinated Notes" means the Company's 9-1/4% Senior
Subordinated Notes due 2005 in the aggregate original principal amount of
$100,000,000.
"6 1/2% Senior Subordinated Note No. VNO-2" means the Company's 6 1/2%
Senior Subordinated Note No. VNO-2 due 2010 in the original principal amount of
$6,000,000, delivered pursuant to the Stock Purchase Agreement and any note
issued in exchange or replacement thereof pursuant to the terms of such note.
"6 1/2% Senior Subordinated Set-Off Note" means the Company's 6 1/2%
Senior Subordinated Set-Off Note due 2015 in the principal amount of $5,000,000,
delivered pursuant to the Stock Purchase Agreement and any note issued in
exchange or replacement thereof pursuant to the terms of such note.
"Stated Maturity", when used with respect to any security or any
installment of interest thereon, means the date specified in such security as
the fixed date on which the principal of such security or such installment of
interest is due and payable.
"Subsidiary" means a corporation more than 50% of the outstanding
Voting Stock of which is owned, directly or indirectly, by the Company or by one
or more other Subsidiaries.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of stock has such voting power by reason of any contingency.
Section 2Limitation on Issuance of Other Subordinated Indebtedness. Except when
it may do so without violating the Indenture, the Company will not issue,
assume, guarantee or otherwise become liable, directly or indirectly, for any
Indebtedness which is subordinate or junior in ranking in any respect of any
Senior Indebtedness but senior in right of payment to this Note. Section 1.
<PAGE>
Section 3Events of Default. "Event of Default", wherever used herein, means any
one of the following events (whatever the reason for such Event of Default and
whether it shall be occasioned by the provisions of Section 10 or be voluntary
or involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(1) default in the payment of any interest upon this Note when it becomes due
and payable, and continuance of such default for a period of 30 days; or
(2) default in the payment of the principal of this Note when due and
payable; or
(3) default in the performance, or breach, of any covenant or agreement of
the Company under the Note (other than a default in the performance, or
breach, of a covenant or agreement that is specifically dealt with
elsewhere in this paragraph), and continuance of such default or breach
for a period of 60 days after there has been given, by registered or
certified mail, to the Company by the Holder a written notice specifying
such default or breach and stating that such notice is a "Notice of
Default"; or
(4) (1) an event of default shall have occurred under any mortgage, bond,
indenture, loan agreement or other document evidencing any issue of
Indebtedness of the Company or any Subsidiary for money borrowed, which
issue has an aggregate outstanding principal amount of not less than
$5,000,000, and such default shall result in such Indebtedness becoming,
whether by declaration or otherwise, due and payable prior to the date on
which it would otherwise become due and payable or (2) a default in any
payment when due at final Stated Maturity of any such Indebtedness
outstanding in an aggregate principal amount of not less than $5,000,000
and, in each case, 20 Business Days shall have elapsed after such event
during which period such event shall not have been cured or rescinded or
such indebtedness shall not have been satisfied; or
<PAGE>
(5) final judgments or orders are rendered against the Company or any
Subsidiary by a court or regulatory agency of competent jurisdiction
which require the payment in money, either individually or in an
aggregate amount, that is more than $5,000,000 (other than any judgment
as to which a reputable insurance company has accepted full liability)
and such judgment or order shall not be discharged and either (1) any
creditor shall have commenced an enforcement proceeding upon such
judgment or order, which enforcement proceeding shall have remained
unstayed for a period of 10 days, or (2) a period of 60 days during which
a stay of enforcement shall not be in effect shall have elapsed following
the date on which any period for appeal has expired; or
(6) a decree or order is entered by a court having jurisdiction (1) for
relief in respect of the Company or any Subsidiary in an involuntary case
or proceeding under the Federal Bankruptcy Code or any other federal or
state bankruptcy, insolvency, reorganization or similar law or (2)
adjudging the Company or any Subsidiary a bankrupt or insolvent, or
seeking reorganization, arrangement, adjustment or composition of or in
respect of the Company or any Subsidiary under the Federal Bankruptcy
Code or any other applicable federal or state law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator (or
other similar official) of the Company or any Subsidiary or of any
substantial part of any of their properties, or ordering the winding up
or liquidation of any of their affairs, and any such decree or order
remains unstayed and in effect for a period of 60 consecutive days; or
(7) the Company or any Subsidiary institutes a voluntary case or proceeding
under the Federal Bankruptcy Code or any other applicable federal or
state law or any other case or proceedings to be adjudicated a bankrupt
or insolvent, or the Company or any Subsidiary consents to the entry of a
decree or order for relief in respect of the Company or any Subsidiary in
any involuntary case or proceeding under the Federal Bankruptcy Code or
any other applicable federal or state law or to the institution of
bankruptcy or insolvency proceedings against the Company or any
Subsidiary, or the Company or any Subsidiary files a petition or answer
or consent seeking reorganization or relief under the Federal Bankruptcy
Code or any other applicable federal or state law, or consents to the
filing of any such petition or to the appointment of or taking possession
by a custodian, receiver, liquidator, assignee, trustee, sequestrator (or
other similar official) of any of the Company or any Subsidiary or of any
substantial part of its property, or makes an assignment for the benefit
of creditors, or admits in writing its inability to pay its debts
generally as they become due or takes corporate action in furtherance of
any such action.
then, in the case of an event described in (f) or (g) above, this Note shall
immediately become due and payable, together with interest accrued hereon or, in
the case of any other event described above, the Holder of the Note may declare
this Note, together with all interest accrued hereon to be due and payable and,
upon such declaration, this Note shall be due and payable on the date specified
in the declaration, in each case without presentment, demand, protest or other
notice of any kind, all of which are hereby waived by the Company. The holder of
this Note may also, subject to the provisions of Section 10 hereof, proceed to
protect and enforce its rights either by suit in equity and/or by action at law,
or by other appropriate proceedings, or may, subject to the provisions of
Section 10 hereof, proceed to enforce the payment of this Note or to enforce any
other legal or equitable right of the Holder of this Note.
<PAGE>
Section 4Registration of Transfers. The Company shall register the transfer of
this Note upon records to be maintained by the Company for that purpose, upon
surrender of this Note, with the Form of Assignment attached hereto duly filled
in and signed, to the Secretary of the Company at the Company's principal
executive offices in Kansas City, Missouri. Upon any such registration of
transfer, a new Note, in substantially the form of this Note evidencing the Note
so transferred shall be issued to the transferee.
Section 5Payment of Taxes. The Company shall not be required to pay any tax in
respect of the transfer of the Note.
Section 6Redemption. The Note is subject to redemption upon not less than 30 nor
more than 60 days' notice by mail, at any time, as a whole or in part, at the
election of the Company at a redemption price equal to 100% of the principal
amount to be redeemed, together in the case of any such redemption with accrued
interest on the portion of the Note to be redeemed to the redemption date.
The Note does not have the benefit of any sinking fund
obligations.
In the event of redemption of this Note in part only, a new Note
of like tenor and maturity for the unredeemed portion hereof, with appropriate
changes in the scheduled payments to reflect the reduced principal amount, will
be issued in the name of the Holder hereof upon the cancellation hereof.
Section 7Mutilated or Missing Note. If this Note shall be mutilated, lost,
stolen or destroyed, upon request by the Holder hereof, the Company will issue,
in exchange for and upon cancellation of the mutilated Note, or in substitution
for the lost, stolen or destroyed Note, a new Note, in substantially the form of
this Note, of like tenor and maturity and representing the equivalent principal
amount, but, in the case of loss, theft or destruction, only upon receipt of
evidence satisfactory to the Company of such loss, theft or destruction of this
Note and, if requested by the Company, indemnity reasonably satisfactory to it.
Section 8Restriction on Transfer.
(a) [Deleted]
(b) [Deleted]
<PAGE>
(c) This Note and each Note issued upon transfer or exchange shall
bear a legend required under the Internal Revenue Code of 1986, as amended,
relating to original issue discount.
Section 9Financial Information. Until this Note is paid in full, the Company
agrees to furnish to the registered Holder, at the address specified in the Note
Register, within one hundred twenty (120) days after the end of the Company's
fiscal year, a copy of the Company's annual audited consolidated financial
statements.
Section 1Ranking and Subordination.
(1) Note Subordinate to Senior Indebtedness and pari passu with Senior
Subordinated Notes, 6 1/2% Senior Subordinated Set-Off Note and 6 1/2%
Senior Subordinated Note No. VNO-2.
The Company covenants and agrees, and each Holder of the Note, by
his acceptance thereof, likewise covenants and agrees, that the Note is pari
passu in right of payment with the Company's Senior Subordinated Notes, 6 1/2%
Senior Subordinated Set-Off Note, 6 1/2% Senior Subordinated Note No. VNO-2 and
any other Indebtedness that the Company may create, incur, assume or guarantee
after the date of this Note, which Indebtedness by its terms is pari passu in
right of payment with this Note, and that, to the extent and in the manner
hereinafter set forth in this Section 10, the indebtedness represented by the
Note and the payment of the principal of and interest on the Note are hereby
expressly made subordinate and subject in right of payment to the prior payment
in full of all Senior Indebtedness, whether outstanding on the date hereof or
thereafter created, incurred, assumed or guaranteed.
(2) Payment Over of Proceeds Upon Dissolution, Etc.
- --------- -----------------------------------------------
<PAGE>
In the event of (i) insolvency or bankruptcy case or proceeding,
or any receivership, liquidation, reorganization or other similar case or
proceeding in connection therewith, relative to the Company or to its creditors,
as such, or to its assets, or (ii) reorganization, liquidation, dissolution,
winding up or other similar proceeding related to the Company or its property,
whether voluntary or involuntary, partial or complete, and whether or not
involving insolvency, receivership or bankruptcy, or (iii) assignment for the
benefit of creditors or any other marshalling of assets and liabilities of the
Company, then and in any such event specified in (i), (ii), or (iii) above (each
such event, if any, herein sometimes referred to as a "Proceeding") the holders
of Senior Indebtedness shall be entitled to receive payment in full of all
principal of, premium, if any, interest on, and fees and other amounts due or to
become due on or in respect of all Senior Indebtedness, including interest
accruing subsequent to a bankruptcy or insolvency event at the rate provided for
in the documents governing such Senior Indebtedness, whether or not such
interest is an allowed claim enforceable against the debtor in a bankruptcy case
under Title 11 of the United States Code, or provision shall be made for such
payment in cash or Cash Equivalents or otherwise in a manner satisfactory to the
holder of Senior Indebtedness, before the Holder of the Note is entitled to
receive any payment or distribution of any kind or character, whether in cash,
property or securities (including any payment or distribution which may be
payable or deliverable by reason of the payment of any other Indebtedness of the
Company subordinated to the payment of the Note, such payment or distribution
being hereinafter referred to as a "Junior Subordinated Payment") on account of
principal of or interest on or other amounts payable in respect of the Note or
on account of any purchase or other acquisition of any portion of the Note by
the Company or any Subsidiary of the Company (all such payments, distributions,
purchases and acquisitions herein referred to, individually and collectively, a
"Note Payment"), and to that end the holders of Senior Indebtedness shall be
entitled to receive, for application to the payment thereof, any Note Payment
which may be payable or deliverable in respect of the Note in any such
Proceeding.
Any payment or distribution of assets of the Company of any kind
or character, whether in cash, property or securities, by set-off or otherwise,
to which any Holder would be entitled except for the subordination provisions of
this Section 10 shall be paid by the Company or the liquidating trustee or agent
or other Person making such payment or distribution, whether a trustee in
bankruptcy, a receiver or a liquidating trustee or otherwise, directly to the
holders of Senior Indebtedness or their representatives or to the trustee or
trustees under any indenture under which any instruments evidencing any of such
Senior Indebtedness may have been issued, ratably according to the aggregate
amounts remaining unpaid on account of the Senior Indebtedness held or
represented by each, to the extent necessary to make payment in full in cash or
Cash Equivalents, of all Senior Indebtedness remaining unpaid, after giving
effect to any concurrent payment or distribution or provision therefor to the
holders of such Senior Indebtedness.
In the event that, notwithstanding the foregoing provisions of
this Section, the Holder shall have received any Note Payment before all Senior
Indebtedness is paid in full or payment thereof provided for in cash or cash
equivalents or otherwise in a manner satisfactory to the holders of Senior
Indebtedness, and if such fact shall, at or prior to the time of such Note
Payment, have been made known to such Holder, then and in such event such Note
Payment shall be paid over or delivered forthwith to the trustee in bankruptcy,
receiver, liquidating trustee, custodian, assignee, agent or other Person making
payment or distribution of assets of the Company for application to the payment
of all Senior Indebtedness remaining unpaid, to the extent necessary to pay all
Senior Indebtedness in full, after giving effect to any concurrent payment or
distribution to or for the holders of Senior Indebtedness.
<PAGE>
For purposes of this Section only, the words "any payment or
distribution of any kind or character, whether in cash, property or securities"
shall not be deemed to include a payment or distribution of stock or securities
of the Company provided for by a plan of reorganization or readjustment or of
any other corporation provided for by such plan of reorganization or
readjustment authorized by an order or decree of a court of competent
jurisdiction in a reorganization proceeding under any applicable bankruptcy law
which stock or securities are subordinated in right of payment to all then
outstanding Senior Indebtedness to substantially the same extent as the Note is
so subordinated as provided in this Section. The consolidation of the Company
with, or the merger of the Company into, another Person or the liquidation or
dissolution of the Company following the conveyance or transfer of all or
substantially all of its properties and assets as an entirety to another Person
shall not be deemed a Proceeding for the purposes of this Section if the Person
formed by such consolidation or into which the Company is merged or the Person
which acquires by conveyance or transfer such properties and assets as an
entirety, as the case may be, shall, as a part of such consolidation, merger,
conveyance or transfer, agree to assume the obligations of the Company under
this Note.
(3) No Payment When Senior Indebtedness in Default.
----------------------------------------------
In the event that any Senior Payment Default shall have occurred
and be continuing, then no Note Payment shall be made unless and until such
Senior Payment Default shall have been cured or waived or shall have ceased to
exist or all amounts then due and payable in respect of Senior Indebtedness
shall have been paid in full, or provision shall have been made for such payment
in cash or cash equivalents or otherwise in a manner satisfactory to the holders
of Senior Indebtedness.
<PAGE>
In the event that any Senior Non-Payment Default shall have
occurred and be continuing (or if a Senior Non-Payment Default would result upon
any payment with respect to the Note), then, upon the receipt by the Company of
written notice of such Senior Non-Payment Default from a holder or holders of
Senior Indebtedness as to which there is a Senior Non-Payment Default or the
representative or representatives of such holder, no Note Payment shall be made
during the period (the "Payment Blockage Period") commencing on the date of such
receipt of such written notice and ending (subject to any blockage of payment
that may be in effect in respect of a Senior Payment Default or Proceeding) on
the earlier of (i) the date of acceleration of such Senior Indebtedness, (ii)
179 days after the Company's receipt of such written notice, (iii) the date such
Senior Non-Payment Default shall have been cured or waived, or shall have ceased
to exist, (iv) the date such Senior Indebtedness shall have been discharged or
paid in full, or (v) the date such Payment Blockage Period shall have been
terminated by written notice to the Company from the holder of Senior
Indebtedness (or its representative) initiating such Payment Blockage Period
after which, in the case of clauses (ii), (iii), (iv) and (v) the Company shall
resume making any and all required payments in respect of the Note, including
any missed payments, unless the provisions described in the immediately
preceding paragraph are then applicable; provided, however, that (i) no more
than one Payment Blockage Period may be commenced with respect to the Note
during any 360-day period, (ii) a Payment Blockage Period may not extend beyond
179 days from the date of receipt by the Company of the Notice initiating such
Payment Blockage Period, and (iii) there shall be a period of at least 180
consecutive days in each 360-day period when no Payment Blockage Period is in
effect. For all purposes of this paragraph, no Senior Non-Payment Default that
existed or was continuing on the date of commencement of any Payment Blockage
Period with respect to the Senior Indebtedness initiating such Payment Blockage
Period shall be, or be made, the basis for the commencement of a subsequent
Payment Blockage Period by holders of Senior Indebtedness or their
representatives unless such Senior Non-Payment Default shall have been cured or
waived for a period of not less than 90 consecutive days.
If any payment or distribution of assets of the Company is
received by the Holder at a time when that payment or distribution is prohibited
as a result of the application of the provisions described in the preceding two
paragraphs, such payment or distribution will be received and held in trust for
and will be paid over and delivered forthwith to the holders (or their
representatives) of Senior Indebtedness, in trust for distribution to the
holders of all Senior Indebtedness (pro rata as to each of such holders on the
basis of the respective amounts of Senior Indebtedness which is due and payable
held by them) until all such Senior Indebtedness has been paid in full, after
giving effect to any concurrent payment or distribution or provision therefor to
the holders of such Senior Indebtedness; provided that to the extent amounts are
not then due in respect of Senior Indebtedness, such amounts shall be promptly
returned to the Company or distributed in such other manner as a court of
competent jurisdiction shall direct.
The provisions of this paragraph shall not apply to any Note
Payment with respect to which paragraph (d) of this Section would be applicable.
(4) Payment Permitted If No Default.
Nothing contained in this Section 10 or elsewhere in this Note or
in any of the Securities shall prevent the Company, at any time except during
the pendency of any Proceeding referred to in paragraph (b) of this Section or
under the conditions described in paragraph (c) of this Section, from making
Note Payments.
(5) Subrogation to Rights of Holders of Senior Indebtedness.
- --------- -------------------------------------------------------
<PAGE>
Subject to the payment in full of all amounts due or to become due
on or in respect of Senior Indebtedness, or the provision for such payment in
cash or cash equivalents or otherwise in a manner satisfactory to the holders of
Senior Indebtedness, the Holder of this Note shall be subrogated to the rights
of the holders of such Senior Indebtedness to receive payments and distributions
of cash, property and securities applicable to the Senior Indebtedness until the
principal of and interest on the Note shall be paid in full. For purposes of
such subrogation, no payments or distributions to the holders of the Senior
Indebtedness of any cash, property or securities to which the Holder of the Note
would be entitled except for the provisions of this Section, and no payments
over pursuant to the provisions of this Section to the holders of Senior
Indebtedness by the Holder of the Note, shall, as among the Company, its
creditors other than holders of Senior Indebtedness and the Holder of the Note,
be deemed to be a payment or distribution by the Company to or on account of the
Senior Indebtedness.
(6) Provisions Solely to Define Relative Rights.
- --------- -------------------------------------------
The provisions of this Section are and are intended solely for the
purpose of defining the relative rights of the Holder on the one hand and the
holders of Senior Indebtedness on the other hand. Nothing contained in this
Section or elsewhere in this Note is intended to or shall (i) impair, as among
the Company, its creditors other than holders of Senior Indebtedness and the
Holder of the Note, the obligation of the Company, which is absolute and
unconditional (and which, subject to the rights under this Section of the
holders of Senior Indebtedness, is intended to rank equally with all other
general obligations of the Company) to pay to the Holder of the Note the
principal of and interest on the Note as and when the same shall become due and
payable in accordance with its terms; or (ii) affect the relative rights against
the Company of the Holder of the Note and creditors of the Company other than
the holders of Senior Indebtedness; or (iii) the Holder of the Note from
exercising all remedies otherwise permitted by applicable law upon default under
this Note, subject to the rights, if any, under this Section of the holders of
Senior Indebtedness to receive cash, property and securities otherwise payable
or deliverable to such Holder.
(7) Company to Effectuate Subordination.
Each Holder of the Note by his acceptance thereof authorizes and
directs the Company on his behalf to take such action as may be necessary or
appropriate to effectuate the subordination provided in this Section and
appoints the Secretary of the Company his attorney-in-fact for any and all such
purposes.
(8) No Waiver of Subordination Provisions.
No right of any present or future holder of any Senior
Indebtedness to enforce subordination as herein provided shall at any time in
any way be prejudiced or impaired by any act or failure to act on the part of
the Company or by any act or failure to act, in good faith, by any such holder,
or by any noncompliance by the Company with the terms, provisions and covenants
of this Note, regardless of any knowledge thereof any such holder may have or be
otherwise charged with.
<PAGE>
Without in any way limiting the generality of the foregoing
paragraph, the holders of Senior Indebtedness may, at any time and from time to
time, without the consent of or notice to the Holder of the Note, without
incurring responsibility to the Holder of the Note and without impairing or
releasing the subordination provided in this Section or the obligations
hereunder of the Holder of the Note to the holders of Senior Indebtedness, do
any one or more of the following: (i) change the manner, place or terms of
payment or extend the time of payment of, or renew or alter, Senior
Indebtedness, or otherwise amend or supplement in any manner Senior Indebtedness
or any instrument evidencing the same or any agreement under which Senior
Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with
any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii)
release any Person liable in any manner for the collection of Senior
Indebtedness; and (iv) exercise or refrain from exercising any rights against
the Company and any other Person.
(9) Notice to Company.
The Company shall give prompt written notice to the Holder of any
fact known to the Company which would prohibit the making of any payment in
respect of the Note. Notwithstanding the provisions of this Section, the Company
shall not be charged with knowledge of the existence of any facts which would
prohibit the making of any payment to or by the Company in respect of the Note,
unless and until the Company shall have received written notice thereof from a
holder of Senior Indebtedness or from any trustee therefor; and, prior to the
receipt of any such written notice, the Company, shall be entitled in all
respects to assume that no such facts exist.
The Company shall be entitled to rely on the delivery to it of a
written notice by a Person representing himself to be a holder of Senior
Indebtedness (or a trustee therefor) to establish that such notice has been
given by a holder of Senior Indebtedness (or a trustee therefor). In the event
that the Company determines in good faith that further evidence is required with
respect to the right of any Person as a holder of Senior Indebtedness to
participate in any payment or distribution pursuant to this Section, the Company
may request such Person to furnish evidence to the reasonable satisfaction of
the Company as to the amount of Senior Indebtedness held by such Person, the
extent to which such Person is entitled to participate in such payment or
distribution and any other facts pertinent to the rights of such Person under
this Section, and if such evidence is not furnished, the Company may defer any
payment to such Person pending judicial determination as to the right of such
Person to receive such payment.
(10) Reliance on Judicial Order or Certificate of Liquidating Agent.
- --------- --------------------------------------------------------------
<PAGE>
Upon any payment or distribution of assets of the Company referred
to in this Section, the Holder of the Note shall be entitled to rely upon any
order or decree entered by any court of competent jurisdiction in which such
Proceeding is pending, or a certificate of the trustee in bankruptcy, receiver,
liquidating trustee, custodian, assignee for the benefit of creditors, agent or
other Person making such payment or distribution, delivered to the Holder of the
Note, for the purpose of ascertaining the Persons entitled to participate in
such payment or distribution, the holders of the Senior Indebtedness and other
indebtedness of the Company, the amount thereof or payable thereon, the amount
or amounts paid or distributed thereon and all other facts pertinent thereto or
to this Section.
(11) Company Not Fiduciary for Holders of Senior Indebtedness.
- --------- --------------------------------------------------------
The Company shall not be deemed to owe any fiduciary duty to the
holders of Senior Indebtedness and shall not be liable to any such holders if it
shall in good faith mistakenly pay over or distribute to the Holder of the Note
or to any other Person cash, property or securities to which any holders of
Senior Indebtedness shall be entitled by virtue of this Section or otherwise.
Section 1Notices. All notices, requests, demands and other communications
relating to the Notes shall be in writing, including by telex, telegram or
cable, addressed, if to the registered holder hereof, to it or them at the
address(es) furnished by said registered holder(s) to the Company, and if to the
Company, to it at 300 West 11th Street, Kansas City, Missouri 64105, Attention:
President, or to such other address as any party shall notify the other party in
writing, and shall be effective, in the case of written notice by mail, upon
placement into the mails (first class, postage prepaid), and in the case of
notice by telex, telegram or cable, on the day sent.
Section 1Binding Effect. This Note shall be binding upon and inure to the sole
and exclusive benefit of the Company, its successors and assigns, and the
registered holder or holders from time to time of this Note.
Section 1Survival of Rights and Duties. This Note shall terminate and be of no
further force and effect on the date the principal hereof and all interest
hereon shall have been paid in full.
Section 1Governing Law. The Notes shall be construed in accordance with and
governed by the internal laws of the State of Missouri.
IN WITNESS WHEREOF, the Company has caused this Note to be
executed under its corporate seal by its officers thereunto duly authorized on
___________ ____, 1998.
AMERICO LIFE, INC.
[CORPORATE SEAL]
By:___________________________
Gary L. Muller, President
ATTEST:
- -------------------------------
Richard J. Juneau, Secretary
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, ____________________ hereby sells, assigns and
transfers to the assignee set forth below all of the rights of the undersigned
in and to this Note:
Name of Assignee Address
Name of Holder
-----------------------------
Dated: _____________, 199__
(By:)_________________________
(Title:)______________________
EXHIBIT 10.9(A)
FIRST AMENDMENT TO LEASE AGREEMENT
AMENDMENT dated this 10th day of October, 1998, by and between BROADWAY
SQUARE PARTNERS, LLP, a Missouri limited liability partnership ("Landlord")
having its principal office at 300 West Eleventh Street, Kansas City, Missouri
64105, and UNITED FIDELITY LIFE INSURANCE COMPANY ("Tenant") having its
principal office at 300 West Eleventh Street, Kansas City, Missouri 64105.
WHEREAS, Landlord is successor to Broadway Square Partners, a Missouri
general partnership.
WHEREAS, Landlord and Tenant are parties to that certain Lease Agreement
dated February 24, 1988 (the "Lease") relating to the premises herein described
and located in the building now known as 1055 Broadway (formerly 310 Broadway
Square), Kansas City, Missouri.
WHEREAS, the parties which to amend the Lease as hereinafter more
specifically provided, including the extension of the term and a change in the
amount of the base rent.
WHEREAS, terms which are capitalized but not defined herein shall have the
same meanings which are given to such terms in the Lease.
NOW, THEREFORE, in consideration of the premises and the mutual terms,
covenants, and conditions herein contained, the receipt and legal sufficiency of
which are hereby acknowledged, the parties agree as follows:
1. The Premises. The premises shall contain 45,231 square feet of net
rentable area and shall include the areas described in Exhibit A attached hereto
and made a part of hereof (the "Premises").
2. Extension of the Term. The term of the Lease is hereby extended for a
term commencing immediately upon the expiration of the original term of the
Lease and ending September 30, 2010. The extended term shall be upon the same
terms, covenants and conditions as those of the initial term, as the same shall
have been amended by this amendment.
3. Base Rental. The Base Rental under the Lease for the 12th floor (22,687
square feet) shall be $13.65 per square foot and $15.83 per square foot for the
Penthouse floor (22,544 square feet) for the period beginning September 1, 1998
and ending on the fifteenth anniversary of the Commencement Date. On the
fifteenth and twentieth anniversaries of the Commencement Date the Base Rental
shall be adjusted as provided in Section 7 of the Lease, except that it shall be
increased from the amount thereof hereinabove provided and payable on September
1, 1998, and not from the amount thereof payable on the Commencement Date or the
date of the otherwise last adjustment.
4. Base Rental After Loan Default. Notwithstanding any other provision of
the Lease and this Amendment, including without limitation Section 3 hereof, if
and when a default occurs under the Promissory Note (the "Note") made by
Landlord to Massachusetts Mutual Life Insurance Company ("Mass Mutual") in the
original principal amount of $24,000,000 or a default under any of the loan or
security documents securing the Note (the "Loan Documents") including the Deed
of Trust and Security Agreement, and if such default remains uncured beyond the
period of cure provided in the loan documents, the Base Rental from and after
such default shall be as follows:
a) During the period beginning September 1, 1998 and ending August 31,
2003, the annual Base Rental shall be $14.00 per square foot of net
rentable area which extends to $633,234 per annum.
b) During the period beginning September 1, 2003 and ending August 31,
2010, the annual Base Rental shall be $15.00 per square foot of net
rentable area which extends to $678,465 per annum.
5. For the Benefit of Mass Mutual. In consideration of the execution and
delivery by Mass Mutual, the current holder of the note, of Subordination,
Nondisturbance and Attornment Agreement dated at the date of the Note for the
benefit of the Tenant, the legal sufficiency of which is hereby acknowledged by
Tenant, the rights and benefits of the foregoing Section 4 shall inure to the
benefit of the holder of the Note, and the holder of the Note shall in all
respects be entitled to enforce the provisions of Section 4 by all remedies at
law or in equity directly against the Tenant without joinder of Landlord.
6. The Lease. Except as hereinabove provided, the Lease remains unchanged
and in full force and effect.
IN WITNESS WHEREOF, the parties have executed this First Amendment of Lease
as of the day and year first above written.
LANDLORD: TENANT:
BROADWAY SQUARE PARTNERS, LLP, UNITED FIDELITY LIFE INSURANCE COMPANY
a Missouri limited liability partnership
By: SCOL, Inc., a General Partner,
a Missouri corporation
By: By:
---------------------------------- ---------------------------------
Robert J. Graham, Secretary and
Authorized Representative Name:
---------------------------------
Title:
---------------------------------
By: DST SYSTEMS, INC., a General Partners,
A Delaware corporation.
By:
---------------------------------
Vincent P. Dasta, Vice President
and Authorized Representative
LIST OF SUBSIDIARIES OF THE REGISTRANT
<TABLE>
Owned Subsidiaries State of Percentage
Incorporation Owned
<S> <C>
Argus Health Systems, Inc. Delaware 50
Hereford, LLP Missouri 50
Oak Lane Associates Texas 50
Oak Lane, L.C. Texas 50
Oak Lane/GSL & Venture, G.P. Texas 50
Americo International Corporation Missouri 100
Americo Services, Inc. Missouri 100
Annuity Service Corporation Texas 100
Broadway Realty Company, LLC Missouri 100
Broadway Square Redevelopment Company Texas 100
College Insurance Group, Inc. Missouri 100
Financial Assurance Life Insurance Company Texas 100
Great Southern Life Insurance Company Texas 100
Great Southern Vida Compania de Seguros, S.A. Argentina 100
GSSW LM I L.P. Missouri 100
GSSW LM II L.C. Missouri 100
GSSW LM, Inc. Missouri 100
GSSW REO Landmark L.P. Texas 100
GSSW WR I, L.P. Missouri 100
GSSW WR II, L.C. Missouri 100
GSSW WR, Inc Missouri 100
GSSW WWA I, L.P. Missouri 100
GSSW WWA II L.C. Missouri 100
GSSW WWA, Inc. Missouri 100
GSSW-REO Briarwood, L.P. Texas 100
GSSW-REO L.C. Texas 100
GSSW-REO Westwood Arlington Texas 100
Landmark Mortgage Company Missouri 100
Lufkin-REO, Inc. Texas 100
NAP Partners, Inc. Texas 100
National Farmers Union Life Insurance Company Texas 100
Pension Consultants and Administration, Inc. Texas 100
Riverdale Square-REO, L.P. Texas 100
The College Life Insurance Company of America Texas 100
The Ohio State Life Insurance Company Texas 100
United Fidelity Life Insurance Company Texas 100
Windrush-REO, L.P. Texas 100
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000908139
<NAME> Americo Life, Inc.
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.00
<DEBT-HELD-FOR-SALE> 925,191
<DEBT-CARRYING-VALUE> 876,594
<DEBT-MARKET-VALUE> 914,672
<EQUITIES> 89,022
<MORTGAGE> 190,074
<REAL-ESTATE> 28,606
<TOTAL-INVEST> 2,346,395
<CASH> 68,219
<RECOVER-REINSURE> 1,207,197
<DEFERRED-ACQUISITION> 131,574
<TOTAL-ASSETS> 4,105,814
<POLICY-LOSSES> 3,335,030
<UNEARNED-PREMIUMS> 36,332
<POLICY-OTHER> 45,467
<POLICY-HOLDER-FUNDS> 106,241
<NOTES-PAYABLE> 132,533
0
0
<COMMON> 10
<OTHER-SE> 257,170
<TOTAL-LIABILITY-AND-EQUITY> 4,105,814
218,582
<INVESTMENT-INCOME> 226,534
<INVESTMENT-GAINS> 8,284
<OTHER-INCOME> 12,163
<BENEFITS> 251,506
<UNDERWRITING-AMORTIZATION> 87,189
<UNDERWRITING-OTHER> 89,394
<INCOME-PRETAX> 12,027
<INCOME-TAX> 3,235
<INCOME-CONTINUING> 8,792
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,792
<EPS-PRIMARY> 879.2
<EPS-DILUTED> 879.2
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
