10-K/A 1 g70633e10-ka.txt STANDARD MANAGEMENT CORPORATION 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-20882 STANDARD MANAGEMENT CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-1773567 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 10689 North Pennsylvania Avenue, Indianapolis, Indiana 46280 (317) 574-6200 (Address of principal executive offices) (Telephone) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on March 15, 2001 as reported on The NASDAQ Stock Market, was approximately $20.0 million. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 15, 2001 Registrant had outstanding 7,545,156 shares of Common Stock. Documents Incorporated by Reference: Portions of the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. 2 PART I As used in this report, unless the context otherwise clearly requires, "SMC", or the "Company" refers to Standard Management Corporation and its consolidated subsidiaries and "Standard Management" refers to Standard Management Corporation on an unconsolidated basis. All financial information contained in this report is presented in accordance with generally accepted accounting principles ("GAAP") unless otherwise specified. ITEM 1. BUSINESS OF SMC SMC is an international financial services holding company that directly and through its subsidiaries develops, markets and administers domestic asset accumulation and international unit-linked assurance products. During 1999 and 2000, SMC has focused on organic growth. In years prior to 1999, a primary component of SMC's growth related to the acquisition of selected insurance companies and blocks of in force life insurance and annuity businesses. Through its insurance subsidiaries, the Company's operating strategy is to develop profitable products, enhance marketing distribution channels and consolidate and streamline management and administrative functions of acquired companies. OPERATING SEGMENTS The Company conducts and manages its business through the following operating segments reflecting the geographical locations of principal insurance subsidiaries: Domestic Operations includes the following insurance subsidiaries at December 31, 2000: - Standard Life Insurance Company of Indiana ("Standard Life"), SMC's principal insurance subsidiary, was organized in 1934 as an Indiana domiciled life insurer. It is licensed to write new business or service existing business in the District of Columbia and all states except New York and New Jersey. Standard Life offers flexible premium deferred annuities ("FPDA's"), equity-indexed annuities, single premium immediate annuities ("SPIA's"), and traditional and universal life insurance products. Standard Life also generates cash flow and income from closed blocks of in force life insurance and annuities. Standard Life has a rating of B+ (Very Good, Secure) by the rating agency A.M. Best Company, Inc. ("A.M. Best"). - Dixie National Life Insurance Company ("Dixie Life"), a 99.4% owned subsidiary of Standard Life, was organized in 1965 as a Mississippi domiciled life insurer. Dixie Life is licensed in 22 states and administers life insurance products, primarily "burial expense" policies. Effective January 1, 1999, the Company ceased selling new business through Dixie Life. Dixie Life has a rating of "B" ("Fair") by A.M. Best. - Savers Marketing Corporation ("Savers Marketing") is the prior marketing distributor of Savers Life Insurance Company ("Savers Life"). Refer to "Acquisition Strategy and Recent Acquisitions". Savers Marketing markets Standard Life's products through financial institutions and independent agents. Savers Marketing also receives administrative, marketing and commission fees for services provided to unaffiliated companies. International Operations include the following holding company and its two wholly owned insurance subsidiaries at December 31, 2000: - Standard Management International S.A., a wholly owned subsidiary of SMC, is a holding company organized under Luxembourg law with its registered office in Luxembourg. At December 31, 2000, Standard Management International, S.A. and its subsidiaries ("SMI") had policies in force in over 80 countries. The majority of its business is unit-linked assurance products with a range of policyholder directed investment choices coupled with a small death benefit, sold through its subsidiaries. - Premier Life (Luxembourg) S.A. ("Premier Life (Luxembourg)") primarily offers unit-linked products throughout the European Union. - Premier Life (Bermuda) Ltd. ("Premier Life (Bermuda)") primarily offers unit-linked products in markets throughout the world. MARKETING DOMESTIC MARKETING General: The Company's agency force, of approximately 4,000 independent general agents, was organized to provide a lower cost alternative to the traditional captive agency force. These agents distribute a full line of life insurance and annuity products issued by Standard Life. The Company selectively recruits new agents from those formerly associated with companies acquired by SMC. 2 3 SMC believes that both agents and policy owners value the service provided by SMC. The Company i) assists agents in submitting and processing policy applications, ii) assists with licensing applications, iii) provides marketing support for its agents, and iv) introduces agents to lead services. Standard Life offers a full portfolio of life insurance and annuity products selected on the basis of their competitive position, company profitability and likely consumer acceptance. Such portfolio includes FPDA's, equity-indexed annuities, and whole and universal life insurance products. Each general agent operates his own agency and is responsible for all expenses of the agency. The general agents are compensated directly by Standard Life, who performs all policy issuance, underwriting and accounting functions. Standard Life is not dependent on any one agent or agency for any substantial amount of its business. No single agent accounted for more than 5% of Standard Life's annual sales in 2000, and the top twenty individual agents accounted for approximately 37% of Standard Life's volume in 2000. At December 31, 2000, approximately 66% of Standard Life's independent agents were located in Indiana, California, Florida, Ohio, Hawaii and North Carolina with the balance distributed across the country. Standard Life is attempting to increase the number and geographic diversity of its agents. Standard Life does not have exclusive agency agreements with its agents. Therefore, SMC's management believes most of these agents sell similar products for other insurance companies. This could result in a sales decline if Standard Life's products were to become relatively less competitive. Standard Life's 2000 FPDA and equity-indexed annuity sales increased partially due to an aggressive marketing campaign targeted to high volume sales agents and marketing companies. Also contributing to the increase in premiums was the continued development of Standard Life's distribution system through an aggressive program aimed at retention of key producers and expanded geographical concentration. Savers Marketing distributes life and annuity products through financial institutions and independent general agents. Savers Marketing has approximately 2,000 active brokers and is not dependent on any one broker or agency for any substantial amount of its business. Each broker operates independently and is responsible for all of his or her expenses. Savers Marketing employs three Regional Managers, who are responsible for personally initiating and maintaining direct communications with brokers and are responsible for the recruitment and training of all new brokers. Savers Marketing also entered into a three-year marketing and administrative contract ("the Administrative Contract") with QualChoice of North Carolina ("QualChoice") effective October 1, 1998 whereby Savers Marketing is the distribution system for the small group product offered by QualChoice. QualChoice is an HMO in a twenty-county area in the northwestern part of North Carolina offering HMO insurance coverage. Savers Marketing is compensated for this effort with a marketing fee, administrative fee and commission reimbursement for the use of its brokers. INTERNATIONAL MARKETING SMI has designed and launched new single and regular premium products in recent years. It is also in discussions with a number of distribution companies to form alliances to produce tailored products for their markets. Premier Life (Luxembourg) writes business within the European Union and Premier Life (Bermuda) writes international business throughout the world. The primary market for SMI's products is considered to be medium to high net worth individuals who typically have in excess of $100,000 to invest in a single premium policy and medium to high earners who have in excess of $3,000 per annum to invest in a regular premium savings product. The above individuals come from a combination of expatriates, residents of European Union countries and from other targeted areas. The expatriate and European insurance markets are well established and highly competitive with a large number of domestic and international groups operating in, or going into, the same markets as SMI. SMI's products are distributed through independent agents and stock brokers who have established connections with targeted individuals. SMI is striving to develop into an entrepreneurial-intermediary oriented organization committed to building long term relationships with high quality distributors, thereby creating a niche position. SMI places the same emphasis as SMC's United States ("U.S.") insurance companies on a high level of service to intermediaries and policyholders while striving to achieve low overhead costs. No single agent or broker accounted for more than 12% of SMI's annual sales for 2000, and the top ten agents and/or brokers accounted for approximately 47.6% of annual sales for 2000. CURRENTLY MARKETED PRODUCTS SMC primarily markets unit-linked policies, FPDA's, equity-indexed annuities, SPIA's, traditional life, universal and interest-sensitive life insurance policies. The following table sets forth the amounts and percentages of net premiums received by SMC from currently marketed products for the years ended December 31, 2000, 1999 and 1998, respectively (in thousands). 3 4
Year Ended December 31, 2000 1999 1998 ------------------- ------------------- ------------------- AMOUNT % Amount % Amount % -------- ----- -------- ----- -------- ----- Currently marketed products: Unit-linked products .................... $170,514 47.2 $ 55,192 25.1 $ 42,536 32.5 FPDA's .................................. 94,699 26.2 98,678 44.9 60,086 45.8 Equity-indexed annuities ................ 73,122 20.2 59,348 27.0 16,858 12.9 SPIA's .................................. 21,506 5.9 3,162 1.4 2,545 1.9 Universal and interest-sensitive life ... 963 .3 2,302 1.0 5,816 4.4 Traditional life ........................ 734 .2 1,029 .6 3,282 2.5 -------- ----- -------- ----- -------- ----- $361,538 100.0 $219,711 100.0 $131,123 100.0 ======== ===== ======== ===== ======== =====
The increase in deposits from unit-linked products in 2000 is primarily due to i) strengthening of SMI's distribution system by engaging more, highly productive agents, ii) concentrated marketing efforts in certain European countries, primarily Sweden, Belgium and Italy, and iii) favorable demand, in general, for investment based products. Annuity sales increased in 2000 primarily due to the introduction of new products and an increase in the agency base achieved through the recruitment of high volume agents. Also attributable to the annuity sales increase were larger managing general agencies and continued expansion of geographical marketing efforts. The individual annuity business is a growing segment of the savings and retirement industry, which increased in sales from $49 billion in 1989 to more than $115 billion in 1999. The individual annuity market, which is one of SMC's primary targets, comprises virtually all of it s domestic sales and 52% of its total sales. As the 76 million baby boomers born from 1946 through 1964 grow older, demand for insurance products is expected to grow. SMC believes that those seeking adequate retirement incomes will become less dependent on Social Security and their employers' retirement programs and more dependent upon their own financial resources. Annuities currently enjoy an advantage over certain other saving mechanisms because the annuity buyer receives a tax-deferred accrual of interest on the investment during the accumulation period. SMC's gross domestic sale percentages by U.S. geographical region are summarized as follows:
State 2000 1999 1998 ----- ---- ---- ---- Indiana...................................... 19% 15% 17% California................................... 15 11 5 Ohio......................................... 9 14 15 Florida...................................... 9 8 8 North Carolina............................... 6 8 10 Hawaii....................................... 6 5 7 Wisconsin.................................... 4 2 2 Michigan..................................... 4 1 2 All other states(1).......................... 28 36 34 --- --- --- Total........................................ 100% 100% 100% === === ===
(1) No other state had gross sales greater than 4% in 2000. DOMESTIC PRODUCTS FPDA's provide for an initial deposit by the owner and optional additional deposits, the time and amount of which are at the discretion of the owner. Standard Life credits the account of the owner with earnings at interest rates that are revised periodically until the maturity date. This accumulated value is tax deferred. Revisions to interest rates on FPDA's are restricted by an initial crediting rate guaranteed for a specific period of time, usually one year, and a minimum crediting rate guaranteed for the term of the FPDA, which is typically 3%. At maturity, the owner can elect a lump sum cash payment of the accumulated value or one of the various payout options available. Standard Life's FPDA's also typically provide for penalty-free partial withdrawals of up to 10% annually of the accumulation value after the owner has held the FPDA for more than 12 months. In addition, the owner may surrender the FPDA at any time before the maturity date and receive the accumulated value, less any surrender charge then in effect for that contract. To protect holders of FPDA's from a sharp reduction in the credited interest rate after a FPDA is issued, Standard Life permits the FPDA holder of certain annuities to surrender the annuity during a specified period without incurring a surrender charge if the renewal-crediting rate is below a stated level. This stated level of interest is referred to as the "bail-out rate" and is typically below the original crediting rate, but above the minimum guaranteed crediting rate. 4 5 As of January 1, 2001, the crediting rates available on Standard Life's currently marketed FPDA's ranged from 5.75% to 12.5%, with most new issues having an interest rate with a one-year guarantee period. A series of annuity products introduced in 2000 have their interest rate guaranteed for an initial period of 5-10 years. After the initial period, the crediting rate may be changed periodically, subject to a minimum guaranteed rate of 3.0%. As of January 1, 2001, interest crediting rates after the initial guarantee period ranged from 4% to 5.5%. The surrender charge is initially 7% to 15% of the contract value depending on the product and decreases over the applicable surrender charge period of five to thirteen years. As of January 1, 2001, the bail-out rate for Standard Life's FPDA's was 4.5%; certain currently marketed products carry a bail out rate for the first two to five years after issuance. As of December 31, 2000, Standard Life had 6,352 currently marketed FPDA contracts in force. Equity-indexed Annuities. In response to consumers' desire for alternative investment products with returns linked to common stocks, Standard Life introduced a line of equity-indexed annuity products in May 1998. These products accounted for $73.1 million of the total premiums collected in 2000. The annuity's contract value is equal to the premium paid increased for returns based upon a percentage (the "participation rate") of the change in the Standard & Poor's 500 Index ("S&P's 500 Index") and/or the Dow Jones Industrial Average Index ("DJIA") during each year of its term, subject to a minimum guaranteed value. The Company has the discretionary ability to annually change the participation rate (which currently is 70% plus a first-year "bonus"). The minimum guaranteed values are equal to between 75% and 85% of first year premiums and between 87.5% and 90% of renewal premiums collected for equity-indexed annuities, plus interest credited at an annual rate of 3%. The annuities provide for penalty-free withdrawals of up to 10% in each year after the first year of the annuity's term. Other withdrawals from the product are subject to a surrender charge. The Company purchases S&P's 500 Index or DJIA Index Call Options to hedge potential increases to policyholder benefits resulting from increases in the Index to which the product's return is linked. As of December 31, 2000, Standard Life had 4,015 currently marketed equity-indexed contracts. SPIA's. Standard Life offers two SPIA's whereby an annuitant purchases an immediate annuity with a one-time premium deposit at the time of issuance. Standard Life begins a payout stream shortly after the time of issuance consisting of principal plus accumulated interest credited to the annuity. A new SPIA product was introduced in the first quarter of 2000, which resulted in a 500% increase in sales over 1999 for this line of business. As of December 31, 2000, Standard Life had 475 currently marketed SPIA contracts in force. Payout is guaranteed until the termination of the contract. Universal Life. Flexible premium universal life ("FPUL") policies provide for periodic deposits, interest credits to account values and charges to the account values for mortality and administrative costs. As of January 1, 2001, the current interest rate on new sales of FPUL's was 5% to 6% with a guaranteed interest rate of 4%. As of December 31, 2000, Standard Life had 645 currently marketed FPUL policies in force. Traditional Life. Standard Life offers several types of non-participating traditional life policies, whole life policies with face amounts up to $50,000. Traditional life insurance products involve fixed premium payments made over time, with the stated death benefit paid in full upon the death of the insured. The whole life policy combines the death benefit with a forced savings plan. Premiums remain level over the life of the policy, with the policyholder prefunding during the early years of coverage when risk of death is low. Over time, whole life policies begin to accrue a cash value, which can be made available to the policyholder net of taxes and withdrawal penalties. The term policy provides benefits only as long as premiums are paid. As of December 31, 2000, Standard Life had 3,635 currently marketed traditional life policies in force. 5 6 INTERNATIONAL PRODUCTS Unit-linked Products. SMI currently writes unit-linked life products, which are similar to U.S. produced variable life products. Separate account assets and liabilities are maintained primarily for the exclusive benefit of universal life contracts and investment contracts of which the majority represents unit-linked business, where benefits on surrender and maturity are not guaranteed. They generally represent funds held in accounts to meet specific investment objectives of policyholders who bear the investment risk. Products include i) single premium unit-linked, publicly traded investments and ii) annual premium unit-linked, publicly traded investments and personal portfolio investments which can be used to place personal assets including private stock and investments with limited markets. Investment income and investment gains and losses within the separate accounts accrue directly to the policyholders. The fees received by SMI for administrative and contract holder maintenance services performed for these separate accounts are included in SMC's statement of operations. In the past SMI also sold investment contracts, universal life policies, and to a lesser extent, traditional life policies. The investment contracts are mainly short-term single premium endowments or temporary annuities under which fixed benefits are paid to the policyholder. The terms of these contracts are such that SMI has relatively small morbidity or mortality risk. The universal life contracts are mainly regular premium and single premium endowment. The benefits payable to the policyholders are directly linked to the investment performance of the underlying assets. FORMER PRODUCTS ("CLOSED BLOCKS") SMC also generates cash flow and income from its closed blocks of in force life insurance and annuities. Closed blocks consist of in force life insurance and annuities that are not currently being marketed by SMC. The closed block designation does not have legal or regulatory significance and there are no restrictions on their assets or future profits. The premiums received on the closed blocks are primarily from the ordinary and universal life business. Closed block premiums typically decline over extended periods of time as a result of policy lapses, surrenders and expiries. Annuities. SMC's closed blocks of deferred annuities consist primarily of FPDA's and a small amount of single premium deferred annuities ("SPDA's"), which, unlike FPDA's, do not provide for additional deposits. As of January 1, 2001, these deferred annuities had crediting rates ranging from 3.0% to 5.25% and guaranteed minimum crediting rates ranging from 3.0% to 5.0%. The crediting rate may be changed periodically. The contract owner is permitted to withdraw all or part of the accumulation value. SMC's closed blocks of annuities include payout annuities. Payout annuities consist of those annuities in which benefits are being paid out over a specified time period. Payout annuities cannot be terminated by surrender or withdrawal. SMC's crediting rates on payout annuities range from 3.0% to 7.0% and cannot be changed. At December 31, 2000, SMC had 13,374 annuity contracts in force for closed blocks. Traditional Life. The traditional life policies included in SMC's closed blocks are composed primarily of fixed premium, cash value whole life products. In addition, they include annually renewable term policies as well as five, ten and fifteen year level premium term policies. At December 31, 2000, SMC had 39,317 traditional life policies in force for closed blocks. Universal Life. Certain closed blocks include universal life business. For this business, SMC credits deposits and interest to account values and charges the account values for mortality and administrative costs. At December 31, 2000, SMC had 11,936 universal life policies in force for the closed block of business. Refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion on product profitability. OPERATIONS SMC emphasizes a high level of service to agents and policyholders and strives to achieve low overhead costs. SMC's principal administrative departments are its financial, policyholder services and management information services ("MIS") departments. The financial department provides accounting, budgeting, tax, investment, financial reporting and actuarial services and establishes cost control systems for SMC. The policyholder services department reviews policy applications, issues and administers policies and authorizes disbursements related to claims and surrenders. The MIS department oversees and administers SMC's information processing systems. SMC's administrative departments in the United States ("U.S.") use a common integrated system that permits efficiency and cost control. SMC's MIS system services approximately 75,000 active policies at December 31, 2000 and is continually being improved to provide for growth from potential acquisitions and sales. SMI's administrative and MIS departments in Luxembourg are an autonomous unit from the systems in the U.S. In 2000, SMI integrated an operating system consistent with that used for Domestic operations, in an effort to enhance efficiency and effectiveness. Additional system enhancements are in process and are expected to be completed in 2001. 6 7 UNDERWRITING Premiums charged on insurance products are based in part on assumptions about the incidence and timing of insurance claims. SMC has adopted and follows underwriting procedures for traditional life and universal life insurance policies. To implement these procedures, SMC employs a professional underwriting staff. All underwriting decisions are made in SMC's home office. To the extent that an applicant does not meet SMC's underwriting standards for issuance of a policy at the standard risk classifications, SMC may rate or decline the application. Underwriting with respect to annuities is minimal. Traditional underwriting procedures are not applied to policies acquired in blocks. In these cases, SMC reviews the mortality experience for recent years and compares actual experience to that assumed in the actuarial projections for the acquired policies. INVESTMENTS Investment activities are an integral part of SMC's business as the investment income of SMC's insurance subsidiaries is an important part of its total revenues. Profitability is significantly affected by spreads between interest earned on invested assets and rates credited on insurance liabilities. Substantially all credited rates on FPDA's may be changed at least annually. For the year ended December 31, 2000, the weighted average net yield of SMC's investment portfolio was 7.28% and the weighted average interest rate credited on SMC's interest-sensitive liability portfolio, excluding liabilities related to separate accounts and equity indexed annuities, was approximately 4.90% per annum for an average interest spread of 238 basis points at December 31, 2000, compared to 226 basis points at December 31, 1999. The increase in the average interest spread includes lower crediting rates on new and existing FPDA business in order to meet targeted pricing spreads. Increases or decreases in interest rates could increase or decrease the average interest rate spread between investment yields and interest rates credited on insurance liabilities, which in turn could have a beneficial or adverse effect on the future profitability of SMC. Sales of fixed maturity securities that result in investment gains may also tend to decrease future average interest rate spreads. State insurance laws and regulations prescribe the types of permitted investments and limit their concentration in certain classes of investments. SMC balances the duration of its invested assets with the expected duration of benefit payments arising from insurance liabilities. The "duration" of a security is a measure of a security's price sensitivity to changes in market interest rates. The option adjusted duration of fixed maturity securities and short-term investments for its U.S. insurance subsidiaries was 4.4 and 5.3 at December 31, 2000 and 1999, respectively. SMC's investment strategy is guided by strategic objectives established by the Investment Committee of the Board of Directors. SMC's major investment objectives are to: i) ensure adequate safety of investments and protect and enhance capital, ii) maximize after-tax return on investments, iii) match the anticipated duration of investments with the anticipated duration of policy liabilities, and iv) provide sufficient liquidity to meet cash requirements with minimum sacrifice of investment yield. Consistent with its strategy, SMC invests primarily in securities of the U.S. government and its agencies, investment grade utilities and corporate debt securities and collateralized mortgage obligations ("CMOs"). When opportunities arise, below investment grade securities may be purchased; however, protection against default risk is a primary consideration. SMC has determined it will not invest more than 7% of its bond portfolio in below investment grade securities. The National Association of Insurance Commissioners ("NAIC") assigns quality ratings and uniform book values to securities called "NAIC Designations" which are used by insurers when preparing their annual statements. The NAIC assigns ratings to publicly traded and privately-placed securities. The ratings assigned range from Class 1 to Class 6, with a rating in Class 1 being of the highest quality. The following table sets forth the quality of SMC's fixed maturity securities as of December 31, 2000, classified in accordance with the ratings assigned by the NAIC:
PERCENT OF FIXED NAIC RATING MATURITY SECURITIES ----------- ------------------- 1.................................................... 57 2.................................................... 37 --- TOTAL INVESTMENT GRADE............................... 94 3-4.................................................. 5 5-6.................................................. 1 --- TOTAL FIXED MATURITY SECURITIES.............. 100% ===
Effective December 1, 2000, Zurich Scudder Investments (formerly known as Scudder Kemper Investments, Inc.) began managing SMC's domestic fixed maturity securities, subject to the direction of SMC's Investment Committee. Prior to December 1, 2000 SMC's domestic invested assets were managed by Conseco Capital Management, Inc. Approximately 27% of SMC's fixed maturity securities at December 31, 2000 are comprised of mortgage-backed securities that include CMOs and mortgage-backed pass-through securities. Approximately 4% of the book value of mortgage-backed securities in SMC's portfolio is backed by the full faith and credit of the U.S. government as to the full amount 7 8 of both principal and interest and 70% are backed by an agency of the U.S. government (although not by the full faith and credit of the U.S. government). SMC closely monitors the market value of all investments within its mortgage-backed portfolio. The following table summarizes SMC's mortgage-backed securities at December 31, 2000 (in thousands):
ESTIMATED AVG. % OF % OF AVG. LIFE TERM AMORTIZED FIXED FAIR FIXED OF TO FINAL COST MATURITIES VALUE MATURITIES INVESTMENT MATURITY --------- ---------- -------- ---------- ---------- -------- (IN YEARS) (IN YEARS) AGENCY CMOS: PLANNED AND TARGET AMORTIZATION CLASSES .... $ 32,395 4.4% $ 32,240 4.6% 5.2 21.5 SEQUENTIAL AND SUPPORT CLASSES ............. 6,118 0.8% 5,950 0.8% 4.8 23.6 -------- ---- -------- ---- --- ---- TOTAL ................................. 38,513 5.2% 38,190 5.4% 5.1 21.8 NON-AGENCY CMOS: SEQUENTIAL CLASSES ....................... 3,311 0.5% 3,069 0.4% 4.7 11.8 OTHER .................................... 28,191 3.8% 28,493 4.0% 6.3 23.8 -------- ---- -------- ---- --- ---- TOTAL ...................................... 31,402 4.3% 31,562 4.4% 6.1 22.6 NON AGENCY CMBS ............................ 17,960 2.4% 16,683 2.3% 4.4 17.9 AGENCY MORTGAGE-BACKED PASS-THROUGH SECURITIES ............................... 114,915 15.6% 115,955 16.3% 6.5 24.5 -------- ---- -------- ---- --- ---- TOTAL MORTGAGE-BACKED SECURITIES ...... $202,890 27.5% $202,390 28.4% 6.0 23.1 ======== ==== ======== ==== === ====
The market values for SMC's mortgage-backed securities were determined from broker-dealer markets, internally developed methods and nationally recognized statistical rating organizations. Certain mortgage-backed securities are subject to significant prepayment risk, since, in periods of declining interest rates, mortgages may be repaid more rapidly than scheduled as individuals refinance higher rate mortgages to take advantage of the lower current rates. As a result, holders of mortgage-backed securities may receive large prepayments on their investment, which cannot be reinvested at an interest rate comparable to the rate on the prepaying mortgages. SMC has addressed this risk of prepayment risk by investing 18% of its mortgage-backed investment portfolio in planned and target amortization classes. These investments are designed to amortize in a more predictable manner by shifting the primary risk of prepayment of the underlying collateral to investors in other tranches ("support classes"). Mortgage-backed pass-through securities, "sequential" and support class CMOs, which comprised the remaining 82% of the book value of SMC's mortgage-backed securities at December 31, 2000, are more sensitive to this prepayment risk. SEPARATE ACCOUNTS Separate account assets and liabilities are maintained primarily for universal life contracts of which the majority represents unit-linked business where benefits on surrender and maturity are not guaranteed. They generally represent funds held in accounts to meet specific investment objectives of policyholders who bear the investment risk. Investment income and investment gains and losses accrue directly to such policyholders. RESERVES Our insurance subsidiaries have established and carry as liabilities in their financial statements actuarially determined liabilities to satisfy their respective annuity contract and life insurance policy obligations. Insurance policy liabilities for deferred annuities and universal life policies are equal to the full account value that accrues to the policyholder (cumulative premiums less certain charges, plus interest credited) with rates ranging from 3.0% to 12.5% in 2001 and 3.0% to 12.5% in 2000. Standard Management performs periodic studies to compare current experience for mortality, interest and lapse rates with projected experience used in calculating the deferred annuity and universal life insurance policy liabilities. Differences are reflected currently in earnings for each period. Standard Management historically has not experienced significant adverse deviations from its assumptions. 8 9 Insurance policy liabilities for traditional life insurance contracts are computed using the net level premium method on the basis of assumed investment yields, mortality and withdrawals, which were appropriate at the time the policies were issued. Assumed investment yields are based on interest rates ranging from 6.2% to 7.5%. Mortality is based upon various actuarial tables, principally the 1965-1970 or the 1975-1980 Select and Ultimate Table. Withdrawals are based upon Company experience and vary by issue age, type of coverage, and duration. REINSURANCE Consistent with the general practice of the life insurance industry, SMC has reinsured portions of the coverage provided by its insurance products with other insurance companies under agreements of indemnity reinsurance. SMC's policy risk retention limit on the life of any one individual does not exceed $150,000. Indemnity reinsurance agreements are intended to limit a life insurer's maximum loss on a particular risk or to obtain a greater diversification of risk. Indemnity reinsurance does not discharge the primary liability of the original insurer to the insured, but it is the practice of insurers for statutory accounting purposes (subject to certain limitations of state insurance statutes) to account for risks which have been reinsured with other approved companies, to the extent of the reinsurance, as though they are not risks for which the original insurer is liable. However, under Statement of Financial Accounting Standards No. 113 ("SFAS 113"), "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" these amounts are added back to policy reserves and recorded as amounts due from reinsurers. Reinsurance ceded on life insurance policies to unaffiliated companies by SMC in 2000, 1999 and 1998, excluding financial reinsurance agreements, represented 45.3%, 40.3% and 46.8%, respectively, of gross combined individual life insurance in force at the end of such years. Reinsurance assumed in the normal course from unaffiliated companies by SMC in 2000, 1999 and 1998 represented 8.71%, 9.15%, and 9.42%, respectively, of net combined individual life insurance in force. The following is reinsurance ceded information for in force life insurance policies at December 31, 2000 (in thousands):
% OF TOTAL FACE VALUE OF REINSURANCE REINSURANCE INSURANCE COMPANY LIFE POLICIES CEDED RECOVERABLE ----------------- ------------- ----------- ----------- LINCOLN NATIONAL LIFE INSURANCE COMPANY $ 184,483 15.21% $1,374 EMPLOYERS REINSURANCE CORPORATION 119,815 9.88% 341 BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA 114,824 9.47% 413
Reinsured life insurance in force at December 31, 2000 is ceded to insurers rated "A" ("Excellent") or better by A.M. Best. SMC historically has not experienced any material losses in collection of reinsurance receivables. SMC's largest annuity reinsurer at December 31, 2000, SCOR Life U.S. Insurance Company ("SCOR Life"), formerly known as Winterthur Life Re Insurance Company, represented $22.7 million, or 55.5% of total reinsurance recoverable and is rated "A+" ("Superior") by A.M. Best. SCOR Life limits dividends and other transfers by Standard Life to SMC or affiliated companies if adjusted surplus is less than 5.5% of admitted assets or $41.9 million at December 31, 2000. Standard Life's adjusted surplus was greater than 5.5% of its admitted assets at December 31, 2000. "Admitted assets" are defined by the National Association of Insurance Commissioners as "probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events" which may be included in an insurance company's balance sheet. Some assets or portions of assets may be considered "nonadmitted" because they do not conform to the laws and regulations of various states. Therefore, certain assets which normally would be accorded value in noninsurance corporations are accorded no value and thus reduce the reported surplus of the insurance company. Effective October 1, 1998, Standard Life no longer ceded its new annuity business as the growth of its liabilities, which can erode surplus during periods of increasing sales, was not as great as originally anticipated. The annuity business remained in effect for policies reinsured prior to October 1, 1998. As a result of discontinuing ceding its new annuity business, Standard Life has been able to retain more profitable business. Savers Life issued and marketed Medicare supplement policies in 1998 including the time period from March 12, 1998, the acquisition date of Savers Life, through July 1, 1998, when the Medicare supplement business was sold. In connection with the sale of the Medicare supplement business, Savers Life received an initial statutory ceding allowance of $4.2 million, which was offset by a reserve reduction of $1.6 million and write off of present value of future profits of $2.6 million and resulted in no 9 10 gain or loss for GAAP. Under the terms of the reinsurance agreement, Standard Life administered the Medicare supplement business through October 1, 1999 in exchange for administrative fee income. The consummation of this transaction resulted in the Company exiting from the Medicare supplement business it acquired with the Savers Life acquisition. ACQUISITION STRATEGY AND RECENT ACQUISITIONS A principal component of SMC's strategy is to grow through the acquisition of life insurance companies and blocks of in force life insurance and annuities. SMC regularly investigates acquisition opportunities in the life insurance industry that complement or are otherwise strategically consistent with its existing business. Any decision to acquire a block of business or an insurance company will depend on a favorable evaluation of various factors. SMC believes that availability of blocks of business in the marketplace will continue in response to ongoing industry consolidation, risk-based capital requirements and other regulatory and rating agency concerns. In addition, SMC plans to market annuity and life insurance products directly, as it has done in the past. SMC currently has no plans or commitments to acquire any specific insurance business or other material assets. SMC has the information systems and administrative capabilities necessary to add additional blocks of business without a proportional increase in operating expenses. In addition, SMC has developed management techniques for reducing or eliminating the expenses of the companies it acquires through the consolidation of their operations with those of SMC. Such techniques include reduction or elimination of overhead, including the acquired company's management, staff and home office, elimination of marketing expenses and, where appropriate, the substitution of Standard Life's distribution network for the acquired company's current distribution system, and the conversion of the acquired company's data processing operations to SMC's system. SMC typically acquires companies or blocks of business through the purchase or exchange of shares. This method is also used for assumption reinsurance transactions. SMC's future acquisitions may be subject to certain regulatory approvals, policyholder consents and stockholder approval. The following is a list of SMC's most recent acquisitions and the terms under which they were purchased (in millions):
Purchase Price ------------------------------------------------------------ Acquisition Company SMC Stock Cash Costs Total ------------------------- --------- ---- ----------- ----- Savers Life $14.9 $2.2 $ 1.5 $18.6 Midwestern Life Insurance Company of Ohio ("Midwestern Life") 4.6 8.9 .6 14.1
The acquisitions of Savers Life and Midwestern Life were accounted for using the purchase method of accounting and accordingly, SMC's consolidated financial statements include the results of operations of the acquired companies from the effective dates of their respective acquisitions. Savers Life and Midwestern Life were merged into Standard Life effective December 31, 1998. As a result of these mergers, Standard Life remained as the surviving entity. Under purchase accounting, SMC allocated the total purchase price of the assets and liabilities acquired, based on a determination of their fair values and recorded the excess of acquisition cost over net assets acquired as goodwill, which is being amortized on a straight-line basis over 20 - 30 years. COMPETITION The life insurance industry is highly competitive and consists of a large number of both stock and mutual insurance companies, many of which have substantially greater financial resources, broader and more diversified product lines and larger staffs than those possessed by SMC. There are approximately 2,000 life insurance companies in the United States, which may offer insurance products similar to those marketed by SMC. Competition within the life insurance industry occurs on the basis of, among other things, i) product features such as price and interest rates, ii) perceived financial stability of the insurer, iii) policyholder service, iv) name recognition, and v) ratings assigned by insurance rating organizations. Additionally, when SMC bids on companies it wishes to acquire, it typically is in competition with other entities. SMC must also compete with other insurers to attract and retain the allegiance of agents. SMC believes it has been successful in attracting and retaining agents because it has been able to offer competitive products, competitive commission structures, internet based agent services, prompt policy issuance and responsive policyholder service. Because most annuity business written by life companies is through agents, management believes that competition centers more on the strength of the agent relationship rather than on the identity of the insurer. Competition also is encountered from the expanding number of banks, securities brokerage firms and other financial intermediaries which are marketing insurance products and which offer competing products such as savings accounts and 10 11 securities. The Company began distributing annuities through financial institutions as a result of the acquisition of Savers Marketing in March 1998. The recent passage, by Congress, of the Gramm-Leach-Bliley Financial Services Modernization Act ("GLB Act") has expanded competitive opportunities for non-insurance financial services companies. The full effects of the GLB Act on our competition cannot be predicted with certainty at this time. The unit-linked life insurance market in Europe is highly competitive and consists of many companies domiciled in the United Kingdom and its offshore centers, as well as many companies in Luxembourg and Ireland, which sell products similar to those of SMI. SMI is able to develop its share of a competitive market by developing strong relationships with investment advisors, brokers, accountants and tax attorneys. Financial institutions, school districts, marketing companies, agents who market insurance products and policyholders use the ratings of an insurer as one factor in determining which insurer's annuity to market or purchase. Standard Life and Dixie Life have a rating of "B+" and "B", respectively, by A.M. Best. A rating of "B+" is assigned by A.M. Best to companies that, in their opinion, have achieved very good overall performance when compared to the standards established by A.M. Best, and have a good ability to meet their obligations to policyholders over a long period of time. A rating of "B" is assigned by A.M. Best to companies that, in their opinion, have achieved good overall performance when compared to the standards established by A.M. Best. According to A.M. Best, these companies generally have an adequate ability to meet their obligations to policyholders, but their financial strength is vulnerable to unfavorable changes in underwriting or economic conditions. In evaluating a company's financial and operating performance, A.M. Best reviews the company's profitability, leverage and liquidity as well as the company's book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its reserves and the experience and competence of its management. A.M. Best's ratings are based upon factors relevant to policyholders, agents, insurance brokers and intermediaries and are not directed to the protection of investors. Generally, rating agencies base their ratings on information furnished to them by the issuer and on their own investigations, studies and assumptions by the rating agencies. There is no assurance that any particular rating will continue for any given period of time or that it will not be changed or withdrawn entirely if, in the judgment of the rating agency, circumstances so warrant. Although a higher rating by A.M. Best or another insurance rating organization could have a favorable effect on Standard Life's business, management believes that it is able to compete on the basis of their competitive crediting rates, asset quality, strong relations with its independent agents and the quality of service to its policyholders. FEDERAL INCOME TAXATION The life insurance and annuity products marketed and issued by Standard Life generally provide the policyholder with an income tax advantage, as compared to other saving investments such as certificates of deposit and bonds, in that income taxation on the increase in value of the product is deferred until receipt by the policyholder. With other savings investments, the increase in value is taxed as earned. Life insurance benefits that accrue prior to the death of the policyholder, and annuity benefits, are generally not taxable until paid, and life insurance death benefits are generally exempt from income tax. The tax advantage for life insurance and annuity products is provided in the Internal Revenue Code ("IRC"), and is generally followed in all states and other U.S. taxing jurisdictions. Accordingly, it is subject to change by Congress and the legislatures of the respective taxing jurisdictions. SMC and its U.S. non-insurance subsidiaries file a consolidated return for federal income tax purposes and, as of December 31, 2000, have net operating loss carryforwards of approximately $6.3 million, which expire from 2007 to 2018. In addition, Standard Life and Dixie Life file a consolidated return for federal income tax purposes and at December 31, 2000, have a net operating loss carryforward of approximately $2.2 million, which expires in 2010, 2012 and 2019. These carryforwards will be available to reduce taxable income in the Standard Life consolidated return. SMI is a Luxembourg 1929 holding company, and has a preferential tax status. SMI is completely exempt from corporate income tax, municipal business tax and net capital tax, but is subject to "taxe d'abonnement", levied annually at a rate of 0.2% of the paid up capital. Premier Life (Bermuda) is exempt from income tax until March 2016 pursuant to a decree from the Minister of Finance. Premier Life (Luxembourg) is subject to Luxembourg income taxation (statutory corporate rate of 37.45%) and a capital tax of approximately 0.5% of its net equity. At December 31, 2000, Premier Life (Luxembourg) had accumulated corporate income tax loss carryforwards of approximately $.4 million, all of which may be carried forward indefinitely. To the extent that such income is taxable under U.S. law, it will be included in SMC's consolidated return. Effective January 1, 2000, Standard Management entered into a tax sharing agreement with Savers Marketing and SMI that allocates the consolidated federal income tax liability. In 2000, Savers Marketing and SMI paid Standard Management $.3 million and $1.0 million, respectively, in accordance with this agreement. INFLATION The primary direct effect of inflation on SMC is the increase in operating expenses. A large portion of SMC's operating expenses consists of salaries, which are subject to wage increases at least partly affected by the rate of inflation. 11 12 The rate of inflation also has an indirect effect on SMC. To the extent that the government's economic policy to control the level of inflation results in changes in interest rates, SMC's new sales of insurance products and investment income are affected. Changes in the level of interest rates also have an effect on interest spreads, as investment earnings are reinvested. FOREIGN OPERATIONS AND CURRENCY RISK SMI policyholders invest in assets denominated in a broad range of currencies. Policyholders effectively bear the currency risk, if any, as these investments are matched by policyholder separate account liabilities. Therefore, their investment and currency risk is limited to premiums they have paid. Policyholders are not permitted to invest directly in options, futures and derivatives. SMI could be exposed to currency fluctuations if currencies within the conventional investment portfolio or certain actuarial reserves are mismatched. The assets and liabilities of this portfolio and the reserves are continually matched by the company and at regular intervals by an independent actuary. In addition, Premier Life's (Luxembourg) stockholder's equity is denominated in Luxembourg francs. Premier Life (Luxembourg) does not hedge its translation risk because its stockholder's equity will remain in Luxembourg francs for the foreseeable future and no significant realized foreign exchange gains or losses are anticipated. At December 31, 2000, there is a $2.4 million unrealized loss from foreign currency translation. Due to the nature of unit-linked products issued by SMI, which represent virtually all of the SMI portfolio, the investment risk rests with the policyholder. Investment risk for SMI exists where investment decisions are made with respect to the remaining traditional business and for the assets backing certain actuarial and regulatory reserves. The investments underlying these liabilities mostly represent short term investments and fixed maturity securities which are normally bought and/or disposed of only on the advice of independent consulting actuaries who perform an annual exercise comparing anticipated cash flows on the insurance portfolio with the cash flows from the fixed maturity securities. Any resulting material foreign currency mismatches are then covered by buying and/or selling the securities as appropriate. REGULATORY FACTORS SMC's insurance subsidiaries are subject to significant regulation by the insurance regulatory authorities in the jurisdictions in which they are domiciled and the insurance regulatory bodies in the other jurisdictions in which they are licensed to sell insurance. The purpose of such regulation is primarily to ensure the financial stability of insurance companies and to provide safeguards for policyholders rather than to protect the interest of stockholders. The insurance laws of various jurisdictions establish regulatory agencies with broad administrative powers relating to i) the licensing of insurers and their agents, ii) the regulation of trade practices, iii) management agreements, iv) the types of permitted investments and maximum concentration, v) deposits of securities, vi) the form and content of financial statements, vii) premiums charged by insurance companies, viii) sales literature and insurance policies, ix) accounting practices and the maintenance of specified reserves, and x) capital and surplus. SMC's insurance subsidiaries are required to file detailed periodic financial reports with supervisory agencies in certain jurisdictions. Most states have also enacted legislation regulating insurance holding company activities including acquisitions, extraordinary dividends, terms of surplus debentures, terms of affiliate transactions and other related matters. The insurance holding company laws and regulations vary by state, but generally require an insurance holding company and its insurance company subsidiaries licensed to do business in the state to register and file certain reports with the regulatory authorities, including information concerning capital structure, ownership, financial condition, certain intercompany transactions and general business operations. State holding company laws also require prior notice or regulatory agency approval of certain material intercompany transfers of assets within the holding company structure. Recently a number of state regulators have considered or have enacted legislation proposing that change, and in many cases increase, the authority of state agencies to regulate insurance companies and holding companies. For additional information on state laws regulating insurance company subsidiaries, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and Note 13 to the Company's consolidated financial statements. Under Indiana insurance law, Standard Life may not enter into certain transactions, including management agreements and service contracts, with members of its insurance holding company system, including Standard Management, unless Standard Life has notified the Indiana Department of Insurance ("IDOI") of its intention to enter into these transactions and the IDOI has not disapproved of them within the period specified by Indiana law. Among other things, these transactions are subject to the requirement that their terms and charges or fees for services performed be fair and reasonable. The Indiana insurance laws and regulations require that the statutory surplus of Standard Life following any dividend or distribution be reasonable in relation to its outstanding liabilities and adequate to its financial needs. The IDOI may bring an action to enjoin or rescind the payment of a dividend or distribution by Standard Life that would cause its statutory surplus to be unreasonable or inadequate under this requirement. Most states, including Indiana, require administrative approval of the acquisition of 10% or more of the outstanding shares of an insurance company incorporated in the state or the acquisition of 10% or more of the outstanding shares of an insurance holding company whose insurance subsidiary is incorporated in the state. The request for approval must be accompanied by detailed information concerning the acquiring parties and the plan of acquisition. The acquisition of 10% of these 12 13 shares is generally deemed to be the acquisition of "control" for the purpose of the holding company statutes. However, in many states the insurance authorities may find that "control" in fact does or does not exist in circumstances in which a person owns or controls either a lesser or a greater amount of securities. In some instances state regulatory authorities require deposits of assets for the protection of either policyholders in those states or for all policyholders. At December 31, 2000, securities of $8.4 million or approximately 1% of the book value of SMC's U.S. insurance subsidiaries' invested assets were on deposit with various state treasurers or custodians. These deposits must consist of securities that comply with the standards that the particular state has established. SMI's account assets plus $6.6 million were held by a custodian bank approved by the Luxembourg regulatory authorities to comply with local insurance laws at December 31, 2000. In recent years, the NAIC and state insurance regulators have reexamined existing laws and regulations and their application to insurance companies. This reexamination has focused on i) insurance company investment and solvency issues, ii) risk-based capital guidelines, iii) assumption reinsurance, iv) interpretations of existing laws, v) the development of new laws, vi) the interpretation of nonstatutory guidelines, vii) the standardization of statutory accounting rules and viii) the circumstances under which dividends may be paid. The NAIC has encouraged states to adopt model NAIC laws on specific topics such as holding company regulations and the definition of extraordinary dividends. It is not possible to predict the future impact of changing state regulation on the operations of SMC. The NAIC, as well as Indiana and Mississippi, have each adopted Risk-Based Capital ("RBC") requirements for life and health insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks. State insurance regulators use the RBC requirements as regulatory tools only, which aid in the identification of insurance companies that could potentially lack sufficient capital. Regulatory compliance is determined by a ratio (the "RBC Ratio") of the company's regulatory total adjusted capital to its authorized control level RBC. The two components of the RBC Ratio are defined by the NAIC. The RBC ratios that require corrective action as follows:
------------------------------------------------------------------------------------- LEVEL RBC RATIO CORRECTIVE ACTION ------------------------------------------------------------------------------------- Company Action 1.5 - 2 Company is required to submit a plan to improve its RBC Ratio ------------------------------------------------------------------------------------- Regulatory Action 1 - 1.5 Regulators will order corrective actions ------------------------------------------------------------------------------------- Authorized Control 0.7 - 1 Regulators are authorized to take control of the company ------------------------------------------------------------------------------------- Mandatory Control less than 0.7 Regulators must take over the company -------------------------------------------------------------------------------------
At December 31, 2000, the RBC Ratios of Standard Life and Dixie Life were both at least two times greater than the levels at which company action is required. If these RBC Ratios should decline in the future, those subsidiaries might be subject to increased regulatory supervision and decreased ability to pay dividends, management fees and surplus debenture interest to Standard Management. On the basis of annual statutory statements filed with state regulators, the NAIC calculates twelve financial ratios to assist state regulators in monitoring the financial condition of insurance companies. A "usual range" of results for each ratio is used as a benchmark. In the past, variances in certain ratios of our insurance subsidiaries have resulted in inquiries from insurance departments to which we have responded. Such inquiries did not lead to any restrictions affecting the Company's operations. SMC attempts to manage its assets and liabilities so that income and principal payments received from investments are adequate to meet the cash flow requirements of its policyholder liabilities. The cash flows of SMC's liabilities are affected by actual maturities, surrender experience and credited interest rates. SMC periodically performs cash flow studies under various interest rate scenarios to evaluate the adequacy of expected cash flows from its assets to meet the expected cash requirements of its liabilities. SMC utilizes these studies to determine if it is necessary to lengthen or shorten the average life and duration of its investment portfolio. Because of the significant uncertainties involved in the estimation of asset and liability cash flows, there can be no assurance that SMC will be able to effectively manage the relationship between its asset and liability cash flows. The statutory filings of SMC's insurance subsidiaries require classifications of investments and the establishment of an Asset Valuation Reserve ("AVR"), designed to stabilize a company's statutory surplus against fluctuations in the market value of stocks and bonds, according to regulations prescribed by the NAIC. The AVR consists of two main components: a "default component" to provide for future credit-related losses on fixed income investments and an "equity component" to provide for losses on all types of equity investments, including real estate. The NAIC requires an additional reserve, called the Investment Maintenance Reserve ("IMR"), which consists of the portion of realized capital gains and losses from the sale of fixed income 13 14 securities attributable to changes in interest rates. The IMR is required to be amortized against earnings on a basis reflecting the remaining period to maturity of the fixed income securities sold. These regulations affect the ability of SMC's insurance subsidiaries to reflect future investment gains and losses in current period statutory earnings and surplus. The amounts related to AVR and IMR for the insurance subsidiaries at December 31, 2000 are summarized as follows (in thousands):
MAXIMUM AVR AVR IMR ------- ------- ------- STANDARD LIFE..................... $ 2,536 $ 7,909 $11,636 DIXIE LIFE........................ 232 432 160
The annual addition to the AVR for 2000 is 20% of the maximum reserve over the accumulated balance. If the calculated reserve with current year additions exceeds the maximum reserve amount, the reserve is reduced to the maximum amount. For the year ended December 31, 2000, SMC's U.S. subsidiaries each made the required contribution to the AVR. Most jurisdictions require insurance companies to participate in guaranty funds designed to cover claims against insolvent insurers. Insurers authorized to transact business in these jurisdictions are generally subject to assessments based on annual direct premiums written in that jurisdiction to pay such claims, if any. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer's financial strength and, in certain instances, may be offset against future state premium taxes. The incurrence and amount of such assessments have increased in recent years and may increase further in future years. The likelihood and amount of all future assessments cannot be reasonably estimated and are beyond the control of SMC. As part of their routine regulatory oversight process, approximately once every three to five years, state insurance departments conduct periodic detailed examinations ("Examinations") of the books, records and accounts of insurance companies domiciled in their states. Standard Life had an Examination during 1996 for the five-year period ended December 31, 1995 and Dixie Life had an examination during 1998 for the three-year period ended December 31, 1997. The final examination reports issued by the Indiana and Mississippi Departments of Insurance did not raise significant issues. The federal government does not directly regulate the insurance business. However, federal legislation and administrative policies in several areas, including pension regulation, age and sex discrimination, financial services regulation and federal taxation, do affect the insurance business. In addition, legislation has been introduced from time to time in recent years, which, if enacted, could result in the federal government assuming a more direct role in the regulation of the insurance industry. The recently passed GLB Act has left the currently existing regime of state insurance regulation largely intact; however, more comprehensive federal legislation in this area is still being actively considered by Congress. EMPLOYEES As of March 15, 2001, SMC had 149 employees which were comprised of the following: Standard Life - 89 employees, Savers Marketing - 24 employees, SMI - 24 employees (15 of whom are covered by a collective bargaining agreement), and Standard Management - 12 employees. SMC believes that its future success will depend, in part, on its ability to continue to attract and retain highly-skilled technical, marketing, support and management personnel. Management believes that it has excellent relations with its employees. ITEM 2. PROPERTIES Domestic Operations. SMC recently completed the construction of a new domestic home office of 58,000 square feet at 10689 North Pennsylvania Avenue, Indianapolis, Indiana. SMC owns this new building. SMC entered into a lease on March 31, 1997, for approximately 16,000 square feet in a warehouse located at 2525 North Shadeland, Indianapolis, Indiana which expires on September 30, 2001. Savers Marketing leases approximately 6,000 square feet in an office building located at 8064 North Point Boulevard, Winston-Salem, North Carolina, under the terms of a lease, which expires on September 30, 2001. International Operations. SMI entered into a lease on November 17, 1997 for approximately 4,500 square feet in an office building located at 13A, rue de Bitbourg, L-1273 Luxembourg, Grand Duchy of Luxembourg which expires on November 16, 2003. 14 15 ITEM 3. LEGAL PROCEEDINGS An officer and director of SMC resigned effective April 15, 1997. On June 19, 1997, this former officer commenced an action in the Superior Court of Marion County, Indiana against SMC claiming that his employment agreement contained a provision that would entitle him to receive certain benefits following a termination of his employment with SMC under certain circumstances. This former officer has asserted to SMC that he is entitled to a lump sum termination payment of $1.7 million and liquidated damages not exceeding $3.3 million by virtue of his voluntarily leaving SMC's employment. SMC disputes those claims. SMC filed its Answer and Counterclaim on September 11, 1997. SMC's investigation since the action was filed revealed a basis for the termination of employment of the former officer for cause relative to after-acquired evidence. On October 14, 1997, the Board of Directors of SMC terminated the former officer for cause effective March 15, 1997. Such termination was argued by SMC as a complete defense to all claims asserted by the former officer. On January 12, 2001, the trial court ruled on motions for summary judgment filed by both SMC and the former officer. The court ruled that the officer was entitled to a severance benefit in the amount of $.4 million plus interest thereon calculated as of July 15, 1997. The court dismissed all of the former officer's other claims, including his request for additional damages up to $3.3 million. On February 12, 2001, the former officer filed a notice of appeal of the trial court's ruling as to the dismissal of all additional damages, and the former officer is in the process of perfecting the appeal. Currently, SMC plans to cross-appeal the $.4 million in damages awarded, as well as aggressively pursue its counterclaim which is still pending in the trial court. Management believes that the conclusion of such litigation will not have a material adverse effect on SMC's consolidated financial conditions. In addition, SMC is involved in various legal proceedings in the normal course of business. In most cases, these proceedings involve claims under insurance policies or other contracts of SMC. The outcomes of these legal proceedings are not expected to have a material adverse effect on the consolidated financial position, liquidity, or future results of operations of SMC based on SMC's current understanding of the relevant facts and law. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS At the Company's Annual Meeting of Stockholders held on June 7, 2000, the following individuals were elected to the Board of Directors:
Shares For Shares Withheld ---------- --------------- Stephen M. Coons........................................ 4,955,677 294,558 Martial R. Knieser...................................... 4,947,863 302,372 P.B. (Pete) Pheffer..................................... 4,945,863 304,372
A total of 5,250,235 shares were present in person or by proxy at the Annual Meeting of Stockholders. EXECUTIVE OFFICERS The following sets forth information concerning each of SMC's executive officers: RONALD D. HUNTER, 49, Chairman of the Board, Chief Executive Officer and President of SMC - Chairman of the Board and Chief Executive Officer of Standard Life since 1987 - Held management and sales positions with: Conseco, Inc from 1981 to 1986 Aetna Life & Casualty Company from 1978 to 1981 United Home Life Insurance Company from 1975 to 1977 Prudential Life Insurance Company from 1972 to 1975 RAYMOND J. OHLSON, 50, Executive Vice President, Chief Marketing Officer and Director of SMC - President of Standard Life since 1993 - President and Director of Standard Marketing since 1991 - Earned CLU designation in 1980 - Life member of the Million Dollar Round Table P.B. (PETE) PHEFFER, CPA, 50, Executive Vice President, Chief Financial Officer and Director of SMC - Senior Vice President -- Chief Financial Officer and Treasurer of Jackson National Life Insurance Company from 1994 to 1996 - Senior Vice President -- Chief Financial Officer of Kemper Life Insurance Companies from 1992 to 1994 - Received MBA from the University of Chicago in 1988 STEPHEN M. COONS, 60, Executive Vice President, General Counsel, Secretary and Director of SMC - Counsel to the law firm of Coons, Maddox & Koeller from 1993 to 1995 - Partner with the law firm of Coons & Saint prior to 1993 - Indiana Securities Commissioner from 1978 to 1983 15 16 - Practicing law for 30 years EDWARD T. STAHL, 54, Executive Vice President, Chief Administrative Officer and Director of SMC - Secretary of Standard Life since 1993 - President and Chief Operations Officer of Standard Life from 1988 to 1993 - Director of Standard Life since 1987 - Served in various capacities in the insurance industry since 1966 and is a member of several insurance associations 16 17 PART II ITEM 5. MARKET FOR SMC COMMON STOCK AND RELATED STOCKHOLDER MATTERS SMC Common Stock trades on NASDAQ under the symbol "SMAN". The following table sets forth, for the periods indicated, the range of the high and low sales prices of SMC Common Stock as reported by NASDAQ. SMC has never paid cash dividends on its Common Stock. At the close of business on March 15, 2001 there were approximately 3,000 holders of record of the outstanding shares of SMC Common Stock. Although SMC Common Stock is traded on NASDAQ, no assurance can be given as to the future price of or the markets for the stock.
SMC Common Stock ---------------------- High Low ----- ----- 1999 Quarter ended March 31, 1999 7.125 5.375 Quarter ended June 30, 1999 6.563 5.250 Quarter ended September 30, 1999 6.938 4.656 Quarter ended December 31, 1999 6.219 4.250 2000 QUARTER ENDED MARCH 31, 2000 5.250 4.188 QUARTER ENDED JUNE 30, 2000 4.813 3.063 QUARTER ENDED SEPTEMBER 30, 2000 4.000 2.750 QUARTER ENDED DECEMBER 31, 2000 4.000 2.938
17 18 ITEM 6. SMC SELECTED HISTORICAL FINANCIAL DATA (A) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SHARES OUTSTANDING) The following historical financial data of SMC was derived from its audited consolidated financial statements. This historical financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the SMC Consolidated Financial Statements and related Notes.
Year Ended December 31 ------------------------------------------------------------------------ 2000 1999 1998 1997 1996 ------------ ---------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: Premium income ...................................... $ 15,470 $ 13,090 $ 14,479(d) $ 7,100 $ 10,468(e) Investment activity Net investment income............................ 50,776 43,612 33,589 29,197 20,871 Call option gains (losses) ...................... (7,603) 1,209 632 -- -- Net realized investment gains (losses) .......... (4,492) 78 353 396 1,302 Total revenues ...................................... 76,063 72,963 63,275 46,855 40,205 Interest expense and financing costs ................ 3,417 3,385 2,955 2,381 805 Total benefits and expenses ......................... 69,659 65,565 56,964 43,593 36,670(e) Income before income taxes and extraordinary gain (loss) ....................... 6,404 7,398 6,311 3,262 3,535 Net income .......................................... 5,267 5,272 4,681 2,645 4,767 PER SHARE DATA: Net income .......................................... .68 .69 .68 .54 .98 Net income, assuming dilution ....................... $ .66 $ .65 $ .62 $ .48 $ .91 Weighted average common shares outstanding, assuming dilution ................ 9,183,949 9,553,731 9,363,763 5,591,217 5,549,057 Book value per common share ......................... $ 8.34 $ 6.85 $ 8.64 $ 8.88 $ 7.95 Common shares outstanding ........................... 7,545,156 7,785,156 7,641,454 4,876,490 5,024,270 COVERAGE RATIOS (B): Earnings to fixed charges ........................... 1.2X 1.2X 1.3X 1.2X 1.3X Earnings to fixed charges, excluding policyholder interest ......................... 2.5X 2.8x 3.0x 2.4x 5.4x BALANCE SHEET DATA (at year end): Invested assets ..................................... $ 760,444 $ 648,503 $ 592,123 $ 398,782 $ 370,138 Assets held in separate accounts .................... 520,439 319,973 190,246 148,064 128,546 Total assets ........................................ 1,470,457 1,150,977 956,150 668,992 628,413 Long-term debt, notes payable and capital lease obligations ............................. 31,500 34,500 35,000 26,141 20,697 Total liabilities ................................... 1,401,028 1,091,087 883,578 625,679 586,737 Preferred stock ..................................... 6,530 6,530 6,530 -- 1,757 Shareholders' equity ................................ 62,899 53,360 66,042 43,313 39,919 OTHER DATA: Operating income(c) ................................. 7,333 5,221 4,448 2,384 1,174 Operating cash flows ................................ 935 2,853 207 7,696 1,726
18 19 NOTES TO SMC SELECTED HISTORICAL FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (a) Comparison of consolidated financial information is significantly affected by the acquisitions of Dixie Life on October 2, 1995, Shelby Life on November 8, 1996, Savers Life on March 12, 1998, Midwestern Life on October 30, 1998 and the disposal of First International on March 18, 1996. Refer to the notes to the consolidated financial statements in this report for a description of business combinations. (b) The ratio of earnings to fixed charges is calculated by dividing earnings (income before federal income taxes, extraordinary loss and preferred stock dividends plus interest expense and policyholder interest) by fixed charges (interest expense on notes payable, dividends on preferred stock and policyholder interest). The "Earnings to fixed charges, excluding policyholder interest" ratios do not include interest credited to policyholder accounts of $21.1 million, $25.7 million, $19.8 million, $16.3 million, and $11.1 million for the years ended December 31, 2000, 1999, 1998, 1997 and 1996, respectively. "Earnings to fixed charges, excluding policyholder interest" may not be comparable to similarly titled measures used by other companies. (c) Operating income is commonly used as a meaningful measure of reporting results as a supplemental disclosure to net income. Operating income is not a GAAP measure of performance and may not be comparable to similarly titled measures used by other companies. Operating income represents income before extraordinary gains (losses), excluding net realized investment gains (losses) (less income taxes (benefits) and amortization relating to such gains (losses)), and gain on disposal of subsidiary. Operating income should be reviewed in conjunction with net income and cash flow information included elsewhere in this report. (d) Includes Medicare supplement premiums of $6.0 million related to the Savers Life acquisition. This business was sold effective July 1, 1998. (e) Includes recapture of premiums ceded and an increase in benefits due to an increase in reserves of $4.2 million due to the termination and recapture of a reinsurance agreement with National Mutual Life Insurance Company. 19 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion highlights the principal factors affecting the results of operations and the significant changes in balance sheet items of SMC on a consolidated basis for the periods listed, as well as liquidity and capital resources. This discussion should be read in conjunction with the accompanying Consolidated Financial Statements, related Notes and selected historical financial data. FORWARD-LOOKING STATEMENTS All statements, trend analyses, and other information contained in this Annual Report on Form 10-K or any document incorporated by reference herein relative to markets for the Company's products and trends in the Company's operations or financial results, as well as other statements including words such as "anticipate", "believe", "plan", "estimate", "expect", "intend" and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, but are not limited to: - General economic conditions and other factors, including prevailing interest rate levels, and stock market performance, which may affect the ability of the Company to sell its products, the market value of the Company's investments and the lapse rate and profitability of the Company's policies. - The Company's ability to achieve anticipated levels of operational efficiencies at recently acquired companies, as well as through other cost-saving initiatives. - Customer response to new products, distribution channels and marketing initiatives. - Mortality, morbidity and other factors which may affect the profitability of the Company's insurance products. - Changes in the federal income tax laws and regulation which may affect the relative tax advantages of some of the Company's products. - Increasing competition in the sale of the Company's products. - Regulatory changes or actions, including those relating to regulation of financial services affecting bank sales and underwriting of insurance products, regulation of the sale, underwriting and pricing of insurance products. - The availability and terms of future acquisitions. - The risk factors or uncertainties listed from time to time in any document incorporated by reference herein. GENERAL Product Profitability. Margins on life insurance and annuity products are affected by interest rate fluctuations. Rising interest rates would result in a decline in the market value of assets. However, as there are positive cash flows from renewal premiums, investment income and maturities of existing assets, the need for early disposition of investment assets to meet operating cash flow requirements would be unlikely. Rising interest rates would also result in available cash flows from maturities being invested at higher interest rates, which would help support a gradual increase in new business and renewal interest rates on interest-sensitive products. A sharp, sudden rise in the interest rate environment without a concurrent increase in crediting rates could result in higher surrenders, particularly for annuities. The effect of such surrenders would be to reduce earnings over the long term. Earnings in the period of the surrender could increase or decrease depending on whether surrender charges were applicable and whether such charges differed from the write-off of related deferred acquisition costs or present value of future profits. When interest rates fall, SMC generally attempts to adjust the credited interest rates subject to competitive pressures. Although SMC believes that such strategies will continue to permit it to achieve a positive spread, a significant decline in the yield on SMC's investments could adversely affect the results of operations and financial condition of SMC. The long-term profitability of insurance products depends on the accuracy of the actuarial assumptions that underlie the pricing of such products. Actuarial calculations for such insurance products, and the ultimate profitability of such products, are based on four major factors: i) persistency, ii) mortality, iii) return on cash invested by the insurer during the life of the policy, and iv) expenses of acquiring and administering the policies. The average expected remaining life of Standard Life's traditional life and annuity business in force at December 31, 2000 was 6.9 years. This calculation was determined based upon SMC's actuarial models and assumptions as to expected persistency and mortality. Persistency is the extent to which insurance policies sold are maintained by the insured. The persistency 20 21 of life insurance and annuity products is a critical element of their profitability. However, a surrender charge often applies in the early contract years and declines to zero over time. Policyholders sometimes do not pay premiums, thus causing their policies to lapse. For the years 2000, 1999 and 1998 Standard Life experienced total policy lapses, excluding surrenders, of 5.7%, 3.6% and 5.0% of total policies in force at December 31 of each year, respectively. Present Value of Future Profits. In accordance with industry practice, when SMC purchases additional insurance business, it assigns a portion of the purchase price, called the present value of future profits, to the right to receive future cash flows arising from existing insurance policies. This asset is recorded when the business is purchased at the value of projected future cash flows on existing policies, less a discount to present value. As future cash flows emerge, they are treated as a recovery of this asset. Therefore, if cash flows emerging from the purchased or recaptured business during a period exactly equal the projections, they are offset by that period's amortization of the cost of the policies purchased. In that event, the only income statement effect from the purchased business is the realization of the discount that was initially deducted from the asset to reflect its present value. Changes in the future annual amortization of this asset are not expected to have a significant effect on the results of operations, because the amount of amortization is expected to be equal to the profits emerging from the purchased policies, net of interest on the unrecovered present value of future profits balance. This asset is amortized over the expected life of the related policies purchased. Present value of future profits is increased for the estimated effect of realizing unrealized investment losses and decreased for the estimated effect of realizing unrealized investment gains. In selecting the interest rate to calculate the discounted present value of the projected future profits, SMC uses the risk rate of return it needs to earn in order to invest in the business being acquired or recaptured. In determining this required risk rate of return, SMC considers the following factors: - The magnitude of the risks associated with each of the actuarial assumptions used in determining expected future cash flows (as described above). - The cost of the capital required to fund the acquisition or recapture. - The likelihood of changes in projected future cash flows that might occur if there are changes in insurance regulations and tax laws. - The acquired company's compatibility with other SMC activities that may favorably affect future cash flows. - The complexity of the acquired company or recaptured business. - Recent prices (i.e., discount rates used in determining valuations) paid by others to acquire or recapture similar blocks of business. The discount rate selected may affect subsequent earnings in those instances where the purchase price of the policies exceeds the value of net assets acquired (including the value of future profits discounted at the selected interest rate). Selection of a lower (or higher) discount rate will increase (or decrease) the portion of the purchase price assigned to the present value of future cash flows and will result in an offsetting decrease (or increase) in the amount of the purchase price assigned to goodwill. The effect on subsequent earnings caused by this variation in purchase price allocation will depend on the characteristics of the policies purchased. Use of a lower rate may result in an increase in reported earnings in the early years after an acquisition followed by a decrease in earnings in later years. The percentage of future expected net amortization of the beginning balance of the present value of future profits before the effect of net unrealized gains and losses, based on the present value of future profits at December 31, 2000 and current assumptions as to future events on all policies in force, are expected to be between 8% and 10% in each of the years 2001 through 2005. SMC used discount rates of 13% and 15% to calculate the present value of future profits of the Savers Life and Midwestern Life acquisitions, respectively. Each is being amortized over 20 years based on the mix of their respective annuity and life business. For more information related to Present Value of Future Profits refer to Note 4 to the Consolidated Financial Statements. Deferred Acquisition Costs. Insurance products generate two types of profit streams: i) from the excess of investment income earned over that credited to the policyholder and ii) from the excess of premiums received over costs incurred for policy issuance, administration and mortality. Costs incurred in issuing new policies are deferred and recorded as deferred acquisition costs ("DAC"), which are amortized using present value techniques so that profits are realized in proportion to premium revenue for certain products and estimated gross profits for certain other products. Profits from all of these elements are recognized over the lives of the policies; no profits are recorded at the time the policies are issued. 21 22 Amortization of DAC related to operations was $9.7 million, $4.6 million, and $3.3 million for the years ended December 31, 2000, 1999 and 1998, respectively. The increase in current year amortization expense resulted primarily from increased amortization of DAC as gross profits from business sold in recent years began to emerge. DAC is generally amortized over the expected lives of the policies, a period of approximately 20 years. Interest is being accumulated at the projected crediting rate on the policies. DAC is increased for the estimated effect of realizing unrealized investment losses and decreased for the estimated effect of realizing unrealized investment gains. The offset to these amounts is recorded directly to shareholders' equity, net of taxes. Future expected amortization of DAC for the next five years before the effect of net realized and unrealized gains and losses, based on DAC at December 31, 2000 and current assumptions, is as follows (in thousands):
2001 2002 2003 2004 2005 -------- -------- -------- -------- ------ Gross amortization ........... $ 13,793 $ 13,387 $ 12,123 $ 10,736 $9,451 Interest accumulation ........ 5,854 4,765 3,870 3,180 2,612 -------- -------- -------- -------- ------ Net amortization ............. $ 7,939 $ 8,622 $ 8,253 $ 7,556 $6,839 ======== ======== ======== ======== ======
The amounts included in the foregoing table do not include any amortization of DAC resulting from the sale of new products after December 31, 2000. Any changes in future annual amortization of this asset are not expected to have a significant effect on results of operations because the amount of amortization is expected to be proportionate to the profits from the produced policies, net of interest on DAC. Variances Between Actual and Expected Profits. Actual experience on purchased and produced insurance may vary from projections due to differences in renewal premiums collected, investment spreads, mortality costs, persistency, administrative costs and other factors. Variances from original projections, whether positive or negative, are included in net income as they occur. To the extent that these variances indicate that future experience will differ from the estimated profits reflected in the capitalization and amortization of the cost of policies purchased or the cost of policies produced, current and future amortization rates may be adjusted. Accounting for Annuities and Universal and Interest-Sensitive Life Products. The Company primarily accounts for its annuity, universal and interest-sensitive life policy deposits in accordance with Statement of Financial Accounting Standards No. 97 ("SFAS No. 97"), "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses on the Sale of Investments." Under SFAS No. 97, a benefit reserve is established at the time of policy issuance in an amount equal to the deposits received. Thereafter, the benefit reserve is adjusted for any additional deposits, interest credited and partial or complete withdrawals. Revenues for annuities and universal and interest-sensitive life policies, other than certain non-interest sensitive annuities, consist of policy charges for surrenders and partial withdrawals, mortality and administration, and investment income earned. These revenues do not include the annuity, universal and interest-sensitive life policy deposits. Expenses related to these products include interest credited to policyowner account balances, operating costs for policy administration, amortization of DAC and mortality costs in excess of account balances. Costs relating to the acquisition of new business, primarily commissions paid to agents, which vary with and are directly related to the production of new business, are deferred to the extent that such costs are recoverable from future profit margins. At the time of issuance, the acquisition expenses, approximately 13% of initial annuity premium deposits and 55% of premiums from universal and interest-sensitive life products for SMC, are capitalized as DAC. In accordance with SFAS No. 97, DAC with interest is amortized over the lives of the policies in a constant relationship to the present value of estimated future gross profits. Accounting for Unit-linked Products. Separate account assets and liabilities are maintained primarily for contracts of which the majority represents unit-linked products where benefits on surrender and maturity are not guaranteed. They generally represent funds held in accounts to meet specific investment objectives of policyholders who bear the investment risk. Investment income and investment gains and losses accrue directly to these policyholders. SMC earns income from the investment management fee it charges on these unit-linked contracts, which ranges from .8% to 1.2% of the value of the underlying separate accounts. 22 23 Results of operations by segment for the three years ended December 31, 2000: The following tables and narratives summarize the results of our operations by business segment:
2000 1999 1998 -------- -------- -------- (Dollars in thousands) Operating income before income taxes: Domestic operations .................................................. $ 5,440 $ 6,054 $ 3,700 International operations ............................................. 3,128 1,266 2,258 -------- -------- -------- Consolidated operating income before income taxes .................... 8,568 7,320 5,958 Applicable income taxes related to operating income .................. 1,235 2,099 1,510 -------- -------- -------- Consolidated operating income after taxes ................... 7,333 5,221 4,448 -------- -------- -------- Consolidated realized investment gains (losses) before income taxes (benefits) ........................................... (2,164) 78 353 Applicable income taxes (benefits) related to realized investment gains (losses) ................................................... (457) 27 120 -------- -------- -------- Consolidated realized investment gains (losses) after taxes (benefits) ................................................. (1,707) 51 233 -------- -------- -------- Income before extraordinary loss .............................. 5,626 5,272 4,681 -------- -------- -------- Extraordinary loss, net of $185 tax benefit ................... 359 -- -- -------- -------- -------- Net income .................................................... $ 5,267 $ 5,272 $ 4,681 ======== ======== ========
Consolidated Results and Analysis SMC's 2000 net income was $5.3 million, or 66 cents per diluted share, up 2% on a diluted per share basis over the comparable 1999 period. The results for 2000 include increases due to i) net spread revenue, the difference between the investment income earned on SMC's investments less the interest SMC credits to its policyholders, of $22.1 million compared to $19.1 million, ii) fees from separate accounts of $7.7 million compared to $3.9 million, and iii) a lower marginal tax rate due to the utilization of SMC's net operating loss carryforwards. These increases were offset by i) paid life insurance claims of $7.1 million compared to $5.7 million, ii) amortization of $9.4 million compared to $7.5 million, iii) net realized investment losses of $4.5 million, and iv) an extraordinary loss of $.4 million in the 2000 period. Operating income for 2000 was $7.3 million, an increase of 40% over 1999. SMC's 1999 net income was $5.3 million, or 65 cents per diluted share, up 13% and 5%, respectively, compared to 1998. The results for 1999 include increases due to i) net spread revenue of $19.1 million compared to $14.4 million, ii) fees from separate accounts of $3.9 million compared to $2.9 million, and iii) economies of scale achieved through the acquisitions of Savers Life and Midwestern Life, including the elimination of certain Medicare supplement expenses in connection with the sale of that business. These increases were somewhat offset by i) the completion of negative goodwill amortization, a nonrecurring item, which contributed $1.4 million or $.15 per diluted share in 1998, ii) paid life insurance claims of $5.7 million compared to $5.1 million, and iii) amortization of $7.5 million compared to $5.4 million. Operating income for 1999 was $5.2 million, an increase of 17% over 1998. 23 24 Domestic operations:
2000 1999 1998 ----------- ---------- ---------- (Dollars in thousands) Premiums and deposits collected: Traditional life ........................................................ $ 15,429 $ 12,990 $ 8,392 Medicare supplement ..................................................... -- -- 5,992 ----------- ---------- ---------- Subtotal - traditional and Medicare supplement premiums ................. 15,429 12,990 14,384 ----------- ---------- ---------- FPDA's .................................................................. 94,699 98,678 58,072 Equity-indexed annuities ................................................ 73,122 59,348 16,858 SPIA's and other deposits ............................................... 27,802 5,872 3,537 Universal and interest-sensitive life ................................... 866 1,778 3,391 ----------- ---------- ---------- Subtotal - interest-sensitive and other financial products .............. 196,489 165,676 81,858 ----------- ---------- ---------- Total premiums and deposits collected ...................... $ 211,918 $ 178,666 $ 96,242 =========== ========== ========== Premium income ............................................................ $ 15,429 $ 12,990 $ 14,384 Policy income ............................................................. 8,204 6,826 6,529 ----------- ---------- ---------- Total policy related income .................................... 23,633 19,816 20,913 Net investment income...................................................... 50,278 43,167 33,089 Call option gains (losses) ................................................ (7,603) 1,209 632 Fee and other income ...................................................... 5,980 4,207 3,068 ----------- ---------- ---------- Total revenues(a) .............................................. 72,288 68,399 57,702 ----------- ---------- ---------- Benefits and claims ....................................................... 20,045 14,516 13,310 Interest credited to interest sensitive annuities and other financial products ................................................................ 21,080 25,728 19,775 Amortization .............................................................. 9,703 6,313 4,755 Commission expenses ....................................................... 1,918 735 895 Other operating expenses .................................................. 10,685 11,668 12,312 Interest expense and financing costs ...................................... 3,417 3,385 2,955 ----------- ---------- ---------- Total benefits and expenses .................................... 66,848 62,345 54,002 ----------- ---------- ---------- Operating income before income taxes ........................... 5,440 6,054 3,700 Net realized investment gains (losses), net of related amortization ....... (2,164) 78 353 ----------- ---------- ---------- Income before income taxes ..................................... $ 3,276 $ 6,132 $ 4,053 =========== ========== ==========
(a) total revenues exclude net realized investment gains (losses), net of related amortization. Number of annuity contracts in force ...................................... 24,216 24,322 20,121 =========== ========== ========== Interest-sensitive annuity and other financial products reserves, net of reinsurance ceded ...................... $ 695,475 $ 595,388 $ 506,749 =========== ========== ========== Number of life policies in force .......................................... 55,533 61,573 66,412 =========== ========== ========== Life insurance in force, net of reinsurance ceded ......................... $ 1,042,566 $1,367,533 $1,403,164 =========== ========== ==========
24 25 General: This segment consists of revenues earned and expenses incurred from U.S. operations which includes deposits and/or income from annuity products (primarily FPDA's), equity-indexed products, SPIA's, universal life products and traditional life products. This segment has been significantly impacted by the acquisitions of Savers Life, effective March 12, 1998, and Midwestern Life, effective October 30, 1998. The profitability for this segment is primarily a function of its investment spread earned (i.e. the excess of investment earnings over interest credited on annuity and universal life deposits), persistency of the in force business, mortality experience and management of operating expenses. Premium deposits consist of FPDA's, equity-indexed annuities, SPIA's, interest-sensitive annuities and other financial products that do not incorporate significant mortality features. For GAAP these premium deposits are not shown as premium income in the income statement. Furthermore, a change in premium deposits in a single period does not directly cause operating income to change, although continued increases or decreases in premiums may affect the growth rate of total assets on which investment spreads are earned. - Premium deposits for 2000 increased $30.8 million or 19% to $196.5 million. The increase relates to i) a continued increase in the agency base achieved through the recruitment of high volume agents and larger managing general agencies, ii) the introduction of a SPIA product that contributed $18.3 million of deposits for the period, and iii) continued momentum of our equity-indexed products which contributed an additional $13.8 million for the period. - Premium deposits for 1999 increased $83.8 million or 102% to $165.7 million. The increase relates to i) an increase in the agency base achieved through the recruitment of high volume agents and larger managing general agencies, ii) expansion of geographical concentration, iii) the full year impact of an equity-indexed product introduced in 1998, and iv) the introduction of three equity-indexed annuity products in 1999. Premium income consists of premiums earned from i) traditional life products, ii) annuity business that incorporates significant mortality features, and iii) Medicare supplement premiums for the 1998 period. - Life premiums were up $2.4 million or 19% in 2000 to $15.4 million, which is primarily the result of increased traditional life premiums and other deposits that incorporate mortality features. - Life premiums were up $4.6 million or 55% in 1999 to $13.0 million. The increase was primarily the result of renewal premiums from Midwestern Life's traditional life block and first year premiums of existing traditional life products. - Health premiums for 1998 include $6.0 million of Medicare supplement premiums that were earned from March 12, 1998, the acquisition date of Savers Life, through July 1, 1998, the effective sale date of the Medicare supplement block of business. Policy income represents i) mortality charges and administrative fees earned on universal life products, and ii) surrender charges earned as a result of terminated universal life and annuity policies. - During 2000, policy income increased $1.4 million or 20% to $8.2 million. The increase primarily relates to $1.6 million of surrender income received as a result of i) reducing crediting rates on certain FPDA products and ii) general market conditions, offset by lower cost of insurance income. - During 1999, policy income increased $.3 million or 5% to $6.8 million. The increase is due to i) mortality charges of a new universal life product and ii) surrender charges on certain FPDA products which is primarily the result of lowering credited rates on those products. Net investment income includes interest earned on invested assets and fluctuates with changes in i) the amount of average invested assets supporting insurance liabilities, and ii) the average yield earned on those invested assets. - During 2000, net investment income increased $7.1 million or 16% to $50.3 million. Average invested assets, at book value, increased by $95.7 million or 15% due to the growth in insurance liabilities from premium sales of recent periods. - During 1999, net investment income increased $10.1 million or 31% to $43.2 million. Average invested assets, at book value, increased by $166.7 million or 35% due to the growth in insurance liabilities from premium sales of recent periods and from the acquisitions of Savers Life and Midwestern Life. 25 26 - The net investment yield earned on average invested assets was 7.26%, 7.13% and 7.27% for 2000, 1999 and 1998, respectively. Investment yields fluctuate from period to period primarily due to changes in the general interest rate environment. Call option gains (losses) relate to equity-indexed products which are hedged with call options to limit risk against unusually high crediting rates from favorable returns in the equity market. The market value of these options fluctuate from period to period and are substantially offset by amounts credited to policyholder account balances. - During 2000, call option losses increased $8.8 million to ($7.6) million compared to call option gains of $1.2 million in 1999. The increased losses were due to the unfavorable impact of changes in the market value of SMC's call options. Also refer to "Interest credited on interest sensitive annuities and other financial products" below. - During 1999, call option gains increased $0.6 million to $1.2 million compared to call option gains of $0.6 million in 1998. This increase was due to the favorable impact of changes in the market value of SMC's call options. Fee and other income consist of fee income related to servicing blocks of business for unaffiliated companies, experience refunds, and commission income. - During 2000, fee and other income increased $1.8 million or 42%, to $6.0 million. This increase includes i) $1.5 million of commission income from administrative agreements, including the Savers Marketing administrative agreement, and ii) $.3 million of other income related to a recovery under a keyman insurance policy. - During 1999, fee and other income increased $1.1 million or 37%, to $4.2 million. This increase was due to commission income that related to the Savers Marketing administrative agreement and the marketing efforts associated with the management of that business. Benefits and claims include i) paid life insurance claims, ii) benefits from other policies that incorporate significant mortality features and, iii) changes in future policy reserves. Throughout the Company's history, it has experienced both periods of higher and lower benefit claims. Such volatility is not uncommon in the life insurance industry and, over extended periods of time, periods of higher claim experience tend to offset periods of lower claim experience. - Benefits and claims in 2000 increased $5.5 million or 38%, to $20.0 million. This increase includes i) additional reserves needed as a result of increased traditional life premiums and other deposits that incorporate mortality features and ii) additional mortality benefits of $1.5 million compared to the 1999 period. - Benefits and claims in 1999 increased $1.2 million, to $14.5 million. This is due to $6.1 million of claims and benefits resulting from an increase in the average in force life business for the periods due to the acquisitions of Savers Life and Midwestern Life. This was somewhat offset by the inclusion of $4.9 million of benefits and claims in 1998 results related to the Medicare supplement business that was sold July 1998. Interest credited to interest-sensitive annuities and other financial products represents interest credited to insurance liabilities of the FPDA's, equity-indexed annuities, SPIA's, interest sensitive and other financial products. This expense fluctuates with changes in i) average interest-sensitive insurance liabilities, ii) the average credited rate on those liabilities, and iii) the market value fluctuations of call options. Also refer to "Net investment income" in Item 7. - In 2000, interest credited decreased $4.6 million or 18%, to $21.1 million. This decrease consists of a $7.6 million decline in the market value of liabilities supporting equity-indexed products. This decrease was offset by increased interest credited due to larger average interest sensitive liabilities of $98.9 million or 20% for the period, including a $61.4 million increase from equity-indexed products. - In 1999, interest credited increased $6.0 million or 30%, to $25.7 million. This increase was due to larger average interest-sensitive insurance liabilities of approximately $125.3 million or 34% for the period, which includes increases from the acquisitions of Savers Life and Midwestern Life, and from equity indexed products. The remaining increase primarily relates to FPDA products. These increases were somewhat offset by a decrease in the average credited rate for the period. 26 27 - The weighted average credited rate was 4.90%, 4.89% and 5.16% in 2000, 1999 and 1998, respectively. Amortization includes i) amortization related to the present value of polices purchased from acquired insurance business, ii) amortization of deferred acquisition costs related to capitalized costs of insurance business sold, and iii) amortization of goodwill and organizational costs. - Amortization in 2000 increased $3.4 million or 54%, to $9.7 million. This increase relates to i) additional amortization of deferred acquisition costs, ii) increased business in force, and iii) the recognition of additional profits for the period. Additional profits were recognized from i) the realization of profits from increased sales of annuity products in recent periods and ii) the realization of profits from surrender income of deferred annuities. - Amortization in 1999 increased $1.6 million or 33%, to $6.3 million. This increase relates to additional amortization of deferred acquisition costs, due to increased business in force, and the recognition of additional profits for the period. Additional profits were recognized from i) the realization of profits from increased sales of annuity products in recent periods, and ii) the realization of profits from the purchased insurance business of Savers Life and Midwestern Life. Commission expenses represent commission expenses, net of deferrable amounts. - During 2000, commission expenses increased $1.2 million to $1.9 million primarily due to nondeferrable commissions related to SPIA sales during the year. We enhanced our presence in this market beginning in 2000. - During 1999, commission expenses declined $0.2 million to $0.7 million due to slight variations in product mix and sales for the period. Other operating expenses consist of general operating expenses, including salaries, and commission expenses, net of deferrable amounts. - In 2000, other operating expenses decreased $1.0 million or 8%, to $10.7 million. The decrease is due to continued efficiencies achieved through the assimilation of recent acquisitions. - In 1999, other operating expenses declined $.6 million or 5%, to $11.7 million. The majority of this decrease relates to efficiencies achieved through the assimilation of the former insurance operations of Savers Life, Savers Marketing and Midwestern Life including the elimination of certain Medicare supplement expenses in connection with the sale of that business. Interest expense and financing costs represent interest expense incurred and the amortization of related debt issuance costs. - In 2000, interest expense and financing costs remained at $3.4 million. Average borrowings for the period declined $3.2 million, however, they were offset by an increased interest rate for the period. - In 1999, interest expense and financing costs increased $.4 million or 15%, to $3.4 million primarily due to increased average borrowings for the period of approximately $5.6 million and an increase in the average interest rate for the period on the revolving line of credit. Net realized investment gains (losses), net of related amortization fluctuate from period to period and generally arise when securities are sold in response to changes in the investment environment. Realized investment gains (losses) can affect the timing of the amortization of deferred acquisition costs and the amortization of the present value of future profits. - Net realized investment losses, net of related costs and amortization, for 2000 were $2.2 million, which is reduced by $2.3 million of deferred acquisition cost amortization. Approximately 64% of the gross losses for 2000 are related to fixed maturity securities that have a decline in fair value that is considered other than temporary. These securities are considered to be in substantive default (i.e. default as to interest and principal). The Company maintains a high quality investment portfolio with 94% of its fixed maturity securities being classified as investment grade securities. - In 1999, net realized investment gains were $.1 million. 27 28 International operations:
2000 1999 1998 ---------- ---------- ---------- (Dollars in thousands) Premiums and deposits collected: Traditional life ................................. $ 41 $ 100 $ 95 Separate account deposits ........................ 170,514 55,192 42,536 ---------- ---------- ---------- Total premiums and deposits collected ... $ 170,555 $ 55,292 $ 42,631 ========== ========== ========== Premium income ..................................... $ 41 $ 100 $ 95 Net investment income .............................. 498 445 500 Separate account fees .............................. 7,728 3,941 2,884 Amortization of negative goodwill .................. -- -- 1,388 Other income ....................................... -- -- 353 ---------- ---------- ---------- Total revenues .......................... 8,267 4,486 5,220 ---------- ---------- ---------- Benefits and claims ................................ 35 (140) (40) Amortization ....................................... 2,061 1,158 658 Commission expenses ................................ 12 10 22 Other operating expenses ........................... 3,031 2,192 2,322 ---------- ---------- ---------- Total benefits and expenses ............. 5,139 3,220 2,962 ---------- ---------- ---------- Income before income taxes .............. $ 3,128 $ 1,266 $ 2,258 ========== ========== ========== Separate account contracts(1) ...................... 4,989 3,380 3,070 ========== ========== ========== Separate account liabilities(1) .................... $ 520,439 $ 319,973 $ 190,246 ========== ========== ==========
(1) Primarily unit-linked assurance products General: International operations include revenues earned and expenses incurred from abroad, primarily Europe, and include fees collected on deposits from unit-linked products. The profitability for this segment primarily depends on the amount of separate account assets under management, the management fee charged on those assets and management of operating expenses. Net investment income represents income earned on corporate assets such as cash, short-term investments and fixed securities. SMI is required to hold a certain level of cash and short-term investments in order to comply with local insurance laws. - Net investment income was $.5 million and $.4 million in 2000 and 1999, respectively, on average invested assets of approximately $11.0 million for each period. - The net investment yields earned on average invested assets were 4.54%, 4.06% and 4.74% for 2000, 1999 and 1998, respectively. Fees from separate accounts represent the net fees earned on the various unit-linked products sold. The fees fluctuate in relationship to total separate account assets and the fees earned on such assets. Fees include initial set-up fees on certain products and annual recurring fees on almost all products. - During 2000, fees from separate accounts increased $3.8 million or 96%, to $7.7 million. This increase is primarily due to an increase of 82% in the average value of assets held in separate accounts for the period. Actual separate account 28 29 assets increased $200.5 million or 63%, to $520.4 million. Net deposits from SMI's sales of unit-linked products increased $115.3 million or 209%, to $170.5 million for the period. The increase in deposits is primarily due to i) strengthening of SMI's distribution system by engaging more, highly productive agents, ii) concentrated marketing efforts in certain European countries, primarily Sweden, Belgium and Italy, and iii) favorable demand, in general, for investment based products. - During 1999, fees from separate accounts increased $1.1 million or 37%, to $3.9 million. This increase is primarily due to an increase of 36% in the average value of assets held in separate accounts for the period. Actual separate account assets increased $129.7 million or 68%, to $320.0 million. Net deposits from SMI's sales of unit-linked products increased $12.7 million or 30%, to $55.2 million for the period. This increase is due to expanded marketing efforts, which have generated additional sales in Sweden and Belgium for the period. Amortization of negative goodwill, which is the amortization of the excess cost of assets acquired over the purchase price paid for SMI in December 1993 of $6.9 million, has been amortized over 5 years at $1.4 million per year and was fully amortized at December 31, 1998. Amortization includes the amortization of deferred acquisition costs, such as sales commissions and other costs, directly related to selling new business. - Amortization increased $.9 million in 2000 to $2.1 million and increased $.5 million in 1999 to $1.2 million. These increases are due to amortizing deferred acquisition costs associated with increased sales of recent periods. Commission expenses represent commission expenses, net of deferrable amounts. - Commission expenses remained at less than $.1 million for the years ended December 31, 2000 and 1999. Due to the nature of SMI's business, virtually 100% of incurred commissions are deferred. Other operating expenses consist of recurring general operating expenses, net of deferred amounts. - Other operating expenses increased $1.1 million or 56% in 2000, to $3.0 million primarily as a result of fixed costs associated with international business growth. The number of separate account contracts administered increased 48% to 4,989 in 2000 and 10% to 3,380 in 1999. - Other operating expenses declined $.1 million or 6% in 1999, to $2.2 million. Foreign currency translation comparisons between 2000, 1999 and 1998 are impacted by the strengthening and weakening of the U.S. dollar relative to foreign currencies, primarily the Luxembourg franc. The impact of these translations has been quantified on individual income statement components of fees from separate accounts and amortization solely. 29 30 LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY OF STANDARD MANAGEMENT (PARENT COMPANY) Standard Management is a financial services holding company whose liquidity requirements are met through payments received from its subsidiaries. These payments include i) surplus debenture interest, ii) dividends, iii) management fees and iv) rental income, which are subject to restrictions under applicable insurance laws and are used to pay operating expenses and meet debt service obligations. These internal sources of liquidity have been supplemented in the past by external sources such as revolving credit agreements and long-term debt and equity financing in the capital markets. General: On a consolidated GAAP basis SMC reported net cash provided by operations of $.9 million and $2.9 million for 2000 and 1999, respectively. Although deposits received on SMC's interest-sensitive annuities and other financial products are not included in cash flow from operations under GAAP, these funds are available for use by SMC. Cash provided by operations plus net deposits received, less net account balances returned to policyholders on interest sensitive annuities and other financial products, resulted in positive cash flow of $108.2 million and $92.6 million for 2000 and 1999, respectively. Cash generated on a consolidated basis is available to Standard Management only to the extent that it is generated at the Standard Management level or is available through dividends, interest, management fees or other payments from subsidiaries. SMC has instituted a program to repurchase its common stock. At December 31, 2000, Standard Management is authorized to repurchase 724,790 additional shares of SMC Common Stock under this program. At April 27, 2001, Standard Management had "parent company only" cash and short-term investments of $.7 million. These funds are available to Standard Management for general corporate purposes. Standard Management's "parent company only" operating expenses (not including interest expense) were $4.5 million and $4.8 million for 2000 and 1999, respectively. In 1998, the Company issued convertible redeemable preferred stock with a stated value of $6.5 million. Proceeds were used to reduce the borrowings from the Amended Credit Agreement. Holders are entitled to receive annual dividends of $7.75 per share. Refer to Notes 7 and 10, respectively, to the consolidated financial statements for additional information. Standard Management anticipates the available cash from its existing working capital, plus anticipated 2001 dividends, management fees, rental income and interest payments on its surplus debentures receivable will be more than adequate to meet its anticipated "parent company only" cash requirements for 2001. Surplus Debenture and Notes Payable Interest: THE FOLLOWING ARE CHARACTERISTICS OF THE AMENDED CREDIT AGREEMENT AT DECEMBER 31, 2000: - $20.5 million outstanding balance - Weighted average interest rate of 9.86% - Principal payments: $3.2 million due March 2001 (which was paid), $4.3 million due annually through March 2005 - Subject to restrictions and financial and other covenants - Interest payments required in 2001 based on December 31, 2000 balances will be $1.8 million THE FOLLOWING ARE CHARACTERISTICS OF THE SUBORDINATED DEBT AGREEMENT AT DECEMBER 31, 2000: - $11.0 million outstanding balance - Interest rate is greater of i) 10% per annum or ii) six month London Inter-Bank Offered Rate ("LIBOR") plus 1.5% - Due October 2007 - Interest payments required in 2001 based on December 31, 2000 balances will be $1.1 million Refer to Note 5 to the consolidated financial statements for additional information. 30 31 Standard Management loaned $27.0 million to Standard Life pursuant to Unsecured Surplus Debenture Agreements ("surplus debenture") which requires Standard Life to make quarterly interest payments to Standard Management at a variable corporate base rate plus 2% per annum, and annual principal payments of $1.0 million per year beginning in 2007 and concluding in 2033. The interest and principal payments are subject to quarterly approval by the IDOI, depending upon satisfaction of certain financial tests relating to levels of Standard Life's capital and surplus and general approval of the Commissioner of the IDOI. Standard Management currently anticipates these quarterly approvals will be granted. Assuming the approvals are granted and the December 31, 2000 interest rate of 11.50% continues, Standard Management will receive interest income of $3.1 million from the surplus debenture in 2001. Dividends paid from Standard Life to Standard Management are limited by laws applicable to insurance companies. As an Indiana domiciled insurance company, Standard Life may pay a dividend or distribution from its surplus profits, without the prior approval of the Commissioner of the IDOI, if the dividend or distribution, together with all other dividends and distributions paid within the preceding twelve months, does not exceed the greater of i) net gain from operations or ii) 10% of surplus, in each case as shown in its preceding annual statutory financial statements. In 2001, Standard Life can pay dividends of approximately $4.4 million without regulatory approval. Management Fees. Pursuant to a management services agreement, Standard Life paid Standard Management $3.6 million during 2000 and $3.4 million during 1999 for certain management services related to the production of business, investment of assets and evaluation of acquisitions. Prior to its merger into Standard Life, Savers Life paid Standard Management $.8 million during 1998 for certain management services pursuant to a management services agreement. In addition, Dixie Life paid Standard Life $1.2 million and $.9 million in 2000 and 1999, respectively, for certain management services provided. Both of these agreements provide that they may be modified or terminated by the applicable Departments of Insurance in the event of financial hardship of Standard Life or Dixie Life. Pursuant to the management services agreement, Premier Life (Luxembourg) paid Standard Management $.3 million during 2000 and $.2 million during 1999 for certain management, technical support and administrative services. The agreement provides that it may be modified or terminated by either Standard Management or Premier Life (Luxembourg). Equipment Rental Fees. In 2000 and 1999, Standard Management charged subsidiaries $1.1 million and $1.0 million, respectively, for the use of equipment owned by Standard Management. LIQUIDITY OF INSURANCE OPERATIONS U.S. Insurance Operations. The principal liquidity requirements of Standard Life are its contractual obligations to policyholders, dividend, rent, management fee and surplus debenture interest payments to Standard Management and other operating expenses. The primary source of funding for these obligations has been cash flow from premium income, net investment income, investment sales and maturities and sales of FPDA's and equity-indexed products. These sources of liquidity for Standard Life significantly exceed scheduled uses. Liquidity is also affected by unscheduled benefit payments including death benefits and policy withdrawals and surrenders. The amount of withdrawals and surrenders is affected by a variety of factors such as renewal interest crediting rates, interest rates for competing products, general economic conditions, Standard Life's A.M. Best rating (currently rated "B+") and events in the industry that affect policyholders' confidence. The policies and annuities issued by Standard Life contain provisions that allow policyholders to withdraw or surrender their policies under defined circumstances. These policies and annuities generally contain provisions, which apply penalties or otherwise restrict the ability of policyholders to make such withdrawals or surrenders. Standard Life closely monitors the surrender and policy loan activity of its insurance products and manages the composition of its investment portfolios, including liquidity, to ensure it has sufficient cash resources in light of such activity. Changes in interest rates may affect the incidence of policy surrenders and other withdrawals. In addition to the potential effect on liquidity, unanticipated withdrawals in a changing interest rate environment could adversely affect earnings if SMC were required to sell investments at reduced values to meet liquidity demands. SMC manages the asset and liability portfolios in order to minimize the adverse earnings effect of changing market interest rates. SMC seeks assets that have duration characteristics similar to the liabilities that they support. SMC also prepares cash flow projections and performs cash flow tests under various market interest rate scenarios to assist in evaluating liquidity needs and adequacy. SMC's U.S. insurance subsidiaries currently expect available liquidity sources and future cash flows to be adequate to meet the demand for funds. Statutory surplus is computed according to rules prescribed by the NAIC, as modified by the IDOI, or the state in which the insurance subsidiaries do business. Statutory accounting rules are different from GAAP and are intended to reflect a more conservative perspective. With respect to new business, statutory accounting practices require that: i) acquisition costs (primarily commissions and policy issue costs) and ii) reserves for future guaranteed principal payments and interest in excess of statutory rates, be expensed in the year the new business is written. These items cause a reduction in statutory surplus ("surplus strain") in the year written for many insurance products. SMC designs its products to minimize such first-year losses, but certain products continue to cause a statutory loss in the year written. For each product, SMC controls the amount of net new premiums written to manage the effect of such surplus strain. SMC's long-term growth goals contemplate continued growth in its insurance businesses. To achieve these growth goals, SMC's U.S. insurance subsidiaries will need to increase statutory surplus. Additional statutory 31 32 surplus may be secured through various sources such as internally generated statutory earnings, infusions by Standard Management with funds generated through debt or equity offerings or mergers with other life insurance companies. If additional capital is not available from one or more of these sources, SMC believes that it could reduce surplus strain through the use of reinsurance or through reduced writing of new business. Management believes that the operational cash flow of Standard Life will be sufficient to meet its anticipated needs for 2001. As of December 31, 2000, Standard Life had statutory capital and surplus for regulatory purposes of $43.9 million compared to $43.7 million at December 31, 1999. As the life insurance and annuity business produced by Standard Life increases, Standard Life expects to continue to satisfy statutory capital and surplus requirements through statutory profits and through additional capital contributions by Standard Management. Net cash flow from operations on a statutory basis of Standard Life, after payment of benefits and operating expenses, was $95.4 million and $91.4 million for 2000 and 1999, respectively. If the need arises for cash, which is not readily available, additional liquidity could be obtained from the sale of invested assets. International Operations. The amount of dividends that may be paid by SMI without regulatory approval is limited to its accumulated earnings. SMI and Premier Life (Luxembourg) were not permitted to pay dividends in 2000 and 1999 due to accumulated losses. Premier Life (Bermuda) paid a dividend of $.3 million in 2000 and $.8 million in 1999 to SMI and no dividends in 1998. SMC does not anticipate receiving dividends from SMI in 2001. FACTORS THAT MAY AFFECT FUTURE RESULTS SMC is subject to a number of factors affecting its business, including intense competition in the industry and the ability to attract and retain agents and employees. If SMC is unable to respond appropriately to any of these factors, business and financial results could suffer. SMC's operating results are affected by many factors, including, competition, lapse rates, interest rates, maintenance of insurance ratings, governmental regulation and general business conditions, many of which are outside its control. SMC operates in a highly competitive environment and is in direct competition with a large number of insurance companies, many of which offer a greater number of products through a greater number of agents and have greater resources. In addition, SMC may be subject, from time to time, to new competition resulting from additional private insurance carriers introducing products similar to those offered by SMC. Moreover, as a result of recent federal legislation, commercial banks, insurance companies, and investment banks may now combine, provided certain requirements are satisfied, and SMC expects to encounter increased competition from these providers of financial services. This competitive environment could result in lower premiums, loss of sales and reduced profitability. SMC's management believes that the ability to compete is dependent upon, among other things, the ability to retain and attract independent general agents to market products and the ability to develop competitive products that also are profitable. Although management believes that good relationships with our independent general agents exist, competition for those agents among insurance companies is intense. SMC's independent general agents typically represent other insurance companies and may sell products that compete with our products. See "Business of SMC-Competition." SMC's success also depends upon the continued contributions of key officers and employees. Should one or more of these individuals leave or otherwise become unavailable to SMC for any reason, business and results of operations could be materially adversely affected. See "Business of SMC-Employees." SMC's success depends on the performance of others. SMC's results may be affected by the performance of others because of entering into various arrangements involving other parties. For instance, many products are sold through independent distribution channels and arise from arrangements with unrelated marketing organizations. As with all financial services companies, the ability to conduct business is dependent upon consumer confidence in the industry and its products. Actions of competitors, and financial difficulties of other companies in the industry, could undermine consumer confidence and adversely affect business results. Financial results could suffer if our A.M. Best ratings are downgraded. Insurers compete with other insurance companies, financial intermediaries and other institutions on the basis of a number of factors, including the ratings assigned by A.M. Best. Standard Life and Dixie Life have a rating of "B+" and "B," respectively, by A.M. Best. A rating of "B+" is assigned by A.M. Best to companies that, in their opinion, have achieved very good overall performance when compared to the standards established by A.M. Best, and have a good ability to meet their obligations to policyholders over a long period of time. A rating of "B" is assigned by A.M. Best to companies that, in their opinion, have achieved good overall performance when compared to the standards established by A.M. Best. According to A.M. Best, these companies generally have an adequate ability to meet their obligations to policyholders, but their financial strength is vulnerable to unfavorable changes in underwriting or economic conditions. In evaluating a company's financial and operating performance, A.M. Best reviews the company's profitability, leverage and liquidity as well as the company's book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its reserves, and the experience and competence of its management. A.M. Best reviews its ratings of insurance companies from time to time. If the A.M. Best ratings were 32 33 downgraded, sales of annuity products and life insurance policies could be significantly impacted and the financial condition and results of operations could be materially adversely affected. See "Business of SMC-Competition." A tax law change could adversely affect SMC's ability to compete with non-insurance products. Under the United States Internal Revenue Code, income tax payable by policyholders on investment earnings is deferred during the accumulation period of certain life insurance and annuity products. This favorable tax treatment may give certain products a competitive advantage over other non-insurance products. To the extent that the Internal Revenue Code is revised to reduce the tax-deferred status of life insurance and annuity products, or to increase the tax-deferred status of competing products, all life insurance companies, including SMC, would be adversely affected with respect to their ability to sell these products, and, depending on grandfathering provisions, the surrenders of existing annuity contracts and life insurance policies. In addition, life insurance products are often used to fund estate tax obligations. If the estate tax were eliminated or significantly reduced, the demand for certain life insurance products could be adversely affected. SMC cannot predict what tax initiatives may be enacted which could have an adverse affect on its business. Interest-rate fluctuations could negatively affect spread income. Significant changes in interest rates expose insurance companies to the risk of not earning anticipated spreads between the interest rate earned on investments and the credited interest rates paid on outstanding policies. Both rising and declining interest rates can negatively affect spread income. Although SMC develops and maintains asset/liability management programs and procedures designed to preserve spread income in rising or falling interest rate environments, changes in interest rates could adversely affect these spreads. Financial results could suffer if the value of investments decreases due to factors beyond SMC's control. SMC's invested assets are subject to customary risks of credit defaults and changes in market values. The value of the Company's investment portfolio depends in part on the financial condition of the companies in which it has made investments. Factors that my affect the overall market value of invested assets include interest rate levels, financial market performance, and general economic conditions, as well as particular circumstances affecting the businesses of individual companies. SMC's reinsurance program is subject to the financial failure of the reinsurer and to market conditions which affect the amount and cost of reinsurance. If a large number of SMC's reinsurers fail or market conditions make it more difficult to reinsure profitably, SMC financial results could suffer. SMC is able to assume insurance risks beyond the level which capital and surplus would support by transferring substantial portions of risks to other, larger insurers through reinsurance contracts. These reinsurance arrangements, which are the usual practice in the insurance industry, leave exposure to credit risk which exists because reinsurance does not fully relieve SMC of liability to insureds for the portion of the risks ceded to reinsurers. Although SMC places reinsurance with reinsurers it believes to be financially stable, a reinsurer's subsequent insolvency or inability to make payments under the terms of a reinsurance treaty could have a materially adverse effect on SMC's financial condition. Policy claims fluctuate from year to year, and future benefit payments may exceed reserves, which may cause financial results to suffer. Financial results may fluctuate from year to year due to fluctuations in policy claims received by subsidiaries. Reserves are established for claims and future policy benefits based on accepted actuarial practices. By care in underwriting new policies and sharing risk with reinsurance companies, SMC has attempted to limit the risk that actual payments for death and other benefits will exceed its reserves. The reserves are, however, only actuarial estimates and it is possible that SMC's claims experience could be worse than anticipated, so that reserves may prove to be insufficient. If this were to happen, it could result in a decline in operating earnings. SMC could be forced to sell illiquid investments at a loss to cover policyholder withdrawals. Many products allow policyholders and contract holders to withdraw their funds under defined circumstances. SMC manages its liabilities and configures its investment portfolio to provide and maintain sufficient liquidity to support anticipated withdrawal demands, contract benefits and maturities. While a significant amount of liquid assets are owned, certain portions of assets are relatively illiquid. Unanticipated withdrawal or surrender activity could, under some circumstances, compel SMC to dispose of illiquid assets on unfavorable terms, which could have an adverse effect. Because a significant portion of SMC's annuity contracts are surrenderable, any substantial increase in the level of surrenders could negatively affect financial results. As of February 28, 2001, approximately 91.7% or $598.6 million of annuity contracts in force (measured by statutory reserves) were surrenderable. Approximately 8.3% of those contracts or approximately $54.5 million of annuity contracts in force (measured by statutory reserves) are surrenderable without charge. Changes in prevailing interest rates, ratings or other factors which result in or lead to significant levels of surrenders of existing annuity contracts could have a material adverse effect upon SMC's financial condition and results of operations. Surrenders result in a reduction of invested assets that earn investment income and a reduction of policyholder account balances that credit interest. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." A stock price decline may limit the ability to raise capital or consummate acquisitions. During 1999 and 2000, many financial services companies, including SMC, experienced a decrease in the market price of their common stock. Although management believes that SMC has sufficient, internally generated cash flow to fund its day-to-day operations, a lower stock price may limit the ability to raise capital to fund other growth opportunities and acquisitions. 33 34 SMC's business strategy has in the past and might in the future include the acquisition of other businesses. SMC may not be able to identify appropriate acquisition candidates or properly integrate their businesses. From time to time, acquisitions of other businesses may be considered. Competition for acquisition candidates, which may limit the number of acquisition opportunities, may lead to higher acquisition prices. Also, SMC may not be able to identify, acquire or manage additional businesses profitably or to successfully integrate the acquired businesses. Businesses acquired may have liabilities that SMC underestimated or did not discover during pre-acquisition investigations. Some of the liabilities of the businesses acquired, even if not expressly assumed, may be imposed on SMC as the successor to the business. Further, each acquisition involves a number of other special risks that could cause the acquired business to fail to meet expectations. For example: - the acquired business may not achieve expected results; - key personnel of the acquired business may not be retained; - substantial, unanticipated costs, delays or other operational financial problems may be incurred when the business is integrated with SMC; - management's attention may be diverted; or - management may not be able to manage the combined entity effectively or to make acquisitions and grow our business internally at the same time. The timing, size or success of any future acquisitions cannot be predicted, nor the ability to integrate any acquired businesses, or their associated capital requirements. In addition, SMC may not be able to obtain acquisition financing when required, or such financing may only be available on terms and conditions that are unacceptable. SMC's failure to address the above issues, could cause financial results to suffer. Mergers, Acquisitions and Consolidations. The U.S. insurance industry is experiencing an increasing number of mergers, acquisitions, consolidations and sales of certain business lines. These consolidations are largely the result of the following: - the need to reduce costs of distribution and overhead; - the need to maintain business in force; - increased competition; - regulatory capital requirements; and - technology costs. SMC expects this trend to continue. Foreign Currency Risk. SMI policyholders invest in assets denominated in a wide range of currencies. As policyholders are not permitted to invest directly in options, futures and derivatives, their investment and currency risk is limited to premiums they have paid. Although policyholders effectively bear the currency risk, SMI could be exposed to currency fluctuations if currencies within the conventional investment portfolio or certain actuarial reserves are mismatched. In order to minimize this risk, SMI continually matches the assets and liabilities of the portfolio and the reserves. In addition, Premier Life's (Luxembourg) shareholder's equity is denominated in Luxembourg francs. Premier Life (Luxembourg) does not hedge currency risk because its shareholder's equity will remain in Luxembourg francs for the foreseeable future, thus, no significant realized foreign exchange gains or losses are anticipated. At December 31, 2000, there was a $2.4 million unrealized loss from foreign currency translation. Euro Currency. Effective January 1, 1999, eleven participating European member union countries established fixed conversion rates between their legal currencies and the Euro. The legal currencies in those countries will continue to be used as legal tender through June 30, 2002. Subsequent to this date, the legal currencies will be canceled and Euro bills and coins will be used for cash transactions in the participating countries. During this three-year dual-currency environment, conversion rates between the legal currencies will no longer be computed directly between one another. Instead, a special "triangulation" procedure must be followed by first converting one legal currency into its euro equivalent and then converting the Euro equivalent into the other legal currency. Although the Company has not initiated an analysis plan for the Euro conversion, SMC does not expect it to have a material impact on its operations or financial condition. Possibility of Future Dilution of Ownership and Voting Power. The SMC Board of Directors has the authority to issue up to .9 million additional shares of preferred stock and 11.0 million additional shares of common stock. The board's authority under SMC's charter typically does not require stockholder approval unless it is otherwise required for a particular transaction. Although SMC is not currently involved in any life insurance acquisitions, the Company regularly investigates such opportunities and could issue additional shares of SMC common or preferred stock in connection with an acquisition. 34 35 Uncertainties Regarding Intangible Assets. Included in SMC's December 31, 2000 financial statements are certain assets that are primarily valued, for financial statement purposes, on the basis of management assumptions. These assets include items such as: - deferred acquisition costs; - present value of future profits; - costs in excess of net assets acquired; and - organization and deferred debt issuance costs. The value of these assets reflected in the December 31, 2000 balance sheet total $124.6 million or 8.5% of SMC's assets. SMC has established procedures to periodically review the assumptions used to value these assets and determine the need to make adjustments of such values in SMC's consolidated financial statements. SMC has determined that the assumptions used in the initial valuation of the assets are consistent with the current operations of SMC as of December 31, 2000. Regulatory Environment. Currently, prescribed or permitted statutory accounting principles ("SAP") may vary between states and between companies. The NAIC has completed the process of codifying SAP to promote standardization of methods utilized throughout the industry. Completion of this project might result in changes in statutory accounting practices for SMC's insurance subsidiaries; however, it is not expected that such changes would materially affect SMC's insurance subsidiaries' statutory capital requirements. There can be no assurance that existing insurance-related laws and regulations will not become more restrictive in the future and, therefore, it is not possible to predict the potential effects that any proposed or future legislation may have on the financial condition or operations of the company. See "Business of SMC-Regulatory Factors." Financial Services Deregulation. The U.S. Congress is currently considering a number of legislative proposals intended to reduce or eliminate restrictions on affiliations among financial services organizations. The recently passed GLB Act would allow banks to own or affiliate with insurers and securities firms. An increased presence of banks in the life insurance and annuity businesses may increase competition in these markets. The Company cannot predict the impact of these proposals on the earnings of the Company. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company seeks to invest available funds in a manner that will maximize shareholder value and fund future obligations to policyholders and debtors, subject to appropriate risk considerations. Many of the Company's products incorporate surrender charges, market interest rate adjustments or other features to encourage persistency. Approximately 86% of the total insurance liabilities at December 31, 2000 had surrender penalties or other restrictions and approximately 4% are not subject to surrender. The Company also seeks to maximize the total return on its investments through active investment management. Accordingly, the Company has determined that the entire portfolio of fixed maturity securities is available to be sold in response to: i) changes in market interest rates, ii) changes in relative values of individual securities and asset sectors, iii) changes in prepayment risks, iv) changes in credit quality outlook for certain securities, v) liquidity needs, and vi) other factors. Profitability of many of the Company's products is significantly affected by the spreads between interest yields on investments and rates credited on insurance liabilities. Although substantially all credited rates on annuity products may be changed annually (subject to minimum guaranteed rates), changes in competition and other factors, including the impact of the level of surrenders and withdrawals, may limit the ability to adjust or to maintain crediting rates at levels necessary to avoid narrowing of spreads under certain market conditions. As of December 31, 2000, the average yield, computed on the cost basis of the investment portfolio, was 7.28%, and the average interest rate credited or accruing to total insurance liabilities was 4.90%, excluding guaranteed interest bonuses for the first year of the annuity contract. Computer models were used to perform simulations of the cash flows generated from the Company's existing business under various interest rate scenarios. These simulations measured the potential gain or loss in fair value of interest rate-sensitive financial instruments. With such estimates, the Company seeks to closely match the duration of assets to the duration of liabilities. When the estimated duration of assets and liabilities are similar, exposure to interest rate risk is minimized because a change in the value of assets should be largely offset by a change in the value of liabilities. At December 31, 2000, the option adjusted duration of fixed maturity securities and short-term investments were approximately 4.4, and the option adjusted duration of insurance liabilities was approximately 3.9. If interest rates were to increase by 10% from their December 31, 2000 levels, the Company's fixed maturity securities and short-term investments (net of the corresponding changes in the values of cost of policies purchased, cost of policies produced and insurance liabilities) would decline in fair value by approximately $17.1 million. The calculations involved in the Company's computer simulations incorporate numerous assumptions, require significant estimates and assume an immediate change in interest rates without any management of the investment portfolio in reaction to such change. Consequently, potential changes in the value of our financial instruments indicated by the simulations will likely be 35 36 different from the actual changes experienced under given interest rate scenarios, and the differences may be material. Because the Company's investments and liabilities are actively managed, actual losses could be less than those estimated above. SMI could be exposed to currency fluctuations if currencies within the conventional investment portfolio or certain actuarial reserves are mismatched. The assets and liabilities of this portfolio and the reserves are continually matched by the company and at regular intervals by an independent actuary. In addition, Premier Life (Luxembourg's) stockholder's equity is denominated in Luxembourg francs. Premier Life (Luxembourg) does not hedge its translation risk because its stockholder's equity will remain in Luxembourg francs for the foreseeable future and no significant realized foreign exchange gains or losses are anticipated. At December 31, 2000, there is a $2.4 million unrealized loss from foreign currency translation. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required with respect to this Item 8 are listed in Item 14(a)(1) and included in a separate section of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE. PART III The Registrant will file a definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 in connection with the Company's 2001 Annual Meeting of Shareholders, (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this report, and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statements that specifically address the items set forth herein are incorporated by reference. Such incorporation does not include the Compensation Committee Report or the Performance Graph included in the Proxy Statement. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning SMC's directors required by this item is incorporated by reference to SMC's Proxy Statement. The information concerning SMC's executive officers required by this Item is incorporated by reference herein to the section in Part I, entitled "Executive Officers". The information regarding compliance with Section 16 of the Securities and Exchange Act of 1934 is to be set forth in the Proxy Statement and is hereby incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to SMC's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to SMC's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to SMC's Proxy Statement. 36 37 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) and (2) The response to this portion of Item 14 is submitted as a separate section of this report. (a)(3) List of Exhibits:
Exhibit Number Description of Document ------- ----------------------- 2.1 Amended and Restated Agreement and Plan of Merger dated as of December 9, 1997 among SMC, SAC and Savers Life (incorporated by reference to SMC's Registration Statement on Form S-4 (Registration No. 333-43023)). 2.2 Stock Purchase Agreement dated as of June 4, 1998 by and among SMC and MC Equities, Inc. (incorporated by reference to SMC's Form 8-K (Registration No. 0-20882)). 2.3 First Amendment to Stock Purchase Agreement dated as of July 1, 1998 by and among SMC and MC Equities, Inc. (incorporated by reference to SMC's Form 8-K (Registration No. 0-20882)). 2.4 Second Amendment to Stock Purchase Agreement dated as of July 23, 1998 by and among SMC and MC Equities, Inc. (incorporated by reference to SMC's Form 8-K (Registration No. 0-20882)). 2.5 Third Amendment to Stock Purchase Agreement dated as of October 8, 1998 by and among SMC and MC Equities, Inc. (incorporated by reference to SMC's Form 8-K (Registration No. 0-20882)). 3.1 Amended and Restated Articles of Incorporation, as amended (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1996). 3.2 Amended and Restated Bylaws of SMC as amended (incorporated by reference to SMC's Registration Statement on Form S-1 (Registration No. 33-53370) as filed with the Commission on January 27, 1993 and to Exhibit 3 of SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended September 30, 1994). 4.1 Form of Senior Note Agreement Warrant (incorporated by reference to SMC's Registration Statement on Form S-1 (Registration No. 33-53370)). 4.2 Amended and Restated Registration Rights Agreement dated as of April 15, 1997 by and between SMC and Fleet National Bank (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882)). 4.3 Form of Fleet National Bank Warrant (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882)). 4.4 Form of President's Club Warrant (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882)).
37 38
Exhibit Number Description of Document ------- ----------------------- 10.1 Third Amended and Restated Employment Contract by and between SMC and Ronald D. Hunter, dated and effective, as amended, July 1, 1999 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended September 30, 1999). 10.2 Third Amended and Restated Employment Contract by and between SMC and Edward T. Stahl, dated and effective, as amended, July 1, 1999 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended September 30, 1999). 10.3 Third Amended and Restated Employment contract by and between SMC and Raymond J. Ohlson, dated and effective, as amended, July 1, 1999 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended September 30, 1999). 10.4 Second Amended and Restated Employment Contract by and between SMC and Stephen M. Coons dated and effective, as amended, July 1, 1999 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended September 30, 1999). 10.5 Indemnification Agreement between SMC and Stephen M. Coons and Coons & Saint, dated August 1, 1991 (incorporated by reference to SMC's Registration Statement on Form S-1 (Registration No. 33-53370) as filed with the Commission on January 27, 1993). 10.6 Standard Management Corporation Amended and Restated 1992 Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-4 (Registration No. 333-35447) as filed with the Commission on September 11, 1997. 10.7 Lease by and between Standard Life and WRC Properties, Inc., dated February 27, 1991 (incorporated by reference to SMC's Registration Statement on Form S-1 (Registration No. 33-53370) as filed with the Commission on January 27, 1993). 10.8 Management Service Agreement between Standard Life and SMC dated August 1, 1992, as amended on January 1, 1997 and as further amended on January 1, 1999 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882)). 10.9 Agreement for Assumption Reinsurance between the National Organization Of Life and Health Insurance Guaranty Associations and Standard Life, concerning, The Midwest Life Insurance Company In Liquidation effective June 1, 1992 (incorporated by reference to SMC's Registration Statement on Form S-1 (Registration No. 33-53370) as filed with the Commission on January 27, 1993). 10.10 Reinsurance Agreement between Standard Life and Swiss Re Life and Health effective May 1, 1975 (incorporated by reference to SMC's Registration Statement on Form S-1 (Registration No. 33-53370) as filed with the Commission on January 27, 1993). 10.11 Reinsurance Agreement between Firstmark Standard Life Insurance Company and Swiss Re Life and Health effective February 1, 1984 (incorporated by reference to SMC's Registration Statement on Form S-1 (Registration No. 33-53370) as filed with the Commission on January 27, 1993). 10.12 Reinsurance Contract between First International and Standard Life dated July 10, 1992 (incorporated by reference to SMC's Registration Statement on Form S-1 (Registration No. 33-53370) as filed with the Commission on January 27, 1993). 10.13 Amended Reinsurance Agreement between Standard Life and Winterthur Life Re Insurance Company effective January 1, 1995 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1996). 10.14 Management Service Agreement between Premier Life (Luxembourg) and SMC dated September 30, 1994 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1994).
38 39
Exhibit Number Description of Document ------- ----------------------- 10.15 Assignment of Management Contract dated October 2, 1995 of Management Contract dated January 1, 1987 between DNC and Dixie Life to Standard Life (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1996). 10.16 Automatic Indemnity Reinsurance Agreement between First International and The Guardian Insurance & Annuity Company, Inc. dated and effective January 1, 1996 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1996). 10.17 Indemnity Retrocession Agreement between The Guardian Insurance & Annuity Company, Inc. and Standard Life dated and effective January 1, 1996 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1996). 10.18 Automatic Indemnity Reinsurance Agreement between The Guardian Insurance & Annuity Company, Inc. and Standard Life dated and effective January 1, 1996 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1996). 10.19 Administrative Services Agreement between First International and Standard Life dated and effective March 18, 1996 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1996). 10.20 Amendment No. 1 to Amended and Restated Revolving Line of Credit Agreement dated as of March 10, 1998 between SMC and Fleet National Bank (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882)). 10.21 Amended and Restated Note Agreement dated as of March 10, 1998 between SMC and Fleet National Bank in the amount of $20,000,000 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882)). 10.22 Amended and Restated Pledge Agreement dated as of March 10, 1998 between SMC and Fleet National Bank (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882)). 10.23 Surplus Debenture dated as of November 8, 1996 by and between SMC and Standard Life in the amount of $13,000,000 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended September 30, 1996). 10.24 Portfolio Indemnify Reinsurance Agreement between Dixie Life and Cologne Life Reinsurance Company dated and effective December 31, 1997 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1996). 10.25 Coinsurance Agreement effective as of July 1, 1997 by and between Savers Life and World Insurance Company (incorporated by reference to SMC's Registration Statement on Form S-4 (Registration No. 333-35447)). 10.26 Amendment I to the Guardian Indemnity Retrocession Agreement effective as of January 1, 1996 by and between The Guardian Insurance and Annuity Company and Standard Life (incorporated by reference to SMC's Registration Statement on Form S-4 (Registration No. 333-35447)). 10.27 Promissory Note from Ronald D. Hunter to SMC in the amount of $775,500 executed October 28, 1997 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended September 30, 1997). 10.28 Reinsurance Agreement between Standard Life and Life Reassurance Corporation of America effective September 1, 1997 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1997). 10.29 Reinsurance Agreement between Standard Life and Business Men's Assurance Company of America effective September 1, 1997 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1997).
39 40
Exhibit Number Description of Document ------- ----------------------- 10.30 Indemnity Reinsurance Agreement between Standard Life and the Mercantile and General Life Reassurance Company of America dated March 30, 1998 and effective June 1, 1997 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended June 30, 1998). 10.31 Certificate of Designations for Series A Convertible Redeemable Preferred Stock (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended June 30, 1998). 10.32 Quota Share Reinsurance Agreement between Savers Life and the Oxford Life Insurance Company dated September 24, 1998 and effective July 1, 1998 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended September 30, 1998). 10.33 Addendum No. 5 to Reinsurance Agreement between Standard Life Insurance Company of Indiana and Winterthur Life Re Insurance Company dated August 20, 1998 and effective October 1, 1998 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended September 30, 1998). 10.34 Employment Agreement between Robert B. Neal and Standard Management Corporation dated October 2, 1998 and effective October 2, 1998 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended September 30, 1998). 10.35 Articles of Merger of Savers Life into Standard Life effective as of December 31, 1998 and approved by the Indiana Department of Insurance December 29, 1998 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1998). 10.36 Plan and Agreement of Merger of Savers Life into Standard Life effective as of December 31, 1998 dated October 30, 1998 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1998). 10.37 Articles of Merger of Midwestern Life into Standard Life effective as of December 31, 1998 and approved by the Indiana Department of Insurance December 29, 1998 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1998). 10.38 Plan and Agreement of Merger of Midwestern Life into Standard Life effective as of December 31, 1998 dated October 30, 1998 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1998). 10.39 Amended and Restated note Agreement dated as of September 24, 1998 between SMC and Fleet National Bank in the amount of $26,000,000 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1998). 10.40 Amendment No. 2 to Amended and Restated Revolving Line of Credit Agreement dated as of September 24, 1998 between SMC and Fleet National Bank (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1998). 10.41 Amended and Restated Registration Rights Agreement dated as of August 19, 1998 between SMC and Fleet National Bank (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1998). 10.42 Amended and Restated Pledge Agreement dated as of September 23, 1998, between SMC and Fleet National Bank (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1998).
40 41
Exhibit Number Description of Document ------- ----------------------- 10.43 Warrant to purchase common stock of SMC dated August 19, 1998 entitling Fleet National Bank to purchase 20,000 shares (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1998). 10.44 Guaranty dated October 1, 1998 made by SMC in favor of Fleet National Bank (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1998). 10.45 Surplus debenture dated as of December 31, 1998 by and between SMC and Standard Life in the amount of $8.0 million (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1998). 10.46 Surplus debenture dated as of December 31, 1998 by and between SMC and Standard Life in the amount of $6.0 million (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1998). 10.47 Employment Agreement between Standard Management Corporation and P.B. (Pete) Pheffer dated and effective July 1, 1999, (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended September 30, 1999). 10.48* Note Agreement dated October 31, 2000 by and between SMC and Zurich Capital Markets, Inc. in the amount of $11.0 million. Included as an exhibit to this note agreement is an Investment Advisory Agreement dated December 1, 2000 by and between SMC and Scudder Kemper Investments, Inc. 21* List of Subsidiaries of SMC 23.1 Consent of Ernst & Young LLP 23.2 Consent of KPMG Audit 24* Powers of Attorney 27* Financial Data Schedule, which is submitted electronically pursuant to Regulation S-K to the Securities and Exchange Commission for information only and not filed. (FOR SEC USE ONLY)
---------------------- *Previously filed with the initial filing of this Form 10-K on March 29, 2001. The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report. EXHIBIT NUMBER None (b) Reports on Form 8-K filed during the fourth quarter of 2000. No reports on Form 8-K were filed with the Commission in the fourth quarter of 2000. 41 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: July 23, 2001 STANDARD MANAGEMENT CORPORATION /s/ Ronald D. Hunter ---------------------------------------- Ronald D. Hunter Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on July 23, 2001 by the following persons on behalf of the Registrant and in the capacities indicated. /s/ Ronald D. Hunter ------------------------------ ----------------------------------------------- Ronald D. Hunter Chairman, President and Chief Executive Officer (Principal Executive Officer) * ------------------------------ ----------------------------------------------- P.B. (Pete) Pheffer Director, Executive Vice President, and Chief Financial Officer (Principal Financial Officer) * ------------------------------ ----------------------------------------------- Gerald R. Hochgesang Senior Vice President - Finance and Treasurer (Principal Accounting Officer) * ------------------------------ ----------------------------------------------- Raymond J. Ohlson Director * ------------------------------ ----------------------------------------------- Edward T. Stahl Director * ------------------------------ ----------------------------------------------- Stephen M. Coons Director * ------------------------------ ----------------------------------------------- Martial R. Knieser Director * ------------------------------ ----------------------------------------------- Robert A. Borns Director * ------------------------------ ----------------------------------------------- John J. Dillon Director * ------------------------------ ----------------------------------------------- Jerry E. Francis Director *By: /s/ Ronald D. Hunter ------------------------- Ronald D. Hunter Attorney-in-Fact
42 43 ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14(a)(1) AND (2),(c) AND (d) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA LIST OF FINANCIAL STATEMENTS and FINANCIAL STATEMENT SCHEDULES CERTAIN EXHIBITS FINANCIAL STATEMENT SCHEDULES Year Ended December 31, 2000 STANDARD MANAGEMENT CORPORATION INDIANAPOLIS, INDIANA 44 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE ---- AUDITED CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors.................................................................. F-2 Consolidated Balance Sheets as of December 31, 2000 and 1999.................................... F-4 Consolidated Statements of Income for the Years Ended December 31, 2000, 1999 and 1998........................................................... F-5 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2000, 1999 and 1998........................................................... F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998........................................................... F-8 Notes to Consolidated Financial Statements...................................................... F-9 FINANCIAL STATEMENT SCHEDULES The following consolidated financial statement schedules are included in this report and should be read in conjunction with the Audited Consolidated Financial Statements. Schedule II -- Condensed Financial Information of Registrant (Parent Company) for the Years Ended December 31, 2000, 1999 and 1998...................... F-29 Schedule IV -- Reinsurance for the Years Ended December 31, 2000, 1999 and 1998................. F-32 Schedules not listed above have been omitted because they are not applicable or are not required, or because the required information is included in the Audited Consolidated Financial Statements or related Notes.
F-1 45 REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors Standard Management Corporation We have audited the accompanying consolidated balance sheets of Standard Management Corporation and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We did not audit the consolidated balance sheets at September 30, 2000 and 1999 or the consolidated statements of operations, shareholder's equity and cash flows for each of the three years in the period ended September 30, 2000 of Standard Management International S.A. and subsidiaries, a wholly owned subsidiary group, which financial statements reflect assets totaling approximately 37% and 29% of the Company's consolidated assets at December 31, 2000 and 1999 and revenues totaling approximately 11%, 6% and 8% of consolidated revenues for each of the three years in the period ended December 31, 2000. Those financial statements, which as explained in Note 1, are included in the Company's consolidated balance sheets at December 31, 2000 and 1999, and the Company's consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000, were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the data included for Standard Management International S.A., is based solely on the report of other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Standard Management Corporation and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Indianapolis, Indiana February 9, 2001 F-2 46 REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors Standard Management International, S.A. We have audited the consolidated balance sheets of Standard Management International S.A. and its subsidiaries as at September 30, 2000 and 1999 and the related consolidated statements of operations, shareholder's equity and comprehensive income, and cash flows for each of the years in the three year period ended September 30, 2000 (none of which aforementioned financial statements are separately presented herein). 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 in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion the financial statements referred to above present fairly, in all material aspects, the consolidated financial position of Standard Management International S.A. and its subsidiaries as at September 30, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the years in the three year period ended September 30, 2000 in conformity with generally accepted accounting principles in the United States of America. Luxembourg City, Luxembourg January 15, 2001 /s/ KPMG Audit F-3 47 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31 ------------------------------- 2000 1999 ----------- ----------- ASSETS Investments: Securities available for sale: Fixed maturity securities, at fair value (amortized cost: $742,597 in 2000 and $646,284 in 1999) ........................................................ $ 718,912 $ 606,907 Equity securities, at fair value (cost: $538 in 2000 and $565 in 1999) ......... 362 378 Mortgage loans on real estate ...................................................... 4,778 8,131 Policy loans ....................................................................... 14,280 14,033 Real estate ........................................................................ 8,847 3,233 Other invested assets .............................................................. 776 845 Short-term investments ............................................................. 12,489 14,976 ----------- ----------- Total investments ........................................................... 760,444 648,503 Cash .................................................................................. 1,840 3,659 Accrued investment income ............................................................. 12,298 11,105 Amounts due and recoverable from reinsurers ........................................... 43,158 58,230 Deferred acquisition costs ............................................................ 91,855 67,811 Present value of future profits ....................................................... 26,343 30,688 Goodwill .............................................................................. 5,430 5,636 Other assets .......................................................................... 8,650 5,372 Assets held in separate accounts ...................................................... 520,439 319,973 ----------- ----------- Total assets ................................................................ $ 1,470,457 $ 1,150,977 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Insurance policy liabilities ....................................................... $ 837,345 $ 727,189 Accounts payable and accrued expenses .............................................. 7,347 9,076 Notes payable ...................................................................... 31,500 34,500 Deferred federal income taxes ...................................................... 4,397 349 Liabilities related to separate accounts ........................................... 520,439 319,973 ----------- ----------- Total liabilities ........................................................... 1,401,028 1,091,087 Series A convertible redeemable preferred stock, par value $100 per share ............. 6,530 6,530 Shareholders' Equity: Preferred stock, no par value ...................................................... -- -- Common stock, no par value ......................................................... 63,019 62,152 Treasury stock, at cost ............................................................ (7,589) (6,802) Accumulated other comprehensive income (loss): Unrealized gain (loss) on securities available for sale, net tax benefits of $4,977 in 2000 and $8,196 in 1999 ......................................... (9,643) (15,859) Unrealized gain on other investments, net taxes of $1 in 2000 and $8 in 1999 ... 3 15 Foreign currency translation adjustment ........................................ (2,368) (862) Retained earnings .................................................................. 19,477 14,716 ----------- ----------- Total shareholders' equity .................................................. 62,899 53,360 ----------- ----------- Total liabilities and shareholders' equity .................................. $ 1,470,457 $ 1,150,977 =========== ===========
See accompanying notes to consolidated financial statements. F-4 48 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31 --------------------------------- 2000 1999 1998 -------- ------- ------- Revenues: Premium income ...................................................... $ 15,470 $13,090 $14,479 Net investment income ............................................... 50,776 43,612 33,589 Call option gains (losses) .......................................... (7,603) 1,209 632 Net realized investment gains (losses) .............................. (4,492) 78 353 Policy income ....................................................... 8,204 6,826 6,529 Negative goodwill amortization ...................................... -- -- 1,388 Separate account fees ............................................... 7,728 3,941 2,884 Fee and other income ................................................ 5,980 4,207 3,421 -------- ------- ------- Total revenues .................................................. 76,063 72,963 63,275 -------- ------- ------- Benefits and expenses: Benefits and claims ................................................. 20,080 14,376 13,270 Interest credited to interest-sensitive annuities and other financial products .................................... 21,080 25,728 19,775 Amortization ........................................................ 9,436 7,471 5,413 Other operating expenses ............................................ 15,646 14,605 15,551 Interest expense and financing costs ................................ 3,417 3,385 2,955 -------- ------- ------- Total benefits and expenses ..................................... 69,659 65,565 56,964 -------- ------- ------- Income before federal income taxes, extraordinary loss and preferred stock dividends ................................................. 6,404 7,398 6,311 Federal income tax expense ............................................. 778 2,126 1,630 -------- ------- ------- Income before extraordinary loss and preferred stock dividends ......... 5,626 5,272 4,681 Extraordinary loss, net tax benefits of $185 ........................... 359 -- -- -------- ------- ------- Net income ............................................................. 5,267 5,272 4,681 Preferred stock dividends .............................................. 506 506 180 -------- ------- ------- Earnings available to common shareholders .............................. $ 4,761 $ 4,766 $ 4,501 ======== ======= ======= Earnings per share - basic: Income before extraordinary loss and preferred stock dividends ...... $ .73 $ .69 $ .68 Extraordinary loss .................................................. .05 -- -- -------- ------- ------- Net income .......................................................... .68 .69 .68 Preferred stock dividends ........................................... .06 .07 .03 -------- ------- ------- Earnings available to common shareholders ........................... $ .62 $ .62 $ .65 ======== ======= ======= Earnings per common share - diluted: Income before extraordinary loss and preferred stock dividends ...... $ .70 $ .65 $ .62 Extraordinary loss .................................................. .04 -- -- -------- ------- ------- Net income .......................................................... .66 .65 .62 Preferred stock dividends ........................................... .05 .05 .02 -------- ------- ------- Earnings available to common shareholders ........................... $ .61 $ .60 $ .60 ======== ======= =======
See accompanying notes to consolidated financial statements. F-5 49 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
Accumulated other Common Treasury comprehensive Retained Total stock stock income (loss) earnings -------- -------- -------- ------------- --------- Balance at January 1, 1998 ............................. $ 43,313 $ 40,646 $(4,572) $ 1,698 $ 5,541 Comprehensive income: Net income ........................................... 4,681 4,681 Other comprehensive income (loss): Change in unrealized gain (loss) on securities, net tax benefits of $251 ..................... (488) (488) Change in foreign currency translation ............ 477 477 -------- Other comprehensive loss ........................ (11) -------- Comprehensive income .......................... 4,670 Issuance of common stock for Savers Life acquisition ... 15,024 15,024 Issuance of common stock for Midwestern Life acquisition ......................................... 4,614 4,614 Issuance of common stock warrants ...................... 64 64 Issuance of common stock in connection with exercise of stock warrants .......................... 233 234 (1) Treasury stock acquired ................................ (1,702) (1,702) Conversion of preferred stock into common stock ........ 4 4 Reissuance of treasury stock in connection with exercise of stock options ........................... 2 54 (52) Preferred stock dividends .............................. (180) (180) -------- -------- ------- -------- ------- Balance at December 31, 1998 ........................... $ 66,042 $ 60,586 $(6,220) $ 1,687 $ 9,989 Comprehensive income (loss): Net income ........................................... 5,272 5,272 Other comprehensive income (loss): Change in unrealized gain (loss) on securities, net tax benefits of $8,961 ....................... (17,527) (17,527) Change in foreign currency translation ............. (866) (866) -------- Other comprehensive loss ......................... (18,393) -------- Comprehensive loss ............................ (13,121) Issuance of common stock warrants ...................... 1,566 1,566 Treasury stock acquired ................................ (582) (582) Exercise of stock options .............................. (39) (39) Preferred stock dividends .............................. (506) (506) -------- -------- ------- -------- ------- Balance at December 31, 1999 ........................... $ 53,360 $ 62,152 $(6,802) $(16,706) $14,716
(continued on following page) See accompanying notes to consolidated financial statements. F-6 50 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED) (DOLLARS IN THOUSANDS)
Accumulated other Common Treasury comprehensive Retained Total stock stock income (loss) earnings -------- -------- -------- ------------- --------- Balance December 31, 1999 (carried forward from prior page)........................................ $ 53,360 $62,152 $(6,802) $(16,706) $ 14,716 Comprehensive income: Net income.......................................... 5,267 5,267 Other comprehensive income: Change in unrealized gain (loss) on securities, net taxes of $3,219......................... 6,204 6,204 Change in foreign currency translation........... (1,506) (1,506) -------- Other comprehensive income..................... 4,698 -------- Comprehensive income..................... 9,965 Issuance of common stock warrants...................... 867 867 Treasury stock acquired................................ (787) (787) Preferred stock dividends.............................. (506) (506) -------- ------- ------- -------- -------- Balance at December 31, 2000........................... $ 62,899 $63,019 $(7,589) $(12,008) $ 19,477 ======== ======= ======= ======== ========
See accompanying notes to consolidated financial statements F-7 51 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
Year Ended December 31 --------------------------------------- 2000 1999 1998 --------- --------- --------- OPERATING ACTIVITIES Net income ......................................................................... $ 5,267 $ 5,272 $ 4,681 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred acquisition costs ...................................... 6,419 4,580 2,658 Deferral of acquisition costs ................................................... (35,138) (27,818) (13,542) Deferred federal income taxes ................................................... 829 2,005 957 Depreciation and amortization ................................................... 3,671 3,889 1,209 Insurance policy liabilities .................................................... 16,337 14,530 6,400 Net realized investment (gains) losses .......................................... 4,492 (78) (353) Accrued investment income ....................................................... (1,194) (1,541) (1,451) Other ........................................................................... 252 2,014 (352) --------- --------- --------- Net cash provided by operating activities ................................ 935 2,853 207 INVESTING ACTIVITIES Fixed maturity securities available for sale: Purchases ....................................................................... (290,117) (236,969) (261,744) Sales ........................................................................... 180,402 116,511 162,503 Maturities, calls and redemptions ............................................... 7,466 19,006 32,570 Short-term investments, net ........................................................ 2,487 (3,350) 44,460 Other investments, net ............................................................. (6,872) 2,270 320 Purchase of Savers Life Insurance Company, less cash acquired of $518 .............. -- -- (18,039) Purchase of Midwestern National Life Insurance Company of Ohio, less cash acquired of $1,026 .............................................................. -- -- (13,104) --------- --------- --------- Net cash used by investing activities .................................... (106,634) (102,532) (53,034) FINANCING ACTIVITIES Borrowings, net of debt issuance costs of $206 in 1998 ............................ 11,000 300 11,794 Repayments on notes payable ........................................................ (14,000) (800) (3,141) Premiums received on interest-sensitive annuities and other financial products credited to policyholder account balances, net of premiums ceded ................ 196,489 165,750 81,858 Return of policyholder account balances on interest-sensitive annuities and other financial products .............................................................. (89,183) (75,981) (52,934) Issuance of Series A redeemable preferred stock .................................... -- -- 6,389 Proceeds from common and treasury stock sales ...................................... -- -- 234 Issuance of common stock and warrants .............................................. 867 1,566 19,935 Purchase of common stock for treasury .............................................. (787) (582) (1,702) Dividends on preferred stock ....................................................... (506) (506) (180) --------- --------- --------- Net cash provided by financing activities ................................ 103,880 89,747 62,253 --------- --------- --------- Net increase (decrease) in cash .................................................... (1,819) (9,932) 9,426 Cash at beginning of year .......................................................... 3,659 13,591 4,165 --------- --------- --------- Cash at end of year ................................................................ $ 1,840 $ 3,659 $ 13,591 ========= ========= =========
See accompanying notes to consolidated financial statements. F-8 52 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Standard Management Corporation ("Standard Management") is an international financial services holding company, which directly and through its subsidiaries i) acquires and manages in force life insurance and annuity business, ii) issues and distributes life insurance and annuity products, and iii) offers unit-linked assurance products through its international subsidiaries. Standard Management's active subsidiaries at December 31, 2000 include: (i) Standard Life Insurance Company of Indiana ("Standard Life") and its subsidiary, Dixie National Life Insurance Company ("Dixie Life"), (ii) Standard Management International, S.A. and its subsidiaries ("SMI"), Premier Life (Luxembourg) S.A. ("Premier Life (Luxembourg)") and Premier Life (Bermuda) Ltd. ("Premier Life (Bermuda)"), (iii) Standard Marketing Corporation ("Standard Marketing") and (iv) Savers Marketing Corporation ("Savers Marketing"). Basis of Presentation The accompanying consolidated financial statements of Standard Management and its subsidiaries (the "Company" or "SMC") have been prepared in conformity with accounting principles generally accepted in the United States ("GAAP") and include the accounts of the Company since acquisition or organization. All significant intercompany balances and transactions have been eliminated. The fiscal year end for SMI is September 30. To facilitate reporting on the consolidated level, the fiscal year end for SMI was not changed and the consolidated balance sheets and statements of operations for SMI at September 30, 2000 and 1999 and for each of the three years in the period ended September 30, 2000, are included in the Company's consolidated balance sheets at December 31, 2000 and 1999 and for each of the three years in the period ended December 31, 2000. Use of Estimates The nature of the Company's insurance businesses requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts disclosed in this report. Investments The Company classifies its fixed maturity and equity securities as available for sale and, accordingly, such securities are carried at fair value. Fixed maturity securities include bonds and redeemable preferred stocks. Changes in fair values of securities available for sale, after adjustment for deferred acquisition costs, present value of future profits and deferred income taxes, are reported as unrealized gains or losses directly in shareholders' equity and, accordingly, have no effect on net income. The deferred acquisition costs and present value of future profits adjustments to the unrealized gains or losses represent valuation adjustments or reinstatements of these assets that would have been required as a charge or credit to operations had such unrealized amounts been realized. The cost of fixed maturity securities is adjusted for amortization of premiums and discounts. The amortization is provided on a constant effective yield method over the life of the securities and is included in net investment income. Mortgage-backed and other collateralized securities, classified as fixed maturity securities in the consolidated balance sheets, are comprised principally of obligations backed by an agency of the United States ("U.S.") government (although generally not by the full faith and credit of the U.S. government). The Company has reduced the risk normally associated with these investments by primarily investing in highly rated securities and in those that provide more predictable prepayment patterns. The income from these securities is recognized using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from anticipated prepayments, the income recognized is adjusted currently to match that which would have been recorded had the effective yield been applied since the acquisition of the security. This adjustment is included in net investment income. F-9 53 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Mortgage loans on real estate and policy loans are carried at unpaid principal balances and are generally collateralized. Real estate investments, which the Company has the intent to hold for the production of income, are carried at cost, less accumulated depreciation. Short-term investments are carried at amortized cost, which approximates fair value. Net Realized Investment Gains or Losses Net realized investment gains and losses are calculated using the specific identification method and included in the consolidated statements of income. If the values of investments decline below their amortized cost and this decline is considered to be other than temporary, the amortized cost of these investments is reduced to net realizable value and the reduction is recorded as a realized loss. Future Policy Benefits Liabilities for future policy benefits for deferred annuities and universal life policies are equal to full account value that accrues to the policyholder (cumulative premiums less certain charges, plus interest credited) with rates ranging from 3.0% to 12.5% in 2000 and 3.0% to 12.3% in 1999. Future policy benefits for traditional life insurance contracts are computed using the net level premium method on the basis of assumed investment yields, mortality and withdrawals, which were appropriate at the time the policies were issued. Assumed investment yields are based on interest rates ranging from 6.2% to 7.5%. Mortality is based upon various actuarial tables, principally the 1965-1970 or the 1975-1980 Select and Ultimate Table. Withdrawals are based upon Company experience and vary by issue age, type of coverage, and duration. Recognition of Insurance Policy Revenue and Related Benefits and Expenses Revenue for interest-sensitive annuity contracts consists of policy charges for surrenders and investment income earned. Premiums received for these annuity contracts are reflected as premium deposits and are not recorded as revenues. Expenses related to these annuities include interest credited to policyholder account balances. Revenue for universal life insurance policies consists of policy charges for the cost of insurance, policy administration charges, surrender charges and investment income earned during the period. Expenses related to universal life policies include interest credited to policyholder account balances and death benefits incurred in excess of policyholder account balances. Traditional life insurance and immediate annuity premiums are recognized as premium revenue when due over the premium paying period of the policies. Benefits are charged to expense in the period when claims are incurred and are associated with related premiums through changes in reserves for future policy benefits which results in the recognition of profit over the premium paying period of the policies. Reinsurance Premiums, annuity policy charges, benefits and claims, interest credited and amortization expense are reported net of reinsurance ceded and are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Separate Accounts The majority of the balance represents i) unit-linked business, where benefits on surrender and maturity are not guaranteed, and ii) investment contracts, which pay fixed benefits to the policyholder and have minimal mortality risk. Separate accounts generally represent funds maintained in accounts to meet specific investment objectives of policyholders who bear the investment risk. The Company records the related liabilities at amounts equal to the underlying assets. Investment income and investment gains and losses accrue directly to such policyholders. The assets of each account are segregated and are not subject to claims that arise out of any other business of the Company. Deposits, net investment income and realized gains and losses on separate accounts assets are not reflected in the consolidated statements of income. F-10 54 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Foreign Currency Translation The Company's foreign subsidiaries' balance sheets and statements of operations are translated at the year end exchange rates and average exchange rates for the year, respectively. The resulting unrealized gain or loss adjustment from the translation to U.S. dollars is recorded in the foreign currency translation adjustment as a separate component of accumulated other comprehensive income. Foreign exchange gains or losses relating to policyholders' funds in separate accounts are allocated to the relevant separate account. Income Taxes Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period in which the change is enacted. Standard Life and Dixie Life filed a consolidated return for 1999 and plan to file a consolidated return for 2000. SMC and other U.S. non-insurance subsidiaries are taxed as regular corporations and file a consolidated return. SMC and its U.S. non-insurance subsidiaries were eligible to consolidate with Standard Life for income tax purposes beginning in 1996, but do not currently plan to do so. SMI is incorporated as a holding company in the Grand Duchy of Luxembourg and, accordingly, is not currently subject to taxation on income or capital gains. SMI is subject to an annual capital tax, which is calculated on the nominal value of the statutory shareholder's equity at an annual rate of .20%. Premier Life (Luxembourg) is a normal commercial taxable company and is subject to income tax at regular corporate rates (statutory corporate rate of 37.45%), and annual capital taxes amounting to approximately 0.5% of its net equity. Premier Life (Bermuda) is exempt from taxation on income until March 2016 pursuant to a decree from the Minister of Finance in Bermuda. To the extent that such income is taxable under U.S. law, such income will be included in SMC's consolidated return. Deferred Acquisition Costs Costs relating to the production of new business (primarily commissions and certain costs of marketing, policy issuance and underwriting) are deferred and included in the deferred acquisition cost asset to the extent that such costs are recoverable from future related policy revenues. For interest-sensitive annuities and other financial products, deferred acquisition costs, with interest, are amortized over the lives of the policies and products in a constant relationship to the present value of estimated future gross profits, discounted using the interest rate credited to the policy. Traditional life insurance deferred acquisition costs are being amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policy benefit reserves. The Company reviews the recoverability of the carrying value of the deferred acquisition costs each year. For interest-sensitive annuities and other financial products, the Company considers estimated future gross profits in determining whether the carrying value is appropriate; for other insurance products, the Company considers estimated future premiums. In all cases, the Company considers expected mortality, interest earned and crediting rates, persistency and expenses. Amortization is adjusted retrospectively for interest-sensitive annuities and other financial products when estimates of future gross profits to be realized are revised. Present Value of Future Profits Present value of future profits are recorded in connection with acquisitions of insurance companies or a block of policies. The initial value is based on the actuarially determined present value of the projected future gross profits from the in-force business acquired. In selecting the interest rate to calculate the discounted present value of the projected future gross profits, the Company uses the risk rate of return believed to best reflect the characteristics of the purchased policies, taking into account the relative risks of such policies, the cost of funds to acquire the business and other factors. The value of in force insurance purchased is amortized on a constant yield basis over its estimated life from the date of acquisition in proportion to the emergence of profits or the expected premium pattern over a period of approximately 20 years. F-11 55 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) For acquisitions the Company made on or before November 19, 1992, the Company amortizes the asset with interest at the same discount rate used to determine the present value of future profits at the date of purchase. For acquisitions after November 19, 1992, the Company amortizes the asset using the interest rate credited to the underlying policies. Goodwill The excess of the cost to acquire purchased companies over the fair value of net assets acquired ("goodwill") is being amortized on a straight-line basis over periods that generally correspond with the benefits expected to be derived from the acquisitions, usually 20 to 40 years. Accumulated amortization was $1.2 million and $.9 million at December 31, 2000 and 1999, respectively. The Company continually monitors the goodwill based on estimates of future earnings. If it determines that goodwill has been impaired, the carrying value is reduced with a corresponding charge to expense. Negative Goodwill The excess of the net assets acquired over the cost to acquire purchased companies ("negative goodwill"), after reducing the basis in property and equipment and other noncurrent assets to zero, was amortized into earnings on a straight-line basis over a five year period. Negative goodwill was fully amortized at December 31, 1998. Stock Options The Company recognizes compensation expense for its stock option plan using the intrinsic value method of accounting. Under the terms of the intrinsic value method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date, or other measurement date, over the amount an employee must pay to acquire the stock. Under the Company's stock option plans, no expense is recognized since the exercise price equals or exceeds the market price at the measurement date. Reclassifications Certain amounts in the 1999 and 1998 consolidated financial statements and notes have been reclassified to conform with the 2000 presentation. These reclassifications had no effect on previously reported shareholders' equity or net income in the periods presented. Recently Issued Professional Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (the Standard). The Standard requires companies to record derivatives on the new balance sheet as assets and or liabilities measured at fair value. The Company adopted the Standard on January 1, 2001. Adoption of the Standard will be recorded as a cumulative effect of a change in accounting principle and will not result in restatement of previously issued financial statements. The adoption of the Standard is expected to have an immaterial impact to net income. Additionally, its application may increase the volatility of other income and expense. 2. ACQUISITIONS On March 12, 1998, SMC acquired Savers Life Insurance Company ("Savers Life"). Each of the 1.8 million shares of Savers Life Common Stock outstanding was converted into 1.2 shares of SMC Common Stock plus $1.50. Each holder of Savers Life Common Stock could elect to receive the $1.50 per share portion of the merger consideration in the form of additional shares of SMC Common Stock. SMC issued approximately 2.2 million shares with a value of approximately $14.9 million and paid $2.2 million in cash and $1.5 million in acquisition costs for an aggregate purchase price of $18.6 million to acquire Savers Life. On October 30, 1998, SMC acquired Midwestern National Life Insurance Company of Ohio ("Midwestern Life"). SMC issued .7 million shares of its common stock valued at $4.6 million, increased its bank debt by $6.0 million on restructured terms, and paid $2.9 million in cash and $.6 million of acquisition costs for an aggregate purchase price of $14.1 million to acquire Midwestern Life. The acquisitions of Savers Life and Midwestern Life were accounted for using the purchase method of accounting and accordingly, SMC's consolidated financial statements include the results of operations of the acquired companies from the effective dates of their respective acquisitions. Under purchase accounting, SMC allocated the total purchase price of the assets and liabilities acquired, based on a determination of their fair values and recorded the excess of acquisition cost over net assets acquired as goodwill, which will be amortized on a straight line basis over 30 years and 20 years for Savers Life and Midwestern F-12 56 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Life, respectively. SMC merged Savers Life and Midwestern Life into Standard Life effective December 31, 1998, with Standard Life as the surviving entity. 3. INVESTMENTS The amortized cost, gross unrealized gains and losses and estimated fair value of securities available for sale are as follows (in thousands):
DECEMBER 31, 2000 ----------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ------- Securities available for sale: Fixed maturity securities: United States Treasury securities and obligations of United States government agencies .................. $ 18,098 $ 140 $ 9 $ 18,230 Obligations of states and political subdivisions ......................... 2,116 59 -- 2,175 Foreign government securities ........... 3,348 17 162 3,203 Utilities ............................... 26,603 75 1,093 25,585 Corporate bonds ......................... 484,012 3,832 25,689 462,154 Mortgaged-backed securities ............. 202,890 1,905 2,405 202,390 Redeemable preferred stock .............. 5,530 -- 355 5,175 -------- ------ ------- -------- Total fixed maturity securities ...... 742,597 6,028 29,713 718,912 Equity securities ........................... 538 4 180 362 -------- ------ ------- -------- Total securities available for sale ..... $743,135 $6,032 $29,893 $719,274 ======== ====== ======= ========
December 31, 1999 ----------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- Securities available for sale: Fixed maturity securities: United States Treasury securities and obligations of United States government agencies .................. $ 20,455 $ 7 $ 517 $ 19,945 Obligations of states and political subdivisions ......................... 3,997 50 87 3,960 Foreign government securities ........... 3,489 50 274 3,265 Utilities ............................... 29,068 -- 2,284 26,784 Corporate bonds ......................... 479,332 308 32,658 446,982 Mortgaged-backed securities ............. 104,413 70 3,629 100,854 Redeemable preferred stock .............. 5,530 -- 413 5,117 -------- ---- ------- -------- Total fixed maturity securities ...... 646,284 485 39,862 606,907 Equity securities ........................... 565 6 193 378 -------- ---- ------- -------- Total securities available for sale ..... $646,849 $491 $40,055 $607,285 ======== ==== ======= ========
The estimated fair values for fixed maturity securities are based on quoted market prices, where available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or by F-13 57 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) discounting expected future cash flows using a current market rate applicable to the coupon rate, credit rating, and maturity of the investments. 3. INVESTMENTS (CONTINUED) The amortized cost and estimated fair value of fixed maturity securities at December 31, 2000 by contractual maturity are shown below (in thousands). Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties and because most mortgage-backed securities provide for periodic payments throughout their lives.
AMORTIZED FAIR COST VALUE --------- -------- Due in one year ........................... $ 13,321 $ 13,329 Due after one year through five years ..... 143,580 141,957 Due after five years through ten years .... 200,824 193,120 Due after ten years ....................... 176,452 162,941 -------- -------- Subtotal .............................. 534,177 511,347 Redeemable preferred stock ................ 5,530 5,175 Mortgage-backed securities ................ 202,890 202,390 -------- -------- Total fixed maturity securities ....... $742,597 $718,912 ======== ========
The Company maintains a highly-diversified investment portfolio with limited concentration of financial instruments in any given region, industry or economic characteristic. At December 31, 2000, the Company held no investments in any entity in excess of 10% of shareholders' equity other than asset-backed securities and investments issued or guaranteed by the U.S. government or a U.S. government agency, all of which were classified as fixed maturity securities available for sale. Net investment income was attributable to the following (in thousands):
Year Ended December 31 ----------------------------------------- 2000 1999 1998 ------- ------- ------- Fixed maturity securities .......... $48,623 $39,625 $29,852 Common stocks ...................... -- 17 46 Mortgage loans on real estate ...... 930 947 679 Policy loans ....................... 925 960 654 Real estate ........................ 30 33 135 Short-term investments and other ... 847 2,602 2,932 ------- ------- ------- Gross investment income ......... 51,355 44,184 34,298 Less: investment expenses .......... 579 572 709 ------- ------- ------- Net investment income ........... $50,776 $43,612 $33,589 ======= ======= =======
Net realized investment gains (losses) were attributable to the following (in thousands):
Year Ended December 31 ------------------------------------------- 2000 1999 1998 ------- ------- ------- Fixed maturity securities available for sale: Gross realized gains .......................... $ 1,545 $ 2,000 $ 2,570 Gross realized losses ......................... (1,854) (1,415) (964) Other than temporary decline in fair value .... (3,048) (15) (1,110) ------- ------- ------- Net ...................................... (3,357) 570 496 Real estate ................................... -- 9 -- Other losses .................................. (1,135) (501) (143) ------- ------- ------- Net realized investment gains (losses) ... $(4,492) $ 78 $ 353 ======= ======= =======
F-14 58 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENTS (CONTINUED) Life insurance companies are required to maintain certain amounts of assets with state or other regulatory authorities. At December 31, 2000, fixed maturity securities of $7.9 million and cash and short-term investments of $.5 million were held on deposit by various state regulatory authorities in compliance with statutory regulations. Additionally, fixed maturity securities of $.7 million, short-term investments of $5.9 million and account assets of SMI were held by a custodian bank approved by the Luxembourg regulatory authorities to comply with local insurance laws. Comprehensive income excludes reclassification adjustments for net realized investment gains (losses) after income taxes (benefits) of ($2.2) million, $.4 million and $.3 million in 2000, 1999 and 1998, respectively. The income tax rate used for comprehensive income is 34%. 4. DEFERRED ACQUISITION COSTS AND PRESENT VALUE OF FUTURE PROFITS The activity related to the deferred acquisition costs is summarized as follows (in thousands):
Year Ended December 31 -------------------------------------- 2000 1999 1998 -------- -------- -------- Balance, beginning of year ................................ $ 67,811 $ 32,946 $ 21,435 Additions .............................................. 35,138 27,817 14,200 Amortization ........................................... (6,419) (4,580) (3,316) Adjustment relating to net unrealized (gain) loss on securities available for sale ...................... (4,675) 11,628 627 -------- -------- -------- Balance, end of year ...................................... $ 91,855 $ 67,811 $ 32,946 ======== ======== ========
The activity related to the present value of future profits is summarized as follows (in thousands):
Year Ended December 31 -------------------------------------- 2000 1999 1998 -------- -------- -------- Balance, beginning of year ................................ $ 30,688 $ 28,793 $ 20,537 Amounts and adjustments related to acquisitions and disposals ..................................... -- (949) 10,401 Interest accreted on unamortized balance ............... 3,472 3,890 4,223 Amortization ........................................... (6,226) (6,517) (6,088) Adjustments relating to net unrealized (gain) loss on securities available for sale ...................... (1,591) 5,471 (280) -------- -------- -------- Balance, end of year ...................................... $ 26,343 $ 30,688 $ 28,793 ======== ======== ========
The percentages of future expected net amortization of the beginning balance of the present value of future profits, before the effect of net unrealized gains and losses, are expected to be between 8% and 10% in each of the years 2001 through 2005. Future net amortization is based on the present value of future profits at December 31, 2000 and current assumptions as to future events on all policies in force. The discount rate used to calculate the present value of future profits reflected in the Company's consolidated balance sheets at December 31, 2000, ranged from 7.5% to 18%. The Company used discount rates of 13% and 15% to calculate the present value of future profits of the Savers Life and Midwestern Life acquisitions, respectively. F-15 59 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. NOTES PAYABLE Notes payable were as follows (in thousands):
December 31 Interest ------------------------ Rate 2000 1999 -------- -------- -------- Borrowings under revolving credit agreements .............. 9.86%(1) $ 20,500 $ 24,500 Senior subordinated notes ................................. 10.00% 11,000 10,000 $ 31,500 $ 34,500
(1) Current weighted average rate at December 31, 2000. Borrowings Under Revolving Credit Agreements Standard Management has outstanding borrowings at December 31, 2000 pursuant to the Amended Credit Agreement that provides for it to borrow up to $26.0 million in the form of a seven-year reducing revolving loan arrangement. Standard Management has agreed to pay a non-use fee of .50% per annum on the unused portion of the commitment. Borrowings under the Amended Credit Agreement may be used for contributions to surplus of insurance subsidiaries, acquisition financing and repurchases of Common Stock. The debt is secured by a Pledge Agreement of all of the issued and outstanding shares of Common Stock of Standard Life and Standard Marketing. Interest on the borrowings under the Amended Credit Agreement is determined, at the option of SMC, to be: (i) a fluctuating rate of interest to the corporate base rate announced by the bank periodically, plus 1% per annum, or (ii) a rate at London Inter-Bank Offered Rate ("LIBOR") plus 3.25%. The repayment schedule includes $3.2 million due March 2001 and $4.3 million each year thereafter to March 2005. Indebtedness incurred under the Amended Credit Agreement is subject to certain restrictions and covenants including, among other things, certain minimum financial ratios, minimum consolidated equity requirements for SMC, positive net income, minimum statutory surplus requirements for the Company's insurance subsidiaries and certain limitations on acquisitions, additional indebtedness, investments, mergers, consolidations and sales of assets. SMI has an unused line of credit of $1.5 million, with no borrowings in connection with this line of credit in 2000 or 1999. Senior Subordinated Note On October 31, 2000, the Company issued a Senior Subordinated Note due October 31, 2007 in the principal amount of $11 million. The note bears interest equal to i) a fixed rate of 10% per annum; or ii) six month LIBOR plus 150 basis points; whichever is higher. Interest payments are payable in cash semi-annually on April 30 and October 31 of each year. The note may be prepaid in whole or in part at the option of SMC commencing on November 1, 2001 at a redemption price equal to 105% of the principal amount (plus accrued interest) and declining to l00% of the principal amount (plus accrued interest) on November 1, 2005. The note may be prepaid beginning November 1, 2001 at a redemption price equal to l00% of the principal amount (plus accrued interest) under certain limited circumstances. The note is subject to certain restrictions and covenants substantially similar to those in the Amended Credit Agreement. The holder also received a warrant to purchase 220,000 shares of the Company's common stock at a purchase price of $4.00 per share for a period of seven years. The proceeds of the Senior Subordinated Note were used to repay the Senior Subordinated Convertible Notes of $10 million at a redemption price of 105% of the principal balance plus accrued interest. The extraordinary loss of $.4 million, net of tax, in 2000 reflects the early extinguishment of the Senior Subordinated Convertible Notes. These notes were convertible at any time at the option of the note holders into SMC common stock at the rate of $5.747 per share or a total of 1,740,038 shares. Interest Paid Cash paid for interest was $3.6 million, $3.4 million, and $2.7 million in 2000, 1999 and 1998, respectively. F-16 60 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. INCOME TAXES The components of the federal income tax expense, applicable to pre-tax income before extraordinary loss, were as follows (in thousands):
Year Ended December 31 -------------------------------------- 2000 1999 1998 -------- -------- -------- Current taxes ............................................. $ -- $ 151 $ 673 Deferred taxes ............................................ 778 1,975 957 -------- -------- -------- $ 778 $ 2,126 $ 1,630 ======== ======== ========
The effective tax rate on pre-tax income is lower than the statutory corporate federal income tax rate as follows (in thousands):
Year Ended December 31 -------------------------------------- 2000 1999 1998 -------- -------- -------- Federal income tax expense at statutory rates (34%) ....... $ 2,177 $ 2,515 $ 2,146 Operating income in SMC consolidated return offset by NOL carryforwards ......................................... (1,152) (219) (83) Amortization of negative goodwill ......................... -- -- (472) Other items, net .......................................... (247) (170) 39 -------- -------- -------- Federal income tax expense ............................ $ 778 $ 2,126 $ 1,630 ======== ======== ======== Effective tax rate ........................................ 12% 29% 26% ======== ======== ========
The Company recovered $.3 million, $.4 million and $1.7 million in federal income taxes in 2000, 1999 and 1998, respectively, and paid federal income taxes of $.1 million and $.7 million in 1999 and 1998, respectively. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax return purposes. Significant temporary differences included in the Company's deferred tax assets (liabilities) are as follows (in thousands):
December 31 ----------------------- 2000 1999 -------- -------- Deferred income tax assets: Future policy benefits ........................................ $ 18,898 $ 15,867 Unrealized loss on securities available for sale .............. 10,220 12,037 Capital and net operating loss carryforwards .................. 3,042 5,659 Other-net ..................................................... 1,298 1,435 -------- -------- Gross deferred tax assets ................................. 33,458 34,998 Valuation allowance for deferred tax assets ................... (5,653) (7,858) -------- -------- Deferred income tax assets, net of valuation allowance .... 27,805 27,140 Deferred income tax liabilities: Present value of future profits ............................... (8,956) (10,435) Deferred policy acquisition costs ............................. (23,246) (17,054) -------- -------- Total deferred income tax liabilities ..................... (32,202) (27,489) -------- -------- Net deferred income tax liabilities ........................... $ (4,397) $ (349) ======== ========
F-17 61 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. INCOME TAXES (CONTINUED) The Company is required to establish a "valuation allowance" for any portion of its deferred tax assets, which are unlikely to be realized. The valuation allowance for deferred tax assets includes $1.6 million at December 31, 2000 with respect to deferred tax assets and net tax operating loss carry forwards of acquired companies. As of December 31, 2000, Standard Management and its noninsurance subsidiaries had consolidated net operating loss carryforwards of approximately $6.3 million for tax return purposes, which expire from 2007 through 2018. These carryforwards will only be available to reduce the taxable income of Standard Management. At December 31, 2000, the Standard Life consolidated return had net operating loss carryforwards of approximately $2.2 million which expire in 2010, 2012 and 2019. These carryforwards will only be available to reduce the taxable income of the Standard Life consolidated return. At December 31, 2000, Premier Life (Luxembourg) had accumulated corporate income tax loss carryforwards of approximately $.4 million, all of which may be carried forward indefinitely. 7. SHAREHOLDERS' EQUITY Redeemable Preferred Stock Shareholders have authorized 1,000,000 shares of Preferred Stock. Other terms, including preferences, voting and conversion rights, may be established by the Board of Directors. The Company has authorized 130,000 shares of preferred stock as Series A convertible redeemable preferred stock ("Series A preferred stock"). The Company issued 65,300 shares with a stated value of $6.5 million ($100 per share). The following, among other things, are characteristics of the Series A preferred stock: - The holders are entitled to cumulative annual dividends of $7.75 per share (payable quarterly). - Conversion into 11.765 shares of SMC common stock per share of Series A preferred stock. - Redeemable on July 1, 2003. - Redemption by the Company may occur at 105% of stated value beginning July 1, 1999 and decreasing 1% per year to 100% at July 1, 2003. - There are no voting rights attached to these shares. Common Stock The Company repurchased 240,000, 92,124, and 308,465 shares of Common Stock for $.8 million, $.6 million, and $1.7 million in 2000, 1999 and 1998, respectively under its stock repurchase program. At December 31, 2000, the Company was authorized to purchase an additional 724,790 shares under this program. THE FOLLOWING TABLE REPRESENTS OUTSTANDING WARRANTS TO PURCHASE COMMON STOCK AS OF DECEMBER 31, 2000:
EXERCISE WARRANTS ISSUE DATE EXPIRATION DATE PRICE OUTSTANDING -------------- ------------------ -------- ----------- NOVEMBER 1995 NOVEMBER 2002 4.5238 31,500 JULY 1996 JULY 2003 4.3750 30,000 APRIL 1997 APRIL 2004 5.1250 12,000 JUNE 1998 JUNE 2001 7.5000 25,000 AUGUST 1998 AUGUST 2005 7.1250 20,000 OCTOBER 1998 OCTOBER 2001 8.0000 75,000 JANUARY 1999 JANUARY 2002 6.6250 89,750 JANUARY 2000 JANUARY 2003 4.8750 166,500 OCTOBER 2000 OCTOBER 2003 4.0000 15,000 OCTOBER 2000 OCTOBER 2007 4.0000 220,000 --------- 684,750 =========
F-18 62 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. SHAREHOLDERS EQUITY (CONTINUED) Changes in Shares of Common Stock and Treasury Stock The following table represents changes in the number of common and treasury shares as of December 31:
2000 1999 1998 ---------- ---------- --------- Common Stock (Authorized - 20,000,000 shares): Balance, beginning of year 9,038,134 8,802,313 5,752,499 Issuance of common stock -- 235,821 3,049,814 ---------- ---------- --------- Balance, end of year 9,038,134 9,038,134 8,802,313 ========== ========== ========= Treasury Stock: Balance, beginning of year (1,252,978) (1,160,854) (876,009) Treasury stock acquired (240,000) (92,124) (308,465) Reissuance of treasury stock in connection with exercise of stock options -- -- 23,620 ---------- ---------- ---------- Balance, end of year (1,492,978) (1,252,978) (1,160,854) ========== ========== ==========
Unrealized Gain (Loss) on Securities The components of the balance sheet caption "Unrealized gain (loss) on securities available for sale" in shareholders' equity are summarized as follows (in thousands):
December 31 ------------------------- 2000 1999 --------- --------- Fair value of securities available for sale ......................... $ 719,274 $ 607,285 Amortized cost of securities available for sale ..................... 743,135 646,849 --------- --------- Gross unrealized gain (loss) on securities available for sale .... (23,861) (39,564) Adjustments for: Deferred acquisition costs ....................................... 5,852 10,527 Present value of future profits .................................. 3,389 4,982 Deferred federal income taxes .................................... 4,977 8,196 --------- --------- Net unrealized gain (loss) on securities available for sale .. $ (9,643) $ (15,859) ========= =========
8. STOCK OPTION PLAN SMC has a non-qualified Stock Option Plan (the "Plan") under which 2,500,000 shares of Common Stock are reserved for grants of stock options to employees and directors. The purchase price per share specified in any Plan option must be at least equal to the fair market value of common stock at the grant date. Options generally become exercisable over a three-year period and have a term of 10 years. The Plan is administered by the Board of Directors and officers of SMC. The terms of the options, including the number of shares and the exercise price, are subject to the sole discretion of the Board of Directors. A total of 75,820 shares are available for future issuance for the Plan as of December 31, 2000. The provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", allows companies to either expense the estimated fair value of stock options or to continue their current practice and disclose the pro forma effects on net income and earnings per share had the fair value of the options been expensed. The Company has elected to continue its practice of recognizing compensation expense for its Plan using the intrinsic value based method of accounting and to provide the required pro forma information. Had compensation cost for the Plan been determined based on the fair value at the grant date for awards under the Plan consistent with the provisions of SFAS No. 123, the Company's pro forma net income and pro forma earnings per share would have been the following (in thousands, except per share amounts): F-19 63 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. STOCK OPTION PLAN (CONTINUED)
Year Ended December 31 --------------------------------------- 2000 1999 1998 --------- --------- --------- Net income .......................................................... $ 4,328 $ 3,640 $ 3,094 Earnings per share .................................................. .49 .41 .43 Earnings per share, assuming dilution ............................... .49 .41 .43
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-valuation model with the following weighted-average assumptions:
2000 1999 1998 ------ ------- ------- Risk-free interest rates.............. 6.2% 5.6% 5.6% Volatility factors.................... .57 .59 .55 Weighted average expected life........ 7 years 7 years 7 years
The Black-Scholes option-valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in subjective assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not provide a reliable single measure of the fair value of its employee stock options. Because SFAS No. 123 is effective only for awards granted after January 1, 1995, the pro forma disclosures provided may not be representative of the effects on reported net income for future years. A summary of the Company's stock option activity and related information for the years ended December 31, 2000, 1999 and 1998 is as follows:
2000 1999 1998 ------------------------ -------------------------- -------------------------- WEIGHTED- Weighted- Weighted- AVERAGE Average Average EXERCISE Exercise Exercise SHARES PRICE Shares Price Shares Price --------- --------- ---------- --------- --------- --------- Options outstanding, beginning of year 2,411,882 $6.10 1,891,287 $6.15 1,916,820 $6.08 Exercised.............................. (525) 4.17 (19,163) 4.45 (97,988) 5.23 Granted................................ 7,500 4.58 633,300 6.15 79,950 6.94 Expired or forfeited................... (20,599) 5.98 (93,542) 7.91 (7,495) 6.75 --------- ---------- --------- Options outstanding, end of year....... 2,398,258 6.09 2,411,882 6.10 1,891,287 6.15 ========= ========== ========= Options exercisable, end of year....... 2,190,658 1,973,799 1,664,153 ========= ========== ========= Weighted-average fair value of options granted during the year............. $ 2.93 $ 3.94 $ 4.42 ========= ========== =========
F-20 64 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. STOCK OPTION PLAN (CONTINUED) Information with respect to stock options outstanding at December 31, 2000 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------- -------------------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE -------- ----------- ------------ --------- ----------- ---------- $3-5 338,025 5 $ 4.43 334,025 $ 4.43 5-7 1,587,850 7 6.07 1,384,250 6.06 7-9 454,533 5 7.28 454,533 7.28 9-11 17,850 3 9.43 17,850 9.43 --------- --------- 2,398,258 2,190,658 ========= =========
9. REINSURANCE The Company's insurance subsidiaries have entered into reinsurance agreements with non-affiliated companies to limit the net loss arising from large risks, maintain their exposure to loss within capital resources, and provide additional capacity for future growth. The maximum amount of life insurance retained on any one life ranges from $30,000 to $150,000. Amounts of standard risk in excess of that limit are reinsured. Reinsurance premiums ceded to other insurers were $4.8 million, $23.3 million and $17.0 million in 2000, 1999 and 1998, respectively. Reinsurance ceded has reduced benefits and claims incurred by $6.3 million, $2.7 million and $10.5 million in 2000, 1999 and 1998, respectively. A contingent liability exists to the extent any of the reinsuring companies are unable to meet their obligations under the reinsurance agreements. To minimize exposure to significant losses from reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers. Based on its periodic reviews of these companies, the Company believes the assuming companies are able to honor all contractual commitments under the reinsurance agreements. At December 31, 2000 the Company's largest annuity reinsurer, which is rated "A+" (Superior) by A.M. Best, represented $22.7 million, or 56.6% of total reinsurance recoverable. On July 1, 1998, Savers Life's Medicare supplement business was sold to Oxford Life Insurance Company ("Oxford Life") through a quota share reinsurance agreement. Under the terms of the reinsurance agreement, Standard Life administered the Medicare supplement business through October 1, 1999 and received administration fee income. Effective December 31, 1998, Standard Life replaced Savers Life as a party to this reinsurance agreement and became responsible for the administration of the Medicare supplement business. Effective December 1, 1999, the assumption of the business was effected by Oxford Life. 10. RELATED PARTY TRANSACTIONS On October 28, 1997, SMC made an interest-free loan to an officer and director of SMC. The principal balance of the loan was $775,000 at December 31, 2000 and 1999, respectively. Repayment is due within 10 days of the officer's voluntary termination or resignation as an officer of SMC. In the event of a termination of the officer's employment with SMC following a change in control, the loan is deemed to be forgiven. Certain officers and directors have purchased 31,000 shares, or $3.1 million of the Series A preferred stock as described in Note 7. These shares were purchased in connection with a loan agreement of $2.6 million, which the Company guaranteed. F-21 65 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. COMMITMENTS AND CONTINGENCIES Lease Commitments The Company rents office and storage space under noncancellable operating leases. The Company incurred rent expense for operating leases of $1.0 million, $1.1 million, and $1.0 million in 2000, 1999 and 1998, respectively. Pursuant to the terms of a lease agreement effective June 1, 1991, Standard Life has agreed to lease office space for a ten-year period. After the initial ten-year lease period, Standard Life may continue to lease the premises on a month-to-month basis at a rental of 125% of the prevailing market rate for the leased premises in effect at that time. Future required minimum rental payments, by year and in the aggregate, under operating leases as of December 31, 2000, are as follows (in thousands): 2001 ................................ $ 729 2002 ................................ 227 2003 ................................ 196 2004 ................................ 101 2005 ................................ 101 ------- TOTAL MINIMUM LEASE PAYMENTS........... $ 1,354 =======
Employment Agreements Certain officers are employed pursuant to executive employment agreements that create certain liabilities in the event of the termination of the covered executives following a change in control of the Company. The commitment under these agreements is approximately three times their current annual salaries. Additionally, following termination from the Company due to a change in control, each executive is entitled to receive a lump sum payment equal to all unexercised stock options granted multiplied by the highest per share fair market value during the six month period ending on the date of termination. There were unexercised options outstanding to these executives to buy 1,852,880 shares at December 31, 2000. Real Estate Real estate at December 31, 2000 includes $5.6 million for construction in progress of the Company's new home office. 12. LITIGATION An officer and director of SMC resigned effective April 15, 1997. On June 19, 1997, this former officer commenced an action in the Superior Court of Marion County, Indiana against SMC claiming that his employment agreement contained a provision that would entitle him to receive certain benefits following a termination of his employment with SMC under certain circumstances. This former officer has asserted to SMC that he is entitled to a lump sum termination payment of $1.7 million and liquidated damages not exceeding $3.3 million by virtue of his voluntarily leaving SMC's employment. SMC disputes those claims. SMC filed its Answer and Counterclaim on September 11, 1997. SMC's investigation since the action was filed revealed a basis for the termination of employment of the former officer for cause relative to after-acquired evidence. On October 14, 1997, the Board of Directors of SMC terminated the former officer for cause effective March 15, 1997. Such termination was argued by SMC as a complete defense to all claims asserted by the former officer. On January 12, 2001, the trial court ruled on motions for summary judgment filed by both SMC and the former officer. The court ruled that the officer was entitled to a severance benefit in the amount of $.4 million plus interest thereon calculated as of July 15, 1997. The court dismissed all of the former officer's other claims, including his request for additional damages up to $3.3 million. On February 12, 2001, the former officer filed a notice of appeal of the trial court's ruling as to the dismissal of all additional damages, and the former officer is in the process of perfecting the appeal. Currently, SMC plans to cross-appeal the $.4 million in damages awarded, as well as aggressively pursue its counterclaim which is still pending in the trial court. Management believes that the conclusion of such litigation will not have a material adverse effect on SMC's consolidated financial conditions. In addition, the Company is involved in various legal proceedings in the normal course of business. In most cases, such proceedings involve claims under insurance policies or other contracts of the Company. The outcomes of these legal proceedings are not expected to have a material adverse effect on the consolidated financial position, liquidity or future results of operations of the Company based on the Company's current understanding of the relevant facts and law. F-22 66 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. STATUTORY ACCOUNTING INFORMATION OF SUBSIDIARIES The Company's U.S. life insurance subsidiaries maintain their records in conformity with statutory accounting practices prescribed or permitted by state insurance regulatory authorities. Statutory accounting practices differ in certain respects from GAAP. In consolidation, adjustments have been made to conform the Company's domestic subsidiaries' accounts with GAAP. The Company's U.S. life insurance subsidiaries had consolidated statutory capital and surplus of $43.9 million and $43.7 million at December 31, 2000 and 1999, respectively. Consolidated net income of the Company's life insurance subsidiaries on a statutory basis, after elimination of subsidiaries' intercompany accounts was $1.5 million, $.9 million, and $1.7 million for the years ended December 31, 2000, 1999 and 1998, respectively. Minimum statutory capital and surplus required by the Indiana Insurance Code was $.5 million as of December 31, 2000. State insurance regulatory authorities impose minimum risk-based capital requirements on insurance enterprises that were developed by the NAIC. The formulas for determining the amount of risk-based capital ("RBC") specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of investment and insurance risks. Regulatory compliance is determined by a ratio (the "Ratio") of the enterprise's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Enterprises below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. At December 31, 2000, the RBC Ratios of Standard Life and Dixie Life were both at least two times greater than the levels at which company action is required. The statutory capital and surplus for Premier Life (Luxembourg) was $6.5 million and $6.9 million at fiscal years ended 2000 and 1999, respectively, and minimum capital and surplus under local insurance regulations was $2.2 million and $2.6 million at fiscal years ended 2000 and 1999, respectively. The statutory capital and surplus for Premier Life (Bermuda) was $3.8 million and $2.2 million at fiscal years ended 2000 and 1999, respectively, and minimum capital and surplus under local insurance regulations was $.3 million at fiscal years ended 2000 and 1999. SMI dividends are limited to its accumulated earnings without regulatory approval. SMI and Premier Life (Luxembourg) were not permitted to pay dividends under Luxembourg law in 2000 and 1999 due to accumulated losses. The National Association of Insurance Commissioners ("NAIC") has codified statutory accounting practices ("Codification") to be implemented January 1, 2001. Codification will likely change, to some extent, prescribed statutory accounting practices and may result in changes to the accounting practices that the Company uses to prepare its statutory-basis financial statements. Management believes that the impact of codification will not be material to the Company's statutory-basis financial statements. SMC loaned $27.0 million to Standard Life pursuant to an Unsecured Surplus Debenture Agreement ("Surplus Debenture") which requires Standard Life to make quarterly interest payments to SMC at a variable corporate base rate plus 2% per annum, and annual principal payments of $1.0 million per year beginning in 2007 and concluding in 2033. As required by state regulatory authorities, the balance of the surplus debenture at December 31, 2000 and 1999 of $27.0 million is classified as a part of capital and surplus of Standard Life. The interest and principal payments are subject to quarterly approval by the IDOI depending upon satisfaction of certain financial tests relating to levels of Standard Life's capital and surplus and general approval of the Commissioner of the IDOI. SMC's ability to pay operating expenses and meet debt service obligations is partially dependent upon the amount of dividends received from Standard Life. Standard Life's ability to pay cash dividends to SMC is, in turn, restricted by law or subject to approval by the insurance regulatory authorities of Indiana. Dividends are permitted based on, among other things, the level of the preceding year statutory surplus and net income. In 2000, Standard Life paid dividends of $2.0 million to SMC. During 2001, Standard Life can pay dividends of $4.4 million without regulatory approval; Standard Life must notify the Indiana regulatory authorities of the intent to pay dividends at least ten days prior to payment. F-23 67 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. OPERATIONS BY BUSINESS SEGMENT The Company's reportable segments are as follows: Domestic Operations includes revenues earned and expenses incurred from United States operations and includes deposits and/or income from annuity products (primarily flexible premium deferred annuities ("FPDA's"), equity indexed products, universal life products and traditional life products). The profitability for this segment primarily depends on the investment spread earned (annuities and universal life), the persistency of the in-force business, claim experience and expense management. International Operations includes revenues earned and expenses incurred from abroad, primarily Europe, and includes fees collected on deposits from unit-linked products. The profitability for this segment primarily depends on the amount of separate account assets under management, the management fee charged on those assets and expense management. The accounting policies of the segments are the same as described in Note 1 (Summary of Significant Accounting Policies). The following segment presentation contains the same operating data and results the Company uses to evaluate the performance of the business and provides reconciliations to consolidated totals (in thousands):
Year Ended December 31 ---------------------------------------- 2000 1999 1998 ---------- ---------- -------- Revenues: Domestic .................................................... $ 67,796 $ 68,477 $ 58,055 International ............................................... 8,267 4,486 5,220 ---------- ---------- -------- Consolidated Revenues ................................... $ 76,063 $ 72,963 $ 63,275 ========== ========== ======== Net Investment Income: Domestic .................................................... $ 42,675 $ 44,376 $ 33,721 International ............................................... 498 445 500 ---------- ---------- -------- Consolidated Net Investment Income ...................... $ 43,173 $ 44,821 $ 34,221 ========== ========== ======== Interest Credited to Interest Sensitive Annuities and Other Financial Products (All Domestic) ........................... $ 21,080 $ 25,728 $ 19,775 ========== ========== ======== Pre-tax Income: Domestic .................................................... $ 3,276 $ 6,132 $ 4,053 International ............................................... 3,128 1,266 2,258 ---------- ---------- -------- Consolidated Pre-tax Income ............................. $ 6,404 $ 7,398 $ 6,311 ========== ========== ======== Assets: Domestic ................................................... $ 921,727 $ 811,653 $750,683 International .............................................. 548,730 339,324 205,467 ---------- ---------- -------- Consolidated Assets .................................... $1,470,457 $1,150,977 $956,150 ========== ========== ========
Revenues by product have not been disclosed because it is impracticable for the Company to provide this information. Although premiums and deposits collected by product are available on a statutory basis, it is impracticable to disclose revenues by product on a GAAP basis because the Company does not allocate certain components of revenues such as net investment income, net realized investment gains (losses) and fee and other income to its products. 15. DERIVATIVE FINANCIAL INSTRUMENTS Standard Life offers equity-indexed annuity products that provide a base rate of return with a higher potential return linked to the performance of a broad-based equity index. The Company buys Standard & Poor's 500 Index Call Options and Dow Jones Industrial Average Call Options (collectively known as "the options") in an effort to hedge potential increases to policyholder benefits resulting from increases in the S&P 500 and Dow Jones Indexes to which the product's return is linked. The cost of the options is included in the pricing of the equity-indexed annuity products. The changes in the value of the options are reflected in net investment income and fluctuate in relation to changes in interest credited to policyholder account balances for these annuities. Premiums paid to purchase these instruments are deferred and amortized over their term. F-24 68 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) Total revenues include ($7.6) million, $1.2 million and $.6 million in 2000, 1999 and 1998, respectively, related to changes in the fair value of the options. Such investment income (loss) was substantially offset by amounts credited to policyholder account balances. The fair value of the options was $1.9 million, $5.3 million and $1.8 million at December 31, 2000, 1999 and 1998, respectively. The notional amounts at December 31, 2000 and 1999 were $123.4 million and $69.2 million, respectively. If the counterparties of the aforementioned financial instruments do not meet their obligations, the Company may have to recognize a loss. The Company limits its exposure to such a loss by diversifying among several counterparties believed to be strong and creditworthy. At December 31, 2000, all of the counterparties were rated "A" or higher by Standard & Poor's. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The following discussion outlines the methods and assumptions used by the Company in estimating its fair value disclosures for its financial instrument assets and liabilities. Because fair values for all balance sheet items are not required to be disclosed pursuant to SFAS No. 107, "Disclosures about Fair Values of Financial Instruments", the aggregate fair value amounts presented herein do not necessarily represent the underlying value of the Company; likewise, care should be exercised in deriving conclusions about the Company's business or financial condition based on the fair value information presented herein. Fixed maturity securities: Fair values for fixed maturity securities are based on quoted market prices from broker-dealers, where available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or, in the case of private placements, are estimated by discounting the expected future cash flows using current market rates applicable to the coupon rate, credit rating and maturity of the investments. Equity securities: The fair values for equity securities are based on the quoted market prices. Derivative securities: The fair values for derivative securities are based on internal methods developed by our investment advisor. Mortgage loans and policy loans: The estimated fair values for mortgage loans and policy loans are estimated using discounted cash flow analyses and interest rates currently being offered for similar loans to borrowers with similar credit ratings. Assets and liabilities held in separate accounts: Fair values for the assets held in separate accounts are determined from broker-dealers or valuations supplied by internationally recognized statistical rating organizations. The separate account liability represents the Company's obligations to policyholders and approximates fair value. Insurance liabilities for investment contracts: Fair values for the Company's liabilities under investment-type insurance contracts are estimated using discounted cash flow calculations, based on interest rates currently being offered for similar contracts with maturities consistent with those remaining contracts being valued. The estimated fair value of the liabilities for investment contracts was approximately equal to its carrying value at December 31, 2000 and 1999. This is due to i) credited rates on the vast majority of account balances approximating current rates paid on similar investments and ii) rates not generally being guaranteed beyond one year. Insurance liabilities for non-investment contracts: Fair value disclosures for the Company's reserves for insurance contracts other than investment-type contracts are not required and have not been determined by the Company. However, the Company closely monitors the level of its insurance liabilities and the fair value of reserves under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk. Notes payable: The Company believes the fair value of its variable rate long-term debt was equal to its carrying value at December 31, 2000 and 1999. The Company pays a variable rate of interest on the debt, which reflects the change in market conditions. The fair value of the subordinated convertible debt is based on quoted market prices for the amount of shares convertible. The carrying amount of all other financial instruments approximates their fair values. F-25 69 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The fair value of the Company's financial instruments is shown below using a summarized version of the Company's assets and liabilities at December 31, 2000 and 1999 (in thousands). Refer to Note 3 for additional information relating to the fair value of investments.
December 31 -------------------------------------------------------------- 2000 1999 -------------------------- -------------------------- Fair Carrying Fair Carrying Value Amount Value Amount -------- -------- -------- -------- Assets: Investments: Securities available for sale: Fixed maturity securities ................. $718,912 $718,912 $606,907 $606,907 Equity securities ......................... 362 362 378 378 Mortgage loans on real estate ................ 4,931 4,778 8,392 8,131 Policy loans ................................. 13,591 14,280 13,357 14,033 Other invested assets ........................ 776 776 845 845 Short-term investments ....................... 12,489 12,489 14,976 14,976 Cash ............................................. 1,840 1,840 3,659 3,659 Assets held in separate accounts ................. 520,439 520,439 319,973 319,973 Liabilities: Insurance liabilities for investment contracts ... 695,475 695,475 595,388 595,388 Notes payable .................................... 31,500 31,500 34,500 34,500 Liabilities related to separate accounts ......... 520,439 520,439 319,973 319,973
17. EARNINGS PER SHARE A reconciliation of income and shares used to calculate basic and diluted earnings per share is as follows (dollars in thousands):
2000 1999 1998 ----------- ----------- ----------- Income: Net Income ................................................................ $ 5,267 $ 5,272 $ 4,681 Preferred stock dividends ................................................. (506) (506) (180) ----------- ----------- ----------- Income available to common shareholders for basic earnings per share ...... 4,761 4,766 4,501 Effect of dilutive securities: Preferred stock dividends ............................................. -- -- 180 Interest on subordinated convertible debt ............................. 833 1,000 1,000 ----------- ----------- ----------- Income available to common shareholders for diluted earnings per share .... $ 5,594 $ 5,766 $ 5,681 =========== =========== =========== Shares: Weighted average shares outstanding for basic earnings per share ........ 7,727,344 7,583,086 6,846,335 Effect of dilutive securities: Stock options ..................................................... 6,081 136,656 263,636 Stock warrants .................................................... 492 93,951 211,989 Subordinated convertible debt ..................................... 1,450,032 1,740,038 1,740,038 Series A convertible preferred stock .............................. -- -- 301,765 ----------- ----------- ----------- Dilutive potential common shares .................................. 1,456,605 1,970,645 2,517,428 ----------- ----------- ----------- Weighted average shares outstanding for diluted earnings per share ...... 9,183,949 9,553,731 9,363,763 =========== =========== ===========
F-26 70 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Earnings per common and common equivalent share for each quarter are computed independently of earnings per share for the year. Due to the transactions affecting the weighted average number of shares outstanding in each quarter and due to the uneven distribution of earnings during the year, the sum of the quarterly earnings per share may not equal the earnings per share for the year.
2000 QUARTERS ----------------------------------------------------- FIRST SECOND THIRD FOURTH -------- -------- -------- -------- Total revenues ............................ $ 19,201 $ 17,617 $ 20,528 $ 18,717 ======== ======== ======== ======== Components of net income: Operating income ....................... $ 1,628 $ 1,523 $ 1,976 $ 2,206 Net realized investment losses ......... (263) (515) (220) (709) -------- -------- -------- -------- Income before extraordinary loss ....... 1,365 1,008 1,756 1,497 Extraordinary loss ..................... -- -- -- 359 -------- -------- -------- -------- Net Income ............................. $ 1,365 $ 1,008 $ 1,756 $ 1,138 ======== ======== ======== ======== Net income per common share ............... $ .18 $ .13 $ .23 $ .14 ======== ======== ======== ======== Net income per common share, assuming dilution ............................... $ .17 $ .13 $ .20 $ .16 ======== ======== ======== ========
1999 Quarters ----------------------------------------------------- First Second Third Fourth -------- -------- -------- -------- Total revenues ............................ $ 16,941 $ 17,341 $ 16,770 $ 21,911 ======== ======== ======== ======== Components of net income: Operating income ....................... $ 1,275 $ 1,397 $ 1,468 $ 1,081 Net realized investment gains (losses) . 22 4 (164) 189 -------- -------- -------- -------- Net income ............................. $ 1,297 $ 1,401 $ 1,304 $ 1,270 ======== ======== ======== ======== Net income per common share ............... $ .17 $ .19 $ .17 $ .17 ======== ======== ======== ======== Net income per common share, assuming dilution ............................... $ .16 $ .17 $ .16 $ .16 ======== ======== ======== ========
Reporting the results of insurance operations on a quarterly basis requires the use of numerous estimates throughout the year, primarily in the computation of reserves, amortization of deferred policy acquisition costs and present value of future profits, and the effective rate for income taxes. It is the Company's practice to review estimates at the end of each quarter and, if necessary, make appropriate adjustments, with the effect of such adjustments being reported in current operations. Only at year-end is the Company able to assess the accuracy of its previous quarterly estimates. The Company's fourth quarter results include the effect of the difference between previous estimates and actual year-end results. Therefore, the results of an interim period may not be indicative of the results of the entire year. F-27 71 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT STANDARD MANAGEMENT CORPORATION (PARENT COMPANY) CONDENSED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31 ------------------------- 2000 1999 --------- --------- ASSETS Investments: Investment in subsidiaries ......................................................... $ 71,728 $ 64,120 Surplus debenture due from Standard Life ........................................... 27,000 27,000 Fixed maturity securities, at fair value (amortized cost: $900 in 2000 and 1999) ... 775 775 Equity securities available for sale, at fair value (cost: $35 in 2000 and $20 in 1999) ......................................................................... 8 35 Real estate ........................................................................ 123 124 Notes receivable from officers and directors ....................................... 776 845 --------- --------- Total investments ............................................................... 100,410 92,899 Cash ..................................................................................... 305 641 Property and equipment, less depreciation of $1,518 in 2000 and $1,033 in 1999 ........... 1,148 1,097 Note receivable from affiliate ........................................................... 2,858 2,858 Amounts receivable from subsidiaries ..................................................... 3,868 2,654 Other assets ............................................................................. 9 1,390 --------- --------- Total assets .................................................................... $ 108,598 $ 101,539 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Notes payable ......................................................................... $ 31,500 $ 34,500 Note payable to affiliate ............................................................. 2,858 2,858 Amounts due to subsidiaries ........................................................... 2,414 2,134 Other liabilities ..................................................................... 2,397 2,157 --------- --------- Total liabilities ............................................................... 39,169 41,649 Class A convertible redeemable preferred stock, par value $100 per share; ................ 6,530 6,530 Shareholders' Equity: Preferred stock, no par value ......................................................... -- -- 63,019 Common stock and additional paid-in capital, no par value ............................. 62,152 Treasury stock, at cost ............................................................... (7,589) (6,802) Accumulated other comprehensive income (loss): Unrealized gain (loss) on securities of subsidiaries .............................. (9,640) (15,844) Foreign currency translation adjustment of subsidiaries ........................... (2,368) (862) Retained earnings ..................................................................... 19,477 14,716 --------- --------- Total shareholders' equity ...................................................... 62,899 53,360 --------- --------- Total liabilities and shareholders' equity ...................................... $ 108,598 $ 101,539 ========= =========
See accompanying notes to condensed financial statements. F-28 72 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (CONTINUED) STANDARD MANAGEMENT CORPORATION (PARENT COMPANY) CONDENSED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS)
Year Ended December 31 ----------------------------------- 2000 1999 1998 ------- ------- ------- Revenues: Net investment loss ................................... $ (31) $ (23) $ (26) Interest income from subsidiaries ..................... 3,209 2,837 1,709 Net realized investment losses ........................ (820) (250) (100) Other income .......................................... 440 149 118 Rental income from subsidiaries ....................... 1,100 1,040 995 Management fees from subsidiaries ..................... 3,850 3,575 2,850 ------- ------- ------- Total revenues ..................................... 7,748 7,328 5,546 Expenses: Other operating expenses .............................. 4,487 4,763 3,134 Interest expense and financing costs .................. 3,416 3,380 2,850 Interest expense on note payable to affiliate ......... 179 142 160 ------- ------- ------- Total expenses ..................................... 8,082 8,285 6,144 ------- ------- ------- Loss before federal income taxes, equity in earnings of consolidated subsidiaries, extraordinary loss and preferred stock dividends ............................. (334) (957) (598) Federal income tax expense (benefit) ..................... (1,145) (417) 30 ------- ------- ------- Income (loss) before equity in earnings of consolidated subsidiaries, extraordinary loss and preferred stock dividends ............................. 811 (540) (628) Equity in earnings of consolidated subsidiaries .......... 4,815 5,812 5,309 ------- ------- ------- Income before extraordinary loss and preferred stock dividends ............................ 5,626 5,272 4,681 Extraordinary loss ....................................... 359 -- -- ------- ------- ------- Net income ............................................... 5,267 5,272 4,681 Preferred stock dividends ................................ 506 506 180 ------- ------- ------- Earnings available to common shareholders ................ $ 4,761 $ 4,766 $ 4,501 ======= ======= =======
See accompanying notes to condensed financial statements. F-29 73 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (CONTINUED) STANDARD MANAGEMENT CORPORATION (PARENT COMPANY) CONDENSED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
Year Ended December 31 ------------------------------------- 2000 1999 1998 -------- ------- -------- OPERATING ACTIVITIES Net income ..................................................................... $ 5,267 $ 5,272 $ 4,681 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization ............................................... 650 645 536 Equity in earnings of subsidiaries .......................................... (4,815) (5,812) (5,309) Accrued interest payable .................................................... (440) (203) 197 Dividends ................................................................... 2,500 -- -- Other ....................................................................... 351 733 (608) -------- ------- -------- Net cash provided (used) by operating activities ......................... 3,513 635 (503) INVESTING ACTIVITIES Investments, net ............................................................... 98 (46) (1,685) Purchase of property and equipment, net ........................................ (1,004) (866) (385) Purchase of Savers Life, less cash acquired of $518 ..................................................................... -- -- (18,039) Purchase of Midwestern Life, less cash acquired of $1,026 ...................... -- -- (13,104) -------- ------- -------- Net cash used by investing activities .................................... (906) (912) (33,213) FINANCING ACTIVITIES Borrowings, net of debt issuance costs of $206 in 1998 ......................... 11,000 300 11,794 Repayments on notes payable .................................................... (14,000) (800) (3,141) Issuance of convertible preferred stock, net of issuance costs of $141 in 1998 ................................................................ -- -- 6,389 Proceeds from common and treasury stock sales .................................. -- -- 234 Issuance of common stock and warrants .......................................... 867 1,566 19,935 Purchase of common stock for treasury .......................................... (304) (582) (1,702) Dividends on preferred stock ................................................... (506) (506) (180) -------- ------- -------- Net cash provided (used) by financing activities ......................... (2,943) (22) 33,329 -------- ------- -------- Net decrease in cash ........................................................... (336) (299) (387) Cash at beginning of year ...................................................... 641 940 1,327 -------- ------- -------- Cash at end of year ............................................................ $ 305 $ 641 $ 940 ======== ======= ========
See accompanying notes to condensed financial statements. F-30 74 SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) STANDARD MANAGEMENT CORPORATION (PARENT COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 2000 1. BASIS OF PRESENTATION For purposes of these condensed financial statements, Standard Management Corporation ("SMC") carries its investments in subsidiaries at cost plus equity in undistributed earnings of subsidiaries since date of acquisition. Net income of its subsidiaries is included in income using the equity method. These condensed financial statements should be read in conjunction with SMC's consolidated financial statements included elsewhere in this document. 2. DIVIDENDS FROM SUBSIDIARIES SMC received $2.5 million of dividends from subsidiaries in 2000 and zero in 1999 and 1998, respectively. F-31 75 SCHEDULE IV -- REINSURANCE STANDARD MANAGEMENT CORPORATION YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (DOLLARS IN THOUSANDS)
Percentage Ceded to Assumed of Amount Gross Other from Other Assumed Amount Companies Companies Net Amount to Net ---------- ---------- ---------- ---------- ---------- YEAR ENDED DECEMBER 31, 2000 LIFE INSURANCE IN FORCE ........................ $1,739,302 $ 787,590 $ 90,854 $1,042,566 8.71% ========== ========== ======== ========== ==== PREMIUMS: LIFE INSURANCE AND ANNUITIES ................ $ 17,630 $ 4,783 $ 937 $ 13,784 ACCIDENT AND HEALTH INSURANCE ............... 128 12 -- 116 SUPPLEMENTARY CONTRACT AND OTHER FUNDS ON DEPOSIT ............................... 1,570 -- -- 1,570 ---------- ---------- -------- ---------- TOTAL PREMIUMS ........................ $ 19,328 $ 4,795 $ 937 $ 15,470 ========== ========== ======== ========== YEAR ENDED DECEMBER 31, 1999 Life insurance in force ........................ $2,079,568 $ 837,155 $125,120 $1,367,533 9.15% ========== ========== ======== ========== ==== Premiums: Life insurance and annuities ................ $ 16,489 $ 4,908 $ 904 $ 12,485 Accident and health insurance ............... 18,710 18,365 -- 345 Supplementary contract and other funds on deposit ............................... 260 -- -- 260 ---------- ---------- -------- ---------- Total premiums ........................ $ 35,459 $ 23,273 $ 904 $ 13,090 ========== ========== ======== ========== YEAR ENDED DECEMBER 31, 1998 Life insurance in force ........................ $2,388,428 $1,117,393 $132,129 $1,403,164 9.42% ========== ========== ======== ========== ==== Premiums: Life insurance and annuities ................ $ 12,169 $ 4,705 $ 991 $ 8,455 Accident and health insurance ............... 18,333 12,341 -- 5,992 Supplementary contract and other funds on deposit ............................... 32 -- -- 32 ---------- ---------- -------- ---------- Total premiums ........................ $ 30,534 $ 17,046 $ 991 $ 14,479 ========== ========== ======== ==========
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