STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FIXED AND VARIABLE DEFERRED ANNUITY CONTRACTS
WITH FLEXIBLE CONTRIBUTIONS
ISSUED BY
LPLA SEPARATE ACCOUNT ONE
AND
LONDON PACIFIC LIFE & ANNUITY COMPANY
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS DATED MAY 1, 1998, FOR THE INDIVIDUAL
FIXED AND VARIABLE DEFERRED ANNUITY CONTRACTS WITH FLEXIBLE CONTRIBUTIONS WHICH
ARE REFERRED TO HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION FOR A PROSPECTIVE INVESTOR. FOR
A COPY OF THE PROSPECTUS CALL OR WRITE THE COMPANY AT: P.O. BOX 29564, RALEIGH,
NORTH CAROLINA 27626; (800) 852-3152.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED MAY 1, 1998.
TABLE OF CONTENTS
PAGE
Company..................................................................3
Experts..................................................................3
Legal Opinions...................... ...................................3
Distributor........................... ..................................3
Yield Calculation for the Berkeley Money Market Sub-Account........3
Performance Information.................................................4
Annuity Provisions......................................................6
Financial Statements....................................................7
COMPANY
Information regarding London Pacific Life & Annuity Company (the "Company") and
its ownership is contained in the Prospectus.
The Company contributed the initial capital to the Separate Account. As of April
1, 1998, the initial capital contributed by the Company represented
approximately 6.03% of the total assets of the Separate Account. The Company
currently intends to retain these funds in the Separate Account.
EXPERTS
The financial statements of the Company as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997, and the financial
statements of the Separate Account for the year ended December 31, 1997 and the
period from January 31, 1996 (commencement of operations) to December 31, 1996,
included in this Statement of Additional Information have been so included in
reliance on the reports of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
LEGAL OPINIONS
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut has provided advice on
certain matters relating to the federal securities and income tax laws in
connection with the Contracts.
DISTRIBUTOR
London Pacific Financial and Insurance Services acts as the distributor. London
Pacific Financial and Insurance Services is an affiliate of the Company. The
offering is on a continuous basis.
YIELD CALCULATION FOR THE BERKELEY MONEY MARKET SUB-ACCOUNT
The Berkeley Money Market Sub-Account of the Separate Account will calculate its
current yield based upon the seven days ended on the date of calculation. The
Company does not currently advertise any yield information for the Berkeley
Money Market Sub-Account.
The current yield of the Berkeley Money Market Sub-Account is computed daily by
determining the net change (exclusive of capital changes) in the value of a
hypothetical pre-existing Owner account having a balance of one Accumulation
Unit of the Sub-Account at the beginning of the period, subtracting the
Mortality and Expense Risk Charge, the Administrative Charge, the Distribution
Charge and the Contract Maintenance Charge, dividing the difference by the value
of the Owner account at the beginning of the same period to obtain the base
period return and multiplying the result by (365/7).
The Berkeley Money Market Sub-Account computes its effective compound yield by
determining the net changes (exclusive of capital change) in the value of a
hypothetical pre-existing Owner account having a balance of one Accumulation
Unit of the Sub-Account at the beginning of the period, subtracting the
Mortality and Expense Risk Charge, the Administrative Charge, the Distribution
Charge and the Contract Maintenance Charge and dividing the difference by the
value of the Owner account at the beginning of the base period to obtain the
base period return, and then compounding the base period return by adding 1,
raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the
result, according to the following formula: Effective Yield = ((Base Period
Return +1) 365/7)-1. The current and the effective yields reflect the
reinvestment of net income earned daily on the Berkeley Money Market
Sub-Account's assets.
Net investment income for yield quotation purposes will not include either
realized capital gains and losses or unrealized appreciation and depreciation,
whether reinvested or not.
The yields quoted should not be considered a representation of the yield of the
Berkeley Money Market Sub-Account in the future since the yield is not fixed.
Actual yields will depend not only on the type, quality and maturities of the
investments held by the Berkeley Money Market Sub-Account and changes in the
interest rates on such investments, but also on changes in the Berkeley Money
Market Sub-Account's expenses during the period.
Yield information may be useful in reviewing the performance of the Berkeley
Money Market Sub-Account and for providing a basis for comparison with other
investment alternatives. However, the Berkeley Money Market Sub-Account's yield
fluctuates, unlike bank deposits or other investments which typically pay a
fixed yield for a stated period of time.
PERFORMANCE INFORMATION
From time to time, the Company may advertise performance data as described in
the Prospectus. Any such advertisement will also include standardized average
annual total return figures for the time periods indicated in the advertisement.
Such total return figures will reflect the deduction of a 1.25% Mortality and
Expense Risk Charge, a .15% Administrative Charge, a .10% Distribution Charge,
the investment advisory fee and expenses for the underlying Portfolio being
advertised and any applicable Contract Maintenance Charge and Contingent
Deferred Sales Charges.
The hypothetical value of a Contract purchased for the time periods described in
the advertisement will be determined by using the actual Accumulation Unit
values for an initial $1,000 purchase payment, and deducting any applicable
Contract Maintenance Charge to arrive at the ending hypothetical value. The
average annual total return is then determined by computing the fixed interest
rate that a $1,000 purchase payment would have to earn annually, compounded
annually, to grow to the hypothetical value at the end of the time periods
described. The formula used in these calculations is:
n
P (1+T) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the time periods used (or
fractional portion thereof) of a hypothetical $1,000 payment
made at the beginning of the time periods used.
Chart 1 below shows the performance of the Accumulation Units calculated for a
specified period of time assuming an initial contribution of $1,000 allocated to
each Portfolio and a deduction of all charges and deductions under the Contract
and the expenses of the Portfolio. Chart 2 is identical to Chart 1 except that
it does not reflect the deduction of the Contingent Deferred Sales Charge.
<TABLE>
<CAPTION>
CHART 1
<S> <C> <C>
Portfolio 1 Year Since Inception
- ------------ --------- ----------------
Harris Associates 17.27% 20.11%
MFS Total Return 12.56% 11.79%
Berkeley U. S. Quality Bond 1.23% 1.44%
Strong International Stock (19.44)% (8.13)%
Berkeley Money Market (3.33)% (0.22)%
Robertson Stephens Diversified 10.85% 6.71%
Growth
Lexington Corporate Leaders 16.64% 15.78%
Strong Growth 17.38% 20.20%
</TABLE>
<TABLE>
<CAPTION>
CHART 2
<S> <C> <C>
Portfolio 1 Year Since Inception
- ------------ --------- ----------------
Harris Associates 24.47% 23.21%
MFS Total Return 19.56% 15.10%
Berkeley U. S. Quality Bond 8.23% 5.03%
Strong International Stock (12.44)% (4.21)%
Berkeley Money Market 3.67% 3.85%
Robertson Stephens Diversified 17.85% 10.15%
Growth
Lexington Corporate Leaders 23.64% 18.98%
Strong Growth 24.38% 23.30%
</TABLE>
In addition to total return data, the Company may include yield information in
its advertisements. For each Sub-Account (other than the Berkeley Money Market
Sub-Account) for which the Company will advertise yield, it will show a yield
quotation based on a 30 day (or one month) period ended on the date of the most
recent balance sheet of the Separate Account included in the registration
statement, computed by dividing the net investment income per Accumulation Unit
earned during the period by the maximum offering price per Unit on the last day
of the period, according to the following formula:
6
Yield = 2 [( a-b + 1) - 1]
----
cd
<TABLE>
<CAPTION>
<S> <C> <C>
Where:
a = Net investment income earned during the period by the Portfolio
attributable to shares owned by the Sub-Account.
b = Expenses accrued for the period (net of reimbursements).
c = The average daily number of Accumulation Units outstanding
during the period.
d = The maximum offering price per Accumulation Unit on the
last day of the period.
</TABLE>
The Company may also advertise performance data which may be computed on a
different basis which may not include certain charges. If such charges were
deducted, the performance would be lower.
Owners should note that the investment results of each Sub-Account will
fluctuate over time, and any presentation of the Sub-Account's total return or
yield for any period should not be considered as a representation of what an
investment may earn or what an Owner's total return or yield may be in any
future period.
ANNUITY PROVISIONS
Variable Annuity Payments reflect the investment performance of the Separate
Account in accordance with the allocation of the Adjusted Contract Value to the
Sub-Accounts during the Annuity Period. Annuity Payments also depend upon the
Age of the Annuitant and any Joint Annuitant and the assumed interest factor
utilized. The Annuity Table used will depend upon the Annuity Option chosen. The
dollar amount of Variable Annuity Payments for each applicable Sub-Account after
the first Variable Annuity Payment is determined as follows:
1. The dollar amount of the first Variable Annuity Payment is divided by
the value of an Annuity Unit for each applicable Sub-Account as of the Annuity
Date. This sets the number of Annuity Units for each monthly payment for the
applicable Sub-Account. The number of Annuity Units remains fixed during the
Annuity Period.
2. The fixed number of Annuity Units per payment in each Sub-Account is
multiplied by the Annuity Unit Value for that Sub-Account for the last Valuation
Period of the month preceding the month for which the payment is due. This
result is the dollar amount of the payment for each applicable Sub-Account.
The total dollar amount of each Variable Annuity Payment is the sum of all
Sub-Account Variable Annuity Payments reduced by the applicable portion of the
Contract Maintenance Charge.
ANNUITY UNIT
The value of any Annuity Unit for each Sub-Account of the Separate Account was
arbitrarily set initially at $10.
The Sub-Account Annuity Unit Value at the end of any subsequent Valuation Period
is determined as follows:
1. The Net Investment Factor for the current Valuation Period is multiplied
by the value of the Annuity Unit for the Sub-Account for the immediately
preceding Valuation Period. The Net Investment Factor is equal to the
Accumulation Unit Value for the current Valuation Period divided by the
Accumulation Unit Value for the immediately preceding Valuation Period.
2. The result in (1) is then divided by the Assumed Investment Rate Factor
which equals 1.00 plus the Assumed Investment Rate for the number of days since
the preceding Valuation Date. The Assumed Investment Rate is equal to an
effective annual rate of 4%.
The value of an Annuity Unit may increase or decrease from Valuation Period to
Valuation Period.
(See "Annuity Provisions" in the Prospectus.)
FINANCIAL STATEMENTS
The financial statements of the Company included herein should be considered
only as bearing upon the ability of the Company to meet its obligations under
the Contracts.
LPLA SEPARATE ACCOUNT ONE
FINANCIAL STATEMENTS
CONTENTS
Audited Financial Statements
Statement of Assets & Liabilities........................... 1
Statement of Operations..................................... 2
Statement of Changes in Net Assets.......................... 3
Notes to Financial Statements................................ 5
Report of Independent Accountants........................... 9
<TABLE>
<CAPTION>
LPLA SEPARATE ACCOUNT ONE
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
Harris MFS Total Berkeley U.S. Berkeley Strong
Associates Value Return Quality Bond Money Market International Stock
Sub-Account (1) Sub-Account Sub-Account (2) Sub-Account (3) Sub-Account
------------------ --------------- ------------------ ------------------- --------------------
ASSETS
Investments in the LPT
Variable Insurance Series
<S> <C> <C> <C> <C> <C> <C>
Trust, at value (Note 3) $3,522,651 $5,973,164 $1,081,897 $1,373,157 $1,250,078
---------- ---------- ---------- ---------- ----------
Total Assets 3,522,651 5,973,164 1,081,897 1,373,157 1,250,078
--------- --------- --------- --------- ---------
LIABILITIES
Amounts retained by London
Pacific Life & Annuity in
LPLA Separate Account One
(Note 7) 125,000 125,000 125,000 0 113,617
- ------- ------- ------- - -------
TOTAL LIABILITIES 125,000 125,000 125,000 0 113,617
------- ------- ------- - -------
NET ASSETS ATTRIBUTABLE TO
CONTRACT OWNERS $3,397,651 $5,848,164 $956,897 $1,373,157 $1,136,461
========== ========== ======== ========== ==========
UNIT VALUE $15.08 $13.20 $10.99 $10.76 $9.28
====== ====== ====== ====== =====
UNITS OUTSTANDING 225,262 443,010 87,032 127,652 122,491
======= ======= ====== ======= =======
<FN>
(1) Formerly MAS Value Sub-Account
(2) Formerly Salomon U.S. Quality Bond Sub-Account
(3) Formerly Salomon Money Market Sub-Account
(4) Formerly Berkeley Smaller Companies Sub-Account
</FN>
</TABLE>
<TABLE>
<CAPTION>
LPLA SEPARATE ACCOUNT ONE
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
Strong Robertson Stephens Lexington
Growth Diversified Growth Corporate Leaders
Sub-Account Sub-Account (4) Sub-Account
---------------- --------------------- -------------------
ASSETS
Investments in the LPT
Variable Insurance Series
<S> <C> <C> <C> <C>
Trust, at value (Note 3) $2,912,226 $3,043,064 $3,453,305
---------- ---------- ----------
Total Assets 2,912,226 3,043,064 3,453,305
--------- --------- ---------
LIABILITIES
Amounts retained by London
Pacific Life & Annuity in
LPLA Separate Account One
(Note 7) 250,000 148,998 125,000
- ------- ------- -------
TOTAL LIABILITIES 250,000 148,998 125,000
------- ------- -------
NET ASSETS ATTRIBUTABLE TO
CONTRACT OWNERS $2,662,226 $2,894,066 $3,328,305
========== ========== ==========
UNIT VALUE $15.72 $12.21 $14.25
====== ====== ======
UNITS OUTSTANDING 169,389 236,983 233,629
======= ======= =======
<FN>
(1) Formerly MAS Value Sub-Account
(2) Formerly Salomon U.S. Quality Bond Sub-Account
(3) Formerly Salomon Money Market Sub-Account
(4) Formerly Berkeley Smaller Companies Sub-Account
</FN>
</TABLE>
<TABLE>
<CAPTION>
LPLA SEPARATE ACCOUNT ONE
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
Harris MFS Total Berkeley U.S. Berkeley Strong
Associates Value Return Quality Bond Money Market International
Stock
Sub-Account (1) Sub-Account Sub-Account (2) Sub-Account (3) Sub-Account
------------------- -------------- ------------------ ------------------ -----------------
INCOME AND EXPENSES
Income:
Dividends from the LPT Variable
<S> <C> <C> <C> <C> <C>
Insurance Series Trust $335,030 $179,583 $83,991 $57,276 $59,328
Expenses:
Mortality and other expense
Note (4) 22,178 39,996 13,771 15,883 10,947
------ ------ ------ ------ ------
Net investment income 312,852 139,587 70,220 41,393 48,381
------- ------- ------ ------ ------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) on sales
of investments 61,876 52,774 7,612 0 8,762
------ ------ ----- - -----
Net unrealized depreciation
(depreciation) on investments
Beginning of period 40,172 19,948 646 0 2,107
End of period (26,304) 257,270 3,760 0 (203,633)
------- ------- ----- - --------
Net unrealized appreciation
(depreciation) during period (66,476) 237,322 3,114 0 (205,740)
------- ------- ----- - --------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (4,600) 290,096 10,726 0 (196,978)
------ ------- ------ - --------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $308,252 $429,683 $80,946 $41,393 ($148,597)
======== ======== ======= ======= =========
<FN>
(1) Formerly MAS Value Sub-Account
(2) Formerly Salomon U.S. Quality Bond Sub-Account
(3) Formerly Salomon Money Market Sub-Account
(4) Formerly Berkeley Smaller Companies Sub-Account
</FN>
</TABLE>
<TABLE>
<CAPTION>
LPLA SEPARATE ACCOUNT ONE
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
Strong Robertson Stephens Lexington
Growth Diversified Growth Corporate Leaders
Sub-Account Sub-Account (4) Sub-Account
- ---------------- -------------------- ------------------
INCOME AND EXPENSES
Income:
Dividends from the LPT Variable
<S> <C> <C> <C>
Insurance Series Trust $271,023 $15 $215,915
Expenses:
Mortality and other expense
Note (4) 20,965 19,764 17,667
------ ------ ------
Net investment income 250,058 (19,749) 198,248
------- ------- -------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) on sales
of investments 89,791 (130,610) 69,824
------ -------- ------
(depreciation) on investments
Beginning of period (5,660) (142,697) 24,589
End of period (22,600) 344,221 (46,190)
------- ------- -------
Net unrealized appreciation
(depreciation) during period (16,940) 486,918 (70,779)
------- ------- -------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 72,851 356,308 (955)
------ ------- ----
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $322,909 $336,559 $197,293
======== ======== ========
<FN>
(1) Formerly MAS Value Sub-Account
(2) Formerly Salomon U.S. Quality Bond Sub-Account
(3) Formerly Salomon Money Market Sub-Account
(4) Formerly Berkeley Smaller Companies Sub-Account
</FN>
</TABLE>
<TABLE>
<CAPTION>
LPLA SEPARATE ACCOUNT ONE
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
Harris MFS Total Berkeley U.S. Berkeley Strong
Associates Value Return Quality Bond Money Market International
Stock
INCREASE (DECREASE) IN NET ASSETS Sub-Account (1) Sub-Account Sub-Account (2) Sub-Account (3) Sub-Account
------------------- --------------- ---------------- ---------------- -------------------
FROM OPERATIONS
<S> <C> <C> <C> <C> <C>
Net investment income $312,852 $139,587 $70,220 $41,393 $48,381
Net realized gain (loss) on sales
of investments 61,876 52,774 7,612 0 8,762
Net unrealized appreciation
(depreciation) during the year (66,476) 237,322 3,114 0 (205,740)
------- ------- ----- - --------
Net increase (decrease) in net
assets
resulting from operations 308,252 429,683 80,946 41,393 (148,597)
------- ------- ------ ------ --------
CONTRACT RELATED TRANSACTIONS:
Net premiums 448,289 679,593 187,734 14,102,512 239,002
Benefits and contract charges (32,555) (135,077) (37,173) (14,603) (67,415)
Transfers between Sub-Accounts
(including fixed account), net 2,093,609 3,991,383 (65,908) (13,038,636) 661,907
--------- --------- ------- ----------- -------
Net increase in net assets
resulting
from contract related transactions 2,509,343 4,535,899 84,653 1,049,273 833,494
Change in amount retained by
London Pacific Life & Annuity
LPLA Separate Account One, net
(Note 7) (33,183) (24,781) (7,123) (5,183) 19,523
- ------- ------- ------ ------ ------
INCREASE IN NET ASSETS 2,784,412 4,940,801 158,476 1,085,483 704,420
NET ASSETS, BEGINNING OF PERIOD 613,239 907,363 798,421 287,674 432,041
------- ------- ------- ------- -------
NET ASSETS, END OF PERIOD $3,397,651 $5,848,164 $956,897 $1,373,157 $1,136,461
========== ========== ======== ========== ==========
<FN>
(1) Formerly MAS Value Sub-Account
(2) Formerly Salomon U.S. Quality Bond Sub-Account
(3) Formerly Salomon Money Market Sub-Account
(4) Formerly Berkeley Smaller Companies Sub-Account
</FN>
</TABLE>
<TABLE>
<CAPTION>
LPLA SEPARATE ACCOUNT ONE
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
Strong Robertson Stephens Lexington
Growth Diversified Growth Corporate Leaders
INCREASE (DECREASE) IN NET ASSETS Sub-Account Sub-Account (4) Sub-Account
---------------- -------------------- -------------------
FROM OPERATIONS
<S> <C> <C> <C>
Net investment income $250,058 ($19,749) $198,248
Net realized gain (loss) on sales
of investments 89,791 (130,610) 69,824
Net unrealized appreciation
(depreciation) during the year (16,940) 486,918 (70,779)
------- ------- -------
Net increase (decrease) in net
assets
resulting from operations 322,909 336,559 197,293
------- ------- -------
CONTRACT RELATED TRANSACTIONS:
Net premiums 474,217 381,037 460,740
Benefits and contract charges (61,170) (95,133) (95,125)
Transfers between Sub-Accounts
(including fixed account), net 1,398,404 1,745,826 2,450,950
--------- --------- ---------
Net increase in net assets
resulting
from contract related transactions 1,811,451 2,031,730 2,816,565
Change in amount retained by
London Pacific Life & Annuity
LPLA Separate Account One, net
(Note 7) (34,493) (17,746) (30,058)
- ------- ------- -------
INCREASE IN NET ASSETS 2,099,867 2,350,543 2,983,800
NET ASSETS, BEGINNING OF PERIOD 562,359 543,523 344,505
------- ------- -------
NET ASSETS, END OF PERIOD $2,662,226 $2,894,066 $3,328,305
========== ========== ==========
<FN>
(1) Formerly MAS Value Sub-Account
(2) Formerly Salomon U.S. Quality Bond Sub-Account
(3) Formerly Salomon Money Market Sub-Account
(4) Formerly Berkeley Smaller Companies Sub-Account
</FN>
</TABLE>
<TABLE>
<CAPTION>
LPLA SEPARATE ACCOUNT ONE
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD JANUARY 31, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
Harris MFS Total Berkeley U.S. Berkeley Strong
Associates Value Return Quality Bond Money Market International
Stock
INCREASE (DECREASE) IN NET Sub-Account (1) Sub-Account Sub-Account Sub-Account(3) Sub-Account
-------------------- --------------- ---------------- ----------------- ------------------
ASSETS FROM OPERATIONS
<S> <C> <C> <C> <C> <C>
Net investment income $ 17,561 $ 12,863 $ 31,872 $ 13,221 $ 933
Net realized gain on sales
of investments 29 2 102 0 75
Net unrealized appreciation
(depreciation) during the period 40,172 19,948 646 0 2,107
------ ------ --- - -----
Net increase (decrease) in net
assets resulting from operations 57,762 32,813 32,620 13,221 3,115
------ ------ ------ ------ -----
CONTRACT RELATED TRANSACTIONS:
Net premiums 286,034 414,918 95,545 2,841,064 155,627
Benefits and contract charges (357) (3,655) (3,368) 0 (1,948)
Transfers between Sub-Accounts
(including fixed account), net 297,996 477,506 676,623 (2,561,350) 283,386
------- ------- ------- ---------- -------
Net increase in net assets
resulting
from contract related transactions 583,673 888,769 768,800 279,714 437,065
------- ------- ------- ------- -------
INITIAL CONTRIBUTION BY LONDON PACIFIC
LIFE & ANNUITY COMPANY 125,000 125,000 125,000 125,000 125,000
Change in amount retained by London
Pacific Life & Annuity LPLA
Separate Account One (Note 7) (153,196) (139,219) (127,999) (130,261) (133,139)
- -------- -------- -------- -------- --------
INCREASE IN NET ASSETS 613,239 907,363 798,421 287,674 432,041
NET ASSETS, BEGINNING OF PERIOD 0 0 0 0 0
- - - - -
NET ASSETS, END OF PERIOD $613,239 $907,363 $798,421 $287,674 $432,041
======== ======== ======== ======== ========
<FN>
(1) Formerly MAS Value Sub-Account
(2) Formerly Salomon U.S. Quality Bond Sub-Account
(3) Formerly Salomon Money Market Sub-Account
(4) Formerly Berkeley Smaller Companies Sub-Account
</FN>
</TABLE>
<TABLE>
<CAPTION>
LPLA SEPARATE ACCOUNT ONE
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD JANUARY 31, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
Strong Robertson Stephens Lexington
Growth Diversified Growth Corporate Leaders
INCREASE (DECREASE) IN NET Sub-Account Sub-Account (4) Sub-Account
--------------- -------------------- -------------------
ASSETS FROM OPERATIONS
<S> <C> <C> <C>
Net investment income $ 36,980 $111,424 $ 3,592
Net realized gain on sales
of investments 551 85 4
Net unrealized appreciation
(depreciation) during the period (5,660) (142,697) 24,589
------ -------- ------
Net increase (decrease) in net
assets resulting from operations 31,871 (31,188) 28,185
------ ------- ------
CONTRACT RELATED TRANSACTIONS:
Net premiums 227,819 246,768 187,429
Benefits and contract charges (2,879) (1,896) (53)
Transfers between Sub-Accounts
(including fixed account), net 341,131 336,092 148,616
------- ------- -------
Net increase in net assets
resulting
from contract related transactions 566,071 580,964 335,992
------- ------- -------
INITIAL CONTRIBUTION BY LONDON PACIFIC
LIFE & ANNUITY COMPANY 125,000 125,000 125,000
Change in amount retained by London
Pacific Life & Annuity LPLA
Separate Account One (Note 7) (160,583) (131,253) (144,672)
- -------- -------- --------
INCREASE IN NET ASSETS 562,359 543,523 344,505
NET ASSETS, BEGINNING OF PERIOD 0 0 0
- - -
NET ASSETS, END OF PERIOD $562,359 $543,523 $344,505
======== ======== ========
<FN>
(1) Formerly MAS Value Sub-Account
(2) Formerly Salomon U.S. Quality Bond Sub-Account
(3) Formerly Salomon Money Market Sub-Account
(4) Formerly Berkeley Smaller Companies Sub-Account
</FN>
</TABLE>
LPLA SEPARATE ACCOUNT ONE
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
LPLA Separate Account One ("Separate Account") is a separate investment account
of London Pacific Life & Annuity Company ("Company"). The Separate Account was
established on November 23, 1994 under the insurance laws of the State of North
Carolina for the purpose of issuing flexible payment variable annuity contracts.
Under North Carolina's insurance laws, the assets of the Separate Account are
clearly identified and distinguished from the other assets and liabilities of
the Company. The Separate Account cannot be charged with liabilities arising out
of any other business of the Company.
The Separate Account is a unit investment trust registered with the Securities
and Exchange Commission under the Investment Company Act of 1940. Contract
owners may allocate their account values to one or more of the Separate
Account's investment Sub-Accounts. Funds of the investment Sub-Accounts of the
Separate Account are invested exclusively in a corresponding investment
portfolio of the LPT Variable Insurance Series Trust ("Trust") managed by LPIMC
Insurance Marketing Services ("LPIMC"), a registered investment advisor and a
wholly-owned subsidiary of the Company.
Prior to May 1, 1997, the Harris Associates Sub-Account was known as the MAS
Value Sub-Account and the Robertson Stephens Diversified Growth Sub-Account was
known as the Berkeley Smaller Companies Sub-Account. Prior to November 3, 1997,
the Berkeley Money Market Sub-Account was known as the Salomon Money Market
Sub-Account and the Berkeley U.S. Quality Bond Sub-Account was known as the
Salomon U.S. Quality Bond Sub-Account.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles consistently followed
by the Separate Account in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates.
INVESTMENTS - Security transactions are recorded on the trade date. Investments
held by the Sub-Accounts are stated at the net asset value per share of the
respective investment portfolio of the Trust. Realized gains and losses on sales
of shares of the Trust are determined based on the first-in, first-out method.
Dividends and capital gain distributions are recorded on the ex-dividend date
and are reinvested in additional shares of the respective investment portfolio
of the Trust.
FEDERAL INCOME TAXES - Operations of the Separate Account are included in the
income tax return of the Company, which is taxed as a life insurance company
under the Internal Revenue
LPLA SEPARATE ACCOUNT ONE
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION (CONTINUED)
Code. The Separate Account will not be taxed as a registered investment company
under Sub-Chapter M of the Internal Revenue Code. Under existing federal income
tax law, no taxes are payable on the investment income or on the capital gains
of the Separate Account.
NOTE 3 - INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Trust at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Portfolio Information
Investment Number of Aggregate Net Asset
Sub-Account Shares Cost Value Per Share
- --------------------------------------------------- -------------------- --------------------- ---------------------
<S> <C> <C> <C>
Harris Associates Value 261,935 $3,548,955 $13.45
MFS Total Return 466,464 5,715,894 12.81
Berkeley U.S. Quality Bond 109,188 1,078,137 9.91
Berkeley Money Market 1,373,157 1,373,157 1.00
Strong International Stock 140,432 1,453,711 8.90
Strong Growth 216,183 2,934,826 13.47
Robertson Stephens Diversified Growth 297,806 2,698,843 10.22
Lexington Corporate Leaders 257,809 3,499,495 13.40
</TABLE>
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company assesses a charge of 1.25% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The Company also charges each Sub-Account .15% and .10% per annum based
on the average daily net assets of each Sub-Account for administrative and
distribution expenses, respectively. These charges are deducted from the daily
unit value of each Sub-Account but are paid to the Company on a monthly basis. A
contract maintenance charge of $36 is currently deducted on the policy
anniversary date and upon full surrender of the policy when the accumulated
value is $50,000 or less.
London Pacific Financial and Insurance Services ("LPFIS"), a registered
broker/dealer and wholly-owned subsidiary of the Company, is principal
underwriter and general distributor of the Separate Account. LPFIS does not
receive any compensation for sales of the variable annuity contracts.
LPLA SEPARATE ACCOUNT ONE
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - CHANGES IN UNITS OUTSTANDING
Changes in units outstanding for the year ended December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
Units Units Units Net
Investment Sub-Account Purchased Transferred Redeemed Increase
- ------------------------------------------------ -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Harris Associates Value 31,390 145,533 (2,244) 174,679
MFS Total Return 54,569 316,738 (10,576) 360,731
Berkeley U.S. Quality Bond 18,135 (6,287) (3,516) 8,332
Berkeley Money Market 1,326,219 (1,224,959) (1,371) 99,889
Strong International Stock 22,776 65,340 (6,465) 81,651
Strong Growth 31,965 96,900 (4.031) 124,834
Robertson Stephens Diversified Growth 35,235 156,951 (7,719) 184,467
Lexington Corporate Leaders 33,246 177,264 (6,814) 203,696
</TABLE>
NOTE 6 - DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code a variable
annuity contract, other than a contract issued in connection with certain types
of employee benefit plans, will not be treated as an annuity contract for
federal income tax purposes for any period for which the investments of the
segregated asset account on which the contract is based are not adequately
diversified. The Code provides that the "adequately diversified" requirement may
be met if the underlying investments satisfy either a statutory safe harbor test
or diversification requirements set forth in regulations issued by the Secretary
of Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of the
Code. The Company believes that it satisfies the current requirements of the
regulations, and it intends that the Separate Account will continue to meet such
requirements.
NOTE 7 - AMOUNT RETAINED BY THE COMPANY
The amount retained by the Company is attributable to the Company's
contributions to the Separate Account, the underlying investment results and
amounts withdrawn by the Company. The change in this amount arises from that
portion, determined ratably, of the Separate Account's investment results
applicable to the net assets owned by the Company. The funds contributed by the
Company, as well as any investment appreciation or depreciation, are not subject
to charges for mortality and expense risks, administration expenses and
distribution expenses.
Amounts retained by the Company in the Separate Account may be transferred by
the Company to its General Account at any time.
LPLA SEPARATE ACCOUNT ONE
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of the Trust shares by the Separate
Account during the year ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Investment Sub-Account Purchases Sales
---------------------- --------- -----
<S> <C> <C>
Harris Associates Value $ 3,043,226 $ 282,433
MFS Total Return 4,968,263 331,810
Berkeley U.S. Quality Bond 460,506 315,786
Berkeley Money Market 11,118,944 10,163,738
Strong International Stock 1,079,388 197,527
Strong Growth 2,696,933 580,516
Robertson Stephens Diversified Growth 2,472,968 461,006
Lexington Corporate Leaders 3,294,773 329,704
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of London Pacific Life & Annuity
Company and Contract Owners of LPLA Separate Account One
In our opinion, the accompanying statement of assets and liabilities and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
(Harris Associates Value, MFS Total Return, Berkeley U.S. Quality Bond, Berkeley
Money Market, Strong International Stock, Strong Growth, Robertson Stephens
Diversified Growth and Lexington Corporate Leaders) constituting LPLA Separate
Account One at December 31, 1997, the results of each of their operations for
the year then ended and the changes in each of their net assets for the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of London Pacific Life & Annuity
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of investments at December 31, 1997 by correspondence with the
Trust, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
April 6, 1998
LONDON PACIFIC LIFE
& ANNUITY COMPANY
(A wholly-owned subsidiary
of London Pacific Group Limited)
STATUTORY BASIS FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
London Pacific Life & Annuity Company
(A wholly-owned subsidiary of London Pacific Group Limited)
Statutory Basis Financial Statements
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Report of Independent Accountants............................................... 1
AUDITED FINANCIAL STATEMENTS
Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus....... 3
Statutory Statements of 4
Operations......................................................................
Statutory Statements of Changes in Capital and Surplus.......................... 5
Statutory Statements of Cash Flows.............................................. 6-7
Notes to Statutory Financial Statements......................................... 8-20
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
January 30, 1998, except as to Note 17,
which is as of March 12, 1998
To the Board of Directors and Shareholder of
London Pacific Life & Annuity Company
We have audited the accompanying statutory statements of admitted assets,
liabilities, capital and surplus of London Pacific Life & Annuity Company (a
wholly-owned subsidiary of London Pacific Group Limited) as of December 31, 1997
and 1996, and the related statutory statements of operations, of changes in
capital and surplus, and of cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1, these financial statements were prepared in conformity
with accounting practices prescribed or permitted by the North Carolina
Department of Insurance, which practices differ from generally accepted
accounting principles. Accordingly, the financial statements are not intended to
represent a presentation in accordance with generally accepted accounting
principles. The effects on the financial statements of the variances between the
statutory basis of accounting and generally accepted accounting principles,
although not reasonably determinable, are presumed to be material.
To the Board of Directors and Shareholder of
London Pacific Life & Annuity Company
Page 2
January 30, 1998, except as to Note 17,
which is as of March 12, 1998
In our opinion, the financial statements referred to above (1) do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of London Pacific Life & Annuity Company at December 31, 1997
and 1996, or the results of its operations or its cash flows for each of the
three years in the period ended December 31, 1997 because of the effects of the
variances between the statutory basis of accounting and generally accepted
accounting principles referred to in the third paragraph of this report and (2)
do present fairly, in all material respects, its financial position and the
results of its operations and its cash flows on the basis of accounting
described in Note 1.
Price Waterhouse LLP
Boston, Massachusetts
<TABLE>
<CAPTION>
LONDON PACIFIC LIFE & ANNUITY COMPANY
(A wholly-owned subsidiary of London Pacific Group Limited)
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES, CAPITAL AND SURPLUS
- ---------------------------------------------------------------------------
DECEMBER 31,
------------
1997 1996
---- ----
ASSETS
Investments:
<S> <C> <C>
Bonds $ 1,157,095,942 $ 1,142,464,351
Preferred stock 51,262,033 1,687,616
Common stock 8,477,904 20,479,485
Short-term investments 11,694,690 88,249,049
Policy loans 8,487,559 6,294,811
Receivable for securities 21,836,311 53,223,692
---------- ----------
Total investments 1,258,854,439 1,312,399,004
------------- -------------
Cash 3,347,694 26,008,933
--------- ----------
Total cash and invested assets 1,262,202,133 1,338,407,937
Investment income due and accrued 16,790,319 12,363,810
Electronic data processing equipment, net 185,870 358,143
Receivable from affiliates 11,503 138,877
Other assets 696,682 1,037,418
Separate account assets 22,609,542 5,609,610
---------- ---------
Total assets $ 1,302,496,049 $ 1,357,915,795
================ ================
LIABILITIES, CAPITAL AND SURPLUS
Aggregate reserves for life policies and contracts $ 1,132,728,673 $ 1,097,795,798
Policy and contract claims 354,014 382,429
Accrued dividends to policyholders 433,099 422,330
Interest maintenance reserve 17,684,781 11,668,491
Federal income taxes payable 3,283,673 3,998,217
Remittances and items not allocated 419,689 631,586
Asset valuation reserve 24,184,363 29,133,762
Payable to affiliates 720,136 36,512
Amounts due to broker-dealers 20,558,221 131,945,347
Accounts payable, accrued expenses and other liabilities 1,184,201 1,840,168
Transfers to Separate Account, net (1,330,627) (265,469)
Separate account liabilities 21,596,927 4,489,291
---------- ---------
Total liabilities $ 1,221,817,150 $ 1,282,078,462
================ ================
Commitments and contingent liabilities
Capital and surplus:
Capital stock - $10 par value, 1,000,000 shares
authorized; 200,000 shares issued and outstanding 2,000,000 2,000,000
Paid-in and contributed surplus 70,394,120 70,394,120
Unassigned surplus 8,284,779 3,443,213
--------- ---------
Total capital and surplus
80,678,899 75,837,333
---------- ----------
Total liabilities, capital and surplus $ 1,302,496,049 $ 1,357,915,795
================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
LONDON PACIFIC LIFE & ANNUITY COMPANY
(A wholly-owned subsidiary of London Pacific Group Limited)
STATUTORY STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
REVENUES
Insurance premiums and annuity
<S> <C> <C> <C>
considerations $ 176,547,838 $ 137,499,919 $ 203,233,606
Net investment income 88,797,926 91,013,416 88,960,512
Amortization of interest maintenance reserve 2,306,437 683,806 (185,844)
Net gain from operations from separate account 133,043 120,319 --
Other income 552,225 287,470 1,255
------- ------- -----
Total revenues 268,337,469 229,604,930 292,009,529
----------- ----------- -----------
BENEFITS AND EXPENSES
Policyholder benefits and changes in reserve 226,126,436 196,153,897 256,854,252
Commissions 11,156,421 8,531,145 14,237,877
Net transfer to separate account 14,607,074 4,175,745 --
Other operating expenses 11,819,652 12,844,370 10,358,955
---------- ---------- ----------
Total benefits and expenses 263,709,583 221,705,157 281,451,084
----------- ----------- -----------
Gain from operations before dividends to
policyholders, federal income taxes and
net realized capital gains 4,627,886 7,899,773 10,558,445
Dividends to policyholders 930,165 915,864 1,007,373
------- ------- ---------
Gains from operations, before federal income taxes
and net realized capital gains 3,697,721 6,983,909 9,551,072
Federal income tax expense (benefit) (excluding
tax on capital gains) (2,212,021) 991,257 2,597,127
---------- ------- ---------
Gain from operations before net realized capital
gains 5,909,742 5,992,652 6,953,945
Net realized capital gains, less capital gains
tax of $4,852,562, 4,617,743 and
$1,931,162 and excluding $8,322,727, $1,976,127
and $303,286 transferred to the IMR in 1997, 1996
and 1995, respectively. 1,044,541 988,636 3,445,440
--------- ------- ---------
Net income $ 6,954,283 $ 6,981,288 $ 10,399,385
================ ================ ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
LONDON PACIFIC LIFE & ANNUITY COMPANY
(A wholly-owned subsidiary of London Pacific Group Limited)
STATUTORY STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS
PAID-IN AND
CAPITAL CONTRIBUTED UNASSIGNED
STOCK SURPLUS SURPLUS TOTAL
----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1994 $2,000,000 $46,938,570 $(11,616,966) $37,321,604
Net income 10,399,385 10,399,385
Increase in unrealized capital gains 9,403 9,403
Decrease in non-admitted assets 1,575,841 1,575,841
Increase in asset valuation reserve (1,151,285) (1,151,285)
Capital contributions 1,455,550 1,455,550
--------- ---------
Balance as of December 31, 1995 2,000,000 48,394,120 (783,622) 49,610,498
Net income 6,981,288 6,981,288
Increase in unrealized capital losses (4,163,544) (4,163,544)
Increase in non-admitted assets (4,004) (4,004)
Decrease in asset valuation reserve 1,413,095 1,413,095
Capital contributions __________ 22,000,000 ____________ 22,000,000
---------- ----------
Balance as of December 31, 1996 $ 2,000,000 $ 70,394,120 $ 3,443,213 $75,837,333
Net income 6,954,283 6,954,283
Increase in unrealized capital losses (886,116) (886,116)
Increase in non-admitted assets (184,000) (184,000)
Decrease in asset valuation reserve 4,949,399 4,949,399
Dividends to stockholder (5,992,000) (5,992,000)
---------- ----------
Balance as of December 31, 1997 $ 2,000,000 $ 70,394,120 $ 8,284,779 $ 80,678,899
============ ============ ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
LONDON PACIFIC LIFE & ANNUITY COMPANY
(A wholly-owned subsidiary of London Pacific Group Limited)
STATUTORY STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
CASH PROVIDED BY:
Premiums and annuity considerations
<S> <C> <C> <C>
collected $ 176,547,838 $ 137,499,919 $ 203,233,606
Investment income received (excluding
realized gains/losses and net of investment
expenses) 84,805,153 95,583,016 86,134,922
Other income received 552,390 287,305 1,255
------- ------- -----
Total cash provided by operations 261,905,381 233,370,240 289,369,783
----------- ----------- -----------
CASH USED FOR:
Life and accident and health claims paid 1,266,207 832,760 1,213,526
Surrender benefits and other fund
withdrawals paid 136,308,194 110,213,086 81,936,665
Other benefits to policyholders paid 53,647,576 54,325,262 51,869,119
---------- ---------- ----------
191,221,977 165,371,108 135,019,310
----------- ----------- -----------
Commissions and other expenses paid 23,639,673 20,570,531 24,913,719
---------- ---------- ----------
Net transfers to separate account 15,431,650 5,441,049 --
Dividends to policyholders paid 919,396 1,020,952 1,048,627
Federal income taxes (recoverable) paid
(excluding tax on capital gains) (1,497,477) (999,143) (2,654,355)
---------- -------- ----------
Total cash used for operations 229,715,219 191,404,497 158,327,301
----------- ----------- -----------
Net cash provided by operations 32,190,162 41,965,743 131,042,482
---------- ---------- -----------
PROCEEDS FROM INVESTMENTS SOLD, MATURED OR
REPAID:
Bonds 758,322,204 651,187,776 193,271,490
Stocks 23,444,566 105,201,117 11,228,210
Other proceeds 1,403,827 15,922 96,780
--------- ------ ------
783,170,597 756,404,815 204,596,480
Tax on capital gains (4,825,562) (4,617,743) (1,931,162)
---------- ---------- ----------
Total investment proceeds 778,345,035 751,787,072 202,665,318
=========== =========== ===========
</TABLE>
(continued on next page)
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
LONDON PACIFIC LIFE & ANNUITY COMPANY
(A wholly-owned subsidiary of London Pacific Group Limited)
STATUTORY STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
COST OF INVESTMENTS ACQUIRED:
<S> <C> <C> <C>
Bonds 762,123,622 735,812,956 268,824,294
Stocks 59,641,808 112,429,288 6,872,362
Miscellaneous other 709,824 52,218 575,445
------- ------ -------
Total investments acquired 822,475,254 848,294,462 276,272,101
Net increase in policy loans 2,192,748 1,838,835 1,456,664
--------- --------- ---------
Net cash from investments (46,322,967) (98,346,225) (75,063,447)
----------- ----------- -----------
CASH FROM FINANCING AND MISCELLANEOUS
SOURCES:
Capital and surplus paid in - 22,000,000 1,455,550
Other cash provided 32,627,192 116,248,250 20,941,157
Dividends to stockholder paid (5,992,000)
Other cash applied (111,717,985) (40,021,732) (17,753,828)
------------ ----------- -----------
Net cash from financing and
miscellaneous sources (85,082,793) 98,226,518 4,642,879
----------- ---------- ---------
Net change in cash and short-term investments (99,215,598) 41,846,036 60,621,914
----------- ---------- ----------
CASH AND SHORT-TERM INVESTMENTS:
Beginning of year 114,257,982 72,411,946 11,790,032
----------- ---------- ----------
End of year $ 15,042,384 $ 114,257,982 $ 72,411,946
============== ============= ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year
for:
Income taxes $ 3,381,115 $ 3,664,978 $ 2,524,651
</TABLE>
The accompanying notes are an integral part of these financial statements.
LONDON PACIFIC LIFE & ANNUITY COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF LONDON PACIFIC GROUP LIMITED)
NOTES TO STATUTORY FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
London Pacific Life & Annuity Company (the Company) is domiciled in North
Carolina and is a wholly-owned subsidiary of The London Pacific Assurance
Group Limited (the Parent), a holding company domiciled in the state of
California, which is ultimately a wholly-owned subsidiary of London
Pacific Group Limited (formerly Govett & Company Limited). The Company
has two wholly-owned subsidiaries, LPIMC Insurance Marketing Services
(the Marketing Company), a registered investment advisor and London
Pacific Financial & Insurance Services (the Broker Dealer), a registered
broker-dealer. The Company is engaged primarily in the development and
marketing of annuity products and universal life insurance. Although the
Company is licensed and sells its universal life and annuity products in
40 states, its primary markets are California, Florida, Michigan, Ohio,
Texas and Washington.
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported
in the financial statements and accompanying notes. Such estimates and
assumptions could change in the future as more information becomes known,
which could impact amounts reported and disclosed herein.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity
with accounting practices prescribed or permitted by the North Carolina
Department of Insurance which is a comprehensive basis of accounting
other than generally accepted accounting principles. Significant
differences between statutory accounting principles and generally
accepted accounting principles (GAAP) are described in Note 2.
INVESTMENTS
Investments are recorded in accordance with the requirements of the
National Association of Insurance Commissioners (NAIC). Bonds not backed
by loans are reported at cost or amortized cost; the discount or premium
on bonds is amortized using the interest method. For loan-backed bonds,
anticipated prepayments are considered when determining the amortization
of discount or premium. Prepayment assumptions are obtained from dealer
surveys and are based on the current interest rate and economic
development. The retrospective adjustment method is used to value all
such securities except for interest-only securities, which are valued
using the prospective method. Preferred stocks are carried at NAIC
Securities Valuation Office (SVO) values. Common stocks are reported at
market value as determined by the SVO and the related unrealized capital
gain/(loss) is reported in unassigned surplus without any adjustment for
federal income taxes. The Company's subsidiaries are reported at equity
in the underlying statutory basis of their net assets. As of December 31,
1997, the carrying value of the Company's investment in subsidiaries was
$1,050,061. Short-term investments are carried at cost which
approximates market value.
FOREIGN EXCHANGE FORWARD CONTRACTS
The Company enters into foreign exchange forward contracts to hedge
exposure to currency risk on foreign denominated bonds. The cost of the
contracts is included as part of the carrying value of the underlying
securities. As of December 31, 1997, there were no open contracts. The
Company uses the deferral method to account for foreign exchange forward
contracts. Under the deferral method, realized and unrealized gains and
losses from these forward contracts are deferred on the Statutory
Statement of Admitted Assets, Liabilities, Capital and Surplus. Upon
disposal of the hedged security, deferred gains and losses are recognized
in net realized capital gains in the Statutory Statement of Operations.
The Company only enters into foreign exchange forward contracts with
brokers deemed to be credit worthy by management.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ELECTRONIC DATA PROCESSING EQUIPMENT
Electronic data processing equipment is recorded at cost, net of
accumulated depreciation of $2,000,381 and $1,783,263 at December 31,
1997 and 1996. Depreciation is provided using the straight-line method
over the estimated useful life of five years. Depreciation expense
amounted to $217,118, $272,204 and $346,495 for the years ended December
31, 1997, 1996 and 1995.
REMITTANCES AND ITEMS NOT ALLOCATED
Remittances and items not allocated consist primarily of cash received
with policy applications for policies that have not been issued.
POLICY AND CONTRACT CLAIMS
Policy and contract claims of $243,843 and $294,629 related to death
benefits payable on life and annuity contracts have been accrued at
December 31, 1997 and 1996. The remaining policy and contract claims of
$110,171 and $87,800 at December 31, 1997 and 1996 relate to estimated
incurred but unreported claims on life contracts.
SEPARATE ACCOUNT
Separate account assets and liabilities reported in the accompanying
Statutory Statement of Admitted Assets, Liabilities, Capital and Surplus
represent funds that are separately administered for variable annuity
contracts, and for which the contract holder, rather than the Company,
bears the investment risk. Separate account assets are reported at market
value. The operations of the separate account are not included in the
accompanying financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation.
2. DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND
STATUTORY ACCOUNTING PRINCIPLES
Statutory accounting principles vary in some respects from generally
accepted accounting principles. The more significant of these differences
are as follows:
INVESTMENTS
Market values of certain investments in bonds and stocks are based on
values specified by the NAIC, rather than on values provided by outside
broker confirmations or internally calculated estimates. For GAAP,
investments in bonds would be designated at purchase as held-to-maturity,
trading, or available-for-sale. Held-to-maturity fixed investments would
be reported at amortized cost, and the remaining fixed maturity
investments would be reported at fair value with unrealized holding gains
and losses reported in operations for those designated as trading and as
a separate component of shareholders' equity for those designated as
available-for-sale. Realized gains and losses are reported in income net
of income tax rather than on a pretax basis. The Asset Valuation Reserve
is determined by an NAIC prescribed formula and is reported as a
liability rather than as a valuation allowance or an appropriation of
surplus.
2. DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND
STATUTORY ACCOUNTING PRINCIPLES (CONTINUED)
SUBSIDIARIES
The accounts and operations of the Company's subsidiaries are not
consolidated with the accounts and operations of the Company.
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred
rather than capitalized and amortized over the terms of the related
policies.
NON-ADMITTED ASSETS
Certain assets designated as "non-admitted," principally furniture and
equipment, are excluded from the accompanying Statutory Statements of
Admitted Assets, Liabilities, Capital and Surplus and are charged
directly to unassigned surplus.
PREMIUMS
Single premium whole life, annuity and flexible premium variable life
insurance considerations are recognized as earned upon issuance of the
contract, whereas under GAAP, premium income consists of mortality
charges, surrender charges earned, policy fees earned and amounts
deducted from policyholder accounts.
BENEFIT RESERVES
Certain policy reserves are calculated based on statutory required
interest and mortality assumptions rather than estimated expected
experience or actual account balances.
INCOME TAXES
Deferred income taxes are not provided for differences between the
financial statement amounts and the tax bases of assets and liabilities.
3. ANALYSIS OF ASSETS
An analysis of the Company's ledger assets as compared with its net
admitted assets is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
LEDGER NONLEDGER ASSETS NOT NET
ASSETS ASSETS ADMITTED ADMITTED ASSETS
------ ------ -------- ---------------
<S> <C> <C> <C>
Bonds $ 1,162,584,191 $ 5,488,249 $1,157,095,942
Preferred stock 51,262,033 51,262,033
Common stock 8,436,964 $ 110,474 69,534 8,477,904
Policy loans 8,487,559 8,487,559
Cash 3,347,694 3,347,694
Short-term investments 11,694,690 11,694,690
Receivable for securities 21,836,311 21,836,311
Investment income due and accrued 16,790,319 16,790,319
Electronic data processing
equipment, net 430,341 244,471 185,870
Receivable from affiliates 18,815 7,312 11,503
Furniture and equipment 274,564 274,564
Deposits, prepaid expenses and
other assets 798,486 11,419 113,223 696,682
Separate account assets 22,609,542 22,609,542
---------- ----------
$ 1,291,781,190 $ 16,912,212 $ 6,197,353 $1,302,496,049
=============== ============ ============ ==============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
LEDGER NONLEDGER ASSETS NOT NET
ASSETS ASSETS ADMITTED ADMITTED ASSETS
------ ------ -------- ---------------
<S> <C> <C> <C>
Bonds $1,147,330,467 $ 4,866,116 $1,142,464,351
Preferred stock 1,687,616 1,687,616
Common stock 20,194,334 $ 341,598 56,447 20,479,485
Policy loans 6,294,811 6,294,811
Cash 26,008,933 26,008,933
Short-term investment 88,249,049 88,249,049
Receivable for securities 53,223,692 53,223,692
Investment income due and accrued 12,363,810 12,363,810
Electronic data processing
equipment, net 358,143 358,143
Furniture and equipment 350,583 350,583
Deposits, prepaid expenses and
other assets 1,219,000 62,282 104,987 1,176,295
Separate account assets 5,609,610 5,609,610
--------- ---------
$1,350,526,238 $ 12,767,690 $ 5,378,133 $1,357,915,795
============== ============= ============= ==============
</TABLE>
4. RELATED PARTIES
The Company had material transactions with its parent and affiliated
companies as follows:
CAPITAL CONTRIBUTIONS
The Company received capital contributions from its parent during the
years ended December 31, 1997, 1996 and 1995 totaling $0, $22,000,000 and
$1,455,550, respectively, principally in the form of investments and
4. RELATED PARTIES (CONTINUED)
related accrued interest. During 1996, the Company made a $500,000
capital contribution to the Marketing Company.
EXPENSES
The Company receives investment advisory services under the terms of an
investment management agreement with Berkeley Institutional Investment,
Inc. (BIII), an affiliate of London Pacific Group Limited. Fees charged
to the Company under the agreement amounted to $5,742,889, $5,578,673 and
$5,272,984 during the years ended December 31, 1997, 1996, and 1995,
respectively.
Under the terms of a cost-sharing agreement, the Company has agreed to
reimburse Berkeley International Capital Corporation, ("BICC"), an
affiliate, for certain expenses incurred on behalf of the Company. For
the year ended December 31, 1997, 1996 and 1995, the Company paid
$745,344, $87,060 and $100,548, respectively, to BICC.
Commissions on insurance business produced for the Company by its agents
are paid by the Marketing Company, the exclusive master general agent for
the Company. All of the Company's universal life and fixed annuity
business is written through the Marketing Company. For the year ended
December 31, 1997, $138,174,030 of premium was written through the
Marketing Company. Effective January 1, 1995, the Company directly paid
all agents' commissions via the Marketing Company. For the years ended
December 31, 1997, 1996, and 1995, the Company paid commissions of
$9,905,069, $8,261,301 and $14,237,877, respectively, to the Marketing
Company (and the Marketing Company paid commissions to agents of
approximately $9,905,064, $8,261,301 and $14,237,877, respectively).
The Company has payables to affiliates of $720,136 and $36,512 at December
31, 1997 and 1996, respectively, relating to these transactions.
The Company leases certain office space and equipment to Select Advisors,
Inc., ("Select"), an affiliate. During 1997, the Company received rental
income of $188,994 from Select.
The Company acquired and disposed of securities with affiliates BG
Securities Limited ("BGSL") and Berkeley (USA) Holding Limited ("BHL"),
during the year as follows:
<TABLE>
<CAPTION>
Acquisitions
Bonds Transfer Date Consideration From
----- ------------- ------------- ----
<S> <C> <C> <C> <C> <C> <C>
MZ Berger, 8% due 12/2006 1-14-97 $ 13,000,000 BGSL
Catalina Furniture Co., 13% due 6/2002 4-09-97 4,000,000 BHL
COMTECO, 12% due 10/2001 6-30-97 6,000,000 BGSL
Andros Acquisition, Inc., 13% due 03/2003 9-30-97 4,085,213 BGSL
Integral Systems, Inc., 4.75% due 12-2000 9-30-97 8,341,107 BGSL
Childers Products Co., 10% due 05/2006 9-30-97 1,300,392 BGSL
---------
$ 36,726,712
Dispositions
Bonds Transfer Date Consideration From
----- ------------- ------------- ----
COMTECO, 12% due 10/2001 3-31-97 $ 6,000,000 BHL
Hybrid Networks, Inc., 12% due 4/2002 6-30-97 5,500,000 BGSL
Nazareth/Century Mills, Inc., 13.43% due 12/2003 9-30-97 13,726,713 BGSL
----------
$ 25,226,713
</TABLE>
4. RELATED PARTIES (CONTINUED)
As of December 31, 1997, the Company had investments in bonds issued by
affiliates as follows:
<TABLE>
<CAPTION>
STATEMENT
ISSUER COUPON MATURITY VALUE
------ ------ -------- -----
<S> <C> <C> <C>
Bon-Art/Bauchet International 13.00% 10/02 $ 6,529,494
Catalina Furniture Company 13.00% 06/02 $ 4,000,000
Ocean Acquisition Corporation 12.00% 12/00 $ 4,000,000
Select Advisors, Inc. 7.00% 11/98 $ 750,000
</TABLE>
5. FEDERAL INCOME TAXES
The provision for federal income taxes has been computed in accordance
with provisions of the Internal Revenue Code, as amended. The Company
files a separate federal income tax return and is not included in a
consolidated return with affiliated entities.
The Company's total tax expense differs from an amount computed by
applying the federal income tax of 35 percent to statutory income. The
five primary items required to reconcile taxable income and statutory
income are: (1) capitalization of policy acquisition costs, (2)
differences in computing reserves for statutory and tax purposes, (3)
differences in statutory and tax bases of assets sold, (4) exclusion of
IMR amortization, and (5) differences in timing for the deduction of
accrued expenses.
6. AGGREGATE RESERVES FOR LIFE POLICIES AND CONTRACTS
Aggregate reserves for life policies and contracts have generally been
computed using the Commissioners' Reserve Valuation Method (CRVM) or the
Commissioners' Annuity Reserve Valuation Method (CARVM) prescribed by the
North Carolina Department of Insurance. The aggregate reserves for life
policies and contracts were computed on a policy-by-policy basis.
Statutory reserves for policy benefits due under universal life and
accumulation annuity insurance contracts are computed using the CRVM and
the CARVM, respectively. The CRVM and CARVM reserves established for
specific contracts are the greater of a formula reserve or the cash
surrender value of the contract.
The formula reserves for the universal life policies are computed using
the 1980 Commissioners Standard Ordinary (CSO) mortality table and
discount rates of 5.5% - 4.0%. These assumptions are in compliance with
the minimum statutory requirements.
The accumulation annuity insurance contracts include a single premium
deferred annuity product and a flexible premium deferred annuity product.
The formula reserves for the single premium deferred annuity are higher
than the cash surrender value due to the one year interest rate guarantee
provision of these contracts. The Company computed reserves with an
interest rate of 5.50% for 1997 and 1996 issues and 6.00% for 1995
issues. These rates are the maximum statutory interest rates for such
contracts. For flexible premium deferred annuities, the cash surrender
value is never greater than the formula reserves, but may be equal to the
CARVM reserve due to the calendar quarter interest guarantee provision of
these contracts. The Company uses the same interest rates to compute
reserves as are used for single premium deferred annuities.
Reserves for policy benefits due under immediate annuity insurance
contracts are based on a present value actuarial computation using a
statutory discount rate and a statutory mortality basis. The reserves are
based on the 83a annuity and mortality table and with a discount rate of
6.75% for 1997 and 1996 and 7.25% for 1995.
6. AGGREGATE RESERVES FOR LIFE POLICIES AND CONTRACTS (CONTINUED)
The withdrawal characteristics of annuity actuarial reserves and deposit
liabilities at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Subject to discretionary withdrawal at book
<S> <C> <C> <C> <C> <C>
value less surrender charge of 5% or more $ 465,856,317 42.21% $ 445,721,115 42.24%
Subject to discretionary withdrawal at book
value less surrender charge greater than
0% but less than 5% 467,548,853 42.36% 440,023,827 41.70%
Subject to discretionary withdrawal at book
value with no surrender charge 18,944,526 1.72% 13,795,748 1.31%
Not subject to discretionary withdrawal 151,396,771 13.71% 155,624,990 14.75%
----------- ----- ----------- -----
$1,103,746,467 100% $1,055,165,680 100%
============== ==== ============== ====
</TABLE>
7. INVESTMENTS
The Company records its investments in debt securities at cost or
amortized cost. The securities are designated investment grade (NAIC SVO
categories "1" and "2") or non-investment grade (categories "3", "4",
"5", and "6"). The NAIC 's highest ratings classification includes issues
normally rated investment grade by independent rating agencies.
The NAIC SVO classified the Company's debt securities as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
STATEMENT PERCENT STATEMENT PERCENT
NAIC CATEGORY VALUE OF TOTAL VALUE OF TOTAL
------------- ----- -------- ----- --------
<S> <C> <C> <C> <C> <C>
1 - Highest quality $ 635,602,909 55% $ 642,553,936 57%
2 - High quality 362,777,042 31 309,858,268 27
3 - Medium quality 76,456,905 7 70,923,479 6
4 - Low quality 58,310,711 5 94,156,455 8
5 - Lower quality 13,267,848 1 15,018,522 1
6 - Debt securities in or
near default 10,680,527 1 9,953,691 1
---------- - --------- -
$1,157,095,942 100% $1,142,464,351 100%
============== === ============== ===
</TABLE>
7. INVESTMENTS (CONTINUED)
The cost or amortized cost and the fair, or comparable value of
investments in debt securities are as follows:
<TABLE>
<CAPTION>
COST OR GROSS UNREALIZED
DECEMBER 31, 1997 AMORTIZED COST GAINS LOSSES FAIR VALUE
----------------- -------------- ----- ------ ----------
U.S. Government
<S> <C> <C> <C> <C>
obligations $ 8,220,444 $ 128,216 ($ 3,560) $ 8,345,100
Obligations of states
and political subdivisions 5,068,119 28,221 -- 5,096,340
Corporate securities 704,295,379 4,004,751 (1,753,246) 706,546,884
Other debt securities 51,306,693 4,868 (3,710) 51,307,851
Mortgage-backed securities 388,205,307 -- -- 388,205,307
----------- -----------
$1,157,095,942 $ 4,166,056 ($ 1,760,516) $1,159,501,482
============== =========== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
COST OR GROSS UNREALIZED
DECEMBER 31, 1996 AMORTIZED COST GAINS LOSSES FAIR VALUE
----------------- -------------- ----- ------ ----------
U.S. Government
<S> <C> <C> <C> <C>
obligations $ 8,221,012 $ 91,040 ($ 138,952) $ 8,173,100
Obligations of states
and political subdivisions 5,276,177 115,665 ( 35,812) 5,356,030
Corporate securities 635,225,514 1,274,089 ( 5,347,151) 631,152,452
Other debt securities 110,687,081 173,235 ( 21,547) 110,838,769
Mortgage-backed securities 383,054,567 -- -- 383,054,567
----------- -----------
$1,142,464,351 $1,654,029 ($5,543,462) $1,138,574,918
============== ========== =========== ==============
</TABLE>
Fair values are based on published quotations of the SVO of the NAIC.
Fair values generally represent quoted market value prices for securities
traded in the public marketplace, or analytically determined values using
bid or closing prices for securities not traded in the public
marketplace. However, for certain investments for which the NAIC does not
provide a value, the Company uses the amortized cost amount as a
substitute for fair value in accordance with prescribed guidance. As of
December 31, 1997 and 1996, the fair value of investments in debt
securities includes $823,054,516 and $863,848,633, respectively, of debt
securities that were valued at amortized cost.
The cost or amortized cost and the fair value of debt securities at
December 31, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or repay obligations with or without call or
prepayment penalties.
7. INVESTMENTS (CONTINUED)
A summary of the cost or amortized cost and fair value of the Company's
investment in debt securities at December 31, 1997, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED COST FAIR VALUE
-------------- ----------
Maturity:
<S> <C> <C> <C>
In 1998 $ 7,405,626 $ 7,406,823
In 1999-2002 230,271,457 231,042,261
In 2003-2007 287,442,290 287,620,624
After 2007 243,771,262 245,226,467
Mortgage-backed securities 388,205,307 388,205,307
----------- -----------
Total $1,157,095,942 $1,159,501,482
============== ==============
</TABLE>
Proceeds from sales of investments in fixed maturities and related
gross gains and losses on those sales are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Proceeds from sales $758,322,204 $651,187,776 $193,271,491
Gross realized gains $ 13,454,190 $ 13,725,509 $ 2,078,023
Gross realized losses $ 1,537,996 $ 9,195,257 $ 1,618,499
</TABLE>
At December 31, 1997, debt securities with an admitted asset value of
$10,159,313 were on deposit with state insurance departments to satisfy
regulatory requirements.
Unrealized gains and losses on investments in non-redeemable preferred
and common stocks are reported directly in unassigned surplus and do
not affect operations. The gross unrealized gains and losses on, and
the cost and fair value of, those investments are summarized as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C>
AT DECEMBER 31, 1997
Preferred stocks $ 41,355,002 $ -- $ -- $ 41,355,002
Common stocks 9,363,323 1,455,866 ( 2,341,285) 8,477,904
--------- --------- - --------- ---------
Total $ 50,718,325 $ 1,455,866 ($ 2,341,285) $ 49,832,906
============= =============== ============== ==============
AT DECEMBER 31, 1996
Preferred stocks $ -- $ -- $ -- $ --
Common stocks 20,832,834 629,246 (982,595) 20,479,485
---------- ------- ---------- ----------
Total $ 20,832,834 $ 629,246 ($ 982,595) $ 20,479,485
============= ================= ================ ===============
</TABLE>
8. INVESTMENT INCOME
An analysis of the Company's net investment income is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest on debt securities $91,803,407 $94,149,963 $91,585,614
Interest on short-term investments 1,840,299 787,618 554,252
Interest on cash on hand and on deposit 268,480 375,723 274,696
Equity in undistributed earnings of subsidiaries 37,168 (39,151) (285,874)
Other investment income 1,696,372 1,532,466 2,493,535
--------- --------- ---------
Gross investment income 95,645,726 96,806,619 94,622,223
Less investment expenses (6,847,800) (5,793,203) (5,661,711)
---------- ---------- ----------
Net investment income $88,797,926 $91,013,416 $88,960,512
</TABLE>
9. REINSURANCE
The maximum amount of direct universal life insurance retained on any
life is $250,000. Amounts in excess of $250,000 are ceded on a Yearly
Renewable Term basis of reinsurance. Life insurance ceded to other
companies for the years ended December 31, 1997 and 1996 totaled
$42,496,000 and $47,349,000 or 11.2% and 11.7% of life insurance in
force, respectively. A contingent liability exists with respect to
insurance ceded which would become a liability should the reinsurer be
unable to meet the obligations assumed under reinsurance agreements.
10. SURPLUS
Under the Insurance Code of the State of North Carolina, in a given
year the Company may make dividend distributions without prior approval
of the Insurance Commissioner up to the lesser of its net gain from
operations for the preceding year or 10% of surplus as of December 31
of the preceding year. The maximum dividend that could be paid during
1998 without the Insurance Commissioner's approval is $5,909,742.
The NAIC has adopted Risk-Based Capital (RBC) requirements which became
effective December 31, 1993, that attempt to evaluate the adequacy of a
life insurance company's adjusted statutory capital and surplus in
relation to investment, insurance and other business risks. The RBC
formula is used by the states as an early warning tool to identify
possible weakly capitalized companies for the purpose of initiating
regulatory action and is not designed to be a basis for ranking the
financial strength of insurance companies. In states which have adopted
the NAIC regulations, the new RBC requirements provide for four
different levels of regulatory attention depending on the ratio of the
company's adjusted capital and surplus to its RBC. As of December 31,
1997, the adjusted capital and surplus of the Company is substantially
in excess of the minimum level of RBC that would require regulatory
response.
11. ASSET VALUATION AND INTEREST MAINTENANCE RESERVES
The purpose of the AVR is to decrease the volatility of the incidence of
asset losses and to recognize the long term return expectations for
equity investments. The increase or decrease to this reserve is charged
or credited directly to surplus.
The purpose of the IMR is to minimize the effect of gains and losses
arising from interest rate movements. All realized gains and losses (net
of tax) classified as interest related are accumulated and amortized into
net income over the remaining period to maturity of the security sold.
The effect of recording the IMR at December 31, 1997, 1996 and 1995 was
to defer total net capital gains of $19,991,216, $12,352,297 and
$10,190,326, respectively, and to recognize $2,306,437, $683,806 and
($185,844), respectively, of IMR amortization into income.
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair values of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards ("SFAS") No. 107, "Disclosure about Fair
Value of Financial Instruments." The estimated fair value amounts have
been determined using available market information and appropriate
valuation methodologies. However, considerable judgment is required to
interpret market data to develop these estimates. Accordingly, these
estimates are not necessarily indicative of the amounts which could be
realized in a current market exchange. The use of different market
assumptions or estimation methodologies may have a material effect on the
estimated fair value amounts. For financial instruments not separately
disclosed below, the carrying value is a reasonable estimate of fair
value.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------- -------------------- -------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
--------------------- -------------------- -------------------- ---------------------
Assets:
<S> <C> <C> <C> <C>
Debt securities $1,157,095,942 $1,171,666,397 $1,142,464,351 $1,145,112,378
Redeemable preferred
stock $ 9,907,031 $ 10,607,958 $ 1,687,616 $ 1,616,150
Liabilities:
Insurance and annuity
reserves-investment-type
contracts $1,130,221,744 $1,149,093,067 $1,097,795,798 $1,116,979,648
</TABLE>
POLICY RESERVES
In accordance with SFAS No. 107, estimated fair values have been
calculated on policy reserves only for those products determined to be
investment-type. The estimated fair value of deferred annuity and
universal life contracts equals account value after deduction of
surrender charges. The estimated fair value of immediate annuity
contracts is based on the present value of expected benefits using a
discount rate equal to the 5-year Treasury rate.
13. CONCENTRATIONS OF CREDIT RISK
At December 31, 1997, the Company held unrated or less-than-investment
grade corporate bonds of $158,715,991. Those holdings amounted to 13.7%
of the Company's investments in bonds and less than 12.4% of the
Company's total admitted assets. The holdings of less-than-investment
grade bonds are widely diversified and management believes are of
satisfactory quality based on the Company's investment policies and
credit standards.
14. RECONCILIATION OF NET TRANSFERS TO OR (FROM) SEPARATE ACCOUNT
Transfers are reported in the Summary of Operations of the Separate
Account Statement:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1997 1996
---- ----
<S> <C> <C>
Transfers to separate account $ 16,973,122 $4,455,205
Transfers from separate account 2,527,210 296,184
--------- -------
Net transfers to or (from) separate account 14,445,912 4,159,021
Reconciling Adjustments: Mortality & Expense Fees 161,162 16,724
------- ------
Transfers as reported in the Statutory Summary of Operations
of the Company $ 14,607,074 $4,175,745
============= ==========
</TABLE>
15. DEFERRED COMPENSATION ARRANGEMENTS
Certain agents producing business for the Company participate in a
stock appreciation rights plan sponsored by the Parent. The rights vest
over a five year period based on the persistency of certain levels of
policyholder account values assigned to the agent and the agent
remaining active with the Company. The Parent will reimburse the
Company for any plan benefits as they are withdrawn by the
participating agents. There were no plan benefits paid in 1997 and none
of the plan benefits were vested as of December 31, 1997.
Certain members of Company management are eligible to participate in a
contributory deferred compensation plan sponsored by BHL. Compensation
deferred pursuant to the terms of the plan was $125,408 as of December
31, 1997.
Certain members of Company management participate in an incentive share
option plan sponsored by the Parent whereby the employee can purchase
shares of the Parent's common stock. Stock options are granted to
employees at a price equal to the fair market value of the stock on the
date of grant. The stock options were granted during the years 1990
through 1997. As of December 31, 1997 1,763,500 shares of the Parent's
common stock were subject to options granted under the plan with option
prices ranging from $2.15 to $3.86. During 1997, options on 249,000
shares of common stock became exercisable under the plan with option
prices ranging from $2.39 to $3.86. No options were exercised or
forfeited during 1997. The Parent will reimburse the Company for any
plan benefits as they are paid.
16. COMMITMENT AND CONTINGENT LIABILITIES
Rental expense for all leases was $609,627, $550,944 and $722,359 for
1997, 1996 and 1995, respectively. Future minimum rental commitments
under noncancelable operating leases for office space and equipment
aggregate $2,133,639 through 2000. The amounts due by year are $719,453
in 1998, $723,578 in 1999, $368,891 in 2000, $138,016 in 2001, and
$183,701 thereafter.
The Company has contingent liabilities resulting from anticipated state
guaranty association assessments for life insurers deemed insolvent
during the year. Although the total amount of this exposure is not
known, a substantial portion of the amount assessed will be recovered
against future premium taxes under current laws and regulations. As of
December 31, 1997, the Company estimates its net contingent liability
for future state guaranty association assessments is within range of
$500,000 to $2,000,000. The Company has not committed any surplus funds
to reserve for the contingent liability. The Company recognizes its
obligation for guaranty fund assessments when it receives notice that
an amount is payable to a guaranty fund. Expenses incurred for guaranty
fund assessments were $1,007,354, $1,674,481 and $1,075,244 in 1997,
1996 and 1995, respectively.
The Company is, from time to time, involved in various legal actions
concerning policy benefits and certain other matters. Those actions are
considered by the Company in estimating policy reserves and other
liabilities. The Company believes that the resolution of those actions
should not have a material adverse affect on the Company's statutory
surplus.
The Company has been named as a cross-defendant in a complaint filed by
The American Endeavor Fund Limited ("AEF") where the plaintiff seeks
damages in excess of $2 million. The Company believes that the alleged
claims are without merit. While these claims are being contested, the
outcome is not predictable with assurance. The Company believes that
any liability resulting from these claims should not have a material
adverse affect on the Company's statutory surplus.
17. SUBSEQUENT EVENTS
On March 12, 1998, all legal proceedings involving AEF were settled.
The settlement is conditional upon the passing by AEF shareholders of
resolutions ratifying and approving AEF's participation in the
settlement agreement and upon approval from The Royal Court of the
Island of Jersey for a related reduction of AEF's share premium
account. AEF has announced that it has received irrevocable
undertakings in favor of the resolutions from sufficient shareholders
to assure their passing. The Company does not expect to have any
liability to AEF under the terms of the settlement agreement.
