STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL AND GROUP FIXED AND VARIABLE DEFERRED
ANNUITY CONTRACTS
ISSUED BY
UNITED LIFE & ANNUITY SEPARATE ACCOUNT ONE
AND
UNITED LIFE & ANNUITY INSURANCE COMPANY
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD
BE READ IN CONJUNCTION WITH THE PROSPECTUS DATED APRIL 30, 1999, FOR THE
INDIVIDUAL AND GROUP FIXED AND VARIABLE DEFERRED ANNUITY CONTRACTS WHICH ARE
REFERRED TO HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR
OUGHT TO KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS CALL OR WRITE THE
COMPANY AT: UNITED LIFE & ANNUITY INSURANCE COMPANY, 851 SW SIXTH AVENUE, SUITE
800, PORTLAND, OR 97204-1346.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1999.
TABLE OF CONTENTS
Page
Company..................................................... 3
Independent Auditors........................................ 3
Legal Opinions.............................................. 3
Distributor................................................. 3
Reduction or Elimination of the Contingent Deferred Sales
Charge.................................................... 4
Yield Calculation For Money Market Portfolio................ 4
Calculation of Performance Information...................... 5
Federal Tax Status.......................................... 14
Annuity Provisions.......................................... 22
Financial Statements........................................ 22
COMPANY
United Life & Annuity Insurance Company ("ULA" or the "Company") is a stock
life insurance company organized in 1955. ULA was originally domiciled in
Louisiana and was re-domesticated to Texas on December 18, 1998. ULA is licensed
to do business in 47 states, the District of Columbia and Puerto Rico. On or
about May 1, 1997, ULA changed its name from United Companies Life Insurance
Company to its present name.
On July 24, 1996, Pacific Life and Accident Insurance Company ("PLAIC")
acquired one hundred percent ownership of the Company from United Companies
Financial Corporation, including its wholly-owned subsidiary United Variable
Services, Inc., a registered broker-dealer which acts as the principal
underwriter of the Contracts issued by the Company. PLAIC is a wholly-owned life
insurance subsidiary of PennCorp Financial Group, Inc.
On February 21, 1999, PLAIC signed a definitive agreement to sell ULA and
its wholly-owned subsidiary, United Variable Services, Inc. to ING America
Insurance Holdings Inc. ("ING"). ING's ultimate parent is ING Group,
headquartered in the Netherlands. ING Group is one of the largest financial
services organizations in the world. The sale was completed on April 30, 1999.
INDEPENDENT AUDITORS
The consolidated financial statements and financial statement schedules of
United Life & Annuity Insurance Company and subsidiary as of December 31, 1998
and 1997 and for the years ended December 31, 1998, and 1997 and the periods
from July 24, 1996 to December 31, 1996 (Successor period) and January 1, 1996
to July 23, 1996 (Predecessor period) and the financial statements of United
Life & Annuity Separate Account One as of December 31, 1998 and for the year
then ended have been audited by KPMG Peat Marwick LLP, independent auditors, as
stated in their reports appearing herein.
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
United Variable Services, Inc., a wholly-owned subsidiary of the Company,
acts as the distributor. The offering is on a continuous basis.
REDUCTION OR ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE
The amount of the Contingent Deferred Sales Charge on the Contracts may be
reduced or eliminated when sales of the Contracts are made to individuals or to
a group of individuals in a manner that results in savings of sales expenses.
The entitlement to a reduction of the Contingent Deferred Sales Charge will be
determined by the Company after examination of the following factors: 1) the
size of the group; 2) the total amount of purchase payments expected to be
received from the group; 3) the nature of the group for which the Contracts are
purchased, and the persistency expected in that group; 4) the purpose for which
the Contracts are purchased and whether that purpose makes it likely that
expenses will be reduced; and 5) any other circumstances which the Company
believes to be relevant to determining whether reduced sales or administrative
expenses may be expected. None of the reductions in charges for sales is
contractually guaranteed.
The Contingent Deferred Sales Charge will be eliminated when the Contracts
are issued to an officer, director or employee of the Company or any of its
affiliates. In no event will any reduction or elimination of the Contingent
Deferred Sales Charge be permitted where the reduction or elimination will be
unfairly discriminatory to any person.
YIELD CALCULATION FOR MONEY MARKET PORTFOLIO
The Money Market Portfolio will calculate its current yield based upon the
seven days ended on the date of calculation. For the seven calendar days ended
December 31, 1998, the annualized yield of the Money Market Portfolio was 3.69%
for Contracts with Death Benefit Option 1 and 3.89% for Contracts with Death
Benefit Option 2.
The current yield of the Money Market Portfolio is computed 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
Portfolio at the beginning of the period, subtracting the Mortality and Expense
Risk Charge and the Administrative Charge, dividing the difference by the value
of the account at the beginning of the same period to obtain the base period
return and multiplying the result by (365/7).
The Money Market Portfolio computes its effective compound yield according
to the method prescribed by the Securities and Exchange Commission. The
effective yield reflects the reinvestment of net income earned daily on Money
Market Portfolio assets. For the seven calendar days ended December 31, 1998,
the effective yield of the Money Market Portfolio was 3.15% for Contracts with
Death Benefit Option 1 and 3.35% for Contracts with Death Benefit Option 2.
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 Money Market Portfolio 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 Money Market Portfolio and changes in the interest rates
on such investments, but also on changes in the Money Market Portfolio's
expenses during the period.
Yield information may be useful in reviewing the performance of the Money
Market Portfolio and for providing a basis for comparison with other investment
alternatives. However, the Money Market Portfolio's yield fluctuates, unlike
bank deposits or other investments which typically pay a fixed yield for a
stated period of time.
CALCULATION OF PERFORMANCE INFORMATION
From time to time, the Company may advertise performance data as described
in the Prospectus. Any such advertisement will include total return figures for
the time periods indicated in the advertisement. There will be different
presentations of total return figures. One set will reflect the deduction of a
1.45% Mortality and Expense Risk Charge, a .15% Administrative Charge and the
expenses for the underlying Portfolio being advertised. Another set will reflect
the deduction of a 1.25% Mortality and Expense Risk Charge, a .15%
Administrative Charge and the expenses of the underlying Portfolio. Any such
advertisement will also include average annual total return for the time periods
indicated in the advertisement and will reflect the deduction of the Mortality
and Expense Risk Charge, the Administrative Charge, the Contingent Deferred
Sales Charge and the expenses for the underlying Portfolio being advertised.
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 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.
In addition to total return data, the Company may include yield information
in its advertisements. For each Portfolio (other than the Money Market
Portfolio) 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
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.
The Company may also advertise performance data which will be computed on a
different basis.
PERFORMANCE INFORMATION
The Sub-Accounts of the Separate Account are relatively new and therefore
have little or no meaningful investment performance history. However, certain
corresponding Portfolios have been in existence for some time and consequently
have investment performance history. In order to demonstrate how the actual
investment experience of the Portfolios affects Accumulation Unit values, the
following performance information was developed. The information is based upon
the historical experience of the Portfolios and is for the periods shown. There
is also standardized performance shown based on the historical performance of
the Portfolios for the periods commencing from the date on which a Sub-Account
first invested in the Portfolio (Charts 5 and 6 below).
Actual performance will vary and the results shown are not necessarily
representative of future results. Performance for periods ending after those
shown may vary substantially from the examples shown below. The charts below
show the performance of the Accumulation Units calculated for a specified period
of time assuming an initial Purchase Payment of $1,000 allocated to each
Portfolio and a deduction of charges and deductions (see "Expenses" in the
Prospectus for more information). The percentage increases are determined by
subtracting the initial Purchase Payment from the ending value and dividing the
remainder by the beginning value.
There are six charts of performance below. Charts 1-4 reflect performance
based on the historical experience of the Portfolios. Charts 5 and 6 reflect
standardized performance from the date on which a Sub-Account first invested in
the Portfolio.
* Chart 1 reflects the deduction of all fees and expenses for Contracts
with Death Benefit Option 1.
* Chart 2 reflects the deduction of all fees and expenses for Contracts
with Death Benefit Option 2.
* Chart 3 reflects the deduction of all fees and expenses except the CDSC,
for Contracts with Death Benefit Option 1.
* Chart 4 reflects deduction of all fees and expenses, except the CDSC, for
Contracts with Death Benefit Option 2.
* Chart 5 reflects the average annual total return for periods ending
December 31, 1998 for Contracts with Death Benefit Option 1.
* Chart 6 reflects the average annual total return for the periods ending
December 31 1998 for Contracts with Death Benefit Option 2.
You should note that the investment results of each Portfolio will
fluctuate over time, and any presentation of the Portfolio's total return or
yield for any period should not be considered as a representation of what an
investment may earn or what your total return or yield may be in any future
period.
For the Periods Ended 12/31/98:
CHART 1
(reflects the deduction of all fees and expenses for Contracts
with Death Benefit Option 1)
<TABLE>
<CAPTION>
SINCE PORTFOLIO
PORTFOLIO INCEPTION
1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION DATE
------ ------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund........ 11.44% 13.46% 14.87% 16.47% 5/5/93
AIM V.I. Diversified Income Fund.......... -4.06% 4.76% 5.10% 5.40% 5/5/93
AIM V.I. Growth Fund...................... 25.99% 23.27% 19.29% 18.78% 5/5/93
AIM V.I. Growth and Income Fund........... 19.66% 21.52% 20.21% 5/2/94
AIM V.I. International Equity Fund........ 7.66% 11.15% 9.28% 11.35% 5/5/93
Alger American Growth..................... 39.73% 25.34% 18.93% 18.61% 1/9/89
AMT Guardian.............................. 23.69% 25.50% 11/3/97
AMT Limited Maturity Bond................. -3.27% 2.21% 3.16% 5.09% 6.19% 9/10/84
AMT Mid-Cap Growth........................ 31.08% 45.39% 11/3/97
AMT Partners.............................. -3.44% 18.14% 17.48% 3/22/94
Dreyfus VIF Growth and Income............. 4.04% 13.20% 18.51% 5/2/94
Dreyfus Stock Index....................... 20.18% 24.61% 16.32% 10.35% 9/29/89
Federated American Leaders Fund II........ 9.68% 20.32% 17.32% 2/10/94
Federated High Income Bond II............. -4.93% 7.22% 3.74% 3/1/94
Federated Fund for U.S. Government
Securities II........................... -0.05% 3.88% 2.76% 3/28/94
Federated Prime Money Fund II............. -2.33% 3.32% 4.24% 11/18/94
Federated Utility II...................... 6.14% 13.98% 10.28% 2/10/94
MFS Emerging Growth....................... 26.03% 21.33% 23.37% 7/24/95
MFS Growth With Income.................... 14.39% 22.61% 23.20% 10/9/95
MFS Research.............................. 12.74% 19.44% 20.11% 7/26/95
MFS Total Return.......................... 4.55% 12.97% 16.12% 1/3/95
MFS Utilities............................. 10.19% 19.73% 22.87% 1/3/95
Morgan Stanley Dean Witter Emerging
Markets Debt............................ -35.53% -24.86% 6/16/97
Morgan Stanley Dean Witter Equity Growth.. 11.18% 21.54% 1/2/97
Morgan Stanley Dean Witter Global Equity.. 5.50% 12.17% 1/2/97
Morgan Stanley Dean Witter High-Yield..... -2.86% 4.53% 1/2/97
Morgan Stanley Dean Witter Value.......... -9.60% 4.31% 1/2/97
Scudder International..................... 10.61% 10.88% 8.00% 9.18% 7.87% 5/1/87
Scudder Money Market...................... -2.31% -0.39% 1.40% 3.72% 7/16/85
Van Eck Worldwide Hard Assets............. -38.07% -10.95% -5.78% -0.16% 9/1/89
Warburg Pincus Fixed Income............... 0.36% 4.77% 3/31/97
Warburg Pincus International Equity....... -4.48% -0.56% 2.35% 6/30/95
Warburg Pincus Post-Venture Capital....... -6.73 0.21% 9/30/96
</TABLE>
CHART 2
(reflects the deduction of all fees and expenses for
Contracts with Death Benefit Option 2)
<TABLE>
<CAPTION>
SINCE PORTFOLIO
PORTFOLIO INCEPTION
1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION DATE
------ ------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund........ 11.67% 13.69% 15.11% 16.71% 5/5/93
AIM V.I. Diversified Income Fund.......... -3.86% 4.97% 5.31% 5.62% 5/5/93
AIM V.I. Growth Fund...................... 26.26% 23.53% 19.53% 19.02% 5/5/93
AIM V.I. Growth and Income Fund........... 19.91% 21.77% 20.45% 5/2/94
AIM V.I. International Equity Fund........ 7.88% 11.38% 9.50% 11.58% 5/5/93
Alger American Growth..................... 40.02% 25.60% 19.17% 18.85% 1/9/89
AMT Guardian.............................. 23.95% 25.76% 11/3/97
AMT Limited Maturity Bond................. -3.06% 2.42% 3.37% 6.30% 6.40% 9/10/84
AMT Mid-Cap Growth........................ 31.35% 45.69% 11/3/97
AMT Partners.............................. -3.24% 18.38% 17.72% 3/22/94
Dreyfus VIF Growth and Income............. 4.26% 13.44% 18.75% 5/2/94
Dreyfus Stock Index....................... 20.43% 24.87% 16.56% 10.57% 9/29/89
Federated American Leaders Fund II........ 9.92% 20.57% 17.56% 2/10/94
Federated High Income Bond II............. -4.73% 7.44% 3.96% 3/1/94
Federated Fund for U.S. Government
Securities II........................... 0.16% 4.10% 2.98% 3/28/94
Federated Prime Money Fund II............. -2.18% 3.39% 4.30% 11/18/94
Federated Utility II...................... 6.37% 14.21% 10.51% 2/10/94
MFS Emerging Growth....................... 26.30% 21.58% 23.63% 7/24/95
MFS Growth With Income.................... 14.63% 22.86% 23.45% 10/9/95
MFS Research.............................. 12.97% 19.68% 20.35% 7/26/95
MFS Total Return.......................... 4.77% 13.21% 16.36% 1/3/95
MFS Utilities............................. 10.42% 19.97% 23.12% 1/3/95
Morgan Stanley Dean Witter Emerging
Markets Debt............................ -35.39% -24.69% 6/16/97
Morgan Stanley Dean Witter Equity Growth.. 11.41% 21.79% 1/2/97
Morgan Stanley Dean Witter Global Equity.. 5.72% 12.41% 1/2/97
Morgan Stanley Dean Witter High-Yield..... -2.65% 4.76% 1/2/97
Morgan Stanley Dean Witter Value.......... -9.41% 4.54% 1/2/97
Scudder International..................... 10.84% 11.11% 8.22% 9.40% 8.09% 5/1/87
Scudder Money Market...................... -2.11% -0.19% 1.60% 3.92% 7/16/85
Van Eck Worldwide Hard Assets............. -37.93% -10.76% -5.58% 0.04% 9/1/89
Warburg Pincus Fixed Income............... 0.58% 4.99% 3/31/97
Warburg Pincus International Equity....... -2.12% 1.50% 3.21% 6/30/95
Warburg Pincus Post-Venture Capital....... -0.97% 3.97% 9/30/96
</TABLE>
CHART 3
(reflects the deduction of all fees and expenses, except the
CDSC, for Contracts with Death Benefit Option 1)
<TABLE>
<CAPTION>
SINCE PORTFOLIO
PORTFOLIO INCEPTION
1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION DATE
------ ------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund........ 17.44% 14.48% 15.10% 16.64% 5/5/93
AIM V.I. Diversified Income Fund.......... 1.94% 5.96% 5.42% 5.68% 5/5/93
AIM V.I. Growth Fund...................... 31.99% 24.14% 19.48% 18.93% 5/5/93
AIM V.I. Growth and Income Fund........... 25.66% 22.42% 20.54% 5/2/94
AIM V.I. International Equity Fund........ 13.66% 12.22% 9.56% 11.57% 5/5/93
Alger American Growth..................... 45.73% 26.19% 19.12% 18.61% 1/9/89
AMT Guardian.............................. 29.69% 30.48% 11/3/97
AMT Limited Maturity Bond................. 2.73% 3.47% 3.51% 5.09% 6.19% 9/10/84
AMT Mid-Cap Growth........................ 37.08% 50.26% 11/3/97
AMT Partners.............................. 2.56% 19.09% 17.82% 3/22/94
Dreyfus VIF Growth and Income............. 10.04% 14.24% 18.85% 5/2/94
Dreyfus Stock Index....................... 26.18% 25.47% 16.54% 10.35% 9/29/89
Federated American Leaders Fund II ....... 15.68% 21.23% 17.65% 2/10/94
Federated High Income Bond II............. 1.07% 8.36% 4.28% 3/1/94
Federated Fund for U.S. Government
Securities II........................... 5.95% 5.10% 3.33% 3/28/94
Federated Prime Money Fund II............. 3.67% 4.56% 4.88% 11/18/94
Federated Utility II...................... 12.14% 15.00% 10.70% 2/10/94
MFS Emerging Growth....................... 32.03% 22.23% 24.07% 7/24/95
MFS Growth With Income.................... 20.39% 23.49% 23.97% 10/9/95
MFS Research.............................. 18.74% 20.36% 20.85% 7/26/95
MFS Total Return.......................... 10.55% 14.01% 16.75% 1/3/95
MFS Utilities............................. 16.19% 20.65% 23.41% 1/3/95
Morgan Stanley Dean Witter Emerging
Markets Debt............................ -29.53% -20.39% 6/16/97
Morgan Stanley Dean Witter Equity Growth.. 17.18% 23.99% 1/2/97
Morgan Stanley Dean Witter Global Equity.. 11.50% 14.83% 1/2/97
Morgan Stanley Dean Witter High-Yield..... 3.14% 7.38% 1/2/97
Morgan Stanley Dean Witter Value.......... -3.60% 7.16% 1/2/97
Scudder International..................... 16.61% 11.95% 8.29% 9.18% 7.87% 5/1/87
Scudder Money Market...................... 3.69% 3.61% 3.40% 3.72% 7/16/85
Van Eck Worldwide Hard Assets............. -32.07% -9.30% -5.28% -0.16% 9/1/89
Warburg Pincus Fixed Income............... 6.36% 8.04% 3/31/97
Warburg Pincus International Equity....... 1.52% 1.88% 3.42% 6/30/95
Warburg Pincus Post-Venture Capital....... -2.73% 2.39% 9/30/96
</TABLE>
CHART 4
(reflects the deduction of all fees and expenses, except the CDSC,
for Contracts with Death Benefit Option 2)
<TABLE>
<CAPTION>
SINCE PORTFOLIO
PORTFOLIO INCEPTION
1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION DATE
------ ------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund........ 17.67% 14.71% 15.33% 16.88% 5/5/93
AIM V.I. Diversified Income Fund.......... 2.14% 6.17% 5.64% 5.89% 5/5/93
AIM V.I. Growth Fund...................... 32.26% 24.39% 19.72% 19.17% 5/5/93
AIM V.I. Growth and Income Fund........... 25.91% 22.66% 20.78% 5/2/94
AIM V.I. International Equity Fund........ 13.88% 12.44% 9.78% 11.79% 5/5/93
Alger American Growth..................... 46.02% 26.44% 19.36% 18.85% 1/9/89
AMT Guardian.............................. 29.95% 30.74% 11/3/97
AMT Limited Maturity Bond................. 2.94% 3.67% 3.72% 5.30% 6.40% 9/10/84
AMT Mid-Cap Growth........................ 37.35% 50.56% 11/3/97
AMT Partners.............................. 2.76% 19.33% 18.06% 3/22/94
Dreyfus VIF Growth and Income............. 10.26% 14.46% 19.09% 5/2/94
Dreyfus Stock Index....................... 26.43% 25.72% 16.77% 10.57% 9/29/89
Federated American Leaders Fund II ....... 15.92% 21.48% 17.89% 2/10/94
Federated High Income Bond II............. 1.27% 8.58% 4.49% 3/1/94
Federated Fund for U.S. Government
Securities II........................... 6.16% 5.31% 3.53% 3/28/94
Federated Prime Money Fund II............. 3.82% 4.62% 4.93% 11/18/94
Federated Utility II...................... 12.37% 15.23% 10.92% 2/10/94
MFS Emerging Growth....................... 32.30% 22.47% 24.31% 7/24/95
MFS Growth With Income.................... 20.63% 23.74% 24.22% 10/9/95
MFS Research.............................. 18.97% 20.61% 21.09% 7/26/95
MFS Total Return.......................... 10.77% 14.24% 16.99% 1/3/95
MFS Utilities............................. 16.42% 20.89% 23.66% 1/3/95
Morgan Stanley Dean Witter Emerging
Markets Debt............................ -29.39% -20.23% 6/16/97
Morgan Stanley Dean Witter Equity Growth.. 17.41% 24.24% 1/2/97
Morgan Stanley Dean Witter Global Equity.. 11.72% 15.05% 1/2/97
Morgan Stanley Dean Witter High-Yield..... 3.35% 7.59% 1/2/97
Morgan Stanley Dean Witter Value.......... -3.41% 7.38% 1/2/97
Scudder International..................... 16.84% 12.18% 8.51% 9.40% 8.09% 5/1/87
Scudder Money Market...................... 3.89% 3.81% 3.60% 3.92% 7/16/85
Van Eck Worldwide Hard Assets............. -31.93% -9.12% -5.09% 0.04% 9/1/89
Warburg Pincus Fixed Income............... 6.58% 8.25% 3/31/97
Warburg Pincus International Equity....... 3.88% 2.78% 4.25% 6/30/95
Warburg Pincus Post-Venture Capital....... 5.03% 6.06% 9/30/96
</TABLE>
CHART 5
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDING 12/31/98 FOR CONTRACTS WITH DEATH
BENEFIT OPTION 1:
<TABLE>
<CAPTION>
SINCE SEPARATE
SEPARATE ACCOUNT
ACCOUNT INCEPTION
1 YEAR 3 YEARS INCEPTION DATE IN PORTFOLIO
------ ------- ---------- ------------------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund........ 2.59% 7/9/98
AIM V.I. Diversified Income Fund.......... -1.39% 7/31/98
AIM V.I. Growth Fund...................... 6.80% 7/15/98
AIM V.I. Growth and Income Fund........... 10.75% 7/31/98
AIM V.I. International Equity Fund........ -1.36% 6/12/98
Alger American Growth..................... 21.57% 36.37% 35.05% 1/19/96
AMT Guardian.............................. 5.66% 8/14/98
AMT Limited Maturity Bond................. 0.45% 8/24/98
AMT Mid-Cap Growth........................ 18.59% 8/24/98
AMT Partners.............................. 4.43% 8/6/98
Dreyfus VIF Growth and Income............. 21.59% 17.13% 17.00% 1/19/96
Dreyfus Stock Index....................... 21.79% 30.23% 29.42% 3/4/96
Federated American Leaders Fund II........ 9.68% 8/17/98
Federated High Income Bond II............. 11.56% 8.76% 8.60% 1/19/96
Federated Fund for U.S. Government
Securities II........................... 3.94% 5.80% 5.96% 3/15/96
Federated Prime Money Fund II............. 1.18% 8/14/98
Federated Utility Fund II................. 11.00% 16.71% 17.35% 1/19/96
MFS Emerging Growth....................... 25.08% 32.70% 29.45% 1/19/96
MFS Growth With Income.................... 0.91% 7/14/98
MFS Research.............................. 29.83% 10/9/98
MFS Total Return.......................... 21.75% 13.63% 9/12/96
MFS Utilities............................. 10.23% 8/24/98
Morgan Stanley Dean Witter Emerging
Markets Debt............................ 0.25% 12/7/98
Morgan Stanley Dean Witter Equity Growth.. -1.53% 7/14/98
Morgan Stanley Dean Witter Global Equity.. 10.28% 10/19/98
Morgan Stanley Dean Witter High-Yield..... -0.01% 8/10/98
Morgan Stanley Dean Witter Value.......... -7.13% 6/23/98
Scudder International..................... 11.71% 14.36% 13.28% 1/19/96
Scudder Money Market...................... 3.39% 3.62% 3.58% 1/12/96
Van Eck Worldwide Hard Assets............. -6.66% -16.97% 1/29/97
Warburg Pincus Fixed Income............... 3.46% 8/10/98
Warburg Pincus International Equity....... 0.00% N/A
Warburg Pincus Post-Venture Capital....... 0.00% N/A
</TABLE>
CHART 6
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDING 12/31/98 FOR CONTRACTS WITH DEATH
BENEFIT OPTION 2
<TABLE>
<CAPTION>
SINCE SEPARATE
SEPARATE ACCOUNT
ACCOUNT INCEPTION
INCEPTION DATE IN PORTFOLIO
--------- ------------------
<S> <C> <C>
AIM V.I. Capital Appreciation Fund........ 13.91% 8/4/98
AIM V.I. Diversified Income Fund.......... 1.40% 9/1/98
AIM V.I. Growth Fund...................... 10.37% 7/23/98
AIM V.I. Growth and Income Fund........... 8.70% 7/23/98
AIM V.I. International Equity Fund........ 10.57% 9/1/98
Alger American Growth..................... 8.17% 7/14/98
AMT Guardian.............................. N/A N/A
AMT Limited Maturity Bond................. N/A N/A
AMT Mid-Cap Growth........................ N/A N/A
AMT Partners.............................. N/A N/A
Dreyfus VIF Growth and Income............. 21.47% 10/1/98
Dreyfus Stock Index....................... 14.64% 8/4/98
Federated American Leaders Fund II........ N/A N/A
Federated High Income Bond II............. -3.16% 7/29/98
Federated Fund for U.S. Government
Securities II........................... 0.86% 11/2/98
Federated Prime Money Fund II............. 1.09% 8/31/98
Federated Utility Fund II................. 3.06% 12/1/98
MFS Emerging Growth....................... 9.43% 7/23/98
MFS Growth With Income.................... 20.45% 10/5/98
MFS Research.............................. 10.32% 8/4/98
MFS Total Return.......................... 3.89% 7/31/98
MFS Utilities............................. 4.15% 12/16/98
Morgan Stanley Dean Witter Emerging
Markets Debt............................ -28.86% 7/14/98
Morgan Stanley Dean Witter Equity Growth.. 9.75% 8/4/98
Morgan Stanley Dean Witter Global Equity.. 15.03% 9/4/98
Morgan Stanley Dean Witter High-Yield..... -0.58% 7/14/98
Morgan Stanley Dean Witter Value.......... N/A N/A
Scudder International..................... 18.54% 10/1/98
Scudder Money Market...................... 1.53% 8/3/98
Van Eck Worldwide Hard Assets............. -19.54% 7/14/98
Warburg Pincus Fixed Income............... 2.23% 8/27/98
Warburg Pincus International Equity....... -10.96% 7/14/98
Warburg Pincus Post-Venture Capital....... N/A N/A
</TABLE>
FEDERAL TAX STATUS
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING
OF CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE
COMPANY CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE
MADE. PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE
POSSIBILITY OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF
THE CONTRACTS. PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE
TREATED AS "ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS. IT SHOULD BE
FURTHER UNDERSTOOD THAT THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE AND THAT
SPECIAL RULES NOT DESCRIBED HEREIN MAY BE APPLICABLE IN CERTAIN SITUATIONS.
MOREOVER, NO ATTEMPT HAS BEEN MADE TO CONSIDER ANY APPLICABLE STATE OR OTHER TAX
LAWS.
GENERAL
Section 72 of the Code governs taxation of annuities in general. An Owner
is not taxed on increases in the value of a Contract until distribution occurs,
either in the form of a lump sum payment or as annuity payments under the
Annuity Option elected. For a lump sum payment received as a total surrender
(total redemption) or death benefit, the recipient is taxed on the portion of
the payment that exceeds the cost basis of the Contract. For Non-Qualified
Contracts, this cost basis is generally the purchase payments, while for
Qualified Contracts there may be no cost basis. The taxable portion of the lump
sum payment is taxed at ordinary income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion
amount is includible in taxable income. The exclusion amount for payments based
on a fixed annuity option is determined by multiplying the payment by the ratio
that the cost basis of the Contract (adjusted for any period certain or refund
feature) bears to the expected return under the Contract. Payments received
after the investment in the Contract has been recovered (i.e. when the total of
the excludible amounts equals the investment in the Contract) are fully taxable.
The taxable portion is taxed at ordinary income rates. For certain types of
Qualified Plans there may be no cost basis in the Contract within the meaning of
Section 72 of the Code. Owners, Annuitants and Beneficiaries under the Contracts
should seek competent financial advice about the tax consequences of any
distributions.
The Company is taxed as a life insurance company under the Code. For
federal income tax purposes, the Separate Account is not a separate entity from
the Company, and its operations form a part of the Company.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not adequately
diversified in accordance with regulations prescribed by the United States
Treasury Department ("Treasury Department"). Disqualification of the Contract as
an annuity contract would result in imposition of federal income tax to the
Contract Owner with respect to earnings allocable to the Contract prior to the
receipt of payments under the Contract. The Code contains a safe harbor
provision which provides that annuity contracts such as the Contracts meet the
diversification requirements if, as of the end of each quarter, the underlying
assets meet the diversification standards for a regulated investment company and
no more than fifty-five percent (55%) of the total assets consist of cash, cash
items, U.S. government securities and securities of other regulated investment
companies.
On March 2, 1989, the Treasury Department issued regulations (Treas. Reg.
1.817-5) which established diversification requirements for the investment
portfolios underlying variable contracts such as the Contracts. The regulations
amplify the diversification requirements for variable contracts set forth in the
Code and provide an alternative to the safe harbor provision described above.
Under the regulations, an investment portfolio will be deemed adequately
diversified if: (1) no more than 55% of the value of the total assets of the
portfolio is represented by any one investment; (2) no more than 70% of the
value of the total assets of the portfolio is represented by any two
investments; (3) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments.
The Code provides that for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
by Section 817(h) of the Code have been met, "each United States government
agency or instrumentality shall be treated as a separate issuer."
The Company intends that all Portfolios underlying the Contracts will be
managed by the investment advisers for the Portfolios in such a manner as to
comply with these diversification requirements.
The Treasury Department has indicated that the diversification Regulations
do not provide guidance regarding the circumstances in which Owner control of
the investments of the Separate Account will cause the Owner to be treated as
the owner of the assets of the Separate Account, thereby resulting in the loss
of favorable tax treatment for the Contract. At this time it cannot be
determined whether additional guidance will be provided and what standards may
be contained in such guidance.
The amount of Owner control which may be exercised under the Contract is
different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the policy
owner was not the owner of the assets of the separate account. It is unknown
whether these differences, such as the Owner's ability to transfer among
investment choices or the number and type of investment choices available, would
cause the Owner to be considered as the owner of the assets of the Separate
Account resulting in the imposition of federal income tax to the Owner with
respect to earnings allocable to the Contract prior to receipt of payments under
the Contract.
In the event any forthcoming guidance or ruling is considered to set forth
a new position, such guidance or ruling will generally be applied only
prospectively. However, if such ruling or guidance was not considered to set
forth a new position, it may be applied retroactively resulting in the Owner
being retroactively determined to be the owner of the assets of the Separate
Account.
Due to the uncertainty in this area, the Company reserves the right to
modify the Contract in an attempt to maintain favorable tax treatment.
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity contracts which are
issued within a calendar year period to the same contract owner by one company
or its affiliates are treated as one annuity contract for purposes of
determining the tax consequences of any distribution. Such treatment may result
in adverse tax consequences, including more rapid taxation of the distributed
amounts from such combination of contracts. For purposes of this rule, contracts
received in a Section 1035 exchange will be considered issued in the year of the
exchange. Owners should consult a tax adviser prior to purchasing more than one
non-qualified annuity contract in any calendar year period.
CONTRACTS OWNED BY OTHER THAN NATURAL PERSONS
Under Section 72(u) of the Code, the investment earnings on purchase
payments for the Contracts will be taxed currently to the Owner if the Owner is
a non-natural person, e.g., a corporation or certain other entities. Such
Contracts generally will not be treated as annuities for federal income tax
purposes. However, this treatment is not applied to Contracts held by a trust or
other entity as an agent for a natural person nor to Contracts held by qualified
plans. Purchasers should consult their own tax counsel or other tax adviser
before purchasing a Contract to be owned by a non-natural person.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable event. Owners should
therefore consult competent tax advisers should they wish to assign or pledge
their Contracts.
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includible in the gross
income of the Owner are subject to federal income tax withholding. Generally,
amounts are withheld from periodic payments at the same rate as wages and at the
rate of 10% from non-periodic payments. However, the Owner, in most cases, may
elect not to have taxes withheld or to have withholding done at a different
rate.
Effective January 1, 1993, certain distributions from retirement plans
qualified under Section 401 or Section 403(b) of the Code, which are not
directly rolled over to another eligible retirement plan or individual
retirement account or individual retirement annuity, are subject to a mandatory
20% withholding for federal income tax. The 20% withholding requirement
generally does not apply to: a) a series of substantially equal payments made at
least annually for the life or life expectancy of the participant or joint and
last survivor expectancy of the participant and a designated beneficiary, or for
a specified period of 10 years or more; b) distributions which are required
minimum distributions; (c) the portion of the distributions not includible in
gross income (i.e. returns of after-tax contributions); or d) hardship
withdrawals. Participants should consult their own tax counsel or other tax
adviser regarding withholding requirements.
TAX TREATMENT OF WITHDRAWALS -- NON-QUALIFIED CONTRACTS
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the contract value exceeds the aggregate purchase
payments made, any amount withdrawn will be treated as coming first from the
earnings and then, only after the income portion is exhausted, as coming from
the principal. Withdrawn earnings are includible in gross income. It further
provides that a ten percent (10%) penalty will apply to the income portion of
any distribution. However, the penalty is not imposed on amounts received: (a)
after the taxpayer reaches age 59 1/2; (b) after the death of the Owner; (c) if
the taxpayer is totally disabled (for this purpose disability is as defined in
Section 72(m)(7) of the Code); (d) in a series of substantially equal periodic
payments made not less frequently than annually for the life (or life
expectancy) of the taxpayer or for the joint lives (or joint life expectancies)
of the taxpayer and his Beneficiary; (e) under an immediate annuity; or (f)
which are allocable to purchase payments made prior to August 14, 1982.
With respect to (d) above, if the series of substantially equal periodic
payments is modified before the later of your attaining age 59 1/2 or 5 years
from the date of the first periodic payment, then the tax for the year of the
modification is increased by an amount equal to the tax which would have been
imposed (the 10% penalty tax) but for the exception, plus interest for the tax
years in which the exception was used.
The above information does not apply to Qualified Contracts. However,
separate tax withdrawal penalties and restrictions may apply to such Qualified
Contracts. (See "Tax Treatment of Withdrawals -- Qualified Contracts.")
QUALIFIED PLANS
The Contracts offered by the Prospectus are designed to be suitable for use
under various types of Qualified Plans. Because of the minimum purchase payment
requirements, these Contracts may not be appropriate for some periodic payment
retirement plans. Taxation of participants in each Qualified Plan varies with
the type of plan and terms and conditions of each specific plan. Owners,
Annuitants and Beneficiaries are cautioned that benefits under a Qualified Plan
may be subject to the terms and conditions of the plan regardless of the terms
and conditions of the Contracts issued pursuant to the plan. Some retirement
plans are subject to distribution and other requirements that are not
incorporated into the Company's administrative procedures. Owners, participants
and Beneficiaries are responsible for determining that contributions,
distributions and other transactions with respect to the Contracts comply with
applicable law. Following are general descriptions of the types of Qualified
Plans with which the Contracts may be used. Such descriptions are not exhaustive
and are for general informational purposes only. The tax rules regarding
Qualified Plans are very complex and will have differing applications, depending
on individual facts and circumstances. Each purchaser should obtain competent
tax advice prior to purchasing a Contract issued under a Qualified Plan.
On July 6, 1983, the Supreme Court decided in Arizona Governing Committee
v. Norris that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women. The Contracts sold by the Company in connection with
Qualified Plans will utilize annuity tables which do not differentiate on the
basis of sex. Such annuity tables will also be available for use in connection
with certain non-qualified deferred compensation plans.
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available and described in
this Statement of Additional Information. Generally, Contracts issued pursuant
to Qualified Plans are not transferable except upon surrender or annuitization.
Various penalty and excise taxes may apply to contributions or distributions
made in violation of applicable limitations. Furthermore, certain withdrawal
penalties and restrictions may apply to surrenders from Qualified Contracts.
(See "Tax Treatment of Withdrawals -- Qualified Contracts.")
a. Tax-Sheltered Annuities
Section 403(b) of the Code permits the purchase of "tax-sheltered
annuities" by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. These qualifying
employers may make contributions to the Contracts for the benefit of their
employees. Such contributions are not includible in the gross income of the
employee until the employee receives distributions from the Contract. The amount
of contributions to the tax-sheltered annuity is limited to certain maximums
imposed by the Code. Furthermore, the Code sets forth additional restrictions
governing such items as transferability, distributions, nondiscrimination and
withdrawals. (See "Tax Treatment of Withdrawals -- Qualified Contracts" and
"Tax-Sheltered Annuities -- Withdrawal Limitations.") Employee loans are not
allowed under these Contracts. Any employee should obtain competent tax advice
as to the tax treatment and suitability of such an investment.
b. Individual Retirement Annuities
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed to an
IRA which may be deductible from the individual's taxable income. These IRAs are
subject to limitations on eligibility, contributions, transferability and
distributions. (See "Tax Treatment of Withdrawals -- Qualified Contracts.")
Under certain conditions, distributions from other IRAs and other Qualified
Plans may be rolled over or transferred on a tax-deferred basis into an IRA.
Sales of Contracts for use with IRAs are subject to special requirements imposed
by the Code, including the requirement that certain informational disclosure be
given to persons desiring to establish an IRA. Purchasers of Contracts to be
qualified as Individual Retirement Annuities should obtain competent tax advice
as to the tax treatment and suitability of such an investment.
c. Pension and Profit-Sharing Plans
Sections 401(a) and 401(k) of the Code permit employers, including
self-employed employers, to establish various types of retirement plans for
employees. These retirement plans may permit the purchase of the Contracts to
provide benefits under the Plan. Contributions to the Plan for the benefit of
employees will not be includible in the gross income of the employee until
distributed from the Plan. The tax consequences to participants may vary,
depending upon the particular Plan design. However, the Code places limitations
and restrictions on all Plans, including on such items as: amount of allowable
contributions; form, manner and timing of distributions; transferability of
benefits; vesting and nonforfeitability of interests; nondiscrimination in
eligibility and participation; and the tax treatment of distributions,
withdrawals and surrenders. Participant loans are not allowed under the
Contracts purchased in connection with these Plans. (See "Tax Treatment of
Withdrawals -- Qualified Contracts.") Purchasers of Contracts for use with
Pension or Profit-Sharing Plans should obtain competent tax advice as to the tax
treatment and suitability of such an investment.
TAX TREATMENT OF WITHDRAWALS -- QUALIFIED CONTRACTS
In the case of a withdrawal under a Qualified Contract, a ratable portion
of the amount received is taxable, generally based on the ratio of the
individual's cost basis to the individual's total accrued benefit under the
retirement plan. Special tax rules may be available for certain distributions
from a Qualified Contract. Section 72(t) of the Code imposes a 10% penalty tax
on the taxable portion of any distribution from qualified retirement plans,
including Contracts issued and qualified under Code Sections 401 (Pension and
Profit-Sharing Plans), 403(b) (Tax-Sheltered Annuities) and 408 (Individual
Retirement Annuities). To the extent amounts are not includible in gross income
because they have been properly rolled over to an IRA or to another eligible
Qualified Plan, no tax penalty will be imposed. The tax penalty will not apply
to the following distributions: (a) if distribution is made on or after the date
on which the Owner or Annuitant (as applicable) reaches age 59 1/2; (b)
distributions following the death or disability of the Owner or Annuitant (as
applicable) (for this purpose disability is as defined in Section 72(m)(7) of
the Code); (c) after separation from service, distributions that are part of
substantially equal periodic payments made not less frequently than annually for
the life (or life expectancy) of the Owner or Annuitant (as applicable) or the
joint lives (or joint life expectancies) of such Owner or Annuitant (as
applicable) and his designated beneficiary; (d) distributions to an Owner or
Annuitant (as applicable) who has separated from service after he has attained
age 55; (e) distributions made to the Owner or Annuitant (as applicable) to the
extent such distributions do not exceed the amount allowable as a deduction
under Code Section 213 to the Owner or Annuitant (as applicable) for amounts
paid during the taxable year for medical care; (f) distributions made to an
alternate payee pursuant to a qualified domestic relations order; (g)
distributions from an Individual Retirement Annuity for the purchase of medical
insurance (as described in Section 213(d)(1)(D) of the Code) for the Owner or
Annuitant (as applicable) and his or her spouse and dependents if the Owner or
Annuitant (as applicable) has received unemployment compensation for at least 12
weeks (this exception will no longer apply after the Owner or Annuitant (as
applicable) has been re-employed for at least 60 days); (h) distributions from
an Individual Retirement Annuity made to the Owner or Annuitant (as applicable)
to the extent such distributions do not exceed the qualified higher education
expenses (as defined in Section 72(t)(7) of the Code) of the Owner or Annuitant
(as applicable) for the taxable year; and (i) distributions from an Individual
Retirement Annuity made to the Owner or Annuitant (as applicable) which are
qualified first-time home buyer distributions (as defined in Section 72(t)(8) of
the Code). The exceptions stated in items (d) and (f) above do not apply in the
case of an Individual Retirement Annuity. The exception stated in item (c)
applies to an Individual Retirement Annuity without the requirement that there
be a separation from service.
With respect to (c) above, if the series of substantially equal periodic
payments is modified before the later of your attaining age 59 1/2 or 5 years
from the date of the first periodic payment, then the tax for the year of the
modification is increased by an amount equal to the tax which would have been
imposed (the 10% penalty tax) but for the exception, plus interest for the tax
years in which the exception was used.
Generally, distributions from a Qualified Plan must commence no later than
April 1 of the calendar year following the later of: (a) the year in which the
employee attains age 70 1/2, or (b) the calendar year in which the employee
retires. The date set forth in (b) does not apply to an Individual Retirement
Annuity. Required distributions must be over a period not exceeding the life
expectancy of the individual or the joint lives or life expectancies of the
individual and his or her designated beneficiary. If the required minimum
distributions are not made, a 50% penalty tax is imposed as to the amount not
distributed.
TAX-SHELTERED ANNUITIES -- WITHDRAWAL LIMITATIONS
The Code limits the withdrawal of amounts attributable to contributions
made pursuant to a salary reduction agreement (as defined in Section 403(b)(11)
of the Code) to circumstances only when the Owner: (1) attains age 59 1/2; (2)
separates from service; (3) dies; (4) becomes disabled (within the meaning of
Section 72(m)(7) of the Code); or (5) in the case of hardship. However,
withdrawals for hardship are restricted to the portion of the Owner's Contract
value which represents contributions by the Owner and does not include any
investment results. The limitations on withdrawals became effective on January
1, 1989 and apply only to salary reduction contributions made after December 31,
1988, and to income attributable to such contributions and to income
attributable to amounts held as of December 31, 1988. The limitations on
withdrawals do not affect rollovers and transfers between certain Qualified
Plans. Owners should consult their own tax counsel or other tax adviser
regarding any distributions.
SECTION 457 -- DEFERRED COMPENSATION PLANS
Under Section 457 of the Code, governmental and certain other tax-exempt
employers may establish deferred compensation plans for the benefit of their
employees which may invest in annuity contracts. The Code, as in the case of
qualified plans, establishes limitations and restrictions on eligibility,
contributions and distributions. Under these Plans, contributions made for the
benefit of the employees will not be includible in the employees' gross income
until distributed from the Plan. Under a Section 457 Plan, the plan assets
remain solely the property of the employer, subject only to the claims of the
employer's general creditors, until such time as made available to the
participant or beneficiary. However, for Plans established after August 20,
1996, it is required that plan assets must be held in trust for the benefit of
plan participants and are not subject to the claims of the general creditors of
the employer. Furthermore, this requirement must be met for all Plans no later
than January 1, 1999. IN CERTAIN STATES, THE CONTRACTS MAY NOT BE AVAILABLE FOR
USE IN CONNECTION WITH SECTION 457 PLANS.
ANNUITY PROVISIONS
Currently, the Company makes available payment plans on a fixed basis only.
(See the Prospectus for a description of the Annuity Options.)
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.
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Financial Statements
December 31, 1998
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Board of Directors
United Life & Annuity Insurance Company and
Contractowners of United Life & Annuity
Separate Account One:
We have audited the accompanying statement of assets and liabilities of the
sub-accounts of United Life & Annuity Separate Account One as of December 31,
1998 and the related statement of operations for the year then ended, and the
statement of changes in net assets for the years ended December 31, 1998 and
1997. These financial statements are the responsibility of the Separate
Account's management. Our responsibility is to express an opinion of these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets and liabilities of the sub-accounts of United
Life & Annuity Account One as of December 31, 1998, and the results of their
operations for the year then ended and the changes in their net assets for the
years ended December 31, 1998 and 1997 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Portland, Oregon
February 22, 1999
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
Alger Federated
------------- ---------------------------------------------------------------
U.S.
American Prime High Income Government
Growth Leaders Money Bond Bond Utility
------------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Investments in mutual funds at market value:
The Alger American Fund (Alger):
Alger American Growth Portfolio - 314,693
shares (cost $14,150,245) $ 16,747,980 $ -- $ -- $ -- $ -- $ --
Federated Investors (Federated):
American Leaders Fund - 44,457 shares
(cost $884,959) -- 963,818 -- -- -- --
Prime Money Fund - 3,367,951 shares
(cost $3,367,951) -- -- 3,367,951 -- -- --
High Income Bond Fund II - 595,812 shares
(cost $6,354,550) -- -- -- 6,506,271 -- --
Fund for U.S. Government Securities II -
249,591 shares (cost $2,674,380) -- -- -- -- 2,782,939 --
Utility Fund II - 190,047 shares
(cost $2,595,678) -- -- -- -- -- 2,902,018
------------- ------------ ------------ ------------ ----------- -----------
Total assets $ 16,747,980 $ 963,818 $ 3,367,951 $ 6,506,271 $ 2,782,939 $ 2,902,018
============= ============ ============ ============ =========== ===========
Liabilities -- -- -- -- -- --
------------- ------------ ------------ ------------ ----------- -----------
Net assets $ 16,747,980 $ 963,818 $ 3,367,951 $ 6,506,271 $ 2,782,939 $ 2,902,018
============= ============ ============ ============ =========== ===========
Units outstanding 871,098 95,071 329,821 520,480 237,976 193,281
============= ============ ============ ============ =========== ===========
Average unit value 19.23 10.14 10.21 12.50 11.69 15.01
============= ============ ============ ============ =========== ===========
SpectraDirect unit value 20.18 10.13 10.20 12.91 11.74 15.77
============= ============ ============ ============ =========== ===========
SpectraSelect unit value 20.22 10.14 10.20 12.94 11.77 15.81
============= ============ ============ ============ =========== ===========
Spectra SDB unit value 12.49 10.15 10.22 9.82 10.45 10.89
============= ============ ============ ============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
2 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
Van Eck Dreyfus Scudder
-------------- ------------------------------ ------------------------------
Worldwide Growth and Money
Hard Assets Stock Index Income Market International
-------------- --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in mutual funds at market value:
Van Eck Worldwide Insurance Trust (Van Eck):
Van Eck Worldwide Hard Assets - 20,077
shares (cost $272,911) $ 184,710 $ -- $ -- $ -- $ --
The Dreyfus Variable Investment Fund (Dreyfus):
Stock Index Portfolio - 604,330 shares
(cost $16,772,066) -- 19,652,813 -- -- --
Growth and Income Fund - 410,836 shares
(cost $8,793,656) -- -- 9,297,214 -- --
Scudder Variable Life Investment Fund (Scudder):
Money Market Portfolio - 6,628,217 shares
(cost $6,628,217) -- -- -- 6,628,217 --
International Portfolio - 411,953 shares
(cost $5,902,490) -- -- -- -- 5,998,029
-------------- --------------- -------------- -------------- ---------------
Total assets $ 184,710 $ 19,652,813 $ 9,297,214 $ 6,628,217 $ 5,998,029
============== =============== ============== ============== ===============
Liabilities -- -- -- -- --
-------------- --------------- -------------- -------------- ---------------
Net assets $ 184,710 $ 19,652,813 $ 9,297,214 $ 6,628,217 $ 5,998,029
============== =============== ============== ============== ===============
Units outstanding 24,187 1,057,803 605,589 606,111 422,522
============== =============== ============== ============== ===============
Average unit value 7.64 18.58 15.35 10.94 14.20
============== =============== ============== ============== ===============
SpectraDirect unit value 7.73 20.17 15.63 11.10 14.27
============== =============== ============== ============== ===============
SpectraSelect unit value 7.74 20.22 15.67 11.13 14.30
============== =============== ============== ============== ===============
Spectra SDB unit value 6.85 11.05 9.90 10.24 10.07
============== =============== ============== ============== ===============
</TABLE>
See accompanying notes to financial statements.
3 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
MFS
-------------------------------------------------------------------------
Emerging Total Growth with
Growth Return Income Research Utilities
-------------- -------------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in mutual funds at market value:
MFS Variable Insurance Trust (MFS):
Emerging Growth Series - 893,035 shares
(cost $15,354,263) $ 19,173,453 $ -- $ -- $ -- $ --
Total Return Series - 764,529 shares
(cost $12,721,085) -- 13,853,262 -- -- --
Growth with Income Series - 48,561 shares
(cost $893,341) -- -- 976,562 -- --
Research Series - 69,790 shares (cost $1,217,638) -- -- -- 1,329,496 --
Utilities Series - 44,448 shares (cost $831,523) -- -- -- -- 880,954
-------------- -------------- -------------- ------------ -----------
Total assets $ 19,173,453 $ 13,853,262 $ 976,562 $ 1,329,496 $ 880,954
============== ============== ============== ============ ===========
Liabilities -- -- -- -- --
-------------- -------------- -------------- ------------ -----------
Net assets $ 19,173,453 $ 13,853,262 $ 976,562 $ 1,329,496 $ 880,954
============== ============== ============== ============ ===========
Units outstanding 1,098,386 952,508 92,389 127,109 83,695
============== ============== ============== ============ ===========
Average unit value 17.46 14.54 10.57 10.46 10.53
============== ============== ============== ============ ===========
SpectraDirect unit value 18.56 15.19 10.57 10.45 10.51
============== ============== ============== ============ ===========
SpectraSelect unit value 18.60 15.22 10.57 10.46 10.52
============== ============== ============== ============ ===========
Spectra SDB unit value 11.15 10.35 10.59 10.47 10.53
============== ============== ============== ============ ===========
</TABLE>
See accompanying notes to financial statements.
4 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
Warburg Pincus AIM
------------------------------------- -----------------------------------
Fixed International Post Venture Capital Diversified
Income Equity Capital Appreciation Income Growth
----------- ------------ ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Investments in mutual funds at market value:
Warburg Pincus Funds (Warburg Pincus):
Warburg Pincus II - Fixed Income Portfolio
211,109 shares (cost $2,247,419) $ 2,178,645 $ -- $ -- $ -- $ -- $ --
Warburg Pincus Trust International Equity Portfolio
6,666 shares (cost $70,106) -- 73,261 -- -- -- --
Warburg Pincus Trust Post Venture Capital Portfolio
5,330 shares (cost $60,920) -- -- 62,790 -- -- --
AIM Funds (AIM):
Capital Appreciation Fund - 81,001 shares
(cost $1,811,521) -- -- -- 2,041,222 -- --
Diversified Income Fund - 46,579 shares
(cost $536,932) -- -- -- -- 509,574 --
Growth Fund - 48,297 shares (cost $1,065,146) -- -- -- -- -- 1,197,773
----------- ------------ ------------ ------------ ---------- -----------
Total assets $ 2,178,645 $ 73,261 $ 62,790 $ 2,041,222 $ 509,574 $ 1,197,773
=========== ============ ============ ============ ========== ===========
Liabilities -- -- -- -- -- --
----------- ------------ ------------ ------------ ---------- -----------
Net assets $ 2,178,645 $ 73,261 $ 62,790 $ 2,041,222 $ 509,574 $ 1,197,773
=========== ============ ============ ============ ========== ===========
Units outstanding 207,482 8,207 6,957 196,604 51,420 102,814
=========== ============ ============ ============ ========== ===========
Average unit value 10.50 8.93 9.03 10.38 9.91 11.65
=========== ============ ============ ============ ========== ===========
SpectraDirect unit value 10.50 8.91 9.02 10.38 9.90 11.50
=========== ============ ============ ============ ========== ===========
SpectraSelect unit value 10.50 8.73 8.38 10.38 9.91 11.51
=========== ============ ============ ============ ========== ===========
Spectra SDB unit value 10.52 8.93 9.04 10.40 9.92 11.53
=========== ============ ============ ============ ========== ===========
</TABLE>
See accompanying notes to financial statements.
5 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
AIM NB
--------------------------- ----------------------------------------------
Growth International Limited Mid Cap
and Income Equity Guardian Maturity Growth Partners
------------- ------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Investments in mutual funds at market value:
AIM Funds (AIM):
Growth and Income Fund - 58,544 shares
(cost $1,240,550) $ 1,390,431 $ -- $ -- $ -- $ -- $ --
International Equity Fund - 55,995 shares
(cost $1,029,230) -- 1,098,622 -- -- -- --
Neuberger Berman Funds (NB):
AMT Guardian - 28,328 shares (cost $344,968) -- -- 392,065 -- -- --
Limited Maturity Bond Fund - 1,512 shares
(cost $20,816) -- -- -- 20,900 -- --
AMT Mid Cap Growth - 23,462 shares
(cost $312,247) -- -- -- -- 380,552 --
Partners Fund - 17,644 shares (cost $311,296) -- -- -- -- -- 334,006
------------- ------------ ----------- ---------- ----------- -----------
Total assets $ 1,390,431 $ 1,098,622 $ 392,065 $ 20,900 $ 380,552 $ 334,006
============= ============ =========== ========== =========== ===========
Liabilities -- -- -- -- -- --
------------- ------------ ----------- ---------- ----------- -----------
Net assets $ 1,390,431 $ 1,098,622 $ 392,065 $ 20,900 $ 380,552 $ 334,006
============= ============ =========== ========== =========== ===========
Units outstanding 122,167 114,030 41,940 2,059 33,595 35,832
============= ============ =========== ========== =========== ===========
Average unit value 11.38 9.63 9.35 10.15 11.33 9.32
============= ============ =========== ========== =========== ===========
SpectraDirect unit value 11.29 9.84 9.34 10.14 11.32 9.31
============= ============ =========== ========== =========== ===========
SpectraSelect unit value 11.29 9.84 9.35 10.14 11.32 9.32
============= ============ =========== ========== =========== ===========
Spectra SDB unit value 11.31 9.85 9.36 10.16 11.34 9.33
============= ============ =========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
6 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
MS
------------------------------------------------------------
Emerging Equity Global High Total
Markets Debt Growth Equity Yield Value all Funds
------------- ---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Investments in mutual funds at market value:
Morgan Stanley Funds (MS):
Emerging Markets Debt Fund - 11,411 shares
(cost $74,636) $ 69,606 $ -- $ -- $ -- $ -- $
Equity Growth Fund - 28,017 shares
(cost $379,706) -- 423,062 -- -- --
Global Equity Fund - 90,682 shares
(cost $1,164,324) -- -- 1,191,563 -- --
High Yield Fund - 133,526 shares
(cost $1,420,871) -- -- -- 1,381,990 --
Value Fund - 51,399 shares (cost $553,101) -- -- -- -- 570,529
------------- ---------- ----------- ----------- ----------- ------------
Total assets $ 69,606 $ 423,062 $ 1,191,563 $ 1,381,990 $ 570,529 $124,562,278
============= ========== =========== =========== =========== ============
Liabilities -- -- -- -- -- --
------------- ---------- ----------- ----------- ----------- ------------
Net assets $ 69,606 $ 423,062 $ 1,191,563 $ 1,381,990 $ 570,529 $124,562,278
============= ========== =========== =========== =========== ============
Units outstanding 10,208 40,838 121,267 138,827 64,497 8,616,769
============= ========== =========== =========== =========== ============
Average unit value 6.82 10.36 9.83 9.95 8.85
============= ========== =========== =========== =========== ============
SpectraDirect unit value 6.75 10.34 9.82 9.95 8.85
============= ========== =========== =========== =========== ============
SpectraSelect unit value 6.76 10.35 9.83 9.95 8.86
============= ========== =========== =========== =========== ============
Spectra SDB unit value 6.77 10.36 9.84 9.97 8.87
============= ========== =========== =========== =========== ============
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Operations
Year ended December 31, 1998
<TABLE>
<CAPTION>
Alger Federated
------------ ---------------------------------------------------------------
U.S.
American Prime High Income Government
Growth Leaders Money Bond Bond Utility
------------ ---------- ------------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Investment Income:
Income:
Dividends $ 27,562 $ -- $ 66,000 $ 144,942 $ 39,026 $ 46,112
Expenses:
Mortality and expense risks charges
and administrative fees (189,346) (5,527) (22,180) (89,467) (48,050) (39,153)
------------ ---------- ------------- ------------ ----------- ---------
Net investment income (loss) (161,784) (5,527) 43,820 55,475 (9,024) 6,959
------------ ---------- ------------- ------------ ----------- ---------
Realized gain (loss) on investments:
Proceeds from sales 5,865,428 598,583 13,465,253 8,287,419 2,331,098 958,770
Cost of securities (4,705,659) (638,360) (13,465,253) (8,247,330) (2,214,580) (779,858)
------------ ---------- ------------- ------------ ----------- ---------
Net gain (loss) 1,159,769 (39,777) -- 40,089 116,518 178,912
Capital gain distributions received 1,684,268 -- -- 12,286 1,546 86,463
------------ ---------- ------------- ------------ ----------- ---------
Net realized gain (loss) 2,844,037 (39,777) -- 52,375 118,064 265,375
------------ ---------- ------------- ------------ ----------- ---------
Unrealized gain (loss) on investments:
Beginning of year 954,645 -- -- 213,157 55,834 277,927
End of year 2,597,735 78,859 -- 151,721 108,559 306,340
------------ ---------- ------------- ------------ ----------- ---------
Net unrealized gain (loss) 1,643,090 78,859 -- (61,436) 52,725 28,413
------------ ---------- ------------- ------------ ----------- ---------
Net increase (decrease) in net
assets resulting from operations $ 4,325,343 $ 33,555 $ 43,820 $ 46,414 $ 161,765 $ 300,747
============ ========== ============= ============ =========== =========
</TABLE>
See accompanying notes to financial statements.
8 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Operations
Year ended December 31, 1998
<TABLE>
<CAPTION>
Van Eck Dreyfus Scudder
------------ --------------------------- ---------------------------
Worldwide Growth Money
Hard Assets Stock Index and Income Market International
------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Investment Income:
Income:
Dividends $ 42,206 $ 194,655 $ 170,463 $ 402,646 $ 660,728
Expenses:
Mortality and expense risks charges
and administrative fees (4,144) (217,556) (124,022) (129,228) (95,997)
------------ ------------ ------------- ------------ -------------
Net investment income (loss) 38,062 (22,901) 46,441 273,418 564,731
------------ ------------ ------------- ------------ -------------
Realized gain (loss) on investments:
Proceeds from sales 152,840 3,929,570 1,365,352 38,911,957 7,642,191
Cost of securities (212,131) (2,743,674) (1,340,806) (38,911,957) (7,534,730)
------------ ------------ ------------- ------------ -------------
Net gain (loss) (59,291) 1,185,896 24,546 -- 107,461
Capital gain distributions received -- 24,491 19,976 -- --
------------ ------------ ------------- ------------ -------------
Net realized gain (loss) (59,291) 1,210,387 44,522 -- 107,461
------------ ------------ ------------- ------------ -------------
Unrealized gain (loss) on investments:
Beginning of year (12,410) 891,753 (24,988) -- 69,639
End of year (88,201) 2,880,747 503,558 -- 95,539
------------ ------------ ------------- ------------ -------------
Net unrealized gain (loss) (75,791) 1,988,994 528,546 -- 25,900
------------ ------------ ------------- ------------ -------------
Net increase (decrease) in net
assets resulting from operations $ (97,020) $ 3,176,480 $ 619,509 $ 273,418 $ 698,092
============ ============ ============= ============ =============
</TABLE>
See accompanying notes to financial statements.
9 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Operations
Year ended December 31, 1998
<TABLE>
<CAPTION>
MFS
------------------------------------------------------------------------
Emerging Growth with
Growth Total Return Income Research Utilities
------------- -------------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Investment Income:
Income:
Dividends $ 106,849 $ 298,496 $ -- $ -- $ --
Expenses:
Mortality and expense risks charges
and administrative fees (221,219) (178,004) (3,872) (4,711) (3,071)
------------- -------------- -------------- ----------- ----------
Net investment income (loss) (114,370) 120,492 (3,872) (4,711) (3,071)
------------- -------------- -------------- ----------- ----------
Realized gain (loss) on investments:
Proceeds from sales 4,937,910 2,343,128 441,876 60,706 41,239
Cost of securities (3,606,093) (1,862,244) (437,213) (63,674) (40,650)
------------- -------------- -------------- ----------- ----------
Net gain (loss) 1,331,817 480,884 4,663 (2,968) 589
Capital gain distributions received -- -- -- -- --
------------- -------------- -------------- ----------- ----------
Net realized gain (loss) 1,331,817 480,884 4,663 (2,968) 589
------------- -------------- -------------- ----------- ----------
Unrealized gain (loss) on investments:
Beginning of year 1,026,161 697,656 -- -- --
End of year 3,819,190 1,132,177 83,221 111,858 49,431
------------- -------------- -------------- ----------- ----------
Net unrealized gain (loss) 2,793,029 434,521 83,221 111,858 49,431
------------- -------------- -------------- ----------- ----------
Net increase (decrease) in net assets
resulting from operations $ 4,010,476 $ 1,035,897 $ 84,012 $ 104,179 $ 46,949
============= ============== ============== =========== ==========
</TABLE>
See accompanying notes to financial statements.
10 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Operations
Year ended December 31, 1998
<TABLE>
<CAPTION>
Warburg Pincus AIM
---------------------------------------- ------------------------------------
Fixed International Post Venture Capital Diversified
Income Equity Capital Appreciation Income Growth
----------- ------------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Investment Income:
Income:
Dividends $ 91,285 $ 383 $ -- $ 2,850 $ 23,863 $ 3,773
Expenses:
Mortality and expense risks charges
and administrative fees (11,820) (486) (336) (8,137) (1,894) (6,067)
----------- ------------- ------------ ------------ ---------- ----------
Net investment income (loss) 79,465 (103) (336) (5,287) 21,969 (2,294)
----------- ------------- ------------ ------------ ---------- ----------
Realized gain (loss) on investments:
Proceeds from sales 1,841,071 25,284 12,371 462,994 134,868 460,940
Cost of securities (1,808,216) (27,653) (14,799) (488,710) (135,783) (461,857)
----------- ------------- ------------ ------------ ---------- ----------
Net gain (loss) 32,855 (2,369) (2,428) (25,716) (915) (917)
Capital gain distributions received -- -- -- 50,498 7,614 70,741
----------- ------------- ------------ ------------ ---------- ----------
Net realized gain (loss) 32,855 (2,369) (2,428) 24,782 6,699 69,824
----------- ------------- ------------ ------------ ---------- ----------
Unrealized gain (loss) on investments:
Beginning of year -- -- -- -- -- --
End of year (68,774) 3,155 1,870 229,701 (27,358) 132,627
----------- ------------- ------------ ------------ ---------- ----------
Net unrealized gain (loss) (68,774) 3,155 1,870 229,701 (27,358) 132,627
----------- ------------- ------------ ------------ ---------- ----------
Net increase (decrease) in net assets
resulting from operations $ 43,546 $ 683 $ (894) $ 249,196 $ 1,310 $ 200,157
=========== ============= ============ ============ ========== ==========
</TABLE>
See accompanying notes to financial statements.
11 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Operations
Year ended December 31, 1998
<TABLE>
<CAPTION>
AIM NB
--------------------------- --------------------------------------------------
Growth International Limited Mid Cap
and Income Equity Guardian Maturity Growth Partners
------------ ------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Investment Income:
Income:
Dividends $ 4,659 $ 8,191 $ 187 $ -- $ -- $ --
Expenses:
Mortality and expense risks charges
and administrative fees (4,618) (4,116) (1,854) (60) (2,050) (1,373)
------------ ------------- ----------- ---------- ----------- -----------
Net investment income (loss) 41 4,075 (1,667) (60) (2,050) (1,373)
------------ ------------- ----------- ---------- ----------- -----------
Realized gain (loss) on investments:
Proceeds from sales 146,773 596,226 215,209 2,133 132,987 12,760
Cost of securities (157,110) (605,311) (218,642) (2,126) (129,759) (13,624)
------------ ------------- ----------- ---------- ----------- -----------
Net gain (loss) (10,337) (9,085) (3,433) 7 3,228 (864)
Capital gain distributions received 11,499 -- -- -- -- --
------------ ------------- ----------- ---------- ----------- -----------
Net realized gain (loss) 1,162 (9,085) (3,433) 7 3,228 (864)
------------ ------------- ----------- ---------- ----------- -----------
Unrealized gain (loss) on investments:
Beginning of year -- -- -- -- -- --
End of year 149,881 69,392 47,097 84 68,305 22,710
------------ ------------- ----------- ---------- ----------- -----------
Net unrealized gain (loss) 149,881 69,392 47,097 84 68,305 22,710
------------ ------------- ----------- ---------- ----------- -----------
Net increase (decrease) in net assets
resulting from operations $ 151,084 $ 64,382 $ 41,997 $ 31 $ 69,483 $ 20,473
============ ============= =========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
12 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Operations
Year ended December 31, 1998
<TABLE>
<CAPTION>
MS
-------------------------------------------------------------------
Emerging Equity Global High Total
Markets Debt Growth Equity Yield Value all Funds
------------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Investment Income:
Income:
Dividends $ 8,120 $ -- $ 4,979 $ 76,234 $ 7,942 $ 2,432,151
Expenses:
Mortality and expense risks charges
and administrative fees (304) (1,338) (2,664) (4,358) (3,905) (1,430,927)
------------ ----------- ------------ ------------ ------------ ------------
Net investment income (loss) 7,816 (1,338) 2,315 71,876 4,037 1,001,224
------------ ----------- ------------ ------------ ------------ ------------
Realized gain (loss) on investments:
Proceeds from sales 928 109,932 475,463 227,077 528,219 96,718,555
Cost of securities (1,099) (117,455) (454,350) (237,697) (600,667) (92,279,070)
------------ ----------- ------------ ------------ ------------ ------------
Net gain (loss) (171) (7,523) 21,113 (10,620) (72,448) 4,439,485
Capital gain distributions received -- 573 2,346 12,672 12,922 1,997,895
------------ ----------- ------------ ------------ ------------ ------------
Net realized gain (loss) (171) (6,950) 23,459 2,052 (59,526) 6,437,380
------------ ----------- ------------ ------------ ------------ ------------
Unrealized gain (loss) on investments:
Beginning of year -- -- -- -- -- 4,149,374
End of year (5,030) 43,356 27,239 (38,881) 17,428 12,503,536
------------ ----------- ------------ ------------ ------------ ------------
Net unrealized gain (loss) (5,030) 43,356 27,239 (38,881) 17,428 8,354,162
------------ ----------- ------------ ------------ ------------ ------------
Net increase (decrease) in net
assets resulting from operations $ 2,615 $ 35,068 $ 53,013 $ 35,047 $ (38,061) $ 15,792,766
============ =========== ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Changes in Net Assets
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Alger Federated
----------------------------- --------------------------------------------
Growth American Leaders Prime Money
----------------------------- ------------------- -----------------------
1998 1997 1998 1997 1998 1997
-------------- ------------- ----------- ------ --------------- ------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) $ (161,784) $ (70,474) $ (5,527) $ -- $ 43,820 $ --
Net realized gain (loss) 2,844,037 172,076 (39,777) -- -- --
Net unrealized gain (loss) on investments 1,643,090 838,150 78,859 -- -- --
-------------- ------------- ----------- ------ --------------- ------
Net increase in net assets
resulting from operations 4,325,343 939,752 33,555 -- 43,820 --
-------------- ------------- ----------- ------ --------------- ------
Contract transactions:
Transfer of annuity fund deposits 1,211,540 633,101 28,126 -- 19,443,103 --
Net transfers between sub-accounts 4,624,224 3,020,107 922,825 -- (16,107,045) --
Death benefits (92,985) (9,359) -- -- -- --
Surrenders (625,485) (250,808) (20,688) -- (11,927) --
-------------- ------------- ----------- ------ --------------- ------
Net increase in net assets result-
ing from contract transactions 5,117,294 3,393,041 930,263 -- 3,324,131 --
-------------- ------------- ----------- ------ --------------- ------
Total increase in net assets 9,442,637 4,332,793 963,818 -- 3,367,951 --
Net assets:
Beginning of year 7,305,343 2,972,550 -- -- -- --
-------------- ------------- ----------- ------ --------------- ------
End of year $ 16,747,980 $ 7,305,343 $ 963,818 $ -- $ 3,367,951 $ --
============== ============= =========== ====== =============== ======
</TABLE>
See accompanying notes to financial statements.
14 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Changes in Net Assets
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Federated
-------------------------------------------------------------------------------
High Income Bond U.S. Government Bond Utility
-------------------------- -------------------------- -------------------------
1998 1997 1998 1997 1998 1997
------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) $ 55,475 $ 116,196 $ (9,024) $ 9,701 $ 6,959 $ 9,531
Net realized gain (loss) 52,375 42,909 118,064 7,262 265,375 41,913
Net unrealized gain (loss) on investments (61,436) 157,147 52,725 54,388 28,413 245,216
------------ ------------ ------------ ------------ ------------ -----------
Net increase in net assets resulting
from operations 46,414 316,252 161,765 71,351 300,747 296,660
------------ ------------ ------------ ------------ ------------ -----------
Contract transactions:
Transfer of annuity fund deposits 432,244 190,348 339,710 304,693 177,211 216,933
Net transfers between sub-accounts 2,754,469 1,094,026 779,548 1,107,179 818,692 711,466
Death benefits (81,340) -- (53,972) -- (16,908) (4,755)
Surrenders (349,476) (111,293) (162,179) (33,436) (92,705) (18,500)
------------ ------------ ------------ ------------ ------------ -----------
Net increase in net assets resulting
from contract transactions 2,755,897 1,173,081 903,107 1,378,436 886,290 905,144
------------ ------------ ------------ ------------ ------------ -----------
Total increase in net assets 2,802,311 1,489,333 1,064,872 1,449,787 1,187,037 1,201,804
Net assets:
Beginning of year 3,703,960 2,214,627 1,718,067 268,280 1,714,981 513,177
------------ ------------ ------------ ------------ ------------ -----------
End of year $ 6,506,271 $ 3,703,960 $ 2,782,939 $ 1,718,067 $ 2,902,018 $ 1,714,981
============ ============ ============ ============ ============ ===========
</TABLE>
See accompanying notes to financial statements.
15 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Changes in Net Assets
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Van Eck Dreyfus
------------------------- ------------------------------------------------------
Worldwide Hard Assets Stock Index Growth and Income
------------------------- -------------------------- --------------------------
1998 1997 1998 1997 1998 1997
------------ ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) $ 38,062 $ 721 $ (22,901) $ 27,612 $ 46,441 $ 292,223
Net realized gain (loss) (59,291) 3,592 1,210,387 326,587 44,522 13,929
Net unrealized gain (loss) on investments (75,791) (15,618) 1,988,994 753,893 528,546 80,276
------------ ----------- ------------ ------------ ------------ ------------
Net increase in net assets resulting
from operations (97,020) (11,305) 3,176,480 1,108,092 619,509 386,428
------------ ----------- ------------ ------------ ------------ ------------
Contract transactions:
Transfer of annuity fund deposits 9,016 31,683 2,027,643 766,485 803,245 518,285
Net transfers between sub-accounts (8,452) 191,362 7,218,363 4,098,748 3,679,277 2,521,967
Death benefits -- -- (77,961) (15,141) (173,350) (42,170)
Surrenders (8,991) (5,428) (651,701) (225,015) (367,887) (148,497)
------------ ----------- ------------ ------------ ------------ ------------
Net increase in net assets resulting
from contract transactions (8,427) 217,617 8,516,344 4,625,077 3,941,285 2,849,585
------------ ----------- ------------ ------------ ------------ ------------
Total increase in net assets (105,447) 206,312 11,692,824 5,733,169 4,560,794 3,236,013
Net assets:
Beginning of year 290,157 83,845 7,959,989 2,226,820 4,736,420 1,500,407
------------ ----------- ------------ ------------ ------------ ------------
End of year $ 184,710 $ 290,157 $ 19,652,813 $ 7,959,989 $ 9,297,214 $ 4,736,420
============ =========== ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
16 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Changes in Net Assets
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Scudder MFS
----------------------------------------------------- -------------------------
Money Market International Emerging Growth
--------------------------- ------------------------ -------------------------
1998 1997 1998 1997 1998 1997
------------- ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) $ 273,418 $ 137,843 $ 564,731 $ (3,593) $ (114,370) $ (101,145)
Net realized gain (loss) -- -- 107,461 79,372 1,331,817 124,395
Net unrealized gain (loss) on investments -- -- 25,900 6,812 2,793,029 1,023,482
------------- ------------ ----------- ----------- ------------ -----------
Net increase in net assets resulting
from operations 273,418 137,843 698,092 82,591 4,010,476 1,046,732
------------- ------------ ----------- ----------- ------------ -----------
Contract transactions:
Transfer of annuity fund deposits 43,149,414 27,008,328 615,750 309,848 990,005 841,749
Net transfers between sub-accounts (41,017,091) (24,402,932) 1,438,599 1,847,991 5,915,927 4,544,948
Death benefits (24,167) -- (52,696) (21,789) (73,768) (31,649)
Surrenders (708,223) (157,922) (208,972) (77,246) (679,764) (240,566)
------------- ------------ ----------- ----------- ------------ -----------
Net increase in net assets resulting
from contract transactions 1,399,933 2,447,474 1,792,681 2,058,804 6,152,400 5,114,482
------------- ------------ ----------- ----------- ------------ -----------
Total increase in net assets 1,673,351 2,585,317 2,490,773 2,141,395 10,162,876 6,161,214
Net assets:
Beginning of year 4,954,866 2,369,549 3,507,256 1,365,861 9,010,577 2,849,363
------------- ------------ ----------- ----------- ------------ -----------
End of year $ 6,628,217 $ 4,954,866 $ 5,998,029 $ 3,507,256 $ 19,173,453 $ 9,010,577
============= ============ =========== =========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
17 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Changes in Net Assets
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
MFS
-------------------------------------------------------------------------
Total Return Growth with Income Research
----------------------------- ------------------- ---------------------
1998 1997 1998 1997 1998 1997
-------------- ------------- ----------- ------ ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) $ 120,492 $ (67,407) $ (3,872) $ -- $ (4,711) $ --
Net realized gain (loss) 480,884 91,551 4,663 -- (2,968) --
Net unrealized gain (loss) on investments 434,521 634,884 83,221 -- 111,858 --
-------------- ------------- ----------- ------ ------------- ------
Net increase in net assets resulting
from operations 1,035,897 659,028 84,012 -- 104,179 --
-------------- ------------- ----------- ------ ------------- ------
Contract transactions:
Transfer of annuity fund deposits 1,028,178 820,813 40,816 -- 23,727 --
Net transfers between sub-accounts 5,678,697 4,038,530 863,937 -- 1,217,125 --
Death benefits (169,731) (11,022) -- -- -- --
Surrenders (719,246) (195,836) (12,203) -- (15,535) --
-------------- ------------- ----------- ------ ------------- ------
Net increase in net assets resulting
from contract transactions 5,817,898 4,652,485 892,550 -- 1,225,317 --
-------------- ------------- ----------- ------ ------------- ------
Total increase in net assets 6,853,795 5,311,513 976,562 -- 1,329,496 --
Net assets:
Beginning of year 6,999,467 1,687,954 -- -- -- --
-------------- ------------- ----------- ------ ------------- ------
End of year $ 13,853,262 $ 6,999,467 $ 976,562 $ -- $ 1,329,496 $ --
============== ============= =========== ====== ============= ======
</TABLE>
See accompanying notes to financial statements.
18 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Changes in Net Assets
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
MFS Warburg Pincus
---------------------------------------------------------------
Utilities Fixed Income International Equity
-------------------- --------------------- ------------------
1998 1997 1998 1997 1998 1997
----------- ------- ------------ ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) $ (3,071) $ -- $ 79,465 $ -- $ (103) $ --
Net realized gain (loss) 589 -- 32,855 -- (2,369) --
Net unrealized gain (loss) on investments 49,431 -- (68,774) -- 3,155 --
----------- ------- ------------ ------ ---------- ------
Net increase in net assets resulting
from operations 46,949 -- 43,546 -- 683 --
----------- ------- ------------ ------ ---------- ------
Contract transactions:
Transfer of annuity fund deposits 56,609 -- 146,883 -- 7,050 --
Net transfers between sub-accounts 781,790 -- 1,999,870 -- 65,528 --
Death benefits -- -- -- -- -- --
Surrenders (4,394) -- (11,654) -- -- --
----------- ------- ------------ ------ ---------- ------
Net increase in net assets resulting
from contract transactions 834,005 -- 2,135,099 -- 72,578 --
----------- ------- ------------ ------ ---------- ------
Total increase in net assets 880,954 -- 2,178,645 -- 73,261 --
Net assets:
Beginning of year -- -- -- -- -- --
----------- ------- ------------ ------ ---------- ------
End of year $ 880,954 $ -- $ 2,178,645 $ -- $ 73,261 $ --
=========== ======= ============ ====== ========== ======
</TABLE>
See accompanying notes to financial statements.
19 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Changes in Net Assets
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Warburg Pincus AIM
---------------------------------------------------------------
Post Venture Capital Capital Appreciation Diversified Income
------------------- --------------------- -------------------
1998 1997 1998 1997 1998 1997
---------- ------- ------------ ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) $ (336) $ -- $ (5,287) $ -- $ 21,969 $ --
Net realized gain (loss) (2,428) -- 24,782 -- 6,699 --
Net unrealized gain (loss) on investments 1,870 -- 229,701 -- (27,358) --
---------- ------- ------------ ------- ----------- ------
Net increase in net assets resulting
from operations (894) -- 249,196 -- 1,310 --
---------- ------- ------------ ------- ----------- ------
Contract transactions:
Transfer of annuity fund deposits 795 -- 146,124 -- 66,742 --
Net transfers between sub-accounts 63,335 -- 1,666,016 -- 446,194 --
Death benefits -- -- -- -- -- --
Surrenders (446) -- (20,114) -- (4,672) --
---------- ------- ------------ ------- ----------- ------
Net increase in net assets resulting
from contract transactions 63,684 -- 1,792,026 -- 508,264 --
---------- ------- ------------ ------- ----------- ------
Total increase in net assets 62,790 -- 2,041,222 -- 509,574 --
Net assets:
Beginning of year -- -- -- -- -- --
---------- ------- ------------ ------- ----------- ------
End of year $ 62,790 $ -- $ 2,041,222 $ -- $ 509,574 $ --
========== ======= ============ ======= =========== ======
</TABLE>
See accompanying notes to financial statements.
20 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Changes in Net Assets
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
AIM
--------------------------------------------------------------------
Growth Growth and Income International Equity
--------------------- -------------------- ---------------------
1998 1997 1998 1997 1998 1997
------------- ------ ------------ ------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) $ (2,294) $ -- $ 41 $ -- $ 4,075 $ --
Net realized gain (loss) 69,824 -- 1,162 -- (9,085) --
Net unrealized gain (loss) on investments 132,627 -- 149,881 -- 69,392 --
------------- ------ ------------ ------ ------------ -------
Net increase in net assets resulting
from operations 200,157 -- 151,084 -- 64,382 --
------------- ------ ------------ ------ ------------ -------
Contract transactions:
Transfer of annuity fund deposits 145,638 -- 164,418 -- 7,519 --
Net transfers between sub-accounts 867,353 -- 1,080,630 -- 1,030,701 --
Death benefits -- -- -- -- -- --
Surrenders (15,375) -- (5,701) -- (3,980) --
------------- ------ ------------ ------ ------------ -------
Net increase in net assets resulting
from contract transactions 997,616 -- 1,239,347 -- 1,034,240 --
------------- ------ ------------ ------ ------------ -------
Total increase in net assets 1,197,773 -- 1,390,431 -- 1,098,622 --
Net assets:
Beginning of year -- -- -- -- -- --
------------- ------ ------------ ------ ------------ -------
End of year $ 1,197,773 $ -- $ 1,390,431 $ -- $ 1,098,622 $ --
============= ====== ============ ====== ============ =======
</TABLE>
See accompanying notes to financial statements.
21 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Changes in Net Assets
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
NB
--------------------------------------------------------------
Guardian Limited Maturity Mid Cap Growth
-------------------- ------------------ --------------------
1998 1997 1998 1997 1998 1997
----------- ------- ---------- ------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) $ (1,667) $ -- $ (60) $ -- $ (2,050) $ --
Net realized gain (loss) (3,433) -- 7 -- 3,228 --
Net unrealized gain (loss) on investments 47,097 -- 84 -- 68,305 --
----------- ------- ---------- ------ ----------- -------
Net increase in net assets resulting
from operations 41,997 -- 31 -- 69,483 --
----------- ------- ---------- ------ ----------- -------
Contract transactions:
Transfer of annuity fund deposits 19,096 -- -- -- 59,064 --
Net transfers between sub-accounts 336,700 -- 21,150 -- 255,764 --
Death benefits -- -- -- -- -- --
Surrenders (5,728) -- (281) -- (3,759) --
----------- ------- ---------- ------ ----------- -------
Net increase in net assets resulting
from contract transactions 350,068 -- 20,869 -- 311,069 --
----------- ------- ---------- ------ ----------- -------
Total increase in net assets 392,065 -- 20,900 -- 380,552 --
Net assets:
Beginning of year -- -- -- -- -- --
----------- ------- ---------- ------ ----------- -------
End of year $ 392,065 $ -- $ 20,900 $ -- $ 380,552 $ --
=========== ======= ========== ====== =========== =======
</TABLE>
See accompanying notes to financial statements.
22 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Changes in Net Assets
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
NB MS
--------------------------------------------------------------
Partners Emerging Markets Debt Equity Growth
-------------------- ------------------ --------------------
1998 1997 1998 1997 1998 1997
----------- ------- ---------- ------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) $ (1,373) $ -- $ 7,816 $ -- $ (1,338) $ --
Net realized gain (loss) (864) -- (171) -- (6,950) --
Net unrealized gain (loss) on investments 22,710 -- (5,030) -- 43,356 --
----------- ------- ---------- ------ ----------- -------
Net increase in net assets resulting
from operations 20,473 -- 2,615 -- 35,068 --
----------- ------- ---------- ------ ----------- -------
Contract transactions:
Transfer of annuity fund deposits 22,449 -- 939 -- 51,539 --
Net transfers between sub-accounts 294,631 -- 66,052 -- 336,984 --
Death benefits -- -- -- -- -- --
Surrenders (3,547) -- -- -- (529) --
----------- ------- ---------- ------ ----------- -------
Net increase in net assets resulting
from contract transactions 313,533 -- 66,991 -- 387,994 --
----------- ------- ---------- ------ ----------- -------
Total increase in net assets 334,006 -- 69,606 -- 423,062 --
Net assets:
Beginning of year -- -- -- -- -- --
----------- ------- ---------- ------ ----------- -------
End of year $ 334,006 $ -- $ 69,606 $ -- $ 423,062 $ --
=========== ======= ========== ====== =========== =======
</TABLE>
See accompanying notes to financial statements.
23 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Statement of Changes in Net Assets
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
MS
------------------------------------------------------
Global High Yield Value Total all Funds
------------------ ------------------ ---------------- ----------------------------
1998 1997 1998 1997 1998 1997 1998 1997
----------- ----- ----------- ----- --------- ----- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) $ 2,315 $ -- $ 71,876 $ -- $ 4,037 $ -- 1,001,224 351,208
Net realized gain (loss) 23,459 -- 2,052 -- (59,526) -- 6,437,380 903,586
Net unrealized gain (loss) on
investment 27,239 -- (38,881) -- 17,428 -- 8,354,162 3,778,630
----------- ----- ----------- ----- --------- ----- ------------- -------------
Net increase in net assets
resulting from operations 53,013 -- 35,047 -- (38,061) -- 15,792,766 5,033,424
----------- ----- ----------- ----- --------- ----- ------------- -------------
Contract transactions:
Transfer of annuity fund deposits 15,255 -- 38,608 -- 25,690 -- 71,294,146 31,642,266
Net transfers between sub-accounts 1,133,975 -- 1,314,337 -- 598,223 -- (8,861,672) (1,226,608)
Death benefits -- -- -- -- -- -- (816,878) (135,885)
Surrenders (10,680) -- (6,002) -- (15,323) -- (4,747,167) (1,464,547)
----------- ----- ----------- ----- --------- ----- ------------- -------------
Net increase in net assets
resulting from contract
transactions 1,138,550 -- 1,346,943 -- 608,590 -- 56,868,429 28,815,226
----------- ----- ----------- ----- --------- ----- ------------- -------------
Total increase in net assets 1,191,563 -- 1,381,990 -- 570,529 -- 72,661,195 33,848,650
Net assets:
Beginning of year -- -- -- -- -- -- 51,901,083 18,052,433
----------- ----- ----------- ----- --------- ----- ------------- -------------
End of year $ 1,191,563 $ -- $ 1,381,990 $ -- $ 570,529 $ -- 124,562,278 51,901,083
=========== ===== =========== ===== ========= ===== ============= =============
</TABLE>
See accompanying notes to financial statements.
24 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Notes to Financial Statements
December 31, 1998
(1) Organization and Business
United Life & Annuity Separate Account One (the Separate Account) is a
separate investment account of United Life & Annuity Insurance Company
(ULA). The Separate Account is registered with the Securities and
Exchange Commission under the Investment Company Act of 1940 as a unit
investment trust. ULA administers its SpectraSelect, SpectraDirect and
Spectra SDB products (the Products) through the Separate Account. The
Products range from seven to ten years. ULA is a stock life insurance
company domiciled in Texas and organized in 1955. ULA is currently
authorized to conduct business in 47 states, the District of Columbia and
Puerto Rico. ULA is a wholly-owned subsidiary of Pacific Life and
Accident Insurance Company, a wholly-owned subsidiary of PennCorp
Financial Group, Inc., an insurance holding company.
Generally the Separate Account consists of thirty-three sub-accounts.
Each of the thirty-three sub-accounts invests only in a single
corresponding portfolio of either The Alger American Fund (Fred Alger
Management, Advisor), the Dreyfus Variable Investment Fund and the
Dreyfus Stock Index Fund (The Dreyfus Corporation, Advisor), Federated
Insurance Series (Federated Advisors, Advisor), MFS Variable Insurance
Trust (Massachusettes Financial Services Corp., Advisor), Scudder
Variable Life Investment Fund (Scudder Kemper Investments, Inc.,
Advisor), the Van Eck Worldwide Insurance Trust (Van Eck Associates
Corporation, Advisor), AIM (AIM Advisors, Inc., Advisor), Emerging
Markets Debt (Morgan Stanley Asset Managements, Inc., Advisor), High
Yield and Value (Miller, Anderson and Sherrerd, LLP, Advisor), Neuberger
and Berman (N&B Management, Advisor) or Warburg Pincus (Warburg Pincus
Asset Management, Inc., Advisor).
(2) Investments
Investments of the Separate Account are valued daily at market value
using net asset values provided by the respective sub-account advisors.
Transactions are accounted for on the trade date and dividend income is
recognized on the ex-dividend date. Realized gains and losses are
determined on a first-in first-out basis. Generally, investment income
and realized capital gains are reinvested.
25 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Notes to Financial Statements
December 31, 1998
(3) Contract Charges
A mortality and expense risk charge is deducted from the Separate
Account, on a daily basis equal, on an annual basis, to 1.52% for
SpectraDirect, to 1.45% for SpectraSelect and to 1.25% for Spectra SDB,
of the average daily net asset value of each sub-account of the Separate
Account. This charge compensates ULA for assuming the mortality and
expense risks under the contracts and certificates. In addition, an
administrative charge is deducted from the Separate Account on an annual
basis equal to .15% of the average daily net asset value of each
sub-account of the Separate Account. This charge compensates ULA for
costs associated with the administration of the contracts, certificates
and the Separate Account. Under certain circumstances, a transfer fee may
be assessed when an owner or certificate holder transfers contract values
or certificate holder's account values between sub-accounts or to or from
ULA's fixed accounts. A contingent deferred sales charge is assessed
against full or partial surrenders in accordance with contract terms.
There is no contingent deferred sales charge if all premiums were
received generally for at least seven to ten years prior to the date of
the full or partial surrenders. An annual contract or certificate
maintenance fee of $30 is charged on SpectraDirect and Spectra SDB
contracts based upon a minimum contract value. Some states and other
jurisdictions assess premium taxes at the time purchase payments are
made; others assess premium taxes at the time annuity payments begin.
Premium taxes are deducted when they are due.
(4) Income Taxes
The operations of the Separate Account are included in the federal income
tax return of ULA, which is taxed as a Life Insurance Company under the
provisions of the Internal Revenue Code. ULA does not expect to incur any
federal income tax liability on earnings, or realized capital gains
attributable to the Separate Account, therefore, no charges for federal
income taxes are currently deducted from the Separate Account. If ULA
incurs income taxes attributable to the Separate Account, or determines
that such taxes will be incurred, it may make a charge for such taxes
against the Separate Account.
(5) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements
in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
26 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Notes to Financial Statements
December 31, 1998
(6) Changes in the Units Outstanding
<TABLE>
<CAPTION>
Alger Federated
----------------------------- ----------------------------------------------------------
Growth American Leaders Prime Money
----------------------------- ----------------------------------------------------------
1998 1997 1998 1997 1998 1997
-------------- -------------- -------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding beginning
of the year 527,092 265,242 -- -- -- --
Units purchased 76,659 49,810 2,904 -- 1,935,625 --
Units transferred between
sub-accounts 312,222 232,123 94,311 -- (1,583,519) --
Units surrendered (44,875) (20,083) (2,144) -- (22,285) --
-------------- -------------- -------------- -------------- -------------- -------------
Units outstanding end of the year 871,098 527,092 95,071 -- 329,821 --
============== ============== ============== ============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
Federated
----------------------------------------------------------------------------------------
High Income Bond U.S. Government Bond Utility
----------------------------- ----------------------------------------------------------
1998 1997 1998 1997 1998 1997
-------------- -------------- -------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding beginning
of the year 289,681 193,943 154,877 25,831 121,807 45,403
Units purchased 33,678 15,721 29,878 28,420 15,331 18,348
Units transferred between
sub-accounts 231,697 89,252 72,142 103,695 66,947 59,915
Units surrendered (34,576) (9,235) (18,921) (3,069) (10,804) (1,859)
-------------- -------------- -------------- -------------- -------------- -------------
Units outstanding end of the year 520,480 289,681 237,976 154,877 193,281 121,807
============== ============== ============== ============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
Van Eck Dreyfus
----------------------------- ----------------------------------------------------------
Worldwide Hard Assets Stock Index Growth and Income
----------------------------- ----------------------------------------------------------
1998 1997 1998 1997 1998 1997
-------------- -------------- -------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding beginning
of the year 25,487 7,122 497,429 181,969 333,084 120,598
Units purchased 1,253 2,678 127,114 52,851 57,645 38,724
Units transferred between
sub-accounts (1,145) 16,142 477,654 279,089 254,596 187,968
Units surrendered (1,408) (455) (44,394) (16,480) (39,736) (14,206)
-------------- -------------- -------------- -------------- -------------- -------------
Units outstanding end of the year 24,187 25,487 1,507,803 497,429 605,589 333,084
============== ============== ============== ============== ============== =============
</TABLE>
27 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Notes to Financial Statements
December 31, 1998
(6) Changes in the Units Outstanding, Continued
<TABLE>
<CAPTION>
Scudder MFS
----------------------------------------------------------------------------------------
Money Market International Emerging Growth
----------------------------- ----------------------------------------------------------
1998 1997 1998 1997 1998 1997
-------------- -------------- -------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding beginning
of the year 461,537 228,486 286,406 119,631 640,544 242,852
Units purchased 4,037,207 2,555,841 46,649 25,371 68,611 66,048
Units transferred between
sub-accounts (3,809,793) (2,307,894) 108,633 149,475 439,767 352,324
Units surrendered (82,841) (14,896) (19,166) (8,071) (50,536) (20,680)
-------------- -------------- -------------- -------------- -------------- -------------
Units outstanding end of the year 606,111 461,537 422,522 286,406 1,098,386 640,544
============== ============== ============== ============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
MFS
----------------------------------------------------------------------------------------
Total Return Growth with Income Research
----------------------------- ----------------------------------------------------------
1998 1997 1998 1997 1998 1997
-------------- -------------- -------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding beginning
of the year 509,069 146,453 -- -- -- --
Units purchased 78,142 63,721 4,218 -- 2,599 --
Units transferred between
sub-accounts 434,730 315,014 89,370 -- 126,198 --
Units surrendered (69,433) (16,119) (1,199) -- (1,688) --
-------------- -------------- -------------- -------------- -------------- -------------
Units outstanding end of the year 952,508 509,069 92,389 -- 127,109 --
============== ============== ============== ============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
MFS Warburg Pincus
----------------------------- ----------------------------------------------------------
Utilities Fixed Income International Equity
----------------------------- ----------------------------------------------------------
1998 1997 1998 1997 1998 1997
-------------- -------------- -------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding beginning
of the year -- -- -- -- -- --
Units purchased 5,677 -- 14,718 -- 753 --
Units transferred between
sub-accounts 78,467 -- 194,274 -- 7,454 --
Units surrendered (449) -- (1,510) -- -- --
-------------- -------------- -------------- -------------- -------------- -------------
Units outstanding end of the year 83,695 -- 207,482 -- 8,207 --
============== ============== ============== ============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
Warburg Pincus AIM
----------------------------- ----------------------------------------------------------
Post Venture Capital Capital Appreciation Diversified Income
----------------------------- ----------------------------------------------------------
1998 1997 1998 1997 1998 1997
-------------- -------------- -------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding beginning
of the year -- -- -- -- -- --
Units purchased 92 -- 15,791 -- 6,681 --
Units transferred between
sub-accounts 6,923 -- 183,299 -- 45,217 --
Units surrendered (58) -- (2,486) -- (478) --
-------------- -------------- -------------- -------------- -------------- -------------
Units outstanding end of the year 6,957 -- 196,604 -- 51,420 --
============== ============== ============== ============== ============== =============
</TABLE>
28 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Notes to Financial Statements
December 31, 1998
(6) Changes in the Units Outstanding, Continued
<TABLE>
<CAPTION>
AIM
----------------------------------------------------------------------------------------
Growth Growth and Income International Equity
----------------------------- ----------------------------------------------------------
1998 1997 1998 1997 1998 1997
-------------- -------------- -------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding beginning
of the year -- -- -- -- -- --
Units purchased 15,156 -- 16,414 -- 759 --
Units transferred between
sub-accounts 89,394 -- 106,346 -- 113,704 --
Units surrendered (1,736) -- (593) -- (433) --
-------------- -------------- -------------- -------------- -------------- -------------
Units outstanding end of the year 102,814 -- 122,167 -- 114,030 --
============== ============== ============== ============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
NB
----------------------------------------------------------------------------------------
Guardian Limited Maturity Mid Cap Growth
----------------------------- ----------------------------------------------------------
1998 1997 1998 1997 1998 1997
-------------- -------------- -------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding beginning
of the year -- -- -- -- -- --
Units purchased 2,068 -- -- -- 6,060 --
Units transferred between
sub-accounts 40,522 -- 2,087 -- 27,925 --
Units surrendered (650) -- (28) -- (390) --
-------------- -------------- -------------- -------------- -------------- -------------
Units outstanding end of the year 41,940 -- 2,059 -- 33,595 --
============== ============== ============== ============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
NB MS
----------------------------- ----------------------------------------------------------
Partners Emerging Markets Debt Equity Growth
----------------------------- ----------------------------------------------------------
1998 1997 1998 1997 1998 1997
-------------- -------------- -------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding beginning
of the year -- -- -- -- -- --
Units purchased 2,461 -- 231 -- 5,427 --
Units transferred between
sub-accounts 33,846 -- 10,046 -- 35,464 --
Units surrendered (475) -- (69) -- (53) --
-------------- -------------- -------------- -------------- -------------- -------------
Units outstanding end of the year 35,832 -- 10,208 -- 40,838 --
============== ============== ============== ============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
MS
----------------------------------------------------------------------------------------
Global Equity High Yield Value
----------------------------- ----------------------------------------------------------
1998 1997 1998 1997 1998 1997
-------------- -------------- -------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding beginning
of the year -- -- -- -- -- --
Units purchased 1,583 -- 3,905 -- 2,901 --
Units transferred between
sub-accounts 120,797 -- 135,538 -- 63,356 --
Units surrendered (1,113) -- (616) -- (1,760) --
-------------- -------------- -------------- -------------- -------------- -------------
Units outstanding end of the year 121,267 -- 138,827 -- 64,497 --
============== ============== ============== ============== ============== =============
</TABLE>
29 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Notes to Financial Statements
December 31, 1998
(7) Unit Values
A summary of unit values and units outstanding for variable annuity
contracts and the expense ratios, including expenses of the underlying
funds for each of the two years in the period ended December 31, 1998
follows:
<TABLE>
<CAPTION>
Annualized
ratio of
expenses
Average to average
Units unit value Net assets net assets
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Alger American Growth Portfolio
December 31:
1998 871,098 $ 19.23 $16,747,980 1.57%
1997 527,092 13.88 7,305,343 1.66
Federated American Leaders
December 31:
1998 95,071 10.14 963,818 1.15
1997 -- -- -- --
Federated Prime Money
December 31:
1998 329,821 10.21 3,367,951 1.32
1997 -- -- -- --
Federated High Income Bond Fund II
December 31:
1998 520,480 12.50 6,506,271 1.75
1997 289,681 12.79 3,703,960 1.61
Federated Fund for U.S. Government Securities
II December 31:
1998 237,976 11.69 2,782,939 2.14
1997 154,877 11.09 1,718,067 1.50
Federated Utility Fund II
December 31:
1998 193,281 15.01 2,902,018 1.70
1997 121,807 14.08 1,714,981 1.69
</TABLE>
30 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Notes to Financial Statements
December 31, 1998
(7) Unit Values, Continued
<TABLE>
<CAPTION>
Annualized
ratio of
expenses
Average to average
Units unit value Net assets net assets
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Van Eck Worldwide Hard Assets
December 31:
1998 24,187 $ 7.64 $ 184,710 1.75%
1997 25,487 11.38 290,157 1.77
Dreyfus Stock Index
December 31:
1998 1,057,803 18.58 19,652,813 1.58
1997 497,429 16.00 7,959,989 1.55
Dreyfus Growth and Income
December 31:
1998 605,589 15.35 9,297,214 1.77
1997 333,084 14.22 4,736,420 1.61
Scudder Money Market
December 31:
1998 606,111 10.94 6,628,217 2.23
1997 461,537 10.74 4,954,866 1.78
Scudder International
December 31:
1998 422,522 14.20 5,998,029 2.02
1997 286,406 12.25 3,507,256 1.73
MFS Emerging Growth
December 31:
1998 1,098,386 17.46 19,173,453 1.57
1997 640,544 14.07 9,010,577 1.71
MFS Total Return
December 31:
1998 952,508 14.54 13,853,262 1.71
1997 509,069 13.75 6,999,467 1.55
</TABLE>
31 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Notes to Financial Statements
December 31, 1998
(7) Unit Values, Continued
<TABLE>
<CAPTION>
Annualized
ratio of
expenses
Average to average
Units unit value Net assets net assets
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
MFS Growth with Income December 31:
1998 92,389 $ 10.57 $ 976,562 0.79%
1997 -- -- -- --
MFS Research
December 31:
1998 127,109 10.46 1,329,496 0.71
1997 -- -- -- --
MFS Utilities
December 31:
1998 83,695 10.53 880,954 0.70
1997 -- -- -- --
Warburg Pincus Fixed Income
December 31:
1998 207,482 10.50 2,178,645 1.09
1997 -- -- -- --
Warburg Pincus International Equity
December 31:
1998 8,207 8.93 73,261 1.33
1997 -- -- -- --
Warburg Pincus Post Venture Capital
December 31:
1998 6,957 9.03 62,790 1.07
1997 -- -- -- --
</TABLE>
32 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Notes to Financial Statements
December 31, 1998
(7) Unit Values, Continued
<TABLE>
<CAPTION>
Annualized
ratio of
expenses
Average to average
Units unit value Net assets net assets
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
AIM Capital Appreciation
December 31:
1998 196,604 $ 10.38 $2,041,222 0.80%
1997 -- -- -- --
AIM Diversified Income
December 31:
1998 51,420 9.91 509,574 0.74
1997 -- -- -- --
AIM Growth
December 31:
1998 102,814 11.65 1,197,773 1.01
1997 -- -- -- --
AIM Growth and Income December 31:
1998 122,167 11.38 1,390,431 0.66
1997 -- -- -- --
AIM International Equity
December 31:
1998 114,030 9.63 1,098,622 0.75
1997 -- -- -- --
NB Guardian
December 31:
1998 41,940 9.35 392,065 0.95
1997 -- -- -- --
NB Limited Maturity
December 31:
1998 2,059 10.15 20,900 0.57
1997 -- -- -- --
</TABLE>
33 (Continued)
<PAGE>
UNITED LIFE & ANNUITY
SEPARATE ACCOUNT ONE
Notes to Financial Statements
December 31, 1998
(7) Unit Values, Continued
<TABLE>
<CAPTION>
Annualized
ratio of
expenses
Average to average
Units unit value Net assets net assets
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
NB Mid Cap Growth
December 31:
1998 33,595 $ 11.33 $ 380,552 1.08%
1997 -- -- -- --
NB Partners
December 31:
1998 35,832 9.32 334,006 0.82
1997 -- -- -- --
MS Emerging Markets
December 31:
1998 10,208 6.82 69,606 0.87
1997 -- -- -- --
MS Equity Growth
December 31:
1998 40,838 10.36 423,062 0.63
1997 -- -- -- --
MS Global
December 31:
1998 121,267 9.83 1,191,563 0.45
1997 -- -- -- --
MS High Yield
December 31:
1998 138,827 9.95 1,381,990 0.63
1997 -- -- -- --
MS Value
December 31:
1998 64,497 8.85 570,529 1.37
1997 -- -- -- --
</TABLE>
3
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
United Life & Annuity Insurance Company:
We have audited the accompanying consolidated balance sheets of United Life &
Annuity Insurance Company and subsidiaries (the Company) as of December 31, 1998
and 1997, and the related consolidated statements of income and comprehensive
income (loss), shareholders' equity, and cash flows for the years ended December
31, 1998 and 1997 and for the periods from July 24, 1996 to December 31, 1996
(Successor period) and January 1, 1996 to July 23, 1996 (Predecessor period).
Our audit also included the related financial statement schedules III, IV and V.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial statements present
fairly, in all material respects, the financial position of United Life &
Annuity Insurance Company and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for the years ended
December 31, 1998 and 1997 and the periods from July 24, 1996 to December 31,
1996 (Successor period) and January 1, 1996 to July 23, 1996 (Predecessor
period), in conformity with generally accepted accounting principles. Also in
our opinion, the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/S/ KPMG LLP
Dallas, Texas
March 31, 1999
1
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of December 31, 1998 and 1997
(In thousands, except share information)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at fair value (cost $933,296 and $1,069,459) $ 955,449 $ 1,106,961
Equity securities available for sale, at fair value (cost $392 and $--)......... 362 5
Mortgage loans on real estate, net of allowance of $8,851 in 1998 and
$3,923 in 1997................................................................ 212,503 227,755
Policy loans.................................................................... 22,168 22,585
Short-term investments.......................................................... 21,342 22,804
Investments in limited partnerships............................................. 14,081 16,026
Real estate..................................................................... 458 932
Other investments............................................................... -- 145
------------ -------------
Total investments............................................................. 1,226,363 1,397,213
Due from reinsurers................................................................ 36,215 33,379
Accrued investment income.......................................................... 16,619 17,482
Investment in securities of affiliates............................................. 13,746 5,509
Accounts and notes receivable...................................................... 5,340 3,309
Present value of insurance in force................................................ 25,988 27,769
Deferred policy acquisition costs.................................................. 26,438 13,671
Deferred income taxes, net......................................................... 4,636 3,529
Other assets....................................................................... 2,620 2,140
Costs in excess of net assets acquired............................................. 25,226 27,324
Assets held in separate accounts................................................... 124,562 51,901
------------ -------------
Total assets.................................................................. $ 1,507,753 $ 1,583,226
============ =============
LIABILITIES
Policy liabilities and accruals.................................................... $ 1,190,973 $ 1,312,876
Accrued expenses and other liabilities............................................. 12,271 18,195
Due to affiliates.................................................................. 3,112 453
Liabilities related to separate accounts........................................... 124,562 51,901
------------ -------------
Total liabilities............................................................. 1,330,918 1,383,425
------------ -------------
SHAREHOLDERS' EQUITY
Common stock, $2.00 par value; 4,200,528 shares authorized issued and outstanding.. 8,401 8,401
Additional paid in capital......................................................... 163,675 174,447
Other comprehensive income, net of tax of $3,075 and $5,211........................ 5,710 9,678
Retained earnings (deficit)........................................................ (951) 7,275
------------ -------------
Total shareholders' equity.................................................... 176,835 199,801
------------ -------------
Total liabilities and shareholders' equity.................................... $ 1,507,753 $ 1,583,226
============ =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
for the Years Ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
Historical
basis of
Purchase basis of accounting accounting
-------------------------------------------- -------------
Period Period
from from
July 24 to January 1,
December 31, to July 23,
1998 1997 1996 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Premiums........................................ $ 4,177 $ 5,731 $ 3,483 $ 3,732
Interest sensitive policy product charges....... 3,342 2,821 1,048 1,421
Net investment income........................... 100,018 111,536 50,666 66,421
Net realized gains (losses) from sale of
investments................................... 2,321 5,932 (157) (1,592)
Other income.................................... 15,942 16,459 20,274 52
------------- ------------- ------------- -------------
Total revenues.............................. 125,800 142,479 75,314 70,034
------------- ------------- ------------- -------------
Benefits and expenses:
Policyholder benefits incurred.................. 11,521 6,980 3,332 5,215
Interest on annuity policies.................... 60,128 67,354 32,022 42,434
Change in liability for future policy benefits
and other policy benefits..................... (3,120) 169 504 752
Amortization of present value of insurance
in force and deferred policy acquisition costs 14,717 15,588 5,068 9,699
Amortization of costs in excess of net
assets acquired............................... 1,476 1,434 583 --
Underwriting and other administrative expenses.. 29,944 28,209 25,162 9,753
------------- ------------- ------------- -------------
Total benefits and expenses................. 114,666 119,734 66,671 67,853
------------- ------------- ------------- -------------
Income before income taxes......................... 11,134 22,745 8,643 2,181
Income taxes.................................. 4,812 9,122 3,155 769
------------- ------------- ------------- -------------
Net income......................................... $ 6,322 $ 13,623 $ 5,488 $ 1,412
============= ============= ============= =============
Comprehensive Income Information:
Net income...................................... $ 6,322 $ 13,623 $ 5,488 $ 1,412
Change in unrealized holding gains (losses)
on securities available for sale, net of
taxes (benefits) of ($2,136), $3,048,
$2,163 and ($17,051).......................... 2,893 10,320 3,860 (32,534)
Reclassification adjustments for (gains) losses
included in net income........................ (6,861) (4,659) 157 869
------------- ------------- ------------- -------------
Total comprehensive income (loss)........... $ 2,354 $ 19,284 $ 9,505 $ (30,253)
============= ============= ============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the Years Ended December 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Additional Other Retained Total
Common Paid-in Comprehensive Earnings Shareholder's
Stock Capital Income (Deficit) Equity
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Historical basis of accounting:
Balance at December 31, 1995............. $ 8,401 $ 28,980 $ 29,477 $ 119,667 $ 186,525
Net income............................... -- -- -- 1,412 1,412
Change in unrealized holding losses
on securities available for sale,
net of taxes........................... -- -- (32,534) -- (32,534)
Reclassification adjustments for
losses included in net income.......... -- -- 869 -- 869
Dividends................................ -- -- -- (58,334) (58,334)
---------- ---------- ---------- ---------- ----------
Balance at July 23, 1996................. $ 8,401 $ 28,980 $ (2,188) $ 62,745 $ 97,938
========== ========== ========== ========== ==========
Purchase basis of accounting:
Balance, July 24, 1996................... $ 8,401 $ 101,655 $ -- $ -- $ 110,056
Pooling of interest with affiliate under
common control......................... -- 15,534 -- (1,709) 13,825
Net income............................... -- -- -- 5,488 5,488
Capital contribution..................... -- 57,258 -- -- 57,258
Change in unrealized holding gains
on securities available for sale,
net of taxes........................... -- -- 3,860 -- 3,860
Reclassification adjustments for
losses included in net income.......... -- -- 157 -- 157
---------- ---------- ---------- ---------- ----------
Balance, December 31,1996 (restated)..... 8,401 174,447 4,017 3,779 190,644
Net income............................... -- -- -- 13,623 13,623
Change in unrealized holding gains
on securities available for sale,
net of taxes........................... -- -- 10,320 -- 10,320
Reclassification adjustments for gains
included in net income................. -- -- (4,659) -- (4,659)
Dividends................................ -- -- -- (10,127) (10,127)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997............... 8,401 174,447 9,678 7,275 199,801
Net income............................... -- -- -- 6,322 6,322
Change in unrealized holding gains
on securities available for sale,
net of taxes........................... -- -- 2,893 -- 2,893
Reclassification adjustments for gains
included in net income................. -- -- (6,861) -- (6,861)
Dividends................................ -- -- -- (14,548) (14,548)
Deemed contributions from transactions
with affiliates:
Acquisition of subsidiary.............. -- 321 -- -- 321
Acquisition of promissory note
from affiliate....................... -- 214 -- -- 214
Deemed distribution to affiliate in
connection with acquisition of
Marketing One.......................... -- (11,307) -- -- (11,307)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1998............... $ 8,401 $ 163,675 $ 5,710 $ (951) $ 176,835
========== ========== ========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Years Ended December 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Historical
basis of
Purchase basis of accounting accounting
---------------------------- ----------
Period Period
From From
July 24 to January 1
December, to July 23
1998 1997 1996 1996
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 6,322 $ 13,623 $ 5,488 $ 1,412
Adjustments to reconcile net income to net cash used by
operating activities:
Adjustments relating to universal life and investment products:
Interest credited to account balances....................... 60,128 67,354 32,022 42,434
Charges for mortality and administration.................... (3,342) (2,821) (1,048) (1,421)
Capitalization of deferred policy acquisition costs........... (16,423) (10,465) (5,172) (4,797)
Amortization of intangibles, depreciation and accretion, net.. 13,968 15,311 4,601 10,502
Decrease in policy liabilities, accruals and other
policyholder funds.......................................... (5,700) 3,823 (18,283) 18,947
Other, net.................................................... (5,492) (4,243) 10,187 (6,986)
--------- -------- -------- --------
Net cash provided by operating activities................... 49,461 82,582 27,795 60,091
--------- -------- -------- --------
Cash flows from investing activities:
Cash expended in acquisition of business under common control,
net of cash acquired of $3,278 in 1998........................ (7,708) -- -- --
Sales of fixed maturities available for sale.................... 189,267 500,058 18,233 34,065
Maturities and other redemptions of fixed maturities
available for sale............................................ 102,413 107,177 2,000 2,650
Sales of mortgages, real estate and other investments........... 2,502 7,692 151,921 733,271
Principal collected on mortgage loans and collateral loans...... 47,289 52,591 21,657 44,264
Change in short-term investments, net........................... 1,462 (22,337) 50,063 (27,726)
Acquisition or originations of mortgage loans................... (36,965) (44,375) (112,473) (749,953)
Purchases of fixed maturities available for sale................ (146,148) (493,929) (94,025) (158)
Purchases of limited partnerships and other investments......... (9,530) (10,023) -- --
Other, net...................................................... -- 313 7,137 2,486
--------- -------- -------- --------
Net cash provided by investing activities..................... 142,582 97,167 44,513 38,899
--------- -------- -------- --------
Cash flows from financing activities:
Receipts from interest sensitive products credited to
policyholders' account balances............................... 91,370 86,194 48,770 51,464
Return of policyholders' account balances on interest
sensitive products............................................ (268,865) (277,033) (104,528) (155,464)
Increase(decrease) in repurchase agreements..................... -- -- (52,839) 11,982
Contributed capital............................................. -- -- 57,259 --
Other, net...................................................... -- -- 247 --
Dividends....................................................... (14,548) (10,127) -- (10,000)
--------- -------- -------- --------
Net cash used by financing activities......................... (192,043) (200,966) (51,091) (102,018)
--------- -------- -------- --------
Net increase (decrease) in cash.................................... -- (21,217) 21,217 (3,028)
Cash at beginning of period (cash overdrafts of $1,863, $--,
$2,354 and $-- were reclassified to other liabilities).......... -- 21,217 -- 3,028
--------- -------- -------- --------
Cash at end of period (cash overdrafts of $2,430, $1,863, $--
and $2,354 were reclassified to other liabilities).............. $ -- $ -- $ 21,217 $ --
========= ======== ======== ========
Supplemental disclosures:
Income taxes paid............................................... $ 6,342 $ 7,119 $ 128 $ 2,797
Interest paid................................................... -- 171 439 2,392
</TABLE>
See accompanying Notes to Consolidated Financial Statement.
5
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
(In thousands)
1. Basis of Presentation
United Life & Annuity Insurance Company (the "Company" or "ULA") is a
wholly-owned subsidiary of Pacific Life and Accident Insurance Company
("PLAIC"), a wholly-owned subsidiary of PennCorp Financial Group, Inc.
("PennCorp"). (See Note 3 to Notes to Consolidated Financial Statements.)
PennCorp is an insurance holding company which offers, through its wholly-owned
subsidiaries, a broad range of life insurance, annuity and accident and sickness
products.
The Company, a life insurance company originally domiciled in Louisiana,
redomiciled to Texas in 1998 and organized in 1955, is currently authorized to
conduct business in 47 states, the District of Columbia and Puerto Rico. The
primary products of the Company are tax deferred annuity contracts marketed to
individuals principally through independent marketing organizations and
independent agents.
The consolidated financial statements include the Company and its wholly-owned
subsidiaries, United Variable Services, Inc., Cyberlink Development, Inc. and
Marketing One Financial Corporation ("Marketing One"), which was acquired from
other PennCorp subsidiaries effective March 24, 1998. Marketing One is a third
party marketing firm supplying investment products and programs to the banking
industry. All significant intercompany accounts and transactions have been
eliminated.
All dollar amounts presented hereafter are stated in thousands.
As required by generally accepted accounting principles ("GAAP"), the
acquisition of Marketing One has been reflected as an "as-if
pooling-of-interest" as a result of Marketing One previously being owned by
affiliated entities. The accompanying financial statements have been restated to
reflect such pooling of interest as if it had occurred at the date ULA was
acquired by PLAIC. The impact was to increase total revenues by $16,056 and
$19,992 for the year ended December 31, 1997 and the period from July 24, 1996
to December 31, 1996, respectively, and to reduce net income by $2,334 and $215
for the year ended December 31, 1997 and the period from July 24, 1996 to
December 31, 1996, respectively.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities as well as revenues and expenses. Accounts that the
Company deems to be acutely sensitive to changes in estimates include deferred
policy acquisition costs, policy liabilities and accruals, present value of
insurance in force, costs in excess of net assets acquired and deferred taxes.
In addition, the Company must determine requirements for disclosure of
contingent assets and liabilities as of the date of the financial statements
based upon estimates. As additional information becomes available, or actual
amounts are determinable, the recorded estimates may be revised and reflected in
operating results. Although some variability is inherent in these estimates,
management believes the amounts provided are adequate. In all instances, actual
results could differ from estimates.
2. Summary of Significant Accounting Policies
(a) Investments
Fixed maturity and equity securities classified as available for sale
are recorded at fair value, as they may be sold in response to changes
in interest rates, prepayment risk, liquidity needs, the need or desire
to increase income, capital or other economic factors. Changes in
unrealized gains and losses related to securities available for sale
are recorded as accumulated other comprehensive income, a separate
component of shareholders' equity, net of applicable income taxes and
amounts attributable to deferred policy acquisition costs and present
value of insurance in force related to universal life and accumulation
products. Mortgage-backed securities are amortized using the interest
method including anticipated prepayments at the date of purchase.
Significant changes in estimated cash flows from original assumptions
are reflected in the period of such change. Mortgage loans on real
estate are recorded at cost, adjusted for amortization of premium or
discount and provision for loan losses, if necessary. Mortgage loans in
default are carried at the lower of cost or fair value. Policy loans,
short-term investments and other assets are recorded at amortized cost.
As a result of the Company's decision to exit the private placement
bond sector, the Company transferred all of its remaining assets in the
fixed maturities held for investment portfolio aggregating $20,800 to
its fixed maturities available for sale portfolio as of April 1, 1997.
In accordance with Statement of Financial Accounting Standards
6
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (Continued)
("SFAS") No. 115, the Company marked all assets subject to the
transfer to fair value resulting in a net increase in shareholders'
equity, net of applicable income taxes, of $1,900.
Real estate, substantially all of which was acquired through
foreclosure, is recorded at the lower of fair value, minus estimated
costs to sell, or cost. If the fair value of the foreclosed real estate
minus estimated costs to sell is less than cost, a valuation allowance
is provided for the deficiency. Increases in the valuation allowance
are charged to income.
Investments in limited partnerships are carried on an equity basis.
The Company regularly evaluates the carrying value of its investments
based on current economic conditions, past credit loss experience and
other circumstances. A decline in net realizable value that is other
than temporary is recognized as a realized investment loss and a
reduction in the cost basis of the investment. The Company discounts
expected cash flows in the computation of net realizable value of its
investments, other than certain mortgage-backed securities. In those
circumstances where the expected cash flows of residual interest and
interest-only mortgage-backed securities, discounted at a risk-free
rate of return, result in an amount less than the carrying value, a
realized loss is reflected in an amount sufficient to adjust the
carrying value of a given security to its fair value.
Realized investment gains and losses and declines in value which are
other than temporary, determined on the basis of specific
identification, are included in the determination of net income.
(b) Accounts and Notes Receivable
Accounts and notes receivable consist primarily of agents' balances and
premiums receivable from agents and policyholders. Agents' balances are
partially secured by commissions due to agents in the future and
premiums receivable are secured by policy liabilities. An allowance for
doubtful accounts is established, based upon specific identification,
for amounts which the Company estimates will not ultimately be
collected.
(c) Intangible Assets
During 1996, the Company implemented SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Assets to be Disposed of." This
accounting standard modified the methodology companies utilize to
evaluate the carrying value of certain assets by requiring, among other
things, companies evaluate assets at the lowest level at which
identifiable cash flows can be determined.
The Company continually monitors the recoverability of the carrying
value of intangible assets using the methodology prescribed in SFAS No.
121. The Company also reviews long-lived assets and the related
intangible assets for impairment whenever events or changes in
circumstances indicate the carrying amounts of these assets may not be
recoverable. Recoverability of these assets is determined by comparing
the forecast undiscounted net cash flows of the operation to which the
assets relate, to the carrying amount, including associated intangible
assets, of such operation. If the operation is determined to be unable
to recover the carrying amount of its assets, intangible assets are
written down initially, followed by the other long-lived assets of the
operation, to fair value. Fair value is determined based upon
discounted cash flows or appraised values, depending on the nature of
the associated assets.
(d) Deferred Policy Acquisition Costs
Estimated costs of acquiring new business which vary with, and are
primarily related to, the production of new business, have been
deferred to the extent that such costs are deemed recoverable from
future revenues. Such estimated costs include commissions and certain
costs of policy issuance, underwriting, certain variable agency and
7
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (Continued)
marketing expenses and other costs directly associated with these
functions to the extent such costs are determined to vary with and are
primarily related to the production of new business. Costs deferred on
accident and health and traditional life policies are amortized, with
interest, over the anticipated premium-paying period of the related
policies in proportion to the ratio of annual premium revenue to
expected total premium revenue to be received over the life of the
policies. Expected premium revenue is estimated by using the same
mortality, morbidity and withdrawal assumptions used in computing
liabilities for future policy benefits. For interest sensitive products
and limited pay life products, policy acquisition costs are amortized
in relation to the emergence of anticipated gross profits over the life
of the policies.
(e) Present Value of Insurance In Force
The present value of insurance in force represents the anticipated
gross profits to be realized from future revenues on insurance in force
at the date such insurance was purchased, discounted to provide an
appropriate rate of return and amortized, with interest, based on
credited rate, over the years that such profits are anticipated to be
received in proportion to the estimated gross profits. Accumulated
amortization was $33,034 and $20,332 of December 31, 1998 and 1997,
respectively.
(f) Costs in Excess of Net Assets Acquired
Costs in excess of the fair value of net assets acquired are primarily
amortized on a straight-line basis over 20 years. Accumulated
amortization totaled $3,749 and $2,273 at December 31, 1998 and 1997,
respectively.
For each of the years presented, the Company has made certain valuation
determinations with respect to pre-acquisition contingencies or
allocations. For the year ended December 31, 1998, the Company reduced
tax liabilities and associated costs in excess of net assets acquired
by $622 as a result of the resolving certain acquisition date
contingencies.
(g) Policy Liabilities and Accruals
Policy benefit reserves for traditional life insurance policies
generally have been computed on the net level premium method, based on
estimated future investment yield, mortality, morbidity and
withdrawals. Estimates used are based on experience adjusted to provide
for possible adverse deviation. These estimates are periodically
reviewed and compared with actual experience. Future policy benefits
for interest sensitive products include the balance that accrues to the
benefits of the policyholders and amounts that have been assessed to
compensate the life insurance subsidiaries for services to be provided
in the future.
Reserves for annuity policies and interest sensitive life policies
represent the policy account balance, or accumulated fund value, before
applicable surrender charges. Benefits incurred in excess of related
policy account balances and interest credited during the period to
policy account balances are charged to expense.
Reserves for separate account policies are carried at account value.
Policy and contract claims represent estimates of both reported claims
and claims incurred but not reported and are based on the Company's
experience.
(h) Insurance Revenue Recognition
Accident and sickness insurance premiums are recognized as revenue
ratably over the time period to which premiums relate. Revenues from
traditional life insurance policies represent premiums which are
recognized as earned when due. Benefits and expenses are associated
with earned premiums so as to result in recognition of
8
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (Continued)
profits over the lives of the policies. This association is
accomplished by means of the provision for liabilities for future
policy benefits and the deferral and amortization of policy acquisition
costs.
Revenues for interest sensitive products such as universal life and
annuity contracts represent charges assessed against the policyholders'
account balance for the cost of insurance, surrenders and policy
administration. Benefits charged to expenses include benefit claims
incurred during the period in excess of policy account balances and
interest credited to policy account balances.
(i) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases as well as operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
In assessing the realization of deferred taxes, management considers
whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent on the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning
strategies in making this assessment.
(j) Reinsurance
Financial reinsurance that does not transfer insurance risk is
accounted for as deposits. The cost of reinsurance related to
long-duration contracts is accounted for over the life of the
underlying reinsured policies. Balances due to, or from, reinsurers
have been reflected as assets and liabilities rather than being netted
against the related account balances. Realized gains on retroactive
reinsurance arrangements are deferred and amortized into net income
over the estimated duration of the reinsured business.
(k) Participating Policies
Direct participating business, primarily related to the Company's
pre-need funeral policies, represented 75% and 74.7% of the amount of
life insurance in force and 50.5% and 47.2% of the life insurance
policies in force as of December 31, 1998 and 1997, respectively. The
amount of dividends paid on participating policies is based on
published dividend scales and totaled $854, $1,501 and $1,198 for the
years ended December 31, 1998, 1997 and 1996, respectively.
(l) Accounting Pronouncements Not Yet Adopted
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 defines derivative
instruments and provides comprehensive accounting and reporting
standards for the recognition and measurement of derivative and hedging
activities (including certain instruments embedded in other contracts).
It requires derivatives to be recorded in the Consolidated Balance
Sheet at fair value and establishes criteria for hedges of changes in
the fair value of assets, liabilities or firm commitments, hedges of
variable cash flows of forecasted transactions, and hedges of foreign
currency exposures of net investments in foreign operations. Changes in
the fair value of derivatives not meeting specific hedge accounting
criteria would be recognized in the Consolidated Statement of
Operations. SFAS No. 133 is effective for all fiscal quarters of all
9
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (Continued)
years beginning after June 15, 1999. The Company is evaluating SFAS
No.133 and has not determined its effect on the consolidated financial
statements.
In December 1997, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position ("SOP") 97-3. SOP
97-3 provides (1) guidance for determining when an entity should
recognize a liability for guaranty-fund and other insurance-related
assessments, (2) guidance on how to measure the liability, (3) guidance
on when an asset may be recognized for a portion or all of the
assessment liability or paid assessment that can be recovered through
premium tax offsets or policy surcharges, and (4) requirements for
disclosure of certain information. This SOP is effective for financial
statements for fiscal years beginning after December 15, 1998. It is
expected that adoption of this SOP will not have a material effect on
the consolidated financial statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This SOP
provides guidance for determining whether costs of software developed
or obtained for internal use should be capitalized or expensed as
incurred. In the past, the Company has expensed such costs as they were
incurred. This SOP is also effective for fiscal years beginning after
December 15, 1998. The Company is currently completing its evaluation
of the financial impact as well as the changes to its related
disclosures.
3. Ownership of the Company
On July 24, 1996, PLAIC consummated the acquisition of the Company from United
Companies Financial Corporation ("UC Financial"). Pursuant to an Amended and
Restated Stock Purchase Agreement (the "Agreement") dated as of July 24, 1996,
PLAIC acquired 100% of the outstanding capital stock of the Company for $110,056
in cash including expenses incurred of $9,706 as part of the acquisition.
Immediately following the acquisition of the Company, PLAIC contributed $57,258
in cash to the Company, which represented the market value of certain real
estate and other assets distributed to UC Financial immediately prior to the
consummation of the acquisition.
The Company's acquisition has been accounted for using the purchase method of
accounting. The total purchase price of the acquisition was allocated to the
tangible and intangible assets and liabilities acquired based upon their
respective fair values as of the date of acquisition. Based upon such respective
fair values, the value of the net assets acquired was $82,580, resulting in
costs in excess of net assets acquired at the date of acquisition of $27,476.
4. Investments
The amortized cost and fair value of investments in fixed maturities available
for sale at December 31, 1998 and 1997 by categories of securities are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1998:
Mortgage-backed securities........................... $ 467,283 $ 16,777 $ (3,502) $ 480,558
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies.......... 57,692 130 (242) 57,580
Debt securities issued by states of the United States
and political subdivisions of the states.......... 3,245 140 -- 3,385
Debt securities issued by foreign governments........ 3,255 30 -- 3,285
Corporate debt securities............................ 401,821 13,517 (4,697) 410,641
----------- ----------- ----------- -----------
Total fixed maturities available for sale.......... $ 933,296 $ 30,594 $ (8,441) $ 955,449
=========== =========== =========== ===========
</TABLE>
10
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Investments (Continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1997:
Mortgage-backed securities........................... $ 619,152 $ 21,421 $ (30) $ 640,543
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies.......... 8,883 118 -- 9,001
Debt securities issued by states of the United States
and political subdivisions of the states.......... 3,371 155 -- 3,526
Debt securities issued by foreign governments........ 5,541 165 -- 5,706
Corporate debt securities............................ 432,512 16,051 (378) 448,185
----------- ----------- ----------- -----------
Total fixed maturities available for sale.......... $ 1,069,459 $ 37,910 $ (408) $ 1,106,961
=========== =========== =========== ===========
</TABLE>
The amortized cost and fair value of fixed maturities at December 31, 1998, by
contractual maturity, are shown below:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------------ ------------
<S> <C> <C>
Available for sale:
Due in one year or less........................................... $ 13,190 $ 13,221
Due after one year through five years............................. 213,719 218,771
Due after five years through ten years............................ 187,365 190,037
Due after ten years............................................... 51,739 52,862
------------ ------------
466,013 474,891
Mortgage-backed securities........................................ 467,283 480,558
------------ ------------
$ 933,296 $ 955,449
============ ============
</TABLE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without prepayment
penalties.
Investments with a fair value of $25,963 and $14,622 were on deposit with
certain regulatory authorities at December 31, 1998 and 1997, respectively.
Included in fixed maturities available for sale at December 31, 1998 and 1997,
are below investment-grade securities with amortized costs of $79,869 and
$75,065, respectively, and fair values of $74,276 and $78,467, respectively.
Included in fixed maturities available for sale as of December 31, 1998 and
1997, are unrated securities with an amortized cost of $8,000 and $10,235 and a
fair value of $8,000 and $10,252, respectively.
In 1990, the Company securitized pools of commercial real estate loans owned in
two transactions and in connection therewith sold pass-through certificates
("Series 90-1" and "Series 90-2") for which an election under the real estate
mortgage investment conduit provisions ("REMIC") of the Internal Revenue Code of
1986, as amended were made. The Company retained as an investment subordinated
junior certificates in both issues, as well as a senior certificate interest in
Series 90-2. In the first quarter of 1997, the Company closed the Series 90-2
REMIC and reacquired the underlying mortgages. The two primary purposes of
closing the REMIC were the elimination of the administration and servicing fees
and the resulting improvement to the Company's Statutory Risk Based Capital.
Fixed maturity securities available for sale at December 31, 1998 and 1997
included REMIC investments of $6,391 and $9,606, respectively.
11
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Investments (Continued)
A summary of the Company's investment at December 31, 1998 and 1997, in the
REMIC's are as follows:
<TABLE>
<CAPTION>
Remaining
Principal Carrying Interest
Date of Issue Balance Value Rate Maturity Date
------------- ------- ----- ---- -------------
<S> <C> <C> <C> <C> <C>
December 31, 1998:
United Companies Life REMIC
Series 90-1, Class B-1........ March 29, 1990 $ 6,314 $ 6,391 10.05% September 25, 2009
=========== ===========
December 31, 1997:
United Companies Life REMIC
Series 90-1, Class B-1........ March 29, 1990 $ 10,351 $ 9,606 10.05% September 25, 2009
=========== ===========
</TABLE>
The following schedule summarizes the composition of mortgage loans on real
estate as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Residential....................................................... $ 23,729 $ 34,372
Unearned loan charges............................................. (214) (232)
Allowance for loan losses......................................... (5,000) --
------------- -------------
Residential, net.................................................. 18,515 34,140
------------- -------------
Commercial........................................................ 197,839 197,538
Allowance for loan losses......................................... (3,851) (3,923)
------------- -------------
Commercial, net................................................... 193,988 193,615
------------- -------------
Total......................................................... $ 212,503 $ 227,755
============= =============
</TABLE>
The Company has an arrangement with UC Lending, Inc. ("UC Lending"), a
subsidiary of UC Financial, in which UC Lending is obligated to repurchase home
equity loans originated or purchased and underwritten by UC Lending that are
subject to foreclose (see Note 11 of Notes to Consolidated Financial
Statements). As a result of the voluntary filing for bankruptcy of UC Financial
and certain of its subsidiaries and affiliates, including UC Lending (see Note
15 of Notes to Consolidated Financial Statements), the Company established an
allowance for loan losses of $5,000 on this portfolio based on expected future
cash flows. In addition, the Company owns subordinated debentures of UC Lending
with a book value of $6,752 and a fair value of $5,600 as of December 31, 1998.
Included in the loans owned at December 31, 1998 and 1997 were loans with
delinquencies in excess of 180 days of $49 and $100, respectively.
12
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Investments (Continued)
The Company provides an estimate for future credit losses in an allowance for
loan losses. A summary analysis of the changes in the Company's allowance for
loan losses on its residential and commercial loans is as follows:
<TABLE>
<CAPTION>
Historical
basis of
Purchase basis of accounting accounting
-------------------------------------------- -------------
Period Period
from from
Year ended Year ended July 24 to January 1,
December 31, December 31, December 31, to July 23,
1998 1997 1996 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at beginning of period..................... $ 3,923 $ 4,211 $ 4,211 $ 2,117
Losses charged to allowance........................ (72) (276) -- (771)
Loan loss provision................................ 5,000 (12) -- 478
------------- ------------- ------------- -------------
Balance at end of period........................... $ 8,851 $ 3,923 $ 4,211 $ 1,824
============= ============= ============= =============
Specific reserves.................................. $ 341 $ 418 $ 706 $ 824
Unallocated reserves............................... 8,510 3,505 3,505 1,000
------------- ------------- ------------- -------------
Total reserves.................................. $ 8,851 $ 3,923 $ 4,211 $ 1,824
============= ============= ============= =============
</TABLE>
As of December 31, 1998, commercial and residential mortgage loan investments
were concentrated in the following states:
<TABLE>
<CAPTION>
Percentage
of Total
Carrying Carrying
Value Value
------------ ---
<S> <C> <C>
Georgia............................................................. $ 43,790 21%
Florida............................................................. 30,771 14
Colorado............................................................ 35,604 17
Virginia............................................................ 21,261 10
Texas............................................................... 15,811 7
Arizona............................................................. 13,496 6
Tennessee........................................................... 9,632 5
All other (less than 4% individually)............................... 42,138 20
------------ ---
$ 212,503 100%
============ ===
</TABLE>
Immediately prior to the closing of the sale of the Company in 1996, the Company
distributed all of its real estate to its former parent. The investment real
estate was acquired subsequently through foreclosure.
13
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Investments (Continued)
The limited partnerships were formed for the purpose of participating in
privately placed equity or mezzanine investments. These investments, acquired in
leveraged investment transactions, generally include private equity securities
and/or higher risk subordinated debt. Immediately prior to the closing of the
sale of the Company in 1996, the Company distributed a limited partnership
investment to its former parent aggregating approximately $17,800. Following is
an analysis of the Company's investment in limited partnerships.
<TABLE>
<CAPTION>
Historical
basis of
Purchase basis of accounting accounting
-------------------------------------------- -------------
Period Period
from from
Year ended Year ended July 24 to January 1,
December 31, December 31, December 31, to July 23,
1998 1997 1996 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at beginning of period..................... $ 16,026 $ 5,704 $ 6,041 $ 25,594
Contributions and capitalized costs................ 1,366 13,473 43 620
Net partnership income............................. (445) 1,765 948 1,061
Distributions...................................... (3,505) (6,251) (1,328) (21,234)
Realized gains..................................... 639 1,335 -- --
------------- ------------- ------------- -------------
Balance at end of period........................ $ 14,081 $ 16,026 $ 5,704 $ 6,041
============= ============= ============= =============
</TABLE>
Major categories of investment income consist of the following:
<TABLE>
<CAPTION>
Historical
basis of
Purchase basis of accounting accounting
-------------------------------------------- -------------
Period Period
from from
Year ended Year ended July 24 to January 1,
December 31, December 31, December 31, to July 23,
1998 1997 1996 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Fixed maturity securities.......................... $ 75,984 $ 85,626 $ 37,140 $ 47,606
Mortgage loans on real estate...................... 22,461 24,614 11,192 20,331
Other investments.................................. 4,875 5,288 4,214 4,067
------------- ------------- ------------- -------------
Gross investment income......................... 103,320 115,528 52,546 72,004
Less: Investment expenses.......................... 3,302 3,992 1,880 5,583
------------- ------------- ------------- -------------
Net investment income........................... $ 100,018 $ 111,536 $ 50,666 $ 66,421
============= ============= ============= =============
</TABLE>
14
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Investments (Continued)
Following are changes in net realized gains (losses) from sale of investments:
<TABLE>
<CAPTION>
Historical
basis of
Purchase basis of accounting accounting
-------------------------------------------- -------------
Period Period
from from
Year ended Year ended July 24 to January 1,
December 31, December 31, December 31, to July 23,
1998 1997 1996 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Fixed maturity securities:
Gross gains..................................... $ 8,684 $ 5,923 $ -- $ 42
Gross losses.................................... (1,823) (1,181) (157) (1,388)
Loss provision.................................. -- (83) -- 477
------------- ------------- ------------- -------------
Net gains (losses) on fixed maturity securities 6,861 4,659 (157) (869)
Mortgage loans on real estate...................... (5,000) 12 -- (478)
Investment real estate............................. (131) (1) -- (245)
Limited partnerships............................... 639 1,336 -- --
Other invested assets.............................. (48) (74) -- --
------------- ------------- ------------- -------------
Realized investment gains (losses).......... $ 2,321 $ 5,932 $ (157) $ (1,592)
============= ============= ============= =============
Trading portfolio gains (losses) included in other income were as follows:
Net gains (losses) from sales................. $ -- $ 59 $ (20) $ 37
Net change in unrealized gains (losses)....... -- (135) 135 (26)
------------- ------------- ------------- -------------
Total trading gains (losses)................ $ -- $ (76) $ 115 $ 11
============= ============== ============= =============
</TABLE>
Following are changes in unrealized gains (losses) on investments:
<TABLE>
<CAPTION>
Historical
basis of
Purchase basis of accounting accounting
-------------------------------------------- -------------
Period Period
from from
Year ended Year ended July 24 to January 1,
December 31, December 31, December 31, to July 23,
1998 1997 1996 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Investments carried at fair value:
Fixed maturities................................ $ (15,349) $ 21,187 $ 16,315 $ (48,716)
Equity securities............................... (35) 77 (72) --
------------- ------------- ------------- -------------
(15,384) 21,264 16,243 (48,716)
Less effect on other balance sheet accounts:
Value of business acquired and deferred
acquisition costs............................. 9,280 (12,555) (10,063) --
Deferred income (taxes) benefits................ 2,136 (3,048) (2,163) 17,051
------------- ------------- ------------- -------------
Change in unrealized gains (losses)................ $ (3,968) $ 5,661 $ 4,017 $ (31,665)
============= ============= ============= =============
</TABLE>
At December 31, 1998, net unrealized capital losses of equity securities
available for sale of $30 consisted of gross unrealized gains of $12, less gross
unrealized loss of $42. At December 31, 1997, net unrealized capital gains of
equity securities held for sale of $5 consisted of gross unrealized capital
gains of $5.
15
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Investments (Continued)
The Company had non-income producing investments at December 31, 1998 with an
amortized costs and fair value as follows:
<TABLE>
<CAPTION>
Book Fair
Value Value
----------- -----------
<S> <C> <C>
Common stock, unaffiliated........................... $ 392 $ 362
Real estate.......................................... 458 458
Other invested assets................................ 10,114 10,114
----------- -----------
$ 10,964 $ 10,934
=========== ===========
</TABLE>
The following investments, other than obligations of the U.S. Government or
agencies thereof, individually exceeded 10% of total stockholders' equity.
<TABLE>
<CAPTION>
December 31, 1998
------------------------
Amortized Fair
Investment Cost Value
---------- ----------- -----------
<S> <C> <C>
Collateralized Mortgage Obligation Trust,
Series 64, Class Z................................. $ 20,810 $ 20,380
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
------------------------
Amortized Fair
Investment Cost Value
---------- ----------- -----------
<S> <C> <C>
Collateralized Mortgage Obligation Trust,
Series 64, Class Z................................. $ 20,640 $ 20,672
</TABLE>
5. Deferred Policy Acquisition Costs and Present Value of Insurance in Force
Deferred policy acquisition costs represent commissions and certain costs of
policy issuance and underwriting. Information relating to these costs is as
follows:
<TABLE>
<CAPTION>
Historical
basis of
Purchase basis of accounting accounting
-------------------------------------------- -------------
Period Period
from from
Year ended Year ended July 24 to January 1,
December 31, December 31, December 31, to July 23,
1998 1997 1996 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Unamortized deferred policy acquisition
costs at beginning of period.................... $ 13,671 $ 4,187 $ -- $ 90,703
Policy acquisition costs deferred:
Commissions..................................... 12,221 8,326 4,298 4,531
Underwriting and issue costs.................... 4,202 2,139 874 266
Policy acquisition costs amortized................. (2,015) (316) (8) (9,699)
Impact of unrealized investment gains.............. (1,641) (665) (977) --
------------- ------------- ------------- -------------
Unamortized deferred policy
acquisition costs at end of period............ $ 26,438 $ 13,671 $ 4,187 $ 85,801
============= ============= ============= =============
</TABLE>
16
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Deferred Policy Acquisition Costs and Present Value of Insurance in Force
(Continued)
As a part of the purchase accounting for the Company's acquisition, a present
value of insurance in force is established which represents the value of the
right to receive future cash flows from insurance contracts existing at the date
of acquisition. Such value is the actuarially determined present value of the
projected cash flows from the acquired policies, discounted at an appropriate
risk rate of return.
The methods used by the Company to value the fixed benefit, life, and
accumulation products purchased are consistent with the valuation methods used
most commonly to value blocks of insurance business. It is also consistent with
the basic methodology generally used to value insurance assets. The method used
by the Company includes identifying the future cash flows from the acquired
business, the risks inherent in realizing those cash flows, the rate of return
the Company believes it must earn in order to accept the risks inherent in
realizing the cash flows, and determining the value of the insurance asset by
discounting the expected future cash flows by the discount rate the Company
requires.
The discount rate used to determine such values is the rate of return required
in order to invest in the business being acquired. In selecting the rate of
return, the Company considered the magnitude of the risks associated with the
type of business acquired and the actuarial factors described in the following
paragraph, cost of capital available to the Company to fund the acquisition, the
compatibility with other Company activities that may favorably affect future
profits, and the complexity of the acquired Company.
Expected future cash flows used in determining such values are based on
actuarial determination of future premium collection, mortality, morbidity,
surrenders, operating expenses and yields on assets held to back policy
liabilities as well as other factors. Variances from original projections,
whether positive or negative, are included in income as they occur and will
affect the present value of insurance in force amortization rates for insurance
products accounted for under SFAS No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from Sales of Investments." To the extent that these variances indicate
that future cash flows will differ from those included in the original scheduled
amortization of the value of the insurance in force, current and future
amortization may be adjusted. Recoverability of the value of insurance in force
is evaluated annually and appropriate adjustments are then determined and
reflected in the financial statements for the applicable period.
Information related to the present value of insurance in force is as follows:
<TABLE>
<CAPTION>
Historical
basis of
Purchase basis of accounting accounting
-------------------------------------------- ------------
Period Period
from from
Year ended Year ended July 24 to January 1,
December 31, December 31, December 31, to July 23,
1998 1997 1996 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at the beginning of the period............. $ 27,769 $ 54,931 $ -- $ --
Addition due to acquisition........................ -- -- 69,077 --
Accretion of interest.............................. 4,693 3,438 1,633 --
Amortization....................................... (17,395) (18,710) (6,693) --
Impact of unrealized investment losses (gains)..... 10,921 (11,890) (9,086) --
------------- ------------- ------------- -------------
Balance at end of period........................... $ 25,988 $ 27,769 $ 54,931 $ --
============= ============= ============= =============
</TABLE>
17
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Deferred Policy Acquisition Costs and Present Value of Insurance in Force
(Continued)
Expected amortization, based upon current assumptions and accretion of interest
at a policy liability or contract rate ranging from 5.36% to 5.43% for the next
five years of the present value of insurance in force is as follows:
<TABLE>
<CAPTION>
Beginning Gross Accretion Net
Balance Amortization of Interest Amortization
------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
1999.................................. $ 25,988 $ 7,486 $ 1,980 $ 5,506
2000.................................. 20,482 8,360 1,730 6,630
2001.................................. 13,852 6,345 1,366 4,979
2002.................................. 8,873 4,807 1,072 3,735
2003.................................. 5,138 3,898 842 3,056
</TABLE>
6. Policy Liabilities and Accruals
Policy liabilities and accruals consists of reserves for life and accumulation
products. For interest sensitive life and annuity products, the liability for
future policy benefits is equal to the accumulated fund value. Fund values are
equal to the premium received and interest credited to the fund value less
deductions for mortality costs and expense charges. Current declared interest
rates credited range from 3 to 9.6 percent. Mortality costs and expense charges
are established by the Company based upon its experience and cost structure and
in accordance with policy terms.
For traditional life products, the liability for future policy benefits is based
primarily upon Commissioners' Standard Ordinary Tables with interest rates
ranging from 3 to 7 percent. The liability for future policy benefits is
determined using Company experience as to mortality, morbidity and lapses with a
provision for adverse deviation. The Company varies assumptions by year of
policy issue.
Total policy liabilities and accruals are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Policy benefits on traditional products:
Traditional life insurance contracts............... $ 101,473 $ 107,297
Health............................................. 223 250
----------- -----------
101,696 107,547
Interest sensitive products:
Annuities.......................................... 1,087,269 1,203,549
----------- -----------
1,087,269 1,203,549
Policy and contract claims:
Health............................................. 1,151 1,159
Life and other..................................... 857 621
----------- -----------
2,008 1,780
----------- -----------
$ 1,190,973 $ 1,312,876
=========== ===========
</TABLE>
18
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Income Taxes
The provision for income taxes attributable to operations is as follows:
<TABLE>
<CAPTION>
Historical
basis of
Purchase basis of accounting accounting
-------------------------------------------- -------------
Period Period
from from
Year ended Year ended July 24 to January 1,
December 31, December 31, December 31, to July 23,
1998 1997 1996 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Current............................................ $ 3,783 $ 7,398 $ 2,205 $ 1,139
Deferred........................................... 1,029 1,724 950 (370)
------------- ------------- ------------- -------------
Total........................................... $ 4,812 $ 9,122 $ 3,155 $ 769
============= ============= ============= =============
</TABLE>
ULA files a consolidated federal income tax return with PLAIC and its other
insurance subsidiaries. The method of allocating federal income taxes between
the companies is subject to written agreement approved by the Board of Directors
and insurance regulatory authorities. The allocation is based upon separate
return calculations. Marketing One files its own tax return.
Reported income tax expense attributable to operations differs from the amount
computed by applying the statutory federal income tax rate of 35% to income from
operations before income taxes for the following reasons:
<TABLE>
<CAPTION>
Historical
basis of
Purchase basis of accounting accounting
-------------------------------------------- -------------
Period Period
from from
Year ended Year ended July 24 to January 1,
December 31, December 31, December 31, to July 23,
1998 1997 1996 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Federal income tax provision at statutory rate..... $ 3,896 $ 7,961 $ 3,025 $ 763
Differences resulting from:
Amortization of costs in excess of
net assets acquired......................... 517 502 236 --
Increase in valuation allowance............... 556 985 -- --
Other......................................... (157) (326) (106) 6
------------- ------------- ------------- -------------
Reported income tax provision...................... $ 4,812 $ 9,122 $ 3,155 $ 769
============= ============= ============= =============
</TABLE>
19
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Income Taxes (Continued)
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to the deferred tax assets and
liabilities at December 31, 1998 and 1997 relate to the following:
<TABLE>
<CAPTION>
1998 1997
----------------------------- ----------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Mortgage loans on real estate and
other investments............................... $ -- $ 1,554 $ -- $ 2,238
Deferred policy acquisition costs.................. -- 8,874 -- 4,435
Present value of insurance in force................ 1,973 -- 1,014 --
Net operating losses............................... 1,021 -- 611 --
Unrealized gain on investment securities........... -- 3,075 -- 5,211
Policy reserves.................................... 15,630 -- 15,956 --
Other ............................................ 1,123 -- 441 1,557
------------- ------------- ------------- -------------
Reported income tax provision benefit.............. 19,747 13,503 18,022 13,441
Valuation allowance................................ (1,608) -- (1,052) --
------------- ------------- ------------- -------------
$ 18,139 $ 13,503 $ 16,970 $ 13,441
============= ============= ============= =============
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1998 and 1997
was $1,608 and $1,052, respectively. The net change in the total valuation
allowance for the years ended December 31, 1998 and 1997, was an increase of
$556 and $985, respectively. The increase in the valuation allowance for 1998
and 1997 is largely attributable to deferred tax assets resulting from federal
and state net operating losses generated by Marketing One and its subsidiaries
for which the Company believes it will not fully utilize.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent on the generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon those
considerations, management believes it is more likely than not that the Company
will realize the benefits of these deductible differences, net of the existing
valuation allowance at December 31, 1998.
At December 31, 1998, the Company has federal and state net operating loss
carryforwards of approximately $2,140 and $8,454, respectively, which relate to
Marketing One and its subsidiaries and, if not utilized, will expire in tax
years 2012 and 2018.
8. Statutory Accounting and Dividend Restrictions
Accounting records of the Company are maintained in accordance with practices
prescribed or permitted by the Texas Department of Insurance for 1998 and the
Louisiana Department of Insurance for 1997 and 1996. Prescribed statutory
accounting principles include a variety of publications of the National
Association of Insurance Commissioners, as well as state laws, regulations, and
general administrative rules. Permitted statutory accounting practices encompass
all accounting practices not so prescribed. The Company's capital and surplus
pursuant to the statutory accounting basis as of December 31, 1998, 1997 and
1996 was $100,116, $105,405 and $103,092, respectively. On a statutory
accounting basis, net gain from operations for the years ended December 31,
1998, 1997 and 1996 was $10,227, $14,548 and $10,127, respectively. Net income
on a statutory accounting basis, which includes realized capital gains and
losses, was $9,854, $13,287 and $6,760 for the years ended December 31, 1998,
1997 and 1996, respectively.
The Company paid cash dividends of $14,548 and $10,127 to PLAIC during 1998 and
1997, respectively, pursuant to the statutory dividend restrictions in
Louisiana. During 1996, extraordinary dividends, with a statutory value of
$62,591,
20
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Statutory Accounting and Dividend Restrictions (Continued)
consisting of real estate, an investment in limited partnerships and $10,000
cash, were distributed to the Company's former parent immediately prior to the
closing of the sale of the Company. Immediately after the closing, PLAIC
contributed $57,258 cash to the Company as a replacement for the distributed
assets. (See Note 3 to Notes to Consolidated Financial Statements.) As part of
its July 1996 approval of PLAIC's acquisition of the Company, the Louisiana
Insurance Commissioner approved a dividend plan for the Company pursuant to
which the Company may pay a specified amount of dividends for each of the five
years following the acquisition, beginning in 1997, amounting to the lesser of
the pro forma dividend amounts in such plan or the actual earnings of the
Company, and conditioned on the Company's maintaining a risk- based capital of
at least 300% of the Authorized Control Level. Effective December 18, 1998, the
Company redomesticated to Texas from Louisiana. Statutes in Texas restrict the
payment of dividends by insurance companies to the available surplus funds
derived from their net profits. The maximum amount of cash dividends that may be
declared without regulatory approval in any twelve-month period is the greater
of ten percent (10%) of the insurer's statutory surplus, as shown by its last
annual statement on file with the Texas Department of Insurance, or one hundred
percent (100%) of statutory net gain from operations for the preceding year.
Based upon the Company's net gain from operations for the year ended December
31, 1998, approximately $10,227 of dividends could be paid to its parent without
prior regulatory approval.
The Company historically received written approval from the Louisiana Department
of Insurance to invest in first lien residential mortgage loans originated by UC
Lending on a short-term basis without recording the assignment of the mortgage
loans to the Company, which differs from prescribed statutory accounting
practices. Statutory accounting practices prescribed by the Louisiana Department
of Insurance require that investment in mortgage loans be secured by
unrestricted first liens on the underlying property. As of December 31, 1998,
statutory surplus was not affected as a result of this permitted practice.
In 1998, the Company received approval from the Texas Department of Insurance to
record the unamortized portion of ceded reinsurance premiums as an offset to
reserves to be recognized over the life of the reinsured policies. As of
December 31, 1998, the effect of the permitted practice was an offset of $3,668
to policy reserves which resulted in a corresponding increase to unassigned
surplus.
On March 16, 1998, the NAIC approved the codification of statutory accounting
practices. The codification will constitute the only source of "prescribed"
statutory accounting practices and is subject to adoption by the Texas
Department of Insurance. The Statements of Statutory Accounting Principles
established under the codification are generally effective January 1, 2001. The
Company has not determined the impact the adoption of the codification will have
on unassigned surplus.
9. Reinsurance
In the normal course of business, the Company reinsures portions of certain
polices that it underwrites to limit disproportionate risks. The Company
generally reinsures the portion of any one risk which exceeds $100 except for
certain types of policies where the limit is $25 and certain other types of
policies where the limit is $500. Amounts not retained are ceded to other
insurance enterprises or reinsurers on an automatic or facultative basis.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Therefore, the Company is contingently liable for recoverable
unpaid claims and policyholder liabilities ceded to reinsurers in the unlikely
event that assuming reinsurers are unable to meet their obligations. The Company
evaluates the financial condition of its reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies.
Amounts due from reinsurers related to policy reserves ceded under reinsurance
agreements totaled approximately $36,215 and $32,300 at December 31, 1998 and
1997, respectively.
The Company has a receivable at December 31, 1998 and 1997 of approximately
$29,983 and $31,500 from one reinsurer; however, the funds supporting the
receivable are escrowed in a separate trust account for the benefit of the
Company by
21
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Reinsurance (Continued)
the reinsurer. The following table reflects the effect of reinsurance agreements
on premiums and the amounts earned for the periods indicated.
<TABLE>
<CAPTION>
Historical
basis of
Purchase basis of accounting accounting
-------------------------------------------- -------------
Period Period
from from
Year ended Year ended July 24 to January 1,
December 31 December 31, December 31, to July 23,
1998 1997 1996 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Direct premiums................................. $ 4,274 $ 5,022 $ 2,704 $ 3,148
Reinsurance assumed............................. 1,308 1,927 1,214 1,461
Reinsurance ceded............................... (1,405) (1,218) (435) (877)
------------- ------------- ------------- -------------
Net insurance premiums........................ $ 4,177 $ 5,731 $ 3,483 $ 3,732
============= ============= ============= =============
Policyholder benefits ceded..................... $ 3,372 $ 3,656 $ 819 $ 1,039
============= ============= ============= =============
</TABLE>
10. Retirement and Profit Sharing Plans
Eligible employees may elect to participate in PennCorp's defined contribution
401(k) retirement plan ("PennCorp Plan"). Employees are eligible to participate
in the plan after six months of employment in which they are credited with 500
hours of service. Participants may contribute from 1 to 15% of pre-tax
compensation and/or from 1 to 10% of after tax compensation. The Company matches
each pay-period, 50% of participants' pre-tax contributions up to 6% of the
participants' compensation. If approved by the board of directors, the Company
may make a discretionary profit sharing contribution annually on behalf of
employees eligible to participate in the plan based on their compensation for
the prior plan year. Employee contributions are fully vested at all times. The
employer matching contributions made for employees who participated in the
PennCorp Plan prior to January 1, 1998 vest at the rate of 50% per calendar year
of service. The employer matching contributions made for all other participants
and the employer discretionary contribution vests at the rate of 20% per year of
service. All participants are fully vested at death, disability or attainment of
age 65. The assets of each account are invested at the direction of the
participant. Eleven funds with various investment objectives are available to
the participants. Distributions are normally made in a lump sum. Participants of
the PennCorp Plan prior to January 1, 1998 may elect to receive an annuity in
various forms of payment. The Company's portion of expenses related to this plan
for the years ended December 31, 1998 and 1997 and the period from July 24, 1996
to December 31, 1996, were $300, $382 and $254, respectively, compared to costs
associated with employee benefit plans of the Company's former parent of $185
for the period from January 1, 1996 to July 23, 1996.
11. Related Party Transactions
In conjunction with the acquisition of the Company by PLAIC during 1996, KB
Management, LLC ("KB Management"), an affiliate, accrued transaction fees of
$2,500 during 1996.
Immediately after the closing of the sale, the Company received $57,258 in cash
from PLAIC as replacement for assets distributed to its former parent in
conjunction with the sale of the Company. (See note 3 to Notes to Consolidated
Financial Statements.)
The Company has an Advisory and Management Service Agreement with KB Management
which was amended effective January 2, 1998. The Company incurred fees totaling
$1,291 and $1,000 during 1998 and 1997. For the period from July 24, 1996
through December 31, 1996, the accompanying financial statements include $400
for such fees.
22
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Related Party Transactions (Continued)
KB Management also provides investment management consulting services to the
Company for a fee based upon the average dollar amount of the related
investments. For the years ended December 31, 1998 and 1997 and the period from
July 24, 1996 to December 31, 1996, the Company incurred $2,136, $2,300 and
$600, respectively, related to such services.
Beginning in 1998, the Company is party to a management and services agreement
with Southwestern Financial Services Corporation ("SFSC"), an affiliate. SFSC
provides administrative, management, investment, personnel, data processing,
facilities and certain other services for the Company and other affiliates and
certain other unrelated parties. Under the management and service agreement with
SFSC, the Company paid fees for personnel, data processing, and other services
equal to the cost of such services to SFSC. The Company incurred $3,235 in fees
in accordance with the agreement in 1998.
Effective March 24, 1998, the Company acquired all of the common stock of
Marketing One from affiliates who are also indirect wholly-owned subsidiaries of
PennCorp. The Company acquired Marketing One for cash and securities with a book
value of $10,986 and fair value of $11,307. The difference between the book
value of Marketing One and the book value of the consideration of $321 is
recorded as a deemed capital contribution.
The Company, through Marketing One, provides certain services to SFSC, for which
Marketing One is reimbursed. Marketing One received $89 for such services during
1998.
UC Mortgage Corporation ("UC Mortgage"), an affiliate, services commercial loans
for the Company for a fee of three-eights of one percent of the principal
balances. For the years ended December 31, 1998 and 1997 and the period from
July 24, 1996 to December 31, 1996, the Company paid UC Mortgage $792, $830 and
400, respectively, for mortgage servicing fees. In addition, the Company
provides employees to UC Mortgage and is reimbursed for salary and salary
related expenses for those employees. The total amount of reimbursed employee
expenses for the years ended December 31, 1998 and 1997 and the period from July
24, 1996 to December 31, 1996, were $612, $646 and $300, respectively. As of
December 31, 1998 and 1997, UC Lending serviced loans owned by the Company
having aggregate unpaid principal balances of approximately $23,809 and $34,600,
respectively. The Company paid servicing fees relative to these loans of
approximately $-- and $500 for the periods from July 24, 1996 to December 31,
1996 and January 1, 1996 to July 23, 1996.
In connection with the sale of ULA to PLAIC in 1996, ULA entered into an
agreement with UC Lending to purchase up to $300,000 of qualifying residential
home equity mortgage loans originated or purchased and underwritten by UC
Lending (see note 4 of Notes to Consolidated Financial Statements.) These loans
are usually held three to six months until resold to UC Lending for sale by UC
Lending in loan securitizations. The agreement also had a sublimit of $150,000
for loans that are not eligible for securitization by UC Lending. In addition,
under an agreement UC Lending is obligated to repurchase these home equity loans
previously sold to the Company at the time of foreclosure. At December 31, 1998
and 1997, $23,173 and $33,600, respectively, of home equity loans originated by
UC Lending were owned by the Company. During the periods from July 24, 1996 to
December 31, 1996 and January 1, 1996 to July 23, 1996, the Company purchased
home equity loans for approximately $75,200 and $656,000, respectively, from UC
Lending. Sales of these home equity loans to UC Lending by the Company were $--,
$6,600, $51,400 and $679,200 for the years ended December 31, 1998 and 1997 and
the period from July 24, 1996 to December 31, 1996 and January 1, 1996 to July
24, 1996, respectively. No gain or loss was recorded by the Company in these
transactions. In March 1999, UC Financial and UC Lending filed voluntary
petitions for relief under the Chapter 11 of the United States Bankruptcy Code
(see Note 15 of Notes to Consolidated Financial Statements). Under the terms of
the sale agreement, a material adverse change in the financial position of UC
Financial relieves the Company of its obligation to purchase loans. Currently,
the Company has no intent to fund additional amounts.
The Company formerly leased home office space to UC Financial and other former
affiliates. Rent income attributable to these affiliates was approximately
$1,000 for the period from January 1, 1996 to July 23, 1996. The Company was
allocated certain costs from UC Financial and its affiliates under a cost
sharing agreement during the period from January 1, 1996 to July 23, 1996
totaling $2,100.
United Companies Realty & Development Co., Inc. ("UCRD"), a former affiliate,
managed the home office buildings leased by the Company to UC Financial and
other third party tenants under a real estate management contract for the period
from
23
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Related Party Transactions (Continued)
January 1, 1996 to July 23, 1996. The Company paid approximately $200 to UCRD in
management fees for the period January 1, 1996 to July 23, 1996.
The Company, through Marketing One, owns preferred stock issued by an affiliate,
Southwestern Financial Corporation. Such stock had a value of $6,081, $5,509 and
$4,991 at December 31, 1998, 1997 and 1996, respectively, after reflecting
dividend accretion of $572, $518 and $491 during 1998, 1997 and 1996,
respectively.
During 1998, the Company acquired from an affiliate a promissory note issued by
American Amicable Holdings, an affiliate, with a principal value of $7,665. The
principal of the affiliated note acquired exceeded the book value of the cash
and securities paid to acquire the note by $214. The excess was recorded as a
deemed capital contribution. The Company recognized investment income of $639 on
this note during 1998.
12. Other Commitments and Contingencies
The Company and its subsidiaries are obligated under operating leases. Rent
expense under operating leases was $1,019, $500 and $600 in 1998, 1997 and 1996,
respectively. During 1998, ULA relocated its operations from Louisiana to Texas
and canceled most of its leases. Future minimum lease payments under
noncancelable operating leases of Marketing One and the remaining leases of ULA
as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................ $ 830
2000............................................ 707
2001............................................ 903
2002............................................ 20
-----------
$ 2,460
===========
</TABLE>
Certain lawsuits have been brought against the Company in the normal course of
business involving the settlement of various matters and seeking compensatory
and in some cases punitive damages. Management believes that the ultimate
settlement of all such litigation will not have a material adverse effect on the
Company's consolidated financial position or results of operation.
Life insurance companies are required to be members of various state insurance
guaranty associations in order to conduct business in those states. These
associations have the authority to assess member companies in the event that an
insurance company conducting business in that state is unable to meet its
policyholder obligations. In some states, these assessments can be partially
recovered through a reduction in future premium taxes. The Company paid
assessments in 1998, 1997 and 1996 of $314 and $1,200 and $1,000, respectively.
Based on information currently available, the insurance subsidiaries have
accrued $1,705 at December 31, 1998 for future assessments, net of future
premium tax reductions.
Many computer and software programs were designed to accommodate only two digit
fields to represent a given year (e.g. "98" represents 1998). It is highly
likely that such systems will not be able to accurately process data containing
date information for the year 2000 and beyond. The Company is highly reliant
upon computer systems and software as are many of the businesses with which the
Company interacts. The Company's ability to service its policyholders and agents
is dependent upon accurate and timely transaction processing. Transaction
processing in turn is dependent upon the Company's highly complex interdependent
computer hardware, software, telecommunications and desktop applications. The
inability of the Company or any of its integral business partners to complete
year 2000 remediation efforts associated with these highly complex and
interdependent systems could lead to a significant business interruption. Such
an interruption could result in a decline in current and long-term profitability
and business franchise value.
Although the Company believes that they will be sufficiently compliant and that
the year 2000 issue should not cause a material disruption in the Company's
business, there can be no assurance that there will not be material disruptions
to the Company's business or an increase in the cost of the Company doing
business. Although the Company believes that the year
24
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Other Commitments and Contingencies (Continued)
2000 issues should not cause a material disruption in the Company's business,
the Company has developed various contingency plans associated with remediation
tasks which the Company believes are at a higher risk for potential failure.
13. Financial Instruments
The following is a summary of the carrying value and fair value of the Company's
financial instruments at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Short-term investments................................... $ 21,342 $ 21,342 $ 22,804 $ 22,804
Fixed maturities......................................... 955,449 955,449 1,106,961 1,106,961
Equity securities........................................ 362 362 5 5
Mortgage loans........................................... 212,503 225,812 227,755 234,927
Policy loans............................................. 22,168 22,168 22,585 22,585
Investment in limited partnerships....................... 14,081 14,081 16,026 16,026
Other investments........................................ -- -- 145 145
Liabilities:
Annuity reserves......................................... 1,087,269 1,015,732 1,203,549 1,153,765
Bank overdrafts.......................................... 2,430 2,430 1,863 1,863
</TABLE>
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash, Bank Overdrafts and Short-term Investments: The carrying value of
these investments approximates their fair value due to the short-term
maturity of these instruments.
Fixed Maturities Available for Sale: Fair values for fixed maturities
available for sale are based on quoted market prices, where available.
For fixed maturities not actively traded, fair values are estimated
using values obtained from independent pricing services or are
estimated based on expected future cash flows using a current market
rate applicable to the yield, credit quality, and maturity of the
investments. The fair values for equity securities are based on quoted
market prices.
Mortgage Loans: The fair values for mortgage loans are estimated using
discounted cash flow analyses, based on interest rates currently being
offered for similar loans to borrowers with similar credit ratings.
Loans with similar characteristics are aggregated for purposes of the
calculations.
Policy Loans: Policy loans are an integral part of life insurance
policies which the Company has in force and, in the Company's opinion,
cannot be valued separately. These loans typically carry an interest
rate that is tied to the crediting rate applied to the related policy
and contract reserves.
Investment in Limited Partnerships: Carrying value of investment in
limited partnerships represents the underlying equity of the limited
partnerships or joint ventures at their cost which approximates fair
value.
Other Investments: Fair value of other investments approximated their
fair value. These are evaluated periodically.
Annuity Reserves: The Company's annuity contracts generally do not have
a defined maturity and are considered as deposits under SFAS No. 97.
SFAS No. 107 states that the fair value to be disclosed for deposit
liabilities with no
25
<PAGE>
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Financial Instruments (Continued)
defined maturities is the amount payable on demand at the reporting
date. Accordingly, the Company has estimated the fair value of its
annuity reserves as the cash surrender value of these contracts.
14. Quarterly Financial Data
Summarized quarterly financial data is as follows (unaudited):
<TABLE>
<CAPTION>
Purchase basis of accounting
Three Months Ended
December 31 September 30 June 30 March 31
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
1998:
Total revenues............................ $ 26,873 $ 33,672 $ 32,574 $ 32,681
Income (loss) before income taxes......... (3,270) 3,898 6,057 4,449
Net income (loss)......................... (2,538) 2,302 3,758 2,800
</TABLE>
The Company's fourth quarter 1998 reported loss primarily resulted from a
reserve of $5,000 established on a non-performing residential mortgage
portfolio.
<TABLE>
<CAPTION>
Purchase basis of accounting
Three Months Ended
December 31 September 30 June 30 March 31
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
1997:
Total revenues........................... $ 35,090 $ 35,180 $ 35,340 $ 36,869
Income before income taxes............... 7,835 4,596 5,703 4,611
Net income............................... 4,006 2,912 3,750 2,955
</TABLE>
15. Subsequent Events
On February 21, 1999, PennCorp and PLAIC signed a definitive agreement to sell
ULA, United Variable Services, Inc, Cyberlink Development, Inc. and certain
assets of Marketing One to ING America Insurance Holding, Inc. ("ING"). The sale
agreement provides that certain assets would be sold or transferred to PLAIC as
dividends prior to closing including the common stocks of Marketing One and
United Variable Services, Inc. totaling $10,086, investment in affiliated bonds
of $7,665, cash of $2,052 and certain residential mortgages of approximately
$9,600. Consummation of the sale to ING and related transactions are subject to
regulatory approvals and other material closing conditions. No adjustments have
been made to these financial statements with respect to the sales agreement.
Effective March 25, 1999, the Company reacquired the underlying mortgages of
REMIC Series 90-1. This transaction did not result in a realized gain or loss.
26
<PAGE>
SCHEDULE III
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Supplementary Insurance Information
(In thousands)
<TABLE>
<CAPTION>
Deferred Policy
Acquisition
Cost
Deferred Amortization
Policy Future Net Benefits, and Other
Acquisition Policy Unearned Premium Investment Claims Operating
Costs Benefits(1) Premiums Revenues(2) Income Losses, Etc. Expenses
----- ----------- -------- ----------- ------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Purchase basis of
accounting:
Year ended December 31,
1998.............. $ 26,438 $ 1,190,973 $ 110 $ 4,177 $ 100,018 $ 8,401 $ 31,959
Year ended December 31,
1997.............. 13,671 1,312,876 132 5,731 111,536 7,149 28,525
Period from July 24
through December 31,
1996.............. 4,187 1,443,964 275 3,483 50,666 3,836 25,170
Historical basis of
accounting:
Period from January 1
through July 23, 1996 85,801 1,465,012 1,074 3,732 66,421 5,967 19,452
</TABLE>
NOTES:
(1) Includes accumulated fund values on annuity and interest sensitive products.
(2) Excludes premiums on annuity and interest sensitive products which are
accounted for as deposits.
27
<PAGE>
SCHEDULE IV
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Reinsurance
(In thousands)
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Direct Other From Other Net Assumed to
Amount Companies Companies Amount Net Amount
------ --------- --------- ------ ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Life insurance in force at end of period........ $ 367,132 $ 108,302 $ 642,836 $ 901,668 71.3%
=========== =========== =========== ===========
Premiums
Life insurance............................... 4,027 1,405 1,308 3,930 33.3%
Accident and health insurance................ 247 -- -- 247 --
----------- ----------- ----------- -----------
Total premiums............................. $ 4,274 $ 1,405 $ 1,308 $ 4,177 31.3%
=========== =========== =========== ===========
Year ended December 31, 1997
Life insurance in force at end of period........ $ 410,606 $ 116,672 $ 732,253 $ 1,026,187 71.4%
=========== =========== =========== ===========
Premiums
Life insurance............................... 4,624 1,195 1,927 5,356 36.0
Accident and health insurance................ 398 23 -- 375 --
----------- ----------- ----------- -----------
Total premiums............................. $ 5,022 $ 1,218 $ 1,927 $ 5,731 33.6
=========== =========== =========== ===========
Period from July 24, 1996 to December 31, 1996
Life insurance in force Premiums
Life insurance............................... 2,496 481 1,214 3,229 37.6
Accident and health insurance................ 208 (46) -- 254 --
----------- ----------- ----------- -----------
Total premiums............................. $ 2,704 $ 435 $ 1,214 $ 3,483 34.9
=========== =========== =========== ===========
Period from January 1, 1996 to July 23, 1996
Life insurance in force at end of period........ $ 499,292 $ 141,816 $ 992,672 $ 1,350,148 73.5
=========== =========== =========== ===========
Premiums
Life insurance............................... 2,719 925 1,461 3,255 26.9
Accident and health insurance................ 429 (48) -- 477 --
----------- ----------- ----------- -----------
Total premiums............................. $ 3,148 $ 877 $ 1,461 $ 3,732 23.5
=========== =========== =========== ===========
</TABLE>
28
<PAGE>
SCHEDULE V
UNITED LIFE & ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance
Beginning Costs and Other at end
of Period Expenses Accounts(1) Deductions(2) of Period(3)
--------- -------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Purchase basis of accounting:
Year ended December 31, 1998
Allowance for loan losses....................... $ 3,923 $ 5,000 $ -- $ 72 $ 8,851
Allowance for real estate losses................ -- -- -- -- --
Allowance for bond losses....................... -- -- -- -- --
Unearned loan charges........................... 1,569 -- -- 5 1,564
----------- ----------- ----------- ----------- -----------
Total........................................ $ 5,492 $ 5,000 $ -- $ 77 $ 10,415
=========== =========== =========== =========== ===========
Year ended December 31, 1997
Allowance for loan losses....................... $ 4,211 $ (12) $ -- $ 276 $ 3,923
Allowance for real estate losses................ -- -- -- -- --
Allowance for bond losses....................... 189 -- -- 189 --
Unearned loan charges........................... 2,072 -- -- 503 1,569
----------- ----------- ----------- ----------- -----------
Total........................................ $ 6,472 $ (12) $ -- $ 968 $ 5,492
=========== =========== =========== =========== ===========
Period from July 24, 1996 to
December 31, 1996 (Restated)
Allowance for loan losses....................... $ 4,211 $ -- $ -- $ -- $ 4,211
Allowance for real estate losses................ -- -- -- -- --
Allowance for bond losses....................... 189 -- -- -- 189
Unearned loan charges........................... 2,021 -- -- (51) 2,072
----------- ----------- ----------- ----------- -----------
Total........................................ $ 6,421 $ -- $ -- $ (51) $ 6,472
=========== =========== =========== =========== ===========
Historical basis of accounting:
Period from January 1, 1996 to July 23, 1996
Allowance for loan losses....................... $ 2,117 $ 478 $ -- $ 771 $ 1,824
Allowance for real estate losses................ 3,987 (1,098) -- 2,889 --
Allowance for bond losses....................... 666 884 -- 1,361 189
Unearned loan charges........................... 301 -- -- 17 284
----------- ----------- ----------- ----------- -----------
Total........................................ $ 7,071 $ 264 $ -- $ 5,038 $ 2,297
=========== =========== =========== =========== ===========
</TABLE>
NOTES:
(1) Represents the approximate amount of unearned loan charges on installment
loans originated during the period.
(2) Represents loans and bonds charged off and loan charges earned during the
period.
(3) All of the above are deducted in the balance sheet from the asset to which
they apply.
29
