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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, 1999 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 x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Shares of common stock outstanding as of March 24, 2000:
10,000, none of which is held by non-affiliates.
Documents Incorporated by Reference: None
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<PAGE>
TABLE OF CONTENTS
Item
PART I
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
<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 providing life insurance and
annuity products through its life insurance and asset accumulation operating
segments. At December 31, 1999, the Company had approximately $3.6 billion of
invested assets under management and $44.5 billion of life insurance in force.
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").
In addition, the Company owns 100% of NAP Partners, Inc. and Pension
Consultants and Administrators, Inc., which are the marketing operations of the
Company's Americo Retirement Services ("ARS") operation.
Historically, the Company's focus was to grow principally through
acquisitions. This strategy has proven successful, providing the Company with
critical mass and a large, stable block of in force business. While acquisitions
have not been abandoned as a growth strategy, the Company has more recently
focused on growth through new sales. The Company's new business strategy is to
develop innovative and competitive products and expand distribution sources in
its existing markets. Additionally, the Company intends to look for
opportunities to expand into new markets.
Presently, the Company's new sales activities are divided into three
divisions, Americo Individual Sales, Americo Retirement Services and Americo
Preneed. The first two are more fully described in the "Life Insurance and
Annuity Business" section. In 1999, the Company created the Americo Preneed
division to offer life insurance products focused on providing benefits for
funeral expenses of the insured. These products are sold through a group of
independent agents who have existing relationships with funeral homes in several
states. Sales through the Americo Preneed division began in October and totaled
$2.2 million during 1999.
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 ventures.
Acquisitions and Reinsurance Transactions
As described above, 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 ("Victory Life") in 1995, Ohio State and
Investors Guaranty Life Insurance Company ("Investors Guaranty") in 1997, and
two significant reinsurance transactions in 1996 and 1995. Victory Life was
merged into United Fidelity during 1998.
<PAGE>
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.
In certain transactions more fully described below, 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 the life insurance and annuity policies of Ohio
Life and Fremont Life. At December 31, 1999, these agreements covered 67,802
policies with associated liabilities totaling $507.8 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 while retaining the administration of these policies. At December
31, 1999, the policy liabilities associated with the 234,219 policies
administered totaled $638.3 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 Life
and Fremont Life policies are reinsured on a 100% quota share basis. 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,
Ohio Life and Investors Guaranty in 1996, 1997 and 1999, respectively.
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 had 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 is divided into two segments: life
insurance operations and asset accumulation operations. The life insurance
operations consist primarily of insurance and annuity business acquired by the
Company and is supplemented by new life insurance business sold through its
Americo Individual Sales ("AIS") division and Americo Preneed sales division.
The life insurance operations generated $396.0 million of revenues, or 86% of
total Company revenues, in 1999. The Company's asset accumulation operations
consist of annuity products sold through the Company's ARS division. The asset
accumulation operations generated $42.6 million, or 9% of total Company
revenues, in 1999 and have grown at a compound annual growth rate of 84.3% over
the last three years. Policy liabilities and the number of policies in force as
of December 31, 1999 for the Company's segments are summarized below.
<PAGE>
<TABLE>
Asset Accumulation
Life Insurance Operations
Operations Total
(Dollars in thousands)
<S> <C> <C> <C>
Policyholder account balances:
Universal life $ 1,445,899 $ 31,328 $ 1,477,227
Annuities 588,679 533,721 1,122,400
------------- ------------- -------------
$ 2,034,578 $ 565,049 $ 2,599,627
============= ============= =============
Reserves for future policy benefits $ 822,940 $ - $ 822,940
============= ============= =============
Policies in force 860,800 88,649 949,449
============= ============= =============
</TABLE>
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.
The following table shows the Company's collected premiums during 1999,
1998 and 1997 by product category.
<TABLE>
Premiums Collected
for periods indicated
------------------------------------------------------------------------------------
Life Insurance Operations Asset Accumulation Operations
-------------------------------------- --------------------------------------
First Year Renewal Total First Year Renewal Total
------------- ------------- ------------- ------------- ------------- --------------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Year ended
December 31, 1999
Traditional 14,370 81,444 95,814 1,672 - 1,672
Interest-sensitive 26,603 176,313 202,916 5,034 12,751 17,785
----------- ----------- ----------- ----------- ----------- -----------
Total life 40,973 257,757 298,730 6,706 12,751 19,457
Annuities 27,471 6,028 33,499 156,814 43,901 200,715
----------- ----------- ----------- ----------- ----------- -----------
Direct and assumed premiums 68,444 263,785 332,229 163,520 56,652 220,172
----------- ----------- ----------- -----------
Less ceded premiums (64,504) (51)
----------- ----------
Total 267,725 220,121
=========== ===========
Year ended
December 31, 1998
Traditional 13,411 84,929 98,340 915 - 915
Interest-sensitive 36,455 185,374 221,829 6,152 6,840 15,992
----------- ----------- ----------- ----------- ----------- -----------
Total life 49,866 270,303 320,169 7,067 9,840 16,907
Annuities 18,979 6,377 25,356 40,491 45,975 86,466
----------- ----------- ----------- ----------- ----------- -----------
Direct and assumed premiums 68,845 276,680 345,525 47,558 55,815 103,373
----------- ----------- ----------- -----------
Less ceded premiums (73,786) (52,752)
----------- ----------
Total 271,739 50,621
=========== ===========
Year ended
December 31, 1997
Traditional 10,608 87,607 98,215 576 - 576
Interest-sensitive 39,601 166,917 206,518 4,923 6,467 11,390
----------- ----------- ----------- ----------- ----------- -----------
Total life 50,209 254,524 304,733 5,499 6,467 11,966
Annuities 18,654 6,068 24,722 57,846 38,625 96,471
----------- ----------- ----------- ----------- ----------- -----------
Direct and assumed premiums 68,863 260,592 329,455 63,345 45,092 108,437
----------- ----------- ----------- -----------
Less ceded premiums (61,556) (75,603)
----------- ----------
Total 267,899 32,834
=========== ===========
</TABLE>
<PAGE>
Americo Individual Sales
The Company's principal distribution channels for AIS products are through
independent agents. Although the Company does not employ these agents, each is a
party to a general agency agreement which governs the terms of the agent's
relationship with the Company. The Company manages these agents either through
its Regional Vice President (RVP) operation or through Independent Marketing
Organizations (IMO's). The Company has a Career Partners(TM) program which
builds long-term relationships between the Company and individual agents by
providing benefits in addition to commissions to reward production and longevity
in the program. This program includes agents in both the RVP operation and
IMO's.
The RVP operation uses independent agents recruited and managed by five
Regional Vice Presidents who are Company employees. Approximately 275 producing
agents are licensed with the Company through this operation. Sales generated
through the RVP operation in 1999 amounted to $9.3 million, or 31%, of total
individual sales. The Company intends to expand its RVP operation by recruiting
additional agents.
The Company's IMO operation consists of approximately 20 large independent
organizations that sell the Company's products through agents recruited and
managed by the IMO. Total sales through IMO's amounted to $18.1 million in 1999,
or 61%, of total individual sales. Ten IMO's accounted for 63% of the sales
generated from the IMO operation. The Company's strategy is to enter into
additional IMO relationships to expand its sales in this operation.
The Company's AIS division offers a variety of life insurance and annuity
products primarily focused on life insurance sold to individuals. The Company
offers a portfolio of interest-sensitive whole life, universal life and term
products. The Company also offers equity-indexed annuities and some single
premium and flexible premium annuities. In 1999, the Company revised its product
portfolio to improve competitiveness in the marketplace with respect to both
consumers and agents with a new view toward generating additional sales growth.
Americo Retirement Services
Recognizing the growth potential in the sale of asset accumulation
products, the Company increased its presence in this market with the acquisition
of the remaining 50% interest in its CIG joint venture described above under
"Acquisition and Reinsurance Transactions". Following the acquisition, the
Company created the ARS division. The ARS division focuses on the sale of asset
accumulation products, principally tax-qualified life and annuity products sold
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. The ARS operation also offers
annuity products to individuals in the senior market through independent sales
organizations. 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.
In 1999, the Company introduced its Managed Agent Program (MAP) whereby
previously independent agents became employees of the Company compensated on an
incentive basis. The Company believes this change allows it to better recruit,
retain and train its sales force. Sales from MAP totaled $19 million (12% of
total ARS sales) in 1999. Sales through the independent producers amounted $143
million in 1999 (88% of total ARS sales). Total sales generated by the ARS
operation has increased from $15 million in 1993 to $162 million in 1999.
The Company offers a variety of life and annuity products through the ARS
division. The Company's life insurance products consist of interest-sensitive
whole life and universal life products. The Company's annuity products consist
of equity-indexed, single premium and flexible premium annuities. In 1999, the
Company introduced a series of equity-indexed products which accounted for $120
million of sales through the ARS operation in 1999. The equity-indexed products
include an interest credit component which is based on changes in the Standard &
Poor's 500 Index.
<PAGE>
Operations
An integral part of the Company's philosophy is to improve profitability by
operating at the lowest achievable cost level consistent with providing good
service. Over the years, the Company has made decisions to (i) invest in
technology, (ii) centralize certain functions and (iii) outsource 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 duplicate functions, reduce
operating costs and improve returns on acquired business. In order to provide
capital for anticipated expenses associated with expanding sales in the ARS and
Preneed markets, the Company has reviewed the levels of general expenses in all
of its operating and corporate departments. The Company has identified sources
of expense savings through increased cost controls which should benefit the
Company beginning in 2000.
The Company has outsourced its data processing requirements, with the
exception of local area networks, through contracts entered into by 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 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. A portfolio composed principally of
fixed-rate investments that generate predictable yields backs the Company's
insurance liabilities. The yields 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 requirements and
asset-liability management principles.
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, 1999,
98.1% of the Company's fixed-rate investments were 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 numerous
interest rate scenarios. The Company uses this information to assist it in
managing the duration of its asset portfolio so that it corresponds to the
duration of its liabilities.
<PAGE>
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, 1999 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 $ 2,366 $ 27,529 $ 29,895 1.2
Mortgage-backed securities:
Collateralized mortgage obligations 226,353 105,717 332,070 13.4
Pass-through certificates:
GNMA 19,380 58,337 77,717 3.1
FHLMC 1,407 265 1,672 0.1
FNMA 738 14,232 14,970 0.6
Other agency 4,938 9,483 14,421 0.6
Other asset-backed securities 29,305 83,897 113,202 4.5
Corporate bonds 568,421 626,537 1,194,958 48.1
----------- ----------- ----------- --------
Total fixed maturities $ 852,908 $ 925,997 $ 1,778,905 71.6
=========== =========== -----------
Equity securities 73,448 3.0
Investment in equity subsidiaries 12,141 0.5
Mortgage loans on real estate 227,601 9.2
Investment real estate 28,516 1.1
Policy loans 209,979 8.4
Cash and cash equivalents 122,788 4.9
Other invested assets 30,429 1.3
----------- --------
Total cash and invested assets $2,483,807 100.0
========== ========
- ------------------------------------------------------------
(1) Carrying amount is amortized cost. The market value of held to maturity securities at December 31, 1999
was $821.3 million.
(2) Carrying amount is market value. The amortized cost of available for sale securities at December 31, 1999
was $985.9 million.
</TABLE>
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.
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, 1999 were as follows:
<PAGE>
<TABLE>
Total Carrying
Amount Percentage
<S> <C> <C>
Fixed maturities:
U.S. Treasury and government securities $ 67,292 7.0
Mortgage-backed securities 144,195 15.0
Other asset-backed securities 110,551 11.5
Corporate bonds 581,794 60.5
-------------- -------
Total fixed maturities $ 903,832 94.0
-------------- -------
Cash 57,478 6.0
-------------- -------
Total cash and invested assets $ 961,310 100.0
============== =======
</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, 1999 were the investments in Argus, which is accounted for
using the equity method, and in real estate ventures. The Company's investments
in Argus and the real estate ventures collectively comprise the Company's
non-insurance operations segment.
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 1999, Argus generated revenues of $37.1 million
and processed over 150 million claims compared with 134 million claims processed
in 1998, an increase of 12%. At December 31, 1999, Argus had approximately 261
full-time employees and maintains its corporate headquarters in Kansas City,
Missouri. Currently, there are less than 15 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 Ventures: The Company manages ten investment properties with a
carrying value of $25.0 million including office space, retail space and
apartments principally located in Texas and Missouri. In 1998 and 1997, the
Company disposed of several of the properties for gains of $3.1 million and $5.1
million, respectively. There were no such sales during 1999. The proceeds from
these sales have been reinvested in similar properties.
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. Additionally, the Company
has certain products on which it reinsures a significant quota share to
unaffiliated reinsurers in order to improve the profitability of these products.
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, 1999, the Company had ceded to reinsurers approximately $6.4 billion (19%)
of life insurance in force, of which 97% was reinsured with insurance companies
rated "A (Excellent)" or better by A.M. Best. Approximately $2.4 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.
<PAGE>
The Company has entered into several coinsurance and modified coinsurance
agreements with the Reinsurer with related insurance liabilities totaling $1.1
billion at December 31, 1999.The Reinsurer is rated "AAA" by Standard and Poor's
and "A++" by A.M. Best. 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 $14.0 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 $0.6 million and $0.5 million for the
years ended December 31, 1999 and 1998, 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. That
decision permits national banks to sell annuity products of life insurance
companies in certain circumstances.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999, implementing fundamental changes in the
regulation of the financial services industry in the U.S. The Act permits
mergers that combine commercial banks, insurers and securities firms under one
holding company. Under the Act, national banks retain their existing ability to
sell insurance products in some circumstances. In addition, bank holding
companies that qualify and elect to be treated as "financial holding companies"
may engage in activities, and acquire companies engaged in activities, that are
"financial" in nature or "incidental" or "complementary" to such financial
activities, including acting as principal, agent or broker in selling life,
property and casualty and other forms of insurance and annuities. Under the Act,
no state may prevent or interfere with affiliations between banks and insurers,
insurance agents or brokers, or the licensing of a bank or affiliate as an
insurer or agent or broker. Until passage of the Gramm-Leach-Bliley Act, the
Bank Holding Company Act of 1956, as amended, had restricted banks from being
affiliated with insurers. With the passage of the Gramm-Leach-Bliley Act, among
other things, bank holding companies may acquire insurers, and insurance holding
companies may acquire banks. The ability of banks to affiliate with insurers may
materially adversely affect all of the Company's product lines by substantially
increasing the number, size and financial strength of potential competitors.
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. Nationally, the number of licensed agents is in
decline; however, the Company has implemented its Career Partners(TM) program
and MAP to secure its relationships with existing agents and attract new agents.
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.
<PAGE>
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, although the
federal government generally does not directly regulate the insurance business,
federal initiatives often have an impact on the business in a variety of ways.
Current and proposed federal measures that may significantly affect the
insurance business include limitations on antitrust immunity and minimum
solvency requirements. For a discussion of the Gramm-Leach-Bliley Act of 1999,
permitting affiliations between banks and insurers, see "Business-Competition
and Ratings". The NAIC has also taken initiatives to reduce insurance company
insolvencies and market conduct violations. Most recently, the NAIC has adopted
the Codification of Statutory Accounting Principles for life insurers, which is
to become effective on January 1, 2001. A detailed analysis has determined that
the adoption of Codification will not have a materially adverse impact on the
statutory results of operations and statutory financial position of the Company.
Also, the NAIC has adopted a revision to the Valuation of Life Insurance
Policies Model Regulation (known as XXX Regulation). This model regulation would
establish new minimum statutory reserve requirements for certain individual life
insurance policies written in the future. Before the new reserve standards can
become effective, individual states must adopt the regulation. The State of
Texas adopted XXX Resolution effective January 1, 2000. The Company modified
certain of its products during 1999 in response to XXX Regulation. 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.
<PAGE>
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 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, 1999.
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, 1999, the Company's
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, 2000, Americo and its wholly-owned subsidiaries employed
approximately 661 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 a related party is a partner as described in
the "Certain Relationships and Related Transactions" section included elsewhere
in this Form 10-K. 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
Great Southern is a defendant 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. On March 14, 2000, the court filed an order
certifying a class of all current and former owners of "excess interest whole
life and/or universal life" policies issued from 1982 through 1997. Great
Southern has petitioned the Fifth Circuit Court of Appeals for immediate review
of this ruling. 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.) This case has been stayed pending
final resolution of the class certification issue in the federal multidistrict
litigation case mentioned above.
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). On April
2, 1999, the court entered judgment dismissing with prejudice the action against
Great Southern and all other defendants. On September 15, 1999, plaintiff filed
a notice of appeal from the judgment to the California Court of Appeals.
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). The certification ruling was affirmed by
the Texas Court of Appeals on or about April 30, 1999. The class members, 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 an unrelated company (Entrepreneur Corporation) to be made
public at some point in the future. Plaintiffs' petition seeks monetary damages
from the defendants in an unspecified amount. However, in mediation and
discovery, the plaintiffs have stated that their actual damages claimed
will be in the multimillion dollar range. Plaintiffs also seek exemplary
and treble damages. The case is currently set for trial during the week of
May 22, 2000.
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 parties have
agreed to a settlement under which Great Southern will pay the class counsel's
fees and expenses in an amount to be set by the court and will provide free
insurance for one year to class members who timely submit an application for a
new universal life policy and satisfy Great Southern's underwriting
requirements. A hearing on the proposed settlement, which is subject to court
approval, is scheduled for April 18, 2000. The cost of the settlement, if
approved, cannot be determined at this time.
On July 2, 1999, a purported class action lawsuit (Notzon v. The College
Life Insurance Company of America, et al., 111th District Court, Webb County,
Texas) was filed against the Company, The College Life Insurance Company of
America and several of its officers, directors and other affiliated parties,
several other subsidiaries of the Company and several other defendants.
Plaintiff's claims against the various defendants include allegations of various
misrepresentations, deceptive trade practices and statutory violations in
connection with the marketing and administration of deferred annuity and life
insurance products sold to school teachers and others. The suit seeks actual,
rescissory, treble and punitive damages, as well as injunctive and declaratory
relief. The suit initially was removed to federal court but was remanded to
state court.
On October 21, 1999, a purported class action lawsuit was filed against
Great Southern in Orange County Superior Court, California (Alexander v. Fremont
General Corporation, Fremont Life Insurance Co. and Great Southern Life
Insurance Co.). Plaintiff alleges misrepresentations and other wrongful conduct
in connection with the imposition of increased cost of insurance charges under
certain universal life policies assumed or issued by Fremont Life Insurance
Company, and which were subsequently assumed by Great Southern. The suit seeks
actual and punitive damages, as well as injunctive and restitutionary relief and
an accounting.
On August 16, 1999, a purported class action lawsuit (Pritzker v. The
College Life Insurance Company of America, and Loyalty Life Insurance Company,
U.S. District Court for the District of Massachusetts) was filed against the
Company's subsidiary, The College Life Insurance Company of America,
and former subsidiary, Loyalty Life Insurance Company. Plaintiff alleges
misrepresentations, breach of contract, and other wrongful conduct in connection
with the imposition of increased cost of insurance charges under certain
universal life policies assumed by defendants. Plaintiff also alleges defendants
paid less than the minimum guaranteed interest due under such policies. The suit
seeks actual and punitive damages, restitutionary and injunctive relief and an
accounting.
On November 22, 1999, a purported class action lawsuit (Knauer v. Ohio
State Life Insurance Company) was filed in the Court of Common Pleas, Erie
County, Ohio, and subsequently was removed by defendant to the U.S. District
Court for the Northern District of Ohio, Western Division. The suit alleges
misrepresentations and other wrongful conduct wherein defendant allegedly
collected premiums for life insurance policies prior to being bound to provide
coverage and allegedly misrepresented that premiums would "vanish" after a
certain time period. The suit seeks actual and punitive damages, and
declaratory, restitutionary and injunctive relief.
The Company and its subsidiaries named in the above pending actions deny
any allegations of wrongdoing and intend to defend the actions vigorously.
Although plaintiffs in these actions generally are seeking indeterminate
amounts, including punitive and treble damages, such amounts could be large.
Although there can be no assurances, at the present time the Company does not
anticipate that the ultimate liability arising from such pending litigation,
after consideration of amounts provided in the consolidated financial
statements, will have a material adverse effect on the financial condition of
the Company. However, in light of the indeterminate amounts sought in such
matters and the inherent unpredictability of legal proceedings, it is possible
that an adverse outcome in any one or more of these matters could have a
material adverse effect on the Company's operating results and cash flows in
particular quarterly or annual periods.
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,
1999 and at December 31, 1999, 1998, 1997, 1996 and 1995 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,
----------------------------------------------------------------------
(Dollars in thousands)
1999 1998 (3) 1997 (2) 1996 1995 (1)
---- -------- -------- ---- --------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Premiums and policy revenues $ 224,896 $ 218,582 $ 203,729 $ 165,602 $ 140,130
Net investment income 227,622 226,534 219,267 186,725 152,047
Net realized investment gains (losses) 4,174 8,284 2,950 (120) (282)
Gain on disposition of partnership interest - - - 15,825 -
Other income 6,147 12,163 12,331 3,567 2,168
----------- ----------- ---------- ---------- ----------
Total income 462,839 465,563 438,277 371,599 294,063
Policyholder benefits 261,342 251,506 262,940 218,659 169,162
Commissions 13,771 13,390 11,230 13,473 9,662
Amortization expense 73,643 87,189 43,694 29,714 26,666
Interest expense 11,704 12,057 12,089 12,263 10,593
Other operating expenses 86,161 89,394 77,038 56,703 47,124
----------- ----------- ---------- ---------- ----------
Income before provision for income taxes 16,218 12,027 31,286 40,787 30,856
Provision for income taxes 4,744 3,235 9,230 13,513 11,126
----------- ----------- ---------- ---------- ----------
Net income $ 11,474 $ 8,792 $ 22,056 $ 27,274 $ 19,730
=========== =========== =========== =========== ===========
Net income applicable to common stock per
common share $ 1,147.40 $ 879.20 $ 2,205.60 $ 2,727.40 $ 1,973.00
=========== =========== =========== =========== ===========
Average common shares outstanding 10 10 10 10 10
== == == == ==
Balance Sheet Data:
Total investments $ 2,361,019 $ 2,346,395 $ 2,125,813 $ 2,018,852 $ 2,014,634
Total assets 4,188,162 4,105,814 4,061,236 2,769,583 2,459,805
Total debt 111,165 132,533 132,884 133,312 133,451
Total liabilities 3,962,848 3,848,634 3,814,374 2,562,561 2,269,042
Stockholder's equity 225,314 257,180 246,862 207,022 190,763
- ---------------------------
(1) On July 10, 1995, the Company acquired all of the outstanding common stock of Victory Life.
(2) On April 15, 1997, the Company acquired all of the outstanding common stock of Ohio State and Investors
Guaranty.
(3) On October 1, 1998, the Company acquired the 50% of College Insurance Group, Inc. not previously owned by
the Company.
</TABLE>
<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 141% from
$18.5 billion in 1989 to $44.5 billion in 1999. 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 in force for the last three
years is summarized in the following table. <TABLE>
1999 1998 1997
---- ---- ----
(in billions)
<S> <C> <C> <C>
Beginning of year balance $ 46.9 $ 47.2 $ 27.6
Insurance business acquired or assumed - 1.6 18.9
New business written 2.3 3.4 2.6
Terminations and other (4.7) (5.3) (1.9)
------- ------- -------
End of year balance $ 44.5 $ 46.9 $ 47.2
======= ======= =======
The following table summarizes the Company's sales in terms of collected
first year premiums over the three-year period ended December 31, 1999.
1999 1998 1997
---- ---- ----
(in millions)
Life insurance premiums $ 31.6 $ 42.6 $ 44.5
Annuity premiums 184.3 59.5 76.5
------- ------- -------
$ 215.9 $ 102.1 $ 121.0
======= ======= =======
</TABLE>
The Company intends to continue its focus on the sale of life insurance and
annuity products through its marketing and distribution systems. Specifically,
the Company will continue its efforts in the ARS operations which resulted in
significant sales growth during 1999. 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 income taxes for the Company's operating
segments, as defined by Statement of Financial Accounting Standard ("SFAS") No.
131, "Financial Reporting for Segments of a Business Enterprise", is summarized
as follows (in millions) :
<TABLE>
Life Asset Accumulation Non-Life
Insurance Products Insurance
Operations Operations Investments
------------------------------- ------------------------------- -------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $398.4 $417.5 $414.6 $42.6 $21.8 $7.7 $6.0 $8.0 $11.6
Income (loss)
before income
taxes 43.9 54.4 53.7 0.6 3.9 (3.0) 4.0 6.8 10.6
</TABLE>
Life insurance operations. Income before income taxes decreased $10.5
million from 1998 to 1999. This decrease in profits is primarily due to a $9.6
million increase in death benefits. Income before income taxes increased only
slightly from 1998 and 1997.
Asset accumulation products operations. Income before income taxes
decreased $3.3 million from 1998 to 1999. The primary reasons for the decrease
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 in both 1999 and 1998, and (ii)
increased mortality in 1999. Income before income taxes increased $6.9 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 $2.8
million from 1998 to 1999. The primary reason for the decrease is a $3.1 million
decrease in net realized investment gains on the sale of investment properties
in 1999 compared to 1998. 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 to 1997.
The difference between the segment revenues and income before income taxes
shown above and the amounts reported in the Company's consolidated financial
statements appearing elsewhere in this Form 10-K result from items not allocated
to specific segments. The significant reconciling items are interest expense and
a portion of (i) net investment income, (ii) operating expenses, (iii) net
realized investment gains (losses) and (iv) certain non-recurring transactions
such as gains from the sale of subsidiaries. These reconciling items had the
effect of increasing income before income taxes $20.7 million from 1998 to 1999.
The primary reasons for the increase were (i) a $14.8 million increase in net
realized investment gains not allocated to segments, (ii) a $3.7 million
increase in net investment income related to a reduction in the unrecovered
ceding commission due to the Reinsurer, (iii) a $5.9 million decrease in
advisory and data processing fees paid to FHC, and (iv) a $6.8 million decrease
in expenses not allocated to specific segments, offset by (v) a $4.9 million
gain from the sale of a subsidiary in 1998 and (vi) expenses related to costs
associated with litigation in 1999.
Similar reconciling items had the effect of decreasing income before income
taxes $23.0 million from 1997 to 1998. The primary reasons for the decrease were
(i) a $11.4 million increase in net realized investment losses in 1998 and (ii)
an increase in operating expenses not allocated to segments in 1998.
Consolidated Year to Year Comparisons
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Income before income taxes increased $4.2 million to $16.2 million in 1999.
The primary reasons for the increase were (i) lower advisory and data processing
fees paid to FHC and (ii) an increase in net realized gains, offset by (iii) a
gain on the sale of Investors Guaranty in 1998, and (vi) higher death benefits
in 1999. These items and significant changes in individual income statement
components are discussed in more detail below.
<PAGE>
Premiums and policy revenues. Premiums and policy revenues totaled $224.9
million in 1999 compared to $218.5 million in 1998. Premiums from traditional
life insurance business for the year ended December 31, 1999 were comparable to
the year ended December 31, 1998. Policy revenues increased $6.3 million from
asset accumulation business acquired in October of 1998 in conjunction with the
Company acquiring the 50% of CIG. Inc. not previously owned and the recapture of
business which was previously ceded to an unaffiliated insurance company. In
addition, administrative charges on the Company's universal life insurance
business increased $3.1 million. This increase was offset by a $2.3 million
decrease in surrender charges from a closed block of annuity business.
Net investment income. Net investment income totaled $227.6 million in 1999
compared to $226.5 million in 1998. Net investment income increased due to (i)
an increase in net investment income on the Company's bond portfolio, (ii) a
$1.3 million increase in mortgage loan net investment income, and (iii) a $3.7
million increase in net investment income related to a reduction in the
unrecovered ceding commission due to the Reinsurer, offset by an $10.3 million
decrease in net investment income on investments held by the Reinsurer.
The increased investment income related to the Company's bond portfolio is
primarily due to an increase in assets owned resulting from assets acquired as
part of the acquisition of the asset accumulation business in 1998. Assets
related to the asset accumulation business also increased due to sales in the
ARS division.
The increase related to the Company's mortgage loan portfolio is due to an
increase in the average mortgage loan balance from $189.8 million in 1998 to
$218.1 million in 1999. This increase is partially offset by a decrease in the
average yield of the portfolio from 1998 to 1999.
The decrease related to investments held by the Reinsurer is due primarily
to a $8.5 million decrease in net investment income on a closed block of annuity
business resulting from lower fund values. The associated interest credited on
policyholder fund values decreased $6.2 million.
Net realized investment gains. Net realized investment gains totaled $4.2
million in 1999 compared with $8.3 million in 1998. The Company reported $0.9
million and $16.7 million of realized gains from the sale of fixed maturity
investments held by the Reinsurer in 1999 and 1998, respectively. 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
effects of these gains, the Company realized gains of $3.3 million in 1999 and
realized losses of $8.4 million in 1998; this change in realized gains can be
attributed to a $16.5 million increase in gains on common stock, offset by a
$1.4 million decrease in gains on fixed maturity investments and $3.3 million of
gains in 1998 related to real estate ventures.
Included in 1998 realized losses of $8.4 million was $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 was included in unrealized gains in stockholders'
equity. In 1999, the Company realized gains of $0.6 million on short positions
held on common stocks.
Other income. Other income totaled $6.1 million in 1999 compared to $12.2
million in 1998. In May 1998, the Company realized a gain of $4.9 million from
the sale of Investors Guaranty.
Policyholder benefits. Policyholder benefits totaled $261.3 million in 1999
compared with $251.5 million in 1998. This increase resulted primarily from a
$10.2 million increase in death benefits. Interest credited on universal life
and annuity funds balances remained comparable between periods: however, (i)
interest credited on the Company's closed block of annuity business decreased
$6.2 million due to reduced fund values, (ii) interest credited on asset
accumulation business increased $12.8 million, and (iii) interest credited on
other interest-sensitive products decreased due to a reduction in rates made in
response to market conditions.
<PAGE>
Amortization expense. Amortization expense totaled $73.6 million in 1999
compared with $87.2 million in 1998. Amortization expense included $0.9 million
and $16.7 million in 1999 and 1998, respectively, as a result of realized
investment gains on the sale of fixed maturity investments held by the
Reinsurer. The sale of these fixed maturity investments at a gain will reduce
future investment income, requiring the recognition of additional amortization
expense in the year of the realized gains. Excluding the effects of the sale of
fixed maturity investments, amortization increased $2.2 million due to (i) an
increase in amortization expense related to the Company's universal life
insurance business, offset by (ii) a decrease in amortization expense related to
a closed block of annuity business due to lower surrender charges in 1999.
Included in amortization expense are adjustments to deferred policy
acquisition costs and the cost of business acquired asset which increased the
assets by $0.5 million in 1999 and decreased the assets by $0.9 million in 1998.
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 asset 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 $86.2 million in
1999 compared with $89.4 million in 1998. Other operating expenses decreased due
to the Company amending its advisory and data processing agreements with FHC in
June 1999. The effect of these amendments was to lower the fees paid to FHC by
$5.9 million. Also, other operating expenses decreased $2.8 million related to
the relocation of the Company's Columbus, Ohio operations to other Company
locations during 1998. In addition, other operating expenses increased in 1999
principally due to costs associated with litigation.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
During 1997, the Company entered into a transaction which impacted its
results of operations. On April 15, 1997, Great Southern acquired all of the
outstanding common stock of Ohio State 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, less the net 30% coinsurance, are included in the Company's
results of operations after the date of acquisition. The Reinsurer will receive
100% of the statutory profits from the reinsured policies until the Reinsurer
has recovered the initial ceding commission.
In the above transaction with the Reinsurer, the invested assets related to
the reinsured business are owned by the Reinsurer. At December 31, 1999, the
insurance liabilities associated with this reinsurance transaction totaled
$630.0 million. Results from the Ohio State Acquisition are included in the
Company's results of operations from the date of the transaction.
The effect of the above transaction on the individual income statement
components are set forth in the table below (in millions).
<TABLE>
1997 Acquisition Effect
on 1998 and 1997
Results
-------------------------
1998 1997
<S> <C> <C>
Premiums and policy revenues $ 53.6 $ 42.0
Net investment income 27.2 18.9
Net realized investment gains 6.7 -
Other income 3.8 3.4
Policyholder benefits 49.4 37.5
Commissions 2.5 1.3
Amortization expense 25.1 11.1
</TABLE>
<PAGE>
Income before 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. Net investment income increased
due to (i) an increase in net investment income on the Company's bond portfolio,
(ii) a $2.3 million increase in net investment income related to a reduction in
the unrecovered ceding commission due to the Reinsurer, offset by (iii) a $9.4
million decrease in net investment income on investments held by the Reinsurer
and (iv) a $1.6 million decrease in income from equity subsidiaries.
The increase related to the Company's bond portfolio is due to increased
assets owned resulting from the acquisition of the asset accumulation business
in 1998.
The decrease related to investments held by the Reinsurer is due primarily
to a decrease in net investment income on a closed block of annuity business
resulting from lower fund values. The associated interest credited on
policyholder fund values decreased $8.8 million.
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 the cost of business acquired asset. 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 in 1997.
<PAGE>
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 asset 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 asset 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
development expenses and expenses incurred on the Company's administrative
systems.
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, 1999, Americo had $24.3 million of cash
and marketable equity securities available for debt service and other corporate
requirements. During 1999, the Company repaid $21.0 million of amounts
outstanding under a credit facility using available cash of Americo and $12.3
million of dividends received by Americo from the life insurance subsidiaries.
This credit facility was terminated during 1999.
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 became redeemable at the option
of Americo beginning in 1998. The redemption prices are at par in May 2000 and
thereafter.
<PAGE>
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. 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 recorded in the Company's Consolidated Financial Statements at their
discounted value, which assumes an average effective rate of 11.5%.
At December 31, 1999, United Fidelity had outstanding to Americo four
surplus debentures with an aggregate unpaid balance of $121.9 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, 1999 was $87.2 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 $7.5 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, 1999, National Farmers
Union had adjusted surplus of $50.5 million.
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, 1999, the
Company's investment portfolio included cash and short-term investments totaling
$122.8 million, marketable equity securities totaling $73.4 million as well as
$339.9 million in U.S. Treasury and government securities, mortgage-backed
securities and asset-backed securities and $586.0 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 decreased to $228.6 million at
December 31, 1999 from $257.2 million at December 31, 1998. The decrease was the
result of net income of $14.7 million, a decrease in net unrealized investment
gains of $41.0 million, and a $2.0 million dividend to FHC. Net unrealized
investment losses in 1999 were recorded due to a decrease in the market value of
the Company's 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.
<PAGE>
The changes occurring in the Company's consolidated balance sheet between
December 31, 1999 and December 31, 1998 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, 1999 includes $14.0 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 ($71.4 million at
December 31, 1999) 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 credit quality of its portfolio is high with minimal
amounts of securities below investment grade. 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, 1999: <TABLE>
Equivalent Available Total
S&P Moody's NAIC Held to for Carrying
Rating (1) Rating (1) Rating(1) Maturity(2) Sale(3) Amount Percentage
- -- ----------- -- ----------- --------- ----------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment grade:
AAA Aaa 1 $ 287,399 $ 304,274 $ 591,674 33.3%
AA Aa1,Aa2, Aa3 1 60,691 84,857 145,548 8.2
A A1, A2, A3 1 330,490 317,372 647,862 36.4
BBB Baa1, Baa2, Baa3 2 162,239 197,486 359,724 20.2
----------- ----------- ----------- ---------
Subtotal 840,819 903,989 1,744,808 98.1
Non-investment grade:
BB or below Ba1 or below 3, 4 12,089 22,008 34,097 1.9
----------- ----------- ----------- ---------
Total fixed maturity
investments $ 852,908 $ 925,997 $1,778,905 100.0%
=========== =========== ========== =========
</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 at December 31, 1999 was $821.3 million.
(3) Carrying amount is market value. The amortized cost of available for sale
securities at December 31, 1999 was $985.9 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, 1999,
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 either 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.
<PAGE>
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, 1999, approximately $210.0 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, 16% was office buildings, 22% was retail space and 28%
was other types of properties. At December 31, 1999, approximately 19% of the
mortgage loan portfolio was secured by properties in Texas, 13% in Missouri and
13% in Kansas. No more than 10% of the remaining portfolio was secured by
properties in any one state.
At December 31, 1999, 6.9% of the mortgage loan portfolio consisted of
loans with balloon payments that mature before January 1, 2001. At December 31,
1999, mortgage loans delinquent by more than 90 days, as determined on a
contract delinquency basis, totaled approximately $0.4 million, which
constituted 0.2% of mortgage loans and was 0.02% 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, 1999. 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 and its origination of new mortgage loans. 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 made up 1.5% of the carrying value of the Company's
cash and invested assets at December 31, 1999.
During 1999, the Company began selling equity-indexed life insurance and
annuity products. These products include an interest credit component which is
based on changes in the Standard and Poor's 500 Index ("S&P Index"). In order to
hedge its exposure to changes in the S&P index, the Company purchased option
contracts on the S&P Index. The impact of these transactions are currently not
material to the Company's consolidated financial statements.
Litigation. The Company and its subsidiaries are named in numerous pending
actions as more fully described in "Legal Proceedings". Although plaintiffs in
these actions generally are seeking indeterminate amounts, including punitive
and treble damages, such amounts could be large. Although there can be no
assurances, at the present time the Company does not anticipate that the
ultimate liability arising from such pending litigation,after consideration of
amounts provided in the consolidated financial statements, will have a material
adverse effect on the financial condition of the Company. However, in light of
the indeterminate amounts sought in such matters and the inherent
unpredictability of legal proceedings, it is possible that an adverse outcome in
any one or more of these matters could have a material adverse effect on the
Company's operating results and cash flows in particular quarterly or annual
periods.
Because of the restrictions described above under "Financial Condition and
Liquidity-Liquidity" in surplus debentures and holding company statutes, an
adverse outcome in the litigation referred to above could affect the ability of
one or more of the Company's insurance subsidiaries to pay dividends or, in the
case of United Fidelity, make payments under its surplus debentures to the
Company. Further, were a subsidiary to suffer an adverse outcome, the Company
might need to contribute capital to such subsidiary so that it could continue to
maintain applicable statutory surplus and risk-based capital requirements. See
"Business-Regulation-General Regulation and Risk-Based Capital Requirements".
Because the Company is a holding company whose own cash and cash equivalents are
limited, the Company might have to dispose of some of its assets in order to
address a significant judgment suffered by it or one of its subsidiaries. Also,
an adverse outcome could affect ratings which the Company's subsidiaries receive
from rating agencies, which could affect their ability to compete. See "Business
- -Competition and Ratings".
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 high
yielding and generally correspond to the duration of 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 75% in 1999. 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 18% in 1999. 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, 1999,
approximately 87% and 93% 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, 1999, the aggregate cash surrender values of the Company's
interest-sensitive life insurance and annuity products were approximately 87%
and 91%, respectively, of the aggregate policyholder fund value.
As part of its asset-liability management, the Company conducts detailed
computer simulations that model its fixed-rate assets and liabilities under
commonly-used 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, 1999, the Company's assets
had an effective duration of 5.2 and its liabilities had an effective duration
of 5.5. If interest rates were to decrease 10% from December 31, 1999 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 $19 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 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. The adoption of this accounting standard did not have a material
impact on the consolidated financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("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, 2000. Adoption of this statement is not expected to
have a significant impact on the consolidated financial statements of the
Company.
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, 1999 and the related report of independent accountants
thereon are set forth at pages F-2 to F-29 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:
<TABLE>
Name Age Position
<S> <C>
Michael A. Merriman 42 Chairman of the Board and Director
Gary L. Muller 53 President, Chief Executive Officer and Director
Timothy S. Sotos 51 Director
Mark K. Fallon 45 Senior Vice President and Assistant
Secretary-Investments
David F. Hill 44 Senior Vice President and Chief Marketing Officer
Gary E. Jenkins 42 Senior Vice President, Chief Financial Officer
and Treasurer
Donna H. Kinnaird 48 Senior Vice President, Chief Operating Officer
- Kansas City and Dallas
</TABLE>
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.
Donna H. Kinnaird is Senior Vice President and Chief Operating Officer 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. In 1998, she assumed the position of
Chief Operating Officer of the Dallas-based insurance companies.
<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, 1999.
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 1999 $ 462,000 $ 350,000 $ 4,990
President, Chief Executive Officer and 1998 462,000 350,000 4,887
Director 1997 462,000 350,000 3,220
Michael A. Merriman 1999 363,000 -- 4,990
Chairman of the Board 1998 363,000 -- 4,887
1997 363,000 -- 3,220
Donna H. Kinnaird 1999 200,000 175,000 4,990
Senior Vice President and 1998 200,000 175,000 4,923
Chief Operating Officer-Kansas City and Dallas 1997 200,000 175,000 3,168
Gary E. Jenkins 1999 200,000 175,000 4,992
Senior Vice President and, 1998 200,000 175,000 4,925
Chief Financial Officer and Treasurer 1997 200,000 175,000 3,165
David F. Hill 1999 200,000 150,000 4,991
Senior Vice President and 1998 200,000 175,000 4,927
Chief Marketing Officer 1997 200,000 175,000 103,308
- ------------------------------------------------------
(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 1997 for David F. Hill.
</TABLE>
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 24, 2000
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) 30.6%
Gary L. Muller 43,500 (2) 11.9%
Timothy S. Sotos 49,800 (3) 13.6%
All directors and executive officers as a group 205,300 56.1%
</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, as amended in 1999, 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, 1999 was $5.0 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, as amended in 1999,
FHC provides the Company and its insurance subsidiaries with record-keeping
services for certain life insurance and annuity products. FHC is party to an
agreement with CSC, a third-party vendor, which provides these services. The
Company pays FHC an amount equal to (i) the amount FHC pays to CSC plus (ii)
amortization of FHC's development costs. The aggregate fee paid for the year
ended December 31, 1999 under the Data Processing Agreement was $11.4 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 have 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 a subsidiary of 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 $0.4 million of expense under this agreement
for the year ended December 31, 1999.
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
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.
The Company 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 1999 was
approximately $1,396,000. The terms of the lease are as favorable to the Company
as those offered other unaffiliated tenants of the building.
Subsidiaries of the Company paid an aggregate of approximately $406,000 in
1999 to Clinical Reference Laboratory, Inc., a Kansas corporation ("Clinical"),
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 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:
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 Reinsurance 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 Reinsurance 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 Reassurance 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).
4.3(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
1, 1999, in the amount of $18,000,000 made by United
Fidelity Life Insurance Company (successor by merger to
FHC Life Insurance Company) to the Registrant.
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 Amended and Restated Surplus Debenture No. 007 dated January 1,
1999 in the amount of $38,000,000 made by United Fidelity Life
Insurance Company payable to the Registrant (incorporated by
reference from Exhibit 4.7 to Registrant's Form 10-Q report
(File No. 33-64820) for the quarter ended June 30, 1999).
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).
10.5(a) Amendment, effective January 1, 1999, to the Data Processing
Agreement dated January 1, 1993, between the Registrant and
Financial Holding Corporation (incorporated by reference from
Exhibit 10.5(a) to Registrant's Form 10-Q (File No. 33-64820)
for the quarter ended September 30, 1999).
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).
10.7(c) Third Amendment, effective January 1, 1999, to the Advisory
Agreement dated September 17, 1993 by and between the
Registrant and Financial Holding Corporation (incorporated by
reference from Exhibit 10.7(c) to Registrant's Form 10-Q (File
No. 33-64820) for the quarter ended September 30, 1999).
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 (incorporated by reference from Exhibit
10.9(a) to Registrant's Form 10-K (File No. 33-64820) for the
year ended December 31, 1998).
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).
10.15(c)* Custodian Agreement between State Street Bank and Trust Company
of Boston, Massachusetts, Employers Reassurance Corporation of
Overland Park, Kansas and Great Southern Life Insurance Company
dated as of January 14, 2000.
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).
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)* Custodian Agreement dated as of January 14, 2000, among State
Street Bank and Trust Company, Employers Reassurance
Corporation and Great Southern Life Insurance Company .
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).
*21. Subsidiaries of the Registrant
*27. Financial Data Schedule
- ----------------------------
(c) Reports on Form 8-K.
There were no reports on Form 8-K filed for the three months ended
December 31, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Kansas
City and the State of Missouri, on the 27th day of March, 2000.
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 27, 2000
- ----------------------------------------------------- Directors
Michael A. Merriman
/s/ Gary L. Muller President, Chief Executive March 27, 2000
- ----------------------------------------------------- Officer and Director
Gary L. Muller
/s/ Gary E. Jenkins Senior Vice President, Chief March 27, 2000
- ----------------------------------------------------- Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
Gary E. Jenkins
</TABLE>
<PAGE>
F-2
AMERICO LIFE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Audited Financial Statements for the Three Years Ended December 31, 1999:
Report of Independent Accountants F-2
Consolidated Balance Sheet at December 31, 1999 and 1998 F-3
Consolidated Statement of Income for the Years Ended
December 31, 1999, 1998 and 1997 F-4
Consolidated Statement of Stockholder's Equity for the Years Ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statement of Cash Flows for the Years Ended December
31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-8
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Stockholder of Americo Life, Inc.
In our opinion, the accompanying consolidated balance sheets 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 auditing standards generally
accepted in the United States 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 27, 2000
<PAGE>
See accompanying notes to consolidated financial statements
Americo Life, Inc. and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)
December 31, 1999 and 1998
<TABLE>
1999 1998
---- ----
Assets
<S> <C> <C>
Investments:
Fixed Maturities:
Held to maturity, at amortized cost (market: $821,335 and $914,672) $ 852,908 $ 876,594
Available for sale, at market (amortized cost: $985,854 and $893,664) 925,997 925,191
Equity securities, at market (cost: $33,467 and $42,201) 73,448 89,022
Investment in equity subsidiaries 12,141 9,669
Mortgage loans on real estate, net 227,601 190,074
Investment real estate, net 28,516 28,606
Policy loans 209,979 210,173
Other invested assets 30,429 17,066
------------- -------------
Total investments 2,361,019 2,346,395
Cash and cash equivalents 122,788 68,219
Accrued investment income 31,764 31,862
Amounts receivable from reinsurers 1,140,206 1,207,197
Other receivables 42,596 36,529
Deferred policy acquisition costs 212,860 131,574
Cost of business acquired 219,490 247,125
Amounts due from affiliates 7,710 -
Other assets 49,729 36,913
------------- -------------
Total assets $ 4,188,162 $ 4,105,814
============= =============
Liabilities and Stockholder's Equity
Policyholder account balances $ 2,599,627 $ 2,501,113
Reserves for future policy benefits 822,940 833,917
Unearned policy revenues 60,279 36,332
Policy and contract claims 37,821 45,467
Other policyholder funds 119,664 106,241
Notes payable 111,165 132,533
Amounts payable to reinsurers 48,749 28,199
Deferred income taxes 40,531 63,600
Due to broker 53,810 36,275
Amounts due to affiliates - 3,085
Other liabilities 68,262 61,872
------------- -------------
Total liabilities 3,962,848 3,848,634
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 19,159 60,499
Retained earnings 202,400 192,926
------------- -------------
Total stockholder's equity 225,314 257,180
------------- -------------
Commitments and contingencies
Total liabilities and stockholder's equity $ 4,188,162 $ 4,105,814
============= =============
</TABLE>
Americo Life, Inc. and Subsidiaries
Consolidated Statement of Income
(Dollars in thousands, except per share amounts)
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income
Premiums and policy revenues $ 224,896 $ 218,582 $ 203,729
Net investment income 227,622 226,534 219,267
Net realized investment gains 4,174 8,284 2,950
Other income 6,147 12,163 12,331
------------ ------------ ------------
Total income 462,839 465,563 438,277
------------ ------------ ------------
Benefits and expenses
Policyholder benefits:
Death benefits 123,644 113,552 116,196
Interest credited on universal life and annuity products 108,088 108,664 109,392
Other policyholder benefits 52,675 53,135 55,790
Change in reserves for future policy benefits (23,065) (23,845) (18,438)
Commissions 13,771 13,390 11,230
Amortization expense 73,643 87,189 43,694
Interest expense 11,704 12,057 12,089
Other operating expenses 86,161 89,394 77,038
------------ ------------ ------------
Total benefits and expenses 446,621 453,536 406,991
------------ ------------ ------------
Income before provision for income taxes 16,218 12,027 31,286
Provision for income taxes 4,744 3,235 9,230
------------ ------------ ------------
Net income $ 11,474 $ 8,792 $ 22,056
============ ============ ============
Net income per common share $ 1,147.40 $ 879.20 $ 2,205.60
=========== =========== ===========
</TABLE>
<PAGE>
Americo Life, Inc. and Subsidiaries
Consolidated Statement of Stockholder's Equity
(Dollars in thousands)
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
1999 1998 1997
---- ---- ----
<S> <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 60,499 56,973 37,189
Change during year (41,340) $ (41,340) 3,526 $ 3,526 19,784 $19,784
--------- --------- --------- ---------
Balance at end of year 19,159 60,499 56,973
--------- --------- ---------
Retained earnings
Balance at beginning of year 192,926 186,134 166,078
Net income 11,474 11,474 8,792 8,792 22,056 22,056
--------- --------- ---------
Comprehensive income (loss) $ (29,866) $ 12,318 $ 41,840
========= ========= =========
Dividends (2,000) (2,000) (2,000)
--------- --------- ---------
Balance at end of year 202,400 192,926 186,134
--------- --------- ---------
Total stockholder's equity $ 225,314 $ 257,180 $ 246,862
========= ========= =========
</TABLE>
<PAGE>
Americo Life, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(Dollars in thousands)
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 11,474 $ 8,792 $ 22,056
----------- ----------- ----------
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization 79,033 86,679 47,305
Deferred policy acquisition costs (63,511) (61,179) (34,220)
Undistributed earnings of equity subsidiaries (2,728) (2,581) (3,622)
Distributed earnings of equity subsidiaries 240 9,943 -
Amortization of unrealized investment gains (2,826) (14,407) (6,973)
(Increase) decrease in assets net of effects from business acquisitions:
Accrued investment income 99 (3,277) (797)
Other invested assets - -
Amounts receivable from reinsurers 60,215 64,438 (162,334)
Other receivables 1,057 (14,483) (9,824)
Other assets, net of amortization (17,615) 6,586 10,462
Increase (decrease) in liabilities net of effects from business acquisitions:
Reserves for future policy benefits and unearned policy revenues (12,124) (49,315) 371
Policyholder account balances (90,370) 5,747 72,899
Policy and contract claims (7,646) 8,857 (2,258)
Other policyholder funds 13,424 30,279 (5,482)
Amounts payable to reinsurers 20,550 15,999 (2,053)
Federal income taxes payable - (164) 164
Provision for deferred income taxes (1,002) 3,757 4,277
Other liabilities 6,388 1,104 7,207
Amounts due to/due from affiliates (10,795) (3,362) (4,100)
Net realized gains on investments (4,174) (8,284) (2,950)
Gain on sale of subsidiary - (4,855) (4,848)
Amortization on bonds and mortgage loans 1,351 3,425 1,722
Other changes (1,347) (4,902) (4,564)
----------- ------------ ----------
Total adjustments (31,781) 70,005 (99,618)
----------- ----------- ----------
Net cash provided (used) by operating activities (20,307) 78,797 (77,562)
----------- ----------- ----------
</TABLE>
(Continued)
<PAGE>
Americo Life, Inc. and Subsidiaries
Consolidated Statement of Cash Flows (Continued)
(Dollars in thousands)
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from investing activities
Purchases of fixed maturity investments $ (425,122) $ (338,645) $ (421,408)
Purchases of equity securities (106,290) (107,983) (67,815)
Purchases of other investments (13,766) (7,972) (21,944)
Mortgage loans originated (58,299) (51,461) (24,777)
Maturities or redemptions of fixed maturity investments 10,319 32,110 89,206
Sales of fixed maturity investments 346,488 257,910 380,251
Sales of equity securities 125,627 108,383 173,455
Sales of other investments - 11,494 13,257
Sale of subsidiary, net of cash sold - 13,779 10,911
Payment for subsidiaries acquired, net of cash acquired - (15,377) (248,581)
Repayments from mortgage loans 20,892 27,818 45,287
Change in due to broker 1,608 3,151 (18,662)
Change in policy loans 193 4,723 4,470
----------- ----------- -----------
Net cash used by investing activities (98,350) (62,070) (86,350)
----------- ----------- -----------
Cash flows from financing activities
Repayments of notes payable (21,318) (283) (542)
Receipts credited to policyholder account balances 454,864 284,251 192,648
Return of policyholder account balances (258,320) (267,335) (85,404)
Dividends paid (2,000) (2,000) (2,000)
------------ ------------ -----------
Net cash provided by financing activities 173,226 14,633 104,702
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 54,569 31,360 (59,210)
Cash and cash equivalents at beginning of year 68,219 36,859 96,069
----------- ----------- -----------
Cash and cash equivalents at end of year $ 122,788 $ 68,219 $ 36,859
=========== =========== ===========
Supplemental disclosures of cash flow information Cash paid during year for:
Interest $ 11,647 $ 12,084 $ 12,095
Income taxes 3,515 (359) 4,789
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"), Financial Assurance Life Insurance Company ("Financial Assurance")
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 NAP Partners, Inc. and Pension
Consultants and Administrators, Inc. which are agency operations. The Company
also has a 50% interest in Argus Health Systems, Inc. ("Argus"), which processes
prescription drug claims. 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.
New Pronouncements
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. The adoption of this accounting standard did not have a significant
impact on the consolidated financial statements of the Company.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("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, 2000. Adoption of this accounting standard is not expected to
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 and projected 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 $985, $6,203 and $(4,131) for the years ended December 31,
1999, 1998 and 1997, 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 $(457), $(7,105) and $1,617 for the years
ended December 31, 1999, 1998 and 1997, 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 is 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% to
6% at December 31, 1999.
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.
<PAGE>
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 1.2%, 1.3%
and 1.7% of the ordinary life insurance in force at December 31, 1999, 1998 and
1997, respectively. Premium income related to participating life insurance
policies represents 3.8%, 3.3% and 3.3% of premiums and policy revenues for the
years 1999, 1998 and 1997, 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 $10,814 and $12,434 at December 31, 1999 and 1998, 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 $5,358, $5,492 and $3,436 for the years ended December 31, 1999, 1998 and
1997, 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 1999, 1998
or 1997.
Reclassifications
Previously reported amounts for prior years have in some instances been
reclassified to conform to the current year presentation.
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 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>
1999 1998
------------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets:
Fixed maturities held to maturity $ 852,908 $ 821,335 $ 876,594 $ 914,672
Fixed maturities available for sale 925,997 925,997 925,191 925,191
Equity securities 73,448 73,448 89,022 89,022
Mortgage loans 227,601 229,538 190,074 203,135
Policy loans 209,979 209,979 210,173 210,173
Other invested assets 10,000 9,775 10,000 10,515
Cash and cash equivalents 122,788 122,788 68,219 68,219
Financial liabilities:
Annuities 1,122,400 1,021,384 1,042,622 963,911
Notes payable 111,165 111,165 132,533 134,283
</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 are included in the Company's statement of income after the
date of acquisition.
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 are included in 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, 1997. <TABLE>
1997
<S> <C>
Total revenue $ 458,203
Net income 21,701
Net income per common share 2,170.10
</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 College Insurance Group, Inc. ("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 $2,624 and $3,945 in 1999 and 1998,
respectively and will pay $2,580 in 2000 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 had 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, 1999
------------------------------------------------------------------
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 $ 2,366 $ 29 $ (95) $ 2,300
Public utility securities 52,323 521 (2,336) 50,508
Corporate securities 516,098 3,609 (25,661) 494,046
Asset-backed securities 29,305 - (1,674) 27,631
Mortgage-backed pass-through securities 26,463 419 (606) 26,276
Collateralized mortgage obligations 226,353 643 (6,422) 220,574
------------- ------------- ------------- -------------
852,908 5,221 (36,794) 821,335
------------- ------------- ------------- -------------
Available for sale:
U.S. Treasury and government securities 27,360 277 (108) 27,529
Public utility securities 42,300 32 (1,861) 40,471
Corporate securities 636,371 373 (50,677) 586,067
Asset-backed securities 88,857 182 (5,142) 83,897
Mortgage-backed pass-through securities 83,560 238 (1,482) 82,316
Collateralized mortgage obligations 107,406 1,234 (2,923) 105,717
------------- ------------- ------------- -------------
985,854 2,336 (62,193) 925,997
------------- ------------- ------------- -------------
Subtotal, all fixed maturities 1,838,762 7,557 (98,987) 1,747,332
------------- ------------- ------------- -------------
Equity securities 33,467 41,319 (1,338) 73,448
------------- ------------- -------------- -------------
Total fixed maturities and equity securities $ 1,872,229 $ 48,876 $ (100,325) $ 1,820,780
============= ============= =============- =============
December 31, 1998
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
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>
The amortized cost and estimated market value of mortgage-backed securities
by category at December 31, 1999 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 $ 26,463 $ 26,276 $ 83,560 $ 82,316
Collateralized mortgage obligations:
Sequential class 57,206 55,556 84,846 83,772
Planned amortization class 60,989 58,895 4,249 4,264
Very accurately defined maturity 95,458 93,683 7,198 6,669
Other 12,700 12,440 11,113 11,012
---------- ---------- ---------- ----------
226,353 220,574 107,406 105,717
---------- ---------- ---------- ----------
Total securities $ 252,816 $ 246,850 $ 190,966 $ 188,033
========== ========== ========== ==========
</TABLE>
The amortized cost and estimated market value of fixed maturities which are
held to maturity and available for sale at December 31, 1999, 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 $ 7,680 $ 7,334 $ 16,613 $ 16,701
Due after one year through five years 172,112 167,574 100,550 97,857
Due after five years through ten years 219,743 208,142 238,822 225,001
Due after ten years 171,252 163,804 350,044 314,508
Mortgage-backed securities 282,121 274,481 279,825 271,930
---------- ---------- ---------- ----------
$ 852,908 $ 821,335 $ 985,854 $ 925,997
========== ========== ========== ==========
</TABLE>
At December 31, 1999, the Company held below investment grade (S&P rating
below BBB-) corporate debt securities with an aggregate carrying value of
$34,097 and market value of $33,045. At December 31, 1998, the Company held
below investment grade corporate debt securities with an aggregate carrying
value of $14,941 and market value of $14,950. These holdings amounted to 0.8%
and 0.4% of the Company's total assets at December 31, 1999 and 1998,
respectively.
<PAGE>
Fixed maturities with an amortized book value of $30,198 and $29,223 were
on deposit with insurance regulatory agencies of certain states at December 31,
1999 and 1998, 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>
1999 1998
---- ----
<S> <C> <C>
Mortgage loan principal $ 227,976 $ 190,838
Net unamortized purchase discount (75) (464)
Allowance for losses (300) (300)
------------- ------------
Net mortgage loans $ 227,601 $ 190,074
============ ============
</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, 1999, mortgage loans on real estate were concentrated in the
following property types:
<TABLE>
% 0f
1999 Portfolio
<S> <C> <C>
Property type:
Commercial
Multi-family apartments $ 77,376 34.0%
Retail space 49,582 21.8
Industrial/Warehouses 63,718 28.0
Office buildings 35,278 15.5
Residential 1,647 0.7
---------- -------
Total $ 227,601 100.0%
========== =====
</TABLE>
At December 31, 1999, the following states had a concentration of mortgage
loans aggregating more than 10% of the Company's mortgage loans: Texas -
$43,236; Missouri - $29,431; and Kansas - $30,680.
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 and a hotel joint venture. 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current assets $ 7,382 $ 5,471 $ 16,630
Noncurrent assets 17,466 17,547 96,494
Current liabilities 3,324 3,353 4,883
Noncurrent liabilities 9,383 9,996 86,571
Net revenues 27,864 32,124 28,910
Expenses applicable to net revenues 23,688 26,560 23,521
Income from continuing operations 4,176 3,740 5,083
Net income 2,776 2,581 3,244
</TABLE>
In 1999, the Company received a cash distribution from Hereford LLP of
$240. In 1998, the Company received cash dividends from Argus and Hereford LLP
of $9,500 and $443, respectively.
Net investment income
Net investment income for the years ended December 31, is comprised of the
following:
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Fixed maturities $ 126,739 $ 124,157 $ 117,197
Equity securities 1,328 1,484 1,437
Equity in earnings of equity subsidiaries 2,776 2,581 3,622
Mortgage loans on real estate 16,883 16,518 16,712
Policy loans 12,572 12,671 12,420
Reinsurance funds held by reinsurer 60,342 66,895 65,747
Cash, short-term investments and other 12,431 8,005 8,770
----------- ----------- -----------
Total investment income 233,071 232,311 225,905
Less investment expenses (5,449) (5,777) (6,638)
----------- ----------- -----------
Net investment income $ 227,622 $ 226,534 $ 219,267
=========== =========== ===========
</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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Fixed maturity securities:
Held to maturity:
Realized gains $ - $ - $ -
Realized losses - - -
Available for sale:
Realized gains 3,199 23,193 4,688
Realized losses (592) (1,212) (4,097)
Equity securities:
Realized gains 14,391 6,018 4,582
Realized losses (13,032) (21,642) (5,349)
Other investments:
Realized gains 276 4,929 5,339
Realized losses (68) (3,002) (2,213)
----------- ----------- -----------
Total net realized investment gains $ 4,174 $ 8,284 $ 2,950
=========== =========== ===========
</TABLE>
<PAGE>
Following are the components of net unrealized investment gains as of
December 31:
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Investments carried at amortized cost:
Fixed maturities available for sale $ (62,186) $ 29,200
Fixed maturities reclassified from available for sale to held to maturity 33,482 36,509
Investments carried at estimated fair value:
Equity securities 39,981 47,172
Effect on other balance sheet accounts 16,984 (21,019)
Deferred income taxes (9,102) (31,363)
----------- -----------
Net unrealized investment gains $ 19,159 $ 60,499
=========== ===========
</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 transferred securities from the
available for sale category to the held to maturity category. The net unrealized
gains of $33,482 and $36,509 at December 31, 1999 and 1998, 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
1999
<S> <C> <C> <C>
Unrealized holding losses arising during period $ (60,535) $ 21,188 $ (39,347)
Reclassification adjustments for gains realized
in net income (3,066) 1,073 (1,993)
----------- ----------- -----------
Other comprehensive income $ (63,601) $ 22,261 $ (41,340)
=========== =========== ===========
1998
Unrealized holding gains arising during period $ 15,689 $ (5,470) $ 10,219
Reclassification adjustments for gains realized
in net income (10,297) 3,604 (6,693)
----------- ----------- -----------
Other comprehensive income $ 5,392 $ (1,866) $ 3,526
=========== =========== ===========
1997
Unrealized holding gains arising during period $ 30,939 $ (11,041) $ 19,898
Reclassification adjustments for gains realized
in net income (176) 62 (114)
----------- ----------- -----------
Other comprehensive income $ 30,763 $ (10,979) $ 19,784
=========== =========== ===========
</TABLE>
<PAGE>
The carrying value of investments that were non-income producing during the
three year period ended December 31, 1999 was not material to the Company's
consolidated financial position.
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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Deferred policy acquisition costs:
Balance, beginning of year $ 131,574 $ 87,840 $ 72,438
Capitalization of expenses 64,813 44,548 34,220
Other additions - 30,645 -
Interest accretion 9,290 7,286 5,802
Amortization (44,667) (19,868) (27,207)
Amounts related to fair value adjustment of fixed maturity securities 51,850 (18,877) 2,587
----------- ----------- -----------
Balance, end of year $ 212,860 $ 131,574 $ 87,840
=========== =========== ===========
Cost of business acquired:
Balance, beginning of year $ 247,125 $ 300,180 $ 200,710
Additions 425 9,497 124,052
Interest accretion 12,356 15,453 18,157
Amortization (50,283) (77,524) (46,904)
Amounts related to fair value adjustment of fixed maturity securities 9,867 (481) 4,165
----------- ----------- -----------
Balance, end of year $ 219,490 $ 247,125 $ 300,180
=========== =========== ===========
</TABLE>
The estimated amortization and interest accretion of the cost of business
acquired for the five years ending December 31, 2004 are as follows:
<TABLE>
Interest Estimated
Amortization Accretion Net Decrease
<S> <C> <C> <C>
2000 $ 43,257 $ 10,409 $ 32,848
2001 36,855 9,036 27,819
2002 30,668 7,865 22,803
2003 25,684 6,872 18,812
2004 21,084 6,041 15,043
</TABLE>
<PAGE>
6. Insurance Liabilities and Reinsurance
Insurance liabilities at December 31, consist of the following:
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Policyholder account balances:
Universal life $ 1,477,227 $ 1,458,491
Annuities 1,122,400 1,042,622
------------ ------------
$ 2,599,627 $ 2,501,113
============ ============
Reserves for future policy benefits:
Traditional life $ 807,391 $ 818,312
Accident and health 2,524 2,458
Supplementary contracts 13,025 13,147
------------ ------------
$ 822,940 $ 833,917
============ ============
</TABLE>
At December 31, 1999, approximately 92% 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 accounts 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:
<PAGE>
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Amounts receivable from reinsurers $ 1,029,780 $ 1,101,255
Cost of business acquired 127,397 151,234
Insurance liabilities 1,143,645 1,249,689
</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.
Amounts receivable from reinsurers consists of the following at December 31:
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Amounts recoverable for ceded future policy benefits $ 1,172,898 $ 1,274,931
Unrecovered ceding commission (113,865) (148,435)
Amounts recoverable on ceded policy and contract claims 16,277 17,996
Amounts recoverable on paid losses 6,110 3,901
Other 58,786 58,804
------------- -------------
$ 1,140,206 $ 1,207,197
============= =============
</TABLE>
Amounts receivable from reinsurers include $13,221 and $13,721 from
another unrelated insurance company at December 31, 1999 and 1998, respectively.
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, 1999, no
allowance has been established as all amounts are deemed collectible.
Premiums ceded under reinsurance agreements were $49,905, $50,283 and
$48,279 for the years ended December 31, 1999, 1998 and 1997, respectively.
Reinsurance recoveries netted against other policyholder benefits totaled
$55,494, $52,738 and $55,825 for the years ended December 31, 1999, 1998 and
1997, 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 ($71,454 at
December 31, 1999) to secure obligations to the reinsurer. The Insurance
Companies are in compliance with all requirements at December 31, 1999.
<PAGE>
7. Notes Payable
Notes payable at December 31, are comprised of the following:
<TABLE>
1999 1998
---- ----
<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 - 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 7,616 7,976
Unsecured discounted $5,000 note, bearing interest at an effective interest rate of
12.0% due 2015 3,094 3,053
Other 455 504
----------- -----------
$ 111,165 $ 132,533
=========== ===========
</TABLE>
The senior subordinated notes (the Notes) are redeemable at the option of
the Company, in whole or in part, at 100% of the principal amount on January 1,
2000 and thereafter.
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 Company repaid all amounts
outstanding under the Credit Agreement during 1999. The Credit Agreement
operated as a revolving credit facility until December 31, 1999, at which time
it was terminated. Amounts outstanding under the Credit Agreement accrued
interest at a variable rate or the prime rate. The Company paid 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, 1999 was $3,804. The
$5,000 note is subject to contractual set-off rights and is held under a pledge
and escrow agreement to secure certain indemnification obligations to the
Company.
The Notes 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, investments, dividends and other distributions
by the Company's subsidiaries and transactions with affiliates. The Company was
in compliance with all debt covenants at December 31, 1999.
The aggregate principal payments due during each of the next five years are
as follows:
<TABLE>
<S> <C>
2000 $ 377
2001 396
2002 443
2003 496
2004 551
Later years 108,902
----------
$ 111,165
</TABLE>
<PAGE>
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, 1999 was:
<TABLE>
Reported Statutory
Company Capital and Surplus
<S> <C>
United Fidelity $ 87,190
Great Southern 150,981
College Life 32,393
National Farmers 44,867
Ohio State 125,314
Financial Assuranc 5,766
</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 Texas 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 Texas Department of Insurance. 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, 1999 the Insurance
Companies had statutory capital and surplus in excess of the levels required by
the NAIC and Texas risk-based capital guidelines.
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 table summarizes 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. Included in these
amounts are amounts recorded in accordance with GAAP for non-insurance
subsidiaries. <TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Capital and common stock $ 128,370 $ 129,204 $ 124,600
Net income (loss) 16,573 (13,422) 163,927
</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
1999. As Financial Assurance is ineligible to join in the filing of the
consolidated 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.
<PAGE>
The provision for U.S. federal income taxes for the years ended December 31,
is comprised of the following:
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current tax provision $ 5,746 $ (522) $ 4,953
Deferred tax provision (1,002) 3,757 4,277
----------- ----------- -----------
Provision for income taxes $ 4,744 $ 3,235 $ 9,230
=========== =========== ===========
</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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Computed tax at statutory rate $ 5,676 $ 4,209 $ 10,950
Decrease in tax resulting from:
Availability of dividends received deduction to offset taxable
temporary differences (725) (785) (1,376)
Other (207) (189) (344)
----------- ----------- -----------
Provision for income taxes $ 4,744 $ 3,235 $ 9,230
=========== =========== ===========
</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>
1999 1998
---- ----
<S> <C> <C>
Deferred tax liability:
Agent balances $ 7,387 $ 7,572
Cost of business acquired 137,881 140,683
Investments 5,290 4,423
Net unrealized investment gains 10,430 32,689
Other - 1,121
----------- -----------
Total deferred tax liability 160,988 186,488
----------- -----------
Deferred tax asset:
Policy reserves 75,706 82,546
Deferred policy acquisition costs 26,613 24,904
Utilization of net operating losses 1,289 1,686
Unearned policy revenues 16,733 16,734
Other 3,098 -
----------- -----------
Deferred income tax assets before valuation allowances 123,439 125,870
Less: valuation allowance (2,982) (2,982)
----------- -----------
Total deferred tax asset 120,457 122,888
----------- -----------
Net deferred tax liability $ 40,531 $ 63,600
=========== ===========
</TABLE>
A valuation allowance is provided at December 31, 1999 and 1998 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, 1999, 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 1999.
At December 31, 1999, the Insurance Companies with balances in their PSA
had aggregate balances in their Shareholder Surplus Accounts of approximately
$90,955 from which distributions could be made without incurring any federal tax
liability with respect to the PSA accounts.
Certain subsidiaries have net operating loss carryovers totaling
approximately $3,683 which will begin to expire in 2009 if unutilized.
Utilization of these losses 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 leased from related parties under operating leases. Rental expense
was $4,835, $3,678 and $3,216 in 1999, 1998 and 1997, 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,
1999 are as follows: <TABLE>
<S> <C> <C>
2000 $ 3,833
2001 3,379
2002 3,049
2003 2,761
2004 and thereafter 14,239
----------
$ 27,261
</TABLE>
Great Southern is a defendant 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. On March 14, 2000, the court filed an order
certifying a class of all current and former owners of "excess interest whole
life and/or universal life" policies issued from 1982 through 1997. Great
Southern has petitioned the Fifth Circuit Court of Appeals for immediate review
of this ruling. 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.) This case has been stayed pending
final resolution of the class certification issue in the federal multidistrict
litigation case mentioned above.
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). On April
2, 1999, the court entered judgment dismissing with prejudice the action against
Great Southern and all other defendants. On September 15, 1999, plaintiff filed
a notice of appeal from the judgment to the California Court of Appeals.
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). The certification ruling was affirmed by
the Texas Court of Appeals on or about April 30, 1999. The class members, 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' petition seeks monetary damages from the
defendants in an unspecified amount. However, in mediation and discovery, the
plaintiffs have stated that their actual damages claimed will be in the
multimillion dollar range. Plaintiffs also seek exemplary and treble damages.
The case is currently set for trial during the week of May 22, 2000.
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 parties have
agreed to a settlement under which Great Southern will pay the class counsel's
fees and expenses in an amount to be set by the court and will provide free
insurance for one year to class members who timely submit an application for a
new universal life policy and satisfy Great Southern's underwriting
requirements. A hearing on the proposed settlement, which is subject to court
approval, is scheduled for April 18, 2000. The cost of the settlement, if
approved, cannot be determined at this time.
On July 2, 1999, a purported class action lawsuit (Notzon v. The College
Life Insurance Company of America, et al., 111th District Court, Webb County,
Texas) was filed against the Company, The College Life Insurance Company of
America and several of its officers, directors and other affiliated parties,
several other subsidiaries of the Company and several other defendants.
Plaintiff's claims against the various defendants include allegations of various
misrepresentations, deceptive trade practices and statutory violations in
connection with the marketing and administration of deferred annuity and life
insurance products sold to school teachers and others. The suit seeks actual,
rescissory, treble and punitive damages, as well as injunctive and declaratory
relief. The suit initially was removed to federal court but was remanded to
state court.
On October 21, 1999, a purported class action lawsuit was filed against
Great Southern in Orange County Superior Court, California (Alexander v. Fremont
General Corporation, Fremont Life Insurance Co. and Great Southern Life
Insurance Co.). Plaintiff alleges misrepresentations and other wrongful conduct
in connection with the imposition of increased cost of insurance charges under
certain universal life policies assumed or issued by Fremont Life Insurance
Company, and which were subsequently assumed by Great Southern. The suit seeks
actual and punitive damages, as well as injunctive and restitutionary relief and
an accounting.
On August 16, 1999, a purported class action lawsuit (Pritzker v. The
College Life Insurance Company of America, and Loyalty Life Insurance Company,
U.S. District Court for the District of Massachusetts) was filed against the
Company's subsidiary, The College Life Insurance Company of America ("College"),
and former subsidiary, Loyalty Life Insurance Company. Plaintiff alleges
misrepresentations, breach of contract, and other wrongful conduct in connection
with the imposition of increased cost of insurance charges under certain
universal life policies assumed by defendants. Plaintiff also alleges defendants
paid less than the minimum guaranteed interest due under such policies. The suit
seeks actual and punitive damages, restitutionary and injunctive relief and an
accounting.
On November 22, 1999, a purported class action lawsuit (Knauer v. Ohio
State Life Insurance Company) was filed in the Court of Common Pleas, Erie
County, Ohio, and subsequently was removed by defendant to the U.S. District
Court for the Northern District of Ohio, Western Division. The suit alleges
misrepresentations and other wrongful conduct wherein defendant allegedly
collected premiums for life insurance policies prior to being bound to provide
coverage and allegedly misrepresented that premiums would "vanish" after a
certain time period. The suit seeks actual and punitive damages, and
declaratory, restitutionary and injunctive relief.
The Company and its subsidiaries named in the above pending actions deny
any allegations of wrongdoing and intend to defend the actions vigorously.
Although plaintiffs in these actions generally are seeking indeterminate
amounts, including punitive and treble damages, such amounts could be large.
Although there can be no assurances, at the present time the Company does not
anticipate that the ultimate liability arising from such pending litigation,
after consideration of amounts provided in the consolidated financial
statements, will have a material adverse effect on the financial condition of
the Company.
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.
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. 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
$1,180 and $2,680 is included in other liabilities at December 31, 1999 and
1998, respectively.
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, whole life
insurance, universal-life insurance and annuity products. This segment primarily
consists of insurance business acquired by the Company. The accumulation
products segment includes primarily annuity products sold to public school
teachers and administrators and to the senior market. The non-life insurance
segment includes the Company's 50% investment in Argus and its investments in
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.
<TABLE>
Accumulation Non-Life
Life Insurance Products Insurance Reconciling Consolidated
Operations Operations Operations Items Totals
<S> <C> <C> <C> <C> <C>
Revenues
1999 $ 398,423 $ 42,568 $ 6,019 $ 15,829 $ 462,839
1998 417,586 21,762 8,053 18,162 465,563
1997 414,673 7,742 11,642 4,220 438,277
Amortization expense
1999 67,364 3,179 - 3,100 73,643
1998 73,874 (1,582) - 14,897 87,189
1997 40,238 2,292 - 1,164 43,694
Income (loss) before provision
for income taxes
1999 43,950 642 4,034 (32,408) 16,218
1998 54,421 3,887 6,837 (53,118) 12,027
1997 53,716 (3,025) 10,694 (30,099) 31,286
</TABLE>
<PAGE>
Significant reconciling items to amounts reported in the Company's
consolidated financial statements which are not allocated to specific segments
include interest expense and a portion of (i) net investment income, (ii)
operating expenses (iii) net realized investment gains (losses) and (iv) certain
non-recurring transactions such as gains from the sale of subsidiaries.
13. Related Parties
The Company and FHC are parties to 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
investments 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. The Company pays FHC an amount
equal to (i) the amount FHC pays its data processing vendor plus (ii)
amortization of FHC's development costs. 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 affiliates at December 31, 1999 and 1998 include $1,611
and $3,707, respectively, due from FHC arising from intercompany tax allocation.
The following table summarizes the related party transactions for the three
years ended December 31:
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Data processing agreement between the Company and FHC $ 11,413 $ 14,536 $ 11,802
Advisory agreement between the Company and FHC 5,035 8,066 7,180
Air transportation cost sharing agreement 343 321 667
Rental expense 1,396 1,051 906
Laboratory services 406 343 312
</TABLE>
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
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
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 27, 2000, 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 27, 2000
<PAGE>
Schedule II
Americo Life, Inc. and Subsidiaries
Condensed Financial Information of Registrant
Balance Sheet
(Dollars in thousands)
December 31, 1999 and 1998
<TABLE>
1999 1998
---- ----
Assets
<S> <C> <C>
Equity securities, at market (cost: $9,821 and $11,566) $ 20,712 $ 24,763
Investment in subsidiaries 197,622 233,747
Cash and cash equivalents 3,569 8,432
Surplus debentures receivable 122,571 123,498
Amounts due from affiliates - 1,651
Property and equipment, net 1,345 1,764
Federal income taxes receivable - 1,597
Other assets 14,207 6,933
----------- -----------
Total assets $ 360,026 $ 402,385
=========== ===========
Liabilities and Stockholder's Equity
Notes payable $ 110,712 $ 132,029
Accrued interest payable 980 881
Amounts due to affiliates 4,785 -
Deferred income taxes 5,423 8,113
Other liabilities 12,812 4,182
----------- -----------
Total liabilities 134,712 145,205
----------- -----------
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 19,159 60,499
Retained earnings 202,400 192,926
----------- -----------
Total stockholder's equity 225,314 257,180
----------- -----------
Total liabilities and stockholder's equity $ 360,026 $ 402,385
=========== ===========
</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, 1999, 1998 and 1997
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income
Management and data processing fees from subsidiaries $ 14,840 $ 16,570 $ 13,602
Interest income on surplus debentures receivable 11,427 12,237 12,757
Net investment income 624 686 428
Net realized investment losses (196) (264) (430)
Other income 1,978 2,149 4,936
----------- ----------- -----------
Total income 28,673 31,378 31,293
----------- ----------- -----------
Expenses
Management and advisory fees to parent 14,937 20,379 18,982
Interest expense 11,647 12,057 12,089
Other operating expenses 8,074 3,984 2,092
Amortization expense 1,193 850 941
----------- ----------- -----------
Total expenses 35,851 37,270 34,104
----------- ----------- -----------
Loss before provision for income taxes and equity in income of
subsidiaries (7,178) (5,892) (2,811)
Provision for income taxes (2,341) (1,461) 614
----------- ----------- -----------
Loss before equity in income of subsidiaries (4,837) (4,431) (3,425)
Equity in income of subsidiaries 16,311 13,223 25,481
----------- ----------- -----------
Net income $ 11,474 $ 8,792 $ 22,056
=========== =========== ===========
</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, 1999, 1998 and 1997
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 11,474 $ 8,792 $ 22,056
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation and amortization 1,866 1,575 1,572
Undistributed equity in earnings of subsidiaries (16,311) (13,223) (25,481)
Dividends received from subsidiaries 12,616 9,943 -
(Increase) decrease in other assets, net of amortization (4,459) (1,711) (313)
(Increase) decrease in other liabilities 7,387 (2,033) (96)
Provision for current income taxes 1,597 (1,597) -
Provision for deferred income taxes (1,883) 136 1,564
Increase (decrease) in amounts due to/from affiliates 6,436 (1,983) (1,183)
Net realized losses on investments 196 264 430
Other changes 338 273 183
---------- ---------- ----------
Total adjustments 7,783 (3,356) (23,324)
---------- ---------- ----------
Net cash provided (used) by operating activities 19,257 436 (1,268)
---------- ---------- ----------
Cash flows from investing activities
Purchases of equity securities (2,991) (10,218) (5,393)
Sales of equity securities 5,881 5,733 3,507
Principal collected on surplus debentures receivable 866 13,828 524
Change in other invested assets (4,007) 1,496 641
Purchases of property and equipment, net (254) (362) (633)
---------- ---------- ----------
Net cash provided (used) by investing activities (505) 10,477 (1,354)
---------- ---------- ----------
Cash flows from financing activities
Repayments of notes payable (21,615) (577) (541)
Dividends paid (2,000) (2,000) (2,000)
---------- ---------- ----------
Net cash used by financing activities (23,615) (2,577) (2,541)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (4,863) 8,336 (5,163)
Cash and cash equivalents at beginning of year 8,432 96 5,259
---------- ---------- ----------
Cash and cash equivalents at end of year $ 3,569 $ 8,432 $ 96
========== ========== ==========
Supplemental disclosure of cash flow information
Cash paid during year for interest $ 11,647 $ 12,057 $ 12,089
</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, 1999, 1998 and 1997
In 1999, the Company received dividends totaling $12,376 from United
Fidelity and cash distributions totaling $240 from Hereford LLP. In 1998, the
Company received cash dividends totaling $9,500 from Argus and cash
distributions totaling $443 from Hereford LLP.
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, 1999, 1998 and 1997
<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>
1999
Insurance in force $ 43,802,144 $ 11,134,535 $ 602,028 $ 33,269,637 1.8%
============== ============== ============== ============== ====
Premiums $ 265,134 $ 49,905 $ 9,667 $ 224,896 4.3%
============== ============== ============== ============== ====
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%
============== ============== ============== ============== ====
</TABLE>
<PAGE>
Schedule V
Americo Life, Inc. and Subsidiaries
Valuation and Qualifying Accounts
(Dollars in thousands)
For the Years Ended December 31, 1999, 1998 and 1997
<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>
1999
Reserve for impairment of mortgage loans
on real estate $ 300 $ - $ - $ - $ 300
Write-down for impairment of real estate 107 - - 39 68
Allowance for receivables from agents 3,580 662 - - 4,242
----------- ----------- ----------- ----------- -----------
Total $ 3,987 $ 662 $ - $ 39 $ 4,610
=========== =========== =========== =========== ===========
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
=========== =========== =========== =========== ===========
</TABLE>
(1) Amounts transferred from other allowance accounts.
<PAGE>
* State Street Bank and Trust Company is not authorized to conduct the business
of a bank in the state of Missouri.
Exhibit 10.15 (c)
CUSTODIAN AGREEMENT
THIS AGREEMENT is made as of January 14, 2000, by and between EMPLOYERS
REASSURANCE CORPORATION, a Kansas corporation with its principal place of
business at 5200 Metcalf Avenue, Overland Park, Kansas 66202 (the "Company"),
GREAT SOUTHERN LIFE INSURANCE COMPANY, a Texas corporation with its principal
place of business at 1055 Broadway, Kansas City, Missouri 64105 ("Great
Southern"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust
company* with its principal place of business at 225 Franklin Street, Boston,
Massachusetts 02110 (the "Custodian").
WITNESSETH:
WHEREAS, the Company is the holder of record and the beneficial
owner of certain assets (the "Account"); and
WHEREAS, the Company desires to retain the Custodian to act as
custodian of the assets of the Account, and the Custodian is willing to provide
such services to the Company upon the terms and conditions hereinafter set
forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. EMPLOYMENT OF CUSTODIAN AND PROPERTY TO BE HELD BY IT.
Pursuant to the authority of the Company as both beneficial and record
owner of the Account, the Company hereby employs the Custodian as the
custodian of the assets of the Account which are not held by (a)
brokers, private bankers or other entities appointed by the Company to
hold assets of the Company (each a "Local Agent"), and (b) entities
which have advanced monies to the Company and which have received
Account assets as security for such advance(s) (each a "Pledgee"). The
Custodian shall not be responsible for any property of the Company not
received and held by it or held by a Local Agent or Pledgee.
The Custodian is instructed from time to time to employ one or more
reputable sub-custodians located within the United States provided that the
Custodian shall have obtained the written acknowledgment of the Company with
respect to such employment. The Custodian is instructed from time to time to
employ as sub-custodian the non-United States banking institutions located
outside the United States as noted in Schedule A attached hereto (as amended by
the Custodian from time to time by its delivery to the Company of an updated
Schedule A). The Custodian shall have no more or less responsibility or
liability to the Company on account of any actions or omissions of any such
sub-custodian so employed than any such sub-custodian has to the Custodian. The
Custodian shall not be liable for losses arising from the bankruptcy, insolvency
or receivership of any sub-custodian. 2. DUTIES OF THE CUSTODIAN WITH RESPECT TO
PROPERTY OF THE ACCOUNT HELD BY THE CUSTODIAN IN THE UNITED
STATES.
A. Holding Investments. The Custodian shall hold and segregate
for the account of the Company all non-cash property to be
held by it in the United States other than (a) investments
which are maintained pursuant to Section 2.G. in a clearing
agency which acts as a securities depository or in the
book-entry system authorized by the United States Department
of the Treasury and certain federal agencies
(each, a "U.S. Securities System") and (b) commercial paper of
an issuer for which the Custodian acts as issuing and paying
agent ("Direct Paper") which is deposited and/or maintained in
the Direct Paper System of the Custodian (the "Direct Paper
System") pursuant to Section 2.H.
B. Ohio Life Business/Funds Transferred Segment
1. The first deposit to this Account will be made by
Commerce Bank of Kansas City, N.A. ("Commerce Bank")
at the direction of the Company upon termination of
the Escrow Agreement (Ohio Life Business/Funds
Transferred Segment) of October 2, 1995 between
Commerce Bank, the Company and Great Southern. The
amount of this first deposit will be the entire
amount of assets contained in said Escrow Account,
minus any fees due Commerce Bank as of the
termination date of the Escrow Agreement.
2. The Company will deposit to this Account all payments
received by the Company under the Coinsurance Life,
Annuity and Disability Income Reinsurance Agreement
of January 1, 1995 between the Company and The Ohio
Life Insurance Company ("Treaty").
3. The Company will also deposit to this Account all
payments, exclusive of the risk allowance, received
by the Company under the Modified Coinsurance Life,
Annuity and Disability Income Retrocession Agreement
(Ohio Life Plans) of January 1, 1995 between the
Company and Great Southern ("Retro Contract").
4. Except for those withdrawals permitted by the
following paragraph, all withdrawals to this Account
shall be made or approved by the Company. Withdrawals
made or approved by the Company will be used by the
Company for the purpose of making payments under the
Treaty or the Retro Contracts.
5. For the purpose of administering the business
covered by the Treaty and the Retro Contract,
without specific approval from the Company,
Americo Life may during each calendar quarter
withdraw from this Account not more than
$15,000,000 as a dual advance against the net
balance due Ohio Life at the end of the same quarter
under the Treaty and the balance due the Company at
the end of the same quarter under the Retro Contract.
The Custodian is not responsible for obtaining
approval from any party for withdrawals made by
Americo in an aggregate amount of $15,000,000 or
less during any calendar quarter.
6. The Custodian will have no responsibility for
deciding when the deposits or withdrawals are to be
made or for determining the required amounts thereof
or for determining whether the assets are of a type
which are acceptable to the Company.
C. Delivery Of Investments. The Custodian shall release and
deliver United States investments of the Account held by the
Custodian or in a U.S. Securities System account of the
Custodian or in the Custodian's Direct Paper book entry system
account ("Direct Paper System Account") only upon receipt of
Proper Instructions (as defined below), which may be
continuing instructions when deemed appropriate by the
parties, and only as described in paragraph B. above and in
the following cases:
1. Upon sale of such investments for the account of the Company and
receipt of payment therefor;
2. Upon the receipt of payment in connection with any
repurchase agreement related to such investments
entered into on behalf of the Company;
3. In the case of a sale effected through a U.S.
Securities System, in accordance with the provisions
of Section 2.G. hereof;
4. To the depository agent, against a receipt, in
connection with tender or other similar offers for
portfolio investments of the Account;
6. To the issuer thereof or its agent, against a
receipt, when such investments are called, redeemed,
retired or otherwise become payable; provided that,
in any such case, the cash or other consideration is
to be delivered to the Custodian;
7. To the issuer thereof, or its agent, against a
receipt, for transfer into the name of the Custodian
or into the name of any nominee or nominees of the
Custodian or into the name or nominee name of any
agent appointed pursuant to Section 2.F. or into the
name or nominee name of any subcustodian appointed
pursuant to Section 1; or for exchange for a
different number of bonds, certificates or other
evidence representing the same aggregate face amount
or number of units; provided that, in any such case,
the new investments are to be delivered to the
Custodian.
8. Upon the sale of such investments for the account of
the Company, to the broker or its clearing agent,
against a receipt, for examination in accordance with
"street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or
liability for any loss arising from the delivery of
such investments prior to receiving payment for such
investments except as may arise from the Custodian's
own gross negligence or willful misconduct;
9. For exchange or conversion pursuant to any plan of
merger, consolidation, recapitalization,
reorganization or readjustment of the investments of
the issuer of such investments, or pursuant to
provisions for conversion contained in such
investments, or pursuant to any deposit agreement,
against a receipt; provided that, in any such case,
the new investments and cash, if any, are to be
delivered to the Custodian;
10. In the case of warrants, rights or similar
investments, the surrender thereof in the exercise of
such warrants, rights or similar investments or the
surrender of interim receipts or temporary
investments for definitive investments; provided
that, in any such case, the new investments and cash,
if any, are concurrently delivered to the Custodian
or against a receipt;
11. For delivery in connection with any loans of Account
investments made on behalf of the company, but only
against receipt of adequate forms of collateral as
agreed upon from time to time by the Company or
its delegate, which may be in the form of cash
or obligations issued by the United States
government, its agencies or instrumentalities,
except that in connection with any loans for which
collateral is to be credited to the Custodian's
account in the book-entry system, the Custodian will
not be held liable or responsible for the delivery
of Account investments prior to the receipt of
such collateral;
12. For delivery as security in connection with any
borrowings by the Company requiring a pledge of
Account assets;
13. For delivery in accordance with the provisions of any
agreement among the Company, the Custodian and a
broker-dealer which is a member of The National
Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with the rules of The Options
Clearing Corporation and of any registered national
securities exchange, or of any similar organization
or organizations, regarding escrow or other
arrangements in connection with Account transactions
by the Company;
14. For delivery in accordance with the provisions of any agreement among
the Company, the Custodian, and a Futures Commission Merchant
registered under the Commodity Exchange Act, relating to compliance
with the rules of the Commodity Futures Trading Commission and/or any
Contract Market, or any similar organization or organizations,
regarding deposits in connection with Account transactions by the
Company;
15. Upon the sale of such investments and prior to
receipt of payment therefor, but only as set forth in
written Proper Instructions (such delivery in advance
of payment shall be referred to herein as a "Free
Trade"); and
16. For any other proper corporate purpose, but only upon
receipt of Proper Instructions from the Company,
specifying the investments to be delivered, setting
forth the purpose for which such delivery is to be
made, and naming the person or persons to whom
delivery of such investments shall be made.
D. Registration Of Investments. United States investments
held by the Custodian (other than
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bearer investments) shall be registered in the name of the
Company or in the name of any nominee of the Company or of any
nominee of the Custodian which nominee shall be assigned
exclusively with respect to the Account, or in the name or
nominee name of any agent appointed pursuant to Section 2.F or
in the name or nominee name of any sub-custodian appointed
pursuant to Section 1. All investments accepted by the
Custodian on behalf of the Company under the terms of this
Agreement shall be in "street name" or other good delivery
form. If, however, the Company directs the Custodian to
maintain Account investments in "street name," the Custodian
shall use reasonable efforts only to (a) timely collect income
due to the Company on such investments and (b) notify the
Company of relevant corporate actions including, without
limitation, pendency of calls, maturities, tender or exchange
offers.
E. Collection Of Income. Subject to the provisions of Section
2.C., the Custodian shall collect
------------------------------
on a timely basis all income and other payments with respect
to United States investments held hereunder to which the
Company shall be entitled either by law or pursuant to custom
in the investments business, and shall collect on a timely
basis all income and other payments with respect to United
States bearer investments of the Account if, on the date of
payment by the issuer, such investments are held by the
Custodian or its agent, and shall credit such income as
collected to the Account. Income due on United States
investments of the Account loaned pursuant to the provisions
of Section 2.B.10. shall be the responsibility of the Company;
the Custodian will have no duty or responsibility in
connection therewith other than to provide the Company with
such information or data in its possession as may be necessary
to assist the Company in arranging for the timely delivery to
the Custodian of the income to which the Company is properly
entitled.
F. Payment Of Account Monies. Upon receipt of Proper Instructions
from the Company, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall, from
Account monies, pay out such monies in the following cases
only:
1. Upon the purchase of United States investments, including options,
futures contracts or options on futures contracts, for the Account, but only (i)
against the delivery of such investments, including evidence of title to such
options, futures contracts or options on futures contracts, to the Custodian (or
any bank, banking firm or trust company doing business in the United States or
abroad as a custodian which has been designated by the Custodian as its agent
for this purpose) registered in the name of the Company or in the name of a
nominee of the Company or of the Custodian referred to in Section 2.C. hereof or
in proper form for transfer; (ii) in the case of a purchase effected through a
U.S. Securities System, in accordance with the conditions set forth in Section
2.G. hereof; (iii) in the case of a purchase involving the Direct Paper System,
in accordance with the conditions set forth in Section 2.H.; (iv) in the case of
repurchase agreements entered into between the Company and the Custodian, or
another bank, or a broker-dealer which is a member of NASD, (A) against delivery
of the investments either in certificated form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such investments or (B)
against delivery of the receipt evidencing purchase on behalf of the Company of
investments owned by the Custodian along with written evidence of the agreement
by the Custodian to repurchase such investments from the Company; or (v) for
transfer to a time deposit account of the Company in any bank, whether in the
United States or outside the United States, or any savings and loan; such
transfer may be effected prior to receipt of a confirmation from a broker and/or
the applicable bank or savings and loan pursuant to Proper Instructions from the
Company as defined in Section 6;
2. In connection with conversion, exchange or
surrender of Account investments as set forth in
Section 2.B. hereof;
3. For payment of the amount of dividends received in
respect of Account investments sold short;
4. Upon the purchase of United States investments and
prior to receipt of such investments, but only as set
forth in written Proper Instructions (such payment in
advance of delivery, along with delivery in advance
of payment made in accordance with Section 2.B.14.,
as applicable, shall be referred to herein as a "Free
Trade");
5. For the payment of any expense or liability incurred
by the Company with respect to the Account, including
but not limited to the following payments: interest,
taxes, management, accounting, transfer agent and
legal fees, and operating expenses thereof whether or
not such expenses are to be in whole or part
capitalized or treated as deferred expenses; and
6. For any other proper purpose, but only upon receipt
of Proper Instructions from the Company, specifying
the amount of such payment, setting forth the purpose
for which such payment is to be made, and naming the
person or persons to whom such payment is to be made.
G. Appointment Of Agents. Upon prior written notice to the
Company, the Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank
or trust company to act as its agent to carry out such of the
provisions of this Section 2 as the Custodian may from time to
time direct.
H. Deposit Of Investments In U.S. Securities Systems. The
Custodian may deposit and/or maintain United States
investments of the Account in a U.S. Securities System in
accordance with applicable Federal Reserve Board and
Securities and Exchange Commission rules and regulations, if
any, and only to the extent applicable and subject to the
following provisions:
1. The Custodian may keep United States investments of the Account in a
U.S. Securities System provided that such investments are represented in an
account of the Custodian in the U.S. Securities System ("U.S. Securities System
Account") which shall not include any assets of the Custodian other than assets
held as a fiduciary, custodian or otherwise for customers;
2. The records of the Custodian with respect to United
States investments of the Company which are
maintained in a U.S. Securities System Account shall
identify by book-entry those investments of the
Account;
3. The Custodian shall pay for United States investments
purchased for the Account upon (i) receipt of advice
from the U.S. Securities System that such investments
have been transferred to the U.S. Securities System
Account, and (ii) the making of an entry on the
records of the Custodian to reflect such payment
and transfer for the benefit of the Account. The
Custodian shall transfer United States
investments sold for the Account upon (i) receipt
of advice from the U.S. Securities System that
payment for such investments has been transferred to
the U.S. Securities System Account, and (ii) the
making of an entry on the records of the Custodian
to reflect such transfer and payment for the
benefit of the Account. Copies of all advices
from the U.S. Securities System of transfers of
United States Account investments shall identify the
Company, be maintained for the Company by the
Custodian and be provided to the Company at its
request. The Custodian shall furnish the Company
confirmation of each transfer to or from the Account
in the form of a written advice or notice and shall
furnish to the Company copies of daily transaction
sheets reflecting each day's transactions in
the U.S. Securities System with respect to the
Account; and
4. The Custodian shall provide the Company with any
report obtained by the Custodian on the U.S.
Securities System's accounting system, internal
accounting control and procedures for safeguarding
United States investments deposited in the U.S.
Securities System.
I. Account Assets Held In The Custodian's Direct Paper System.
The Custodian may deposit and/or maintain Account investments
in the Direct Paper System of the Custodian subject to the
following provisions:
1. No transaction relating to investments in the Direct Paper
System will be effected in the absence of Proper Instructions
from the Company; 2. The Custodian may keep Account
investments in the
Direct Paper System only if such investments are
represented in an account of the Custodian in the
Direct Paper System which account shall not include
any assets of the Custodian other than assets held as
a fiduciary, custodian or otherwise for customers;
3. The records of the Custodian with respect to Account
investments which are maintained in the Direct Paper
System shall identify by book-entry such Account
investments; and
4. The Custodian shall pay for investments purchased for
the Account upon the making of an entry on the
records of the Custodian to reflect such payment and
transfer of investments to the Account. The Custodian
shall transfer investments sold for the Account upon
the making of an entry on the records of the
Custodian to reflect such transfer and receipt of
payment for the Account.
J. Segregated Account. The Custodian shall establish and
maintain a segregated account or
-------------------
accounts for and on behalf of the Account, into which
account or accounts shall be transferred cash and/or
investments, including investments maintained in an
account by the Custodian pursuant to Section 2.H. hereof
(a) in accordance with the provisions of any agreement among
the Company and a broker-dealer which is a member of the NASD
(or any Futures Commission Merchant registered under the
Commodity Exchange Act), relating to compliance with the rules
of The Options Clearing Corporation and of any registered
national securities exchange (or the Commodity Futures
Commission or any registered contract market), or of any
similar organization or organizations, regarding escrow or
other arrangements in connection with transactions by the
Company, (b) for purposes of segregating cash or government
investments in connection with options purchased, sold or
written by the Company or commodity futures contracts or
options thereon purchased or sold by the Company or
short-sales, and (c) for other proper purposes set forth in
written Proper Instructions.
K. Proxies. The Custodian shall, with respect to the United
States investments held by it hereunder, cause to be executed
by the registered holder of such investments, if the
investments are registered otherwise than in the name of the
Company or a nominee of the Company, all proxies received by
the Custodian without indication of the manner in which such
proxies are to be voted, and shall deliver to the Company such
proxies, all proxy soliciting materials received by the
Custodian and all notices received relating to such
investments.
L. Communications Relating To Account Investments. Subject to
the provisions of Section 2.C., the
------------------------------------------------
Custodian shall transmit to the Company all written
information (including, without limitation, pendency of calls
and maturities of United States investments and expirations of
rights in connection therewith and notices of exercise of call
and put options written by the Company and the maturity of
futures contracts purchased or sold by the Company) received
by the Custodian from issuers of the United States investments
being held for the Account. With respect to tender or exchange
offers, the Custodian shall transmit to the Company all
written information received by the Custodian from issuers of
the United States investments whose tender or exchange is
sought and from the party (or his agents) making the tender or
exchange offer. If the Company desires to take action with
respect to any tender offer, exchange offer or any other
similar transaction, the Company shall notify the Custodian at
least three United States business days prior to the date on
which the Custodian is required to take such action; provided,
however, that the Custodian will use reasonable efforts to
take such action as the Company may request.
3. DUTIES OF THE CUSTODIAN WITH RESPECT TO CERTAIN PROPERTY OF THE ACCOUNT
HELD OUTSIDE OF THE UNITED STATES.
A. Assets To Be Held. The Custodian shall identify on its books
as belonging to the Company, the non-United States investments
of the Account held by each non-United States banking
institution serving as a sub-custodian hereunder.
B. Non-United States Securities Systems. Except as may
otherwise be agreed upon in writing by the
--------------------------------------
Custodian and the Company, non-United States assets of the
Account held pursuant to this Agreement shall be maintained in
a clearing agency which acts as a securities depository or in
a book-entry system for the central handling of securities
located outside of the United States (each a "Non-U.S.
Securities System") only through arrangements implemented by
the non-United States banking institutions serving as
sub-custodians pursuant to the terms hereof (Non-U.S.
Securities Systems and U.S. Securities Systems are
collectively referred to herein as the "Securities Systems").
C. Reports By Custodian. The Custodian will supply to the
Company from time to time, as mutually
---------------------
agreed upon, statements in respect of the investments and
other assets of the Account held by non-United States banking
institutions serving as sub-custodians, including but not
limited to an identification of entities having possession of
the investments and other assets of the Account and advices or
notifications of any transfers of investments to or from each
custodial account maintained by a non-United States banking
institution for the Custodian on behalf of the Account
indicating, as to securities acquired for the Account, the
identity of the entity having physical possession of such
investments.
D. Transactions In Non-United States Custody Account. Except as
otherwise provided in paragraph (1) of this Section 3.D., the
provision of Sections 2.B. and 2.E. of this Agreement shall
apply with any necessary changes to the non-United States
investments of the Account held outside the United States by
non-United States sub-custodians pursuant to this Agreement.
1. Notwithstanding any provision of this Agreement to the contrary,
settlement and payment for investments received for the Account and delivery of
investments maintained for the Account may be effected in accordance with the
customary established securities trading or securities processing practices and
procedures in the jurisdiction or market in which the transaction occurs,
including, without limitation, delivering investments to the purchaser thereof
or to a dealer therefor (or an agent for such purchaser or dealer) against a
receipt with the expectation of receiving later payment for such investments
from such purchaser or dealer.
2. Investments maintained in the custody of a non-United
States sub-custodian may be maintained in the name of
such entity's nominee to the same extent as set forth
in Section 2.C. of this Agreement, and the Company
agrees to hold any such nominee harmless from any
liability as a holder of record of such investments.
E. Liability Of Non-United States Sub-Custodians. Each agreement
pursuant to which the Custodian employs a non-United States
banking institution as a non-United States sub-custodian shall
require the institution to exercise reasonable care in the
performance of its duties. At the election of the Company, it
shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a non-United
States banking institution as a consequence of any such loss,
damage, cost, expense, liability or claim if and to the extent
that the Company has not been made whole for any such loss,
damage, cost, expense, liability or claim.
4. BANK ACCOUNTS.
The Custodian shall open and maintain a separate bank account or accounts
in the United States in the name of the Company, subject only to draft or order
by the Custodian acting pursuant to the terms of this Agreement, and shall hold
in such account or accounts, subject to the provisions hereof, all cash received
by it from or for the Account. Funds held by the Custodian for the Account may
be deposited by the Custodian to its credit as custodian in the banking
department of State Street Bank and Trust Company or in such other banks or
trust companies as it may in its discretion deem necessary or desirable. Such
funds shall be deposited by the Custodian in its capacity as custodian and shall
be withdrawable by the Custodian only in that capacity.
5. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY.
A. The Custodian may in its discretion, without express authority
from the Company:
1. Make payments to others for minor transactional
expenses of handling investments or other similar
items relating to its duties under this Agreement,
provided that all such payments shall be accounted
for to the Company;
2. Surrender investments in temporary form for
investments in definitive form;
3. Endorse for collection, in the name of the Company,
checks, drafts and other negotiable instruments; and
4. In general, attend to all non-discretionary details
in connection with the sale, exchange, substitution,
purchase, transfer and other dealings with the
investments and property of the Account except as
otherwise directed by the Company.
6. PROPER INSTRUCTIONS.
Proper Instructions as used herein means a writing signed or initialed on
behalf of the Company by one or more person or persons as the Company shall have
from time to time authorized. Each such writing shall set forth the specific
transaction or type of transaction involved. Oral instructions will be
considered Proper Instructions if the Custodian reasonably believes them to have
been given by a person authorized to give such instructions with respect to the
transaction involved. The Company shall cause all oral instructions to be
confirmed in writing. Upon receipt of a certificate of the Company accompanied
by a detailed description of procedures approved by the Company and the
Custodian, Proper Instructions may include communications effected directly
between electro-mechanical or electronic devices. For purposes of this Section,
Proper Instructions shall include instructions received by the Custodian
pursuant to any tri-party agreement which requires a segregated asset account in
accordance with Section 2.I. The Custodian shall have no obligation to determine
if any Proper Instructions received by it from the Company, or any action taken
by it in accordance therewith, comply with the investment policies, restrictions
or guidelines or statutory or regulatory requirements applicable with respect to
the Account.
7. EVIDENCE OF AUTHORITY.
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper reasonably believed
by it to be genuine and to have been properly executed by or on behalf of the
Company. The Custodian may receive and accept a copy of an instruction of the
Company as conclusive evidence (a) of the authority of any person to act in
accordance with such instruction and (b) of any determination or of any action
by said party, in each case as described in such instruction and such
instruction may be considered as in full force and effect until receipt by the
Custodian of written notice to the contrary.
<PAGE>
8. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND CALCULATION OF
VALUE.
The Custodian shall cooperate with and supply necessary information from
its records to the entity or entities appointed by the Company to perform
investment accounting and recordkeeping functions for the assets in the Account
and/or value the assets in the Account.
9. RESPONSIBILITY OF CUSTODIAN.
The Custodian will hold the Company harmless from any loss of securities of the
Company held by the Custodian under this Agreement occasioned in undertaking the
performance of its obligations under this Agreement by (a) the negligence or
dishonesty of the Custodian or the Custodian's officers or employees or (b)
damage, destruction, burglary, robbery, holdup, theft or mysterious
disappearance of any such securities when the Custodian has physical possession
of such securities. In the event there is a loss of the securities for which the
Custodian is obligated to hold the Company harmless as provided in the
immediately preceding sentence, the Custodian shall promptly replace, at its
option, either the security or the value thereof measured as of the date of such
loss and the value of any loss of rights or privileges resulting from said loss
of the security. If the Custodian replaces or reimburses for the loss of
securities, and is later exonerated from liability, the Company shall reimburse
the Custodian for the cost of such replacement or reimbursement.
The Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Agreement and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties, including any
futures commission merchant acting pursuant to the terms of a three-party
futures or options agreement. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Agreement. It shall be
kept indemnified by and shall be without liability to the Company for any action
taken or omitted by it in good faith without negligence. The Company hereby
agrees to indemnify and hold harmless the Custodian from and against any and all
costs, expenses, losses, damages, charges, counsel fees, payments and
liabilities which may be asserted against the Custodian arising out of any
failure of the Company to comply with the laws of the United States or any state
or other regulatory body thereof. The Custodian shall be entitled to rely on and
may act upon advice of counsel (who may be counsel for the Company) on all
matters, and shall be without liability for any action reasonably taken or
omitted pursuant to such advice. The Custodian shall be entitled to rely upon,
and shall have no duty of inquiry with respect to, the accuracy of any
representation or warranty given to it by the Company and shall be without
liability for any action reasonably taken or omitted by it in reliance thereon.
Regardless of whether assets held pursuant to this Agreement are maintained in
the custody of a non-United States banking institution, a non-United States
securities depository, or a branch or affiliate of a United States bank, the
Custodian shall not be liable for any loss, damage, cost, expense, liability or
claim resulting from, or caused by, the direction of or authorization by the
Company to maintain custody of any securities or cash or other property of the
Account outside the United States of America, including, but not limited to,
losses resulting from the nationalization or expropriation of assets, the
imposition of currency controls or restrictions, acts of war or terrorism or
civil unrest, riots, revolutions, work stoppages, natural disasters or other
similar events or acts.
The Custodian shall be without liability to the Company for any loss,
liability, claim or expense resulting from or caused by (a) events or
circumstances beyond the reasonable control of the Custodian or any
sub-custodian or Securities System or any agent or nominee of any of the
foregoing, including, without limitation, the interruption, suspension or
restriction of trading on or the closure of any securities markets, power or
other mechanical or technological failures or interruptions, or computer viruses
or communications disruptions; (b) errors by the Company in its instructions to
the Custodian provided such instructions have been given in accordance with this
Agreement; (c) the insolvency of or acts or omissions by a Securities System;
(d) any delay or failure of any broker, agent or intermediary, central bank or
other commercially prevalent payment or clearing system to deliver to the
Custodian's sub-custodian or agent securities purchased or in the remittance of
payment made in connection with securities sold; (e) any delay or failure of any
company, corporation, or other body in charge of registering or transferring
securities in the name of the Custodian, the Company, the Custodian's
sub-custodians, nominees or agents or any consequential losses arising out of
such delay or failure to transfer such securities including non-receipt of
bonus, dividends and rights and other accretions or benefits; (f) delays or
inability to perform its duties due to any disorder in market infrastructure
with respect to any particular security or Securities System; and (g) changes to
any provision of any present or future law or regulation or order of the United
States of America, or any state thereof, or any other country, or political
subdivision thereof or of any court of competent jurisdiction.
The Custodian shall be liable for the acts or omissions of a non-United
States banking institution employed as sub-custodian hereunder to the same
extent as set forth with respect to sub-custodians generally in this Agreement.
If the Company requires the Custodian to take any action with respect to
investments, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned
with respect to the Account being liable for the payment of money or incurring
liability of some other form, the Company, as a prerequisite to requiring the
Custodian to take such action, shall provide indemnity to the Custodian in an
amount and form satisfactory to it.
The Custodian (including its affiliates, subsidiaries and agents) will
not advance cash or investments to, for or on behalf of the Account.
However, if the Custodian, or its affiliates, subsidiaries,
sub-custodians or agents, does advance cash or investments for any
purpose (including but not limited to securities settlements, foreign
exchange contracts and assumed settlement) for the benefit of the
Account, or in the event that the Custodian, its sub-custodians or
their respective nominee shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the
performance of this Agreement, except such as may arise from its or its
sub-custodians' or their respective nominee's own negligent action,
negligent failure to act or willful misconduct, any property at any
time held pursuant to this Agreement shall be security therefor and
should the Company fail to repay the Custodian promptly, the Custodian
shall be entitled to utilize available cash and to dispose of Account
assets to the extent necessary to obtain reimbursement.
The Company agrees to indemnify and hold the Custodian harmless from
and against any and all costs, expenses, losses, damages, charges,
counsel fees, payments and liabilities which may be asserted against
the Custodian (a) acting in accordance with any Proper Instruction with
respect to Free Trades or (b) for the acts or omissions of any Local
Agent or Pledgee.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
10. TAX LAW.
A. Tax Law Of The United States Of America. The Custodian
shall have no responsibility or
--------------------------------------------
liability for any obligations now or hereafter imposed on the
Company with respect to the Account or the Custodian as
custodian of Account assets by the tax law of the United
States of America or any state or political subdivision
thereof. The Custodian shall be kept indemnified by and shall
be without liability to the Company for any such obligations
including taxes, withholding and reporting requirements,
claims for exemption or refund, additions for late payment,
interest, penalties and other expense (including legal
expenses) that may be assessed against the Company or the
Custodian as custodian of the Account.
B. Tax Law Of Other Jurisdictions. It shall be the
responsibility of the Company to notify the
-------------------------------
Custodian of the obligations imposed on the Company with
respect to the Account by the tax law of jurisdictions other
than those mentioned in Section 10.A. The Custodian shall use
reasonable efforts to assist the Company with respect to any
claim for exemption or refund under the tax law of
jurisdictions for which the Company has provided such
information. Nevertheless, the Custodian shall be kept
indemnified by and shall be without liability to the Company
for any such obligations of which it has not been notified in
writing by the Company,or for which it has received directions
to not withhold United States taxes, including taxes,
withholding and reporting requirements, claims for exemptions
or refund, additions for late payment, interest, penalties and
other expenses (including legal expenses) that may be assessed
against the Company or the Custodian as custodian of the
Company.
<PAGE>
11. COMPUTERIZED REPORTING SERVICES.
A. Protection Of Equipment, Confidential Or Proprietary Programs
And Information. The Company agrees to use the equipment,
computer programs and other information supplied by the
Custodian under this Agreement solely for its own internal use
and benefit and not for resale or other transfer or
disposition to, or use by or for the benefit of, any other
person or organization without the prior written approval of
the Custodian.
The Company acknowledges that the data bases, computer
programs, screen formats, screen designs, report formats,
interactive design techniques, and other information furnished
to the Company by the Custodian constitute copyrighted trade
secrets or proprietary information of substantial value to the
Custodian. Such data bases, programs and other information are
collectively referred to below as "Proprietary Information."
The Company agrees that it shall treat all Proprietary
Information as proprietary to the Custodian and that it shall
not divulge any Proprietary Information to any person or
organization except as expressly permitted hereunder. Without
limiting the foregoing, the Company agrees for itself and its
employees and agents:
1. to use such Proprietary Information (i) solely on the
Custodian's computers, (ii) solely from equipment at
Company locations agreed to between the Company and
the Custodian and (iii) solely in accordance with the
Custodian's applicable user documentation;
2. to use equipment supplied by the Custodian
solely with programs supplied by the
Custodian and no other programs or software;
3. to refrain from copying or duplicating in any way
(other than in the normal course of performing
processing on Custodian's computers) any part
of any Proprietary Information;
4. to refrain from obtaining unauthorized access to any
programs, data or other information not owned by the
Company, and if such access is accidentally obtained,
to respect and safeguard the same as Proprietary
Information;
5. to refrain from causing or allowing information
transmitted from the Custodian's computer to the
Company's terminals to be retransmitted to another
computer, terminal or other device;
6. that the Company shall have access to only those
authorized transactions as agreed to
between the Company and the Custodian; and
<PAGE>
7. to honor reasonable written requests made by the
Custodian to protect at the Custodian's expense the
rights of the Custodian in Proprietary Information at
common law, under the applicable law of the United
States of America.
B. Company Acknowledgment. The Company hereby acknowledges that
the data and information it will be accessing from the
Custodian is unaudited and may not be accurate due to
inaccurate pricing of securities, delays of a day or more in
updating the Account and other causes for which Custodian will
not be liable to the Company.
12. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT.
This Agreement shall become effective as of its execution. Unless sooner
terminated by mutual consent of the Company and Great Southern (in which case
the stipulation of termination shall specify whether Great Southern or the
Company is to receive the assets), this Agreement shall remain in force until
the Company shall have no liability under the Treaty (either to Ohio Life
Insurance Company or to Great Southern as assignee of Ohio Life pursuant to
subparagraph 2 of Article XIII of the Treaty). On termination of this Agreement,
Custodian shall transfer to Great Southern all of the assets held by Custodian
with respect to this Agreement. Upon termination of the Agreement, the Company
shall pay to the Custodian such compensation as may be due as of the date of
such termination and shall likewise reimburse the Custodian for its costs,
expenses and disbursements.
13. SUCCESSOR CUSTODIAN.
If a successor custodian for the Account shall be appointed by the Company,
the Custodian shall, upon termination, deliver to such successor custodian at
the office of the Custodian, duly endorsed and in the form for transfer, all
investments of the Account then held by it hereunder and shall transfer to an
account of the successor custodian all of the investments of the Account held in
a Securities System. If no such successor custodian shall be appointed, the
Custodian shall, in like manner, upon receipt of a certified copy of an
instruction of the Company, deliver at the office of the Custodian such
investments, funds and other properties in accordance with such instruction.
In the event that no written order designating a successor custodian or
certified copy of an instruction of the Company shall have been delivered to the
Custodian on or before the date when such termination shall become effective,
then the Custodian shall have the right to deliver to a bank or trust company,
which is a bank doing business in the United States (including any state) of its
own selection and having an aggregate capital, surplus, and undivided profits,
as shown by its last published report, of not less than $10,000,000 all
investments, funds and other properties held by the Custodian on behalf of the
Account and all instruments held by the Custodian relative thereto and all other
property held by it under this Agreement and to transfer to an account of such
successor custodian all of the investments of the Account held in any Securities
System. Thereafter, such bank or trust company shall be the successor of the
Custodian under this Agreement.
In the event that investments, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Company to procure the certified copy of the instruction referred
to or of the Company to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such investments, funds and other properties and
the provisions of this Agreement relating to the duties and obligations of the
Custodian shall remain in full force and effect.
14. REPRESENTATIONS.
The Company represents and warrants that (a) it is duly incorporated or
organized, is validly existing in good standing in its jurisdiction of
incorporation or organization and is qualified to conduct its business in every
jurisdiction where its business is conducted, (b) the execution, delivery and
performance of this Agreement, all documents and instruments to be delivered
hereunder or thereunder and all transactions contemplated hereunder or
thereunder have been duly authorized by all necessary action, (c) the person
executing this Agreement on its behalf has been duly authorized to act on its
behalf, (d) this Agreement constitutes its legal, valid, binding and enforceable
agreement, (e) it has obtained all authorizations of any governmental body
required in connection with this and all transactions contemplated hereunder and
such authorizations are in full force and effect and (f) the execution, delivery
and performance of this Agreement and the transactions hereunder will not
violate any agreement, law, ordinance, charter, by-law, rule or regulation
applicable to it or by which it is bound or by which any of its assets are
affected. Further, the Company hereby acknowledges and agrees that it shall
notify the Custodian of any statute, regulation, rule, or other regulatory
requirement or policy governing the Company's assets, and any change thereto,
which may affect the Custodian's responsibilities under this Agreement.
15. GENERAL.
A. Compensation Of Custodian. The Custodian shall be entitled
to reasonable compensation for its services and expenses
as Custodian, as agreed upon from time to time between the
Company and the Custodian.
B. Massachusetts Law to Apply. This Agreement shall be
construed and the provisions thereof interpreted under and
in accordance with laws of The Commonwealth of Massachusetts.
C. Records. The Custodian shall create and maintain such records
relating to its activities and obligations under this
Agreement in such manner as shall be agreed between the
Custodian and the Company. All such records shall be the
property of the Company and shall at all times during the
regular business hours of the Custodian be open for inspection
by duly authorized officers, employees or agents of the
Company.
D. Reports on Systems of Custodian's Independent Accountant. The
custodian shall annually provide the Company, at the sole cost
and expense of the Company, reports by the Custodian's
independent public accountants on the accounting system,
internal accounting control and procedures for safeguarding
investments relating to the services provided by the Custodian
under this Agreement.
E. Assignment. Except as otherwise set forth herein, this
Agreement may not be assigned by either party without the
written consent of the other.
F. Prior Agreements. This Agreement supersedes and terminates,
as of the date hereof, all prior contracts between the
Company and the Custodian relating to the custody of Account
assets.
G. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an
original, and all such counterparts taken together shall
constitute but one and the same Agreement.
H. Notices. Any notice, instruction or other instrument required
to be given hereunder may be delivered in person to the
offices of the parties as set forth herein during normal
business hours or delivered prepaid registered mail or by
private delivery service or telecopy to the parties at the
following addresses or such other addresses as may be notified
by any party from time to time.
1. To the Company: Employers Reassurance Corporation
........ 5200 Metcalf Avenue
........ Overland Park, Kansas 66202
........ Attention: Tom Powers
........ Telephone: (913) 676-5200
........ Telecopy: (913) 676-6208
2. To the Custodian: State Street
801 Pennsylvania
........ Kansas City, MO 64105
........ Attention: Insurance Custody
........ Telephone: (816) 871-9232
........ Telecopy: (816) 871-9210
3. To Great Southern: Great Southern Life Insurance
Company
........ c/o Americo
........ 1055 Broadway
........ Kansas City, Missouri 64105
........ Attention: Dennis Walsh
........ Telephone: (816) 391-2120
........ Telecopy: (816) 391-2083
Such notice, instruction or other instrument shall be deemed
to have been served upon actual receipt.
I. Shareholder Communications. Securities and Exchange
Commission Rule 14b-2 requires banks which
---------------------------
hold securities for the account of customers to respond to
requests by issuers of securities for the names, addresses and
holdings of beneficial owners of securities of that issuer
held by the bank unless the beneficial owner has expressly
objected to disclosure of this information. In order to comply
with the rule, the Custodian needs the Company to indicate
whether it authorizes the Custodian to provide the Company's
name, address, and share position to requesting companies
whose securities are held in the Account. If the Company tells
the Custodian "no", the Custodian will not provide this
information to requesting companies. If the Company tells the
Custodian
"yes" or does not check either "yes" or "no" below, the
Custodian is required by the rule to treat the Company as
consenting to disclosure of this information for all
securities owned by the Company or any funds or accounts
established by the Company. For the Company's protection, the
Rule prohibits the requesting company from using the Company's
name and address for any purpose other than corporate
communications. Please indicate below whether the Company
consents or objects by checking one of the alternatives below.
Yes [ ] The Custodian is authorized to
release the Company's name, address,
and share positions.
No [ x ] The Custodian is not
authorized to release the Company's
name, address, and share positions.
J. Reproduction of Documents. This Agreement and all schedules,
exhibits, addenda, attachments
--------------------------
and amendments hereto may be reproduced by any photographic,
photostatic, microfilm, micro-card, miniature photographic or
other similar process. The parties hereto each agree that any
such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding,
whether or not the original is in existence and whether or not
such reproduction was made by a party in the regular course of
business, and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible
in evidence.
K. Year 2000. Custodian will take reasonable steps to ensure
that its products (and those of its
---------
third-party suppliers) reflect the available state of the art
technology to offer products that are Year 2000 ready,
including, but not limited to, century recognition of dates,
calculations that correctly compute same century and multi
century formulas and date values, and interface values that
reflect the date issues arising between now and the next
one-hundred years, and if any changes are required, Custodian
will make the changes to its products at no cost to Company
and in a commercially reasonable time frame and will require
third-party suppliers to do likewise.
Similarly, Company will take reasonable steps to ensure that
its electronic systems reflect the available state of the art
technology and are Year 2000 ready, including, but not limited
to, century recognition of dates, calculations that correctly
compute same century and multi century formulas and date
values, and interface values that reflect the date issues
arising between now and the next one-hundred years, and if any
changes are required, Company will make the changes to its
systems at no cost to Custodian and in a commercially
reasonable time frame.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative as of the
day and year first written above.
<PAGE>
EMPLOYERS REASSURANCE CORPORATION
By:
F Name:
Its: , Duly Authorized
STATE STREET BANK AND TRUST COMPANY
By:
G Name:
H Its: , Duly Authorized
GREAT SOUTHERN LIFE INSURANCE COMPANY
By:
I Name:
Its: , Duly Authorized
<PAGE>
SCHEDULE A
STATE STREET BANK AND TRUST COMPANY
GLOBAL CUSTODY NETWORK
<TABLE>
<S> <C> <C>
Country Subcustodian Depositories
7
Argentina Citibank, N.A. Caja de Valores S.A.
Australia Westpac Banking Corporation Austraclear Limited
Reserve Bank Information and Transfer System
Austria Erste Bank der Oesterreichischen Oesterreichischen Kontrollbank AG
Sparkassen AG (Wertpapiersammelbank Division)
Bahrain British Bank of the Middle East None
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Bangladesh Standard Chartered Bank None
Belgium Generale de Banque Caisse Interprofessionnelle de Depot et
de Virement de Titres S.A.
Banque Nationale de Belgique
Bermuda The Bank of Bermuda Limited None
Bolivia Banco Boliviano Americano S.A. None
Botswana Barclays Bank of Botswana Limited None
Brazil Citibank, N.A. Companhia Brasileira de Liquidacao e Custodia
Bulgaria ING Bank N.V. Central Depository AD
Bulgarian National Bank
Canada State Street Trust Company Canada The Canadian Depository
for Securities Limited
Chile Citibank, N.A. Deposito Central de Valores S.A.
People's Republic The Hongkong and Shanghai Shanghai Securities Central Clearing and
of China Banking Corporation Limited, Registration Corporation
Shanghai and Shenzhen branches
Shenzhen Securities Clearing
Co., Ltd.
Colombia Cititrust Colombia S.A. Deposito Centralizado de Valores
Sociedad Fiduciaria
Costa Rica Banco BCT S.A. Central de Valores S.A.
Croatia Privredna Banka Zagreb d.d. Ministry of Finance
National Bank of Croatia
Cyprus Cypress Popular Bank Ltd. None
Czech Republic Ceskoslovenska Obchodni Stredisko cennych
papiru(degree)
Banka, A.S.
Czech National Bank
Denmark Den Danske Bank Vaerdipapircentralen (the Danish
Securities Center)
Ecuador Citibank, N.A. None
Egypt Egyptian British Bank Misr Company for Clearing, Settlement,
(as delegate of The Hongkong and and Central Depository
Shanghai Banking corporation Limited)
Estonia Hansabank Eesti Vaartpaberite Keskdepositoorium
Finland Merita Bank Limited The Finnish Central Securities
Depository
France Paribas, S.A. Societe Interprofessionnelle
pour la Compensation des
Valeurs Mobilieres (SICOVAM)
Germany Dresdner Bank AG Deutsche Borse Clearing AG
Ghana Barclays Bank of Ghana Limited None
Greece National Bank of Greece S.A. The Bank of Greece, System for
Monitoring Transactions in
Securities Book-Entry Form
The Central Securities Depository
(Apothetirion Titlon)
Hong Kong Standard Chartered Bank The Central Clearing and
Settlement System
Central Money Markets Unit
Hungary Citibank Rt. Kozponti Elszamolohaz es Ertektar
(budapest) Rt. (KELLER)
Iceland Icebank Ltd. None
India Deutsche Bank AG; The National Securities Depository Limited
The Hongkong and Shanghai
Banking Corporation Limited Reserve Bank of India
Indonesia Standard Chartered Bank Bank Indonesia
PT Kusodian Sentral Efek Indonesia
Ireland Bank of Ireland Central Bank of Ireland
Securities Settlement Office
Israel Bank Hapoalim B.M. The Tel Aviv Stock Exchange
Clearing House Ltd. (TASE Clearinghouse)
Bank of Israel
(As part of the TASE Clearinghouse system)
Italy Paribas, S.A. Monte Titoli S.p.A.
Banca d'Italia
Ivory Coast Societe Generale de Banques Depositaire Central Banque de Reglement
en Cote d'Ivoire
Jamaica Scotiabank Jamaica Trust and The Jamaican Central Securities Depository
Merchant Bank, Ltd.
Japan The Fuji Bank, Limited Japan Securities Depository
Sumitomo Bank Ltd. Center (JASDEC)
Bank of Japan Net System
Jordan British Bank of the Middle East None
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Kenya Barclays Bank of Kenya Limited Central Bank of Kenya
Republic of Korea The Hongkong and Shanghai Banking Korea Securities Depository Corporation
Corporation Limited
Latvia A/s Hansabank The Latvian Central Depository
Lebanon British Bank of the Middle East The Custodian and
Clearing Center of (as delegate of The Hongkong and
Financial Instruments for Lebanon and the Shanghai
Banking Corporation Limited) Middle East (MIDCLEAR)
S.A.L.
The Central Bank of Lebanon
Lithuania Vilniaus Bankas AB The Central Securities Depository of Lithuania
Malaysia Standard Chartered Bank The Malaysian Central Depository Sdn.
Malaysia Berhad Bhd.
Bank Negara Malaysia,
Scripless Securities Trading and Safekeepingm
Systems
Mauritius The Hongkong and Shanghai The Central Depository & Settlement
Banking Corporation Limited Co. Ltd.
Mexico Citibank Mexico, S.A. S.D. INDEVAL
(Instituto para el Deposito de Valores)
Morocco Banque Commerciale du Maroc Maroclear
The Netherlands MeesPierson N.V. Nederlands Centraal Instituut voor
Giraal Effectenverkeer B.V. (NECIGEF)
De Nederlandsche Bank N.V.
New Zealand ANZ Banking Group New Zealand Central Securities
(New Zealand) Limited Depository Limited
Norway Christiania Bank og Verdipapirsentralen (the Norwegian
Kreditkasse ASA Registry of Securities)
Oman British Bank of the Middle East Muscat Securities Market
Depository & Securities Registration Company
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Pakistan Deutsche Bank AG Central Depository Company of Pakistan
Limited; State Bank of Pakistan
Palestine British Bank of the Middle East The Palestine Stock Exchange
(as delegate of theHongkong and
Shanghai banking Corporation Limited)
Peru Citibank, N.A. Caja de Valores y Liquidaciones S.A.
CAVALI ICLV S.A.
Philippines Standard Chartered Bank The Philippines Central Depository Inc.
The Registry of Scripless Securities (ROSS) of
the Bureau of the Treasury
Poland Citibank (Poland) S.A.; The National Depository of Securities
(Krajowy Depozyt Papierow Wartos ciowych)
Central Treasury Bills Registrar
Portugal Banco Comercial Portugues Central de Valores Mobiliarios (Central)
Romania ING Bank N.V. National Securities Clearing, Settlement and
Depository Company
Bucharest Stock Exchange Registry Division
National Bank of Romania
Russia Credit Suisse First Boston AO, Moscow None
(as delegate of Credit Suisse First Boston,
Zurich)
Singapore The Development Bank The Central Depository (Pte)
of Singapore Limited Limited
Monetary Authority of Singapore
Slovak Republic Ceskoslovenska Obchodna Stredisko Cennych Papierov
Banka, A.S.
National Bank of Slovakia
Slovenia Bank Austria d.d. Klirinsko Depotna Druzba d.d.
South Africa Standard Bank of South Africa Limited The Central Depository Limited
Spain Banco Santander Central Hispano, S.A. Servicio de Compensacion y
Liquidacion de Valores, S.A.
Banco de Espana,
Central de Anotaciones en Cuenta
Sri Lanka The Hongkong and Shanghai Central Depository System
Banking Corporation Limited (Pvt) Limited
Swaziland Standard Bank Swaziland Limited None
Sweden Skandinaviska Enskilda Banken Vardepapperscentralen, VPC AB
(the Swedish Central Securities Depository)
Switzerland UBS AG SIS - SegaIntersettle
Taiwan - R.O.C. Central Trust of China The Taiwan Securities Central
Depository Co., Ltd.
Thailand Standard Chartered Bank Thailand Securities Depository
Company Limited
Trinidad & Tobago Republic Bank Limited None
Tunisia Banque Internationale Arabe de Tunisie Societe Tunisienne Interprofessionelle de
Compensation et de Depot de Valeurs
Mobilieres
Turkey Citibank, N.A.; Takas ve Saklama Bankasi A.S.
(TAKASBANK)
Central Bank of Turkey
Ukraine ING Bank, Ukraine The National Bank of Ukraine
United Kingdom State Street Bank and Trust Company, The Bank of England,
London Branch The Central Gilts Office;
The Central Moneymarkets Office
Uruguay Citibank, N.A. None
Venezuela Citibank, N.A. Central Bank of Venezuela
Vietnam The Hongkong and Shanghai None
Banking Corporation Limited
Zambia Barclays Bank of Zambia Limited LuSE Central Shares Depository Limited
Bank of Zambia
Zimbabwe Barclays Bank of Zimbabwe Limited None
</TABLE>
Euroclear (The Euroclear System)/State Street London Limited
Cedel, S.A. (Cedel Bank, societe anonyme)/State Street London Limited
INTERSETTLE (for EASDAQ Securities
<PAGE>
2
* State Street Bank and Trust Company is not authorized to conduct the business
of a bank in the state of Missouri.
Exhibit 10.16(l)
CUSTODIAN AGREEMENT
THIS AGREEMENT is made as of January 14, 2000, by and between EMPLOYERS
REASSURANCE CORPORATION, a Kansas corporation with its principal place of
business at 5200 Metcalf Avenue, Overland Park, Kansas 66202 (the "Company"),
GREAT SOUTHERN LIFE INSURANCE COMPANY, a Texas corporation with its principal
place of business at 1055 Broadway, Kansas City, Missouri 64105 ("Great
Southern"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust
company* with its principal place of business at 225 Franklin Street, Boston,
Massachusetts 02110 (the "Custodian").
WITNESSETH:
WHEREAS, the Company is the holder of record and the beneficial owner
of certain assets (the "Account"); and
WHEREAS, the Company desires to retain the Custodian to act as
custodian of the assets of the Account, and the Custodian is willing to provide
such services to the Company upon the terms and conditions hereinafter set
forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. EMPLOYMENT OF CUSTODIAN AND PROPERTY TO BE HELD BY IT.
Pursuant to the authority of the Company as both beneficial and record
owner of the Account, the Company hereby employs the Custodian as the
custodian of the assets of the Account which are not held by (a)
brokers, private bankers or other entities appointed by the Company to
hold assets of the Company (each a "Local Agent"), and (b) entities
which have advanced monies to the Company and which have received
Account assets as security for such advance(s) (each a "Pledgee"). The
Custodian shall not be responsible for any property of the Company not
received and held by it or held by a Local Agent or Pledgee.
The Custodian is instructed from time to time to employ one or more
reputable sub-custodians located within the United States provided that the
Custodian shall have obtained the written acknowledgment of the Company with
respect to such employment. The Custodian is instructed from time to time to
employ as sub-custodian the non-United States banking institutions located
outside the United States as noted in Schedule A attached hereto (as amended by
the Custodian from time to time by its delivery to the Company of an updated
Schedule A). The Custodian shall have no more or less responsibility or
liability to the Company on account of any actions or omissions of any such
sub-custodian so employed than any such sub-custodian has to the Custodian. The
Custodian shall not be liable for losses arising from the bankruptcy, insolvency
or receivership of any sub-custodian. 2. DUTIES OF THE CUSTODIAN WITH RESPECT TO
PROPERTY OF THE ACCOUNT HELD BY THE CUSTODIAN IN THE UNITED STATES.
A. Holding Investments. The Custodian shall hold and
segregate for the account of the Company all
--------------------
non-cash property to be held by it in the United States other
than (a) investments which are maintained pursuant to Section
2.G. in a clearing agency which acts as a securities
depository or in the book-entry system authorized by the
United States Department of the Treasury and certain federal
agencies (each, a "U.S. Securities System") and (b) commercial
paper of an issuer for which the Custodian acts as issuing and
paying agent ("Direct Paper") which is deposited and/or
maintained in the Direct Paper System of the Custodian (the
"Direct Paper System") pursuant to Section 2.H.
B. Fremont Business
1. The first deposit to this Account will be made by
Commerce Bank of Kansas City, N.A. ("Commerce Bank")
at the direction of the Company upon termination of
the Escrow Agreement (Fremont Business) of July 1,
1996 between Commerce Bank, the Company and Great
Southern. The amount of this first deposit will be
the entire amount of assets contained in said Escrow
Account, minus any fees due Commerce Bank as of the
termination date of the Escrow Agreement.
2. The Company will deposit to this Account all payments
received by the Company under the following
reinsurance agreements ("Treaties"):
Coinsurance Universal Life Reinsurance
Agreement of December 31, 1995 between the
Company and Fremont Life Insurance Company
("UL Treaty")
Coinsurance Annuity Reinsurance Agreement of
January 1, 1996 between the Company and
Fremont Life Insurance Company ("Annuity
Treaty").
3. The Company will also deposit to this Account all
payments, exclusive of the risk allowance, received
by the Company under the following retrocession
agreements ("Retro Contracts"):
Modified Coinsurance Universal Life and
Annuity Retrocession Agreement (Fremont
Business) of December 31, 1995 between the
Company and Great Southern
Modified Coinsurance Annuity Retrocession
Agreement (Fremont Business) of January
1, 1996 between the Company and Great
Southern
4. Except for those withdrawals permitted by the
following paragraph, all withdrawals to this Account
shall be made or approved by the Company. Withdrawals
made or approved by the Company will be used by the
Company for the purpose of making payments under the
Treaties or the Retro Contracts.
8. For the purpose of administering the business
covered by the Treaties and the Retro Contracts,
without specific approval from the Company, Americo
Life, Inc. ("Americo") may during each calendar
quarter withdraw from this Account not more than
$20,000,000 as a dual advance against the net
balance due Fremont at the end of the same quarter
under the Treaties and the balance due the
Company at the end of the same quarter under the
Retro Contracts. The Custodian is not responsible
for obtaining approval from any party for
withdrawals made by Americo in an aggregate
amount of $20,000,000 or less during any
calendar quarter.
6. The Custodian will have no responsibility for
deciding when the deposits or withdrawals are to be
made or for determining the required amounts thereof
or for determining whether the assets are of a type
which are acceptable to the Company.
C. Delivery Of Investments. The Custodian shall release and
deliver United States investments of the Account held by the
Custodian or in a U.S. Securities System account of the
Custodian or in the Custodian's Direct Paper book entry system
account ("Direct Paper System Account") only upon receipt of
Proper Instructions (as defined below), which may be
continuing instructions when deemed appropriate by the
parties, and only as described in paragraph B. above or in the
following cases:
1. Upon sale of such investments for the account of the Company
and receipt of payment therefor;
2. Upon the receipt of payment in connection with any
repurchase agreement related to such
investments entered into on behalf of the Company;
3. In the case of a sale effected through a U.S.
Securities System, in accordance with the
provisions of Section 2.G. hereof;
4. To the depository agent, against a receipt, in
connection with tender or other similar
offers for portfolio investments of the Account;
5. To the issuer thereof or its agent, against a
receipt, when such investments are called, redeemed,
retired or otherwise become payable; provided that,
in any such case, the cash or other consideration is
to be delivered to the Custodian;
9. To the issuer thereof, or its agent, against a
receipt, for transfer into the name of the Custodian
or into the name of any nominee or nominees of the
Custodian or into the name or nominee name of any
agent appointed pursuant to Section 2.F. or into the
name or nominee name of any subcustodian appointed
pursuant to Section 1; or for exchange for a
different number of bonds, certificates or other
evidence representing the same aggregate face amount
or number of units; provided that, in any such case,
the new investments are to be delivered to the
Custodian.
7. Upon the sale of such investments for the account of
the Company, to the broker or its clearing agent,
against a receipt, for examination in accordance with
"street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or
liability for any loss arising from the delivery of
such investments prior to receiving payment for such
investments except as may arise from the Custodian's
own gross negligence or willful misconduct;
8. For exchange or conversion pursuant to any plan of
merger, consolidation, recapitalization,
reorganization or readjustment of the investments of
the issuer of such investments, or pursuant to
provisions for conversion contained in such
investments, or pursuant to any deposit agreement,
against a receipt; provided that, in any such case,
the new investments and cash, if any, are to be
delivered to the Custodian;
9. In the case of warrants, rights or similar
investments, the surrender thereof in the exercise of
such warrants, rights or similar investments or the
surrender of interim receipts or temporary
investments for definitive investments; provided
that, in any such case, the new investments and cash,
if any, are concurrently delivered to the Custodian
or against a receipt;
10. For delivery in connection with any loans of Account
investments made on behalf of the company, but only
against receipt of adequate forms of collateral as
agreed upon from time to time by the Company or its
delegate, which may be in the form of cash or
obligations issued by the United States government,
its agencies or instrumentalities, except that in
connection with any loans for which collateral is to
be credited to the Custodian's account in the
book-entry system, the Custodian will not be held
liable or responsible for the delivery of Account
investments prior to the receipt of such collateral;
11. For delivery as security in connection with any
borrowings by the Company requiring a pledge of
Account assets;
12. For delivery in accordance with the provisions of any
agreement among the Company, the Custodian and a
broker-dealer which is a member of The National
Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with the rules of The Options
Clearing Corporation and of any registered national
securities exchange, or of any similar organization
or organizations, regarding escrow or other
arrangements in connection with Account transactions
by the Company;
13. For delivery in accordance with the provisions of any agreement among
the Company, the Custodian, and a Futures Commission Merchant
registered under the Commodity Exchange Act, relating to compliance
with the rules of the Commodity Futures Trading Commission and/or any
Contract Market, or any similar organization or organizations,
regarding deposits in connection with Account transactions by the
Company;
14. Upon the sale of such investments and prior to
receipt of payment therefor, but only as set forth in
written Proper Instructions (such delivery in advance
of payment shall be referred to herein as a "Free
Trade"); and
15. For any other proper corporate purpose, but only upon
receipt of Proper Instructions from the Company,
specifying the investments to be delivered, setting
forth the purpose for which such delivery is to be
made, and naming the person or persons to whom
delivery of such investments shall be made.
D. Registration Of Investments. United States investments
held by the Custodian (other than bearer
----------------------------
investments) shall be registered in the name of the Company or
in the name of any nominee of the Company or of any nominee of
the Custodian which nominee shall be assigned exclusively with
respect to the Account, or in the name or nominee name of any
agent appointed pursuant to Section 2.F or in the name or
nominee name of any sub-custodian appointed pursuant to
Section 1. All investments accepted by the Custodian on behalf
of the Company under the terms of this Agreement shall be in
"street name" or other good delivery form. If, however, the
Company directs the Custodian to maintain Account investments
in "street name," the Custodian shall use reasonable efforts
only to (a) timely collect income due to the Company on such
investments and (b) notify the Company of relevant corporate
actions including, without limitation, pendency of calls,
maturities, tender or exchange offers.
F. Collection Of Income. Subject to the provisions of Section
2.C., the Custodian shall collect on a
------------------------------
timely basis all income and other payments with respect to
United States investments held hereunder to which the Company
shall be entitled either by law or pursuant to custom in the
investments business, and shall collect on a timely basis all
income and other payments with respect to United States bearer
investments of the Account if, on the date of payment by the
issuer, such investments are held by the Custodian or its
agent, and shall credit such income as collected to the
Account. Income due on United States investments of the
Account loaned pursuant to the provisions of Section 2.B.10.
shall be the responsibility of the Company; the Custodian will
have no duty or responsibility in connection therewith other
than to provide the Company with such information or data in
its possession as may be necessary to assist the Company in
arranging for the timely delivery to the Custodian of the
income to which the Company is properly entitled.
F. Payment Of Account Monies. Upon receipt of Proper Instructions
from the Company, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall, from
Account monies, pay out such monies in the following cases
only:
1. Upon the purchase of United States investments, including options,
futures contracts or options on futures contracts, for the Account, but only (i)
against the delivery of such investments, including evidence of title to such
options, futures contracts or options on futures contracts, to the Custodian (or
any bank, banking firm or trust company doing business in the United States or
abroad as a custodian which has been designated by the Custodian as its agent
for this purpose) registered in the name of the Company or in the name of a
nominee of the Company or of the Custodian referred to in Section 2.C. hereof or
in proper form for transfer; (ii) in the case of a purchase effected through a
U.S. Securities System, in accordance with the conditions set forth in Section
2.G. hereof; (iii) in the case of a purchase involving the Direct Paper System,
in accordance with the conditions set forth in Section 2.H.; (iv) in the case of
repurchase agreements entered into between the Company and the Custodian, or
another bank, or a broker-dealer which is a member of NASD, (A) against delivery
of the investments either in certificated form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such investments or (B)
against delivery of the receipt evidencing purchase on behalf of the Company of
investments owned by the Custodian along with written evidence of the agreement
by the Custodian to repurchase such investments from the Company; or (v) for
transfer to a time deposit account of the Company in any bank, whether in the
United States or outside the United States, or any savings and loan; such
transfer may be effected prior to receipt of a confirmation from a broker and/or
the applicable bank or savings and loan pursuant to Proper Instructions from the
Company as defined in Section 6;
2. In connection with conversion, exchange or surrender
of Account investments as set forth in Section 2.B.
hereof;
3. For payment of the amount of dividends received in
respect of Account investments sold short;
4. Upon the purchase of United States investments and
prior to receipt of such investments, but only as set
forth in written Proper Instructions (such payment in
advance of delivery, along with delivery in advance
of payment made in accordance with Section 2.B.14.,
as applicable, shall be referred to herein as a "Free
Trade");
5. For the payment of any expense or liability incurred
by the Company with respect to the Account, including
but not limited to the following payments: interest,
taxes, management, accounting, transfer agent and
legal fees, and operating expenses thereof whether or
not such expenses are to be in whole or part
capitalized or treated as deferred expenses; and
6. For any other proper purpose, but only upon receipt
of Proper Instructions from the Company, specifying
the amount of such payment, setting forth the purpose
for which such payment is to be made, and naming the
person or persons to whom such payment is to be made.
G. Appointment Of Agents. Upon prior written notice to the
Company, the Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank
or trust company to act as its agent to carry out such of the
provisions of this Section 2 as the Custodian may from time to
time direct.
H. Deposit Of Investments In U.S. Securities Systems. The
Custodian may deposit and/or maintain United States
investments of the Account in a U.S. Securities System in
accordance with applicable Federal Reserve Board and
Securities and Exchange Commission rules and regulations, if
any, and only to the extent applicable and subject to the
following provisions:
1. The Custodian may keep United States investments of the Account in a
U.S. Securities System provided that such investments are represented in an
account of the Custodian in the U.S. Securities System ("U.S. Securities System
Account") which shall not include any assets of the Custodian other than assets
held as a fiduciary, custodian or otherwise for customers;
2. The records of the Custodian with respect to United
States investments of the Company which are
maintained in a U.S. Securities System Account shall
identify by book-entry those investments of the
Account;
3. The Custodian shall pay for United States
investments purchased for the Account upon (i)
receipt of advice from the U.S. Securities
System that such investments have been
transferred to the U.S. Securities System Account,
and (ii) the making of an entry on the records of the
Custodian to reflect such payment and transfer
for the benefit of the Account. The Custodian shall
transfer United States investments sold for the
Account upon (i) receipt of advice from the U.S.
Securities System that payment for such investments
has been transferred to the U.S. Securities
System Account, and (ii) the making of an
entry on the records of the Custodian to reflect
such transfer and payment for the benefit of the
Account. Copies of all advices from the U.S.
Securities System of transfers of United States
Account investments shall identify the Company,
be maintained for the Company by the Custodian
and be provided to the Company at its request. The
Custodian shall furnish the Company confirmation of
each transfer to or from the Account in the form of
a written advice or notice and shall furnish to the
Company copies of daily transaction sheets
reflecting each day's transactions in the U.S.
Securities System with respect to the Account; and
4. The Custodian shall provide the Company with any
report obtained by the Custodian on the U.S.
Securities System's accounting system, internal
accounting control and procedures for safeguarding
United States investments deposited in the U.S.
Securities System.
I. Account Assets Held In The Custodian's Direct Paper System.
The Custodian may deposit and/or maintain Account investments
in the Direct Paper System of the Custodian subject to the
following provisions:
1. No transaction relating to investments in the Direct Paper
System will be effected in the absence of Proper Instructions
from the Company;
2. The Custodian may keep Account investments in the
Direct Paper System only if such investments are
represented in an account of the Custodian in the
Direct Paper System which account shall not include
any assets of the Custodian other than assets held as
a fiduciary, custodian or otherwise for customers;
3. The records of the Custodian with respect to Account
investments which are maintained in the Direct Paper
System shall identify by book-entry such Account
investments; and
4. The Custodian shall pay for investments purchased for
the Account upon the making of an entry on the
records of the Custodian to reflect such payment and
transfer of investments to the Account. The Custodian
shall transfer investments sold for the Account upon
the making of an entry on the records of the
Custodian to reflect such transfer and receipt of
payment for the Account.
J. Segregated Account. The Custodian shall establish and
maintain a segregated account or accounts
-------------------
for and on behalf of the Account, into which account or
accounts shall be transferred cash and/or investments,
including investments maintained in an account by the
Custodian pursuant to Section 2.H. hereof (a) in accordance
with the provisions of any agreement among the Company and a
broker-dealer which is a member of the NASD (or any Futures
Commission Merchant registered under the Commodity Exchange
Act), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities
exchange (or the Commodity Futures Commission or any
registered contract market), or of any similar organization or
organizations, regarding escrow or other arrangements in
connection with transactions by the Company, (b) for purposes
of segregating cash or government investments in connection
with options purchased, sold or written by the Company or
commodity futures contracts or options thereon purchased or
sold by the Company or short-sales, and (c) for other proper
purposes set forth in written Proper Instructions.
K. Proxies. The Custodian shall, with respect to the United
States investments held by it hereunder, cause to be executed
by the registered holder of such investments, if the
investments are registered otherwise than in the name of the
Company or a nominee of the Company, all proxies received by
the Custodian without indication of the manner in which such
proxies are to be voted, and shall deliver to the Company such
proxies, all proxy soliciting materials received by the
Custodian and all notices received relating to such
investments.
L. Communications Relating To Account Investments. Subject to
the provisions of Section 2.C., the
------------------------------------------------
Custodian shall transmit to the Company all written
information (including, without limitation, pendency of calls
and maturities of United States investments and expirations of
rights in connection therewith and notices of exercise of call
and put options written by the Company and the maturity of
futures contracts purchased or sold by the Company) received
by the Custodian from issuers of the United States investments
being held for the Account. With respect to tender or exchange
offers, the Custodian shall transmit to the Company all
written information received by the Custodian from issuers of
the United States investments whose tender or exchange is
sought and from the party (or his agents) making the tender or
exchange offer. If the Company desires to take action with
respect to any tender offer, exchange offer or any other
similar transaction, the Company shall notify the Custodian at
least three United States business days prior to the date on
which the Custodian is required to take such action; provided,
however, that the Custodian will use reasonable efforts to
take such action as the Company may request.
3. DUTIES OF THE CUSTODIAN WITH RESPECT TO CERTAIN PROPERTY OF THE ACCOUNT HELD
OUTSIDE OF THE UNITED STATES.
A. Assets To Be Held. The Custodian shall identify on its books
as belonging to the Company, the non-United States investments
of the Account held by each non-United States banking
institution serving as a sub-custodian hereunder.
B. Non-United States Securities Systems. Except as may
otherwise be agreed upon in writing by the
---------------------------------------
Custodian and the Company, non-United States assets of the
Account held pursuant to this Agreement shall be maintained in
a clearing agency which acts as a securities depository or in
a book-entry system for the central handling of securities
located outside of the United States (each a "Non-U.S.
Securities System") only through arrangements implemented by
the non-United States banking institutions serving as
sub-custodians pursuant to the terms hereof (Non-U.S.
Securities Systems and U.S. Securities Systems are
collectively referred to herein as the "Securities Systems").
C. Reports By Custodian. The Custodian will supply to the
Company from time to time, as mutually
---------------------
agreed upon, statements in respect of the investments and
other assets of the Account held by non-United States banking
institutions serving as sub-custodians, including but not
limited to an identification of entities having possession of
the investments and other assets of the Account and advices or
notifications of any transfers of investments to or from each
custodial account maintained by a non-United States banking
institution for the Custodian on behalf of the Account
indicating, as to securities acquired for the Account, the
identity of the entity having physical possession of such
investments.
D. Transactions In Non-United States Custody Account. Except as
otherwise provided in paragraph (1) of this Section 3.D., the
provision of Sections 2.B. and 2.E. of this Agreement shall
apply with any necessary changes to the non-United States
investments of the Account held outside the United States by
non-United States sub-custodians pursuant to this Agreement.
1. Notwithstanding any provision of this Agreement to the contrary,
settlement and payment for investments received for the Account and delivery of
investments maintained for the Account may be effected in accordance with the
customary established securities trading or securities processing practices and
procedures in the jurisdiction or market in which the transaction occurs,
including, without limitation, delivering investments to the purchaser thereof
or to a dealer therefor (or an agent for such purchaser or dealer) against a
receipt with the expectation of receiving later payment for such investments
from such purchaser or dealer.
2. Investments maintained in the custody of a non-United
States sub-custodian may be maintained in the name of
such entity's nominee to the same extent as set forth
in Section 2.C. of this Agreement, and the Company
agrees to hold any such nominee harmless from any
liability as a holder of record of such investments.
F. Liability Of Non-United States Sub-Custodians. Each agreement
pursuant to which the Custodian employs a non-United States
banking institution as a non-United States sub-custodian shall
require the institution to exercise reasonable care in the
performance of its duties. At the election of the Company, it
shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a non-United
States banking institution as a consequence of any such loss,
damage, cost, expense, liability or claim if and to the extent
that the Company has not been made whole for any such loss,
damage, cost, expense, liability or claim.
4. BANK ACCOUNTS.
The Custodian shall open and maintain a separate bank account or accounts
in the United States in the name of the Company, subject only to draft or order
by the Custodian acting pursuant to the terms of this Agreement, and shall hold
in such account or accounts, subject to the provisions hereof, all cash received
by it from or for the Account. Funds held by the Custodian for the Account may
be deposited by the Custodian to its credit as custodian in the banking
department of State Street Bank and Trust Company or in such other banks or
trust companies as it may in its discretion deem necessary or desirable. Such
funds shall be deposited by the Custodian in its capacity as custodian and shall
be withdrawable by the Custodian only in that capacity.
5. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY.
A. The Custodian may in its discretion, without express authority
from the Company:
1. Make payments to others for minor transactional
expenses of handling investments or other similar
items relating to its duties under this Agreement,
provided that all such payments shall be accounted
for to the Company;
2. Surrender investments in temporary form for
investments in definitive form;
3. Endorse for collection, in the name of the Company,
checks, drafts and other negotiable instruments; and
4. In general, attend to all non-discretionary details
in connection with the sale, exchange, substitution,
purchase, transfer and other dealings with the
investments and property of the Account except as
otherwise directed by the Company.
7. PROPER INSTRUCTIONS.
Proper Instructions as used herein means a writing signed or initialed on
behalf of the Company by one or more person or persons as the Company shall have
from time to time authorized, including Americo and Ohio Casualty under the
circumstances described in Section 2.B. of this Agreement. Each such writing
shall set forth the specific transaction or type of transaction involved. Oral
instructions will be considered Proper Instructions if the Custodian reasonably
believes them to have been given by a person authorized to give such
instructions with respect to the transaction involved. The Company shall cause
all oral instructions to be confirmed in writing. Upon receipt of a certificate
of the Company accompanied by a detailed description of procedures approved by
the Company and the Custodian, Proper Instructions may include communications
effected directly between electro-mechanical or electronic devices. For purposes
of this Section, Proper Instructions shall include instructions received by the
Custodian pursuant to any tri-party agreement which requires a segregated asset
account in accordance with Section 2.I. The Custodian shall have no obligation
to determine if any Proper Instructions received by it from the Company, or any
action taken by it in accordance therewith, comply with the investment policies,
restrictions or guidelines or statutory or regulatory requirements applicable
with respect to the Account.
7. EVIDENCE OF AUTHORITY.
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper reasonably believed
by it to be genuine and to have been properly executed by or on behalf of the
Company. The Custodian may receive and accept a copy of an instruction of the
Company as conclusive evidence (a) of the authority of any person to act in
accordance with such instruction and (b) of any determination or of any action
by said party, in each case as described in such instruction and such
instruction may be considered as in full force and effect until receipt by the
Custodian of written notice to the contrary.
8. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND CALCULATION OF
VALUE.
The Custodian shall cooperate with and supply necessary information from
its records to the entity or entities appointed by the Company to perform
investment accounting and recordkeeping functions for the assets in the Account
and/or value the assets in the Account.
9. RESPONSIBILITY OF CUSTODIAN.
The Custodian will hold the Company harmless from any loss of securities of the
Company held by the Custodian under this Agreement occasioned in undertaking the
performance of its obligations under this Agreement by (a) the negligence or
dishonesty of the Custodian or the Custodian's officers or employees or (b)
damage, destruction, burglary, robbery, holdup, theft or mysterious
disappearance of any such securities when the Custodian has physical possession
of such securities. In the event there is a loss of the securities for which the
Custodian is obligated to hold the Company harmless as provided in the
immediately preceding sentence, the Custodian shall promptly replace, at its
option, either the security or the value thereof measured as of the date of such
loss and the value of any loss of rights or privileges resulting from said loss
of the security. If the Custodian replaces or reimburses for the loss of
securities, and is later exonerated from liability, the Company shall reimburse
the Custodian for the cost of such replacement or reimbursement.
The Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Agreement and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties, including any
futures commission merchant acting pursuant to the terms of a three-party
futures or options agreement. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Agreement. It shall be
kept indemnified by and shall be without liability to the Company for any action
taken or omitted by it in good faith without negligence. The Company hereby
agrees to indemnify and hold harmless the Custodian from and against any and all
costs, expenses, losses, damages, charges, counsel fees, payments and
liabilities which may be asserted against the Custodian arising out of any
failure of the Company to comply with the laws of the United States or any state
or other regulatory body thereof. The Custodian shall be entitled to rely on and
may act upon advice of counsel (who may be counsel for the Company) on all
matters, and shall be without liability for any action reasonably taken or
omitted pursuant to such advice. The Custodian shall be entitled to rely upon,
and shall have no duty of inquiry with respect to, the accuracy of any
representation or warranty given to it by the Company and shall be without
liability for any action reasonably taken or omitted by it in reliance thereon.
Regardless of whether assets held pursuant to this Agreement are maintained in
the custody of a non-United States banking institution, a non-United States
securities depository, or a branch or affiliate of a United States bank, the
Custodian shall not be liable for any loss, damage, cost, expense, liability or
claim resulting from, or caused by, the direction of or authorization by the
Company to maintain custody of any securities or cash or other property of the
Account outside the United States of America, including, but not limited to,
losses resulting from the nationalization or expropriation of assets, the
imposition of currency controls or restrictions, acts of war or terrorism or
civil unrest, riots, revolutions, work stoppages, natural disasters or other
similar events or acts.
The Custodian shall be without liability to the Company for any loss,
liability, claim or expense resulting from or caused by (a) events or
circumstances beyond the reasonable control of the Custodian or any
sub-custodian or Securities System or any agent or nominee of any of the
foregoing, including, without limitation, the interruption, suspension or
restriction of trading on or the closure of any securities markets, power or
other mechanical or technological failures or interruptions, or computer viruses
or communications disruptions; (b) errors by the Company in its instructions to
the Custodian provided such instructions have been given in accordance with this
Agreement; (c) the insolvency of or acts or omissions by a Securities System;
(d) any delay or failure of any broker, agent or intermediary, central bank or
other commercially prevalent payment or clearing system to deliver to the
Custodian's sub-custodian or agent securities purchased or in the remittance of
payment made in connection with securities sold; (e) any delay or failure of any
company, corporation, or other body in charge of registering or transferring
securities in the name of the Custodian, the Company, the Custodian's
sub-custodians, nominees or agents or any consequential losses arising out of
such delay or failure to transfer such securities including non-receipt of
bonus, dividends and rights and other accretions or benefits; (f) delays or
inability to perform its duties due to any disorder in market infrastructure
with respect to any particular security or Securities System; and (g) changes to
any provision of any present or future law or regulation or order of the United
States of America, or any state thereof, or any other country, or political
subdivision thereof or of any court of competent jurisdiction.
The Custodian shall be liable for the acts or omissions of a non-United
States banking institution employed as sub-custodian hereunder to the same
extent as set forth with respect to sub-custodians generally in this Agreement.
If the Company requires the Custodian to take any action with respect to
investments, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned
with respect to the Account being liable for the payment of money or incurring
liability of some other form, the Company, as a prerequisite to requiring the
Custodian to take such action, shall provide indemnity to the Custodian in an
amount and form satisfactory to it.
The Custodian (including its affiliates, subsidiaries and agents) will
not advance cash or investments to, for or on behalf of the Account.
However, if the Custodian, or its affiliates, subsidiaries,
sub-custodians or agents, does advance cash or investments for any
purpose (including but not limited to securities settlements, foreign
exchange contracts and assumed settlement) for the benefit of the
Account, or in the event that the Custodian, its sub-custodians or
their respective nominee shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the
performance of this Agreement, except such as may arise from its or its
sub-custodians' or their respective nominee's own negligent action,
negligent failure to act or willful misconduct, any property at any
time held pursuant to this Agreement shall be security therefor and
should the Company fail to repay the Custodian promptly, the Custodian
shall be entitled to utilize available cash and to dispose of Account
assets to the extent necessary to obtain reimbursement.
The Company agrees to indemnify and hold the Custodian harmless from
and against any and all costs, expenses, losses, damages, charges,
counsel fees, payments and liabilities which may be asserted against
the Custodian (a) acting in accordance with any Proper Instruction with
respect to Free Trades or (b) for the acts or omissions of any Local
Agent or Pledgee.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
10. TAX LAW.
A. Tax Law Of The United States Of America. The Custodian
shall have no responsibility or liability
---------------------------------------
for any obligations now or hereafter imposed on the Company
with respect to the Account or the Custodian as custodian of
Account assets by the tax law of the United States of America
or any state or political subdivision thereof. The Custodian
shall be kept indemnified by and shall be without liability to
the Company for any such obligations including taxes,
withholding and reporting requirements, claims for exemption
or refund, additions for late payment, interest, penalties and
other expense (including legal expenses) that may be assessed
against the Company or the Custodian as custodian of the
Account.
B. Tax Law Of Other Jurisdictions. It shall be the
responsibility of the Company to notify the
--------------------------------
Custodian of the obligations imposed on the Company with
respect to the Account by the tax law of jurisdictions other
than those mentioned in Section 10.A. The Custodian shall use
reasonable efforts to assist the Company with respect to any
claim for exemption or refund under the tax law of
jurisdictions for which the Company has provided such
information. Nevertheless, the Custodian shall be kept
indemnified by and shall be without liability to the Company
for any such obligations of which it has not been notified in
writing by the Company, or for which it has received
directions to not withhold United States taxes, including
taxes, withholding and reporting requirements, claims for
exemptions or refund, additions for late payment, interest,
penalties and other expenses (including legal expenses) that
may be assessed against the Company or the Custodian as
custodian of the Company.
11. COMPUTERIZED REPORTING SERVICES.
A. Protection Of Equipment, Confidential Or Proprietary Programs
And Information. The Company agrees to use the equipment,
computer programs and other information supplied by the
Custodian under this Agreement solely for its own internal use
and benefit and not for resale or other transfer or
disposition to, or use by or for the benefit of, any other
person or organization without the prior written approval of
the Custodian.
The Company acknowledges that the data bases, computer
programs, screen formats, screen designs, report formats,
interactive design techniques, and other information furnished
to the Company by the Custodian constitute copyrighted trade
secrets or proprietary information of substantial value to the
Custodian. Such data bases, programs and other information are
collectively referred to below as "Proprietary Information."
The Company agrees that it shall treat all Proprietary
Information as proprietary to the Custodian and that it shall
not divulge any Proprietary Information to any person or
organization except as expressly permitted hereunder. Without
limiting the foregoing, the Company agrees for itself and its
employees and agents:
1. to use such Proprietary Information (i) solely on the
Custodian's computers, (ii) solely from equipment at
Company locations agreed to between the Company and
the Custodian and (iii) solely in accordance with the
Custodian's applicable user documentation;
2. to use equipment supplied by the Custodian solely
with programs supplied by the Custodian
and no other programs or software;
3. to refrain from copying or duplicating in any
way (other than in the normal course of
performing processing on Custodian's computers) any
part of any Proprietary Information;
4. to refrain from obtaining unauthorized access to any
programs, data or other information not owned by the
Company, and if such access is accidentally obtained,
to respect and safeguard the same as Proprietary
Information;
5. to refrain from causing or allowing information
transmitted from the Custodian's computer
to the Company's terminals to be retransmitted
to another computer, terminal or other device;
6. that the Company shall have access to only those
authorized transactions as agreed to
between the Company and the Custodian; and
7. to honor reasonable written requests made by the
Custodian to protect at the Custodian's expense the
rights of the Custodian in Proprietary Information at
common law, under the applicable law of the United
States of America.
B. Company Acknowledgment. The Company hereby acknowledges that
the data and information it will be accessing from the
Custodian is unaudited and may not be accurate due to
inaccurate pricing of securities, delays of a day or more in
updating the Account and other causes for which Custodian will
not be liable to the Company.
12. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT.
This Agreement shall become effective as of its execution. Unless sooner
terminated by mutual consent of the Company and Great Southern (in which case
the stipulation of termination shall specify whether the Company or Great
Southern is to receive the assets), this Agreement shall remain in force until
the Company shall have no liability under the UL Treaty and Annuity Treaty
(either to Fremont Life Insurance Company or to Great Southern as assignee of
Fremont Life pursuant to subparagraph 2 of Article XVIII of the UL Treaty and
the Annuity Treaty). Upon termination of this Agreement, Custodian shall
transfer to Great Southern all of the assets held by Custodian with respect to
this Agreement. Upon termination of the Agreement, the Company shall pay to the
Custodian such compensation as may be due as of the date of such termination and
shall likewise reimburse the Custodian for its costs, expenses and
disbursements.
13. SUCCESSOR CUSTODIAN.
If a successor custodian for the Account shall be appointed by the Company,
the Custodian shall, upon termination, deliver to such successor custodian at
the office of the Custodian, duly endorsed and in the form for transfer, all
investments of the Account then held by it hereunder and shall transfer to an
account of the successor custodian all of the investments of the Account held in
a Securities System. If no such successor custodian shall be appointed, the
Custodian shall, in like manner, upon receipt of a certified copy of an
instruction of the Company, deliver at the office of the Custodian such
investments, funds and other properties in accordance with such instruction.
In the event that no written order designating a successor custodian or
certified copy of an instruction of the Company shall have been delivered to the
Custodian on or before the date when such termination shall become effective,
then the Custodian shall have the right to deliver to a bank or trust company,
which is a bank doing business in the United States (including any state) of its
own selection and having an aggregate capital, surplus, and undivided profits,
as shown by its last published report, of not less than $10,000,000 all
investments, funds and other properties held by the Custodian on behalf of the
Account and all instruments held by the Custodian relative thereto and all other
property held by it under this Agreement and to transfer to an account of such
successor custodian all of the investments of the Account held in any Securities
System. Thereafter, such bank or trust company shall be the successor of the
Custodian under this Agreement.
In the event that investments, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Company to procure the certified copy of the instruction referred
to or of the Company to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such investments, funds and other properties and
the provisions of this Agreement relating to the duties and obligations of the
Custodian shall remain in full force and effect.
14. REPRESENTATIONS.
The Company represents and warrants that (a) it is duly incorporated or
organized, is validly existing in good standing in its jurisdiction of
incorporation or organization and is qualified to conduct its business in every
jurisdiction where its business is conducted, (b) the execution, delivery and
performance of this Agreement, all documents and instruments to be delivered
hereunder or thereunder and all transactions contemplated hereunder or
thereunder have been duly authorized by all necessary action, (c) the person
executing this Agreement on its behalf has been duly authorized to act on its
behalf, (d) this Agreement constitutes its legal, valid, binding and enforceable
agreement, (e) it has obtained all authorizations of any governmental body
required in connection with this and all transactions contemplated hereunder and
such authorizations are in full force and effect and (f) the execution, delivery
and performance of this Agreement and the transactions hereunder will not
violate any agreement, law, ordinance, charter, by-law, rule or regulation
applicable to it or by which it is bound or by which any of its assets are
affected. Further, the Company hereby acknowledges and agrees that it shall
notify the Custodian of any statute, regulation, rule, or other regulatory
requirement or policy governing the Company's assets, and any change thereto,
which may affect the Custodian's responsibilities under this Agreement.
15. GENERAL.
A. Compensation Of Custodian. The Custodian shall be entitled
to reasonable compensation for its services and expenses
as Custodian, as agreed upon from time to time between the
Company and the Custodian.
B. Massachusetts Law to Apply. This Agreement shall be
construed and the provisions thereof interpreted under
and in accordance with laws of The Commonwealth of
Massachusetts.
C. Records. The Custodian shall create and maintain such records
relating to its activities and obligations under this
Agreement in such manner as shall be agreed between the
Custodian and the Company. All such records shall be the
property of the Company and shall at all times during the
regular business hours of the Custodian be open for inspection
by duly authorized officers, employees or agents of the
Company.
D. Reports on Systems of Custodian's Independent Accountant. The
custodian shall annually provide the Company, at the sole cost
and expense of the Company, reports by the Custodian's
independent public accountants on the accounting system,
internal accounting control and procedures for safeguarding
investments relating to the services provided by the Custodian
under this Agreement.
E. Assignment. Except as otherwise set forth herein, this
Agreement may not be assigned by either
party without the written consent of the other.
F. Prior Agreements. This Agreement supersedes and
terminates, as of the date hereof, all prior
contracts between the Company and the Custodian relating to
the custody of Account assets.
G. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an
original, and all such counterparts taken together shall
constitute but one and the same Agreement.
I. Notices. Any notice, instruction or other instrument required
to be given hereunder may be delivered in person to the
offices of the parties as set forth herein during normal
business hours or delivered prepaid registered mail or by
private delivery service or telecopy to the parties at the
following addresses or such other addresses as may be notified
by any party from time to time.
1. To the Company: Employers Reassurance Corporation
5200 Metcalf Avenue
Overland Park, Kansas 66202
Attention: Tom Powers
Telephone: (913) 676-5200
Telecopy: (913) 676-6208
2. To the Custodian: State Street Bank
801 Pennsylvania
Kansas City, MO 64105
Attention: Insurance Custody
Telephone: (816) 871-9232
Telecopy: (816) 871-9210
3. To Great Southern: Great Southern Life
Insurance Company
c/o Americo
1055 Broadway
Kansas City, Missouri 64105
Attention: Dennis Walsh
Telephone: (816) 391-2120
Telecopy: (816) 391-2083
Such notice, instruction or other instrument shall be deemed
to have been served upon actual receipt.
I. Shareholder Communications. Securities and Exchange
Commission Rule 14b-2 requires banks which
---------------------------
hold securities for the account of customers to respond to
requests by issuers of securities for the names, addresses and
holdings of beneficial owners of securities of that issuer
held by the bank unless the beneficial owner has expressly
objected to disclosure of this information. In order to comply
with the rule, the Custodian needs the Company to indicate
whether it authorizes the Custodian to provide the Company's
name, address, and share position to requesting companies
whose securities are held in the Account. If the Company tells
the Custodian "no", the Custodian will not provide this
information to requesting companies. If the Company tells the
Custodian "yes" or does not check either "yes" or "no" below,
the Custodian is required by the rule to treat the Company as
consenting to disclosure of this information for all
securities owned by the Company or any funds or accounts
established by the Company. For the Company's protection, the
Rule prohibits the requesting company from using the Company's
name and address for any purpose other than corporate
communications. Please indicate below whether the Company
consents or objects by checking one of the alternatives below.
Yes [ ] The Custodian is authorized to
release the Company's name, address,
and share positions.
No [ x ] The Custodian is not
authorized to release the Company's
name, address, and share positions.
J. Reproduction of Documents. This Agreement and all schedules,
exhibits, addenda, attachments and amendments hereto may be
reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process.
The parties hereto each agree that any such reproduction shall
be admissible in evidence as the original itself in any
judicial or administrative proceeding, whether or not the
original is in existence and whether or not such reproduction
was made by a party in the regular course of business, and
that any enlargement, facsimile or further reproduction of
such reproduction shall likewise be admissible in evidence.
K. Year 2000. Custodian will take reasonable steps to ensure that
its products (and those of its third-party suppliers) reflect
the available state of the art technology to offer products
that are Year 2000 ready, including, but not limited to,
century recognition of dates, calculations that correctly
compute same century and multi century formulas and date
values, and interface values that reflect the date issues
arising between now and the next one-hundred years, and if any
changes are required, Custodian will make the changes to its
products at no cost to Company and in a commercially
reasonable time frame and will require third-party suppliers
to do likewise.
Similarly, Company will take reasonable steps to ensure that
its electronic systems reflect the available state of the art
technology and are Year 2000 ready, including, but not limited
to, century recognition of dates, calculations that correctly
compute same century and multi century formulas and date
values, and interface values that reflect the date issues
arising between now and the next one-hundred years, and if any
changes are required, Company will make the changes to its
systems at no cost to Custodian and in a commercially
reasonable time frame.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative as of the
day and year first written above.
<PAGE>
EMPLOYERS REASSURANCE CORPORATION
By:
J Name:
Its: , Duly Authorized
STATE STREET BANK AND TRUST COMPANY
By:
K Name:
L Its: , Duly Authorized
GREAT SOUTHERN LIFE INSURANCE COMPANY
By:
M Name:
Its: , Duly Authorized
<PAGE>
SCHEDULE A
STATE STREET BANK AND TRUST COMPANY
GLOBAL CUSTODY NETWORK
<TABLE>
<S> <C> <C>
Country Subcustodian Depositories
7
Argentina Citibank, N.A. Caja de Valores S.A.
Australia Westpac Banking Corporation Austraclear Limited
Reserve Bank Information and Transfer System
Austria Erste Bank der Oesterreichischen Oesterreichischen Kontrollbank AG
Sparkassen AG (Wertpapiersammelbank Division)
Bahrain British Bank of the Middle East None
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Bangladesh Standard Chartered Bank None
Belgium Generale de Banque Caisse Interprofessionnelle de Depot et
de Virement de Titres S.A.
Banque Nationale de Belgique
Bermuda The Bank of Bermuda Limited None
Bolivia Banco Boliviano Americano S.A. None
Botswana Barclays Bank of Botswana Limited None
Brazil Citibank, N.A. Companhia Brasileira de Liquidacao e Custodia
Bulgaria ING Bank N.V. Central Depository AD
Bulgarian National Bank
Canada State Street Trust Company Canada The Canadian Depository
for Securities Limited
Chile Citibank, N.A. Deposito Central de Valores S.A.
People's Republic The Hongkong and Shanghai Shanghai Securities Central Clearing and
of China Banking Corporation Limited, Registration Corporation
Shanghai and Shenzhen branches
Shenzhen Securities Clearing
Co., Ltd.
Colombia Cititrust Colombia S.A. Deposito Centralizado de Valores
Sociedad Fiduciaria
Costa Rica Banco BCT S.A. Central de Valores S.A.
Croatia Privredna Banka Zagreb d.d. Ministry of Finance
National Bank of Croatia
Cyprus Cypress Popular Bank Ltd. None
Czech Republic Ceskoslovenska Obchodni Stredisko cennych
papiru(degree)
Banka, A.S.
Czech National Bank
Denmark Den Danske Bank Vaerdipapircentralen (the Danish
Securities Center)
Ecuador Citibank, N.A. None
Egypt Egyptian British Bank Misr Company for Clearing, Settlement,
(as delegate of The Hongkong and and Central Depository
Shanghai Banking corporation Limited)
Estonia Hansabank Eesti Vaartpaberite Keskdepositoorium
Finland Merita Bank Limited The Finnish Central Securities
Depository
France Paribas, S.A. Societe Interprofessionnelle
pour la Compensation des
Valeurs Mobilieres (SICOVAM)
Germany Dresdner Bank AG Deutsche Borse Clearing AG
Ghana Barclays Bank of Ghana Limited None
Greece National Bank of Greece S.A. The Bank of Greece, System for
Monitoring Transactions in
Securities Book-Entry Form
The Central Securities Depository
(Apothetirion Titlon)
Hong Kong Standard Chartered Bank The Central Clearing and
Settlement System
Central Money Markets Unit
Hungary Citibank Rt. Kozponti Elszamolohaz es Ertektar
(budapest) Rt. (KELLER)
Iceland Icebank Ltd. None
India Deutsche Bank AG; The National Securities Depository Limited
The Hongkong and Shanghai
Banking Corporation Limited Reserve Bank of India
Indonesia Standard Chartered Bank Bank Indonesia
PT Kusodian Sentral Efek Indonesia
Ireland Bank of Ireland Central Bank of Ireland
Securities Settlement Office
Israel Bank Hapoalim B.M. The Tel Aviv Stock Exchange
Clearing House Ltd. (TASE Clearinghouse)
Bank of Israel
(As part of the TASE Clearinghouse system)
Italy Paribas, S.A. Monte Titoli S.p.A.
Banca d'Italia
Ivory Coast Societe Generale de Banques Depositaire Central Banque de Reglement
en Cote d'Ivoire
Jamaica Scotiabank Jamaica Trust and The Jamaican Central Securities Depository
Merchant Bank, Ltd.
Japan The Fuji Bank, Limited Japan Securities Depository
Sumitomo Bank Ltd. Center (JASDEC)
Bank of Japan Net System
Jordan British Bank of the Middle East None
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Kenya Barclays Bank of Kenya Limited Central Bank of Kenya
Republic of Korea The Hongkong and Shanghai Banking Korea Securities Depository Corporation
Corporation Limited
Latvia A/s Hansabank The Latvian Central Depository
Lebanon British Bank of the Middle East The Custodian and
Clearing Center of (as delegate of The Hongkong and
Financial Instruments for Lebanon and the Shanghai
Banking Corporation Limited) Middle East (MIDCLEAR)
S.A.L.
The Central Bank of Lebanon
Lithuania Vilniaus Bankas AB The Central Securities Depository of Lithuania
Malaysia Standard Chartered Bank The Malaysian Central Depository Sdn.
Malaysia Berhad Bhd.
Bank Negara Malaysia,
Scripless Securities Trading and Safekeepingm
Systems
Mauritius The Hongkong and Shanghai The Central Depository & Settlement
Banking Corporation Limited Co. Ltd.
Mexico Citibank Mexico, S.A. S.D. INDEVAL
(Instituto para el Deposito de Valores)
Morocco Banque Commerciale du Maroc Maroclear
The Netherlands MeesPierson N.V. Nederlands Centraal Instituut voor
Giraal Effectenverkeer B.V. (NECIGEF)
De Nederlandsche Bank N.V.
New Zealand ANZ Banking Group New Zealand Central Securities
(New Zealand) Limited Depository Limited
Norway Christiania Bank og Verdipapirsentralen (the Norwegian
Kreditkasse ASA Registry of Securities)
Oman British Bank of the Middle East Muscat Securities Market
Depository & Securities Registration Company
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Pakistan Deutsche Bank AG Central Depository Company of Pakistan
Limited; State Bank of Pakistan
Palestine British Bank of the Middle East The Palestine Stock Exchange
(as delegate of theHongkong and
Shanghai banking Corporation Limited)
Peru Citibank, N.A. Caja de Valores y Liquidaciones S.A.
CAVALI ICLV S.A.
Philippines Standard Chartered Bank The Philippines Central Depository Inc.
The Registry of Scripless Securities (ROSS) of
the Bureau of the Treasury
Poland Citibank (Poland) S.A.; The National Depository of Securities
(Krajowy Depozyt Papierow Wartos(180)ciowych)
Central Treasury Bills Registrar
Portugal Banco Comercial Portugues Central de Valores Mobiliarios (Central)
Romania ING Bank N.V. National Securities Clearing, Settlement and
Depository Company
Bucharest Stock Exchange Registry Division
National Bank of Romania
Russia Credit Suisse First Boston AO, Moscow None
(as delegate of Credit Suisse First Boston,
Zurich)
Singapore The Development Bank The Central Depository (Pte)
of Singapore Limited Limited
Monetary Authority of Singapore
Slovak Republic Ceskoslovenska Obchodna Stredisko Cennych Papierov
Banka, A.S.
National Bank of Slovakia
Slovenia Bank Austria d.d. Klirinsko Depotna Druzba d.d.
South Africa Standard Bank of South Africa Limited The Central Depository Limited
Spain Banco Santander Central Hispano, S.A. Servicio de Compensacion y
Liquidacion de Valores, S.A.
Banco de Espana,
Central de Anotaciones en Cuenta
Sri Lanka The Hongkong and Shanghai Central Depository System
Banking Corporation Limited (Pvt) Limited
Swaziland Standard Bank Swaziland Limited None
Sweden Skandinaviska Enskilda Banken Vardepapperscentralen, VPC AB
(the Swedish Central Securities Depository)
Switzerland UBS AG SIS - SegaIntersettle
Taiwan - R.O.C. Central Trust of China The Taiwan Securities Central
Depository Co., Ltd.
Thailand Standard Chartered Bank Thailand Securities Depository
Company Limited
Trinidad & Tobago Republic Bank Limited None
Tunisia Banque Internationale Arabe de Tunisie Societe Tunisienne Interprofessionelle de
Compensation et de Depot de Valeurs
Mobilieres
Turkey Citibank, N.A.; Takas ve Saklama Bankasi A.S.
(TAKASBANK)
Central Bank of Turkey
Ukraine ING Bank, Ukraine The National Bank of Ukraine
United Kingdom State Street Bank and Trust Company, The Bank of England,
London Branch The Central Gilts Office;
The Central Moneymarkets Office
Uruguay Citibank, N.A. None
Venezuela Citibank, N.A. Central Bank of Venezuela
Vietnam The Hongkong and Shanghai None
Banking Corporation Limited
Zambia Barclays Bank of Zambia Limited LuSE Central Shares Depository Limited
Bank of Zambia
Zimbabwe Barclays Bank of Zimbabwe Limited None
</TABLE>
Euroclear (The Euroclear System)/State Street London Limited
Cedel, S.A. (Cedel Bank, societe anonyme)/State Street London Limited
INTERSETTLE (for EASDAQ Securities
EXHIBIT4.5.DOC
Exhibit 4.5
No. 005 UNITED FIDELITY LIFE INSURANCE COMPANY
------------------------
$18,000,000 SURPLUS DEBENTURE
Originally dated December 29, 1989,
amended and restated as of December 31, 1993
and December 1, 1999
EXPRESSLY CONDITIONED UPON, SUBJECT TO AND contingent upon the terms,
conditions, limitations, contingencies and provisions as hereinafter set forth
in this Debenture, FOR VALUE RECEIVED, United Fidelity Life Insurance Company, a
corporation organized and existing under the laws of the State of Texas and
successor by merger to FHC Life Insurance Company (hereinafter called "United
Fidelity"), does hereby agree to pay to Americo Life, Inc. ("Americo"), or its
order, from the surplus funds identified below, the sum of $18,000,000, being
the unpaid principal amount of this surplus debenture as of December 1, 1999,
with interest on the unpaid principal balance thereof from December 1, 1999
until paid, both principal and interest payable at Dallas County, Texas, only as
hereinafter provided. This Debenture, both principal and interest, shall, except
as otherwise provided herein, be payable only out of the available surplus of
United Fidelity in excess of $22,000,000, to be determined as herein provided.
Terms not otherwise defined herein are defined in paragraph 7 hereof.
Interest on the principal balance hereof from time to time remaining
unpaid shall accrue at a rate of 9 1/4% per annum, hereinafter referred to as
"the Rate."
Subject to, conditioned upon and as provided in paragraph (2) below,
interest shall be payable quarterly on the first day of each December, March,
June and September, beginning March 1, 2000. Subject to, conditioned upon and as
provided in paragraph (4) below, principal shall be payable on March 31, 2005.
(1) Before December 1, March 1, June 1 and September 1 of each calendar
year, commencing March 1, 2000, the Board of Directors of United Fidelity, or
its Executive Committee acting in the absence of the Board of Directors, shall
calculate the surplus of United Fidelity as of the end of the immediately
preceding calendar quarter in accordance with accounting practices required or
permitted by the Texas Department of Insurance.
(2) Subject to the conditions and provisions in paragraphs (5) and (6)
hereof, and provided the surplus of United Fidelity exceeds $22,000,000 as of
the end of the immediately preceding calendar quarter as determined by the
calculation required in paragraph (1) above, United Fidelity shall have a
liability to Americo for and shall, on the dates specified in paragraph (1)
hereof, pay to Americo, as interest hereon, an amount equal to the lesser of (i)
the interest due on such date under this Surplus Debenture, or (ii) the amount
by which the surplus of United Fidelity exceeds $22,000,000 as of such
calculation date.
<PAGE>
5
EXHIBIT4.5.DOC
(3) Subject to the conditions and provisions in paragraph (6) hereof,
and if, at the time the calculation required in paragraph (1) above is made, the
surplus of United Fidelity does not exceed $22,000,000 by an additional amount
sufficient to pay all of the interest due under this Surplus Debenture, after
making the partial payment as provided in paragraph (2) above, the amount of
remaining due but unpaid interest shall not be a liability of United Fidelity,
but shall bear interest at the Rate and shall be carried forward and paid on the
next quarterly interest payment date as provided herein.
(4) Subject to the conditions and provisions in paragraphs (5) and (6)
hereof, and provided the surplus of United Fidelity exceeds the sum of
$22,000,000 plus an amount equal to all interest due hereon as of the date for
which the calculation required in paragraph (1) above is made, United Fidelity
shall have a liability to Americo for, and shall, on the date specified in
paragraph (1) hereof, pay to Americo principal in an amount equal to the lesser
of (i) the amount specified in the principal schedule in the third paragraph
hereof, or (ii) the amount by which the surplus of United Fidelity, after the
payment of accrued interest hereon, exceeds $22,000,000, all as of such
calculation date. The amount of principal becoming due and payable hereunder
shall be either the amount specified in the third paragraph hereof or such
lesser amount as may be paid hereunder in accordance with the provisions hereof
and paragraph (5) below.
(5) Subject to the conditions and provisions in paragraph (6) hereof,
if, at the time the calculation required in paragraph (1) above is made, the
surplus of United Fidelity does not exceed $22,000,000 by an additional amount
sufficient to pay all interest due hereon, plus the full amount of principal
payable on such date, United Fidelity shall only have a liability for and shall
only make such partial payment of such lesser amount as will not reduce its
surplus below $22,000,000, with such partial payment of such lesser amount being
applied first to interest due hereon, and the remainder thereof, if any, being
applied to principal payment. The unpaid portion of such principal payment shall
not be a liability of United Fidelity, but shall be carried forward until the
next payment date on which such unpaid principal may be paid without reducing
the surplus of United Fidelity below $22,000,000, as provided herein.
<PAGE>
(6) Notwithstanding any of the foregoing provisions to the contrary, if
at the time the calculation required in paragraph (1) above is made, should the
Board of Directors of United Fidelity, or its Executive Committee acting in the
absence of the Board of Directors, determine that the surplus of United Fidelity
exceeds $22,000,000, but that such surplus is not of a sufficient amount in
excess of $22,000,000 so as to permit either an interest or principal payment
hereon, either total or partial, without jeopardizing United Fidelity's status
as a licensed insurer or its right to transact business in Texas or elsewhere,
because of the so-called "risk-based capital" requirements of the Texas
Department of Insurance, or other state insurance regulating authority, or any
similar financial regulatory requirement of United Fidelity, the Board of
Directors of United Fidelity, or its Executive Committee acting in the absence
of the Board of Directors, may, at its sole discretion, defer any such interest
or principal payment, total or partial, in which event neither such interest nor
such principal payment shall become a liability of United Fidelity or be paid to
Americo.
(7) For purposes of this Surplus Debenture, the term "surplus"
shall mean the sum of
(i) "aggregate write-ins for special surplus funds"; (ii)
"special surplus funds"; (iii) "gross paid in and contributed
debentures"; (iv) "gross paid in and contributed surplus"; (v)
"unassigned funds (surplus)"; (vi) "aggregate write-ins for
other than special surplus funds";
(vii) "any amounts required to be carried as
liabilities with respect to outstanding surplus
debentures of United Fidelity; and
(viii) "any similar item or entry having the same effect as
any of items (i)-(vii);
as reflected in the Annual Statement of United Fidelity filed with the Texas
Department of Insurance of the State of Texas as of December 31 of each year, or
the statutory quarterly financial statement form as adopted by the Texas
Department of Insurance, whichever is appropriate to the particular payment
hereunder.
(8) The obligation of United Fidelity to pay this Surplus Debenture
shall be strictly construed, and shall not be or constitute either a legal or
financial statement liability of United Fidelity or a claim against any of its
assets, except as specifically provided for herein, and in no event shall this
Surplus Debenture be considered or treated as a current or fixed liability or
obligation of United Fidelity as defined under the insurance laws and
regulations of the State of Texas, except and only to the limited extent of each
quarterly payment of interest or payment of principal that becomes due and
payable as provided hereunder.
(9) In the event of liquidation or receivership of United Fidelity, the
unpaid principal balance of this Surplus Debenture, plus any unpaid interest
thereon, shall become immediately due and payable to Americo and shall be
superior to and in preference of the rights and claims of stockholders of United
Fidelity; provided, however, that all obligations, rights, and claims hereunder
are expressly subordinated to the claim of any supervisor, conservator, or
receiver of United Fidelity appointed by the Commissioner of Insurance of the
State of Texas, and the claims of all other creditors, other than stockholders
of United Fidelity.
(10) All payments made hereunder shall be credited first to interest
which may be due and unpaid, if any, and the balance of such payment shall be
credited to the principal amount hereof.
<PAGE>
(11) Nothing herein contained shall be construed as prohibiting United
Fidelity from merging or consolidating with another corporation or from selling
or reinsuring any part or all of its business, or from acquiring all or any part
of the assets of any other corporation. In the event United Fidelity shall be
consolidated or merged into another corporation or shall sell substantially all
of its assets to any other corporation, the corporation into which United
Fidelity is consolidated or merged or to which the assets of United Fidelity are
transferred, shall expressly assume the liability of United Fidelity hereunder.
(12) No recourse shall be had for the payment of the principal of, or
the interest of this Surplus Debenture, or for any claims based hereon or
otherwise in respect hereof, against any incorporator, stockholder, officer, or
director, past, present or future, of United Fidelity; such liability, the
acceptance of and as a part of the consideration for the issuance hereof, being
expressly released.
(13) By acceptance and as part of the consideration for the issuance
hereof, the above-named payee and any holder hereof expressly acknowledges that
it has been informed and has knowledge that this Surplus Debenture has not been
registered under the Securities Act of 1933, as amended, or the Securities Act
or Blue Sky laws of any state, and that United Fidelity has issued this Surplus
Debenture pursuant to exemptions from registration available under such acts.
The above-named payee and any holder hereof further expressly acknowledges and
agrees that it has acquired this Surplus Debenture for investment purposes and
not with a view toward a public distribution hereof and that this Surplus
Debenture may not be sold or otherwise transferred in the absence of an
effective registration statement with respect hereto or an exemption from
registration under the Securities Act of 1933, as amended, or any other
applicable securities law.
(14) If this Surplus Debenture is collected through judicial
proceedings, United Fidelity agrees, subject to conditions and restrictions
contained herein, to pay reasonable attorneys' fees to the holder with respect
to legal services performed in such collection.
Dated this ______ day of December, 1999.
United Fidelity Life Insurance Company
By: ________________________________
Gary L. Muller, President
Attest:
- ----------------------------------
Major W. Park Jr., Secretary
<TABLE>
<S> <C>
Arugus Health Systmes, 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
Broadway Realty Company, LLC Missouri 100
Broadway Square Redevelopment Company Texas 100
College Insurance Group Missouri 100
Financial Assurance Life Insurance Company Texas 100
Great Southern Life Insurance Company Texas 100
Great Southern Vida Compania de Seguros, S.A. Argentia 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
NAP Partners, Inc. Texas 100
National Farmers Union Life Insurance Company Texas 100
Pension Consultants and Administration 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-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<EXCHANGE-RATE> 1.0
<DEBT-HELD-FOR-SALE> 925,997
<DEBT-CARRYING-VALUE> 852,908
<DEBT-MARKET-VALUE> 821,335
<EQUITIES> 73,448
<MORTGAGE> 227,601
<REAL-ESTATE> 28,516
<TOTAL-INVEST> 2,361,019
<CASH> 122,788
<RECOVER-REINSURE> 1,140,206
<DEFERRED-ACQUISITION> 212,860
<TOTAL-ASSETS> 4,188,162
<POLICY-LOSSES> 3,422,567
<UNEARNED-PREMIUMS> 60,279
<POLICY-OTHER> 37,821
<POLICY-HOLDER-FUNDS> 119,664
<NOTES-PAYABLE> 111,165
0
0
<COMMON> 10
<OTHER-SE> 225,304
<TOTAL-LIABILITY-AND-EQUITY> 4,188,162
224,896
<INVESTMENT-INCOME> 227,622
<INVESTMENT-GAINS> 4,174
<OTHER-INCOME> 6,147
<BENEFITS> 261,342
<UNDERWRITING-AMORTIZATION> 73,643
<UNDERWRITING-OTHER> 86,161
<INCOME-PRETAX> 16,218
<INCOME-TAX> 4,744
<INCOME-CONTINUING> 11,474
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> 11,474
<EPS-DILUTED> 1,147.40
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
