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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(x) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31,
1999
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 0-23637
THE WMA CORPORATION
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(Name of small business issuer in its charter)
Delaware 58-2179041
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(State or other jurisdiction of (I.R.S. Identification No.)
incorporation or organization)
11315 Johns Creek Parkway, Duluth, Georgia 30097
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(Address of principal executive offices) (Zip code)
Issuer's telephone number (770) 248-3311
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Par Value $.001
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to filing requirements for the past 90 days. (X) Yes ( ) No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B, is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. (X)
The issuer's revenues for 1999 were $22,659,341.
The aggregate market value of the common stock held by non-affiliates computed
on the basis of the price at which the stock was sold was $19,950,100. There is
no established market for the shares of common stock.
At March 10, 2000, there were 2,495,010 shares of common stock outstanding.
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ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
The WMA Corporation (the "Company") was incorporated in the state of Delaware in
March 1995 under the name WMA International Corporation. In March 1998, with the
consent of its shareholders, the Company changed its name to The WMA
Corporation. The Company owns 100% of the outstanding stock of WMA Life
Insurance Company Limited, ("WMA Life") a Bermuda life insurance corporation
formed in August 1995. The term "Company", as used in this document, refers to
The WMA Corporation and WMA Life, unless the context requires otherwise.
The Company, through its subsidiary, WMA Life, reinsures certain life insurance
policies and annuities sold by "WMA Sales Associates", a growing network of
independent agents associated with "WMA Agency". Unless the context indicates
otherwise, "WMA Agency" refers to World Marketing Alliance, Inc., an insurance
agency and a Georgia corporation, which operates an international financial
services sales and marketing organization, and certain entities and persons with
which it is associated primarily for licensing purposes. "WMA Sales Associates"
are independent agents who market financial services products through WMA Agency
and often hold licenses as registered representatives for the sale of certain
securities products through another affiliate, WMA Securities, Inc. ("WMA
Securities"), a registered securities broker-dealer. Mr. Humphrey, who
beneficially owns approximately 36.1% of the Company's common stock, owns
substantially all of WMA Agency and 100% of WMA Securities.
The Company was formed principally to provide an opportunity for WMA Sales
Associates to participate indirectly in certain business produced by WMA Agency.
Ownership in the Company creates an incentive for the WMA Sales Associates to
place increasing amounts of profitable business, which is intended to enhance
the earnings of the Company. To enable certain WMA Sales Associates to purchase
the Company's common stock in its 1995 registered, non-underwritten offering,
WMA Agency loaned them funds to purchase the shares. These shares have been
pledged with WMA Agency as security for the loans and irrevocable voting proxies
have been executed in favor of WMA Agency until the loans are no longer
outstanding. As Mr. Humphrey owns substantially all of the WMA Agency, he is
deemed to beneficially own the 400,311 shares of the Company's common stock
pledged as collateral for these loans. The loans are payable from the borrowers'
personal funds in 60 equal monthly installments. As of December 31, 1999, the
outstanding balance of these loans was $836,626. At December 31, 1999, WMA Sales
Associates and employees of WMA Agency beneficially and directly owned
substantially all of the outstanding common stock of the Company.
The life insurance policies and annuities that are reinsured by the Company are
underwritten and issued by three of the major life insurance companies with
which WMA Agency has a relationship. These companies, in turn, are subsidiaries
of three major international insurance organizations:
- Western Reserve Life Assurance Co. of Ohio ("Western
Reserve"), a subsidiary of AEGON USA, Inc., an indirect
subsidiary of AEGON N.V.;
- Kemper Investors Life Insurance Company ("Kemper"), an
indirect subsidiary of Zurich Insurance Company; and
- American Skandia Life Assurance Corporation ("American
Skandia"), an indirect subsidiary of Skandia Insurance
Company, Ltd.
Western Reserve, Kemper and American Skandia are referred to collectively as the
"Ceding Life Companies". The Company's largest reinsurance relationship is with
Western Reserve.
WMA Life currently reinsures two types of variable insurance products, variable
universal life insurance ("VUL") and variable annuities ("VA"). Through 1997,
the Company primarily reinsured the death benefits on VUL policies and
proportionally reinsured variable annuity policies. During 1998, the
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Company expanded its primary reinsurance relationship to assume more of the
benefits and risks associated with the underlying life insurance policies. In
reinsuring the additional benefits, the Company increased its insurance risk
exposure regarding mortality, persistency and investment risk. As a result, in
addition to the variable annuities, under certain of its reinsurance agreements,
the Company participates proportionately in the reinsured VUL policies on the
same basis as the Ceding Life Companies.
For the year ended December 31, 1999, the Company earned $4.32 million on
revenues of $22.66 million. Total assets and stockholders' equity at December
31, 1999 were $49.01 million and $28.41 million, respectively. At December 31,
1999, the Company reinsured nearly 285,000 VUL and variable annuity policies and
riders and had life reinsurance in force with an aggregate face value of $8.03
billion.
POLICIES REINSURED
The Company derives its life reinsurance revenues primarily from VUL policies
issued by Western Reserve and Kemper and its variable annuity reinsurance
revenues from policies issued by Western Reserve and American Skandia. The
Company currently reinsures only VUL and variable annuity policies and
associated riders.
- VUL is a flexible premium adjustable life insurance plan that
offers a form of permanent insurance to the policyholder but
also enables the policyholder, within certain limitations, to
change the face amount or death benefit of the policy and the
timing of the premium payments to meet the policyholder's
situation, even after the policy is written. The death
benefits and cash values in VUL policies may vary to reflect
the investment experience of the policy's fixed or separate
accounts (i.e., a separate pool of assets, typically mutual
funds). The policyholder may specify, within limits and from
time to time, where the assets in the separate account are to
be invested. The policy may have a guaranteed minimum death
benefit while cash values vary with the investment performance
of the separate account. In a VUL policy, the investment risk
of the separate accounts is passed on to the policyholder.
Premiums paid by the policyholder are placed in the insurance
company's fixed account or separate accounts for investment in
accordance with the policyholder's direction. From these
accounts, the insurance company deducts charges for the cost
of the mortality risk and administrative expenses. The net
amount of risk (i.e., the insured mortality risk) on a VUL
policy is often defined as the difference between the policy's
death benefit and the value of the assets in the fixed or
separate account at any given time.
- Variable annuity contracts provide for flexible premium
payments and guarantee that the contract holder will receive a
series of periodic payments commencing at a specified date.
The amount of the deferred annuity cash values will vary in
accordance with the investment experience of the policy's
fixed or separate account much in the same manner as a VUL
policy. Variable annuities may provide a guaranteed minimum
death benefit prior to the commencement of annuity benefit
payments.
TYPES OF REINSURANCE AGREEMENTS
The Company, as a reinsurer, currently writes three types of reinsurance:
monthly renewable term, coinsurance, and modified coinsurance.
- Monthly Renewable Term ("MRT") Reinsurance. Under an MRT
agreement, the ceding company reinsures the mortality risk
with the reinsurer and retains responsibility for establishing
the policy reserves (net of the risks reinsured) as well
as the payment of all policy benefits, commissions and
expenses involved in issuing and maintaining the business. The
reinsurer establishes reserves specific to the mortality risk
reinsured.
The reinsurer is also subject to persistency risk, although it
is not part of the risk transferred. Persistency risk is
associated with the possibility that the reinsurer may not be
able to recover its acquisition expenses during the life of
the policy. MRT involves limited risk compared to other forms
of reinsurance.
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- Coinsurance. Under a coinsurance agreement, the reinsurer
assumes a proportionate share of the risks and expenses and
receives a proportionate share of the premiums and revenues
from the underlying policies. The assumed risks include
mortality, lapse, cash surrender and investment risk. The
reinsurer provides expense allowances relating to costs
associated with commissions, underwriting, marketing, policy
issue and maintenance to the ceding company. The reinsurer is
also responsible for establishing a proportionate share of the
policy reserves.
- Modified Coinsurance. Modified Coinsurance ("ModCo") is a
variation of coinsurance whereby the reserves, and the assets
related to the reserves, which would otherwise be recorded and
held by the reinsurer are retained by the ceding company.
ModCo is used primarily for products that develop cash values
and allows the ceding company to retain the associated assets
for investment purposes. Under coinsurance and ModCo, the
mortality, persistency and investment risks are reinsured on
the same plan as that of the original policy. The ceding
company and the reinsurer share these risks in the same
manner.
REINSURANCE RELATIONSHIPS
The Company provides reinsurance for VUL and variable annuity policies issued by
the Ceding Life Companies. The following table indicates the Ceding Life
Companies that issue the policies underlying the reinsurance, the names and
types of insurance products currently reinsured by the Company, the type of
reinsurance agreement applicable to each, policies reinsured under each
agreement, and the commencement date of the reinsurance.
<TABLE>
<CAPTION>
REINSURANCE
PRODUCT INITIAL POLICY COMMENCEMENT
COMPANY PRODUCT REINSURED TYPE REINSURANCE TYPE ISSUE DATE DATE
- ------- ----------------- ------- ---------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Western Reserve Freedom Equity Protector VUL MRT 1/92 to 12/99 7/96
Western Reserve Financial Freedom Builder VUL MRT 8/97 to 3/98 8/97
Western Reserve Financial Freedom Builder VUL Coinsurance and ModCo 4/98 to 12/98 4/98
Western Reserve Financial Freedom Builder VUL MRT 1/99 to present 10/99
Kemper Power VUL VUL MRT 10/96 to present 10/96
Western Reserve Freedom Wealth Creator VA Coinsurance and ModCo 1/98 to present 1/98
American Skandia Imperium VA ModCo 1/97 to present 1/97
</TABLE>
The agreements initiated in 1996 were written on an MRT basis, reinsuring a
portion of mortality risk under the VUL policies issued by the Ceding Life
Companies.
The agreements initiated in 1997 and 1998 were written primarily on a ModCo
basis with the fixed accounts of the Western Reserve policies being reinsured on
a coinsurance basis. This type of reinsurance allows the Company to participate
in revenues arising principally from charges for mortality and expenses, cost of
insurance, sales charges associated with surrenders, credited interest rate
spreads, administrative charges and asset based allowances. Financial Freedom
Builder VUL policies previously reinsured on a MRT basis continue to remain in
force.
Western Reserve VUL Coinsurance and Modified Coinsurance Agreement. During the
first nine months of 1999, WMA Life continued to reinsure, on a coinsurance and
ModCo basis with Western Reserve, 20% of the Financial Freedom Builder ("FFB")
VUL policies and riders sold by WMA Sales Associates. However, effective October
1, 1999, Western Reserve recaptured FFB VUL policies and riders that were issued
from January 1, 1999 through September 30, 1999, which were reinsured on a
coinsurance and
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ModCo basis. The process of recapture enables a ceding company to remove
policies from the reinsurance agreement that have been previously ceded to the
reinsurer. FFB VUL policies and riders issued from April 1, 1998 through
December 31, 1998 will continue to be reinsured on a coinsurance and ModCo
basis.
As a result of the recapture, the agreement has been amended to reflect a 0%
reinsurance percentage of new business issued during the calendar years of 1999
and 2000. However, under the new Western Reserve FFB MRT agreement (see
discussion below), WMA Life has the option to convert the MRT reinsurance,
regarding new business issued during the calendar years of 1999 and 2000, to the
Western Reserve VUL Coinsurance and Modified Coinsurance Agreement.
New Western Reserve FFB MRT Agreement. Effective October 1, 1999, concurrent
with the recapture of the VUL policies and riders reinsured on a coinsurance and
ModCo basis, WMA Life commenced reinsuring, on a MRT basis, 20% of the FFB VUL
policies and riders issued on or after January 1, 1999. Under the new Western
Reserve FFB MRT Agreement, WMA Life has the option to convert the MRT
reinsurance, with regard to the FFB VUL policies and riders issued from the
beginning of the prior calendar year, to coinsurance and ModCo reinsurance,
provided WMA Life demonstrates sufficient capacity. Sufficient capacity is
defined as having unassigned invested securities and anticipated cash flows in a
sufficient amount to meet expected reinsurance settlements for the ensuing two
calendar years with regard to the converted reinsurance. The option to convert
the MRT reinsurance to coinsurance and ModCo reinsurance expires on March 31,
2003.
The Company's reinsurance percentage for FFB VUL policies and riders issued
during 1999 and 2000 is 20%. Thereafter, the Company's reinsurance percentage
shall be jointly determined on a mutually acceptable basis regarding new issues.
As to the reinsurance in force, and except as otherwise converted to coinsurance
and ModCo, the new Western Reserve FFB MRT agreement is unlimited in duration
and shall remain in effect for so long as the reinsured policies remain in
force. As to the reinsurance of new business, the new Western Reserve FFB MRT
agreement has a term that expires on March 31, 2003. Thereafter, regarding the
reinsurance of new business, the agreement may be canceled by either party upon
giving the other party three hundred sixty-five (365) days advance written
notice of cancellation. None of the policies reinsured under the agreement are
subject to recapture until after a policy has been in force for twenty (20)
years after its issuance.
Western Reserve VA Coinsurance and Modified Coinsurance Agreement. During the
first nine months of 1999, WMA Life continued to reinsure, on a coinsurance and
ModCo basis, 40% of the Freedom Wealth Creator variable annuity policies issued
by Western Reserve. Effective October 1, 1999, Western Reserve recaptured 75% of
the reinsured Freedom Wealth Creator variable annuity policies issued from
January 1, 1999 through September 30, 1999. Thus, as a result of the recapture,
WMA Life will continue to reinsure 10% of the Freedom Wealth Creator variable
annuity policies issued from January 1, 1999. WMA Life will also continue to
reinsure 40% of the Freedom Wealth Creator variable annuity policies issued from
January 1, 1998 through December 31, 1998.
Under the Western Reserve VA Coinsurance and ModCo Agreement, as amended, WMA
Life has the option to prospectively increase the reinsurance percentage, with
regard to the reinsured Freedom Wealth Creator variable annuity policies issued
from the beginning of the prior calendar year, to the reinsurance percentage
otherwise established in accordance with the terms of the agreement, as amended,
provided WMA Life demonstrates sufficient capacity. Sufficient capacity is
defined as having unassigned invested securities and anticipated cash flows in a
sufficient amount to meet expected reinsurance settlements for the ensuing two
calendar years with regard to the increased reinsurance percentage. The option
to increase the reinsurance percentage expires on December 31, 2002.
As a result of the recapture, the agreement has been amended to reflect a 10%
reinsurance percentage of Freedom Wealth Creator variable annuity policies
issued during 1999 and 2000. The Company's reinsurance percentage thereafter
shall be jointly determined on a mutually acceptable basis regarding new
policies in accordance with the terms of the agreement, as amended.
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American Skandia Imperium Modified Coinsurance Agreement. Effective January 1,
2000, WMA Life and American Skandia agreed to reduce the reinsurance percentage,
from 40% to 10%, on all reinsured Imperium variable annuity policies issued
January 1, 2000 and thereafter. WMA Life has the option to prospectively
increase the reinsurance percentage, upon giving sixty (60) days advance notice,
on reinsured Imperium variable annuity policies issued subsequent to the
effective date of the increase, to the reinsurance percentage otherwise
established in accordance with the terms of the agreement. WMA Life will
continue to reinsure 30% to 40% of the reinsured Imperium variable annuity
policies issued from January 1, 1997 through December 31, 1999.
Western Reserve MRT Agreement. Effective January 1, 2000, WMA Life will no
longer reinsure Freedom Equity Protector VUL policies issued January 1, 2000 and
thereafter. WMA Life and Western Reserve jointly determined to discontinue the
reinsurance of Freedom Equity Protector VUL policies issued January 1, 2000 and
thereafter due to low sales volume, which is primarily due to the introduction
of the Financial Freedom Builder VUL product in August 1997. WMA Life will
continue to reinsure Freedom Equity Protector VUL policies issued from January
1992 through December 1999.
Proposed Agreements. WMA Life entered into a letter of intent with Western
Reserve to reinsure two new products introduced for sale in late 1999 by Western
Reserve. The agreement provides for the reinsurance of the WRL Freedom Protector
Term (including riders and supplemental benefits), a term life insurance
product, and the WRL Financial Freedom Accumulator (including riders and
supplemental benefits), a flexible premium whole life insurance product. The
letter of intent, as amended, provides that Western Reserve will cede and WMA
Life will reinsure 20% of these plans, sold by WMA Sales Associates, on
coinsurance basis. Reinsurance of these plans will commence, with an effective
date, upon the earlier of (i) the date submitted new business results in a
reasonable expectation of $5 million of annualized target premium, or (ii) as
WMA Life and Western Reserve may otherwise agree. The cession is contingent on
WMA Life demonstrating that its unassigned invested securities, together with
anticipated cash flows, are sufficient to meet expected reinsurance settlements
through Year 2000 under the proposed agreements.
In 1999, the majority of the Company's reinsurance business was ceded by Western
Reserve. According to information provided by Western Reserve to the Company for
the year ended December 31, 1999, nearly 64% of the VUL premiums from policies
sold by WMA Sales Associates for Western Reserve came from five states, with 44%
coming from California alone. Similarly, in 1999, nearly 56% of all variable
annuity premiums from policies sold by WMA Sales Associates for Western Reserve
came from five states with over 30% coming from California alone. The Company
believes its geographic distribution of business bears a similar relationship.
MARKETING - WMA AGENCY
All of the Company's reinsurance business is generated by the marketing efforts
of WMA Agency, which places business with the Ceding Life Companies. The Company
does not engage in any direct marketing activities or use reinsurance
intermediaries. As a result, the Company is dependent upon and benefits from WMA
Agency marketing those products which the Company reinsures. WMA Agency consists
of independent entities, including World Marketing Alliance Inc., which are
separate and apart from the Company. The Company owns no direct or indirect
equity interests in World Marketing Alliance, Inc. or WMA Securities. The
following information has been compiled and provided to the Company by World
Marketing Alliance, Inc. and WMA Securities.
As of December 31, 1999, World Marketing Alliance Inc., which began operations
in January of 1991, had 330 employees. As of December 31, 1999, WMA Securities,
which began operations in 1994, had 86 employees. Both companies are located in
Duluth, Georgia, a northern suburb of Atlanta. WMA Agency currently markets a
variety of life insurance and annuity products in addition to VUL and variable
annuities. These products include ordinary life, term life, variable life,
universal life, fixed annuities, equity-indexed annuities, long term care,
disability and health insurance. WMA Agency markets products for numerous life
insurance and annuity companies, among them Kemper, Western Reserve, American
Skandia, The Midland Life Insurance Company and Pacific Life Insurance Company.
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WMA Agency contractually regulates all marketing and recruiting literature,
distributes product materials and agent bulletins for various product providers,
and provides administrative resources to WMA Securities for the development of
training programs and payment of commissions.
WMA Agency encourages WMA Sales Associates to use a variety of business
materials it has developed to achieve growth in product sales and distribution.
Examples include the Business Format System(C) and a weekly satellite network
broadcast. The Business Format System(C), which includes manuals, videotapes and
audio tapes, is provided to all new WMA Sales Associates by WMA Agency and
offers suggestions on how to build a sales organization. The weekly broadcast
offers a one and one-half hour motivational and training program, which is often
conducted by WMA Agency's product providers. WMA Sales Associates may also
attend various marketing meetings throughout the year and an annual convention
sponsored by WMA Agency.
WMA Sales Associates recruit both experienced agents and also individuals
without prior experience in the life insurance business. Newly-licensed agents
typically remain at their previous occupations until they acquire sales
experience and develop an established income. As a result, a large portion of
the newly-appointed WMA Sales Associates are initially part-time agents.
Upon joining WMA Agency, a new WMA Sales Associate is required to enter an
agency training program, which includes a number of courses related to product
training, sales compliance issues and financial service related topics. Most
levels of sales promotion require additional courses and training. Independent
parties approved by WMA Agency also provide pre-licensing classes for various
state insurance licenses and securities licenses.
WMA Agency's best selling product is VUL, an insurance product in which cash
values can accumulate on a tax-deferred basis, typically in the separate
accounts of a life insurance company. The separate accounts are managed by
outside fund managers. WMA Agency believes that the moderate to middle-income
markets for this product in the U.S. have been largely overlooked by the
industry and that VUL is often the best life and retirement product for this
market segment. WMA Agency has developed a proprietary software program
containing all of WMA Agency's recruiting material, sales illustrations and
product data for each of its preferred insurance providers. This software
includes the Financial Lifestyles Strategy(C) program, which is a needs-based
analysis program designed to address a client's particular financial situation
and incorporates multiple cross-selling opportunities for WMA Sales Associates.
In order to sell VUL and variable annuity products, WMA Sales Associates must be
securities licensed and affiliated with WMA Securities. Additionally, they must
have reasonable grounds for believing that the purchase of such a product is
suitable for the customer based on the facts disclosed by the customer. WMA
Sales Associates use a New Account Agreement in connection with the sale of
products to any customer, which provides information with respect to the
customer's financial situation and investment objectives. WMA Sales Associates
are required to utilize suitability guidelines developed by the National
Association of Securities Dealers ("NASD") to identify a number of specific
factors to be considered in determining product suitability, including the
customer's need for insurance coverage, age, investment objectives, risk
tolerance, financial condition, existing investment products owned,
relationships with other broker-dealers and occupation. Customers' applications
for VUL and variable annuity products submitted by WMA Sales Associates are
reviewed by registered principals with WMA Securities to ensure proper
registration and licensure of the representative and suitability of the product
based on the NASD guidelines. Additionally, a significant percentage are also
reviewed by WMA Securities' home office personnel to identify any potential
sales practice violations, note any unacceptable marketing or solicitation
trends, to reassess training initiatives, and develop and establish future
controls and procedures.
Regulation of WMA Agency and WMA Securities. WMA Agency and WMA Securities are
governed by various regulations relating to the sale and marketing of insurance
products and securities, including VUL and variable annuity products. The VUL
and variable annuity products marketed by WMA Agency have certain investment
features, which cause these products to be treated as securities under federal
and some states' securities laws. In order to sell these products, the WMA Sales
Associate must be individually licensed by state insurance departments, some
states' securities agencies and the NASD, must be appointed
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by product provider companies, and must become affiliated with a registered
securities broker-dealer. WMA Securities is a registered broker-dealer, which is
owned by Mr. Humphrey, who also owns substantially all of the WMA Agency and is
the principal stockholder of the Company. All of the WMA Sales Associates who
are licensed to sell VUL and variable annuity products are registered
representatives of WMA Securities. WMA Securities also markets mutual funds and
discount brokerage services.
As a registered broker-dealer, WMA Securities' operations are subject to
periodic examination and review by the NASD, the Securities and Exchange
Commission ("SEC"), a federal agency, and by state securities agencies. As a
licensed insurance agency, WMA Agency is subject to periodic examination and
review by state insurance departments. In recent years, the SEC, the NASD and
various state regulatory authorities have commenced a variety of regulatory
investigations of WMA Agency and WMA Securities which have raised significant
concerns about their compliance with applicable regulatory standards and their
failure to appropriately supervise WMA Sales Associates. The most significant of
the ongoing investigations are summarized below. WMA Agency and WMA Securities
have undertaken substantial initiatives in the past eighteen months that are
designed to address these concerns. However, there can be no assurance (i) that
the initiatives undertaken by WMA Agency and WMA Securities will be successfully
implemented, (ii) that such initiatives will be viewed by applicable regulatory
authorities to be adequately responsive to regulatory concerns, or (iii) that
WMA Agency and WMA Securities, regardless of the success and responsiveness of
their initiatives, will not be subject to substantial sanctions and penalties
related to prior conduct which could significantly affect the ability of WMA
Agency and WMA Securities to do business.
Regulatory scrutiny and concerns about the adequacy of the supervision of WMA
Sales Associates may be further heightened by the status of WMA Sales Associates
as independent contractors and not employees of either WMA Agency or WMA
Securities. Furthermore, the accumulation of regulatory actions against and
investigations of WMA Agency and WMA Securities increases the likelihood of
further regulatory investigations by regulatory authorities in other
jurisdictions as well as substantially more intensive regulatory scrutiny in the
future by regulatory authorities in jurisdictions in which these companies
operate. There can be no assurance that the outcome of any such investigations
against WMA Agency or WMA Securities will not have a material adverse effect on
the Company's business, financial condition or results of operation.
Possible SEC and NASD Regulatory Sanctions. As a registered broker-dealer, WMA
Securities' operations are subject to periodic examination and review by the
NASD and the SEC. In September 1997, the Atlanta District Office of the SEC
examined the operations of WMA Securities. On February 3, 1998, WMA Securities
received a letter from the SEC setting forth certain alleged deficiencies and
violations of the 1934 Act including, among other things: insufficient net
capital due to improper accounting with respect to a $1.5 million reverse
repurchase agreement; failure to prepare and maintain a daily trade blotter of
variable product transactions; missing or incomplete customer account
information regarding variable life and annuity investments; and failure to
maintain records of compliance with continuing education requirements for
registered representatives.
WMA Securities has neither admitted nor denied these alleged deficiencies and
violations. WMA Securities subsequently engaged a law firm, Sutherland, Asbill
and Brennan LLP ("SAB"), who in turn retained the services of a securities
consultant to make recommendations to WMA Securities on how to improve its
compliance and supervisory program. WMA Securities responded to the SEC's letter
on April 3, 1998, informing the SEC that a securities consultant had been
engaged and that it planned to implement the consultant's recommendations. A
second consulting firm was also retained by SAB to conduct a thorough review
and assessment of WMA Securities' compliance and supervisory programs and
monitor its progress in the implementation of the initial consultant's
recommendations regarding such program. This firm advised WMA Securities of
further steps that could be taken to fully implement a program designed to
improve WMA Securities' overall compliance and supervisory procedures, and
remedy the deficiencies cited by the SEC. WMA Securities implemented all
material recommendations of the consultants retained by SAB. There can be no
assurance that the compliance and supervisory programs recommended by the
securities consultants, and as implemented, would be viewed as adequately
responsive to the compliance and supervision concerns of the SEC, the NASD or
any state regulatory agency.
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The Company understands that it is not the current policy of the SEC to issue
any written advice as to whether the steps taken by a recipient of a deficiency
letter to address alleged deficiencies are adequate or satisfactory; therefore,
it is unlikely that WMA Securities will receive any indication from the SEC
regarding the adequacy of the corrective action that it has taken or intends to
take, until the SEC conducts a subsequent examination of the operations of WMA
Securities and the alleged deficiencies contained in the current deficiency
letter are found to no longer exist. WMA Securities cannot determine when the
SEC will conduct a subsequent examination of its operations nor can it predict
the outcome of such examination should it occur.
On May 21, 1998, the SEC issued a formal Order of Investigation (the "Order")
directed at certain alleged activities of WMA Securities and persons employed by
or associated with WMA Securities. This investigation was initiated to determine
whether any federal securities laws had been violated. The Order alleges that
such persons or others acting in concert with them have, among other things,
engaged in acts or practices involving the sale and promotion of variable life
insurance products, variable annuities and mutual funds which were fraudulent
and deceptive. The Order also alleges that WMA Securities failed to supervise
such persons with a view to preventing the alleged violations. WMA Securities
has neither admitted nor denied the allegations contained in the Order and is
cooperating with the SEC in this investigation. Subpoenas were issued pursuant
to this Order for the production of documents and the testimony of several
officers of WMA Agency and WMA Securities. Several current and former employees
of WMA Securities have provided testimony. If this investigation reveals one or
more violations of the federal securities laws, the Enforcement Division of the
SEC may recommend the initiation of administrative proceedings wherein the SEC
would seek to prove the violation(s) and further seek the imposition of
sanctions against WMA Securities and other culpable parties. These sanctions,
should they be imposed, could take various forms, including but not limited to,
the imposition of monetary penalties which can be quite substantial depending
upon the nature and severity of the violation, heightened regulatory scrutiny by
the SEC and NASD, and the temporary suspension or permanent revocation of WMA
Securities' registration or of the licenses of WMA Sales Associates, resulting
in the broker-dealer's inability to continue operations.
There can be no assurance that the SEC's Enforcement Division, after completing
its investigation, will not seek to initiate the proceedings which might result
in the imposition of sanctions against WMA Securities, which, if substantial,
could impair the financial and operating condition of WMA Securities. If WMA
Sales Associates are no longer able to maintain their licenses with WMA
Securities, a disruption of the sale of new VUL and variable annuity products
would result until the WMA Sales Associates could become registered with another
broker-dealer. There can be no assurance, however, that WMA Sales Associates
could register with another broker-dealer or that WMA Life could reinsure
products sold through another broker-dealer.
The adverse consequences that could result from the above investigations could
cause a significant interruption in the production of new business reinsured by
the Company due to the Company's dependence upon WMA Agency, WMA Securities and
WMA Sales Associates for the marketing of new VUL and variable annuity policies,
which the Company may thereafter reinsure.
WMA Securities previously notified the NASD that it had not timely filed all
reportable events relating to its registered representatives in accordance with
NASD Conduct Rule 3070. Following WMA Securities' notification to the NASD, on
March 22, 1999 the Division of Enforcement of NASD Regulation, Inc., an entity
of the NASD, notified WMA Securities that it was conducting an inquiry into the
reports filed by WMA Securities under NASD Conduct Rule 3070. Pursuant to the
inquiry, during December 1999, the NASD Enforcement Division issued a "Wells
Notice" to WMA Securities and certain current and former officers of WMA
Securities, citing violations of (i) the failure to report complaints and other
statistical information pursuant to NASD Conduct Rule 3070 and (ii) the failure
to supervise for the failure to report complaints. WMA Securities and its
current and former officers have filed "Wells Submissions" in response to the
"Wells Notice" explaining why the imposition of sanctions sought by the NASD is
inappropriate in light of the alleged conduct. Aside from the violations WMA
Securities reported to the NASD, the NASD has increased the scope of its initial
inquiry to include a review of the licensing, sales and marketing practices of
WMA Securities and WMA Sales Associates. It is possible that as a result of
these inquiries, the NASD could
9
<PAGE> 10
impose sanctions, including, but not limited to, the imposition of monetary
penalties which could be quite substantial, the temporary suspension or
permanent revocation of WMA Securities' registration or of the licenses of WMA
Sales Associates, or the imposition of other restrictions which could limit the
ability of WMA Securities or WMA Sales Associates to conduct business.
State Insurance Regulation. In 1998, the California Department of Insurance
initiated an investigation into the sales activities of certain former and
current WMA Sales Associates in California. The scope of this investigation
relates to product suitability, sales practices relating to the sale of VUL
policies to residents of California and the payment of commissions by Ceding
Life Companies to an unlicensed entity. WMA Agency is cooperating with the
investigation in an effort to resolve this inquiry, which is still in the
investigatory stage, as quickly as possible. If the California Department of
Insurance determines that violations of its insurance laws have occurred, it
could seek to impose sanctions ranging from the issuance of an order to cease
and desist placing VUL policies in California or monetary penalties, to license
suspension or revocation, or limitation on growth in the number of new sales
agents. Because California accounts for a substantial amount of WMA Agency's
total sales production, any sanctions imposed would have an adverse effect on
WMA Agency and the production of new business to be reinsured by the Company.
State Franchise Law. On December 18, 1998, the California Department of
Corporations issued to WMA Agency, WMA Securities and WMA Investment Advisors,
Inc. ("WMA Investment Advisors"), a Desist and Refrain Order ("Desist Order") to
refrain from further offers or sales of franchises in California. WMA Agency and
affiliates have challenged this order on the grounds that their activities do
not fall within the scope of the California franchise laws and are pursuing
available administrative remedies in an effort to resolve this issue. While
legal counsel to WMA Agency does not believe that the order was validly issued,
WMA Agency has reduced its initial processing fee charged to individuals to an
amount that it believes will fall within an exemption to the California
franchise law, if it is otherwise determined to be applicable. On October 7,
1999, an administrative judge upheld the California Department of Corporation's
Desist Order and an appeal is pending in Superior Court seeking to overturn this
decision. If the order is ultimately upheld after all rights of appeal have been
made, monetary penalties could be imposed on WMA Agency and its affiliates and
the manner in which they conduct certain of their business activities could have
to be modified. If WMA Agency is fined or its manner of business modified, such
a disruption could cause a significant interruption in the production of new
business reinsured by the Company due to the Company's dependence upon WMA
Agency, WMA Securities, and WMA Sales Associates for the marketing of new VUL
and variable annuity policies which the Company may then reinsure.
In the past two years, WMA Agency and WMA Securities have been and/or continue
to be subject to other investigations of their compliance and supervisory
programs with respect to customer complaints, the sales and marketing activities
of certain WMA Sales Associates and supervisory procedures by the Washington
Department of Insurance and by other regulatory authorities in Florida, Georgia,
Ohio, Maryland, and Massachusetts. Although WMA Securities has implemented a new
compliance and supervisory program, there can be no assurance that these actions
will be adequate or appropriately responsive to the concerns of regulators.
WMA Securities and WMA Agency have advised the Company that they have been
actively engaged in the implementation of a significant number of initiatives
designed to improve the efficacy of the broker-dealer's and the insurance
agency's operations and compliance with regulatory requirements. Many of these
initiatives were formulated with the assistance and at the recommendation of the
independent consultants engaged by SAB in response to the February 13, 1998 SEC
letter. WMA Securities and WMA Agency have provided the following examples of
the types of initiatives that have been implemented:
- - the supervisory system has been realigned on a geographic basis so that
all WMA Sales Associates are in a closer proximity to their assigned
Branch Office Managers/supervisors;
- - the number of compliance personnel has increased from five (5) in early
1998 to 54 employee positions;
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<PAGE> 11
- - a Regional Compliance Office in San Francisco, California has been
opened and staffed;
- - the number of branch office locations has increased from approximately
200 in early 1998 to approximately 900 and offices of supervisory
jurisdiction (OSJ) have increased from 30 in early 1998 to
approximately 250;
- - new WMA Sales Associates that have been qualified as Marketing
Directors (individuals who head up a sales team within the WMA Agency
sales force) on or after June, 1999, are required to become registered
principals;
- - the commission compensation structure has been changed to allocate a
specific amount to be earned only by Marketing Directors who become
registered principals if supervisory responsibilities are fulfilled;
- - a comprehensive training program for all supervisory and branch
managers was implemented in several phases: (i) training programs were
conducted in 31 cities between November 1998 and April 1999, (ii) every
active and pending representative is required to participate in a
extensive training program that focuses on variable annuities, variable
universal life, mutual funds, communication with the public, and
regulatory compliance and sales standards, and (iii) a third-party
training firm was retained by WMA Securities, who administers the
training program. Any representative that did not complete the training
program by January 31, 2000 was terminated from WMA Securities and WMA
Agency;
- - compliance procedure manuals have been revised and issued to the sales
force;
- - the audit program has been expanded, the audit staff increased, the
audit procedures revised, and the scope and frequency of branch office
audits expanded so that all OSJ's will be audited annually and all
branch locations will be audited annually by the OSJ Manager, with at
least 10% of branch office locations being audited on a random
selection basis by the WMA Securities audit staff and the requirement
that non-branch locations be audited/reviewed on an annual basis;
- - business quality control procedures have been and continue to be
improved and expanded;
- - exception reports and computer systems necessary to provide an
electronic trade blotter have been developed with continuing systems
enhancements;
- - the number of employees to support and maintain the new initiatives has
been substantially increased; and
- - a senior management compliance committee has been established and is
functioning.
WMA Securities and WMA Agency have indicated that the process of developing and
implementing the various initiatives has required and will continue to require a
substantial amount of time and resources to be allocated by WMA Agency and WMA
Securities. WMA Agency and WMA Securities have devoted and continue to devote
the additional financial and managerial resources that they believe are required
to achieve successful implementation and continued oversight of the above
initiatives. The development and implementation of these initiatives have
required increased attention and time from management as well as from the WMA
Sales Associates to whom more supervisory duties have been assigned. WMA Agency
and WMA Securities believe that the expanded base of home office personnel is
adequately carrying out their routine core operations, necessary to support the
continuing sale of variable insurance products.
Litigation Involving WMA Agency and WMA Securities. WMA Agency was plaintiff in
a civil suit, known as World Marketing Alliance, Inc. v. Primerica Financial
Services ("PFS") et al. in the Superior Court of Los Angeles, State of
California, in which WMA Agency sought damages and injunctive and declaratory
relief against PFS and certain of its contractors and affiliates for alleged
statutory unfair competition and restraint of trade as well as tortious
interference with WMA Agency's business interests. Defendants cross-complained
against WMA Agency and WMA Securities for damages and injunctive relief for
alleged statutory unfair competition and tortious interference with business
relations. WMA Agency received and responded to discovery requests in
connection with a civil action pending in the United States District
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<PAGE> 12
Court for the Southern District of Florida known as PFS et al. v. William
Mitchell, in which PFS alleged the defendant, an independent contractor of WMA
Agency, engaged in tortious interference with PFS's business relationships and
other tortious acts. Neither WMA Agency nor WMA Securities was a party to this
action. Both actions have been recently concluded with no material adverse
consequence to WMA Agency or WMA Securities.
UNDERWRITING AND POLICY ADMINISTRATION
As an automatic reinsurer, the Company relies upon the underwriting of the
Ceding Life Companies on policies that the Company reinsures. The Company
reviews and monitors the underwriting standards and procedures of the Ceding
Life Companies, including rules used for policy continuations, changes,
re-entries, reinstatements and conversions.
The Ceding Life Companies administer policies reinsured by the Company and
provide the Company with all information necessary for processing the
reinsurance. Management may not have sufficient information to properly evaluate
the administration of the business reinsured by the Company or the accuracy of
the information provided by the Ceding Life Companies, since it has only
conducted a limited review of the administrative practices of the Ceding Life
Companies.
The Company's reinsurance agreements give the Company the right to periodically
audit the books and records of the Ceding Life Companies to ensure that all
business is being properly ceded and administered. In connection with the
Company's external audits, the Company's external auditors performed a site
visit to observe Western Reserve's administrative practices and procedures.
Company management also communicates frequently with the Ceding Life Companies
regarding the administration of the business, business policies and practices,
underwriting procedures, quality of business considerations and reinsured policy
experience.
FUTURE POLICY BENEFITS
The provision for future policy benefits reflected in the Company's Consolidated
Financial Statements are calculated based on generally accepted accounting
principles ("GAAP"). Liabilities for future benefits under the MRT agreements
include provisions for expected future claims, claims in the course of
settlement and claims incurred but not reported. The liability is estimated
using methods that include assumptions, such as estimates of expected investment
yields, mortality, terminations, and expenses, applicable at the time the
reinsurance contracts are executed including provision for the risk of adverse
deviation.
Liabilities for future policy benefits under the Company's coinsurance
agreements equal its contractual percentage of each Ceding Life Company's
policyholder obligations, and include provision for claims in course of
settlement and claims incurred but not reported.
Liabilities for future policy benefits reflected in the Company's Consolidated
Financial Statements are based on information provided by the Ceding Life
Companies. The reserves established by the Company with respect to individual
risks or classes of business may be greater or less than those established by
Ceding Life Companies due to the use of different mortality and other
assumptions.
RETROCESSION
The Company's profitability, in part, depends on the volume and amount of death
claims incurred. While death claims are reasonably predictable over a period of
many years, claims become less predictable over shorter periods and are subject
to fluctuation from period to period. Actual mortality experience in a
particular period may be greater than expected mortality experience, and,
consequently, may adversely affect the Company's operating results for such
period.
As a partial hedge against the unpredictability of claims experience, effective
April 1, 1998, the Company entered into a pool retrocession agreement. Under the
pool retrocession agreement, WMA Life retrocedes
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<PAGE> 13
mortality risk in excess of its retention limit on Financial Freedom Builder
VUL policies issued by Western Reserve. Standard mortality risks in excess of
$100,000 per life are retroceded to pool participants which include: ERC Life
Reinsurance Corporation, Swiss Re Life & Health America, Inc., The Lincoln
National Life Insurance Company and Transamerica Occidental Life Insurance
Company.
INVESTMENTS
The Company's investments are selected with the objective of maximizing
investment returns consistent with appropriate credit, diversification, tax and
regulatory consideration, while providing sufficient liquidity to enable the
Company to meet its obligations as a reinsurance company on a timely basis.
The Company utilizes an independent investment advisor and manager, to invest
the Company's assets in accordance with the Company's investment guidelines.
Conning Asset Management Inc. ("Conning") has been the Company's investment
manager since June 1998. The performance of, and the fees paid to, its
investment manager are reviewed periodically by the Company's Board of
Directors. Conning has no affiliation with the Company, WMA Agency, or WMA
Securities, nor is the Company aware of any affiliation with the Ceding Life
Companies. The fees paid to Conning for services received during 1999 totaled
$57,115.
The state insurance laws in the United States restricting the investments of
insurance companies are not applicable to WMA Life. Unlike insurance regulations
in the United States, Bermuda law does not limit or regulate investments of WMA
Life provided that such investments are made for the Company's potential
benefit. The Company's guidelines stress diversification of risk, conservation
of principal and liquidity. The Company's investments, however, will be subject
to market risks and fluctuations, as well as to the risks inherent in particular
securities. The guidelines are subject to change at the discretion of the
Company's Board of Directors.
COMPETITION
The Company is dependent upon WMA Agency for the marketing of the VUL and
variable annuity products which the Company reinsures. WMA Agency faces intense
competition in the sale of these products from the independent and captive
agency forces and marketing organizations of major life insurance companies, as
well as from broker-dealers, financial institutions and other companies
marketing investment related products. Many of WMA Agency's competitors have
substantially greater financial and marketing resources than WMA Agency. The
Company believes that many large insurance companies have begun devoting
significant resources to the development and marketing of VUL and variable
annuity products that directly compete with those sold through WMA Agency and
reinsured by the Company. Competition for sales agents with demonstrated ability
is also intense.
The Company has made a considered decision to focus the Company's energies on
existing WMA Agency relationships consistent with its business strategies rather
than developing relationships with other independent entities. This decision has
had a positive impact on the Company as it believes that it has been able to
secure more favorable reinsurance agreements than may have been otherwise
obtainable due to the leverage it has as a result of the WMA Agency
relationship. As the Company matures and develops more resources, it will likely
develop relationships with non-WMA Agency related entities. However, the Company
lacks the resources to pursue such a strategy and believes it would be
counterproductive to do so at this time.
REGULATION OF WMA LIFE
Bermuda. WMA Life is a Bermuda insurance company, registered as a long-term
insurer under the Insurance Act 1978, as Amended, (the "Insurance Act"), and is
subject to regulation and supervision in Bermuda. A long-term insurer is one
which issues life, annuity or accident and disability contracts for periods of
five years or more. An insurer is required to maintain a principal office in
Bermuda and to appoint and maintain a Principal Representative in Bermuda. WMA
Life's Principal Representative is
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<PAGE> 14
CFM Insurance Managers, Ltd. and its principal office is located at 44 Church
Street, Third Floor, Hamilton HM 12, Bermuda.
Among other things, Bermuda statutes and regulations require WMA Life to
maintain a minimum level of statutory capital and surplus of $250,000, prescribe
solvency standards, limit transfers of ownership of its capital shares, and
provide for the performance of certain periodic examinations of WMA Life's
financial condition. Furthermore, Bermuda statutes limit the ability of WMA Life
to pay dividends. These statutes and regulations may, to some extent, restrict
the ability of WMA Life to write reinsurance policies and distribute funds to
the Company. The Insurance Act also grants the Minister of Finance powers to
supervise, investigate and intervene in the affairs of insurance companies.
These statutes and regulations are for the benefit of policyholders of insurance
companies and not investors.
During 2000, the Company will rely primarily on potential dividends from WMA
Life to meet ongoing cash requirements. WMA Life may not declare or pay a
dividend or make a distribution out of contributed surplus if there are grounds
for believing that (i) WMA Life is, or after the payment would be, unable to pay
its liabilities as they become due; or (ii) the realizable value of WMA Life's
assets would thereby be less than the aggregate of its liabilities and its
issued share capital and share premium accounts. As of December 31, 1999, WMA
Life had the statutory capacity to pay $5.21 million in dividends. As approved
by the directors of WMA Life in February 2000, WMA Life paid a dividend of $1.20
million to the Company to meet current cash requirements. WMA Life's 1999 Annual
Statutory Financial Statements and Statutory Financial Return, to be filed with
the Registrar of Companies in Bermuda, will be made available after April 30,
2000.
United States. In general, reinsurers domiciled outside the United States
("alien reinsurers") are not subject to substantial direct regulation in the
United States. The insurance laws of each state of the United States generally
do not regulate the sale of reinsurance within their jurisdictions by non-U.S.
insurers. However, alien reinsurers, such as WMA Life, that provide reinsurance
to insurance companies domiciled or licensed in United States jurisdictions are
indirectly regulated by state "credit for reinsurance" laws. These laws operate
to deny statutory financial statement credit to ceding insurers unless the
unauthorized alien reinsurer posts acceptable security for ceded liabilities and
agrees to certain contract provisions.
Occasionally, there have been Congressional and other initiatives in the United
States regarding the supervision and regulation of the insurance industry,
including proposals to supervise and regulate alien reinsurers. While none of
these proposals have been adopted to date on either the federal or state level,
there can be no assurance that federal or state legislation will not be enacted
subjecting WMA Life to supervision and regulation in the United States. No
assurance can be given that if WMA Life were to become subject to any laws of
the United States or any state thereof, at any time in the future, it would be
in compliance with such laws, which could have a material adverse affect on WMA
Life's operations.
EMPLOYEES
The Company currently employs two executives and four professional and
administrative staff persons. Due to increasing complexities associated with the
growing business in force, the increasing duration of the reinsurance
agreements, and diversification of the business reinsured, Company management is
considering hiring additional employees during the year 2000.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently subleases on a triple net basis approximately 1,500 square
feet of office space in Duluth, Georgia from WMA Agency. The triple-net basis
requires the Company to pay its proportionate share of the taxes, insurance and
common area maintenance as well as a stipulated base rent. The sublease extends
through January 2008. The annual base rent until January 2003 is $18,675, which
is equivalent to the rate being paid by WMA Agency to its lessor. For the second
five-year period of the sublease, the annual base rent will be subject to
increase. The Company does not own or lease any other properties.
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<PAGE> 15
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1999, the Company was not a party to any litigation or
arbitration. Except as disclosed above in Item 1. Description of
Business--Marketing--WMA Agency, the Company is not aware of any litigation or
arbitration that is likely to have a material adverse effect on the Company's
consolidated results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 1999.
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
No public trading market existed for the Company's common stock during 1999. In
March 1998, the Company applied to the NASDAQ National Market to have its stock
quoted under the trading symbol WMAC. In March 1999, the Company was notified
that the application would be closed for inactivity. The Company received a
refund for all fees paid.
At December 31, 1999, the Company had 2,495,010 shares of common stock
outstanding and approximately 800 shareholders.
The Company did not pay or declare a dividend in 1999.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following analysis of the consolidated results of operations and financial
condition of The WMA Corporation should be read in conjunction with the
Company's Consolidated Financial Statements and the notes thereto, included
elsewhere herein.
OVERVIEW
The WMA Corporation is a holding company owning all of the outstanding capital
stock of WMA Life, a Bermuda life insurance corporation. WMA Life began
reinsurance operations in 1996. WMA Life presently provides reinsurance to
certain insurance companies with respect to VUL and variable annuity policies
sold by WMA Sales Associates through WMA Agency and WMA Securities.
All of the Company's reinsurance business is generated by the marketing efforts
of WMA Agency, through business placed with the Ceding Life Companies. As a
consequence, the Company is dependent upon WMA Agency to market those products
that the Company reinsures. The following tables show, by Ceding Life Company,
the percentage of WMA Agency business reinsured by the Company:
LIFE INSURANCE APPLICATIONS(1)
<TABLE>
<CAPTION>
CEDING LIFE COMPANY 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Western Reserve 78% 81% 85%
Kemper 3% 4% 2%
--- --- ---
Total % Subject to Reinsurance 81% 85% 87%
Total % Not Subject to Reinsurance 19% 15% 13%
--- --- ---
Total % Applications Submitted 100% 100% 100%
</TABLE>
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<PAGE> 16
ANNUITY APPLICATIONS(1)
<TABLE>
<CAPTION>
CEDING LIFE COMPANY 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Western Reserve 66% 44% 0%
American Skandia 12% 16% 13%
--- --- ---
Total % Subject to Reinsurance 78% 60% 13%
Total % Not Subject to Reinsurance 22% 40% 87%
--- --- ---
Total % Applications Submitted 100% 100% 100%
</TABLE>
(1) As reported to WMA Agency by life insurance companies, of applications
for life insurance and annuity policies submitted by WMA Sales
Associates, that are monitored by WMA Agency on a regular basis.
WMA Life's revenues do not and are not expected to bear any relationship to the
distribution of business placed by the companies with whom WMA Agency does
business as illustrated by the above tables. The reasons WMA Life's revenues
will diverge from the relationships noted above include, but are not limited to,
the nature, mix and pricing of the products reinsured; the terms of the various
reinsurance agreements; and the prescribed generally accepted accounting
principles for such products and reinsurance structures (e.g. MRT reinsurance
versus coinsurance).
Under a reinsurance agreement, the economic consequences of certain insurance
risks are transferred from the ceding company to the reinsurer. Depending upon
the type of reinsurance agreement, these risks may include: mortality,
persistency, expense and investment. Key considerations in evaluating the risks
include: industry experience, the ceding company's pricing and assumptions, the
type of product, the ceding company's underwriting practices and procedures, the
type of distribution system, the ceding company's recent experience, and the
market for the product.
The Ceding Life Companies retain responsibility for the payment of all claims,
surrender values, commissions and expenses involved in issuing and maintaining
the policies. In addition, the Ceding Life Companies administer the reinsurance
contracts and, on a monthly basis, provide WMA Life with information regarding
premiums, reserves, benefits, claims and settlement expenses for policies
reinsured. Financial activity between the Ceding Life Companies and WMA Life is
generally settled either on a monthly or quarterly basis in accordance with the
terms of the various reinsurance agreements.
At December 31, 1999, WMA Life's reinsurance inforce on life insurance policies
and riders constituted 260,356 policies and riders with an aggregate face amount
of $8.03 billion. This is an increase of 52,035 life insurance policies and
riders, or 25%, and $1.91 billion of inforce face amount, or 31%, from December
31, 1998. The relative increase in the aggregate face amount is greater than the
increase in the number of life insurance policies and riders because the average
reinsured face amount per policy during 1999 increased approximately 10% over
policies reinsured during 1998. The reinsurance agreements entered into during
1998 and 1999 provide for a specific reinsurance percentage of each policy
without limit, whereas previous agreements limit the maximum face amount per
life to $30,000.
At December 31, 1999, WMA Life had reinsurance inforce with respect to variable
annuities for 24,483 policies with reinsured annuity benefits of $324.83
million. This is an increase of 14,455 policies, or 144%, and $167.13 million of
annuity contract benefits, or 106%, from December 31, 1998. Although somewhat
mitigated by the underlying investment performance of the policies reinsured,
the relative increase in the amount of annuity contract benefits is lower than
the increase in the number of annuity policies primarily because the Western
Reserve variable annuity reinsurance percentage was reduced for policies issued
during 1999.
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The following table indicates the percentage of WMA Life's reinsurance revenues
derived from each Ceding Life Company:
<TABLE>
<CAPTION>
CEDING LIFE COMPANY 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Western Reserve 88% 89% 95%
American Skandia 9% 9% 4%
Kemper 3% 2% 1%
--- --- ---
Total 100% 100% 100%
</TABLE>
MRT REINSURANCE
WMA Life's reinsurance indemnity agreements include three MRT agreements
relating to VUL policies. MRT reinsurance is a variation of Yearly Renewable
Term Insurance. The reinsurance of the VUL policies includes business previously
and currently being sold by WMA Sales Associates and issued by Western Reserve
and Kemper. Under the MRT reinsurance agreements, WMA Life assumes a portion of
the mortality risk related to the VUL policies written by Western Reserve and
Kemper.
New Western Reserve FFB MRT Agreement. Effective October 1, 1999, concurrent
with the recapture of the VUL policies and riders reinsured on a coinsurance and
ModCo basis (see discussion under "Western Reserve VUL Coinsurance and Modified
Coinsurance Agreement" below), WMA Life commenced reinsuring, on a MRT basis,
20% of the FFB policies and riders issued on or after January 1, 1999. Under the
new Western Reserve FFB MRT Agreement, WMA Life has the option to convert the
MRT reinsurance, with regard to the FFB VUL policies and riders issued from the
beginning of the prior calendar year, to coinsurance and ModCo reinsurance
provided WMA Life demonstrates sufficient capacity. Sufficient capacity is
defined as having unassigned invested securities and anticipated cash flows in a
sufficient amount to meet expected reinsurance settlements for the ensuing two
calendar years with regard to the converted reinsurance. The option to convert
the MRT reinsurance to coinsurance and ModCo reinsurance expires on March 31,
2003.
The Company's reinsurance percentage for FFB VUL policies and riders issued
during 1999 and 2000 is 20%. Thereafter, the Company's reinsurance percentage
shall be jointly determined on a mutually acceptable basis regarding new issues.
The determination of the percentage of new policies and riders to be ceded by
Western Reserve to WMA Life in subsequent years will be set before the close of
each calendar year. This determination will be based upon the expected new or
"first year" VUL "target" premium to be collected by Western Reserve and sold by
WMA Sales Associates for the ensuing calendar year. The Company's reinsurance
percentages shall be 20%, 25%, 30%, 35% or 40% based upon expected first year
VUL collected target premium levels of $50-149 million, $150-199 million,
$200-249 million, $250-599 million, or $600 million or more, respectively.
As to the reinsurance in force, and except as otherwise converted to coinsurance
and ModCo, the new Western Reserve FFB MRT agreement is unlimited in duration
and shall remain in effect for so long as the reinsured policies remain in
force. As to the reinsurance of new business, the new Western Reserve FFB MRT
agreement has a term that expires on March 31, 2003. Thereafter, regarding the
reinsurance of new business, the agreement may be canceled by either party upon
giving the other party three hundred sixty five (365) days advance written
notice of cancellation. None of the policies reinsured under the agreement are
subject to recapture until after a policy has been in force for twenty (20)
years after its issuance. The process of recapture enables a ceding company to
remove from the reinsurance agreement policies that have been previously ceded
to the reinsurer.
Western Reserve MRT Agreement. Effective January 1, 2000, WMA Life will no
longer reinsure Freedom Equity Protector VUL policies issued January 1, 2000 and
thereafter. WMA Life and Western Reserve jointly determined to discontinue
the reinsurance of Freedom Equity Protector VUL policies issued January
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<PAGE> 18
1, 2000 and thereafter due to low sales volume, which is primarily due to the
introduction of the FFB VUL product in August 1997. WMA Life will continue to
reinsure enforce Freedom Equity Protector VUL policies issued from January 1992
through December 1999.
COINSURANCE AND MODIFIED COINSURANCE
Under a coinsurance arrangement, WMA Life assumes a proportionate share of the
risks and expenses and receives a proportionate share of the premiums and
revenues from the underlying policies. The assumed risks include mortality,
lapses, cash surrenders and investment risk. Additionally, under coinsurance WMA
Life must establish a proportionate share of the policy reserves. Modified
Coinsurance ("ModCo") is a variation of coinsurance. ModCo is similar to
coinsurance except that the ceding company retains the reserves and the assets
related to the reserves, which would otherwise be recorded and held by the
Company. ModCo is used primarily for products that develop cash values which
allows the ceding company to retain the associated assets for investment
purposes. Under coinsurance and ModCo, the mortality, persistency and investment
risks are reinsured on the same plan as that of the original policy. The ceding
company and the reinsurer share in these risks in the same manner.
WMA Life has a ModCo agreement with American Skandia and a coinsurance and
modified coinsurance agreement with Western Reserve providing for the
reinsurance of a portion of certain variable annuity policies sold by WMA Sales
Associates. WMA Life also has a coinsurance and modified coinsurance agreement
with Western Reserve reinsuring a portion of certain VUL policies.
Due to the nature of the VUL and variable annuity products reinsured, the
Company is significantly insulated from the impact of changes in investment
yields as the policyholders retain virtually all of the investment risks.
However, on an overall basis, a decline in investment yields is expected to
cause a decrease in the Company's revenues under its ModCo agreements, as the
account values upon which some of the Company's revenues are calculated would
presumably be lower. Accordingly, the Company's income will be smaller.
Conversely, an increase in investment yields is expected to have the opposite
effect. If mortality experience is worse than assumed (i.e., higher claims), it
is expected to cause a decrease in current and future revenues that would have
otherwise resulted from the policies reinsured. Conversely, if mortality
experience is better than assumed (i.e., lower claims), it is expected to cause
an increase in current and future revenues that would have otherwise resulted
from the policies reinsured.
Western Reserve VUL Coinsurance and Modified Coinsurance Agreement. During the
first nine months of 1999, WMA Life continued to reinsure, on a coinsurance and
ModCo basis with Western Reserve, 20% of the FFB VUL policies and riders.
However, effective October 1, 1999, Western Reserve recaptured FFB policies and
riders that were issued from January 1, 1999 through September 30, 1999, which
were reinsured on a coinsurance and ModCo basis. FFB VUL policies and riders
issued from April 1, 1998 through December 31, 1998 will continue to be
reinsured on a coinsurance and ModCo basis.
As a result of the recapture, the agreement has been amended to reflect a 0%
reinsurance percentage of new business issued during the calendar years of 1999
and 2000. However, under the new Western Reserve FFB MRT agreement (see
discussion under "New Western Reserve FFB MRT Agreement" above), WMA Life has
the option to convert the MRT reinsurance, regarding new business issued during
the calendar years of 1999 and 2000, to the Western Reserve VUL Coinsurance and
Modified Coinsurance Agreement. Upon election of the option to convert the MRT
reinsurance to coinsurance and ModCo reinsurance, the Company's reinsurance
percentage thereafter shall be jointly determined on a mutually acceptable basis
regarding new policies and riders. The determination of the percentage of new
policies and riders to be ceded by Western Reserve to WMA Life in subsequent
years will be set before the close of each calendar year. This determination
will be based upon the expected new or "first year" VUL "target" premium to be
collected by Western Reserve for the ensuing calendar year. The Company's
reinsurance percentages shall be 20%, 25%, 30%, 35% or 40% based upon expected
first year VUL collected target premium levels of $50-149 million, $150-199
million, $200-249 million, $250-599 million, or $600 million or more,
respectively. Provisions relating to the Western Reserve's market share of the
total first year target premium written by WMA Sales Associates in a given year
are no longer applicable to this agreement.
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Western Reserve VA Coinsurance and Modified Coinsurance Agreement. During the
first nine months of 1999, WMA Life continued to reinsure, on a coinsurance and
ModCo basis, 40% of the Freedom Wealth Creator variable annuity policies issued
by Western Reserve. Effective October 1, 1999, Western Reserve recaptured 75% of
the reinsured Freedom Wealth Creator variable annuity policies issued from
January 1, 1999 through September 30, 1999. Thus, as a result of the recapture,
WMA Life will continue to reinsure 10% of the Freedom Wealth Creator variable
annuity policies issued from January 1, 1999. WMA Life will also continue to
reinsure 40% of the Freedom Wealth Creator variable annuity policies issued from
January 1, 1998 through December 31, 1998.
Under the Western Reserve Coinsurance and Modified Coinsurance Agreement, as
amended, WMA Life has the option to prospectively increase the reinsurance
percentage, with regard to the reinsured Freedom Wealth Creator variable annuity
policies issued from the beginning of the prior calendar year, to the
reinsurance percentage otherwise established in accordance with the terms of the
agreement, as amended, provided WMA Life demonstrates sufficient capacity.
Sufficient capacity is defined as having unassigned invested securities and
anticipated cash flows in a sufficient amount to meet expected reinsurance
settlements for the ensuing two calendar years with regard to the increased
reinsurance percentage. The option to increase the reinsurance percentage
expires on December 31, 2002.
As a result of the recapture, the agreement has been amended to reflect a 10%
reinsurance percentage of Freedom Wealth Creator variable annuity policies
issued during 1999 and 2000. The Company's reinsurance percentage thereafter
shall be jointly determined on a mutually acceptable basis regarding new
policies. The determination of the percentage of new policies to be ceded by
Western Reserve to WMA Life in subsequent years will be set before the close of
each calendar year. The Company's variable annuity reinsurance percentages will
be 40% or 50% based upon expected first year variable annuity premium of
$100-249 million or $250 million or more, respectively, to be collected by
Western Reserve on all variable annuity business sold by WMA Sales Associates.
These reinsurance percentages may be reduced 5% if:
(i) The expected first year variable annuity premium in the
ensuing calendar year is expected to decline from the most
recent twelve months' first year variable annuity premium
collected by Western Reserve on all variable annuity business
sold by WMA Sales Associates; and
(ii) The average growth rate of first year variable annuity
premium, collected by Western Reserve on all variable annuity
policies sold by WMA Sales Associates, is less than 15%.
Provisions relating to the Western Reserve's market share of the total new
variable annuity premium written by WMA Sales Associates in a given year are no
longer applicable to this agreement.
American Skandia Imperium Modified Coinsurance Agreement. Effective January 1,
2000, WMA Life and American Skandia agreed to reduce the reinsurance percentage,
from 40% to 10%, on all reinsured Imperium variable annuity policies issued
January 1, 2000 and thereafter. WMA Life has the option to prospectively
increase the reinsurance percentage, upon giving sixty (60) days advance
notice, on reinsured Imperium variable annuity policies issued subsequent to the
effective date of the increase, to the reinsurance percentage otherwise
established in accordance with the terms of the agreement, as amended. WMA Life
will continue to reinsure 30% to 40% of the reinsured Imperium policies issued
from January 1, 1997 through December 31, 1999.
Proposed Agreements. WMA Life entered into a letter of intent with Western
Reserve to reinsure two new products introduced for sale in late 1999 by Western
Reserve. The agreement provides for the reinsurance of the WRL Freedom Protector
Term (including riders and supplemental benefits), a term life insurance
product, and the WRL Financial Freedom Accumulator (including riders and
supplemental benefits), a flexible premium whole life insurance product. The
letter of intent, as amended, provides that Western Reserve will cede and WMA
Life will reinsure 20% of these plans, sold by WMA Sales Associates, on
coinsurance basis. Reinsurance of these plans will commence, with an effective
date, upon the earlier of (i) the date submitted new business results in a
reasonable expectation of $5 million of annualized target premium, or (ii) as
WMA Life and Western Reserve may otherwise agree. The cession is contingent on
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<PAGE> 20
WMA Life demonstrating that its unassigned invested securities, together with
anticipated cash flows, are sufficient to meet expected reinsurance settlements
through Year 2000 under the proposed agreements.
In 1999, Western Reserve ceded the majority of the Company's reinsurance
business. According to information provided by Western Reserve to the Company
for the year ended December 31, 1999, nearly 64% of the VUL premiums from
policies sold by WMA Sales Associates for Western Reserve came from five states,
with 44% coming from California alone. Similarly, in 1999, nearly 56% of all
variable annuity premiums from policies sold by WMA Sales Associates for Western
Reserve came from five states with over 30% coming from California alone. The
Company believes its geographic distribution of business bears a similar
relationship.
ACCOUNTING
WMA Life recognizes premiums as earned on MRT reinsurance for the mortality risk
reinsured. Reinsured policy revenues reflect policy mortality and expense
charges, policy administration charges, asset-based allowances and deferred
sales charges that have been assessed against the reinsured policy account
balances under the coinsurance and modified coinsurance agreements, as they
relate to universal life-type contracts.
Net investment income is the gross income earned from the invested assets less
the investment management expenses and custodial fees.
WMA Life defers costs that vary with and are directly associated with the
acquisition of the reinsured policies. These expenses are deferred to the extent
that such costs are deemed recoverable from future policy revenues in accordance
with GAAP and are recorded as deferred acquisition costs on the balance sheet.
Deferred acquisition costs were $39.75 million at December 31, 1999, an increase
of $12.21 million, or 44%, from December 31, 1998.
Deferred acquisition costs are amortized over the lives of the underlying
policies (with regard to the terms of the reinsurance agreement). Under the MRT
agreements, the amortization is in proportion to the ratio of premiums collected
during the then current period to total anticipated premiums. The rate of
amortization is based upon methods that include assumptions applicable at the
time the policies are reinsured, such as estimates of expected investment
yields, mortality, persistency and expenses. The assumptions include provision
for risk of adverse deviation. Original assumptions continue to be used in
subsequent accounting periods to determine changes in the deferred acquisition
costs unless a premium deficiency exists. (A premium deficiency is recognized if
the sum of expected claim costs, unamortized acquisition costs, and maintenance
costs exceed related unearned premiums. A premium deficiency is first recognized
by charging any unamortized acquisition costs to expense, to the extent required
to eliminate the deficiency. If the premium deficiency is greater than
unamortized acquisition costs, a liability shall be accrued for the excess
deficiency.) Management reviews, on a periodic basis, evolving experience with
regard to the Company's estimates of future expected investment yields,
mortality, persistency and expenses applicable to the reinsured policies in
force. Company management has concluded there is no premium deficiency based on
this analysis.
During 1999, the Company's mortality experience on business reinsured under its
MRT agreements resulted in higher earnings due to fewer claims than otherwise
anticipated. Actual death claims were approximately 75% of expected death claims
assumed in calculating the Company's liabilities. However, due to the Company's
very limited experience, the results are not credible indicators of future
experience. By example, actual death claims under the Company's VUL coinsurance
and ModCo agreement were approximately 25% greater than otherwise anticipated,
which resulted in total Company death claim experience being approximately
80-85% of that otherwise expected.
The Company's persistency experience on its MRT reinsurance prior to 1999 ranged
from 5% better to 5% worse than anticipated. Although subject to a correction,
the Company's persistency experience through year-end 1999 was better than
anticipated by more than 5%. The variation of experience from year to year is
relatively minor and is expected to have little impact on future revenues from
business in force.
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However, due to the Company's very limited experience, the results are not
credible indicators of future experience. It is not known whether the Company's
recent experience is temporary, due to normal random fluctuations, or permanent.
Under the coinsurance and ModCo agreements, the amortization of the deferred
acquisition costs is in proportion to the ratio of gross profits recognized
during the then current period to total anticipated gross profits. During each
accounting period, assumptions used in calculating the amortization of the
Company's deferred acquisition expense reflect actual experience for the then
current accounting period. Management also reviews, on a periodic basis,
evolving experience with regard to the Company's assumptions, concerning future
experience with regard to mortality, persistency, investment yields and
expenses, in determining its estimate of future gross profits. If management
believes variances from expected assumptions are permanent, assumptions used
with regard to future experience will be changed. Upon adoption of any change in
assumptions used with regard to future experience, the amortization of the
Company's deferred acquisition cost will be recalculated and reflected during
the then current accounting period.
American Skandia Imperium Modified Coinsurance Agreement. During 1999, with
regard to the American Skandia ModCo reinsurance, death claims, withdrawals,
surrenders and investment yields were greater than the Company's estimates for
these items. As a result of the emerging experience, Company management revised
its future estimates of investment yields and partial withdrawal rates
accordingly.
The number of death claims are nearly equal to the number of expected claims; as
a result, the higher than expected death claim experience is due to an average
claim amount greater than that otherwise expected based on the distribution of
business in force. Further, variances in claim experience is to be expected
considering the number of variable annuity policies reinsured. As a result of
the death claim observations, management believes the temporary differences in
claim amounts are anomalies and do not justify a change in assumptions used with
regard to future experience. Regarding the surrender experience, the higher than
expected surrender rates during 1999 primarily reflect activity during the
second and third duration of the policies in force. Assumptions concerning
future experience primarily affect the fourth and later policy durations.
Management believes its future experience assumptions, regarding the fourth and
later policy durations, already reflect surrender rates consistent with the
Company's experience and, as a result, does not warrant a change in its future
experience assumptions.
Western Reserve VA Coinsurance and Modified Coinsurance Agreement. During 1999,
with regard to the Western Reserve variable annuity policies, withdrawals,
surrenders and investment yields were greater than the Company's estimates for
these items. On the other hand, death claims and acquisition expenses were
lower. As a result of the emerging experience, Company management revised its
future estimates of partial withdrawal rates and expenses accordingly. In
addition, the Company also revised its assumptions to reflect additional costs
associated with certain benefit enhancements granted under the variable annuity
policies during 1999, as well as the increased cost associated with the
reimbursement of certain variable expenses under the reinsurance agreement.
Unlike the Company's financial models for the American Skandia reinsurance, the
Company's best estimate with regard to future investment yield experience had
already been reflected in the Company's calculation of expected gross profits
for the Western Reserve reinsurance. Accordingly, this assumption was not
changed. Company's management has concluded that the variances in the surrender
rates from expected are not credible enough to warrant a change in the Company's
future surrender rate experience assumptions at this time. Nonetheless, WMA Life
will conduct a policy termination study during year 2000 in an effort to
determine whether its future experience assumptions should be changed based upon
the emerging experience. Regarding the Company's death claim experience, the
number of death claims are approximately 40% of the number of expected claims.
However, similar to the American Skandia experience, the average death claim
amount was greater than the average amount expected based on the distribution of
business in force. Nonetheless, variances in claim experience are to be expected
considering the number of variable annuity policies reinsured. As a result of
the death claim observations, management believes the temporary differences in
claim amounts are anomalies and do not justify a change in assumptions used with
regard to future experience.
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<PAGE> 22
Western Reserve VUL Coinsurance and Modified Coinsurance Agreement. During
1999, with regard to the Western Reserve VUL policies reinsured on a coinsurance
and ModCo basis, death claims, surrenders and investment yields were greater
than the Company's estimates for these items. Revenues and expenses closely
matched the Company's future experience assumptions concerning revenues from
surrender charges, policy loads and cost of insurance charges, and expenses from
acquisition and policy maintenance. Regarding these items, Company management
revised its future estimates of mortality and surrender rates. Although it is
not known whether the Company's mortality experience is temporary, the Company
revised its mortality assumptions during 1999 to better reflect the emerging
mortality experience resulting from claims activity during the last several
years and new industry data. In addition, the Company revised its assumptions to
reflect additional costs associated with the reimbursement of certain variable
expenses under the reinsurance agreement. The Company's best estimate with
regard to future investment yield experience was already reflected in the
Company's calculation of expected gross profits. Accordingly, this assumption
was not changed.
Recognizing the changes in the Company's future experience assumptions under its
coinsurance and modified coinsurance agreements resulted in an increase in the
amortization of the Company's deferred acquisition cost during 1999 by
approximately $165,000, or 5%. To date, management believes the assumptions used
regarding its estimate for future gross profits are appropriate for its
circumstances.
Life insurance claims settled, claims reported and changes in estimates of
claims incurred but not reported related to reinsured VUL policies are recorded
as Benefits, claims and settlement expenses on the Consolidated Financial
Statements. The change in the liability for future policy benefits is recorded
separately as Change in future policy benefits in the Consolidated Financial
Statements.
The liability for future policy benefits was $4.49 million at December 31, 1999,
an increase of $1.87 million, or 71%, compared to the same period in 1998. The
liability at December 31, 1999 is comprised of two components: (i) liabilities
under the Company's MRT reinsurance agreements, and (ii) liabilities related to
the coinsurance of VUL and variable annuity policyholder obligations. The
liability, with regard to the MRT reinsurance, which represents the present
value of future benefits to be paid and related expenses, less the present value
of future net premiums (that portion of the premium required to provide for all
benefits and expenses), is estimated using the same methods and assumptions used
to amortize the deferred acquisition costs under the MRT Agreements. The
liability for the fixed account portion of the Western Reserve VUL and variable
annuity coinsurance agreements is equal to reinsured policy account balances.
To date, management believes the assumptions used regarding its liability for
future policy benefits are appropriate for its circumstances.
RESULTS OF OPERATIONS
Twelve Months Ended December 31, 1999 Compared to Twelve Months Ended December
31, 1998.
Revenues. Revenues increased by $10.06 million, or 80%, for the twelve months
ended December 31, 1999 compared to the same period in 1998. The increase was
primarily attributable to the growth in revenues associated with the coinsurance
and ModCo agreements. To a lesser extent, the increase was attributable to the
growth in premiums associated with the MRT agreements.
Premiums. Premiums increased by $2.41 million, or 33%, for the twelve months
ended December 31, 1999 compared to the same period in 1998. Policies and riders
reinsured on a MRT basis increased by 60,399, or 39%, to 216,680 at December 31,
1999 from 156,281 at December 31, 1998. Effective October 1, 1999, the Company
entered into a new MRT agreement with Western Reserve to reinsure 20% of the
Financial Freedom Builder policies sold by WMA Sales Associates and issued after
January 1, 1999. The increase in premiums due to the new MRT agreement was $1.22
million, as well as 68,171 of the policies in force. The remaining increase in
premiums was primarily attributable to the increasing duration of the policies
in force since the reinsurance premiums increase with the advancing age of the
insured.
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Reinsured Policy Revenues. Reinsured policy revenues increased by $9.41 million,
or 230%, for the twelve months ended December 31, 1999 compared to the same
period in 1998. The revenue increase was largely attributable to the coinsurance
and ModCo VUL agreement with Western Reserve and also to the variable annuity
agreements with Western Reserve and American Skandia. These revenues reflect
policy cost of insurance charges, mortality and expense charges, policy
administration, asset based allowances and deferred sales charges under the
coinsurance and ModCo agreements, as they relate to universal life-type
contracts.
Of the $13.51 million Reinsured policy revenues for the twelve months ended
December 31, 1999, $9.02 million was attributable to the VUL coinsurance and
ModCo agreement with Western Reserve compared to $2.44 million for the same
period in 1998, an increase of $6.58 million, or 269%. Revenues attributed to
the Western Reserve VUL policies and riders issued and reinsured during 1998
totaled $6.01 million, which is an increase of $3.57 million, or 146%, compared
to $2.44 million for the same period in 1998. This increase reflects twelve
months exposure during 1999, on business issued during 1998, compared to an
average exposure of 4.5 months during 1998. The balance, $3.01 million in
revenues, resulted from the VUL policies issued and reinsured during 1999, which
were subsequently recaptured on October 1, 1999. As a result of the recapture,
and the discontinuation of new VUL policies reinsured on a coinsurance and ModCo
basis, future VUL Reinsured policy revenue increases could exhibit a smaller
rate of growth.
The remaining $4.49 million of Reinsured policy revenues was attributable to the
variable annuity reinsurance agreements compared to $1.66 million for the same
period in 1998, an increase of $2.83 million, or 170%. Revenues attributed to
the Western Reserve variable annuity policies reinsured during 1999 totaled
$853,000, which reflects a 40% reinsurance percentage for the first nine months,
and 10% thereafter. Considering the Company will be reinsuring 10% of the
Western Reserve variable annuity policies issued January 1, 1999 through year
2000, and 10% of the American Skandia variable annuity policies issued beginning
January 1, 2000, future variable annuity Reinsured policy revenue increases
could exhibit a smaller rate of growth.
Net Investment Income and Net Realized Gain (Loss) on Investments. Net
investment income decreased by $601,000, or 63%, for the twelve months ended
December 31, 1999 compared to the same period in 1998. Investment income is
earned from investments in fixed income securities and cash equivalents.
Investment expenses of $72,000 and $52,000 for the twelve month periods ended
December 31, 1999 and 1998, respectively, related to investment advisor fees and
custodial fees and were netted with gross investment income excluding realized
gains and losses. The decrease in net investment income was primarily due to the
reduction in total investments, which resulted from the sale of fixed income
securities in order to pay the Ceding Life Companies for reinsurance expense
allowances and benefits. The most significant components of these payments were
attributable to the Western Reserve coinsurance and ModCo agreements and to the
American Skandia ModCo agreement. The sale of the fixed income securities for
the twelve months ended December 31, 1999 resulted in a Net realized loss on
investments of $66,000, or a decrease of $333,000, or 125%, compared to the Net
realized gain on investments of $267,000 reported for the same period in 1998.
The Net realized losses are the result of selling securities after an increase
in market yields subsequent to their purchase; an increase in market yields
cause a decrease in the market value of invested securities.
Loss on Recapture of Business. The recapture of business during the fourth
quarter of 1999 resulted in a loss of $823,000 for the twelve months ended
December 31, 1999. This loss related to the recapture of the Financial Freedom
Builder VUL policies and riders and 75% of the Freedom Wealth Creator variable
annuity policies, issued from January 1, 1999 through September 30, 1999, which
were reinsured on a coinsurance and ModCo basis with Western Reserve. Of the
$823,000 Loss on recapture of business, $556,000 related to the VUL coinsurance
and modified coinsurance business, which is composed of $14.35 million in gross
revenues from recapture allowances, net of $14.91 million in expenses from the
amortization of the related deferred acquisition costs and the release of policy
reserves and reinsurance expense allowance accruals. The balance, $267,000,
related to the variable annuity coinsurance and ModCo business, is composed of
$5.68 million in gross revenues from recapture allowances, net of $5.94 million
in expenses from the amortization of the related deferred acquisition costs.
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Benefits, Claims and Settlement Expenses. Benefits, claims and settlement
expenses increased by $1.02 million, or 29%, for the twelve months ended
December 31, 1999 compared to the same period in 1998. The increase primarily
resulted from an increase in volume of business in force. The amount of business
in force at December 31, 1999 was $8.03 billion compared to $6.12 billion at
December 31, 1998, which represented a $1.91 billion, or 31% increase.
The Company's profitability, in part, depends on the volume and amount of death
claims incurred. While death claims are reasonably predictable over a period of
many years, claims become less predictable over shorter periods, and are subject
to fluctuation from quarter to quarter and year to year. Claims paid plus those
incurred in 1999 were approximately 15-20% lower than otherwise expected based
upon management estimates and prior claims activity. Estimated additional net
income was $750,000 for the year due to this lower than expected claims
activity. Management believes that this activity is not indicative of future
performance because of normal random fluctuation in claims activity.
Change in Future Policy Benefits. Change in future policy benefits increased by
$359,000, or 780%, for the twelve months ended December 31, 1999 compared to the
same period in 1998. The liabilities under the Company's MRT reinsurance
agreements increased $871,000, or 398%, from $219,000 at December 31, 1998 to
$1.09 million at December 31, 1999. The increase primarily resulted from the new
MRT agreement the Company entered into with Western Reserve in the fourth
quarter of 1999 to reinsure 20% of the FFB VUL policies issued January 1, 1999
and after.
Reinsurance Premium Allowances Net. Net reinsurance premium allowances increased
by $2.44 million, or 84%, for the twelve months ended December 31, 1999 compared
to the same period in 1998. Gross Reinsurance premium allowances represent a
portion of reinsurance premiums paid or allowed by WMA Life to the Ceding Life
Companies for each policy reinsured. A certain portion of the gross reinsurance
allowances, with regard to the production of new business was related to the
Company's share of commissions, underwriting costs and other expenses from the
production of new business incurred by the Ceding Life Companies on the business
reinsured. These amounts have been deferred to the extent that such costs are
deemed recoverable from future policy revenue in accordance with GAAP. The
balance of those amounts not deferred are reflected as net reinsurance premium
allowances and are often a level percentage of individual policy revenues (e.g.,
renewal reinsurance allowances). Similar to the increase in revenues, the
increase in net reinsurance premium allowances was due to an increase in the MRT
premiums in force, the placement of the VUL and variable annuity business
reinsured on a coinsurance and ModCo basis, and to the business placed under the
new MRT agreement.
Amortization of Deferred Acquisition Costs. Amortization of deferred acquisition
costs increased by $2.25 million, or 146%, for the twelve months ended December
31, 1999 compared to the same period in 1998. The increase in Amortization of
deferred acquisition costs was attributable to increased revenues, primarily
Reinsured policy revenues, associated with business reinsured and with the
placement of new business.
Amortization for business reinsured on a coinsurance and ModCo basis was $3.62
million for the twelve months ended December 31, 1999 as compared to $1.39
million for the same period in 1998, an increase of 160%. The increase in
amortization is attributable to an increase in gross profits during 1999 from
business inforce and new business reinsured. Amortization includes unlocking of
future experience assumptions used in the calculation of the amortization of
deferred acquisition costs on universal life type contracts, which is performed
annually during the fourth quarter.
Amortization of deferred acquisition costs for business reinsured on a MRT basis
was $171,000 for the twelve months ended December 31, 1999 as compared to
$148,000 for the same period in 1998, an increase of 16%. Premiums on the MRT
business were $9.69 million for the twelve months ended December 31, 1999
compared to $7.28 million for the same period in 1998, an increase of 33%.
Amortization on MRT business is decreasing relative to total MRT premiums.
Amortization was 1.8% of premium revenues for the twelve months ended December
31, 1999 versus 2.0% for the same period in 1998. The Company expects this
decrease in MRT amortization relative to total MRT premiums to continue as there
are no deferred acquisition costs associated with the new Western Reserve FFB
MRT Agreement.
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Amortization of deferred acquisition costs associated with business recaptured
by Western Reserve is included in Loss on Recapture of Business.
Professional Fees and Other Expenses. Professional fees and other expenses
decreased by $23,000, or 2%, for the twelve months ended December 31, 1999
compared to the same period in 1998. Expenses include professional fees for
legal, actuarial and accounting expenses incurred, operating expenses, and other
miscellaneous expenses.
Fees to World Marketing Alliance, Inc. Fees to World Marketing Alliance, Inc.
decreased by $192,000, or 80%, for the twelve months ended December 31, 1999
compared to the same period in 1998. Fees to World Marketing Alliance, Inc.
consist of corporate services, rent expenses and the funding of certain
operating and travel-related expenses for the Company.
The Company has a Sublease Agreement with WMA Agency pursuant to which the
Company pays annual rent of $18,675 to WMA Agency for 1,500 square feet of
office space. The Company also has a Corporate Services Agreement whereby WMA
Agency provides corporate services to the Company for a fixed monthly fee of
$2,250, adjusted annually.
Interest Expense. Interest expense increased by $1.05 million for the twelve
months ended December 31, 1999 compared to the same period in 1998. The increase
was due to interest incurred on the financing received from Money Services, Inc.
("MSI"), a five-year term note issued to MSI, and to the reinsurance fees
associated with the deferred settlements for policies issued and reinsured
during 1999 under the Western Reserve coinsurance and ModCo agreements.
Income Taxes. Income taxes increased by $1.07 million, or 92%, for the twelve
months ended December 31, 1999 compared to the same period in 1998 due to higher
levels of Income before income taxes. The Company's effective tax rate was 34%
for both 1999 and 1998.
Net Income. As a result of the foregoing, Net income for the twelve months ended
December 31, 1999 was $4.32 million compared to $2.24 million for the twelve
months ended December 31, 1998, an increase of $2.08 million, or 93%.
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of the Company's cash flow have been premiums received
from the Ceding Life Companies, investment income, proceeds from the sale of
invested assets, issuance of the Company's common stock, and short and long term
financing. In addition to the need for cash flow to meet operating expenses, the
liquidity requirements of the Company relate primarily to the payment of gross
reinsurance allowances, investment purchases and reinsurance claims.
Premiums are generally received in advance of related claims payments. Under the
MRT reinsurance agreements, premiums vary in proportion to the expected
mortality claims reinsured. The Company's cash inflows under the MRT agreements
are premiums for the mortality risk reinsured. The Company's cash outflows are
reinsurance expense allowances and death benefit claims. The reinsurance expense
allowances represent the Company's share of acquisition and maintenance expenses
incurred by the Ceding Life Company that are attributable to the risks
reinsured.
The Company's cash requirements for operating and investment expenses consist
of: salaries and benefits; management service fees; investment management and
custodial fees; accounting and consulting services fees; expenses related to
regulatory issues and compliance with corporate and tax matters; and other
incidental administrative expenses. The Company incurred no capital expenditures
during 1999.
Net cash flows used in operating activities were $10.71 million for the year
ended December 31, 1999, compared to $13.67 million for the year ended December
31, 1998. The net cash flows used were primarily due to the additional cash
required to reimburse Western Reserve for first year reinsurance
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allowances, with regard to policies issued and reinsured during 1998, as a
result of the VUL coinsurance and modified coinsurance agreement. The net cash
flows also reflect, to a lesser extent, increases in business written under the
variable annuity agreements with American Skandia and Western Reserve. The
decrease in net cash flows from 1998 are primarily the result of deferring
financial settlements due on VUL and variable annuity policies issued and
reinsured from January 1, 1999 through September 30, 1999 and reinsured on a
coinsurance and modified coinsurance basis with Western Reserve.
Effective January 1, 1999, with regard to VUL and variable annuity policies
issued during 1999, the Company and Western Reserve amended the VUL and variable
annuity coinsurance and ModCo agreements to defer financial settlements until
December 30, 1999. The agreements, as amended, allowed Western Reserve to
recapture the reinsurance placed with WMA Life on the policies issued during
1999 if the Company did not settle before December 31, 1999. In addition to the
existing terms of the agreements, a reinsurance fee, at an effective annual rate
of 9%, accrued on the deferred reinsurance settlement balances beginning April
1, 1999. With regard to VUL and variable annuity policies issued during 1998,
financial activity continued to be settled on a quarterly basis.
Pursuant to the recapture of the VUL and variable annuity business effective
October 1, 1999, the deferred reinsurance balances otherwise due Western
Reserve, including reinsurance fees, have been offset against balances due WMA
Life with regard to gross recapture allowances, financial settlements due under
the new FFB MRT agreement and accrued interest. The Consolidated Balance Sheet
at December 31, 1999 reflects Reinsurance balances receivable for these amounts.
As a result of the offset, Western Reserve paid WMA Life a net cash settlement
amount of $1.51 million in early February 2000 with regard to these
transactions. Deferred reinsurance settlements otherwise due Western Reserve
have been extinguished.
Notwithstanding additional capital contributions, which would otherwise allow
the Company to expand its reinsurance capacity, as a result of the following,
the Company expects to realize net positive cash flows from its reinsurance
operations during year 2000 and thereafter:
- - the recapture of VUL business issued and ceded by Western Reserve from
January 1, 1999 through September 30, 1999;
- - the recapture of 75% of the variable annuity business issued and ceded
by Western Reserve from January 1, 1999 through September 30, 1999;
- - the new FFB MRT reinsurance agreement with Western Reserve on all
Financial Freedom Builder VUL policies and riders issued from January
1, 1999;
- - the reduction of the variable annuity reinsurance percentage from 40%
to 10% on all Freedom Wealth Creator policies issued and ceded by
Western Reserve after September 30, 1999; and
- - the reduction of the variable annuity reinsurance percentage from 40%
to 10% on all Imperium policies issued and ceded on and after January
1, 2000 by American Skandia.
On September 30, 1998, the Company entered into a $10 million line of credit
arrangement with Money Services, Inc. ("MSI"), a subsidiary of AEGON USA, Inc.,
pursuant to which the Company borrowed $10 million to cover its cash needs.
Through March 31, 1999, interest accrued at the rate of 8% on amounts drawn
under this line of credit. Effective April 1, 1999, the interest that accrued
through March 31, 1999 was added to the outstanding principal balance and the
interest rate increased to 9%. On July 30, 1999, $5 million from proceeds made
available from the issuance of a 5-year term note (discussed below) were applied
to reduce the outstanding principal balance on the line of credit. The line of
credit had been amended as of December 31, 1999 to extend the maturity date and
establish scheduled principal and interest payments beginning in February 2000.
Under the amended terms, the outstanding balance and related accrued interest is
payable commencing February 15, 2000 and continuing on the 45th day after the
close of each calendar quarter thereafter until the entire outstanding balance
and accrued interest is paid in full. Quarterly principal and interest payments
shall be an amount which will not exceed the quarterly
26
<PAGE> 27
reinsurance settlements due from Western Reserve under the VUL coinsurance and
ModCo agreement with respect to policies reinsured during calendar year 1998. At
December 31, 1999, the anticipated payment amounts for the four quarters of
2000, which represent the current maturities of the long-term debt, are
classified as short-term debt. As of December 31, 1999, the total amount due
under this line of credit had an outstanding principal balance of $5,303,562 and
accrued interest of $507,570.
On July 30, 1999, the Company issued a $5 million, five year term note to MSI
due on July 29, 2004. Interest is payable at 7.5% per annum (except in the event
of redemption), on the 29th of each succeeding January and July through and
including July 29, 2004. MSI may convert, after December 31, 1999 and prior to
July 29, 2004, the outstanding principal balance of this note into Common Stock
of the Company. Upon conversion, 4.17 shares of Common Stock may be obtained per
each $100.00 of the outstanding principal amount of the note. The note may be
redeemed after July 29, 2002, in whole or in part, at the Company's option, at
the redemption price, which shall include all accrued but unpaid interest to the
date of redemption. If the note is redeemed prior to July 29, 2004, interest
shall accrue on the outstanding principal amount at the rate of 9% per annum,
from the date of the note through the date of redemption. As of December 31,
1999, the Company had an outstanding principal amount of $5 million and accrued
interest of $158,219 in regard to the term note. The proceeds from the term note
were applied to reduce the outstanding principal balance on the line of credit.
During 1999, the Company proceeded with a private placement offering up to
1,000,000 share of Series A Convertible Preferred Stock (the "Preferred Stock")
to a limited number of independent sales associates contractually associated
with WMA Agency, WMA Agency employees and certain other investors acceptable to
the Company that quality as "accredited investors" within the meaning of Rule
501 of Regulation D under The Securities Act of 1933. Additionally, the Company
proceeded with a private placement offering up to 4,333,333 shares of Common
Stock (the "Common Stock Offering") to certain institutional investors, which,
if completed, will be closed following the Preferred Stock offering. Upon
closing of the Common Stock Offering (assuming net proceeds to the Company of at
least $10 million), the Preferred Stock will convert to shares of Common Stock.
The Company reserves the right, in its absolute discretion, to decline to offer
Preferred Stock or Common Stock to any and all prospective investors who may be
willing to accept an offer to sell. There can be no assurance that the Company
will sell any shares of Preferred Stock in the Preferred Stock offering or
Common Stock in the Common Stock Offering.
Company management does not expect to successfully place the majority of shares
offered under its Common Stock Offering, nor all the shares offered under its
Preferred Stock Offering. The Preferred Stock Offering, as amended, will
continue until June 30, 2000, unless closed earlier at the Company's discretion.
The Common Stock Offering will be closed following the close of the Preferred
Stock Offering. Notwithstanding additional capital contributions to the Company,
cash inflows from WMA Life's reinsurance operations are expected to be greater
than the Company's operational and debt service expenses. Net proceeds to the
Company from the offerings will be used to repay indebtedness and accrued
interest on the long-term loan obtained from MSI, which will enable WMA Life to
expand its reinsurance capacity.
The Company's primary source of liquidity was $3.48 million in Cash and cash
equivalents at December 31, 1999. The effective duration of the Company's fixed
income portfolio is 3.6 years with 100% of the fixed income securities having an
effective maturity of less than 10 years. The Company's fixed income portfolio
represents 100% of the total invested assets, and has an average quality rating
of AA by Moody's.
In addition to the financing activities described above, the Company has used
its principal paydowns from its mortgage-backed securities and sales of its
fixed securities to reimburse the Ceding Life Companies for allowances
associated with the American Skandia and Western Reserve agreements. The net
cash provided by investing activities for the twelve months ended December 31,
1999 was $7.27 million as compared to $8.85 million for the year ended December
31, 1998. Net cash provided by financing activities for the twelve months ended
December 31, 1999 was $303,562 due to the capitalization of interest on the MSI
line of credit in the second quarter of 1999 and to the issuance of a $5 million
term note of which the proceeds were applied to reduce the outstanding principal
balance of the short-term debt during the third quarter of
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<PAGE> 28
1999. For the same period ended December 31, 1998, $9.97 million provided by
financing activities was due primarily to the issuance of short term debt in the
third and fourth quarters of 1998.
The WMA Corporation is a holding company with no direct operations, and its
principal asset is the capital stock of WMA Life and $318,000 of cash and
invested assets. The Company relies primarily on funds retained at the holding
company level and potential dividends from WMA Life to meet ongoing cash
requirements. The ability of WMA Life to pay dividends to the Company is subject
to, among other things, regulatory restrictions under the insurance laws of
Bermuda. At December 31, 1999, WMA Life had the statutory capacity to pay $5.21
million in dividends. During 2000, the Company will rely primarily on dividends
from WMA Life to meet ongoing cash requirements. As approved by the directors of
WMA Life, in February 2000 WMA Life paid a dividend of $1.20 million to the
Company to meet current cash requirements.
Under the Company's reinsurance agreements, the Company is required to provide
security through a Letter of Credit ("LOC") for the benefit of the Ceding Life
Companies. The Company had three LOCs with Western Reserve as beneficiary under
each of the reinsurance agreements in place for a total of $3.7 million in
support of reserve credits. WMA Life also previously secured a LOC of $140,000
in favor of Kemper. The LOCs were issued by IBJ Whitehall Bank & Trust Company
("IBJ"), the Company's former custodian, and collateralized by the Company's
assets held by IBJ. Due to the withdrawal of IBJ from the custodial business,
the Company entered into a new custodial agreement with Comerica Bank
("Comerica") effective in February 2000. The Company transferred its assets to
Comerica and Comerica subsequently issued new LOCs to Kemper and Western Reserve
in late February 2000. The Kemper LOC was secured in the amount of $140,000. The
three LOCs for Western Reserve were replaced by one LOC in the amount of $4.75
million.
YEAR 2000 COMPLIANCE
The Company has not experienced any disruptions with regard to its financial or
operating activities resulting from Year 2000 computerized systems issues.
Company management does not expect Year 2000 issues to have a material adverse
effect on the Company's operations or financial results in 2000.
FORWARD LOOKING STATEMENTS
Certain statements made in this report are "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995 and are
subject to the safe-harbor provision of that Act. Such statements may include,
but are not limited to, projections of earnings, revenues, income or loss,
capital expenditures, plans for future operations and financing needs or plans,
as well as assumptions relating to the foregoing. Such statements often include
the words "believes," "expects," "assumes," "proposed," "anticipates,"
"intends," "plans," "estimates," "projects," or similar expressions. Because
such forward-looking statements involve risks, both known and unknown, and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by such forward-looking
statements including, but not limited to, changes in the Company's relationship
with WMA Agency, adverse reinsurance experience, increased competition from
within the insurance industry, the extent to which the Company is able to
develop new reinsurance programs and markets for its reinsurance, changes in the
control of the Company, the Company's cash requirements, the outcome of
regulatory examinations and investigations and availability of capital on
acceptable terms and other factors discussed in this report. These
forward-looking statements are subject to change and uncertainty which are
beyond the Company's control and have been made based upon Management's
expectations and beliefs concerning future developments and their potential
effect on the Company. There can be no assurance that future developments will
be in accordance with management's expectations or that the effect of future
developments on the Company will be those anticipated by management. Actual
results could differ materially from those expected by the Company, depending
upon the outcome of certain factors, including those described in the
forward-looking statements.
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<PAGE> 29
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are attached hereto commencing on page F-1.
- Independent Auditors' Report (December 31, 1999 and 1998)
- Consolidated Balance Sheets at December 31, 1999 and 1998
- Consolidated Statements of Income for the years ended December
31, 1999, 1998 and 1997
- Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the years ended December 31, 1999,
1998 and 1997
- Consolidated Statements of Cash flows for the years ended
December 31, 1999, 1998 and 1997
- Notes to Consolidated Financial Statements for the years ended
December 31, 1999, 1998 and 1997
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No change in or disagreement with accountants occurred during 1999.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTER AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE TITLE(S)
--- --------
<S> <C> <C>
S. Hubert Humphrey, Jr......... 56 President and Director of the Company since
March 9, 1995, and President of WMA Life
since August 7, 1995
Thomas W. Montgomery........... 50 Executive Vice President, Secretary and Director of
the Company since March 9, 1995 and Vice President
of WMA Life since August 7, 1995
Edward F. McKernan............. 44 Senior Vice President and Actuary of the Company
since April 1, 1996, Chief Financial Officer of the
Company since December 9, 1997, Director of the
Company since August 11, 1997, and Vice President
of WMA Life since July 29, 1996
C. Simon Scupham............... 45 Director of the Company since April 1, 1996 and
Director of WMA Life since August 7, 1995
Joseph F. Barone............... 63 Director of the Company since June 1, 1998
</TABLE>
The following is certain additional information concerning each of the executive
officers and directors of the Company.
S. HUBERT HUMPHREY, JR. serves as President and Director of the Company and WMA
Life. Mr. Humphrey is also Chairman and CEO of WMA Agency, a corporation engaged
in business as an insurance agency which has, for licensing purposes, interests
in certain related entities and is associated with persons involved in the
marketing and sale of insurance, annuities and other financial products. Mr.
Humphrey also holds various positions with the following companies affiliated
with WMA Agency: a Director and President of WMA Management Services, Inc. ("WMA
Management"), a corporation providing executive management services; a Director
of WMA Investment Advisors, Inc., a registered investment advisor
29
<PAGE> 30
engaged in providing investment advice to customers; a Director and President of
WMA Advisory Services, Inc., a registered investment advisor engaged in
providing asset allocation modeling investment advisory services; the owner of
WMA Securities, a securities brokerage firm, and WMA consumer Services, Inc., a
consumer financial services firm; a Director and Chairman of DotPlanet.com, an
internet service provider; and a Director and Chairman of Zillionaire.com, an
internet marketing company.
Mr., Humphrey has been involved in the financial services field for over 20
years. He was a Senior National Sales Director of A.L. Williams & Associates and
an executive officer and director of A.L. Williams Corporation, a life
reinsurance company affiliated with A.L. Williams & Associates. A.L. Williams &
Associates and A.L. Williams Corporation now comprise part of Primerica
Financial Services, which is owned by Citigroup, Inc.
THOMAS W. MONTGOMERY holds the position of Director, Secretary and Executive
Vice President of the Company and Vice President of WMA Life. Mr. Montgomery is
also President of World Marketing Alliance, Inc.; a Director, Vice President and
Secretary of WMA Management; a Director of WMA Investment Advisors, Inc.; a
Director and Vice President of WMA Advisory Services Inc.; a Director and
President of WMA Consumer Services, Inc.; a Director and Treasurer of
DotPlanet.com; and a Director and Secretary of Zillionaire.com.
Mr. Montgomery is a certified public accountant and is a former audit and tax
partner in the accounting firms of Richter & Company, P.C., and Davis,
Crittenden, Richter & Fletcher, where he worked from 1973 to 1994 after
graduation from Norman College and Florida State University. As a certified
public accountant, Mr. Montgomery represented Mr. Humphrey and his various
business interests including WMA Agency between 1981 and 1994.
EDWARD F. MCKERNAN serves as Director, Senior Vice President, Chief Financial
Officer and Actuary of the Company and Vice President of WMA Life. Mr. McKernan
is also Senior Vice President of WMA Agency. Immediately prior to joining the
Company, Mr. McKernan was a Senior Manager in the Life Actuarial Consulting
Practice of KPMG Peat Marwick LLP. From August 1990 through September 1993, Mr.
McKernan was the Marketing Actuary of U.S. Operations for Seaboard Life
Insurance Company. Prior to his tenure with this firm, Tillinghast, a Towers
Perrin company, employed Mr. McKernan, which is an international actuarial
consulting firm. He is a Fellow of the Society of Actuaries (1988) and a Member
of the American Academy of Actuaries (1985).
C. SIMON SCUPHAM serves as a Director of the Company and of WMA Life. Since
1988, Mr. Scupham has been the President of CFM Insurance Managers Ltd. ("CFM"),
a Bermuda corporation providing professional management services to
international companies operating in Bermuda. He is a qualified Chartered
Accountant (CA) and Associate Fellow of the Institute of Mathematics and its
Applications. Mr. Scupham is also Chairman of Mutual Risk Captive Group and
Shoreline Mutual Management (Bermuda) Limited. Prior to joining CFM, Mr. Scupham
served as the director of Bermuda operations of the Kemper Group.
JOSEPH F. BARONE has been a Director of the Company since June 1, 1998. Since
July 1997, Mr. Barone has been Managing Director of Research for Firemark
Investments of Morristown, New Jersey, a private investment firm. From January
1992 through June 1997, he was associated with Swiss Re Insurance as a Senior
Vice President. From 1981 through 1991, he was a Managing Director of Investment
Banking for the insurance industry at Bear Stearns & Company, Inc. Mr. Barone is
a Chartered Financial Analyst and a member of the New York Society of Security
Analysts and the Association of Insurance and Financial Analysts.
30
<PAGE> 31
ITEM 10. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
OTHER
ANNUAL POSITION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
---- -------- ----- ---------------
<S> <C> <C> <C> <C>
S. Hubert Humphrey, Jr. 1999 -- -- $ 48,851(1)
President 1998 -- -- 240,708(1)
1997 -- -- 177,135(1)
Thomas W. Montgomery 1999 -- -- --
Executive Vice President and Secretary 1998 -- -- --
1997 -- -- --
Edward F. McKernan 1999 $181,867 -- --
Senior Vice President, Actuary and 1998 78,806 -- --
Chief Financial Officer 1997 -- -- --
Joseph F. Barone 1999 -- -- 11,500
Director 1998 -- -- 5,000
1997 -- -- --
</TABLE>
- -----------------
(1) Amounts shown represent payment made by the Company to entities controlled
by Mr. Humphrey pursuant to written agreements between these entities and
the Company. Such payments, while not paid directly to Mr. Humphrey, may be
deemed to be indirect compensation to Mr. Humphrey.
For the years reflected in the above table, no direct compensation was awarded
to, earned by or paid to any of the directors and executive officers of the
Company, except for Mr. McKernan and Mr. Barone, nor were there any employee
agreements. Prior to 1998, the Company had relied upon WMA Agency, WMA
Management and third party providers for all managerial and administrative
service. Beginning in 1998, the Company employed its own personnel but continued
to reimburse WMA Agency for expenses incurred on its behalf. For the year ended
December 31, 1999, $48,851 was reimbursed to WMA Agency for expenses paid on the
Company's behalf. These expenses related to outside service providers, travel
and miscellaneous operating expenses. For 1998 the amount paid to WMA Agency for
these expenses was $240,708.
STOCK OPTIONS
On June 15, 1999 the Company's Board of Directors authorized a 1999 stock option
plan for the directors, officers and employees of the Company (the "1999 Plan")
that contemplated the issuance of up to 700,000 shares of the company's
authorized, but unissued, Common Stock upon the exercise of options granted
under the 1999 Plan. On that same date, the Board of Directors granted options
under the 1999 Plan to purchase 450,000 shares of Common Stock. The Company's
shareholders ratified the 1999 Plan at the Annual Meeting held on August 16,
1999. The number of shares exercisable under the options were limited to a
formula amount determined by multiplying the number of shares by a fraction, the
numerator of which is the proceeds actually received by the Company from the
sale of the Company's Common Stock and Preferred Stock on or before December 31,
1999 and the denominator of which is $75,000,000. No new capital was raised by
the Company on or before December 31, 1999; therefore, the outstanding options
could not, by their terms, be exercised. Accordingly, the previously issued
options are void and have no further force or effect.
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<PAGE> 32
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership as of December 31, 1999,
of the directors and executive officers of the Company and those persons known
by the Company to beneficially own more than 5% of its Common Stock. There is
presently no public market for shares of the Common Stock. The determination of
"beneficial ownership" is made pursuant to Rule 13(d)(3) under the 1934 Act.
Such Rule provides that shares shall be deemed to be "beneficially owned" where
a person or group has, either solely or in conjunction with others, the power to
vote or direct the voting of shares and/or the power to dispose, or to direct
the disposition of shares, or where a person or group has the right to acquire
any such power within 60 days after the date such beneficial ownership is
determined.
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES (1) CLASS
------------------------------------ ---------------- ----------
<S> <C> <C>
S. Hubert Humphrey, Jr.
11315 Johns Creek Parkway
Duluth, GA 30097 900,311(2) 36.1%
Thomas W. Montgomery
11315 Johns Creek Parkway
Duluth, GA 30097 9,908 0.4%
Edward F. McKernan
11315 Johns Creek Parkway
Duluth, GA 30097 5,000 0.2%
Monte Holm(3)
312 Mesquite Blvd., Ste.11
Mesquite, NV 89027 160,726(4) 6.5%
Richard Thawley(3)
1110 W. Kettleman, Ste. 24
Lodi, CA 95240 200,000(5) 8.0%
All directors and executive officers as a group 915,219 36.7%
</TABLE>
- -----------------
(1) All shares are owned individually of record unless otherwise indicated
below.
(2) Includes 400,311 shares of Common Stock for which WMA Agency (of which
Mr. Humphrey is the principal stockholder) holds voting proxies. Mr.
Humphrey has pledged all of the above shares of Common Stock as
security for several loans. See "Certain Relationships and Related
Transactions -- Pledge of Shares."
(3) Mr. Holm and Mr. Thawley are WMA Sales Associates.
(4) Mr. Holm owns 9,226 shares individually of record, 40,000 shares
jointly with his wife, and 1,500 shares jointly with Mr. Steve Marx.
110,000 shares are held of record by seven trusts created by Mr. Holm
and his wife.
(5) Mr. Thawley owns 88,200 shares individually of record. 20,000 shares
are owned by Mr. Thawley's children. 91,800 shares are owned by two IRA
rollover trusts for the benefit of Mr. Thawley and his wife.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Mr. Humphrey is the Company's President, a Director and the largest stockholder.
Mr. Humphrey also owns substantially all of the outstanding shares of World
Marketing Alliance, Inc. and certain affiliated entities constituting WMA
Agency, and WMA Securities, which recruit, train and supervise the sales force
responsible for selling life insurance and annuity contracts reinsured by the
Company. Certain directors and executive officers of the Company, including Mr.
Humphrey, are also employees of WMA Agency.
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<PAGE> 33
The Company has and may continue to enter into transactions from time to time
with WMA Agency, Mr. Humphrey, other officers or directors of the Company or
their affiliates. Such transactions necessarily involve conflicts of interest,
and the terms of such transactions may not necessarily be equivalent to the
terms of transactions entered into between unrelated parties pursuant to arms
length negotiations.
The Company's officers do not, and are not required to, devote their time
exclusively to the business of the Company, nor are they subject to
non-competition agreements. As a consequence, they could legally engage in
activities that could be adverse to the best interests of the Company, subject
to their fiduciary obligations to the Company under appropriate corporate law.
In view of the substantial relationships among the Company, WMA Agency and Mr.
Humphrey, conflicts of interest will exist or arise with respect to existing and
future business dealings, including without limitation: the terms of WMA
Agency's selling agreements (including commission arrangements) and the
Company's reinsurance relationships with life insurance companies; the relative
commitment of time and energy of Mr. Humphrey and the other common executive
officers of WMA Agency and the Company; agreements between the Company and WMA
Agency; potential acquisitions of properties or businesses; the issuance of
additional securities by the Company; the election of the Company's directors;
and the payment of dividends by the Company.
The Company's by-laws require transactions in which a director or executive
officer has a direct or indirect material interest to be approved by a majority
of the Board of Directors, including two independent and disinterested
directors, after full disclosure, or by the vote of the holders of a majority of
the shares of Common Stock outstanding. At the present time, the Company has
only one independent and disinterested director. The Company is seeking
potential candidates to serve as "independent" director. There is no assurance
that any conflicts of interest will be resolved in favor of the Company.
Commissions for sales of life insurance and annuity contracts reinsured by the
Company are paid to WMA Agency and WMA Sales Associates by the Ceding Life
Companies. Mr. Humphrey and Mr. Montgomery receive direct compensation from WMA
Agency and receive virtually no direct compensation from the Company. In
addition, Messrs. Humphrey, Montgomery and McKernan are also executive officers
and employees of companies constituting WMA Agency. As a result of such
relationships, the interests of WMA Agency, with respect to commissions received
on life insurance sales by WMA Agency through the Ceding Life Companies (and
indirectly under coinsurance and ModCo agreements from the Company), may
conflict with the interests of the Company in negotiating reinsurance agreements
beneficial to the Company.
PLEDGE OF SHARES
The Company's major shareholder, S. Hubert Humphrey, Jr., in 1995 pledged all of
his shares of the Company's common stock in connection with a loan made to WMA
Agency ("the Agency Loan"). Part of the Agency Loan proceeds were allocated for
use by WMA Agency to make loans to certain WMA Sales Associates (the "Agent
Loans") to finance 20% of the cost to acquire shares of common stock in the 1995
offering. As of December 31, 1999, the outstanding principal amount of the Agent
Loans was $836,626. The WMA Sales Associates' shares of common stock are pledged
to WMA Agency as security for these Agent Loans. The Agent Loans are payable in
60 equal monthly payments of principal and interest and may not be prepaid. The
shares acquired by the WMA Sales Associates are non-transferable during the loan
term. Proxies have been executed in favor of WMA Agency for voting such shares
of common stock for so long as the Agent Loans are outstanding. By virtue of his
ownership of WMA Agency, Mr. Humphrey is considered to be the beneficial owner
of the 400,311 shares and is able to control the proxies relating to them.
The Agency Loan, which was initially funded in 1995 in the principal amount of
$2.25 million, was subsequently consolidated into a WMA Agency line of credit
facility and increased to $7.75 million. Several increases have been made to the
line of credit facility. The most recent increase occurred in October 1999, in
which the line of credit was increased to a maximum available amount of $22.75
million. Mr. Humphrey's pledge of his shares of Common Stock is one of the
various forms of collateral for this
33
<PAGE> 34
line of credit, which as of December 31, 1999 had an outstanding balance of
$21.41 million. Upon default on this credit line, the lender, Money Services,
Inc., a subsidiary of AEGON USA Inc., would have the right to take title to the
pledged shares and to exercise voting control. This line of credit is being
amortized over the period ending November 1, 2012 with principal and interest
payable monthly. Interest is calculated in arrears based on AEGON's cost of its
five year senior debt instruments, which is, in turn, based upon five year U.S.
Treasury Notes, plus an underwriters' override. Interest on the line of credit
is adjusted every five years.
MANAGEMENT AND RELATED SERVICES
During the first quarter of 1998, employees of WMA Agency performed the
Company's administrative functions. The Company paid WMA Agency a monthly
payroll allocation based upon the amount of time during which WMA Agency
employees provided services to the Company. The Company also received certain
other services from WMA Agency, including the funding of certain operating and
travel related expenses. Effective April 1, 1998, the Company entered into an
ongoing Corporate Services Agreement with WMA Agency whereby WMA Agency provides
corporate services and supplies to the company for a fixed monthly fee of
$2,250, adjustable annually. These services include facilities maintenance,
security, human resources, mail services, utilities, postage, telephone and
copier service. The Company incurred $48,851 and $240,708 of costs for these
services from WMA Agency for the years ended December 31, 1999 and 1998,
respectively. At December 31, 1999, the Company had an outstanding payable to
WMA Agency in the amount of $2,559.
WARRANTS
On June 15, 1999, the Company's Board of Directors authorized the issuance of
warrants to purchase up to 300,000 shares of the Company's Common Stock
("Warrants") to key management employees of and independent sales agents
contractually associated with WMA Agency and its affiliated corporations as
consideration for the agreement of WMA Agency to use its "best efforts" to
encourage life insurance companies whose policies it sells to reinsure such
policies with the Company. The Company's shareholders ratified the 1999 Plan at
the Annual Meeting held on August 16, 1999. The number of shares exercisable
under the Warrants were limited to a formula amount determined by multiplying
the number of shares by a fraction, the numerator of which is the proceeds
actually received by the Company from the sale of the Company's Common Stock and
Preferred Stock on or before December 31, 1999 and the denominator of which is
$75,000,000. No new capital was raised by the Company on or before December 31,
1999; therefore, the outstanding Warrants could not, by their terms, be
exercised. Accordingly, the previously issued Warrants are void and have no
further force or effect.
PRINCIPAL REPRESENTATIVE AGREEMENT
The Company has an agreement with CFM Insurance Managers Ltd. ("CFM"), a Bermuda
corporation providing professional management services to companies operating in
Bermuda. C. Simon Scupham, a director of the Company, is the President of CFM.
Pursuant to this agreement, CFM acts as the Principal Representative for WMA
Life in Bermuda. This agreement is for an unlimited duration, but may be
terminated by either party upon ninety (90) days prior written notice or upon
thirty (30) days prior written notice under specified circumstances. The Company
paid annual fees of $60,000 during 1999 and 1998 to CFM pursuant to the
management agreement.
LEASE AGREEMENT WITH WMA AGENCY
The Company currently subleases on a triple net basis approximately 1,500 square
feet of office space in Duluth, Georgia from WMA Agency. The triple-net basis
requires the Company to pay its proportionate share of the taxes, insurance and
common area maintenance as well as a stipulated base rent. The sublease extends
through January 2008. The annual base rent until January 2003 is $18,675, which
is equivalent to the rate being paid by WMA Agency to its lessor. For the second
five-year period of the sublease, the annual base rent will be subject to
increase.
34
<PAGE> 35
LACK OF SEPARATE LEGAL REPRESENTATION
During 1999, counsel for the Company, Merritt & Tenney LLP, of Atlanta, Georgia,
also represented WMA Agency, WMA Securities and Mr. Humphrey. Should a conflict
of interest result from this lack of separate legal representation, the
independent and disinterested directors shall select independent counsel to
represent the Company and to advise the Company with respect to the conflict of
interest.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
No reports were required to be filed on Form 8-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
10.1 Fourth Amendment of Revolving Line of Credit Promissory Note
between The WMA Corporation and Money Services, Inc. effective
December 31, 1999 (1)
10.2 Amendment Number 2 to the Automatic Flexible Premium Variable
Life Reinsurance Agreement Number 2 between Western Reserve
Life Assurance Co. of Ohio and WMA Life Insurance Company
Limited effective October 1, 1999 (Attached). Portions of this
Exhibit have been omitted, a complete copy of which has been
filed separately with the Secretary of the SEC pursuant to an
application for confidential treatment.
10.3 Automatic Flexible Premium Variable Life Reinsurance Agreement
Number 3 between Western Reserve Life Assurance Co. of Ohio
and WMA Life Insurance Company Limited effective October 1,
1999 (Attached). Portions of this Exhibit have been omitted, a
complete copy of which has been filed separately with the
Secretary of the SEC pursuant to an application for
confidential treatment.
10.4 Amendment Number 2 to the Automatic Variable Annuity
Reinsurance Agreement between Western Reserve Life Assurance
Co. of Ohio and WMA Life Insurance Company Limited effective
October 1, 1999 (Attached). Portions of this Exhibit have been
omitted, a complete copy of which has been filed separately
with the Secretary of the SEC pursuant to an application for
confidential treatment.
10.5 Amendment Number 3 to the Automatic Flexible Premium Variable
Life Reinsurance Agreement Number 2 between Western Reserve
Life Assurance Co. of Ohio and WMA Life Insurance Company
Limited effective February 1, 2000 (Attached)
10.6 Amendment Number 3 to the Automatic Variable Annuity
Reinsurance Agreement between Western Reserve Life
Assurance Co. of Ohio and WMA Life Insurance Company
Limited effective February 1, 2000 (Attached)
27.1 Financial Data Schedule (for SEC use only)(1)
</TABLE>
FOOTNOTES
---------
(1) Filed on March 20, 2000 as an Exhibit to Form 10-KSB for the
fiscal year ended December 31, 1999 and incorporated herein by
reference pursuant to Rule 12b-32.
35
<PAGE> 36
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The WMA Corporation:
We have audited the accompanying consolidated balance sheets of The WMA
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and comprehensive income
and cash flows for each of the years in the three-year period ended December 31,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The WMA Corporation
and subsidiaries as of December 31, 1999 and 1998, and the results of its
operations and its cash flows, for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Atlanta, Georgia
March 10, 2000
F-1
<PAGE> 37
THE WMA CORPORATION
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
Assets 1999 1998
------ ------------ ------------
<S> <C> <C>
Fixed maturity securities - available for sale (amortized cost of
$2,118,705 and $9,501,531 for 1999 and 1998, respectively) $ 2,054,231 $ 9,869,679
Cash and cash equivalents 3,475,950 6,617,710
Investment income due and accrued 19,443 136,196
Reinsurance balances receivable 2,985,937 101,034
Reinsured policy loans 286,963 45,502
Deferred acquisition costs 39,750,100 27,537,866
Deferred organization costs (net of accumulated amortization of
$186,869 and $98,565 at 1999 and 1998, respectively) -- 88,304
Prepaid expenses 346,894 216,746
Due from World Marketing Alliance, Inc. -- 3,507
Fixed assets (net of accumulated depreciation of $55,017 and
$7,649 for 1999 and 1998, respectively) 88,332 84,820
Other assets -- 179,810
------------ ------------
Total assets $ 49,007,850 $ 44,881,174
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Future policy benefits $ 4,494,786 $ 2,624,020
Reinsurance balances payable 716,330 5,425,467
Accrued expenses 110,885 105,854
Accrued interest payable 665,789 101,099
Accounts payable 46,696 70,376
Due to World Marketing Alliance, Inc. 2,559 --
Short term debt 1,125,000 10,000,000
Long term debt 9,178,562 --
Deferred tax liability 4,259,599 2,181,219
------------ ------------
Total liabilities 20,600,206 20,508,035
------------ ------------
Stockholders' equity:
Preferred stock, par value $2.00, 10,000,000 shares authorized;
no shares issued in 1999 or 1998 -- --
Common stock, par value $.001, 50,000,000 shares authorized;
2,500,000 shares issued in 1999 and 1998 2,500 2,500
Additional paid-in capital 20,228,973 20,228,973
Accumulated other comprehensive income (loss) (42,552) 242,977
Retained earnings 8,268,623 3,948,589
Treasury stock, at cost (4,990 shares for 1999 and 1998) (49,900) (49,900)
------------ ------------
Total stockholders' equity 28,407,644 24,373,139
------------ ------------
Total liabilities and stockholders' equity $ 49,007,850 $ 44,881,174
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 38
THE WMA CORPORATION
Consolidated Statements of Income
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Premiums $ 9,692,649 $ 7,280,489 $ 5,217,365
Reinsured policy revenues 13,505,823 4,098,371 195,124
Net investment income 349,683 951,101 1,087,465
Net realized gain (loss) on investments (66,000) 267,063 --
Loss on recapture of business (822,814) -- --
Other income -- -- 300,000
------------ ------------ ------------
Total revenue 22,659,341 12,597,024 6,799,954
------------ ------------ ------------
Benefits and expenses:
Benefits, claims and settlement expenses 4,511,469 3,488,157 2,336,567
Change in future policy benefits 313,679 (45,526) 72,275
Reinsurance premium allowances, net 5,362,263 2,917,483 1,511,858
Amortization of deferred acquisition costs 3,789,318 1,541,439 63,629
Professional fees and other expenses 934,297 957,446 292,275
Interest expense 1,153,958 101,099 10,971
Management fees to WMA Management Services, Inc. -- -- 120,000
Fees to World Marketing Alliance, Inc. 48,851 240,708 57,135
------------ ------------ ------------
Total benefits and expenses 16,113,835 9,200,806 4,464,710
------------ ------------ ------------
Income before income tax 6,545,506 3,396,218 2,335,244
Income tax expense 2,225,472 1,156,861 815,743
------------ ------------ ------------
Net income $ 4,320,034 $ 2,239,357 $ 1,519,501
============ ============ ============
Basic and diluted income per share $ 1.73 $ 0.90 $ 0.63
============ ============ ============
Weighted average common shares outstanding 2,495,010 2,495,766 2,394,769
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 39
THE WMA CORPORATION
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
Accumulated
Additional other
Comprehensive Number of Common paid-in comprehensive Retained
income shares stock capital income (loss) earnings
------------- --------- ------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 2,305,550 $2,306 $ 18,286,667 $ (125,641) $ 189,731
Common stock issued 194,450 194 1,944,306
Comprehensive income
Net income $ 1,519,501 1,519,501
Other comprehensive income, net of tax 283,311 283,311
-------------
Total comprehensive income $ 1,802,812
=============
Purchase of treasury stock
(2,200 shares and 2,000 warrants) -- -- (2,000) -- --
--------- ------ ------------ ------------- -----------
Balance, December 31, 1997 2,500,000 2,500 20,228,973 157,670 1,709,232
Comprehensive income
Net income $ 2,239,357 2,239,357
Other comprehensive income, net of tax 85,307 85,307
-------------
Total comprehensive income $ 2,324,664
=============
Purchase of treasury stock (2,790 shares) -- -- -- -- --
--------- ------ ------------ ------------- -----------
Balance, December 31, 1998 2,500,000 2,500 20,228,973 242,977 3,948,589
Comprehensive income
Net income $ 4,320,034 4,320,034
Other comprehensive loss, net of tax (285,529) -- -- -- (285,529) --
------------- --------- ------ ------------ ------------- -----------
Total comprehensive income $ 4,034,505
=============
Balance, December 31, 1999 2,500,000 $2,500 $ 20,228,973 $ (42,552) $ 8,268,623
========= ====== ============ ============= ===========
<CAPTION>
Total
Treasury stockholders'
stock equity
--------- -------------
<S> <C> <C>
Balance, January 1, 1997 $ -- $ 18,353,063
Common stock issued 1,944,500
Comprehensive income
Net income 1,519,501
Other comprehensive income, net of tax 283,311
Total comprehensive income
Purchase of treasury stock
(2,200 shares and 2,000 warrants) (22,000) (24,000)
--------- -------------
Balance, December 31, 1997 (22,000) 22,076,375
Comprehensive income
Net income 2,239,357
Other comprehensive income, net of tax 85,307
Total comprehensive income
Purchase of treasury stock (2,790 shares) (27,900) (27,900)
--------- -------------
Balance, December 31, 1998 (49,900) 24,373,139
Comprehensive income
Net income 4,320,034
Other comprehensive loss, net of tax -- (285,529)
--------- -------------
Total comprehensive income
Balance, December 31, 1999 $ (49,900) $ 28,407,644
========= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 40
THE WMA CORPORATION
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,320,034 $ 2,239,357 $ 1,519,501
Adjustments to reconcile net income to net cash used in
operating activities:
Amortization and depreciation 3,924,990 1,585,525 100,065
Deferred tax expense 2,225,472 1,156,861 815,743
Net realized (gain) loss on investments 66,000 (267,063) --
Loss on recapture of business 822,814 -- --
Change in:
Investment income due and accrued 116,753 121,433 (76,364)
Reinsurance balances receivable (1,944,005) 82,490 (153,128)
Reinsured policy loans (283,265) (45,502) --
Deferred acquisition cost (36,612,052) (24,575,967) (3,834,638)
Prepaid expenses (130,148) (103,503) (113,243)
Due from World Marketing Alliance, Inc. 3,507 (3,507) --
Other assets 179,810 (179,027) 26,078
Future policy benefits 2,651,956 1,330,103 679,440
Reinsurance balances payable 13,398,265 4,991,024 434,443
Accrued expenses 5,031 52,119 (33,028)
Accrued interest payable 564,690 101,099 --
Accounts payable (23,680) (34,732) 24,335
Due to WMA Management Services, Inc. -- (120,000) 64,780
Due to World Marketing Alliance, Inc. 2,559 (1,916) (14,006)
------------ ------------ -----------
Net cash used in operating activities (10,711,269) (13,671,206) (560,022)
------------ ------------ -----------
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities 7,316,827 8,939,622 5,363,904
Purchase of available-for-sale securities -- -- (7,219,502)
Purchase of fixed assets (50,880) (92,469) --
------------ ------------ -----------
Net cash provided by (used in) investing activities 7,265,947 8,847,153 (1,855,598)
------------ ------------ -----------
Cash flows from financing activities:
Issuance of common stock -- -- 1,944,500
Purchase of treasury stock and warrants -- (27,900) (24,000)
Proceeds from short term debt -- 10,000,000 --
Proceeds from long term debt 5,000,000 -- --
Decrease in principal due on short term debt (4,696,438) -- --
(Decrease) in due to stockholders -- -- (15,418)
------------ ------------ -----------
Net cash provided by financing activities 303,562 9,972,100 1,905,082
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents (3,141,760) 5,148,047 (510,538)
Cash and cash equivalents at beginning of period 6,617,710 1,469,663 1,980,201
------------ ------------ -----------
Cash and cash equivalents at end of period $ 3,475,950 $ 6,617,710 $ 1,469,663
============ ============ ===========
Supplemental disclosure of cash flow information:
Interest paid $ -- $ -- $ 10,971
============ ============ ===========
Income taxes paid $ -- $ -- $ --
============ ============ ===========
Supplemental disclosure of non-cash financing activities:
Recapture of reinsurance business:
Reduction of deferred acquisition costs $ 20,610,500 -- --
Reduction of reinsured policy loans 41,804 -- --
Increase in reinsurance balances receivable (940,898) -- --
Reduction of future policy benefits (781,190) -- --
Reduction of reinsurance balances payable (18,107,402) -- --
------------ ------------ -----------
Loss on recapture of business $ 822,814 -- --
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 41
THE WMA CORPORATION
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
1. Organization
The WMA Corporation is an insurance holding company originally formed
March 9, 1995.
The consolidated financial statements for the year ended December 31,
1999 include the assets, liabilities, and results of operations of The
WMA Corporation ("WMA Corporation") and its wholly owned subsidiary WMA
Life Insurance Company Limited ("WMA Life"), a Bermuda domiciled life
reinsurance company (collectively the "Company"). The consolidated
financial statements for the years ended December 31, 1998 and 1997
also included a former subsidiary WMA Life Holding, Ltd., which was
dissolved in January 1999. Net assets of $7,957 were paid to WMA
Corporation.
The Company, through WMA Life, provides reinsurance for certain
national life insurance companies on variable universal life insurance
("VUL") and variable annuity policies sold by "WMA Sales Associates", a
growing network of independent agents associated with "WMA Agency".
Such policies are sold throughout the United States and its
territories. Unless the context indicates otherwise, "WMA Agency"
refers to World Marketing Alliance, Inc., an insurance agency, and
certain affiliated entities and persons that are involved in the
marketing and sale of life insurance, annuities and other financial
services. "WMA Sales Associates" are independent agents who market
financial services products through WMA Agency and often hold licenses
as registered representatives for the sale of certain securities
products, through another affiliate, WMA Securities, Inc. ("WMA
Securities"), a registered securities broker-dealer.
All of the Company's reinsurance business is generated by the marketing
efforts of WMA Agency, and the Company has made a considered decision
to focus the Company's energies on existing WMA Agency relationships
for the generation of new reinsurance business. As a consequence,
business and regulatory issues facing WMA Agency may have limited the
Company's access to capital markets, which have and are expected to
continue to have a significant impact on the Company's growth thereby
affecting its financial position and results of operations. In recent
years, the SEC, the NASD and various state regulatory authorities have
commenced a variety of regulatory investigations of WMA Agency and WMA
Securities which have raised significant concerns about their
respective compliance with applicable regulatory standards. WMA Agency
and WMA Securities have implemented corrective action plans with
respect to such alleged compliance issues; however no assurance can be
given that such corrective actions will be viewed as sufficient by the
applicable regulatory authorities. If such corrective actions are not
deemed acceptable, it could impact the Company's ability to reinsure
additional plans of insurance.
S. Hubert Humphrey, Jr., a major shareholder of the Company, owns a
controlling interest in WMA Agency, WMA Securities and WMA Management
Services, Inc. ("WMA Management"), which provided operating assistance
to the Company under a management services agreement for a fee through
December 31, 1997. Under the management services agreement, WMA
Management was primarily responsible for the maintenance of the
financial records of the Company. The management services agreement was
terminated as of December 31, 1997. During the first quarter of 1998,
employees of WMA Agency performed the Company's administrative
functions. The Company paid WMA Agency a monthly payroll allocation
based upon the amount of time during which WMA Agency employees
provided services to the Company. The Company also received certain
other services from WMA Agency, including the funding of certain
operating and travel related expenses, as it had in 1997. Effective
April 1, 1998, the Company entered into a Corporate Services Agreement
with WMA Agency pursuant to which WMA Agency provides corporate
services and supplies for a fixed monthly fee of $2,250, adjustable
annually.
Reinsurance is an arrangement under which an insurance company, the
"reinsurer" agrees to indemnify another insurance company, the ceding
company, for all or a portion of the insurance risks underwritten by
the ceding company. The reinsurer, in turn, assumes a portion of the
underwritten risk in exchange for a portion of the premium collected.
The Company currently assumes portions of mortality and other risks
relating to life insurance and annuity policies in order to share in
the net profits generated through the sale of such policies by WMA
Agency.
F-6
<PAGE> 42
The WMA Corporation
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies
Consolidation and Basis of Presentation. The consolidated financial
statements of the Company have been prepared in accordance with
generally accepted accounting principles prescribed for stock life
insurance companies. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the reported amounts of revenues
and expenses during the reporting period. Accounts that the company
deems to be sensitive to changes in estimates include deferred policy
acquisition costs and future policy benefits. In all instances, actual
results could differ from estimates.
The accompanying financial statements consolidate the accounts of WMA
Corporation and its subsidiary. All significant inter-company balances
and transactions have been eliminated.
Investments. The Company classifies all fixed maturity securities and
equity securities as "available for sale." Such securities are reported
at fair value. Fixed maturities available for sale are so classified
based upon the possibility that such securities could be sold prior to
maturity if that action enables the Company to execute its investment
philosophy and appropriately match investment results to operating and
liquidity needs. Unrealized gains and losses on marketable equity
securities and fixed maturity securities available for sale, less
applicable deferred income taxes, are reported as a separate component
of accumulated other comprehensive income within stockholders' equity.
Although no impairments in value have occurred which would require
adjustment to the carrying value of securities, any such impairment
identified in the future would result in a reduction of the carrying
value of the individual security to its fair value as the new cost
basis and reflection of a corresponding write down amount as a realized
capital loss in the consolidated statements of operations. The
Company's policy is to recognize such an impairment when the projected
cash flows of these securities have been reduced on other than a
temporary basis so that the realizable value is reduced to an amount
less than the carrying value.
Investment income is recognized as it accrues or is legally due. Income
on mortgage-backed securities includes amortization and accretion of
purchase premiums and discounts using a method that approximates a
level yield, taking into consideration assumed prepayment patterns. The
retrospective adjustment method is used to adjust for prepayment
activity. Realized gains and losses on sales of investment are included
in net income, as are write-downs of securities where declines in value
are deemed to be other than temporary in nature. The cost of investment
securities sold is determined based upon the specific identification
method.
The Company does not participate in investments defined as derivatives
under Statement of Financial Accounting Standards (SFAS) No. 119,
Disclosure about Derivative Financial Instrument and Fair Value of
Financial Instruments.
Fair Value Disclosures. The carrying values of cash and cash
equivalents, reinsurance receivables and payables, short-term debt,
accrued expenses and accounts payable approximate their fair values due
to the short-term nature of these accounts. The carrying value of
future policy benefits approximates its fair value as credited interest
approximates current market rates. See Note 3 for fair value
information covering the Company's investment portfolio.
Additional Information Regarding Statements of Cash Flows. Cash and
cash equivalents include cash on hand and on deposit purchased with an
original maturity of three months or less.
Deferred Policy Acquisition Costs. 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 costs include reinsurance
commission and expense allowances paid to ceding companies, and certain
other underwriting costs such as actuarial, legal and accounting fees.
Deferred acquisition costs are amortized over the lives of the
underlying policies (with regard to the terms of the reinsurance
agreement), in proportion to the ratio of revenues collected during the
then current period to total anticipated revenues. On those policies
reinsured under a monthly renewable term agreement, revenues represent
premiums recognized for the mortality risk reinsured.
F-7
<PAGE> 43
The WMA Corporation
Notes to Consolidated Financial Statements
Such premiums are estimated using the same assumptions used for
computing liabilities for future policy benefits. Such assumptions
include estimates of expected investment yields, mortality, persistency
and expenses applicable at the time the policies are reinsured.
Original assumptions on monthly renewable term business continue to be
used in subsequent accounting periods to determine changes in the
deferred acquisition costs unless a premium deficiency exists.
For policies reinsured under a coinsurance or modified coinsurance
agreement, revenues represent gross profits associated with mortality
charges, investment margins, surrender charges and expense loads.
Management also reviews on a periodic basis evolving experience with
regard to the Company's assumptions concerning future experience with
regard to mortality, persistency, investment yields and expenses in
determining its estimates of future gross profits. Upon adoption of any
change in assumptions used with regard to future experience, the
amortization of the Company's deferred acquisition cost will be
recalculated and will be reflected during the then current accounting
period.
Reinsurance Premium Allowances. Allowances generally represent a
percentage of each reinsurance premium which is paid or allowed by WMA
Life to the ceding company for each policy reinsured in recognition of
commissions and other expenses associated with the reinsured policies.
These other expenses relate to costs associated with underwriting,
marketing, policy issue and maintenance. The reinsurance expense
allowances represent the Company's share of acquisition and maintenance
expenses incurred by the ceding company that are attributable to the
risks reinsured. Allowances are shown net of amounts deferred as policy
acquisition costs.
Fixed Assets. Fixed assets are stated at cost less accumulated
depreciation. Depreciation is provided on the straight-line basis over
the estimated useful lives of the related assets, which range from
three to seven years.
Future Policy Benefits. Liabilities for future benefits on life
policies are established in an amount adequate to meet the estimated
future obligations on policies in force. Liabilities for future policy
benefits under long-term life insurance policies have been computed
based on estimates of investment yields, mortality and withdrawal rates
expected at the time the policies are reinsured, and other assumptions
including estimates for incurred but not reported losses. These
assumptions include a margin for adverse deviation and vary with the
characteristics of the plan of insurance, year of issue, age of insured
and other appropriate factors. The assumptions for estimated investment
yields are based upon various factors including then current yields on
the Company's investment portfolio and market rates for new investment
money. Interest rates used in estimating future policy benefits range
from 6.0% to 7.0%. The mortality and withdrawal assumptions are based
on the Company's experience, industry experience and industry
standards. Policy and contract reserves are included in future policy
benefits on the consolidated balance sheet.
Liabilities for future policy benefits under the coinsurance and
modified coinsurance agreements equal reinsured policy account balances
on the underlying VUL policies and variable annuity contracts. With
regard to the separate account benefits reinsured on a modified
coinsurance basis, the Company records such liabilities as an offset to
related assets as its intentions and rights under the agreements with
the ceding companies meet the appropriate conditions governing rights
of setoff. Liabilities for the fixed account portion of the variable
annuity contracts and VUL policies reinsured on a coinsurance basis are
recorded as future policy benefits.
Income Taxes. The Company uses the asset and liability method to record
deferred income taxes. Accordingly, deferred tax 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, using
enacted tax rates expected to apply when such temporary differences are
expected to reverse.
Recognition of Revenues and Related Expenses. Reinsurance premiums
received under the monthly renewable term agreements are recognized as
revenue over the premium paying periods of the reinsured policies.
Benefits and expenses are associated with earned premiums so that
profits are recognized over the life of the related contract. This
association is accomplished through the provision for future policy
benefits and the amortization of deferred policy acquisition costs.
F-8
<PAGE> 44
The WMA Corporation
Notes to Consolidated Financial Statements
Other revenue consists of non-recurring items other than reinsurance
premiums or investment earnings and is recognized upon completion of
the related earnings process. During the year ended December 31, 1997,
other income related to a one-time payment from a ceding company to
compensate the Company for delays in the introduction of a reinsured
product.
Reinsured Policy Revenues. Reinsured policy revenues represent the
policy mortality and expense charges, cost of insurance charges net of
retrocession reinsurance premiums, policy administration charges,
asset-based allowances and deferred sales charges that have been
assessed against the reinsured policy account balances under the
coinsurance and modified coinsurance agreements, as they relate to
universal life-type contracts.
Income Per Share. Basic income per share is computed based on the
weighted-average number of common shares outstanding during the period,
in accordance with SFAS No. 128, Earnings Per Share. In August 1999,
the Company's stockholders authorized a 1999 stock option plan and
approved the issuance of options to purchase up to 450,000 shares of
stock under such stock option plan.
Deferred Organization Costs. In April 1998, the Accounting Standards
Executive Committee ("AcSEC") issued Statement of Position (SOP) 98-5,
Reporting on the Costs of Start-Up Activities which provides guidance
regarding the capitalization and expense treatment of start-up
activities including organization costs. The SOP was effective for
1999, with any impact upon adoption recorded at the beginning of the
fiscal year in which the SOP is initially adopted. The Company adopted
SOP-98-5 effective January 1, 1999 and as a result, wrote off $88,304
of remaining deferred organization costs during the first quarter of
1999.
Comprehensive Income. SFAS No. 130, Reporting Comprehensive Income
establishes standards for reporting and displaying comprehensive income
and its components in a full set of general-purpose financial
statements. The Company adopted SFAS No. 130 effective January 1, 1998.
Comprehensive income consists of net income and net unrealized gains
(losses) on securities and is presented in the consolidated statements
of stockholders' equity and comprehensive income. "Other comprehensive
income" refers to revenues, expenses, gains, and losses that are
included in comprehensive income but excluded from earnings under
current accounting standards.
Segment Reporting. The Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information in January 1998. SFAS
No. 131 establishes standards for the disclosures made by public
companies to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers.
Insurance-Related Assessments. SOP 97-3, Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments provides guidance
for determining when an entity should recognize a liability for
guaranty fund and other insurance-related assessments. It also provides
guidance on how to measure the liability. The Company adopted SOP 97-3
effective January 1, 1999. The provisions of SOP 97-3 do not have a
significant impact on the financial statements of the Company.
Recent Accounting Pronouncements. In June 1998, SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities was
issued. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in investment securities and other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those
instruments at fair value. The accounting for changes in the fair value
of a derivative will be included in either earnings or other
comprehensive income depending on the intended use of the derivative
instrument. In June 1999, SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133 was issued. This statement defers the effective
date of SFAS No. 133. The provisions of SFAS No. 133 are effective for
all quarters of fiscal years beginning after June 15, 2000; however,
the Company does not believe such provisions will have a significant
impact on the financial statements upon adoption.
Reclassification. The Company has reclassified the presentation of
certain 1998 and 1997 information to conform to the 1999 presentation.
F-9
<PAGE> 45
The WMA Corporation
Notes to Consolidated Financial Statements
3. Investments
Major categories of net investment income consist of the following:
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
--------- ---------- ----------
<S> <C> <C> <C>
Fixed maturity and equity securities $361,830 $ 939,180 $1,035,453
Short-term investments 59,431 63,957 117,035
-------- ---------- ----------
421,261 1,003,137 1,152,488
Investment expense (71,578) (52,036) (65,023)
-------- ---------- ----------
Net investment income $349,683 $ 951,101 $1,087,465
======== ========== ==========
</TABLE>
Gross losses of $93,267 and $35,718 were realized on sales of fixed
maturity securities for the years ended December 31, 1999 and 1998,
respectively. Gross gains of $27,267 and $116,230 were realized on
sales of fixed maturity securities for the years ended December 31,
1999 and 1998, respectively. Gross gains of $186,551 were realized on
sales of equity securities for the year ended December 31, 1998.
The amortized cost, unrealized gains and losses, and estimated fair
values of investment securities at December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized
cost gains losses Fair value
---------- ---------- ---------- ----------
1999
----
<S> <C> <C> <C> <C>
Fixed maturity securities, available for sale:
Commercial and industrial $1,217,278 -- 32,780 $1,184,498
Public utilities 198,969 -- 13,321 185,648
Mortgage-backed securities 702,458 -- 18,373 684,085
---------- ------- ------ ----------
Total $2,118,705 -- 64,474 $2,054,231
========== ======= ====== ==========
1998
----
Fixed maturity securities, available for sale:
U.S. Government and agencies $ 822,586 60,131 -- $ 882,717
Commercial and industrial 6,114,461 234,985 -- 6,349,446
Public utilities 797,963 54,675 -- 852,638
Mortgage-backed securities 1,766,521 35,083 16,726 1,784,878
---------- ------- ------ ----------
Total $9,501,531 384,874 16,726 $9,869,679
========== ======= ====== ==========
</TABLE>
There were no investments in any entity in excess of 10% of
stockholders' equity at December 31, 1999. Fixed maturity securities
are valued based upon quoted market prices.
At December 31, 1999, the contractual maturities of investments in
fixed maturity securities were as follows:
<TABLE>
<CAPTION>
Amortized
Cost Fair value
---------- ----------
<S> <C> <C>
Available for sale:
Due after one year through five years $ 414,644 $ 409,554
Due after five years through ten years 1,001,603 960,592
Mortgage-backed securities 702,458 684,085
---------- ----------
Total $2,118,705 $2,054,231
========== ==========
</TABLE>
F-10
<PAGE> 46
The WMA Corporation
Notes to Consolidated Financial Statements
Expected maturities will differ from contractual maturities because
some issuers have the right to call or prepay obligations with or
without call or prepayment penalties.
Changes in net unrealized gains and losses were as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Fixed maturity securities, available for sale $(432,622) $ 272,450 $277,314
Equity securities -- (143,196) 151,913
--------- --------- --------
$(432,622) $ 129,254 $429,227
========= ========= ========
</TABLE>
4. Recapture of Business
During the fourth quarter of 1999, as a result of the Company's
inability to pay its deferred reinsurance settlement balances under
the coinsurance and modified coinsurance agreements with Western
Reserve Life Assurance Co. of Ohio ("Western Reserve"), effective
October 1, 1999, Western Reserve recaptured all Financial Freedom
Builder VUL policies and riders and 75% of the Freedom Wealth Creator
variable annuity policies, that were issued from January 1, 1999
through September 30, 1999. Concurrent with the recapture, WMA Life
commenced reinsuring, on a MRT basis, 20% of the Financial Freedom
Builder VUL policies and riders issued on or after January 1, 1999.
The recapture of business during the fourth quarter of 1999 resulted
in a loss of $822,814 for the year ended December 31, 1999. Of the
$822,814 Loss on recapture of business, $556,304 related to the VUL
coinsurance and modified coinsurance business, and is composed of
$14.35 million in gross revenues due to the Company for recapture
allowances, net of $14.91 million in expenses from the amortization of
the related deferred acquisition costs, and the release of the related
policy reserve and reinsurance expense allowance accruals. The
remaining loss of $266,510, related to the variable annuity
coinsurance and modified coinsurance business, is composed of $5.68
million in gross revenues from recapture allowances, net of $5.94
million in expenses from the amortization of the related deferred
acquisition costs.
The Loss on recapture of business included a reinsurance fee relating
to the deferral of financial settlements owed to Western Reserve
during the period in which the Company reinsured the underlying
business. Such reinsurance fees were effectively offset by the
interest due to the Company for amounts previously remitted to Western
Reserve on business subsequently recaptured. The recapture of business
was done in accordance with the terms of the amended reinsurance
agreements regarding the deferral of settlements and recourse provided
to Western Reserve. As a result of the recapture, the Company is owed
a net settlement of $1.51 million, which is included in Reinsurance
balances receivable on the Company's Consolidated Balance Sheet as of
December 31, 1999, prior to any offset from fourth quarter 1999
settlements on the remaining business.
5. Reinsurance
As of December 31, 1999, the Company has six reinsurance contracts and
one retrocession agreement in place. During 1999, the Company amended
its coinsurance and modified coinsurance agreements with Western
Reserve, in which Western Reserve recaptured a portion of 1999 VUL and
variable annuity policies issued from January 1 through September 30
as discussed in Note 4 above. Coincidental with the recapture, WMA
Life entered into another MRT agreement with Western Reserve as also
discussed in Note 4 above. Prior to 1998, the Company had entered into
MRT agreements with Western Reserve and Kemper Investors Life
Insurance Company, a modified coinsurance agreement with American
Skandia Life Assurance Corporation, and two coinsurance and modified
coinsurance agreements with Western Reserve.
All policies reinsured under these agreements are self-administered by
the ceding companies. The ceding companies provide the Company with
all information necessary for processing the reinsurance, including
claims.
F-11
<PAGE> 47
The WMA Corporation
Notes to Consolidated Financial Statements
Retrocession reinsurance agreements do not relieve the Company from
its obligations to ceding companies. Failure of retrocessionaires to
honor their obligations could result in losses to the Company,
consequently, allowances are established for amounts deemed
uncollectible. Currently, no amounts are deemed uncollectible. In
1998, the Company entered into a pool retrocession agreement with four
national companies whereby the Company retrocedes ("reinsures")
standard mortality risks in excess of $100,000 per life to the pool.
The retrocession agreement serves to reduce the impact of fluctuations
in death claims from period to period and limits the Company's
exposure on any one policy reinsured.
The net effect of all reinsurance agreements on premiums and policy
revenues is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
------------ ------------ ----------
<S> <C> <C> <C>
Reinsurance assumed $ 23,435,657 $ 11,406,682 $5,412,489
Reinsurance ceded (237,185) (27,822) --
------------ ------------ ----------
Net premiums and policy revenues $ 23,198,472 $ 11,378,860 $5,412,489
============ ============ ==========
</TABLE>
The net effect of all reinsurance agreements on benefits, claims and
settlement expenses is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Reinsurance assumed $4,511,469 $3,488,157 $2,336,567
Reinsurance ceded -- -- --
---------- ---------- ----------
Net benefits, claims and settlement expenses $4,511,469 $3,488,157 $2,336,567
========== ========== ==========
</TABLE>
The impact of reinsurance on life insurance in force is as follows (in
millions):
<TABLE>
<CAPTION>
Life insurance in force Direct Assumed Ceded Net
----------------------- ------ ------- ----- -------
<S> <C> <C> <C> <C>
December 31, 1999 -- $ 8,030 $ 122 $ 7,908
December 31, 1998 -- 6,117 49 6,068
December 31, 1997 -- 4,315 -- 4,315
</TABLE>
6. Deferred Policy Acquisition Costs
The amount of policy acquisition costs deferred and amortized is as
follows:
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998
------------ ------------
<S> <C> <C>
Deferred acquisition cost:
Assumed $ 39,750,100 $ 27,537,866
Retroceded -- --
------------ ------------
Net $ 39,750,100 $ 27,537,866
============ ============
Beginning of year $ 27,537,866 $ 4,503,338
Capitalized:
Assumed 36,612,052 24,575,967
Retroceded -- --
Amortized:
Assumed (3,789,318) (1,541,439)
Retroceded -- --
Gross Recapture:
Assumed (20,610,500) --
Retroceded -- --
------------ ------------
End of year $ 39,750,100 $ 27,537,866
============ ============
</TABLE>
F-12
<PAGE> 48
The WMA Corporation
Notes to Consolidated Financial Statements
The retrocession agreement is a yearly renewable term agreement,
however the retrocession premiums are offset against reinsured policy
revenues of the Western Reserve VUL coinsurance and modified
coinsurance agreement and the 1999 MRT agreement. Consequently,
retrocession premiums, benefit claims and allowances lose their
identity in calculating estimated gross profits as used in amortizing
capitalized acquisition costs. As such, there is no separate
reportable deferred acquisition costs or associated amortization.
Included within capitalized amounts above for the year ended December
31, 1998 are certain expenses that were paid to WMA Agency for
consulting services relating to the acquisition of reinsured policies.
Consulting services included activities relating to pricing
reinsurance, drafting agreements, negotiating terms and reinsurance
product development. Such amounts totaled $41,129 for 1998. No such
amounts were capitalized for 1999.
7. Income Tax
Under current Bermuda law, WMA Life is not required to pay any taxes
in Bermuda on either income or capital gains. WMA Life has received an
undertaking from the Minister of Finance in Bermuda that in the event
of any such taxes being imposed, WMA Life will be exempted from
taxation until the year 2016.
Effective January 1, 1996, WMA Life made an irrevocable election to be
treated as a domestic insurance company for United States Federal
income tax purposes under section 953(d) of the Internal Revenue Code
of 1986, as amended. As a result of this "domestic" election, WMA Life
is subject to U.S. taxation on its worldwide income as if it were a
U.S. corporation. The Company determines its income tax expense and
liability in accordance with SFAS No. 109, Accounting for Income
Taxes.
Total income taxes (benefit) for the years ended December 31, 1999,
1998 and 1997 were allocated as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C>
Tax attributable to:
Income from continuing operations $2,225,472 $1,156,861 $815,743
========== ========== ========
Unrealized gains (losses) on securities
available for sale $ (147,093) $ 43,947 $145,948
========== ========== ========
</TABLE>
The Federal income tax expense from continuing operations for the
years ended December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
----------- ----------- --------
<S> <C> <C> <C>
Current -- -- $ 29,363
Deferred $ 2,225,472 $ 1,156,861 786,380
----------- ----------- --------
Total $ 2,225,472 $ 1,156,861 $815,743
=========== =========== ========
</TABLE>
The income tax expense from continuing operations for the years ended
December 31, 1999, 1998 and 1997 differed from the amounts computed by
applying the U.S. Federal income tax rate of 34% to income before
income taxes as a result of the following:
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
----------- ----------- --------
<S> <C> <C> <C>
Computed expected tax expense $ 2,225,472 $ 1,154,714 $793,983
Other, net -- 2,147 21,760
----------- ----------- --------
Total $ 2,225,472 $ 1,156,861 $815,743
=========== =========== ========
</TABLE>
F-13
<PAGE> 49
The WMA Corporation
Notes to Consolidated Financial Statements
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying values of assets and liabilities for
financial reporting purposes and Federal income tax purposes. The net
deferred tax liability at December 31, 1999 and 1998 is composed of
the following amounts:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Deferred organizational costs $ 6,120 $ 1,294
Policy benefit reserves 142,199 --
Unrealized loss on securities held for sale 21,922 --
Reserve differences 7,962,034 5,089,257
Net operating loss carry-forward 1,123,160 2,316,168
----------- -----------
Gross deferred tax assets 9,255,435 7,406,719
Deferred tax liabilities:
Policy benefit reserves -- 99,893
Deferred acquisition costs 13,515,034 9,362,874
Unrealized gain on securities held for sale -- 125,171
----------- ----------
Gross deferred tax liabilities 13,515,034 9,587,938
Net deferred tax liabilities $ 4,259,599 $2,181,219
=========== ==========
</TABLE>
There were no valuation allowances for deferred tax assets as of
December 31, 1999 and 1998 since it is management's belief that it is
more likely than not that the deferred tax assets will be realized.
This assessment is made based on the scheduled reversal of deferred
tax liabilities, projected future taxable income, and tax planning
strategies. However, the amount of the deferred tax asset could be
reduced in the near term if estimates of future taxable income are
reduced. At December 31, 1999, the Company has net operating loss
carry-forwards for income tax purposes of $3,303,000, which begin to
expire in 2012.
8. Related Party Transactions
The Company, from time to time, has entered into transactions with WMA
Agency or its affiliates, which are controlled by S. Hubert Humphrey,
Jr., beneficial owner of approximately 36.1% of the Company's
outstanding common stock. Mr. Humphrey and certain directors and
officers of the Company are also employees of WMA Agency. From 1995
through 1997, the Company had a management agreement in place with WMA
Management Services for management and consulting services provided to
the Company including personnel costs relating to the use of certain
WMA Agency and WMA Management employees who performed the day-to-day
activities of the Company. For the year ended December 31, 1997, the
Company incurred costs of $120,000 under this agreement. The
management agreement was terminated as of December 31, 1997.
During the first quarter of 1998, employees of WMA Agency performed
the Company's administrative functions. The Company paid WMA Agency a
monthly payroll allocation based upon the amount of time during which
WMA Agency employees provided services to the Company. The Company
also received certain other services from WMA Agency, including the
funding of certain operating and travel related expenses, as it had in
1997. Effective April 1, 1998, the Company entered into an ongoing
Corporate Services Agreement with WMA Agency whereby WMA Agency
provides corporate services and supplies to the Company for a fixed
monthly fee of $2,250, adjustable annually. These services include
facilities maintenance, security, human resources, mail services,
utilities, postage, telephone and copier service. The Company incurred
costs of $48,851, $240,708 and $57,135 for these services from WMA
Agency for the years ended December 31, 1999, 1998 and 1997,
respectively. The Company has reimbursed WMA Agency for all such
expenditures.
A portion of the amounts paid to WMA Agency were deferred as policy
acquisition costs for expenses associated with the development of the
reinsurance agreements. Amounts deferred for the year ended December
31, 1998 were $41,129. No such amounts were deferred in 1999.
F-14
<PAGE> 50
The WMA Corporation
Notes to Consolidated Financial Statements
The Company's officers do not, and are not required to, devote their
time exclusively to the business of the Company, nor are they subject
to non-competition agreements. As a consequence, they could legally
engage in activities that could be adverse to the best interests of
the Company, subject to their fiduciary duties under applicable
corporate law.
Commissions for sales of life insurance and annuity contracts
reinsured by the Company are paid to WMA Agency and WMA Sales
Associates by the ceding companies. Mr. Humphrey receives direct
compensation from WMA Agency and receives virtually no direct
compensation from the Company. In addition, since Mr. Humphrey and
certain of the directors are also executive officers and directors of
companies constituting WMA Agency, the interests of WMA Agency with
respect to the commissions received on life insurance sales by WMA
Agency from the ceding companies (and indirectly under reinsurance
agreements from the Company) may conflict with the interests of the
Company in negotiating reinsurance agreements beneficial to the
Company.
In 1995, WMA Life entered into an agreement with CFM Insurance
Managers, Ltd. ("CFM"), a Bermuda corporation providing professional
management services to international companies operating in Bermuda.
C. Simon Scupham, a director of the Company, is the President of CFM.
Pursuant to this agreement, CFM acts as the Principal Representative
for WMA Life in Bermuda. This agreement is for an unlimited duration,
but may be terminated by either party upon 90 days prior written
notice or upon 30 days prior written notice under specified
circumstances. The Company paid $60,000 in fees during each of the
years ended December 31, 1999, 1998 and 1997 pursuant to the agreement
with CFM.
In 1995, Mr. Humphrey pledged all of his shares of the Company's
common stock in connection with a loan made by Money Services, Inc. to
WMA Agency ("Agency Loan"). Money Services, Inc. (MSI) is a subsidiary
of AEGON USA, Inc., as is Western Reserve. Part of the Agency Loan
proceeds were allocated for use by WMA Agency to make loans to certain
WMA Sales Associates ("Agent Loans") for the purpose of acquiring
shares of common stock of the Company in its 1995 offering. As of
December 31, 1999, the outstanding principal amount of the Agent Loans
was $836,626. The WMA Sales Associates' shares of common stock are
pledged to WMA Agency as security for these Agent Loans. The Agent
Loans are payable in 60 equal monthly payments of principal and
interest and may not be prepaid. The shares acquired by the WMA Sales
Associates are non-transferable during the loan term. Proxies have
been executed in favor of WMA Agency for voting such shares of common
stock for so long as the Agent Loans are outstanding. By virtue of his
ownership of WMA Agency, Mr. Humphrey is considered to be the
beneficial owner of the 400,311 shares and is able to control the
proxies relating to them.
The Agency Loan, which was in the initial amount of $2.25 million in
1995, was subsequently consolidated into a WMA Agency line of credit
facility. The maximum available amount under this line of credit was
increased in October 1999 to $22.75 million. Mr. Humphrey's pledge of
his shares of common stock is one of the various forms of collateral
for this line of credit, which as of December 31, 1999 had an
outstanding balance of $21.41 million. Upon default on this credit
line, the lender, MSI, would have the right to take title to the
pledged shares and to exercise voting control. Amounts outstanding
under this line of credit are being amortized over the period ending
November 1, 2012 with principal and interest payable monthly by WMA
Agency. Interest is calculated in arrears based on AEGON USA's cost of
its five-year senior debt instruments, which is in turn, based upon
five-year U.S. Treasury Notes, plus an underwriters' override.
Interest on the line of credit is recalculated every five years.
9. Statutory Restrictions
WMA Corporation's subsidiary, WMA Life, is a Bermuda-domiciled
insurance company and as such is subject to the restrictions of the
Bermuda Insurance Act of 1978 (the "Insurance Act"). The most
significant of these restrictions is that WMA Life must maintain a
minimum of $250,000 capital and surplus. In addition, WMA Life must
maintain a solvency margin, defined as the excess of statutory assets
over statutory liabilities, of at least $250,000. Statutory assets and
liabilities refer to those assets and liabilities recorded on the
statutory balance sheet required by the Insurance Act.
F-15
<PAGE> 51
The WMA Corporation
Notes to Consolidated Financial Statements
WMA Corporation relies, and will rely, primarily on funds retained at
the holding company level and potential dividends from WMA Life to
meet ongoing cash requirements of the holding company. The payment of
dividends by WMA Life to the Company is subject to regulatory
restrictions under Bermuda insurance law. WMA Life may not declare or
pay a dividend or make a distribution out of contributed surplus if,
among other things, there are reasonable grounds for believing that
(a) WMA Life is, or after the payment, would be unable to pay its
liabilities as they become due; or (b) the realizable value of WMA
Life's assets would thereby be less than the aggregate of its
liabilities and its issued share capital and share premium accounts.
As of December 31, 1999, WMA Life had the statutory capacity to pay
$5.21 million in dividends.
10. Commitments and Contingent Liabilities
From time to time the Company may be subject to reinsurance-related
litigation and arbitration in the normal course of business.
Management does not believe that the Company is a party to any such
pending litigation or arbitration that would have a material adverse
effect on its future operations.
The Company has obtained letters of credit in favor of unaffiliated
insurance companies with whom the Company has reinsurance agreements.
The posting of a letter of credit allows the ceding company to take
statutory reserve credit for reinsurance ceded which would otherwise
not be available as WMA Life is not "authorized" (essentially
licensed) by the ceding company's state of domicile. At December 31,
1999, the outstanding letters of credit totaled $3.84 million. The
letters of credit were issued by the Company's custodian and secured
by the Company's investments held by the custodian. In February 2000,
the Company increased the letters of credit to amounts totaling $4.89
million.
The Company currently leases office space from WMA Agency under a
sublease, which expires in 2008. Payments under this lease are $18,675
annually through January 2003. For the second five-year period, the
rate paid is subject to increase. Total lease expense for the year
ended December 31, 1999 was $18,675. The following is a schedule of
future minimum lease payments as of December 31, 1999:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
2000 $ 18,675
2001 18,675
2002 18,675
2003 18,675
Thereafter 76,256
--------
$150,956
========
</TABLE>
11. Short Term and Long Term Debt
Short-term and long-term debt at December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Line of credit - short term -- $10,000,000
Line of credit - long term $ 5,303,562 --
Convertible Term Note - 7.5% interest, principal and
interest due at July 29, 2004 5,000,000 --
----------- -----------
Total short-term and long-term debt 10,303,562 10,000,000
Less: Anticipated current maturity of line of credit 1,125,000 --
----------- -----------
Total long-term debt $ 9,178,562 $10,000,000
=========== ===========
</TABLE>
F-16
<PAGE> 52
The WMA Corporation
Notes to Consolidated Financial Statements
In 1998, the Company received short-term debt financing from MSI via a
$10 million line of credit agreement. By the end of 1998, the Company
had drawn down the entire line of $10 million. As of December 31,
1998, all outstanding balances of principal and interest under this
line of credit were due and payable on August 1, 1999, thus the amount
was classified as short-term debt. Through March 31, 1999, borrowings
under this line of credit accrued interest at the rate of 8% per
annum. Effective April 1, 1999, the outstanding interest balance of
$303,562 at March 31, 1999 was added to the outstanding principal
balance and the interest rate increased from 8% to 9%.
On July 30, 1999, the Company issued a $5 million, five year term note
to MSI due on July 29, 2004. Interest is payable at 7.5% per annum
(except in the event of redemption), on the 29th of each succeeding
January and July through and including July 29, 2004. MSI may convert,
after December 31, 1999 and prior to July 29, 2004, the outstanding
principal balance of this note into Common Stock of the Company. Upon
conversion, the number of shares of Common Stock which may be obtained
per each $100.00 of the outstanding principal amount of the note shall
be 4.17 shares. The note may be redeemed after July 29, 2002, in whole
or in part, at the Company's option, at the redemption price, which
shall include all accrued but unpaid interest to the date of
redemption. If the note is redeemed prior to July 29, 2004, interest
shall accrue on the outstanding principal amount at the rate of 9% per
annum from the date of the note through the date of redemption.
Also, on July 30, 1999, the $5 million proceeds made available from
the issuance of the term note discussed above were applied to reduce
the outstanding principal balance of the line of credit, and the line
of credit was amended such that all remaining balances of principal
and interest became due and payable upon the earlier of: (i) December
31, 1999; or (ii) the closing of the Company's offerings related to
the private sale of preferred and common stock to institutional and
other accredited investors.
Effective December 31, 1999, the line of credit was amended to extend
the maturity date and establish scheduled principal and interest
payments beginning in February 2000. Under the amended terms, the
outstanding balance of $5,303,362 and related accrued interest is
payable commencing February 15, 2000 and continuing on the 45th day
after the close of each calendar quarter thereafter until the entire
outstanding balance and accrued interest is paid in full. Quarterly
principal and interest payments shall be an amount equal to the
greater of (A) the lesser of (i) $500,000 or (ii) 90% of the quarterly
reinsurance settlements due from Western Reserve under the VUL
coinsurance and modified coinsurance agreement with respect to
policies reinsured during calendar year 1998; or (B) 75% of the
quarterly reinsurance settlements described in (A)(ii). At December
31, 1999, the anticipated payment amounts for the four quarters of
2000, which will vary as described above and which represent the
current maturities of the long-term debt, are reflected as short-term
debt.
12. Comprehensive Income
The following table sets forth the amounts of other comprehensive
income (loss) along with the related tax effects allocated to other
comprehensive income (loss) for the years ended December 31, 1999,
1998 and 1997:
<TABLE>
<CAPTION>
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------ ------- ------
1999
----
<S> <C> <C> <C>
Net unrealized holding losses arising during period ($366,622) 124,653 ($241,969)
Plus: reclassification adjustment for losses
realized in net income (66,000) 22,440 (43,560)
--------- ------- ---------
Other comprehensive loss ($432,622) 147,093 ($285,529)
========= ======= =========
</TABLE>
F-17
<PAGE> 53
The WMA Corporation
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------ ------- ------
1998
----
<S> <C> <C> <C>
Net unrealized holding gains arising during period $396,317 (134,748) $261,569
Less: reclassification adjustment for gains realized
in net income 267,063 (90,801) 176,262
-------- -------- -------
Other comprehensive income $129,254 (43,947) $ 85,307
======== ======== ========
1997
----
Net unrealized holding gains arising during period $429,259 (145,948) $283,311
Less: reclassification adjustment for gains realized
in net income -- -- --
-------- -------- --------
Other comprehensive income $429,259 (145,948) $283,311
======== ======== ========
</TABLE>
13. Segment Reporting
The Company has two reportable segments: non-universal life-type
agreements and universal life-type agreements.* The reportable
segments are determined based on the nature of the reinsurance
treaties and the accounting treatment used for the various reinsurance
treaties. The Company reinsures variable universal life policies on a
monthly renewable term ("MRT") basis. MRT reinsurance involves the
reinsurance of mortality risk whereby premiums are not directly
related to the premium rates on the original plan of insurance and the
ceding company is liable for the total net amount of risk of the
policies reinsured. The Company's MRT agreements are accounted for
under FAS 60 accounting principles. The Company reinsures variable
annuity contracts and variable universal life policies on a
coinsurance and modified coinsurance basis. Coinsurance involves the
reinsurance of mortality and investment risks on the same basis as
that of the underlying policies. The ceding life companies and the
Company share in these risks in the same manner. The Company's
existing coinsurance and modified coinsurance agreements are accounted
for under FAS 97 accounting principles. Items not directly related to
the business segments and unallocated corporate items (i.e. other
income, interest expense on corporate debt and unallocated operating
expenses) are shown separately, consistent with the Company's internal
measurement process. Segment assets reported include those assets
directly attributable to the reinsurance treaties such as reinsurance
balances receivable, deferred acquisition costs, policy loans, prepaid
expenses, invested assets and cash. Invested assets are allocated to
the treaties based upon the letters of credit posted in support of the
statutory reserves held which is consistent with the Company's
internal measurement process.
- ---------------
* Non-universal life-type agreements and universal Life-type agreements are
referenced in FAS 97, Accounting and Reporting by Insurance Enterprises for
Certain Long-duration Contracts and for Realized Gains and Losses from the Sale
of Investments, paragraphs 44 and 45.
F-18
<PAGE> 54
The WMA Corporation
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
SEGMENT REPORTING
Years Ended December 31 1999 1998
- ----------------------- ---- ----
- ----------------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands) Non- Non-
Universal Universal Universal Universal
Life-type Life-type Other Total Life-type Life-type Other Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Premiums $9,693 -- -- $ 9,693 $7,280 -- -- $ 7,280
Reinsured policy revenues -- 13,506 -- 13,506 -- 4,098 -- 4,098
Benefits, claims and settlement expenses 3,215 1,610 -- 4,825 3,416 26 -- 3,442
Reinsurance premium allowances, net 2,775 2,588 -- 5,363 1,943 974 -- 2,917
Amortization of deferred acquisition cost 171 3,618 -- 3,789 149 1,393 -- 1,542
Loss on recapture of business -- 823 -- 823 -- -- -- --
------ ------ ----- -------- ------ ------ ----- -------
Underwriting profit 3,532 4,867 -- 8,399 1,772 1,705 -- 3,477
Net investment income 118 132 100 350 142 75 733 950
Net realized gain (loss) on investments -- -- (66) (66) -- -- 267 267
Other expenses 22 422 1,693 2,137 18 121 1,159 1,298
------ ------ ----- -------- ------ ------ ----- -------
Segment operating income (loss) before
income tax 3,628 4,577 (1,659) 6,546 1,896 1,659 (159) 3,396
Income tax expense (benefit) 1,234 1,556 (564) 2,226 645 564 (52) 1,157
------ ------ ----- -------- ------ ------ ----- -------
Segment net income (loss) $2,394 3,021 (1,095) $ 4,320 $1,251 1,095 (107) $ 2,239
====== ====== ===== ======== ====== ====== ===== =======
Segment assets $7,762 40,220 1,026 $ 49,008 $5,527 31,774 7,580 $44,881
====== ====== ===== ======== ====== ====== ===== =======
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1997
----
- -------------------------------------------------------------------------------------------
(Amounts in thousands) Non-
Universal Universal
Life-type Life-type Other Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums $ 5,217 -- -- $ 5,217
Reinsured policy revenues -- 195 -- 195
Benefits, claims and settlement expenses 2,409 -- -- 2,409
Reinsurance premium allowances, net 1,492 20 -- 1,512
Amortization of deferred acquisition cost (25) 88 -- 63
Loss on recapture of business -- -- -- --
------- ----- ------ -------
Underwriting profit 1,341 87 -- 1,428
Net investment income 108 -- 979 1,087
Net realized gain (loss) on investments -- -- 300 300
Other expenses -- 9 471 480
------- ----- ------ -------
Segment operating income (loss) before
income tax 1449 78 808 2,335
Income tax expense (benefit) 493 26 297 816
------- ----- ------ -------
Segment net income (loss) $ 956 52 511 $ 1,519
======= ===== ====== =======
Segment assets $ 4,645 2,843 17,577 $25,065
======= ===== ====== =======
- -------------------------------------------------------------------------------------------
</TABLE>
During 1999, 1998, and 1997, the percentage of total premiums and reinsured
policy revenues which relate to Western Reserve is 87%, 89% and 95%,
respectively. The percentage of the total underwriting profit which relates to
Western Reserve for 1999, 1998 and 1997 is 83%, 83% and 91%, respectively.
The Company estimates that approximately 44% of VUL premiums and 30% of
variable annuity premiums, written through Western Reserve and sold by WMA
Agency, originated in California.
F-19
<PAGE> 55
SIGNATURES
In accordance with section 13 or 15(d) of the Exchange Act, the
registrant caused this amended report to be signed on its behalf by the
undersigned, thereunto duly authorized.
(Registrant) The WMA Corporation
--------------------------------
By (Signature and Title) /s/ S. Hubert Humphrey, Jr.
--------------------------------
S. Hubert Humphrey, Jr.,
President and Director
Date: March 30, 2000
--------------
In accordance with the Exchange Act, this amended report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
By (Signature and Title) /s/ S. Hubert Humphrey, Jr.
--------------------------------
S. Hubert Humphrey, Jr.,
President and Director
Date: March 30, 2000
--------------
By (Signature and Title) /s/ Thomas W. Montgomery
------------------------------
Thomas W. Montgomery,
Executive Vice President, Secretary and Director
Date: March 30, 2000
--------------
By (Signature and Title) /s/ Edward F. McKernan
-------------------------------
Edward F. McKernan,
Senior Vice President, Chief Financial Officer,
Actuary and Director
Date: March 30, 2000
--------------
<PAGE> 1
EXHIBIT 10.2
Amendment Number 2 to the
Automatic Flexible Premium Variable Life Reinsurance Agreement Number 2
(Referred to as the Agreement)
Between
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
St. Petersburg, Florida
(referred to as the Reinsured)
and
WMA LIFE INSURANCE COMPANY LIMITED
Hamilton, Bermuda
(referred to as the Reinsurer)
Effective October 1, 1999
Schedule B2, AMOUNT OF REINSURANCE, is replaced by the following:
The amount of reinsurance under this Agreement shall be the Reinsurer's
quota share percentage shown below of the liability of the Reinsured on
all life insurance policies and riders in the forms listed in Schedule
A, Business Reinsured.
Quota Share Percentages for Issue Dates in 1998, 1999, and 2000: For
issue dates in 1998, the quota share percentage will be 20%.
The quota share percentage shall be 0%, commencing as of the effective
date of this amendment, for policies issued from January 1, 1999
through September 30, 1999 previously reinsured on a 20% quota-share
basis. Pursuant to Amendment Number 1 to the Agreement, Article XVI,
RECAPTURE, Paragraph 1, the Reinsured elects to recapture one hundred
percent (100%) of the Reinsured Policies issued from January 1, 1999,
through September 30, 1999. The Reinsured will pay the Reinsurer a
Recapture Fee equal to (a) plus (b) plus (c), where:
(a) equals $13,355,774 plus accrued interest at an effective rate
of 9%, which shall accrue from October 1, 1999 to the date
such amount is settled and paid, which shall be paid no later
than January 31, 2000,
(b) equals $458,456 plus accrued interest at an effective rate of
6.5%, which shall accrue from October 1, 1999 to the date such
amount is settled and paid, which shall be paid no later than
January 31, 2000, and
<PAGE> 2
(c) equals $482,441 plus accrued interest at an effective rate of
6.5%, which shall accrue from November 3, 1999 to the date
such amount is settled and paid, which shall be paid no later
than January 31, 2000.
The Reinsured may offset the Recapture Fee against amounts otherwise
due the Reinsured.
For policies issued from October 1, 1999 through December 31, 2000, the
quota share percentage will be 0%.
Quota Share Percentages for Issue Dates in 2001 and later:
Notwithstanding the provisions of the previous three paragraphs and at
any time, on or after January 1, 2000 and before April 1, 2003, the
Reinsurer shall have the option (provided the Reinsurer demonstrates
sufficient capacity) to convert the reinsurance on all policies and
riders reinsured under the Automatic Flexible Premium Variable Life
Reinsurance Agreement Number 3 ("FFB MRT Agreement"), issued from the
beginning of the prior calendar year to the date the Reinsurer elects
to convert the reinsurance on the policies and riders, to the
Agreement. The Reinsurer shall demonstrate its capacity by showing the
Reinsured that its unassigned invested securities, together with
anticipated cash flows (including retrocession facilities), will be
sufficient to meet expected reinsurance settlements, with regard to the
converted reinsurance on the policies and riders, for a period of not
less than twenty-four months following the date the Reinsurer elects to
convert the reinsurance of the policies and riders from the FFB MRT
Agreement to the Agreement. Upon election to convert the reinsurance on
the policies and riders, the initial ceding allowance payable to the
Reinsured shall equal (a) less (b) less (c), where:
(a) equals settlements that would have otherwise occurred under
the Agreement, had the policies and riders been reinsured
under the Agreement from the beginning of the prior calendar
year to the date the Reinsurer elects to convert the
reinsurance on the policies and riders from the FFB MRT
Agreement, accrued at an effective rate of * %, and
(b) equals all settlements due or paid under the FFB MRT Agreement
from the beginning of the prior calendar year to the date the
Reinsurer elects to convert the reinsurance on the policies
and riders to the Agreement from the FFB MRT Agreement,
accrued at an effective rate of *%.
(c) equals the settlement paid for business that was recaptured
for quarters one through three of 1999 under the Co/ModCo
Agreement. This amount is $458,456 measured from October 1,
1999 or $482,441 measured from November 3, 1999, accrued at an
effective rate of * %. This settlement is applicable only
during Year 2000.
The initial ceding allowance shall be payable within 14 days after the
Reinsurer's election to convert the reinsurance of the policies and
riders.
- ------------------
* Material omitted pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934.
<PAGE> 3
The Reinsurer and the Reinsured will jointly determine the quota share
percentages for the balance of the calendar year in which the Reinsured
converts the reinsurance on the policies and riders reinsured under the
FFB MRT Agreement to the Agreement. Thereafter, the Reinsurer and the
Reinsured will jointly determine the quota share percentages no later
than December 1st applicable to new issues in the following calendar
year. The determining factors for the quota share percentage are the
expected WMA Total Flexible Premium Variable Life First Year Target
Premiums Collected by the Reinsured for the calendar year that the
quota share percentage will be applicable. This determination of the
quota share percentage will be on a mutually acceptable basis,
recognizing the good faith nature of this Agreement, and with
references to the estimates made by both parties, based on results from
prior periods.
The Scheduled Quota Share Percentages for each threshold of expected
WMA Total Flexible Premium Variable Life First Year Target Premiums
Collected by the Reinsured are shown in the following table:
<TABLE>
<CAPTION>
----------------------------------------------------------
WMA TOTAL FLEXIBLE PREMIUM VARIABLE LIFE SCHEDULED
FIRST YEAR TARGET QUOTA SHARE
PREMIUMS COLLECTED PERCENTAGE
BY THE REINSURED (IN MILLIONS)
----------------------------------------------------------
<S> <C>
$50-149 20%
----------------------------------------------------------
$150-199 25%
----------------------------------------------------------
$200-249 30%
----------------------------------------------------------
$250-599 35%
----------------------------------------------------------
$600+ 40%
----------------------------------------------------------
</TABLE>
* * * * *
Except as expressed herein, all terms, covenants and provisions of the Automatic
Flexible Premium Variable Life Reinsurance Agreement Number 2 that are not in
conflict with the provisions of this amendment shall remain unaltered and in
full force and effect.
In witness of the above, the Reinsured and the Reinsurer, by their respective
officers have executed this amendment in duplicate at the dates and places
indicated and shall be effective as of October 1, 1999.
WESTERN RESERVE LIFE WMA LIFE INSURANCE
ASSURANCE CO. OF OHIO COMPANY LIMITED
at St. Petersburg, Fl at Kamuela, Hawaii
on March 16, 2000 on March 20, 2000
By: /s/ Larry Kirkland By: /s/ Edward F. McKernan
----------------------------------- ---------------------------
Title: VP & Managing Actuary Title: Vice President
By: /s/ Alan Yaeger By: /s/ Thomas W. Montgomery
----------------------------------- ---------------------------
Title: EVP Title: Vice President
<PAGE> 1
EXHIBIT 10.3
Automatic Flexible Premium Variable Life Reinsurance Agreement Number 3
(Referred to as this Agreement)
Between
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
St. Petersburg, Florida
(referred to as the Reinsured)
and
WMA LIFE INSURANCE COMPANY LIMITED
Hamilton, Bermuda
(referred to as the Reinsurer)
Effective October 1, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE TITLE PAGE
----
<S> <C>
I. BASIS OF REINSURANCE 3
II. DEFINITIONS 3
III. LIABILITY 5
IV. THE AMOUNT REINSURED 6
V. REDUCTION AND TERMINATIONS 6
VI. PREMIUMS 6
VII. PAYMENTS BY REINSURER 7
VIII. REPORTING 7
IX. REINSURANCE RESERVES 7
X. SETTLEMENT OF CLAIMS 8
XI. GENERAL PROVISIONS 10
XII. REINSTATEMENTS 14
XIII. POLICY CHANGES 14
XIV. RECAPTURE 14
XV. ARBITRATION 14
XVI. IMPROPER SOLICITATION OF REINSURED PLAN OWNERS 15
XVII. DAC TAX (Section 1.848-2(g)(8) Election) 15
XVIII. DURATION OF AGREEMENT 16
XIX. CONVERSION 17
XX. WRITTEN NOTICE 18
XXI. EXECUTION 19
</TABLE>
2
<PAGE> 3
The Reinsured and the Reinsurer mutually agree to reinsure on the terms
and conditions set out below.
I. BASIS OF REINSURANCE
1. Insurance. The reinsured will cede on an automatic basis and
the Reinsurer will accept as reinsurance the individual
Reinsured Plans (policies) written by the Reinsured as shown
in Schedule A1. The Reinsured shall have the right to amend
the Automatic Acceptance Limits if the Reinsured modifies its
Retention Limits, as shown in Schedule A2.
2. Risks are reinsured on a monthly renewable term plan basis.
The Reinsurance Premiums shall be payable on a monthly
renewable term basis, with quarterly settlements as described
in Article III, Liability.
3. Coverages. The individual Reinsured Plans reinsured as shown
in Schedule A1, are the Financial Freedom Builder contracts
and any riders, supplemental benefits or endorsements attached
thereto, with an issue date on or after January 1, 1999.
Reinsurance will be limited in percentage as provided in
Schedule B1. Only plans sold by a Producer registered with an
affiliated broker-dealer identified in Exhibit A shall be
reinsured under this Agreement.
4. In no event shall reinsurance under this Agreement be in force
with respect to a Reinsured Plan unless the issuance and
delivery of the Reinsured Plan is in compliance with the laws
of all applicable jurisdictions and the Reinsured's corporate
charter.
5. The Reinsured declares and agrees that all Reinsured Plans and
benefits covered under this Agreement shall be issued in
accordance with its normal practices in effect when the
Reinsured Plan is issued. These practices will be provided to
the Reinsurer on request. The Reinsured will also notify the
Reinsurer of any material changes made to these practices
before applying them to Reinsured Plans and benefits covered
by this Agreement.
6. Reinsurance Outside This Agreement. The Reinsured retains the
right to reinsure, with any reinsurer, any or all of its plans
or coverages automatically in excess of the Reinsured's normal
retention and facultatively, where appropriate. The Reinsured
agrees to notify the Reinsurer in writing of any change in its
normal retention schedule that may affect the Reinsured Plans.
II. DEFINITIONS
"AMOUNT REINSURED" OR "AMOUNT OF REINSURANCE" means the amount of
reinsurance ceded by the Reinsured to the Reinsurer under this Agreement on the
life of an insured person(s). It is the amount of life insurance ceded for which
the Reinsurer is at risk under this Agreement on the life of the insured
person(s). The Amount Reinsured per insured life is calculated as set forth in
Paragraph 1 of Article IV, The Amount Reinsured.
"ARTICLE" OR "PARAGRAPH" refers to an Article or Paragraph of this
Agreement.
3
<PAGE> 4
"CASH VALUE" has the same meaning ascribed to it in a reinsured policy.
"THE CO/MODCO AGREEMENT" shall mean the Automatic Flexible Premium
Variable Life Reinsurance Agreement Number 2 between the Reinsured and the
Reinsurer, as amended.
"EFFECTIVE DATE", with respect to Reinsured Plans, means the date shown
in Article XXI, Execution. The Reinsured is liable for Reinsurance Premiums,
less applicable Reinsurance Allowances, due on or after the Effective Date of a
Reinsured Plan; and the Reinsurer is liable for any reinsured benefits occurring
on or after the Effective Date.
"EXECUTION DATE" means the date as of which this Agreement has been
executed, as shown in Article XXI, Execution.
"EXHIBIT" AND "SCHEDULE" mean, respectively, an exhibit or schedule
attached to this Agreement and shall be considered part of this Agreement.
"EXPERIENCE REFUND" means the portion of the reinsurance premium that
is returned to the Reinsured when claims experience is better than expected when
the premium was calculated. The experience refund, if any, shall be calculated
as shown in Schedule B3.
"FIXED ACCOUNT" means allocation option(s) other than the Separate
Account.
"FIXED ACCOUNT VALUE" means the value of the Fixed Account on any
valuation date.
"MONTHIVERSARY" has the same meaning ascribed to it in a reinsured
policy. It is the day of each calendar month coinciding with a policy's Policy
Date.
"MONTHLY COST OF INSURANCE" means the monthly cost of insurance for the
reinsured policy together with the charge for benefits provided by riders
attached to the reinsured policy.
"PARTY" or "PARTY" refers to either the Reinsured or the Reinsurer as
appropriate, and PARTIES refers to both collectively.
"POLICY DATE" means the policy date as set forth in the Policy Schedule
of a reinsured policy. It is the date coverage is effective under the Policy.
Policy months, years, Monthiversaries and anniversaries are measured from the
Policy Date.
"PRODUCER" means a licensed representative with a broker-dealer
identified in Exhibit A.
"REINSURED PLAN" means any life insurance policy form or rider form
reinsured under this Agreement, as set forth in Schedule A1.
"SEPARATE ACCOUNT" means a separate investment account shown on the
Policy Schedule page which is composed of several sub-accounts established to
receive and invest net premiums under the policy.
4
<PAGE> 5
"SERIES FUND" means a designated mutual fund from which each
sub-account of the Separate Account will buy shares.
"SETTLEMENT INTEREST RATE" means the interest rate for ninety (90) day
dealer commercial paper as published in The Wall Street Journal or a successor
or substitute publication, as agreed upon by both parties if The Wall Street
Journal should cease to exist. The Settlement Interest Rate for a given month
will be the Settlement Interest Rate published on the fifteenth (15th) of the
month or the next following business day if the fifteenth (15th) of the month is
not a publication date of The Wall Street Journal.
"SPECIFIED AMOUNT" means the Specified Amount as set forth in the
Policy Schedule of a reinsured policy.
"STATUTORY RESERVES AND LIABILITIES" refers to statutory reserves and
liabilities associated with the ceded risk for the reinsured contracts.
"SUB-ACCOUNT" means a subdivision of the Separate Account. Each
Sub-account invests exclusively in the shares of a specified Series Fund
portfolio.
III. LIABILITY
1. The liability of the Reinsurer on any reinsurance under this
Agreement begins upon the effective date of this Agreement as
set forth in Article XXI, Execution and ends after all
Reinsured Plans reinsured have been terminated or recaptured,
as set forth in Article XIV, Recapture.
2. The liability of the Reinsurer to the Reinsured under this
Agreement will be coexisting with the liability of the
Reinsured under the Reinsured Plans reinsured. In no event
shall the Reinsurer's liability for reinsurance continue after
termination of the Reinsured's liability for any claims
relating to its corresponding Reinsured Plans.
3. For a Reinsured Plan or rider reinsured under this Agreement:
(i) the liability of the Reinsurer under this Agreement shall
commence simultaneously with the beginning of the Reinsured's
liability under each corresponding Reinsured Plan or any
application or conditional receipt therefor; and (ii) the
liability of the Reinsured for Reinsurance Premiums under this
Agreement shall begin as of the Policy Date of the reinsured
policy or as of the effective date of reinsured rider, if
different. The Reinsured represents that its normal
underwriting practice is to promptly return any premium
payment taken with an application which the Reinsured has
declined without a counteroffer; however, failure of the
Reinsured to do so shall not relieve the Reinsurer for its
liability under this Paragraph.
4. In no event shall the Reinsurer's liability for reinsurance
continue after termination of the Reinsured's liability for
any claims relating to its corresponding reinsured policy or
rider.
5. On an ongoing basis the liability of the Reinsurer,
reinsurance premiums, reinsurance allowances, benefits and
other items due to or from each party shall be accounted for
and settled and paid quarterly on the basis of the quarterly
reports prepared by the Reinsured in the form of Schedule E5
and sent to Reinsurer via facsimile transmission or such other
medium mutually acceptable to both parties. Also included will
be any adjustments made necessary by changes in reinsurance
effective during the previous quarter, or changes due
5
<PAGE> 6
to any agreed upon errors on a previous report. Payment of any
amount due to be paid by the Reinsurer or the Reinsured shall
be determined on a net basis and shall be paid, in United
States currency, within two (2) weeks after receipt by
Reinsurer of the quarterly report.
6. The settlement, as shown in Schedule E5 will include interest
on monthly reinsurance premiums and allowances accruing from
the fifteenth (15th) of every month to the settlement date.
The interest rate will be the Settlement Interest Rate of the
month named on each Schedule E1 in the quarter. Interest will
be earned from the fifteenth (15th) of the month named on each
Schedule E1 of the quarter to the next following settlement
date.
IV. THE AMOUNT REINSURED
1. The Amount Reinsured will be the quota share percentage, as
specified in Schedule B1, of the death benefit and all other
benefits provided by the Reinsured Plan, including any riders,
supplementary benefits or endorsements attached thereto, as
specified in Schedule A1, less the cash value.
V. REDUCTIONS AND TERMINATIONS
1. If any of the Reinsured Plans reinsured under this Agreement
are reduced or terminated by payment of a death benefit,
withdrawal, surrender or termination due to lapsation,
maturation or expiration of the Reinsured Plan, the
reinsurance will be reduced proportionately. Any policy change
which affects the Death Benefit Proceeds, such as a change in
Option Type, a change in the policy's Specified Amount, a
change in the Face Amount of a rider, or an addition or
deletion of a rider, will result in a proportional change in
the Amount Reinsured. If the change affects the plan, the
amount of reinsurance, premiums, or policy changes under
cession, the Reinsured shall inform the Reinsurer in
subsequent Reinsurance Reports.
2. With regard to liability of the Reinsured under the terms of
an application for a policy or rider to be reinsured under
this Agreement or under the terms of a conditional receipt
issued in connection with such application, the liability of
the Reinsurer under this Agreement shall be equal to the quota
share percentage of the Reinsured's liability, plus any
amounts for which the Reinsurer is responsible under Article
III, Liability.
3. For purposes of Paragraph 1 of this Article, changes in a
policy's death benefit which are due to normal cash value
fluctuation shall be calculated and reported quarterly as
described in Article VIII, Reporting. Other changes in the
Amount Reinsured due to a policy change shall be recalculated
and reported under this Agreement in or for the quarter in
which the policy change occurs. For this purpose, such policy
changes may include, for example, a change in Option Type, a
change in the policy's Specified Amount, a change in the Face
Amount of a rider, and an addition or deletion of a rider.
VI. PREMIUMS
1. The premium to be paid to the Reinsurer by the Reinsured with
respect to each reinsured policy, as specified in Schedule A1,
will be the quota share percentage, as specified in Schedule
B1 of the total amount "Due WMA", as shown in Schedule E5.
6
<PAGE> 7
VII. PAYMENTS BY REINSURER
1. The Reinsurer shall pay to the Reinsured the Reinsurer's quota
share percentage of the total amount "Due WRL", as shown in
Schedule E5.
VIII. REPORTING
1. The Reinsured shall assume responsibility for the
administration of all reinsurance under this Agreement and
will provide the Reinsurer with information as set forth in
Schedules E1 through E6, and Schedule K of this Agreement. The
Reinsurer may request, at its option, to review, at the
administrative office of the Reinsured, any papers associated
with the issuance of any Reinsured Plan subject to Automatic
Reinsurance under this Agreement.
2. Not later than twenty (20) days after the end of each quarter,
the Reinsured will submit a report substantially in accordance
with Schedule E2, E3, and E5. The Reinsured agrees to provide
or make available to the Reinsurer such documentation as may
be necessary to support the items reported.
3. Not later than twenty (20) days after the end of each month,
the Reinsured will submit a report substantially in accordance
with Schedules E1, E4 and K.
4. Not later than thirty (30) days after the end of each calendar
year, the Reinsured will submit a report substantially in
accordance with Schedule E6.
5. Not later than ninety (90) days after the end of each calendar
year, the Reinsured will provide a copy of its statutory
statement as filed with the State of Ohio.
6. Not later than one hundred twenty (120) days after the end of
each calendar year, the Reinsurer will provide a copy of The
WMA Corporation Form 10-K.
7. Not later than sixty (60) days after the end of each quarter,
the Reinsurer will provide a copy of The WMA Corporation Form
10-Q.
IX. REINSURANCE RESERVES
1. The Reinsurer will set up Statutory Reserves and Liabilities
not less than the reduction taken by the Reinsured for the
reinsured contracts.
2. For purposes of Paragraph 1 of this Article, the Statutory
Reserves shall be calculated by the Reinsured according to the
"Commissioners Reserve Valuation Method," as prescribed in the
NAIC Standard Valuation Law and approved by the State of Ohio
Department of Insurance. The Statutory Reserves and
Liabilities will include the reserves for any supplemental
benefits and riders.
3. In the event the Reinsurer is not licensed or otherwise
accredited or authorized as a reinsurer in the State of Ohio,
and in any other jurisdiction where the Reinsured is
7
<PAGE> 8
licensed to do business, the Reinsurer agrees to provide
Letter(s) of Credit or other forms of security acceptable to
the State of Ohio otherwise available. Such Letter(s) of
Credit or other method(s) shall be issued in compliance with
the statutes and regulations of the State of Ohio and shall be
issued by a financial institution located in the United States
chosen by the Reinsurer, which has applied for and has met the
standards of financial conditions set forth by the NAIC's
Securities Valuation Office.
4. The Letter(s) of Credit in favor of the Reinsured will be an
amount which at all times must equal or exceed the reinsurance
credits taken or reasonably estimated to be taken by the
Reinsured in connection with this Agreement under Exhibit 8,
and under Exhibit 11, Part 1, Column 3, Line 4c, and any other
liabilities held for the Reinsured Policies and reported on
the Reinsured's statutory financial statements.
5. The Letter(s) of Credit shall be substantially in the form set
forth in Exhibit B or in such other form as the Ohio Insurance
Department or other applicable state Insurance Department may
require or permit. The terms of the Letter(s) of Credit shall
provide that: it is not conditioned on the delivery of any
other documents or materials; it is irrevocable without the
consent of the Reinsured; it is automatically renewable as
provided in Exhibit B; and its initial term is for a period of
not less than one (1) year. Such Letter(s) of Credit may be
drawn upon at any time, notwithstanding any other provisions
in this Agreement, but shall be utilized by the Reinsured or
its successors only for one or more of the following reasons:
(i) to fund an account on behalf of the Reinsured in an
amount at least equal to the deduction, for
reinsurance ceded, from the Reinsured's reserves and
liabilities for Reinsured Plans, as specified in this
Article; and
(ii) to pay any other amounts the Reinsured claims are due
under this Agreement.
6. Such Letter(s) of Credit shall be promptly issued and
delivered to the Reinsured; but in no event shall the
Letter(s) of Credit be issued or confirmed later than December
31st in respect of the year for which the Reinsured is taking
credits for such reinsurance in its statutory financial
statements, and in no event shall the Letter(s) of Credit be
delivered to the Reinsured later than thirty (30) days after
such December 31st.
X. SETTLEMENT OF CLAIMS
1. Notice. On a monthly basis, the Reinsured shall provide notice
to the Reinsurer of any death claims reported, paid, or
outstanding in a report in the form of Schedule K. On a
quarterly basis, the Reinsured shall account to the Reinsurer
for any death claims due, as provided in Paragraph 1 of
Article IV, The Amount Reinsured. Reinsured agrees to furnish
Reinsurer with copies of the proof of loss or other written
materials relating to a specific claim upon request of
Reinsurer or as provided in Paragraph 5 of this Article.
2. Standard Claim Practices. Reinsured agrees to act in accord
with its standard practices applicable to all claims in
enforcing the terms and conditions of the reinsured policies
or reinsured riders and with respect to the administration,
negotiation, payment, denial, or settlement of any claim or
legal proceeding.
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<PAGE> 9
3. Payment and Settlement of Claim. Reinsurer agrees to accept
the good faith decision of the Reinsured in payment or
settlement of any claim for which Reinsurer has received the
required notice. Reinsurer agrees to pay Reinsured the Amount
Reinsured on which Reinsurance Premiums have been computed
upon receiving proper evidence the Reinsured has paid a policy
claim.
4. Reinsurer's Liability for Covered Claim Expenses. Except as
provided in Paragraph 5 of this Article, Reinsurer's liability
shall include indemnification of the quota share percentage of
any covered claim expenses incurred by Reinsured in defending
or investigating a policy claim. Covered claim expenses are in
addition to the claim expense allowance and shall include, but
not be limited to, cost of investigation, legal fees, court
costs and interest charges and cost of interpleader
proceedings. Covered claim expenses shall not include:
a) Compensation of salaried officers and employees; and
b) routine investigative expenses of incontestable
claims.
5. Contested, Litigated or Compromised Claims. The Reinsured
shall promptly notify Reinsurer of its intention to contest,
compromise or litigate any claim on a Reinsured Plan or its
intention to investigate or defend any litigation initiated
against the Reinsured in response to the Reinsured's denial of
a claim on a Reinsured Plan. With or immediately following
such notice, the Reinsured shall furnish Reinsurer with copies
of written materials relating to such claim. Reinsurer shall
promptly notify Reinsured of its decision whether or not to
accept any such action. If Reinsurer declines to accept any
such action, it will pay the full Amount Reinsured, as if
there had been no such contest, compromise or litigation, and
will be fully discharged as of the date of such payment from
any further liability on that claim under Paragraph 4 of this
Article. If the Reinsurer accepts such action, then: (i)
Reinsurer shall continue to share in the covered claim
expenses as described in Paragraph 4; (ii) the Reinsured shall
keep the Reinsurer informed of the status of any legal
proceeding or settlement negotiations in connection with such
claim; and (iii) if the contest or compromise reduces the
amount of the Reinsured's liability, the Reinsurer's liability
shall be reduced to its quota share percentage of the reduced
amount.
6. Recovery from Third Party. The Reinsured shall promptly notify
Reinsurer if the Reinsured should assert or bring a claim or
action against a third party for contribution, indemnification
or similar grounds to recover from the third party any monies
paid or expenses incurred by the Reinsured in connection with
a policy claim reinsured under this Agreement. Upon request,
the Reinsured shall furnish Reinsurer with copies of written
materials relating to such third party claim or action.
Reinsurer shall promptly notify Reinsured of its decision
whether or not to share in the expenses and potential recovery
of any such proceeding. If Reinsurer declines to so accept any
such proceeding, Reinsurer shall not participate in any costs
of such proceeding and shall not share in any monies so
recovered by the Reinsured. If the Reinsurer accepts such
action, then the Reinsurer shall continue to share in the
expenses of that proceeding and the Reinsurer shall share in
any monies recovered by the Reinsured. The Reinsured shall
keep the Reinsurer informed of the status of such proceeding
or settlement negotiations in connection with such proceeding.
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<PAGE> 10
7. Adjustments for Misstatements. If the amount claimed as death
benefit under a reinsured policy or reinsured rider is
increased or reduced because of a misstatement of age, sex or
smoker status, the Reinsured Amount will be calculated based
on the adjusted amount of death benefit and the Amount
Reinsured will, if applicable, be increased or decreased
proportionately.
8. Interest. If the Reinsured pays interest on a claim, Reinsurer
agrees to pay the interest on the Amount Reinsured computed at
the same rate and for the same period as that paid by the
Reinsured, but in no event later than the date the claim is
finally adjudicated by the Reinsured.
9. Statutory Penalties. If the Reinsured is required to pay
penalties or interest imposed automatically by statute, other
than penalties or interest arising from Reinsured's negligent
or intentional violation of such a statute, Reinsurer shall
indemnify the Reinsured for the quota share percentage of such
penalties and interest.
10. Terminal Illness Accelerated Death Benefit Rider. The
Reinsurer shall participate in any claim under any Terminal
Illness Accelerated Death Benefit Rider in connection with the
Reinsured Plans. A claim for accelerated death benefits shall
be treated under this Agreement as though it were a death
claim and as though the death occurred on the date the claim
was made. If the claimant elects to take less than 100% of the
benefit under the Terminal Illness Accelerated Death Benefit
Rider and the reinsured policy thereby remains in force, then
the Reinsurer shall pay the Reinsured for the Terminal Illness
Accelerated Death Benefit Rider an amount equal to the
accelerated percentage elected by the claimant multiplied by
the present value, calculated in accordance with the rider
form, of the Amount Reinsured; and the reduced Amount
Reinsured for the policy shall be equal to the original Amount
Reinsured reduced by the same percentage used to calculate the
benefits paid under the Terminal Illness Accelerated Death
Benefit Rider.
XI. GENERAL PROVISIONS
1. Parties to Agreement. This Agreement is a contract solely
between the Reinsurer and the Reinsured. The acceptance of
reinsurance hereunder shall not create any right or legal
relation between the Reinsurer and the insured, beneficiary,
or any other party to any Reinsured Plan hereunder.
2. Reinsurance Conditions. The reinsurance is subject to the same
limitations and conditions as the insurance under the
Reinsured Plan written by the Reinsured on which the
reinsurance is based.
3. Expenses. The Reinsurer will not have liability for any
extra-contractual damages which are rendered against the
Reinsured as a result of acts, commission or course of conduct
committed by a Producer of an affiliated broker-dealer
identified in Exhibit A, in connection with the Reinsured
Plans. In no event whatsoever will the Reinsured have any
liability for extra-contractual damages assessed against the
Reinsurer as a result of acts, omissions, or course of conduct
committed by the Reinsurer in connection with the reinsurance
of the Reinsured Plans under this Agreement.
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<PAGE> 11
4. Oversights. If failure to pay any premium due or to perform
any other act required by this Agreement is unintentional and
is caused by misunderstanding oversight or clerical error, the
Reinsured and the Reinsurer shall be restored to the position
they would have occupied had the misunderstanding, oversight
or clerical error not occurred.
5. Inspection. The Reinsured and the Reinsurer, their auditors
and any regulators having authority over the Reinsured and/or
the Reinsurer, shall have the right, at all reasonable times,
and at their expense, to inspect at the office of the other
party all books, records, procedures, and documents of the
other party relating to this Agreement. A party or its auditor
conducting such inspection shall give the other party one (1)
week advance written notice. The Reinsured, its auditors and
regulators shall have the same right to inspect, verify and
value any assets held in a trust account or otherwise held
for the benefit of the Reinsured. The party being audited or
inspected agrees to cooperate in the audit, including
providing any information requested by the other party or its
auditor in advance of the audit or inspection. Upon request,
the Reinsured agrees to permit the Reinsurer, at all
reasonable times and at Reinsurer's expense, to inspect at
the office of the Reinsured, any underwriting information in
the Reinsured's files pertaining to a reinsured policy or
reinsured rider.
It is mutually agreed by the Reinsured and the Reinsurer that
any information that is made available for inspection under
this section of the Agreement shall, to the extent legally
possible, be kept confidential and under no circumstances may
this information be disclosed to, or made available for
inspection by, any third party without the prior consent of
the other contracting party.
6. Assignment or transfer. In no event shall either the Reinsured
or the Reinsurer assign any of its rights, duties or
obligations under this Agreement without the prior written
approval of the other party. Such approval shall not
unreasonably be withheld.
In no event shall either the Reinsured or the Reinsurer
transfer either the Reinsured Plans reinsured under this
Agreement or the reinsurance without the prior written
approval of the other party. Such approval shall not
unreasonably be withheld.
7. Entire Agreement. This Agreement represents the entire
agreement between the Reinsurer and the Reinsured and
supersedes any prior oral or written agreements between the
parties regarding its subject matter.
8. Alterations to Agreement. Any alteration, which may from time
to time become necessary in this Agreement, shall be made by
amendment attached to the Agreement embodying such alterations
as may be agreed upon and taken as part of this Agreement and
equally binding. No modification or waiver of any provision of
this Agreement shall be effective unless set forth in written
amendment to this Agreement, which is executed by both
parties. A waiver shall constitute a waiver only with respect
to the particular circumstance for which it is given and not a
waiver of any future circumstance.
9. If any provision of this Agreement shall be held or made
invalid by an order of a court of competent jurisdiction,
statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby. This Agreement shall be
construed in accordance with the applicable federal law and
the laws of the State of Ohio and the rights and obligations
of this Agreement shall, at all times, be regulated under the
laws of the State of Ohio.
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<PAGE> 12
10. Taxes. The Reinsurer shall reimburse the Reinsured for any
U.S. Excise Tax the Reinsured is required to pay under the
U.S. Internal Revenue Code for the reason that the Reinsurer
fails to make an election or terminates its election to file
U.S. federal income tax returns or otherwise ceases or fails
to file such return. This Paragraph does not diminish in any
way the provisions of Article XVII, DAC Tax.
11. Insolvency of the Reinsured.
(a) The Reinsured shall immediately give Reinsurer written
notice of an event constituting insolvency of the Reinsured.
However, whether such notice is timely given or not, in the
event of the insolvency of the Reinsured, all amounts relating
to reinsurance made, ceded, renewed or otherwise becoming
effective under this Agreement shall be payable by the
Reinsurer directly to the Reinsured or to its liquidator,
receiver or statutory successor on the basis of the liability
of the Reinsured without diminution because of the insolvency
of the Reinsured or because the Reinsured or Reinsured's legal
representative has failed to pay all or a portion of amounts
owed to Reinsurer under this Agreement. It is understood,
however, that in the event of the insolvency of the Reinsured,
the liquidator or receiver or statutory successor of the
insolvent Reinsured shall give written notice to the Reinsurer
of the pendency of a claim against the insolvent Reinsured on
the policy reinsured within a reasonable time after such claim
is filed in the insolvency proceeding and that during the
pendency of such claim that the Reinsurer may investigate such
claim and interpose in the name of the Reinsured (or its
liquidator, receiver or statutory successor), at the
Reinsurer's own expense, in the proceeding where such claim is
to be adjudicated any defense or defenses which it may deem
available to the Reinsured or its liquidator or receiver or
statutory successor.
(b) It is further understood that the expenses thus incurred
by the Reinsurer shall be chargeable, subject to court
approval, against the insolvent Reinsured as part of the
expense of liquidation to the extent of a proportionate share
of the benefit which may accrue to the Reinsured solely as a
result of the defense undertaken by the Reinsurer. When two or
more reinsurers are participating in the same claim and a
majority in interest elect to interpose a defense or defenses
to such claim, the expense shall be apportioned in accordance
with the terms of this Agreement as though such expense had
been incurred by the Reinsured.
12. Insolvency of the Reinsurer. The Reinsurer shall immediately
give the Reinsured written notice of an event constituting
insolvency of the Reinsurer. Upon the insolvency of the
Reinsurer, whether notice thereof was given by the Reinsurer
or not, the Reinsured has the right to immediately, by written
notice, terminate this Agreement and recapture all reinsurance
under this Agreement. Notwithstanding such termination or
recapture, Reinsurer or its legal representative shall
continue to be liable to the Reinsured for any obligations of
the Reinsurer under this Agreement still outstanding after
giving effect to such recapture.
13. For the purpose of this Agreement, either the Reinsurer or the
Reinsured shall be deemed "insolvent" under the following
circumstances:
(a) when a cease and desist order or injunction has been
issued by the commissioner or a court of competent
jurisdiction in its state or jurisdiction of domicile
ordering either party to cease and desist from
transacting, soliciting or writing any new
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<PAGE> 13
business of any kind and is reasonably expected to
result in conservatorship, rehabilitation,
receivership, or liquidation; or
(b) when a court of competent jurisdiction order is
issued voluntarily or involuntarily placing either
party into conservatorship, rehabilitation,
receivership, or liquidation, or appointing a
conservator, rehabilitator, receiver or liquidator to
take over the business of either party; or
(c) when it files or consents to the filing of a petition
in bankruptcy, seeks reorganization or an arrangement
with creditors or takes advantage of any bankruptcy,
dissolution, liquidation or similar law or statute.
14. Offset. The Reinsurer and the Reinsured shall consider any
balance due and unpaid, matured or unmatured, liquidated or
unliquidated, regardless of when they arose or were
incurred, whether on account of premiums, allowances, policy
charges, losses, claims expenses, or any other amount in
accordance with the terms of this Agreement, or any other
reinsurance agreement, due from one party to another to be
mutual debits or credits under this Agreement and shall be
offset and only the balance allowed or paid. If either the
Reinsured or Reinsurer is then under any formal insolvency
proceedings, this right of offset shall be subject to the laws
of the domiciliary jurisdiction of the then insolvent party.
15. Non-Guaranteed Charges and Benefits. The Reinsured agrees to
manage the non-guaranteed charges and benefits in a way that
balances the interests of the owners, agents, stockholders,
contract owners, and the Reinsurer, while exercising sound
actuarial professional judgment. Any changes in the
non-guaranteed contract charges and benefits will be
accompanied by an actuarial report prepared in accordance with
the standards described in the Actuarial Standards of Practice
No. 1, as Reformatted and Readopted in 1990 by the Actuarial
Standards Board. The actuarial report should disclose a
description of the framework within which the actuary's advice
has been developed, a description of the facts, methods,
procedures and assumptions upon which the advice was based,
and the other information called for by the Actuarial Standard
of Practice No. 1. Should the Reinsurer determine that the
Reinsured has not balanced the interests of the Reinsured with
the interests of the Reinsurer and agreement cannot be
reached, any claims may be settled by arbitration in
accordance with Article XV, Arbitration.
16. Forms and Manuals. The Reinsured agrees to make available to
the Reinsurer copies of all appropriate policy forms,
prospectuses, application forms, and other related material.
If new material is published, or changes are made in the
material already filed, the Reinsured agrees to promptly
provide the Reinsurer with copies of such material.
17. Headings. The headings of the Articles, Paragraphs and any
subparagraphs and Schedules of this Agreement are inserted for
convenience of reference only and shall not constitute a part
of this Agreement.
18. Definitions. Any defined term used in this Agreement shall
have the meaning ascribed to it in this Article. Any term not
defined in this Agreement which is in general usage in the
life reinsurance industry shall be given the same meaning as
such general usage ascribes to that term, giving due
consideration to the context in which the term is used in this
Agreement.
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<PAGE> 14
XII. REINSTATEMENTS
1. Should a Reinsured Plan lapse and subsequently be reinstated
in accordance with its terms and the normal rules of the
Reinsured, the reinsurance shall be reinstated automatically.
The Reinsured shall pay reinsurance premiums, net of
allowances, to the Reinsurer for the same period of time cost
of insurance charges are calculated and received by the
Reinsured on the reinstated policy.
XIII. POLICY CHANGES
1. Should the Reinsured make any material changes (including but
not limited to a change in Face Amount, Specified Amount or
Rating Classification) in the provisions and conditions of a
Reinsured Plan issued to an insured and upon which reinsurance
shall have been granted hereunder, the Reinsured shall reflect
such policy changes, as appropriate, in the monthly reports
called for in Article VIII, Reporting.
2. The Reinsured agrees to notify the Reinsurer in writing of any
anticipated material changes in the terms and conditions of
the Reinsured Plans.
XIV. RECAPTURE
1. Business reinsured under this Agreement will not be eligible
for recapture, except the Reinsured reserves the right to
recapture:
(i) any business that has been inforce twenty (20) years
after the policy issue date, or
(ii) all business subject to a decrease in the expense
allowances otherwise applicable as shown in Schedule
B2, provided the Reinsured notifies the Reinsurer of
its election to recapture within ninety (90) days
following notification by the Reinsurer of a decrease
in allowances in accordance with the terms shown in
Schedule B2.
2. Furthermore, should a state regulatory body rule that this
Agreement is not valid for any reason, and there is no
remedial action available to correct the situation, the
Reinsured reserves the right to recapture that portion of the
business that was reinsured. Any adjustment in values as a
result of recapture will be agreed upon at the time of the
recapture. If agreement cannot be reached, any claims will be
settled in accordance with the provision of Article XV,
Arbitration.
XV. ARBITRATION
1. Any controversy or claim between the Reinsured and the
Reinsurer, arising out of or relating to this Agreement or the
breach thereof or the coverage of this arbitration provision,
shall be settled by arbitration.
2. There shall be three (3) arbitrators who shall be current or
former officers of life insurance companies or life
reinsurers. However, unless otherwise consented to in
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<PAGE> 15
writing by the parties, such person shall not be a current or
former employee of, or current or former consultant to, the
parties or any affiliate or reinsurer of the parties; nor
shall he or she have any current employment or affiliation
with, consulting or contractual engagement with, or financial
interest in: a party to this Agreement or persons or companies
affiliated or associated with a party to this Agreement. The
Reinsured shall appoint one of the arbitrators and the
Reinsurer shall appoint a second arbitrator and these two
arbitrators shall select the third. If either party shall fail
to appoint an arbitrator within thirty (30) days after the
other party has given notice of its appointment of an
arbitrator, the appointment of the arbitrator for the party
which has so failed to appoint an arbitrator shall be left to
the other party. Should the two arbitrators appointed by or
for the parties fail to agree on the choice of the third,
within sixty (60) days of their appointment then each of them
shall name three (3) individuals, of whom the other shall
decline two (2), and the decision shall be made by drawing
lots.
3. Arbitration shall be conducted in accordance with the
Commercial Arbitration Rules of the American Arbitration
Association which shall be in effect on the date of delivery
of demand for arbitration; except, however, that arbitrators
shall be appointed in accordance with the provisions of
Paragraph 2 of this Article and that, to the extent any other
terms or provisions of this Article are inconsistent with or
in conflict with the Commercial Arbitration Rules, this
Article shall control.
4. The arbitration shall be conducted in a location to be
determined by a majority of the Arbitrators.
5. The Reinsured and the Reinsurer shall each pay that part of
the expense of arbitration which shall be apportioned to it by
the arbitrators.
6. The award rendered by the arbitrators shall be final, and
judgment may be entered upon it in any court having
jurisdiction thereof.
7. The Arbitrators shall base their decision on the terms and
conditions of this Agreement and, as necessary, on the customs
and practices of the life reinsurance and life insurance
industries rather than on a strict interpretation of
applicable law.
XVI. IMPROPER SOLICITATION OF REINSURED PLAN OWNERS
1. Neither party, nor any affiliate thereof, shall contact or
authorize any other person to contact owners of the Reinsured
Plans for the purpose of soliciting surrender of the Reinsured
Plans, conversion of the Reinsured Plans to another form of
insurance, making policy loans or withdrawals without prior
written approval of the other party.
XVII. DAC TAX - SECTION 1.848-2(G)(8) ELECTION
1. The Reinsurer and the Reinsured each acknowledge that it is
subject to taxation under Subchapter "L" of the Internal
Revenue Code of 1986 (The "Code").
2. The Reinsured and the Reinsurer hereby agree to the following
pursuant to Section 1.848-2(g)(8) of the Income Tax
Regulations issued December 1992, under Section 848 of the
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<PAGE> 16
Internal Revenue Code of 1986, as amended. This election shall
be effective for 1998 and for all subsequent taxable years for
which this Agreement remains in effect.
3. The terms used in this Article are defined by reference to
Regulation Section 1.848-2 in effect December 1992.
4. Each party agrees to attach a schedule to its federal income
tax return which identifies this Agreement for which the joint
election under the Regulation has been made.
5. The party with the net positive consideration for this
Agreement for each taxable year will capitalize specified
policy acquisition expenses with respect to this Agreement
without regard to the general deductions limitation of Section
848(c)(1).
6. Both Parties agree to exchange information pertaining to the
amount of net consideration under this Agreement each year to
ensure consistency or as otherwise required by the Internal
Revenue Service.
7. The Reinsured will submit a schedule to the Reinsurer by May
1, of each year, of its calculation of the net consideration
for the preceding calendar year. This schedule of calculations
will be accompanied by a statement signed by an officer of the
Reinsured stating that the Reinsured will report such net
consideration on its tax return for the preceding calendar
year.
8. The Reinsurer may contest such calculation by providing an
alternative calculation to the Reinsured in writing within
thirty (30) days of the Reinsurer's receipt of the Reinsured's
calculation. If the Reinsurer does not so notify the
Reinsured, the Reinsurer will report the net consideration as
determined by the Reinsured in the Reinsurer's tax return for
the previous calendar year.
9. If the Reinsurer contests the Reinsured's calculation of the
net consideration, the parties will act in good faith to reach
an agreement as to the correct amount within thirty (30) days
of the date the Reinsurer submits its alternative calculation.
If the Reinsured and the Reinsurer reach agreement on an
amount of net consideration, each party shall report such
amount in their respective tax returns for the previous
calendar year.
XVIII. DURATION OF AGREEMENT
1. Except as provided in Article XIV, Recapture, inforce
reinsurance which has been ceded under this Agreement shall be
unlimited as to its duration and shall be maintained in force
for so long as such policies shall remain in force and the
reinsurance premiums and payments referenced in Articles VI,
Premiums and Article VII, Payments By Reinsurer are paid when
due.
2. Term of Agreement. The initial term of this Agreement shall be
three and one-half (3 1/2) years. During and after the initial
term, this Agreement may be canceled as it pertains to the
reinsurance of new business thereafter:
(a) immediately upon written notice by a party if the
other party becomes insolvent, dissolves, ceases to
legally exist, or otherwise ceases to be legally
authorized to act as a reinsurer or insurer,
respectively, in its domiciliary jurisdiction;
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<PAGE> 17
(b) upon thirty (30) days written notice by a party if
the other party has materially breached this
Agreement and has failed to cure such breach within
such thirty (30) days;
(c) when and as agreed upon by the parties in writing.
3. After the initial term of this Agreement, this Agreement may
also be canceled by either party, as it pertains to the
reinsurance of new business thereafter, by giving three
hundred sixty-five (365) days advance notice of cancellation
in writing. In such case, the Reinsured shall continue to
cede, and the Reinsurer shall continue to accept reinsurance,
under this Agreement on policies and riders issued during the
three hundred sixty-five (365) day period, and the interest of
the Reinsurer in new business shall cease at the end of the
three hundred sixty-five (365) day period.
XIX. CONVERSION
1. At any time, on or after January 1, 2000 and before April 1,
2003, the Reinsurer shall have the option (provided the
Reinsurer demonstrates sufficient capacity) to convert the
reinsurance on policies and riders issued from the beginning
of the prior calendar year to the date the Reinsurer elects to
convert the reinsurance of the policies and riders, to the
Co/ModCo Agreement. The Reinsurer shall demonstrate its
capacity by showing the Reinsured that its unassigned invested
securities, together with anticipated cash flows
(including retrocession facilities), will be sufficient to
meet expected reinsurance settlements, with regard to the
converted reinsurance, for a period of not less than
twenty-four months following the date the Reinsurer elects to
convert the reinsurance of the policies and riders to the
Co/ModCo Agreement. Upon election to convert the reinsurance
of the policies and riders, the initial ceding allowance
payable to the Reinsured shall equal (a) less (b) less (c),
where:
(a) equals settlements that would have otherwise occurred
under the Co/ModCo Agreement, had the policies and
riders been reinsured under the Co/ModCo Agreement
from the beginning of the prior calendar year to the
date the Reinsurer elects to convert the reinsurance
of the policies and riders, accrued at an effective
rate of *%,
(b) equals all settlements due or paid under this
Agreement from the beginning of the prior calendar
year to the date the Reinsurer elects to convert the
reinsurance of the policies and riders, accrued at an
effective rate of *%, and
(c) equals the settlement paid for business that was
recaptured for quarters one through three of 1999
under the Co/ModCo Agreement. This amount is $458,456
measured from October 1, 1999 or $482,441 measured
from November 3, 1999, accrued at an effective rate
of *%. This settlement is applicable only during Year
2000.
The initial ceding allowance shall be payable within 14 days
after the Reinsurer's election to convert the reinsurance of
the policies and riders.
----------------
* Material omitted pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934.
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<PAGE> 18
2. The Reinsured shall continue to provide the schedules
contained in the Co/ModCo agreement showing the policy
activity that would otherwise occur should the reinsurance on
policies and riders be converted to the Co/ModCo agreement,
until the option to convert said reinsurance on the policies
and riders expires.
XX. WRITTEN NOTICE
1. Any notice given in connection with this Agreement shall be
deemed to be provided when it is sent by facsimile to the
numbers shown below, or by first class mail or by courier to
the addresses set forth below, or to the last address or
facsimile number of record such party designates in writing:
<TABLE>
<S> <C>
If to the Reinsured: With a Copy to:
-------------------- ---------------
Western Reserve Life Assurance Co. of Western Reserve Life Assurance Co. of
Ohio Ohio
P. 0. Box 5068 P. O. Box 5068
Clearwater, Florida 33758 Clearwater, Florida 33758
Attn: Alan Yaeger, Chief Actuary Attn: Larry Kirkland, Managing Actuary
Facsimile (727) 299-1833 Facsimile: (727) 299-1833
If to the Reinsurer: With a Copy to:
-------------------- ---------------
WMA Life Insurance Company Limited The WMA Corporation
Third Floor, 44 Church Street 11315 Johns Creek Parkway
Hamilton HM 12, Bermuda Duluth, GA 30097-1517
Attn: Manager Attn: Chief Financial Officer
Facsimile: (441) 296-1058 Facsimile: (770) 248-3331
James F. Tenney, Esq.
Merritt & Tenney
200 Galleria Parkway, Suite 500
Atlanta, GA 30067
Facsimile: (770) 952-0028
</TABLE>
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<PAGE> 19
XXI. EXECUTION
In witness of the above, the Reinsured and the Reinsurer, by their
respective officers have executed this Agreement in duplicate at the
dates and places indicated and shall be effective as of October 1,
1999.
WESTERN RESERVE LIFE WMA LIFE INSURANCE
ASSURANCE CO. OF OHIO LIMITED COMPANY
at St. Petersburg, FL at Kamuela, Hawaii
on March 16, 2000. on March 20, 2000.
By: /s/ Larry Kirkland By: /s/ Edward F. McKernan
---------------------------- --------------------------
Title: VP & Managing Actuary Title: VP & Actuary
By: /s/ Alan Yaeger By:/s/ Thomas W. Montgomery
---------------------------- --------------------------
Title: EVP Title:
19
<PAGE> 20
Exhibit A
PRODUCER
Flexible Premium Variable Life policies, applicable riders, and endorsements
must be sold by and distributed through: WMA Securities, Inc. (and/or its
successors) and its affiliates.
20
<PAGE> 21
Exhibit B
FORM OF LETTER OF CREDIT
Effective Date
Western Reserve Life Assurance Co. of Ohio
P. O. Box 5068
Clearwater, FL 33758
Gentlemen:
We have established this clean, irrevocable and unconditional Letter of Credit
in your favor as beneficiary for drawings up to _______________________________
effective immediately. This Letter of Credit is issued, and payable at our
office at ______________________________ and expires with our close of business
on ___________________. Except when the amount of this Letter of Credit is
increased, this Letter of Credit cannot be modified or revoked without your
consent.
The term "Beneficiary" includes any successor by operation of law of the named
Beneficiary. If a court of law appoints a successor in interest to the named
Beneficiary, then the named Beneficiary includes and is limited to the court
appointed domiciliary receiver (including conservator, rehabilitator or
liquidator).
We hereby undertake to promptly honor your sight draft(s) drawn on us,
indicating our Letter of Credit No. _________, for all or any part of this
Letter of Credit upon presentation of your draft drawn on us at our office
specified in paragraph one on or before the expiration date hereof or any
automatically extended expiry date.
Except as expressly stated herein, this undertaking is not subject to any
agreement, requirement or qualification. Our obligation under this Letter of
Credit is our individual obligation and is in no way contingent upon
reimbursement with respect thereto, or upon our ability to perfect any lien,
security interest or any other reimbursement.
This Letter of Credit is deemed to be automatically extended, without amendment,
for one year from the expiration date hereof, or any future expiration date,
unless at least thirty days prior to such expiration date we notify you by
Registered Mail or Certified Mail that this Letter of Credit will not be renewed
for nay such additional period.
21
<PAGE> 22
This Letter of Credit is subject to and governed by the Laws of the State of
Ohio and the 1993 Revision of the Uniform Customs and Practice for Documentary
Credits of the International Chamber of Commerce (Publication 500) and, in the
event of any conflict, the Laws of the State of Ohio will control. If this
Letter of Credit expires during an interruption of business as described in
Article 17 of said Publication 500, we hereby specifically agree to effect
payment if this Letter of Credit is drawn against within thirty days after the
resumption of business.
Very truly yours,
22
<PAGE> 23
Schedule A1
BUSINESS REINSURED
<TABLE>
<CAPTION>
FORM NUMBER DESCRIPTION
- ----------- -----------
<S> <C>
VL.03 Flexible Premium Variable Life Insurance
ACCDB-10/94 Standard Accelerated DB Rider
ACCDB CT-10/94 Accelerated DB Rider -- CT
ACCDB IN-10/94 Accelerated DB Rider -- IN
ACCDB MN-10/94 Accelerated DB Rider -- MN
ACCDB MS-01/95 Accelerated DB Rider -- MS
ACCDB SC-02/95 Accelerated DB Rider -- SC
ACCDBTX Accelerated DB Rider -- TX
AG.41.07.80-SD All SD Replacements
END.05.04.79 All IL policies
EVL123MT-1997 MT FFBs
Form IGAIL All IL policies
IGAKS All KS policies
IGAMD All MD policies
IGAMT All MT policies
IGANC All NC policies
IGANH-V All variable NH policies
IGATX All TX policies
IGA.NP.TX2 All TX FFBs
IGA00012 All CA policies
IGA00013 All NV policies
IGA00015 All HI Variable policies
IGA00016 All AR policies
IGA00017 All CO policies
IGA00019-09/92R All LA policies
IGA00020 - 11/92 All NJ policies
IGA00021 - 11/92 All UT policies
IGA00022 - 06/93 All DC policies
IGA.01.03.89-MO-R3 All MO policies
IGA.02.06.89-OK-R All OK policies
IGA.03.02.90-SD All SD policies
IGA.05.04.90-TN All variable TN policies
IGA.08.07.90-ND All ND policies
IGA.09.12.90 All OH policies
IGA.10.05.91 All WY policies
IGA24194-WV All WV policies
ITPCA30L All CA policies - Owner 60 and over
ITP.01.09.88 VA policies - Agent info filled in by Assembly area
ITP0007 All TX policies
ITP.02.09.88 AR policies - Agent info filled in by Assembly area
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C>
ITP.03.09.88 All TN & UT policies
ITP.06.12.90-R3 All CA policies
ITP9L All Replacement policies - CA, CO, DE, ID, IN, IA, KS, LA, MD, MA, MN, MO,
NE, NM, NC, OH, OK, OR, PA, SC, TN, UT, VT. WA, WI, WY
LD00084-12/96 Welcome letter
PIR10 Standard PIR
PIR11 Standard PIR+
PIR10-AA PIR - PA, WV
PIR11-AA PIR+ - PA, WV
PIR10MO PIR - MO
PIR11MO PIR+ - MO
PIR10NC PIR - NC
PIR11NC PIR+ - NC
PIR10ND PIR+ - ND
RE.END.02.05.89 All VT WRL (internal) Replacements
RE.END.03.06.90 All KS (life) Replacements
SUIC.01.06.84 All CO FFBs
ULB1.01.05.84 Standard Disability Waiver Rider
ULB1.02.08.84 Disability Waiver Rider - NJ, PA (although FFB not available)
ULB1.03.08.84 Disability Waiver Rider - SC, WV
ULB1.04.08.84 Disability Waiver Rider - VT
ULB1.05.11.84 Disability Waiver Rider - CA
ULB2.01.05.84 Standard Accidental Death Benefit Rider
ULB2.02.06.84 Accidental Death Benefit Rider - TN
ULB2.03.07.84 Accidental Death Benefit Rider - IN, MN
ULB2.04.07.84 Accidental Death Benefit Rider - AR, GA, MO, NH, SC, WA
ULB2.05.08.84 Accidental Death Benefit Rider - PA (although FFB not available)
ULB2.06.11.84 Accidental Death Benefit Rider - CA, WV
ULB2.07.11.84 Accidental Death Benefit Rider - CT
ULB2.08.11.84 Accidental Death Benefit Rider - NJ (although FFB not available)
ULB4.01.03.86 Standard Disability Waiver and Income Rider
ULB4.03.04.86 Disability Waiver and Income Rider - SC, WV
ULB4.04.04.86 Disability Waiver and Income Rider - VT
ULB4.05.04.86 Disability Waiver and Income Rider - MO, SD
ULB4.06.05.86 Disability Waiver and Income Rider - TN
ULB4.07.12.86 Disability Waiver and Income Rider - CT
ULR2.01.05.84 Standard Other Insured Rider
ULR2.02.08.84 Other Insured Rider - WV, PA (although FFB not available in PA)
ULR2.03.10.84 Other Insured Rider - TX (although FFB not available in TX)
ULR3.01.05.84 Standard Children's Insurance Rider
ULR3.02.08.84 Children's Insurance Rider - WV, PA (although FFB not available in PA)
ULR3.03.10.86 Children's Insurance Rider - NJ (although FFB not available in NJ)
</TABLE>
24
<PAGE> 25
Schedule A2
REINSURANCE COVERAGE
I. Retention Schedule of the Reinsured:
1. Life Policies and Riders and Accidental Death Benefit Rider:
In determining retention limits, the Reinsured will retain
coverage in the following order: (1) Base Policy first and
coverages on Other Insured Riders; (2) Riders covering death
on the primary insured for all causes next; (3) the ADB Rider
last.
The Reinsured will retain 80% of all coverages and 20% will be
reinsured with the Reinsurer. The Reinsured will retain all
additional amounts of coverage until the total coverage of any
life exceeds the amount shown below.
ALL BUSINESS $750,000
The net effect is that the Reinsured will not retain more than
$600,000 on any one life under any one type of coverage. Note
that life insurance policies, life insurance riders and ADB
riders are considered he same type of coverage. "Single Life"
coverages and "Joint Insured" coverages are considered
different types of coverages.
B. Disability Waiver Rider, Disability Waiver and Income Rider:
Fully retained except for reinsurance provided through this
Agreement and the Co/ModCo Agreement.
II. Pool Automatic Acceptance Limits
A. Life
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Standard Through Table "4" Tables "5"
Issue Ages Flat Extras up to $5/$1,000 Through "16"
--------------------------------------------------------------------
<S> <C> <C>
0-75 $15,000,000 $10,000,000
--------------------------------------------------------------------
76-80 $ 7,500,000 $ 5,000,000
--------------------------------------------------------------------
</TABLE>
25
<PAGE> 26
Schedule B1
AMOUNT OF REINSURANCE
The amount of reinsurance under this Agreement shall be the Reinsurer's quota
share percentage shown below of the liability of the Reinsured on all Reinsured
Plans in the forms listed in Schedule A1.
Quota Share Percentages for Issue Dates in 1999 and 2000: For issue dates in
1999 and 2000, the quota share percentage will be 20%.
Quota Share Percentages for Issue Dates in 2001 and later: The Reinsurer and the
Reinsured will jointly determine the quota share percentages no later than
December 1st applicable to new issues in the following calendar year. The
determining factors for the quota share percentage are the expected WMA Total
Flexible Premium Variable Life First Year Target Premiums Collected by the
Reinsured for the calendar year that the quota share percentage will be
applicable. This determination of the quota share percentage will be on a
mutually acceptable basis, recognizing the good faith nature of this Agreement,
and with references to the estimates made by both parties, based on results from
prior periods.
The Scheduled Quota Share Percentages for each threshold of expected WMA Total
Flexible Premium Variable Life First Year Target Premiums Collected by the
Reinsured are shown in the following table:
<TABLE>
<CAPTION>
----------------------------------------------------------
WMA TOTAL FLEXIBLE PREMIUM VARIABLE LIFE SCHEDULED
FIRST YEAR TARGET QUOTA SHARE
PREMIUMS COLLECTED PERCENTAGE
BY THE REINSURED (IN MILLIONS)
----------------------------------------------------------
<S> <C>
$50-149 20%
----------------------------------------------------------
$150-199 25%
----------------------------------------------------------
$200-249 30%
----------------------------------------------------------
$250-599 35%
----------------------------------------------------------
$600+ 40%
----------------------------------------------------------
</TABLE>
26
<PAGE> 27
Schedule B2
REINSURANCE RATES & EXPENSE ALLOWANCES
1. The reinsurance premium rates shall be the base policy monthly cost of
insurance deductions and rider monthly deductions. No policy fee will
be charged.
2. The reinsurance allowances, as a percentage of premiums, are as
follows:
<TABLE>
<CAPTION>
-----------------------------------------
POLICY YEAR REINSURANCE ALLOWANCE
-----------------------------------------
<S> <C>
1-20 * %
-----------------------------------------
21+ * %
-----------------------------------------
</TABLE>
The reinsurance allowances are non-guaranteed and may be reduced by the
Reinsurer upon providing ninety (90) days written notice. While the
parties anticipate that the reinsurance premiums and allowances will
not change, it may become necessary to pay an allowance that will
result in a net premium greater than that otherwise contemplated upon
the execution of this Agreement. Regardless, the Reinsurer shall not
re-determine an allowance, that, when taken together with the
reinsurance premium, exceeds the corresponding statutory net premium
rate based on the 1980 CSO Table at 4.0% interest for the applicable
mortality rating.
3. The Reinsurer will only change the reinsurance allowances in accordance
with its redetermination policy for non-guaranteed elements. *
4. The Reinsurer will not reimburse the Reinsured premium taxes for
reinsurance ceded under this agreement.
- ---------
* Material omitted pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934.
27
<PAGE> 28
Schedule B3
EXPERIENCE REFUND FORMULA
The Reinsurer shall pay an experience refund to the Reinsured. The experience
refund shall be determined by accruing two experience funds: (a) expected
claims, as determined using the Reinsurer's pricing mortality table applicable
on December 31, 1999, less actual claims and experience refunds, accrued with
interest, and (b) expected claims, as determined using the Reinsurer's pricing
mortality table applicable on December 31, 1999, less expected claims, as
determined using the Reinsured's pricing mortality table applicable on
December 31, 1999, and experience refunds, accrued with interest. Provided both
(a) and (b) are greater than zero (0), the experience refund to be paid shall
be the lessor of (a) or (b), times a factor not less than one-third (1/3)
multiplied by one-fourth (1/4). Where,
A[t] = WMA Life Expected Claims in calendar quarter "t"
B[t] = WRL Expected Claims in calendar quarter "t"
C[t] = Actual Claims in calendar quarter "t"
i[t] = The average of the 52 week high and low Merrill Bond Yield
Index for 1-10 year high quality corporate bonds, as
published in the Wall Street Journal the first publication
date of each calendar quarter or, if not available, as
otherwise mutually agreed upon by the Reinsured and Reinsurer.
EFA[t] = {EFA[t-1] - ER[t-1]} x (1+ i[t] ) 1/4 + A[t] - B[t]
EFB[t] = {EFB[t-1] - ER[t-1]} x (1+ i[t] ) 1/4 + A[t] - C[t]
ER[t] = Experience Refund in calendar quarter "t"
= Max{0, (1/3 x 1/4) x Min[EFA[t], EFB[t]] }
Further, considering the complexities of calculating the experience refund,
this determination will be on a mutually acceptable basis, recognizing the good
faith nature of this Agreement.
28
<PAGE> 29
Schedule E1 - Monthly Reports
Monthly Production and Policy Loads Report
WRL Financial Freedom Builder
Modified Coinsurance
31-Dec-1999
<TABLE>
<CAPTION>
1999 ISSUES Base Riders Base Rider 1998 WMA
Policies PiR, PIR+ Others Units Units Quota Share Source
--------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
In Force 30-Nov-1999 0 0 0 0 0 XX% E1(mr)
Issues 0 0 0 0 0 LEx
Coverage Increases (decreases) 0 0 0 0 LEx
Reinstatements 0 0 0 0 0 LEx
Total Increases 0 0 0 0 0
Disabilities 0 0 0 0 0 LEx
Surrenders 0 0 0 0 0 LEx
Not-Takens 0 0 0 0 0 LEx
Maturities 0 0 0 0 0 LEx
Lapses 0 0 0 0 0 LEx
Expiry 0 0 0 0 0 LEx
Deaths 0 0 0 0 0 LEx
Total Terminations 0 0 0 0 0
Net Change 31-Dec-1999 0 0 0 0 0
In Force 31-Dec-1999 0 0 0 0 0
</TABLE>
<TABLE>
<CAPTION>
Allocated to Quota Share of
Premiums
Fixed Acct Separate Fixed Separate
Acct Acct Acct
<S> <C> <C> <C> <C> <C>
Gross Premiums
Target Premiums - Year 1 0 0 0 0 Ext
Excess Premiums - Year 1 0 0 0 0 Ext
1st Year .......................................... 0 0 0 0
Target Premiums - Years 2 - 10 0 0 0 0 Ext
Excess Premiums - Years 2 - 10 0 0 0 0 Ext
Renewal Years 2 - 10 .............................. 0 0 0 0
Target Premiums - Years 11+ 0 0 0 0 Ext
Excess Premiums - Years 11+ 0 0 0 0 Ext
Renewal Years 11+ ................................. 0 0 0 0
Total Premiums for all years: ......................... 0 0 0 0
</TABLE>
29
<PAGE> 30
<TABLE>
<S> <C> <C> <C> <C> <C>
Administrative Charges
Base COI Monthly Deductions 0 0 0 0 Ext
Rider Monthly Deductions 0 0 0 0 Ext
Monthly Policy Fee Deductions 0 0 0 0 Ext
Premium Collection Charges 0 0 0 0 Ext
Percent of Premium Charges 0 0 0 0 Ext
Total Policy Administrative Charges: .................. 0 0 0 0
</TABLE>
Benefits Paid During Month:
<TABLE>
<CAPTION>
Fixed Account Separate Account
Gross W/D Surr Chgs Gross W/D Surr Chgs
<S> <C> <C> <C> <C> <C>
1. Surrenders 0 0 0 0 Stat
2. Not-Taken Refunds 0 0 0 0 Stat
3. Maturities 0 0 0 0 Stat
4. Disabilities 0 0 0 0 Stat
5. Partial Withdrawals 0 0 0 0 Stat
6. Death Claims 0 0 Stat
7. New Loans 0 0 Stat
</TABLE>
30
<PAGE> 31
Schedule E2 - Quarterly Reports
Quarterly Production and Policy Loads Report
WRL Financial Freedom Builder
Modified Coinsurance
31-Dec-1999
<TABLE>
<CAPTION>
1999 ISSUES Base Riders Base Rider 1998 WMA
Policies PiR, PIR+ Others Units Units Quota Share Source
--------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
In Force 30-Sep-1999 0 0 0 0 0 XX% E1(mr)
Issues 0 0 0 0 0 LEx
Coverage Increases (decreases) 0 0 0 0 0 LEx
Reinstatements 0 0 0 0 0 LEx
Total Increases 0 0 0 0 0
Disabilities 0 0 0 0 0 LEx
Surrenders 0 0 0 0 0 LEx
Not-Takens 0 0 0 0 0 LEx
Maturities 0 0 0 0 0 LEx
Lapses 0 0 0 0 0 LEx
Expiry 0 0 0 0 0 LEx
Deaths 0 0 0 0 0 LEx
Total Terminations 0 0 0 0 0
Net Change 31-Dec-1999 0 0 0 0 0
In Force 31-Dec-1999 0 0 0 0 0
</TABLE>
<TABLE>
<CAPTION>
Allocated to Quota Share of Premiums
Fixed Acct Separate Fixed Acct Separate Acct
Acct
<S> <C> <C> <C> <C> <C>
Gross Premiums
Target Premiums - Year 1 0 0 0 0 Ext
Excess Premiums - Year 1 0 0 0 0 Ext
1st Year ..................................... 0 0 0 0
Target Premiums - Years 2 - 10 0 0 0 0 Ext
Excess Premiums - Years 2 - 10 0 0 0 0 Ext
Renewal Years 2 - 10 ......................... 0 0 0 0
Target Premiums - Years 11+ 0 0 0 0 Ext
Excess Premiums - Years 11+ 0 0 0 0 Ext
Renewal Years 11+ ............................ 0 0 0 0
Total Premiums for all years: .................... 0 0 0 0
</TABLE>
31
<PAGE> 32
<TABLE>
<S> <C> <C> <C> <C> <C>
Administrative Charges
Base COI Monthly Deductions 0 0 0 0 Ext
Rider Monthly Deductions 0 0 0 0 Ext
Monthly Policy Fee Deductions 0 0 0 0 Ext
Premium Collection Charges 0 0 0 0 Ext
Percent of Premium Charges 0 0 0 0 Ext
Total Policy Administrative Charges: ............ 0 0 0 0
</TABLE>
Benefits Paid During Month:
<TABLE>
<CAPTION>
Fixed Account Separate Account
Gross With's Surr Charges Gross With's Surr Charges
<S> <C> <C> <C> <C> <C>
1. Surrenders 0 0 0 0 Stat
2. Not-Taken Refunds 0 0 0 0 Stat
3. Maturities 0 0 0 0 Stat
4. Disabilities 0 0 0 0 Stat
5. Partial Withdrawals 0 0 0 0 Stat
6. Death Claims 0 0 0 0 Stat
7. New Loans 0 0 0 0 Stat
</TABLE>
32
<PAGE> 33
Schedule E3 - Quarterly Reports
Quarterly Reserve Report
WRL Financial Freedom Builder
Modified Coinsurance
31-Dec-1999
<TABLE>
<CAPTION>
1999 ISSUES WMA
Total Quota Share Source
----- ----------- ------
<S> <C> <C> <C> <C> <C>
A. Sources of Reserve Splits:
1. Total FFB Cash Values N/A N/A Ext
2. Reinsured FFB SA Values 0 0 Ext
3. Reinsured FFB GA Values
a. Fixed Account Values 0
b. Loan Collateral Fund 0
c. Total Reinsured FFB GA Values 0 0 Ext
4. Total Reinsured FFB Cash Values 0 0
B. CRVM Statutory Reserves Split between SA and GA:
1. Total FFB CRVM Statutory Reserves N/A N/A Ext
2. Reinsured FFB CRVM Statutory Reserves - Total 0 0 Ext
3. Reinsured FFB CRVM Statutory Reserves - SA only 0 0
4. Reinsured FFB CRVM Statutory Reserves - GA only 0 0
C. Additional Reserves Split between SA and GA:
1. Reinsured Mortality Charge Reserves - GA Only 0 0 Ext
2. Reinsured IPC Reserves - Total (.02 x B(2) ) 0 0
3. Reinsured IPC Reserves - SA only 0 0
4. Reinsured IPC Reserves - GA only 0 0
D. Other GA Reserves and Liabilities
1. Exhibit II, Part I, Column 3, Line 4a Liability 0 0 Acct
2. Disabled Lives Reserves 0 0 Acct
3. Other Reserves and Liabilities 0 0 Acct
4. Total Other GA Reserves and Liabilities 0 0
E. Total Reinsured FFB SA Reserves and Liabilities 0 0
F. Total Reinsured FFB GA Reserves and Liabilities 0 0
</TABLE>
33
<PAGE> 34
Schedule E4 - Monthly Reports
Monthly Renewable Term Premiums and Allowances
WRL Financial Freedom Builder
31-Dec-1999
<TABLE>
<CAPTION>
WMA
Quota Share
XX%
Total
<S> <C>
A. 1. Base Monthly Cost of Insurance Deduction
2. Rider Monthly Deductions
B. Reinsurance Premiums (20% times total Monthly Deductions)
C. Reinsurance Allowances (* % of Reinsurance Premium)
D. Quota Share of Death Claims Paid
1. Actual Death Claims Paid
2. Less Cash Value
3. Equals Net Amount at Risk
E. Premiums less Allowances and Claims ( E = B - C - D )
F. Number of Policies In Force
Number of Riders In Force
</TABLE>
- ---------
* Material omitted pursuant to rule 24b-2 under the Securities Exchange
Act of 1934.
34
<PAGE> 35
Schedule E5 - Quarterly Reports
Monthly Renewable Term Premiums and Allowances
WRL Financial Freedom Builder
31-Dec-1999
Total
A. 1. Base Monthly Cost of Insurance Deduction
2. Rider Monthly Deductions
B. Reinsurance Premiums (20% times total Monthly Deductions)
C. Reinsurance Allowances (* % of Reinsurance Premium)
D. Quota Share of Death Claims Paid
1. Actual Death Claims Paid
2. Less Cash Value
3. Equals Net Amount at Risk
E. Total Due WMA ( E = B - C - D )
F. Experience Fund A
1. Expected Claims using Reinsurer's Pricing Mortality
2. Actual Claims accrued to end of Quarter
3. Accrued Experience Refund (if any)
4. Expected Claims less Actual Claims and Experience Refunds
(4 = 1 - 2 - 3 )
G. Experience Fund B
1. Expected Claims using Reinsurer's Pricing Mortality
2. Expected Claims using Reinsured's Pricing Mortality
3. Accrued Experience Refund (if any)
4. Reinsurer's Expected Claims less Reinsured's Expected Claims
and Experience Refunds ( 4 = 1 - 2 - 3 )
H. Experience Refund
(Minimum of F and G times Factor, if they are both greater than zero)
Factor is 1/3 x 1/4
I. Settlement Due WMA ( I = E - H )
(Settlement is payable to WMA if positive, payable to WRL if negative)
J. Number of Policies In Force
Number of Riders In Force
K. Quota Share of Aggregate Death Benefit (000's omitted)
L. Quota Share of Aggregate Net Amount at Risk (000's omitted)
M. Reinsurance Reserve at Quarter End
- ----------------
* Material omitted pursuant to Rule 24b-2 under the Securities Exchange Act
of 1934.
35
<PAGE> 36
Schedule E6 - Annual Report
Monthly Renewable Term Premiums and Allowances
WRL Financial Freedom Builder
31-Dec-1999
Total
A. 1. Base Monthly Cost of Insurance Deduction
3. Rider Monthly Deductions
B. Reinsurance Premiums (20% times total Monthly Deductions)
C. Reinsurance Allowances (* % of Reinsurance Premium)
D. Quota Share of Death Claims Paid
1. Actual Death Claims Paid
2. Less Cash Value
3. Equals Net Amount at Risk
E. Total Due WMA ( E = B - C - D )
F. Experience Fund A
1. Expected Claims using Reinsurer's Pricing Mortality
2. Actual Claims accrued to ends of Quarters
3. Accrued Experience Refund (if any)
4. Expected Claims less Actual Claims and Experience Refunds
(4 = 1 - 2 - 3 )
G. Experience Fund B
1. Expected Claims using Reinsurer's Pricing Mortality
2. Expected Claims using Reinsured's Pricing Mortality
3. Accrued Experience Refund (if any)
4. Reinsurer's Expected Claims less Reinsured's Expected Claims
and Experience Refunds ( 4 = 1 - 2 - 3 )
H. Experience Refund
(Minimum of F and G times Factor, if they are both greater than zero)
Factor is 1/3 x 1/4
I. Settlement Due WMA ( I = E - H )
(Settlement is payable to WMA if positive, payable to WRL if negative)
J. Number of Policies In Force
Number of Riders In Force
K. Quota Share of Aggregate Death Benefit (000's omitted)
L. Quota Share of Aggregate Net Amount at Risk (000's omitted)
M. Reinsurance Reserve at Quarter End
- -----------------
* Material omitted pursuant to Rule 24b-2 under the Securities Exchange Act
of 1934.
36
<PAGE> 37
SCHEDULE K - DEATH CLAIM REPORT
DEATH CLAIMS PAID
- - Claims Paid From (Date)
- - Report Run Date
- - Claim Number
- - Issue State
- - Name
- - Sex
- - Issue Age
- - Policy Number
- - Risk Class
- - Death Benefit Option Code
- - Plan Code
- - Issue Date
- - Date of Death
- - Date Death Reported
- - Policy Face Amount
- - Reinsurance Amount
- - Cash Value
- - Interest Paid
- - Expenses Paid
- - Date Claim Paid
- - Remark Code
- - Marketing Organization
- - Quarter to Date Totals
- - Month Totals
37
<PAGE> 38
SCHEDULE K - DEATH CLAIM REPORT
DEATH CLAIMS OUTSTANDING
- - Claims Outstanding From (Date)
- - Report Run Date
- - Claim Number
- - Issue State
- - Name
- - Sex
- - Issue Age
- - Policy Number
- - Risk Class
- - Death Benefit Option Code
- - Plan Code
- - Issue Date
- - Date of Death
- - Date Death Reported
- - Policy Face Amount
- - Reinsurance Amount
- - Cash Value
- - Interest Due
- - Expenses Paid
- - Date Claim Paid
- - Remark Code
38
<PAGE> 39
SCHEDULE K - DEATH CLAIM REPORT
DEATH CLAIMS REPORTED
- - Claims Reported From (Date)
- - Report Run Date
- - Claim Number
- - Issue State
- - Name
- - Sex
- - Issue Age
- - Policy Number
- - Risk Class
- - Death Benefit Option Code
- - Plan Code
- - Issue Date
- - Date of Death
- - Date Death Reported
- - Policy Face Amount
- - Reinsurance Amount
- - Cash Value
- - Interest Due
- - Expenses Paid
- - Date Claim Paid
- - Remark Code
39
<PAGE> 1
EXHIBIT 10.4
Amendment Number 2 to the
Automatic Variable Annuity Reinsurance Agreement
(Referred to as the Agreement)
Between
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
St. Petersburg, Florida
(referred to as the Reinsured)
and
WMA LIFE INSURANCE COMPANY LIMITED
Hamilton, Bermuda
(referred to as the Reinsurer)
Effective October 1, 1999
I. Article II, DEFINITIONS, "Cumulative Effective Growth Rate" is added to
read as follows:
"Cumulative Effective Growth Rate" equals the five year rolling growth of
premiums collected in years t = 1 to 5, defined by:
{ ( [ (1/5) x (P1 + P2 + P3 + P4 + P5) ]/[(1/2) x (P1 + P2)) ] ) 1/2 - 1},
where P1, ..., P5 are the WMA Total Variable Annuity First Year Payments
collected by the Reinsured in previous five years, including an accrual to
the end of the current year, based on premiums collected through November
of the current year. P5 stands for the premiums collected in the current
year with an accrual to the end of the calendar year. P1 stands for premium
collected in the current calendar year minus four.
II. Schedule B1, AMOUNT OF REINSURANCE, is replaced by the following:
The amount of reinsurance under this Agreement shall be the Reinsurer's
quota share percentage shown below of the liability of the Reinsured on all
annuity contracts in the forms listed in Schedule A, Business Reinsured.
Quota Share Percentages for Issue Dates in 1998, 1999, and 2000: For issue
dates in 1998, the quota share percentage will be 40%.
<PAGE> 2
The quota share percentage shall be 10%, commencing as of the effective
date of this amendment, for policies issued from January 1, 1999 through
September 30, 1999 previously reinsured on a 40% quota-share basis.
Pursuant to Amendment Number 1 to the Agreement, Article XIV, RECAPTURE,
Paragraph 1, the Reinsured elects to recapture seventy five percent (75%)
of the Reinsured Policies issued from January 1, 1999, through September
30, 1999. The Reinsured will pay the Reinsurer a Recapture Fee equal to
$4,439,173 plus accrued interest at an effective rate of 9%, which shall
accrue from October 1, 1999 to the date such amount is settled and paid,
which shall be paid no later than January 31, 2000. The Reinsured may
offset the Recapture Fee against amounts otherwise due the Reinsured.
For policies issued from October 1, 1999 through December 31, 2000, the
quota share percentage will be 10%.
Quota Share Percentages for Issue Dates in 2001 and later: The Reinsurer
and the Reinsured will jointly determine the quota share percentages no
later than December 1st applicable to new issues in the following calendar
year. The determining factors for the quota share percentage are the
expected WMA Total Variable Annuity First Year Payments Collected by the
Reinsured for the calendar year that the quota share percentage will be
applicable. This determination of the quota share percentage will be on a
mutually acceptable basis, recognizing the good faith nature of this
Agreement, and with references to the estimates made by both parties, based
on results from prior periods.
Notwithstanding the provisions of the previous three paragraphs and at any
time on or after January 1, 2000 and before January 1, 2003, the Reinsurer
shall have the option (provided the Reinsurer demonstrates sufficient
capacity) to prospectively increase the quota share percentage on all
reinsured policies issued from the beginning of the prior calendar year to
the date the Reinsurer elects to increase the quota share percentage. The
quota share percentage, as increased, shall not exceed the Scheduled Quota
Share Percentage in accordance with terms contained in Schedule B1 of the
Agreement, as amended. The Reinsurer shall demonstrate its capacity by
showing the Reinsured that its unassigned invested securities, together
with anticipated cash flows (including retrocession facilities), will be
sufficient to meet expected reinsurance settlements, with regard to the
policies subject to the increased quota share percentage, for a period of
not less than twenty-four months following the date the Reinsurer elects to
increase the quota share percentage. Upon election to increase the quota
share percentage, the initial ceding allowance payable to the Reinsured
shall equal (a) less (b), where:
(a) equals settlements that would have otherwise occurred under the
Agreement, had the increased quota share percentage been applicable
from the beginning of the prior calendar year to the date the Reinsurer
elects to increase the quota share percentage, accrued at an effective
rate of * %, and
----------------
* Material omitted pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934.
2
<PAGE> 3
(b) equals all settlements due or paid under the Agreement from the
beginning of the prior calendar year to the date the Reinsurer elects
to increase the quota share percentage, accrued at an effective rate of
* %.
The initial ceding allowance shall be payable within 14 days after the
Reinsurer's election to increase the quota share percentage.
Thereafter, the quota share percentage applicable to all new policies
issued and reinsured shall be determined in accordance with terms contained
in Schedule B1 of the Agreement, as amended.
The Scheduled Quota Share Percentages for each threshold of expected WMA
Total Variable Annuity First Year Payments Collected by the Reinsured are
shown in the following table:
<TABLE>
<CAPTION>
--------------------------------------------------------------
WMA TOTAL VARIABLE ANNUITY FIRST SCHEDULED
YEAR PAYMENTS COLLECTED BY THE QUOTA SHARE
REINSURED (IN MILLIONS) PERCENTAGE
--------------------------------------------------------------
<S> <C>
$100-249 40%
--------------------------------------------------------------
$250+ 50%
--------------------------------------------------------------
</TABLE>
The scheduled quota share percentages may be reduced 5%, if the expected
WMA Total Variable Annuity First Year Payments Collected by the Reinsured
are anticipated to decline from the sum of the most recent twelve months'
Payments and the Cumulative Effective Growth Rate is less than 15%. A
reduction in the quota share percentage will be mutually acceptable to both
parties.
- ----------------
* Material omitted pursuant to Rule 24b-2 under the Securities Exchange Act
of 1934.
3
<PAGE> 4
* * * * *
Except as expressed herein, all terms, covenants and provisions of the
Automatic Variable Annuity Reinsurance Agreement not in conflict with the
provisions of this amendment shall remain unaltered and in full force and
effect.
In witness of the above, the Reinsured and the Reinsurer, by their respective
officers have executed this amendment in duplicate at the dates and places
indicated and shall be effective as of October 1, 1999.
WESTERN RESERVE LIFE WMA LIFE INSURANCE
ASSURANCE CO. OF OHIO COMPANY LIMITED
at St. Petersburg, Fl at Kamuela, Hawaii
on March 16, 2000 on March 20, 2000
By: /s/ Larry Kirkland By: /s/ Edward F. McKernan
----------------------------- ------------------------
Title: VP & Managing Actuary Title: Vice President
By: /s/ Alan Yaeger By: /s/ Thomas W. Montgomery
----------------------------- ------------------------
Title: EVP Title: Vice President
4
<PAGE> 1
EXHIBIT 10.5
Amendment Number 3 to the
Automatic Flexible Premium Variable Life Reinsurance Agreement Number 2
(Referred to as the Agreement)
Between
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
St. Petersburg, Florida
(referred to as the Reinsured)
and
WMA LIFE INSURANCE COMPANY LIMITED
Hamilton, Bermuda
(referred to as the Reinsurer)
Effective February 1, 2000
Amendment Number 1 to the Agreement is hereby rendered null and void.
* * * * *
Except as expressed herein, all terms, covenants and provisions of the
Automatic Flexible Premium Variable Life Reinsurance Agreement Number 2 that
are not in conflict with the provisions of this amendment shall remain
unaltered and in full force and effect.
In witness of the above, the Reinsured and the Reinsurer, by their respective
officers have executed this amendment in duplicate at the dates and places
indicated and shall be effective as of February 1, 2000.
WESTERN RESERVE LIFE WMA LIFE INSURANCE
ASSURANCE CO. OF OHIO COMPANY LIMITED
at St. Petersburg, FL at Kamuela, Hawaii
on March 16, 2000 on March 20, 2000
By: /s/ Larry Kirkland By: /s/ Edward F. McKernan
----------------------------- ------------------------
Title: VP & Managing Actuary Title: Vice President
By: /s/ Alan Yaeger By: /s/ Thomas W. Montgomery
----------------------------- ------------------------
Title: EVP Title: Vice President
<PAGE> 1
EXHIBIT 10.6
Amendment Number 3 to the
Automatic Variable Annuity Reinsurance Agreement
(Referred to as the Agreement)
Between
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
St. Petersburg, Florida
(referred to as the Reinsured)
and
WMA LIFE INSURANCE COMPANY LIMITED
Hamilton, Bermuda
(referred to as the Reinsurer)
Effective February 1, 2000
Amendment Number 1 to the Agreement is hereby rendered null and void.
* * * * *
Except as expressed herein, all terms, covenants and provisions of the
Automatic Variable Annuity Reinsurance Agreement not in conflict with the
provisions of this amendment shall remain unaltered and in full force and
effect.
In witness of the above, the Reinsured and the Reinsurer, by their respective
officers have executed this amendment in duplicate at the dates and places
indicated and shall be effective as of February 1, 2000.
WESTERN RESERVE LIFE WMA LIFE INSURANCE
ASSURANCE CO. OF OHIO COMPANY LIMITED
at St. Petersburg, Fl at Kamuela, Hawaii
on March 16, 2000 on March 20, 2000
By: /s/ Larry Kirkland By: /s/ Edward F. McKernan
----------------------------- ------------------------
Title: VP & Managing Actuary Title: Vice President
By: /s/ Alan Yaeger By: /s/ Thomas W. Montgomery
----------------------------- ------------------------
Title: EVP Title: Vice President
