<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
May 31, 1998
THE GUARANTEE LIFE COMPANIES INC.
------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 0-26788 47-0785066
--------------------- ---------------- -------------------
(State of Incorporation) (Commission File Number) (IRS Employer Identification
Number)
8801 Indian Hills Drive,
Omaha, Nebraska 68114
------------------------------------ -----------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(402) 361-7300
------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
----------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
Audited financial statements of Westfield Life Insurance Company
("Westfield") for the fiscal year ended December 31,1997 are attached
hereto as Exhibit 99.1.
(b) Pro Forma Financial Information.
Pro forma financial information for The Guarantee Life Companies
Inc. ("Guarantee"), prepared as if Guarantee had acquired Westfield as of
January 1, 1997, are attached hereto as Exhibit 99.2.
(c) Exhibits
The following exhibits are filed with this amendment. Each exhibit
number refers to the numbers in Item 601 of Regulation S-K of exhibits
applicable to Form 8-K.
<TABLE>
<CAPTION>
NUMBER Description
<S> <C>
23 Consent of KPMG Peat Marwick LLP
99.1 Financial Statements of Westfield for the fiscal
year ended December 31, 1997.
99.2 Pro forma financial information for Guarantee, as
if Guarantee had acquired Westfield as of January
1, 1997.
</TABLE>
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE GUARANTEE LIFE COMPANIES INC.
By /s/ Richard A. Spellman
-------------------------------------------
Richard A. Spellman, Senior Vice President,
General Counsel and Secretary
August 14, 1998
3
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP APPEARS HERE]
Exhibit 23
Accountants' Consent
The Board of Directors
The Guarantee Life Companies Inc:
We consent to the inclusion of our report dated June 26, 1998, with respect to
the balance sheets of Westfield Life Insurance Company as of December 31, 1997
and 1996, and the related statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997,
which report appears in the Form 8-K/A of the The Guarantee Life Companies Inc.
dated August 14, 1998.
KPMG Peat Marwick LLP
/s/ KPMG Peat Marwick LLP
Omaha, Nebraska
August 14, 1998
<PAGE>
Exhibit 99.1
WESTFIELD LIFE INSURANCE COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
----------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ohio Farmers Insurance Company (Formerly
Parent of Westfield Life Insurance Company)
and
The Board of Directors
Guarantee Life Insurance Company:
We have audited the accompanying balance sheets of Westfield Life Insurance
Company (the Company) as of December 31, 1997 and 1996, and the related
statements of income, comprehensive income, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
The Company's financial statements were previously prepared in accordance with
accounting practices prescribed by the Ohio Department of Insurance, a
comprehensive basis of accounting other than generally accepted accounting
principles. As a result of the acquisition of the Company by Guarantee Life
Insurance Company (as described in Note 10), the financial statements presented
were restated to conform with generally accepted accounting principles as of
and for the three years ended December 31, 1997.
Omaha, Nebraska
June 26, 1998
1
<PAGE>
WESTFIELD LIFE INSURANCE COMPANY
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Assets 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Invested assets:
Fixed maturities, available-for-sale, at fair value (amortized cost:
$325,359,492 and $306,980,924) $ 341,911,788 317,624,437
Equity securities, at fair value (cost: $15,988,583 and $15,517,865) 22,228,761 19,374,702
Redeemable preferred stock, at amortized cost 8,232,979 6,075,022
Policy loans 7,602,842 7,091,210
Other invested assets 1,957,514 1,832,735
- ---------------------------------------------------------------------------------------------------------------------------
Total invested assets 381,933,884 351,998,106
Cash and cash equivalents 5,508,954 2,674,458
Accrued investment income 4,200,706 4,209,816
Ceded reinsurance recoverables 3,719,034 2,042,923
Accounts receivable 217,995 213,033
Deferred policy acquisition costs 33,731,552 31,722,808
Federal income tax recoverable 152,118 1,715,231
Receivable from affiliate 2,219,619 984,830
Other assets 580,569 543,666
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 432,264,431 396,104,871
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- ---------------------------------------------------------------------------------------------------------------------------
Future policy benefits $ 24,783,422 20,542,183
Policyholder account balances:
Universal life contracts 133,225,165 122,065,228
Annuity contracts 118,884,316 121,095,893
Policy and contract claims 2,843,536 1,032,419
Other policyholder funds 22,349,239 16,916,379
Unearned premium revenue 421,854 444,251
Accounts payable 2,592,892 2,229,572
Deferred tax liability 8,912,332 6,375,627
Other liabilities 935,685 941,029
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 314,948,441 291,642,581
- ---------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock $50 par value; 100,000 shares authorized, issued and
outstanding 5,000,000 5,000,000
Additional paid-in capital 27,000,000 27,000,000
Retained earnings 70,781,325 63,314,123
Accumulated comprehensive income 14,534,665 9,148,167
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 117,315,990 104,462,290
Commitments and contingencies
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 432,264,431 396,104,871
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
WESTFIELD LIFE INSURANCE COMPANY
Statements of Income
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Insurance premiums and policyholder assessments:
Life $ 20,179,652 15,080,914 13,834,680
Policyholder assessments 14,127,410 12,828,195 11,822,575
Reinsurance premiums (3,475,000) (2,951,000) (2,780,000)
- --------------------------------------------------------------------------------------------------------------------------
30,832,062 24,958,109 22,877,255
Investment income, net 25,554,107 23,491,897 22,116,001
Realized investment gains, net 3,498,295 2,018,303 1,169,215
Ceding commissions and other income 796,863 309,189 593,714
- --------------------------------------------------------------------------------------------------------------------------
Total revenues 60,681,327 50,777,498 46,756,185
- --------------------------------------------------------------------------------------------------------------------------
Policyholder benefits:
Life insurance 21,923,437 14,277,545 15,635,459
Reinsurance recoveries (2,087,000) (1,517,000) (1,915,000)
- --------------------------------------------------------------------------------------------------------------------------
19,836,437 12,760,545 13,720,459
Interest credited to policyholder account balances:
Universal contracts 7,301,329 6,597,558 5,992,006
Annuity contracts 5,989,086 6,046,909 6,176,800
Other - 64,634 137,857
- --------------------------------------------------------------------------------------------------------------------------
Total policyholder benefits 33,126,852 25,469,646 26,027,122
- --------------------------------------------------------------------------------------------------------------------------
Expenses:
Policy acquisition costs 4,532,768 3,790,048 3,857,352
Other insurance operating expenses 11,510,659 10,029,874 10,358,928
- --------------------------------------------------------------------------------------------------------------------------
Total expenses 16,043,427 13,819,922 14,216,280
- --------------------------------------------------------------------------------------------------------------------------
Income from operations before dividends to policyholders
and income taxes 11,511,048 11,487,930 6,512,783
Dividends to policyholders 4,449 6,126 4,508
- --------------------------------------------------------------------------------------------------------------------------
Income from operations before income taxes 11,506,599 11,481,804 6,508,275
Income tax expense 4,039,397 4,040,941 2,254,189
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 7,467,202 7,440,863 4,254,086
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
WESTFIELD LIFE INSURANCE COMPANY
Statements of Comprehensive Income
Years ended December 31, 1997, 1996 and 1995
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 7,467,202 7,440,863 4,254,086
- --------------------------------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation) of 7,660,390 (2,469,546) 18,290,270
invested assets arising during the year
Less reclassification adjustment for gains
(losses) included in net income (2,273,892) (1,311,897) (759,990)
- --------------------------------------------------------------------------------------------------------------------------
5,386,498 (3,781,443) 17,530,280
- --------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 12,853,700 3,659,420 21,784,366
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
WESTFIELD LIFE INSURANCE COMPANY
Statements of Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock, beginning and end of year $ 5,000,000 5,000,000 5,000,000
- --------------------------------------------------------------------------------------------------------------------------
Additional paid in capital, beginning of year 27,000,000 17,000,000 17,000,000
Capital contribution from parent - 10,000,000 -
- --------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital, end of year 27,000,000 27,000,000 17,000,000
- --------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of year 63,314,123 55,873,260 51,619,174
Net income 7,467,202 7,440,863 4,254,086
- --------------------------------------------------------------------------------------------------------------------------
Retained earnings, end of year 70,781,325 63,314,123 55,873,260
- --------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on
invested assets carried at fair value:
Beginning of year 9,148,167 12,929,610 (4,600,670)
Unrealized appreciation (depreciation) of
invested assets, net 5,386,498 (3,781,443) 17,530,280
- --------------------------------------------------------------------------------------------------------------------------
End of year 14,534,665 9,148,167 12,929,610
- --------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 117,315,990 104,462,290 90,802,870
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
WESTFIELD LIFE INSURANCE COMPANY
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income from continuing operations $ 7,467,202 7,440,863 4,254,086
Adjustments to reconcile net income from continuing
operations to net cash provided by continuing
operating activities:
Policyholder assessments (14,127,410) (12,828,195) (11,822,575)
Interest credited to policyholder account balances 13,290,415 12,709,101 12,306,663
Realized investment gains (3,498,295) (2,018,303) (1,169,215)
Change in:
Ceded reinsurance recoverables (1,676,111) 164,687 592,439
Deferred policy acquisition costs (2,139,528) (2,245,968) (1,763,965)
Liabilities for future policy benefits 4,241,239 1,590,637 2,261,365
Other policyholder funds 5,432,860 2,726,920 2,706,878
Policy and contract claims 1,811,117 (813,334) (180,527)
Other liabilities 335,579 (29,814) (1,176,766)
Deferred income taxes (238,135) 1,140,036 (199,352)
Other, net 295,569 (986,001) (934,203)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 11,194,502 6,850,629 4,874,828
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed maturities (66,359,581) (83,736,541) (65,378,887)
Proceeds from sale of fixed maturities - available-for-sale 21,429,711 34,340,584 33,232,727
Maturities, calls and principal reductions of fixed maturities 29,236,216 21,305,521 20,574,771
Purchase of equity securities (12,596,453) (4,000,563) (11,513,546)
Proceeds from sale of equity securities 12,223,381 3,413,364 3,394,836
Other, net (510,831) (486,835) (3,417,254)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (16,577,557) (29,164,470) (23,107,353)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Deposits of policyholder account balances 32,739,318 31,130,193 30,567,419
Withdrawals from policyholder account balances (24,521,767) (18,290,222) (12,352,815)
Capital contribution from parent - 10,000,000 -
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 8,217,551 22,839,971 18,214,604
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,834,496 526,130 (17,921)
Cash and cash equivalents at beginning of year 2,674,458 2,148,328 2,166,249
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 5,508,954 2,674,458 2,148,328
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
WESTFIELD LIFE INSURANCE COMPANY
Notes to Financial Statements
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND BUSINESS
Westfield Life Insurance Company, referred to hereafter as the "Company" or
"Westfield", is domiciled in Ohio and is a wholly-owned subsidiary of Ohio
Farmers Insurance Company ("OFIC" or the "Parent").
The Company provides life insurance and annuity contracts to its
policyholders through independent agents in 47 states, although its primary
market is the State of Ohio and certain selected midwestern and southern
states. The Company does not do business outside of the United States. The
Company is subject to competition from other life insurance companies and
is subject to regulation by the insurance departments of states in which it
is licensed. The Company undergoes periodic financial and market conduct
examinations by those departments.
(B) FIXED MATURITIES AND EQUITY SECURITIES
Categorization of Fixed Maturities and Equity Securities
Fixed maturity and equity securities are carried at fair value unless
management believes that the Company has the positive intent and ability to
hold these investments to maturity. Fixed maturity and equity securities
are classified into one of three categories: 1) held-to-maturity, 2)
available-for-sale, or 3) trading securities.
Management determines the appropriate classification of fixed maturities
and equity securities at the time of purchase and reevaluates such
designation at each balance sheet date. When changes in conditions cause a
fixed maturity investment to be transferred to a different category, the
security is transferred to the new category at its fair value at the date
of transfer. Westfield has classified all of its investment portfolio as
available-for-sale, except for U.S. investment in redeemable preferred
stocks which are classified as held-to-maturity.
Available-for-sale Fixed Maturities and Equity Securities
Available-for-sale fixed maturities and equity securities (common and
nonredeemable preferred stocks) are carried at fair value. After adjusting
related balance sheet accounts as if the unrealized gains had been
realized, the net adjustment is recorded in net unrealized appreciation
(depreciation) on securities within shareholders' equity. If the fair value
of a security classified as available-for-sale declines below its cost and
this decline is considered to be other than temporary, the security is
reduced to its net realizable value, and the reduction is recorded as a
realized loss.
Held-to-maturity Redeemable Preferred Stock
Redeemable Preferred Stock for which Westfield has both the ability and
intent to hold to maturity are stated at amortized cost adjusted for other
then temporary fair value decline. Amortized cost reflects actual cost.
Policy Loans and Other Invested Assets
Policy loans are carried at unpaid balances. Other invested assets are
recorded at amortized cost.
7
<PAGE>
WESTFIELD LIFE INSURANCE COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
Investment Income
Bond premium and discounts are amortized into income using the scientific
yield method over the term of the security. Premiums and discounts on
mortgage-backed securities are amortized using the interest method over the
expected life of each security. In addition, a pro rata portion of premiums
and discounts is recognized when unscheduled principal payments are
received and is included in net investment income. Realized gains and
losses on sales of investments are recognized in net income on the specific
identification basis. Changes in fair values of available-for-sale fixed
maturities and equity securities are reflected as unrealized gains (losses)
directly in shareholders' equity, net of tax, and, accordingly, have no
effect on net income.
Invested Asset Impairment and Valuation Allowances
Invested assets are considered impaired when Westfield determines that
collection of all amounts due under the contractual terms is doubtful.
Westfield adjusts invested assets to their estimated net realizable value
at the point at which it determines an impairment is other than temporary.
Valuation allowances for other than temporary impairments in value are
netted against the asset categories to which they apply, and additions to
valuation allowances are included in total investment results. There were
no valuation allowances at December 31, 1997 and 1996.
(C) DEFERRED POLICY ACQUISITION COSTS
Certain commissions, expenses of the policy issue and underwriting
departments and other variable expenses have been deferred. For limited
payment and other traditional life insurance policies, these deferred
policy acquisition costs are being amortized in proportion to the ratio of
the expected annual premium revenue to the expected total premium revenue.
Expected premium revenue was estimated with the same assumptions used for
computing liabilities for future policy benefits for these policies.
For universal life and annuity-type contracts, the deferred policy
acquisition costs are amortized over a period of not more than twenty years
in relation to the present value of estimated gross profits arising from
estimates of mortality, interest, expense and surrender experience. The
estimates of expected gross profits are evaluated regularly and are revised
if actual experience or other evidence indicates that revision is
appropriate. Upon revision, total amortization recorded to date is adjusted
by a charge or credit to current earnings. Deferred policy acquisition
costs are adjusted for the impact on estimated gross profits of net
unrealized gains and losses on securities.
(D) RECOGNITION OF INSURANCE PREMIUM REVENUE AND RELATED EXPENSES
For traditional life policies, premiums are recognized when due, less
allowances for estimated uncollectible balances.
For universal life and annuity policies, contract charges for mortality,
surrender and expense, other than front-end expense charges, are reported
as income when charged to policyholder accounts. Expenses consist primarily
of benefit payments in excess of policyholder account values and interest
credited to policyholder accounts. Profits are recognized over the life of
universal life-type contracts through the amortization of deferred policy
acquisition costs in relation to estimated gross profits from mortality,
interest, surrender and expense.
8
<PAGE>
WESTFIELD LIFE INSURANCE COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
(E) FUTURE POLICY BENEFITS AND POLICYHOLDER ACCOUNT BALANCES
For traditional life insurance policies, future policy benefits and
dividend liabilities are computed using a net level premium method on the
basis of actuarial assumptions as to mortality, persistency and interest
established at policy issue. Assumptions established at policy issue as to
mortality and persistency are based on industry standards and Westfield's
historical experience which, together with interest and expense
assumptions, provide a margin for adverse deviation. Interest rate
assumptions principally range from 7% to 8.5%. When the liabilities for
future policy benefits plus the present value of expected future gross
premiums are insufficient to provide for expected future policy benefits
and expenses, unrecoverable deferred policy acquisition costs are written
off and thereafter a premium deficiency reserve is established through a
charge to earnings.
Policyholders' account balances for universal life and annuity policies are
equal to the policy account value before deduction of any surrender
charges. The policy account value represents an accumulation of gross
premium payments plus credited interest less expense and mortality charges
and withdrawals. An additional liability is established for deferred front-
end expense charges on universal life-type policies. These expense charges
are recognized in income as policyholder assessments using the same
assumptions as are used to amortize deferred policy acquisition costs.
Weighted average interest crediting rates for universal life policies were
5.77%, 5.83% and 5.89%, and for annuity policies, 5.43%, 5.59% and 5.85%
for 1997, 1996 and 1995, respectively.
(F) OTHER POLICYHOLDER FUNDS
The policyholder funds liabilities, for future benefits, are computed using
a method based on actuarial assumptions as to mortality and interest
established at issue, which provide a margin for adverse deviation.
Mortality assumptions are based on industry standards less a provision for
adverse deviation. When the liabilities for future policy benefits plus the
present value of expected future gross premiums are insufficient to provide
for expected future policy benefits and expenses, unrecoverable deferred
policy acquisition costs are written off and thereafter a premium
deficiency reserve is established through a charge to earnings.
(G) POLICY AND CONTRACT CLAIMS
Westfield establishes a liability for unpaid claims based on estimates of
the ultimate cost of claims incurred, which is comprised of aggregate case
basis estimates and average claim costs for reported claims and estimates
of unreported losses based on past experience.
The liability for unreported losses is established using various
statistical and actuarial techniques reflecting historical patterns of
development of paid and reported losses adjusted for current trends. The
liability is continually reviewed and updated as new information becomes
available. Resulting adjustments are reflected in income currently.
Adjustments related to claims incurred in prior periods have not been
material for all periods presented in the accompanying statements of
income.
Management believes the liabilities for unpaid claims are adequate to cover
the ultimate liability; however, due to the underlying risks and the high
degree of uncertainty associated with the determination of the liability
for unpaid claims, the amounts which will ultimately be paid to settle
these liabilities cannot be determined precisely and may vary from the
estimated amount included in the balance sheets.
9
<PAGE>
WESTFIELD LIFE INSURANCE COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
(H) GUARANTY FUND ASSESSMENTS
As a condition of doing business, states and jurisdictions in which
Westfield does business have adopted laws requiring membership in life and
health insurance guaranty funds, which are organized to pay contractual
obligations under insurance policies issued by insolvent and failed life
and health insurers. Member companies are subject to assessments each year
based on life, health or annuity premiums collected in the state. In some
states, these assessments may be applied against premium taxes.
In accordance with estimates provided by the National Organization of Life
and Health Guaranty Associations, Westfield has established a liability of
$156,975 in the accompanying financial statements for amounts due for
actual and potential insurance company failures in the states where
Westfield writes business. Westfield capitalizes the assessments which are
deductible when they are paid and generally amortizes the payments over not
more than five years. Guaranty fund assessments capitalized are reviewed
quarterly to determine that the unamortized portion of such costs does not
exceed recoverable amounts. At December 31, 1997, Westfield had $177,525 of
unamortized guaranty fund assessments which are included in other assets.
(I) PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company participates in a defined benefit pension plan along with other
affiliated companies which is sponsored by its Parent. This plan also
includes a provision for funding a portion of future retirees' health
benefits under Internal Revenue Code Section 401(h). The benefits are based
on years of service and the five highest consecutive years of the
employee's compensation during the last ten years of employment. The
funding policy is to contribute at least the minimum annual required
contribution and not more than the maximum deductible contribution. Pension
expense for each Company corresponds to salary allocations. No pension cost
was recognized in the current year or prior year because the plan was
subject to the full funding limitation under the Internal Revenue Code.
The Parent provides health care and life insurance benefits for retired
employees and their eligible dependents. Employees who meet the
requirements for retirement are eligible for these benefits. The Company's
share of postretirement expense is allocated from the Parent.
(J) FEDERAL INCOME TAXES
Westfield filed a consolidated federal income tax return with OFIC for
1997, while separate returns were filed for tax years 1996 and prior.
Deferred assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. 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.
Federal income tax expense is calculated on a separate return basis. Income
before federal income taxes differs from taxable income principally due to
deferred policy acquisition costs, differences in reserves for policy and
contract liabilities, and amortization of bond discounts, and 1997 income
tax expense reflects certain adjustments to prior years' recorded amounts.
10
<PAGE>
WESTFIELD LIFE INSURANCE COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
(K) FAIR VALUE OF FINANCIAL INSTRUMENTS
Generally accepted accounting principles require disclosure of fair value
information about existing on and off-balance sheet financial instruments.
In cases where quoted market prices are not available, fair values are
based on estimates using the present value derived from other valuation
techniques.
These techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Although
fair value estimates are calculated using assumptions that management
believes are appropriate, changes in assumptions could cause these
estimates to vary materially. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and,
in many cases, could not be realized in immediate settlement of the
instruments. Generally accepted accounting principles exclude certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do
not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments.
INVESTMENT SECURITIES
Fair values for bonds are based on quoted market prices, where available.
For bonds not actively traded, fair values are estimated using values
obtained from independent pricing services. The fair values for common
stocks are based on quoted market prices.
CASH, SHORT-TERM INVESTMENTS AND POLICY LOANS
The carrying amounts reported in the balance sheets for these instruments
approximate their fair values.
INVESTMENT CONTRACTS AND LIMITED PAYMENT POLICIES
Fair values for the Company's liabilities under investment-type contracts
(that is those contracts without significant mortality risks) are estimated
using two methods. For payout annuities without significant mortality risk,
including structured settlements without life contingencies, settlement
options without life contingencies and single premium immediate annuities
without life contingencies, the carrying amounts in the balance sheets
approximate their fair values. For deferred annuity liabilities, fair value
is estimated using a discounted cash flow analysis with a 7% interest rate.
The intangible value of long-term relationships with policyholders is not
taken into account in estimating fair values disclosed. Fair values for
Westfield's insurance contracts other than investment-type contracts are
not required to be disclosed. However, the fair values of liabilities under
all insurance contracts are taken into consideration in Westfield's overall
management of interest rate risk, which minimizes exposure to changing
interest rates through the matching of investment maturities with amounts
due under insurance contracts.
(L) CASH EQUIVALENTS
For purposes of the statements of cash flows, Westfield considers cash
equivalents to be all highly liquid debt instruments with original
maturities of three months or less when purchased. The carrying amounts
reported in the balance sheets for these instruments approximate their fair
value.
11
<PAGE>
WESTFIELD LIFE INSURANCE COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
(M) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(2) INVESTMENTS
Fixed maturities at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. treasury securities and
obligations of U.S. government
corporations and agencies $ 76,188,811 5,747,299 (40,262) 81,895,848
Debt securities issued by foreign
governments 6,945,046 527,454 - 7,472,500
Corporate bonds 138,899,079 9,491,429 (785,681) 147,604,827
Mortgage-backed securities 103,326,556 1,926,768 (314,711) 104,938,613
- -----------------------------------------------------------------------------------------------------------
325,359,492 17,692,950 (1,140,654) 341,911,788
Equity securities 15,988,583 6,242,036 (1,858) 22,228,761
Redeemable preferred stocks 8,232,979 1,249,791 (51,905) 9,430,865
- -----------------------------------------------------------------------------------------------------------
$349,581,054 25,184,777 (1,194,417) 373,571,414
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Westfield manages its credit risk associated with fixed maturities by
diversifying its portfolio. At December 31, 1997, Westfield held no
corporate debt securities or foreign government debt securities of a
single issuer which had a carrying value in excess of 5% of shareholders'
equity.
At December 31, 1997 Westfield held $76.9 million of mortgage backed
securities issued by US Government agencies and $7.4 million issued by
United Companies Financial. At December 31, 1997, Westfield held no other
mortgage backed securities of a single issuer which had a carrying value
in excess of 5% of policyholders' equity. The Company's non-income
earning investments in fixed maturities are not material.
12
<PAGE>
WESTFIELD LIFE INSURANCE COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
Fixed maturities at December 31, 1996 are as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U. S. treasury securities and
obligations of U. S. government
corporations and agencies $ 69,478,162 4,743,580 (234,664) 73,987,078
Debt securities issued by foreign
governments 8,924,183 397,067 - 9,321,250
Corporate bonds 139,398,692 5,978,616 (981,081) 144,396,227
Mortgage-backed securities 89,179,887 1,363,235 (623,240) 89,919,882
- --------------------------------------------------------------------------------------------------------
306,980,924 12,482,498 (1,838,985) 317,624,437
Equity securities 15,517,865 3,986,245 (129,408) 19,374,702
Redeemable preferred stocks 6,075,022 836,308 (28,680) 6,882,650
- --------------------------------------------------------------------------------------------------------
$328,573,811 17,305,051 (1,997,073) 343,881,789
- --------------------------------------------------------------------------------------------------------
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call prepayment penalties. The amortized cost and estimated fair
value of fixed maturities by contractual maturity are as follows:
- --------------------------------------------------------------------------------
December 31, 1997
-------------------------
Amortized Estimated
cost fair value
- --------------------------------------------------------------------------------
Due in one year or less $ 9,383,884 9,489,970
Due after one year through five years 75,051,574 77,851,220
Due five years through ten years 92,777,732 97,666,001
Due after ten years 44,819,746 51,965,984
- --------------------------------------------------------------------------------
222,032,936 236,973,175
Mortgage-backed securities 103,326,556 104,938,613
- --------------------------------------------------------------------------------
$325,359,492 341,911,788
- --------------------------------------------------------------------------------
Westfield had fixed maturities with an aggregate fair market value of
approximately $3 million as of December 31, 1997 on deposit with
regulatory authorities.
13
<PAGE>
WESTFIELD LIFE INSURANCE COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
Proceeds from the sale of fixed maturities during 1997, 1996, and 1995
were $21,429,711, $34,340,584, and $33,232,727, respectively. Gross gains
of $807,501, $1,453,177, and $1,304,606 and gross losses of $44,754, $0,
and $636,102 were realized on those sales in 1997, 1996 and 1995,
respectively.
A summary of realized investment gains (losses) is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Years ended December 31,
------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Gross gains $ 1,287,444 1,537,085 1,532,783
Gross losses (44,754) (357,792) (637,539)
Equity securities 2,255,605 839,010 273,971
- ------------------------------------------------------------------------------------------------------
Realized investment gains $ 3,498,295 2,018,303 1,169,215
- ------------------------------------------------------------------------------------------------------
A summary of net investment income is as follows:
- ------------------------------------------------------------------------------------------------------
<CAPTION>
Years ended December 31,
------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $22,824,884 21,133,587 20,150,477
Equity securities 2,041,506 1,742,506 1,514,150
Policy loans 511,683 460,404 420,280
Cash and short-term investments 166,708 181,849 106,976
Other 253,314 180,100 104,424
- ------------------------------------------------------------------------------------------------------
25,798,095 23,698,446 22,296,307
Less investment expenses (243,988) (206,549) (180,306)
- ------------------------------------------------------------------------------------------------------
Net investment income from invested assets $25,554,107 23,491,897 22,116,001
- ------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
WESTFIELD LIFE INSURANCE COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
A summary of the components of the net unrealized appreciation on
invested assets carried at fair value is as follows:
- --------------------------------------------------------------------------------
Years ended
December 31,
--------------------------
1997 1996
- --------------------------------------------------------------------------------
Unrealized appreciation:
Fixed maturities available-for-sale $ 16,552,296 10,643,513
Equity securities 6,240,178 3,856,837
Deferred policy acquisition costs (280,963) (150,177)
Deferred income taxes (7,976,846) (5,202,006)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 14,534,665 9,148,167
- --------------------------------------------------------------------------------
(3) DEFERRED POLICY ACQUISITION COSTS
A summary of the policy acquisition costs deferred and amortized is as
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 31,722,808 29,312,853 27,883,210
Policy acquisition costs deferred 6,672,298 6,036,016 5,621,317
Policy acquisition costs amortized (4,532,768) (3,790,048) (3,857,352)
Deferred policy acquisition costs related to change
in unrealized gain (loss) on invested assets
carried at fair value (130,786) 163,987 (334,322)
- ----------------------------------------------------------------------------------------------------
Total reflected in balance sheets $ 33,731,552 31,722,808 29,312,853
- ----------------------------------------------------------------------------------------------------
</TABLE>
The increase in policy acquisition costs deferred and amortized from 1996
to 1997 reflects growth in the Universal Life products. The majority of
deferred acquisition costs represent commissions paid to agents for sales
of life policies.
(4) REINSURANCE
In the ordinary course of business Westfield cedes business to other
insurers primarily under yearly renewable term and co-insurance
contracts. The existence of ceded reinsurance constitutes a means by
which Westfield has underwritten a portion of its business.
Westfield's retention limit on its life insurance business was generally
$250,000 on a life risk for each of the years in the thre-year period
ended December 31, 1997. As of December 31, 1997 and 1996, the amount of
ceded life insurance in force was approximately $1.2 billion and $1
billion, respectively. Ceding commissions of $262,078, $254,324 and
$220,662 were earned by the Company for the years ended December 31,
1997, 1996 and 1995, respectively.
15
<PAGE>
WESTFIELD LIFE INSURANCE COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
Westfield generally strives to diversify its credit risks related to
reinsurance ceded; however, certain concentrations of credit risk related
to reinsurance recoverables (including unearned premiums) exist with the
insurance organizations listed in the table below:
- --------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------
Indianapolis Life Insurance Company $ 1,141,528
Business Men's Assurance Company 1,131,190
Phoenix Home Life Mutual Insurance Co. 890,027
Lincoln National Life Insurance Company 370,466
Optimum Re Insurance Company 143,620
Others 42,203
- --------------------------------------------------------------------------------
$ 3,719,034
- --------------------------------------------------------------------------------
This underwriting activity subjects Westfield to certain risks. To the
extent that reinsurers who are underwriting Westfield's business become
unable to meet their contractual obligations, Westfield retains the
primary obligation to its direct policyholders because the existence of
this reinsurance does not discharge Westfield from its obligation to its
policyholders.
Westfield has policies and procedures to approve reinsurers prior to
entering into an agreement and also to monitor financial stability on a
continuous basis. As of December 31, 1997 and 1996, Westfield had no
material overdue reinsurance balances. As of December 31, 1997, Westfield
held funds and other collateral of $1.7 million related to the above
recoverables.
(5) FEDERAL INCOME TAXES
The actual federal income tax expense attributable to income from
operations differs from the amounts computed by applying the U. S.
federal income tax rate of 35% to income from continuing operations
before income taxes as a result of the following:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 4,027,309 4,018,631 2,277,896
Increase (reduction) in income taxes resulting from
other, net 12,088 22,310 (23,707)
- -----------------------------------------------------------------------------------------------
$ 4,039,397 4,040,941 2,254,189
- -----------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
WESTFIELD LIFE INSURANCE COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
Total income tax expense (benefit), substantially all of which is
federal, are recorded in the statements of income and directly in certain
shareholders' equity accounts. Income tax expense (benefit) was allocated
as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statements of income:
Current $ 4,277,532 2,900,905 2,453,541
Deferred (238,135) 1,140,036 (199,352)
- ---------------------------------------------------------------------------------------------------
Total 4,039,397 4,040,941 2,254,189
Shareholders' equity deferred income taxes related
to unrealized appreciation of invested securities
carried at fair value, net 2,774,840 (1,760,095) 9,432,329
- ---------------------------------------------------------------------------------------------------
Total income taxes $ 6,814,237 2,280,846 11,686,518
- ---------------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Years ended December 31,
-----------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Policy liabilities $ 8,492,111 7,487,627 8,031,808
Deferred compensation 377,791 357,417 336,377
- -------------------------------------------------------------------------------------------------
Net deferred tax assets 8,869,902 7,845,044 8,368,185
- -------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs 9,470,931 8,867,940 8,244,413
Unrealized gain on investments available-for-sale 7,976,846 5,202,006 6,962,101
Other 334,457 150,725 157,357
- -------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 17,782,234 14,220,671 15,363,871
- -------------------------------------------------------------------------------------------------
Net deferred tax liabilities (assets) $ 8,912,332 6,375,627 6,995,686
- -------------------------------------------------------------------------------------------------
</TABLE>
As discussed in note 1, Westfield carries its invested securities
classified as available-for-sale at fair value. For federal income tax
purposes, Westfield believes it is not a dealer with respect to these
investment securities and, therefore, recognizes gains and losses on such
investment securities only when they are sold.
17
<PAGE>
WESTFIELD LIFE INSURANCE COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
As of December 31, 1997, Westfield does not believe any valuation
allowance with respect to the gross deferred tax assets is necessary as
it is more likely than not that these deferred tax assets will be
realized due to the expected reversal of existing temporary differences
attributable to gross deferred tax liabilities and the carryback
potential of prior year income taxes paid.
Prior to 1984, a portion of the Company's income was not taxed, but was
accumulated in a Policyholders' Surplus Account ("PSA"). Any
distributions from the PSA are taxable. The balance of the PSA at
December 31, 1997 is approximately $3,117,000. In the event of certain
actions taken by management, the amount of taxes payable would be
approximately $1,060,000.
The Internal Revenue Service completed its examination of Westfield's
federal income tax return for the year ended December 31, 1994. The
settlement did not have a material impact on the financial position of
Westfield. Westfield filed an amended return for 1995 and 1996, based on
the settlement for 1994.
During the years ended December 31, 1997, 1996, and 1995, Westfield's
cash payments for federal income taxes were $1,550,580, $3,081,913 and
$2,352,466, respectively.
(6) FAIR VALUE INFORMATION
The carrying amounts and fair values of invested assets and investment
contracts as of each December 31 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Carrying Fair
value value
- --------------------------------------------------------------------------------------------
<S> <C> <C>
1997:
Assets:
Fixed maturities $ 325,359,492 341,911,788
Equity securities 15,988,583 22,228,761
Redeemable preferred stock 8,232,979 9,430,813
Policy loans 7,602,842 7,602,842
Other invested assets 1,957,514 1,957,514
Liabilities:
Payout annuities without significant mortality risk $ 9,756,798 9,756,798
Deferred annuity liabilities 118,884,316 117,293,000
1996:
Assets:
Fixed maturities $ 306,980,924 317,624,437
Equity securities 15,517,865 19,374,702
Redeemable preferred stock 6,075,022 6,882,650
Policy loans 7,091,210 7,091,210
Other invested assets 1,832,735 1,832,735
Liabilities:
Payout annuities without significant mortality risk $ 10,473,266 10,473,266
Deferred annuity liabilities 121,095,893 120,925,000
- --------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
WESTFIELD LIFE INSURANCE COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
(7) REGULATORY MATTERS
A reconciliation of statutory net income determined for Westfield under
statutory accounting practices to that reflected herein follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Years ended December 31,
-------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net gain from operations as reported to
regulatory authorities $ 8,081,399 5,205,014 2,894,450
Change in deferred acquisition costs 2,139,528 2,245,968 1,763,965
Deferred federal income taxes (1,418,840) (825,850) (6,513)
Interest maintenance reserve 1,032,971 908,554 673,091
Differences in statutory and GAAP reserves (2,323,736) (36,242) (1,009,706)
Other, net (44,120) (56,581) (61,201)
- ------------------------------------------------------------------------------------------
Net income as reported herein $ 7,467,202 7,440,863 4,254,086
- ------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of statutory surplus for Westfield determined under
statutory accounting practices to shareholders' equity reflected herein
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Years ended
December 31,
---------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Statutory surplus as reported to regulatory authorities $ 67,103,597 56,488,900
Deferred policy acquisition costs 33,731,552 31,722,808
Asset valuation and interest maintenance reserves 10,038,697 9,614,271
Deferred income taxes (8,902,309) (5,075,557)
Fixed maturities available-for-sale unrealized appreciation, net 16,552,296 10,643,513
Insurance reserves 1,825,685 3,803,731
Deferred premium (3,017,934) (2,672,245)
Other, net (15,594) (63,131)
- ------------------------------------------------------------------------------------------------------
Shareholders' equity as reported herein $117,315,990 104,462,290
- ------------------------------------------------------------------------------------------------------
</TABLE>
Under the NAIC solvency monitoring program known as Risk-Based Capital
(RBC), Westfield is required to measure its solvency against certain
parameters. As of December 31, 1997, Westfield exceeded the established
minimums in the RBC program. In addition, the Company exceeded the
minimum statutory capital and surplus requirements of the State of Ohio.
19
<PAGE>
WESTFIELD LIFE INSURANCE COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
The NAIC is in the process of codifying statutory accounting practices
("Codification"). Codification will likely change, to some extent,
prescribed statutory accounting practices and may result in changes to
the accounting practices that the Company uses to prepare its statutory-
basis financial statements. Codification has been approved by the NAIC
and will require adoption by the various states before it becomes the
prescribed statutory basis of accounting for insurance companies
domesticated within those states. Accordingly, before Codification
becomes effective for the Company, the State of Ohio must adopt
Codification as the prescribed basis of accounting on which domestic
insurers must report their statutory-basis results to the Department of
Insurance. At this time it is unclear whether Ohio will adopt
Codification.
Dividend payments to shareholders are subject to approval by state
regulatory authorities when the value of any such dividend together with
the value of other dividends paid or distributions made within the
preceding 12 months exceeds the greater of (i) 10% of surplus as regards
to policyholders as of December 31, or (ii) net income for the 12-month
period ended December 31. Based on the foregoing, the Company could pay
dividends of approximately $8,080,000 in 1998 without the prior approval
of the Ohio Department of Insurance.
(8) EMPLOYEE BENEFIT PLANS
Westfield does not have any employees. The following discussion of
employee benefit plans are allocations from its Parent. The Parent is
ultimately responsible for all employee benefit obligations as Westfield
does not employ personnel directly.
PENSION PLAN
The Company participates in the Ohio Farmers Insurance Company Pension
Plan (the "Plan"), a trusteed pension plan sponsored by OFIC, which
includes a provision for funding a portion of future retirees' health
benefits under Internal Revenue Code Section 401(h). The Plan covers
substantially all employees who have completed certain service and age
requirements as defined by the Plan. The Company funds the Plan as
directed by the Parent. During 1997, 1996, and 1995, no contributions
were made by the Company.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Parent provides health care and life insurance benefits for retired
employees and their eligible dependents. Employees who meet the
requirements for retirement are eligible for these benefits. The
Company's share of postretirement expense is allocated from the Parent.
The Company's net periodic benefit cost, including the expected cost of
benefits for newly eligible or vested employees, interest costs, and
gains and losses arising from differences between actuarial assumptions
and actual experience for 1997, 1996, and 1995, was $121,248, $124,898,
and $45,522, respectively. In addition, $389,636 and $451,054 was accrued
by the Company for these benefits as of December 31, 1997 and 1996,
respectively, and is included in other liabilities.
20
<PAGE>
WESTFIELD LIFE INSURANCE COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
PROFIT SHARING PLAN
A noncontributory profit sharing plan is in effect for all employees and
retired employees of the Company and its Parent. The Company's share of
profit sharing expense is allocated from the Parent. The rate of
contributions to the plan is based upon a formula adopted as part of the
plan. Contributions to and investment earnings of the plan are
distributed to the employees annually. The plan may be curtailed, amended
or terminated provided that all contributions to the trust create
nonforfeitable benefits for the participants. The charge to operations
for 1997, 1996, and 1995 was $1,226,000, $1,156,000, and $1,967,000,
respectively.
(9) RELATED PARTY TRANSACTIONS
Management fees of $4,149,721, $3,344,870, and $2,824,042 were assessed
to the Company by the Parent during 1997, 1996 and 1995, respectively,
related to the performance of certain management services.
Limited payment contracts with policy reserves held of approximately
$18,200,000 and $12,700,000 at December 31, 1997 and 1996, respectively,
were purchased by the Parent and other affiliated companies in settlement
of certain of their losses under insurance policies. These policy
reserves are included in other policyholder funds.
(10) SUBSEQUENT EVENT
On March 19, 1998, OFIC and The Guarantee Life Companies Inc.
("Guarantee") entered into an agreement whereby Guarantee would acquire
all the outstanding common stock of the Company from OFIC for $90,000,000
in cash and $10,000,000 of Guarantee stock. The agreement also provided
that the Company declare and pay a $44,000,000 extraordinary dividend to
OFIC prior to the sale closing. Management has determined that this
transaction will result in the amount of accumulated income in the
policyholders' surplus account becoming taxable and that approximately
$1,060,000 in tax expense will be incurred. This transaction, effective
May 31, 1998, closed on June 2, 1998.
(11) COMMITMENTS AND CONTINGENCIES
Westfield is party to certain claims and legal actions arising during the
ordinary course of business. In the opinion of management, after
consulting with legal counsel, these matters will not have a material
adverse effect on the operations or financial condition of Westfield.
21
<PAGE>
Exhibit 99.2
The Guarantee Life Companies Inc. And Subsidiaries
Pro Forma Condensed Consolidated Financial Statements
(UNAUDITED)
The Guarantee Life Companies Inc. ("Guarantee") Unaudited Pro Forma Condensed
Consolidated Statements of Income for the six month period ended June 30, 1998
and for the year ended December 31, 1997 give effect to the following
transactions as described further below, assuming such transactions had occurred
on January 1, 1997: (1) acquisition of all of the issued and outstanding
capital stock of Westfield Life Insurance Company ("Westfield") from Ohio
Farmers Insurance Company ("Ohio Farmers") and (2) borrowing $90 million to pay
for the acquisition of Westfield.
Effective May 31, 1998, The Guarantee Life Companies Inc. acquired all of the
issued and outstanding capital stock of Westfield Life Insurance Company from
Ohio Farmers Insurance Company, the parent company of Westfield, in a negotiated
transaction. The acquisition was consummated pursuant to the Stock Purchase
Agreement dated as of March 19, 1998 among Guarantee, Ohio Farmers and
Westfield. Guarantee acquired the stock of Westfield for a total consideration
of $100 million consisting of $90 million in cash and 371, 402 shares of
Guarantee common stock valued at $10 million.
<PAGE>
The Guarantee Life Companies Inc. and Subsidiaries
Pro Forma Condensed Consolidated Statement of Income
For the Year Ended December 31, 1997
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Historical Historical
Guarantee Life Westfield Pro Forma Guarantee Life
1997 1997 Adjustments Pro Forma
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums and policyholder assessments:
Life $ 76,260 20,180 - 96,440
Accident and health 179,700 - - 179,700
Policyholder assessments 30,476 14,127 - 44,603
Reinsurance premiums (55,508) (3,475) - (58,983)
- ---------------------------------------------------------------------------------------------------- -----------
230,928 30,832 - 261,760
Investment income, net 58,449 25,554 - 84,003
Realized investment gains, net 1,270 3,498 - 4,768
Ceding commissions and other income 15,558 797 - 16,355
Contribution from Closed Block 4,071 - - 4,071
- ---------------------------------------------------------------------------------------------------- -----------
Total revenues 310,276 60,681 - 370,957
- ---------------------------------------------------------------------------------------------------- -----------
Policyholder benefits:
Life insurance 62,749 21,923 - 84,672
Accident and health 113,335 - - 113,335
Reinsurance recoveries (35,752) (2,087) - (37,839)
- ---------------------------------------------------------------------------------------------------- -----------
140,332 19,836 - 160,168
Interest credited to policyholder account balances:
Universal contracts 10,624 7,302 - 17,926
Annuity contracts 15,028 5,989 - 21,017
Other - - - -
- ---------------------------------------------------------------------------------------------------- -----------
Total policyholder benefits 165,984 33,127 - 199,111
- ---------------------------------------------------------------------------------------------------- -----------
Expenses:
Policy acquisition costs 57,364 4,533 4,019 (A) 65,916
Other insurance operating expenses 61,191 11,511 6,019 (B) 78,721
- ---------------------------------------------------------------------------------------------------- -----------
Total expenses 118,555 16,044 10,038 144,637
- ----------------------------------------------------------------------------------------------------
Income from continuing operations before dividends
to policyholders and income taxes 25,737 11,510 (10,038) 27,209
-
Dividends to policyholders - 4 4
- ---------------------------------------------------------------------------------------------------- -----------
Income from continuing operations before income taxes 25,737 11,506 (10,038) 27,205
Income tax expense 9,098 4,039 (3,513) (D) 9,624
- ---------------------------------------------------------------------------------------------------- -----------
Net income from continuing operations $ 16,639 7,467 (6,525) 17,581
- ---------------------------------------------------------------------------------------------------- -----------
Basic Earnings per Share:
Weighted average shares outstanding 9,436 371 9,807
Net Income from continuing operations $1.76 $1.79
Diluted Earnings per Share:
Weighted average shares outstanding 9,686 371 10,057
Net Income from continuing operations $1.72 $1.75
</TABLE>
2
<PAGE>
The Guarantee Life Companies Inc. and Subsidiaries
Pro Forma Condensed Consolidated Statement of Income
For the Six Month Period Ended June 30, 1998
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Historical Historical
Guarantee Life Westfield Pro Forma Guarantee Life
6/30/98 5/31/98 Adjustments Pro Forma
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Direct and assumed premiums and
policyholder assessments $ 184,650 13,303 - 197,953
Reinsurance premiums (38,093) (1,284) - (39,377)
- ----------------------------------------------------------------------------------------------------------- --------------
Net premiums and policyholder assessments 146,557 12,019 - 158,576
Investment income, net 33,491 10,808 (1,620) (D) 42,679
Realized investment gains, net 528 9,851 (8,776) (C) 1,603
Ceding commissions and other income 10,813 2,224 - 13,037
Contribution from Closed Block 1,607 - - 1,607
- ----------------------------------------------------------------------------------------------------------- -------------
Total revenues 192,996 34,902 (10,396) 217,502
- ----------------------------------------------------------------------------------------------------------- -------------
-
Policyholder benefits: -
Direct and assumed benefits 142,344 13,438 - 155,782
Reinsurance recoveries (29,899) (314) - (30,213)
- ----------------------------------------------------------------------------------------------------------- -------------
Total policyholder benefits 112,445 13,124 - 125,569
- ----------------------------------------------------------------------------------------------------------- -------------
Expenses:
Policy acquisition costs 35,711 1,040 1,675 (A) 38,426
Other insurance operating expenses 40,418 4,383 2,508 (B) 45,559
(1,750) (E)
- ----------------------------------------------------------------------------------------------------------- -------------
Total expenses 76,129 5,423 2,433 83,985
- ----------------------------------------------------------------------------------------------------------- -------------
Income from continuing operations before dividends
to policyholders and income taxes 4,422 16,355 (12,829) 7,948
-
Dividends to policyholders 7 2 - 9
- ----------------------------------------------------------------------------------------------------------- -------------
Income from continuing operations before income taxes 4,415 16,353 (12,829) 7,939
Income tax expense 1,545 2,652 (1,419) (F) 2,778
- ----------------------------------------------------------------------------------------------------------- -------------
Net income from continuing operations $ 2,870 13,701 (11,410) 5,161
- ----------------------------------------------------------------------------------------------------------- -------------
Basic Earnings per Share:
Weighted average shares outstanding 8,906 371 (G) 9,277
Net Income from continuing operations $0.32 $0.56
Diluted Earnings per Share:
Weighted average shares outstanding 9,204 371 (G) 9,575
Net Income from continuing operations $0.31 $0.54
</TABLE>
3
<PAGE>
The Guarantee Life Companies Inc. And Subsidiaries
Notes To Pro Forma Condensed Consolidated Financial Statements
For The Six Months Ended June 30, 1998
And
For The Year Ended December 31, 1997
(UNAUDITED)
(Amounts In Thousands)
Pro Forma Statements of Income:
(A) Represents adjustment to amortize an intangible asset which was recorded in
the application of purchase accounting to recognize the value of acquired
insurance in force. The intangible asset is being amortized in proportion
to projected future gross profits at the date of acquisition.
(B) Represents adjustments to reflect additional interest expense associated
with the increased borrowings relating to the transaction. Interest expense
was calculated at 6.6875%. Pursuant to a term loan credit agreement,
Guarantee borrowed $90 million to pay for the acquisition of Westfield and
related fees and expenses in connection with the acquisition, the payment of
amounts owed under a previous credit agreement and to pay off other existing
indebtedness.
(C) Represents adjustment to eliminate the effects of the gains realized by
Westfield upon the transfer of securities from Westfield to Ohio Farmers to
satisfy the $44 million dividend to Ohio Farmers prior to the sale of
Westfield to Guarantee.
(D) Represents foregone investment income of (1) $3,168 and $1,320 for the year
ended December 31, 1997 and the five-month period ended May 31, 1998,
respectively, related to the $44 million extraordinary dividend paid by
Westfield Life Insurance Company to Ohio Farmers and (2) $720 and $300 for
the year ended December 31, 1997 and the five-month period ended May 31,
1998, respectively, related to the $10 million cash consideration paid by
The Guarantee Life Companies Inc. to Ohio Farmers assuming a 7.2% effective
interest rate.
(E) Represents adjustments to reflect expense reductions anticipated to be
achieved through reductions in marketing, overhead, and policy maintenance.
(F) Represents adjustments to reflect the income tax effect of the pro forma
adjustments discussed above, except for adjustment C which is not tax
effected as historical amounts do not reflect income tax as these gains were
treated on a tax-free basis.
(G) Represents additional 371 shares of The Guarantee Life Companies Inc. issued
in connection with the acquisition of Westfield Life Insurance Company.
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