-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JqQWdiBGRPt8Cq28vr3uxb2d6vBBCvsHUkbnC+/sHqYF6JOFfk/4sEkurMu/2YJF DYwte5HJiGfxTjTk8R85gw== 0000054727-97-000033.txt : 19970617 0000054727-97-000033.hdr.sgml : 19970617 ACCESSION NUMBER: 0000054727-97-000033 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970331 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970616 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNAMERICA INC CENTRAL INDEX KEY: 0000054727 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 860176061 STATE OF INCORPORATION: MD FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-04618 FILM NUMBER: 97624137 BUSINESS ADDRESS: STREET 1: 1 SUNAMERICA CENTER CITY: LOS ANGELES STATE: CA ZIP: 90067-6022 BUSINESS PHONE: 3107726000 FORMER COMPANY: FORMER CONFORMED NAME: KAUFMAN & BROAD INC DATE OF NAME CHANGE: 19890515 FORMER COMPANY: FORMER CONFORMED NAME: KAUFMAN & BROAD BUILDING CO DATE OF NAME CHANGE: 19711006 8-K/A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) March 31, 1997 SUNAMERICA INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) MARYLAND 1-4618 86-0176061 (STATE OR OTHER JURISDICTION (COMMISSION (IRS EMPLOYER OF INCORPORATION) FILE NUMBER) IDENTIFICATION NO.) 1 SUNAMERICA CENTER, CENTURY CITY LOS ANGELES, CALIFORNIA 90067-6022 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code (310) 772-6000 Item 2. Acquisition or Disposition of Assets. On November 29, 1996, SunAmerica Inc., through its subsidiary, SunAmerica Life Insurance Company, entered into a definitive agreement to acquire the annuity business of John Alden Financial Corporation for $238,282,000 in cash (the "John Alden Transaction"). The transaction included approximately $3,800,000,000 of annuity reserves acquired under a 100% coinsurance agreement from John Alden Life Insurance Company and the purchase of the outstanding common stock of John Alden Life Insurance Company of New York, which had approximately $1,400,000,000 of annuity reserves and approximately $65,000,000 of statutory capital and surplus at December 31, 1996. The purchase price was agreed to by the parties on an arms-length basis. The acquisition was completed through SunAmerica Life Insurance Company on March 31, 1997. Funds for the acquisition were provided from the working capital of SunAmerica Life Insurance Company. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) Financial statements of businesses acquired. The financial statements of John Alden Life Insurance Company of New York ("JANY") are filed herewith as Exhibit 99-1 and include the following: + Independent auditors' report. + Audited balance sheets as of December 31, 1995 and 1996. + Unaudited balance sheet as of March 31, 1997. + Audited statements of income for the years ended December 31, 1994, 1995 and 1996. + Unaudited statement of income for the three months ended March 31, 1996 and 1997. + Audited statements of changes in stockholder's equity for the years ended December 31, 1994, 1995 and 1996. + Unaudited statement of changes in stockholder's equity for the three months ended March 31, 1996 and 1997. + Audited statements of cash flows for the years ended December 31, 1994, 1995 and 1996. + Unaudited statement of cash flows for the three months ended March 31, 1996 and 1997. + Notes to financial statements. -2- Historical financial statements prepared pursuant to Rule 3-05 of Regulation S-X concerning the coinsurance portion of the John Alden Transaction have not been filed herewith. Under a 100% coinsurance transaction, the coinsurer agrees to indemnify the issuing insurer for all of its obligations under the relevant annuity contracts. However, the issuing insurer remains the only party obligated to the insured party. In consideration for its indemnification, the coinsurer receives assets, usually composed of cash and/or marketable securities, in an amount equal to the annuity liabilities, computed on a statutory basis, less a negotiated fee. Such assets are not specifically associated with the annuity liabilities on an historical basis. The coinsurance portion of the John Alden Transaction reflects the assumption of certain annuity liabilities as to which the parties to the transaction matched assets at a particular point in time. Separate historical financial statements do not exist for these assets and liabilities. Further, it is not possible to make meaningful historical financial statements concerning this portion of the transaction because the various assets acquired may not be properly associated with the various liabilities assumed at any historical point in time. Accordingly, historical financial statements prepared pursuant to Rule 3-05 of Regulation S-X concerning this transaction have not been filed. However, an audited Statement of Assets Acquired and Liabilities Assumed in the Coinsurance Portion of the John Alden Transaction, as of March 31, 1997, the effective date of the transaction, is included herewith as Exhibit 99-2. Such audited financial statement includes related notes and a report of independent accountants. (b) Pro Forma Financial Information. As more fully described under Item 2 of this Current Report on Form 8-K/A, on March 31, 1997, the Registrant acquired all of the outstanding capital stock of John Alden Life Insurance Company of New York, and acquired certain assets and assumed certain liabilities of John Alden Life Insurance Company in a 100% coinsurance transaction (the "John Alden Transaction"). A pro forma condensed balance sheet is not filed herewith because the entire transaction is fully reflected in the Registrant's March 31, 1997 consolidated balance sheet, which was filed on May 15, 1997 as part of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. The pro forma condensed income statement set forth in Exhibit 99-3 herein reflects the effects of the John Alden Transaction as if it had been consummated on October 1, 1995, the beginning of the Registrant's most recent fiscal year end. The pro forma effects of the John Alden Transaction include a $0.21 increase in earnings per share for the 1996 fiscal year. The pro forma condensed income statement set forth in Exhibit 99-4 herein reflects the effects of the John Alden Transaction as if it had been consummated on October 1, 1996, the beginning of the Registrant's most recent fiscal interim period. The pro forma effects of the John Alden Transaction include a $0.12 increase in earnings per share for the six months ended March 31, 1997. -3- (c) Exhibits. Exhibit No. Description of Exhibit ----------- ---------------------- 99-1 Audited Financial Statements of John Alden Insurance Company of New York 99-2 Statement of Assets Acquired and Liabilities Assumed in the Coinsurance Portion of the John Alden Transaction 99-3 Pro Forma Condensed Income Statement for the year ended September 30, 1996 99-4 Pro Forma Condensed Income Statement for the six months ended March 31, 1997 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned hereunto duly authorized. SUNAMERICA INC. Date: June 16, 1997 By: /s/ Scott L. Robinson ----------------------------- Scott L. Robinson Senior Vice President and Controller -4- EX-99.1 2 John Alden Life Insurance Company of New York Financial Statements For the Year Ended December 31, 1996 2 John Alden Life Insurance Company of New York Financial Statements For the Year Ended December 31, 1996 Index
Page Report of Independent Accountants....................................... 1 Balance Sheets as of December 31, 1995 and 1996 and as of March 31, 1997............................................. 2 Statements of Income for the Years Ended December 31, 1994, 1995 and 1996 and for the Three Months Ended March 31, 1996 and 1997...... 3 Statements of Changes in Stockholder's Equity for the Years Ended December 31, 1994, 1995 and 1996 and for the Three Months Ended March 31, 1996 and 1997.............................................. 4 Statements of Cash Flows for the Years ended December 31, 1994, 1995 and 1996 and for the Three Months Ended March 31, 1996 and 1997...... 5 Notes to Financial Statements........................................... 6
3 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholder of John Alden Life Insurance Company of New York In our opinion, the accompanying balance sheets and the related statements of income, of changes in stockholder's equity and of cash flows present fairly, in all material respects, the financial position of John Alden Life Insurance Company of New York at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1, the Company was sold by John Alden Life Insurance Company to SunAmerica Life Insurance Company on March 31, 1997. The accompanying financial statements have been prepared reflecting the accounting principles and estimates used as of December 31, 1996 and prior to the sale. PRICE WATERHOUSE LLP Miami, Florida May 23, 1997 1 4 JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK BALANCE SHEETS (DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31, 1997 -------------------------- ------------ ASSETS 1995 1996 (UNAUDITED) ----------- ----------- ------------ Debt securities: Held-to-maturity securities, at amortized cost (market and $213,726, $222,897 and $211,948) ................................. $ 205,790 $ 220,070 $ 213,083 Available-for-sale securities, at market (cost $769,956, $878,836 and $861,306) ................................................... 812,939 895,580 858,832 Trading account securities, at market (cost $2,027, $1,018 and $1,017) ..................................................... 2,060 999 973 Mortgage loans ....................................................... 225,871 237,105 232,968 Policy loans and other notes receivable .............................. 8,448 8,937 8,702 Real estate owned .................................................... 1,037 1,760 - ----------- ----------- ----------- Total invested assets ........................................... 1,256,145 1,364,451 1,314,558 Cash and cash equivalents ............................................ 40,291 44,408 93,527 Accrued investment income ............................................ 14,761 16,072 15,745 Deferred policy acquisition costs .................................... 24,745 39,393 47,139 Goodwill ............................................................. 8,518 8,019 7,894 Reinsurance receivables .............................................. 13,943 12,636 12,188 Investment deposits recoverable ...................................... 28,831 25,520 25,065 Other assets ......................................................... 3,561 5,597 9,878 ----------- ----------- ----------- Total assets .................................................. $ 1,390,795 $ 1,516,096 $ 1,525,994 =========== =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Contract holder liabilities: Contract holder deposit funds .................................. $ 1,280,775 $ 1,399,752 $ 1,412,999 Other benefit, claim and unearned premium reserves ............. 19,798 22,630 23,152 Accounts payable and other liabilities ............................. 3,271 5,106 1,986 Funds payable under reinsurance treaties ........................... - - - ----------- ----------- ----------- Total liabilities ............................................ 1,303,844 1,427,488 1,438,137 ----------- ----------- ----------- Stockholder's equity: Common stock, $20 par value; 360,000 shares authorized, issued and outstanding .................................................... 7,200 7,200 7,200 Paid-in capital .................................................. 40,420 40,420 45,420 Net unrealized gain (loss) on investments, net of income taxes ... 13,449 5,413 (1,683) Retained earnings ................................................ 25,882 35,575 36,920 ----------- ----------- ----------- Total stockholder's equity .................................. 86,951 88,608 87,857 ----------- ----------- ----------- Total liabilities and stockholder's equity .................. $ 1,390,795 $ 1,516,096 $ 1,525,994 =========== =========== ===========
See Notes to Financial Statements. 2 5 JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK STATEMENTS OF INCOME (DOLLARS IN THOUSANDS)
(UNAUDITED) TWELVE MONTHS ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, ------------------------------------ ------------------------ 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- Revenues: Net insurance premiums and contract charges earned .. $ 4,520 $ 20,945 $ 20,423 $ 5,533 $ 4,826 Net investment income ............................... 68,621 88,591 99,813 24,113 25,579 Other income ........................................ 202 - - - - Net realized investment (losses) gains .............. (3,828) 1,072 (654) (61) (849) --------- --------- --------- --------- --------- Total revenues .......................... 69,515 110,608 119,582 29,585 29,556 --------- --------- --------- --------- --------- Benefits and expenses: Interest credited to account balances ............... 54,451 73,691 73,598 17,398 19,179 Benefit claims incurred in excess of account balances - 2,071 2,396 1,124 371 Increase in life insurance reserves ................ 1,820 2,864 2,247 2,367 425 --------- --------- --------- --------- --------- Total benefits ......................... 56,271 78,626 78,241 20,889 19,975 --------- --------- --------- --------- --------- Commissions ........................................ 83 4,823 3,990 1,284 2,178 General expenses ................................... 5,064 10,706 14,243 3,006 2,858 Amortization of purchased intangibles .............. 1,105 929 850 93 202 Amortization of deferred policy acquisition costs .. 991 5,038 7,922 1,823 2,205 --------- --------- --------- --------- --------- Total expenses ......................... 7,243 21,496 27,005 6,206 7,443 --------- --------- --------- --------- --------- Total benefits and expenses ............ 63,514 100,122 105,246 27,095 27,418 --------- --------- --------- --------- --------- Income before provision for income taxes ............... 6,001 10,486 14,336 2,490 2,138 Provision for income taxes ............................. 2,303 3,858 4,643 918 793 --------- --------- --------- --------- --------- Net income ............................................. $ 3,698 $ 6,628 $ 9,693 $ 1,572 $ 1,345 ========= ========= ========= ========= =========
See Notes to Financial Statements. 3 6 JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DOLLARS IN THOUSANDS)
(UNAUDITED) TWELVE MONTHS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, ------------------------------------- --------------------------- 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- Number of shares outstanding ............................ 360,000 360,000 360,000 360,000 360,000 ========= ========= ========= ========= ========= Common stock, beginning of period ....................... $ 7,200 $ 7,200 $ 7,200 $ 7,200 $ 7,200 --------- --------- --------- --------- --------- Common stock, end of period ............................. $ 7,200 $ 7,200 $ 7,200 $ 7,200 $ 7,200 ========= ========= ========= ========= ========= Paid-in capital, beginning of period .................... $ 32,920 $ 34,920 $ 40,420 $ 40,420 $ 40,420 Capital contributions ................................ 2,000 5,500 - -- 5,000 --------- --------- --------- --------- --------- Paid-in capital, end of period .......................... $ 34,920 $ 40,420 $ 40,420 $ 40,420 $ 45,420 ========= ========= ========= ========= ========= Net unrealized gain on investments, net of income taxes, beginning of period .................................. $ 4,426 $ (3,620) $ 13,449 $ 13,449 $ 5,413 Change in net unrealized gain on investments, net of income taxes .................................... (8,046) 17,069 (8,036) (9,350) (7,096) --------- --------- --------- --------- --------- Net unrealized (loss) gain on investments, net of income taxes, end of period ........................ $ (3,620) $ 13,449 $ 5,413 $ 4,099 $ (1,683) ========= ========= ========= ========= ========= Retained earnings, beginning of period .................. $ 15,556 $ 19,254 $ 25,882 $ 25,882 35,575 Net income ........................................... 3,698 6,628 9,693 1,572 1,345 --------- --------- --------- --------- --------- Retained earnings, end of period ........................ $ 19,254 $ 25,882 $ 35,575 $ 27,454 $ 36,920 ========= ========= ========= ========= ========= Stockholder's equity, beginning of period ............... $ 60,102 $ 57,754 $ 86,951 $ 86,951 $ 88,608 Net income ........................................... 3,698 6,628 9,693 1,572 1,345 Capital contributions ................................ 2,000 5,500 - - 5,000 Change in net unrealized gain on investments, net of income taxes ................................ (8,046) 17,069 (8,036) (9,350) (7,096) --------- --------- --------- --------- --------- Stockholder's equity, end of period ..................... $ 57,754 $ 86,951 $ 88,608 $ 79,173 $ 87,857 ========= ========= ========= ========= =========
See Notes to Financial Statements. 4 7 JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
(UNAUDITED) THREE MONTHS ENDED TWELVE MONTHS ENDED MARCH 31, ------------------------------------- ----------------------- 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- Cash flows from operating activities: Net income ............................................. $ 3,698 $ 6,628 $ 9,693 $ 1,572 $ 1,345 Adjustments to reconcile net income to net cash provided by operating activities: Net realized investment losses (gains) .............. 3,828 (1,072) 654 61 849 Depreciation and amortization ....................... (1,648) (3,003) (2,237) (709) (756) Policy acquisition costs deferred, net of amortization ...................................... (10,526) (7,130) (785) (755) 545 Amortization of purchased intangibles ............... 1,105 940 851 218 202 Cumulative effect of a change in accounting principle - - - - - Net inflows from sales, maturities, calls and purchases of trading account securities ........... 71,476 4,943 1,000 - - Interest credited on universal life and investment type contracts .................................... 54,451 73,691 73,598 17,398 19,179 Decrease in contract holder liabilities ............. (8,399) (12,621) (4,798) (2,237) (1,464) Increase in accrued investment income ............... (440) (3,392) (1,311) (23) 327 Decrease (increase) reinsurance receivables and investment deposits recoverable ................... 4,359 (4,134) 3,344 (81) 233 (Increase) decrease in other assets ................. (51) 1,281 (758) (45) 275 Increase in income taxes payable .................... (1,536) (925) 2,894 1,379 (907) Increase (decrease) in accounts payable and other liabilities ................................. (712) (3,033) 370 (419) (3,055) Increase (decrease) in funds payable under reinsurance treaties .............................. (11) (1,933) 1,275 1,944 669 --------- --------- --------- --------- --------- Net cash provided by operating activities .............. 115,594 50,240 83,790 18,303 17,442 --------- --------- --------- --------- --------- Cash flows from investing activities: Proceeds from investments sold: Available-for-sale securities ................. 30,262 36,597 25,752 1,515 - Real estate owned ............................. 2,359 664 802 - 1,454 Maturities, calls and scheduled loan payments: Held-to-maturity securities ................... 32,957 23,025 28,948 4,919 7,127 Available-for-sale securities ................. 3,068 47,286 24,011 7,847 18,077 Mortgage loans and other notes receivable ..... 21,459 20,394 36,026 8,419 8,118 Investments purchased: Held-to-maturity securities ................... (169,701) (40,953) (42,648) (30,813) - Available-for-sale securities ................. (91,027) (150,480) (156,069) (24,397) - Mortgage loans and other notes receivable ..... (82,972) (97,701) (49,504) (19,097) (4,142) Acquisition of insurance company ..................... - (7,404) - - - Purchases of property, equipment and other ........... (40) (214) - - (11) --------- --------- --------- --------- --------- Net cash used in investing activities .................. (253,635) (168,786) (132,682) (51,607) 30,623 --------- --------- --------- --------- --------- Cash flows from financing activities: Receipts from universal life and investment-type contracts ......................................... 212,486 233,595 153,423 49,811 30,746 Payments on universal life and investment-type contracts ......................................... (72,531) (90,404) (100,414) (23,077) (34,692) Capital contribution from parent ..................... 2,000 5,500 - - 5,000 --------- --------- --------- --------- --------- Net cash provided by financing activities .............. 141,955 148,691 53,009 26,734 1,054 --------- --------- --------- --------- --------- Net increase in cash and cash equivalents ................. 3,914 30,145 4,117 (6,570) 49,119 Cash and cash equivalents, beginning of period ............ 6,232 10,146 40,291 40,291 44,408 --------- --------- --------- --------- --------- Cash and cash equivalents, end of period .................. $ 10,146 $ 40,291 $ 44,408 $ 33,721 $ 93,527 ========= ========= ========= ========= =========
See Notes to Financial Statements. 5 8 JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS NOTE 1 -- ORGANIZATION AND BUSINESS John Alden Life Insurance Company of New York ("JANY" or the "Company"), is a stock life insurance company primarily engaged in selling annuities in the State of New York, its state of domicile. Until March 31, 1997, the Company was a wholly-owned subsidiary of John Alden Life Insurance Company ("JALIC"). JALIC is a wholly-owned subsidiary of Houston National Life Insurance Company, which is a wholly-owned subsidiary of John Alden Financial Corporation ("JAFCO"), an insurance holding company and Delaware Corporation. On March 31, 1997, JALIC sold all of the common stock of JANY to SunAmerica Life Insurance Company ("SunAmerica"). On that date, SunAmerica made a capital contribution to JANY for $5.0 million. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission. The financial statements include management estimates and assumptions that affect the recorded amounts. The interim financial data is unaudited; however, in the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessarily for a fair statement of the results of operations for the interim periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been omitted with respect to the interim period. The results of operations for the three months ended March 31, 1997 are not necessarily indicative of the results to be expected for the full year. As described in Note 1, the Company was sold by JALIC to SunAmerica on March 31, 1997. The description of the accounting policies below and the disclosures in the following footnotes reflect those in effect at JANY while a subsidiary of JALIC. Subsequent to its purchase of JANY, SunAmerica may include different management estimates and assumptions, elect different applications of certain accounting policies and/or change the operations of the Company. The impact of any such potential change on the Company's financial position, results of operations or cash flows can not be determined at this time. Investments Investments in debt securities are classified into one of three categories: held-to-maturity, available-for-sale or trading. Investments in debt securities which the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and carried at amortized cost, with premiums amortized to call dates and discounts amortized to maturity dates. In certain limited circumstances, such as individual issuer credit deterioration or requirements of insurance regulators, the Company may dispose of such investments prior to their scheduled maturities. Investments in debt securities which are held principally for the purpose of resale in the near term are classified as trading securities and carried at market value with unrealized gains and losses included in earnings. Investments in debt securities not classified as held-to-maturity or trading are classified as available-for-sale and carried at market value, with resulting unrealized gains and losses, net of applicable income taxes and deferred policy acquisition costs, credited or charged to stockholder's equity. Policy loans are carried at the unpaid principal balance. Mortgage loans are carried at the unpaid principal balance less unamortized discounts, write-downs and a valuation reserve. The valuation reserve is determined by both a historical analysis and specific loan analysis. Mortgage loan origination incremental costs and fees are deferred and amortized over the life of the loan using the interest method. Mortgage discounts are deferred and amortized to call dates. The Company's policy of placing mortgage loans on non-accrual status (i.e., no longer accruing investment income) is at the earlier of 90 days past due or at the commencement of foreclosure. Real estate owned represents foreclosed mortgage loan collateral and is held for sale and carried at cost less allowances for selling costs and impairments in value. The investment portfolio is continuously reviewed for investments that may have experienced a decline in value considered to be other than temporary. Provisions for impairments that are considered other than temporary are included in net realized investment gains (losses). 6 9 JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cash Equivalents The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Premium and Other Contract-Related Revenues, Contract Holder Liabilities and Deferred Policy Acquisition Costs Single Payment Deferred Annuities and Flexible Payment Annuities. Contract charges earned for investment-type contracts consist of service charges and surrender charges assessed against account balances. Expenses related to these products include interest credited to account balances. Contract holder liabilities are recorded at accumulated value without reduction for surrender charges. Policy acquisition costs (principally excess first year commissions) are deferred and amortized over an initial policy period, generally ten years, in relation to expected profits. This amortization is reviewed annually and adjusted retrospectively when the Company revises its estimate of current or future gross profits to be realized from a group of products, including realized and unrealized gains and losses from investments. Universal Life Insurance. Contract charges earned consist of cost of insurance assessments, service charges and surrender charges assessed against account balances. Expenses consist of interest credited to account balances and benefit claims incurred in excess of policyholder account balances. Contract holder liabilities are recorded at accumulated value without reduction for surrender charges. Ordinary Life Insurance. Premiums are recorded as revenue when due. Policy reserves generally are calculated using the same assumptions as to interest, mortality, lapses and expenses used in pricing, plus additional margins for adverse deviation. Policy acquisition costs (principally excess first year commissions) are deferred and amortized over the premium paying period using the same assumptions as to interest, mortality and lapses used in calculating benefit reserves. Individual Health Insurance. Premiums are recorded as revenue when due. Policy and claim reserves are calculated based on tables prescribed by the New York State Insurance Department, consisting of assumptions as to interest, mortality and morbidity. Goodwill Goodwill is amortized on a straight-line basis over lives ranging from 15 to 25 years. At December 31, 1995 and 1996, the balances of such net goodwill and accumulated amortization were approximately $8.5 million and $8.0 million and $4.4 million and $4.9 million, respectively. The Company periodically reviews the recoverability of goodwill from future cash flows, and adjusts the carrying value as required. At December 31, 1995 and 1996, the Company determined that goodwill, net of accumulated amortization, was not impaired. Income Taxes Tax expense is the amount of income taxes expected to be payable for the current year plus (or minus) the change from the beginning of the year in deferred tax liabilities or assets. Deferred income taxes are provided in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". The tax effect of future taxable temporary differences (liabilities) and future deductible temporary differences (assets) are separately calculated and recorded. A valuation allowance reducing the asset recognized must be recorded if it is determined that it is more likely than not that the asset will not be realized. 7 10 JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) JAFCO has elected to file a Life/Non-Life consolidated federal income tax return which includes all subsidiaries, including JANY. Federal income tax is computed under an inter-company agreement which generally provides that federal income taxes are allocated based on the amount due as if the Company files a separate return. A tax refund to a loss company for utilization of its net operating losses by a profitable company occurs to the extent the loss is utilized in the consolidated tax return. Changes in Accounting Principles The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", effective January 1, 1996. SFAS No. 121 addresses the recognition and measurement of impairments of long-lived assets, certain identifiable intangible assets and goodwill related to those assets to be held as well as impairments of long-lived assets and certain identifiable intangibles to be disposed of. There was no effect on the Company's results of operations or financial position upon adoption of this statement. The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures" effective January 1, 1995. SFAS No. 114 addresses the accounting by creditors for the measurement and recognition of loan impairments. SFAS No. 118 amends certain provisions of SFAS No. 114. There was no effect on the Company's results of operations or financial position upon adoption of these statements. It is the Company's policy to discontinue accrual of interest income on loans at the earlier of 90 days past due or at the commencement of foreclosure. Cash receipts on such loans are recognized as interest income, including recognition of amounts previously not accrued. Receipts in excess of all past due interest are recognized as reductions of principal. Loan impairments are generally considered to be other than temporary declines in value and therefore are reported as realized investment losses. As of December 31, 1995 and December 31, 1996, investments in impaired mortgage loans totaled $2.0 million and $3.8 million, respectively. Impairment reserves due to other than temporary declines in value of $0.4 million and $0.9 million have been recognized as realized investment losses in relation to such loans during 1995 and 1996, respectively. NOTE 3 -- EFFECTS OF ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED IN THE FUTURE In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This statement addresses the accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on a financial-components approach. Adoption is generally required for transactions occurring after December 31, 1996, while the effective date for certain portions of the statement has been deferred one year. The Company does not anticipate a material impact on its financial position or results of operations upon adoption. NOTE 4 -- ACQUISITION OF AMERICAN CROWN LIFE INSURANCE COMPANY Effective January 1, 1995, the Company purchased all of the common stock of American Crown Life Insurance Company ("ACL"), a life and accident and health insurance company domiciled in the State of New York, for a purchase price of $8.0 million. The Company acquired $38.1 million of invested assets and $3.5 million of other assets. JANY also assumed liabilities of $34.2 million, including $32.5 million of contract holder liabilities. These balances, as well as results of operations of ACL, are included in the Company's financial statements from the acquisition date. 8 11 NOTE 5 -- INVESTMENTS In November 1995, the FASB issued "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities". This guidance permitted enterprises a one-time opportunity to reassess the appropriateness of the classifications of all securities and to reclassify held-to-maturity securities to the available-for-sale category without calling into question their intent to hold other debt securities to maturity. On December 18, 1995, the Company transferred securities from the held-to-maturity portfolio with an aggregate amortized cost of approximately $409.0 million to the available-for-sale portfolio at a market value of $417.5 million. As a result, the Company recorded a net unrealized gain in stockholder's equity, net of deferred policy acquisition costs and deferred income taxes (see Note 7), of approximately $2.4 million. The amortized cost and estimated market value of investments in held-to-maturity and available-for-sale securities as of December 31, 1995 and 1996 are as follows (dollars in thousands):
DECEMBER 31, 1995 ---------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---------- ----------- ----------- --------- HELD-TO-MATURITY U.S. Treasury securities and obligations of U.S. government corporations ............ $ 66,285 $ 2,584 $ (8) $ 68,861 and agencies Obligations of state and local ......................... 1,989 110 -- 2,099 governments Corporate securities ................................... 50,940 3,496 -- 54,436 Mortgage-backed securities ............................. 38,146 654 (167) 38,633 Asset-backed securities ................................ 48,430 1,311 (44) 49,697 -------- -------- -------- -------- Total ............................................. $205,790 $ 8,155 $ (219) $213,726 ======== ======== ======== ======== AVAILABLE-FOR-SALE U.S. Treasury securities and obligations of U.S. government corporations and agencies $211,612 $ 10,987 $ (286) $222,313 Obligations of state and local governments ............. 2,205 -- (16) 2,189 Debt securities issued by foreign governments .......... 10,940 835 -- 11,775 Corporate securities ................................... 306,810 21,347 -- 327,387 Mortgage-backed securities ............................. 218,014 10,787 (770) 228,540 Asset-backed securities ................................ 20,375 360 (261) 20,735 -------- -------- -------- -------- Total ............................................. $769,956 $ 44,316 $ (1,333) $812,939 ======== ======== ======== ========
9 12 JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS NOTE 5 -- INVESTMENTS (CONTINUED)
DECEMBER 31, 1996 --------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- --------- HELD-TO-MATURITY U.S. Treasury securities and obligations of U.S. government corporations and agencies ................. $ 57,041 $ 1,414 $ -- $ 58,455 Obligations of state and local governments... 1,990 64 -- 2,054 Corporate securities ........................ 67,715 1,780 (405) 69,090 Mortgage-backed securities .................. 41,608 462 (267) 41,803 Asset-backed securities ..................... 51,716 329 (550) 51,495 -------- -------- -------- -------- Total .................................. $220,070 $ 4,049 $ (1,222) $222,897 ======== ======== ======== ======== AVAILABLE-FOR-SALE U.S. Treasury securities and obligations of U.S. government corporations and agencies ................. $213,837 $ 4,777 $ (2,022) $216,592 Obligations of state and local governments .. 2,205 -- (63) 2,142 Debt securities issued by foreign governments 10,946 396 (8) 11,334 Corporate securities ........................ 313,424 10,529 (764) 323,189 Mortgage-backed securities .................. 239,418 5,466 (1,992) 242,892 Asset-backed securities ..................... 99,006 1,064 (639) 99,431 -------- -------- -------- -------- Total .................................. $878,836 $ 22,232 $ (5,488) $895,580 ======== ======== ======== ========
The amortized cost and estimated market value of investments in held-to-maturity and available-for-sale securities at December 31, 1996, by contractual maturity, are shown below (dollars in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities which will be collected over multiple periods have been allocated based upon the ultimate maturities of the securities.
DECEMBER 31, 1996 --------------------------------------------- HELD-TO-MATURITY AVAILABLE-FOR-SALE ---------------------- --------------------- ESTIMATED ESTIMATED AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE ---------- ---------- --------- ---------- Due in one year or less...... $ 11,622 $ 11,772 $ 16,033 $ 16,037 Due after one year through 63,914 65,044 77,117 79,468 five years................... Due after five year through 81,220 82,832 335,430 345,700 ten years.................... Due after ten years.......... 63,314 63,249 450,256 454,375 --------- --------- -------- --------- Total.................... $ 220,070 222,897 878,836 895,580 ========== ========== ========= ==========
At December 31, 1995 and 1996, the Company held no unrated or less than investment grade (i.e., with a Standard & Poor's Corporation ("S&P") rating below BBB) debt securities. 10 13 JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS NOTE 5 -- INVESTMENTS (CONTINUED) The Company's mortgage loan investments are diversified by property type, location and loan size. Generally, loans do not exceed 75% of the property's value at the time the loan is made. At December 31, 1996, mortgage loan investments were concentrated in the following property types (dollars in thousands):
PROPERTY TYPE: PERCENTAGE CARRYING OF TOTAL VALUE MORTGAGES ----------- ----------- Residential.................................... $ 92,364 39.0% Commercial: Retail space............................... 80,871 34.1 Office buildings........................... 31,620 13.3 Multi-family apartments.................... 14,644 6.2 Warehouse.................................. 14,253 6.0 Other...................................... 3,353 1.4 --------- ----- Total.......................................... $ 237,105 100.0% ========= =====
The following is a summary of activity relating to the mortgage loan impairment reserves as of and for the years ended December 31, 1994, 1995 and 1996 (dollars in thousands):
YEAR ENDED DECEMBER 31, ---------------------------------- 1994 1995 1996 ---------- ---------- ---------- Balance, beginning of year.............. $ 999 $ 480 $ 424 Additions to impairment reserves........ 87 252 1,071 Amounts charged off or transferred to real estate owned....................... (606) (308) (608) -------- ------- ------- Balance, end of year.................... $ 480 $ 424 $ 887 ======== ======= =======
As of December 31, 1995 and 1996, the Company held no investments in debt securities which were non-income producing for the previous twelve months. Non-income producing mortgage loans aggregating approximately $0.9 million were held as of December 31, 1995. The Company held no investments in a single entity (other than United States government agencies and authorities) which exceeded 10% of stockholder's equity as of December 31, 1996. At December 31, 1996, securities with a carrying value of approximately $0.3 million were on deposit with governmental agencies, as required by law in various states in which the insurance subsidiaries of JAFCO conduct business. This amount is included in total invested assets in the Company's accompanying balance sheet. See Note 12 for fair value of investment disclosures. 11 14 JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS NOTE 6 -- NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS (LOSSES) Major categories of investment income for the years ended December 31, 1994, 1995 and 1996 are summarized below (dollars in thousands):
YEAR ENDED DECEMBER 31, -------------------------------------- 1994 1995 1996 ----------- ---------- ----------- Debt securities..................... $ 58,685 $ 72,381 $ 79,885 Mortgage loans...................... 10,634 16,817 21,067 Policy loans and other notes receivable........................ 534 988 636 --------- --------- --------- Total gross investment income... 69,853 90,186 101,588 Less: investment expenses.......... (1,232) (1,595) (1,775) --------- --------- --------- Net investment income.......... $ 68,621 $ 88,591 $ 99,813 ========== ========= =========
Proceeds from sales and calls of investments in debt securities for the years ended December 31, 1994, 1995 and 1996 were $129.3 million, $90.0 million and $33.9 million, respectively. Proceeds from sales and calls of available-for-sale securities for the years ended December 31, 1994, 1995 and 1996 were $30.3 million, $81.6 million and $32.9 million, respectively. Gross unrealized investment gains (losses) related to available-for-sale securities increased (decreased) stockholder's equity by $(20.2) million, $52.3 million and $(26.2) million for the years ended December 31, 1994, 1995 and 1996, respectively. The components of net realized investment (losses) gains for the years ended December 31, 1994, 1995 and 1996 are as follows (dollars in thousands):
YEAR ENDED DECEMBER 31, ----------------------------------- 1994 1995 1996 ----------- ----------- ----------- Realized gains (losses) from sales, call and prepayment Gross realized investment gains from sales and calls ................. $ 1,907 $ 1,119 $ 535 Gross realized investment losses from sales and calls ...................... (1,185) (458) (337) Prepayments of mortgage loans and other (287) 147 108 ------- ------- ------- Realized gains (losses) from sales, calls and prepayments ............ 435 808 306 Impairments in value ....................... 117 (206) (908) Change in net unrealized gains and losses on (4,380) 470 (52) trading accounting securities ------- ------- ------- Net realized investment gains (losses) . $(3,828) $ 1,072 $ (654) ======= ======= =======
12 15 JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS NOTE 7 -- DEFERRED POLICY ACQUISITION COSTS The balances of and changes in deferred policy acquisition costs as of and for the years ended December 31, 1994, 1995 and 1996 are summarized as follows (dollars in thousands):
YEAR ENDED DECEMBER 31, ------------------------------ 1994 1995 1996 --------- --------- --------- Balance, beginning of year.................... $ 29,365 $ 43,588 $ 24,745 Capitalization of commissions, sales and issue expenses.................................... 11,517 12,168 8,707 Amortization.................................. (991) (5,038) (7,922) Effect of change in unrealized gains (losses) on available-for-sale securities............ 3,697 (21,074) 13,863 Effect of implementation of subsequent SFAS No. 115 guidance (see Note 5).................... -- (4,899) -- -------- -------- -------- Balance, end of year.......................... $ 43,588 $ 24,745 $ 39,393 ========= ========= ========
NOTE 8 -- CONTRACT HOLDER LIABILITIES The composition of contract holder liabilities at December 31, 1995 and 1996 and the more significant assumptions as to future investment yield, mortality and withdrawals, are as follows (dollars in thousands):
BASIS OF ASSUMPTION DECEMBER 31, -------------------------------- ---------------------- INTEREST MORTALITY/ 1995 1996 RATES MORBIDITY ---------- ---------- --------- --------------------- Contract holder deposit funds: Deferred and immediate annuities.................. $1,254,257 $1,374,045 3.5-10.0% 1971 IAM and 1983 IAM Universal life insurance.... 26,518 25,707 4.5-6.0% 1980 CSO Tables Other benefit reserves, including individual life insurance................... 9,976 12,673 3.5-6.0% 1958 CSO & 1980 CSO Tables Claim reserves................ 9,492 9,194 Unearned premium reserves..... 330 763 ---------- ---------- Total contract holder liabilities................. $1,300,573 $1,422,382 ========== ==========
Contract holder deposit funds for deferred annuities and universal life contracts are recorded at their accumulated values using the retrospective deposit approach. The average accumulated values per annuity contract were approximately $27,600 and $25,600 as of December 31, 1996 and 1995, respectively. Interest rates shown for these contracts are current credited rates. Mortality rates are contractual guarantees for monthly term charges (universal life insurance) or settlement rates (deferred annuities). 13 16 JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS NOTE 9 -- LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSES The following table provides a reconciliation of the beginning and ending reserve balances for unpaid claims and claims adjustment expenses, on a gross-of-reinsurance basis for the years ended December 31, 1994, 1995 and 1996 (dollars in thousands):
YEAR ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 --------- --------- --------- Balance, at January 1 before acquisition of insurance company ........................ $ 17 $ 11 $ 9,492 Balance at January 1 of acquired insurance company .................................. -- 1,453 -- Less reinsurance recoverables ............ -- -- 8,464 ------- ------- ------- Net balance at January 1 ................... 17 1,464 1,028 ------- ------- ------- Incurred claims related to: Current year ............................. (100) (26) 139 Prior year ............................... (7) -- (381) ------- ------- ------- Total incurred ............................. (107) (26) (242) ------- ------- ------- Paid claims related to: Current year ............................. (111) 399 (1,125) Prior year ............................... 10 11 931 ------- ------- ------- Total paid ................................. (101) 410 (194) ------- ------- ------- Net balance at December 31 ................. 11 1,028 980 Plus reinsurance recoverables ........... -- 8,464 8,214 ------- ------- ------- Balance at December 31 ..................... $ 11 $ 9,492 $ 9,194 ======= ======= =======
The total incurred claims above include claims adjustment expenses net of reinsurance, which are included in general expenses in the accompanying statements of income for the years ended December 31, 1994, 1995 and 1996. NOTE 10 -- REINSURANCE In the ordinary course of business, the Company assumes and cedes business with other insurance companies. Ceding reinsurance is used by the Company to limit its risk on new and unproven products, to meet certain regulatory, rating agency or debt covenant leverage ratios or to limit its risk up to its retention limits. The Company is not relieved of its primary obligation to the policyholder as a result of these reinsurance transactions. The maximum amount of life insurance retained on any one life is generally $50,000 or $500,000, depending upon the plan of insurance. At December 31, 1996, life insurance in force aggregated approximately $1.4 billion, after a reduction of approximately $0.2 billion for reinsurance ceded. The effects of reinsurance on long duration contracts for insurance premiums and contract charges earned are as follows (dollars in thousands):
YEAR ENDED DECEMBER 31, ----------------------------- 1994 1995 1996 --------- --------- ------- INSURANCE PREMIUMS AND CONTRACT CHARGES EARNED FROM LONG DURATION CONTRACTS Direct business........................... $4,521 $ 8,584 $ 9,753 Reinsurance assumed....................... -- 12,106 10,995 Reinsurance ceded......................... -- -- (618) ------ ------- ------- Net.................................... $4,521 $20,690 $20,130 ====== ======= =======
14 17 JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS NOTE 10 -- REINSURANCE (CONTINUED) The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions or economic characteristics of the reinsurers. The Company generally requires that its reinsurers be rated "A (Excellent)" or better by A.M. Best and Company ("A.M. Best"). As of December 31, 1996, receivables from reinsurers and investment deposits recoverable, consisting primarily of contract holder liabilities transferred to reinsurers, were approximately $38.2 million. Of this total, approximately $25.5 million or 66.8% has been placed in trust under agreements which generally require that amounts in trust be equal to at least 100% of the regulatory contract holder liability balances at all times. Effective January 1, 1995, the Company entered into a reinsurance agreement and assumed primarily ordinary life reinsurance premiums from an unaffiliated company. The amounts of reinsurance assumed related to this agreement for the years ended December 31, 1995 and 1996 are as follows: (dollars in thousands):
1995 1996 -------- -------- Premiums and contract changes earned............... $ 12,106 $ 10,995 Benefits........................................... 2,265 (2,480) Commissions and general expenses................... 9,816 13,450
NOTE 11 -- INCOME TAXES The components of the provision for income taxes for the years ended December 31, 1994, 1995 and 1996 are as follows (dollars in thousands):
YEAR ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 --------- --------- --------- Current tax expense...................... $ 4,820 $ 2,987 $ 2,882 Deferred tax expense (benefit)........... (2,517) 871 1,761 ------- ------- ------- Provision for income tax............. $ 2,303 $ 3,858 $ 4,643 ======= ======= =======
Current tax expense was reduced by $0.2 million from the utilization of net operating loss carryovers in 1996. The income tax provisions differ from the amounts determined by multiplying pre-tax income by the statutory federal income tax rate of 35%. Reconciliations between the actual tax provisions and expected tax provisions for the years ended December 31, 1994, 1995 and 1996 are as follows (dollars in thousands):
YEAR ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 --------- --------- --------- Income taxes at statutory rate........... $ 2,100 $ 3,670 $ 5,018 Amortization of goodwill.............. 190 175 175 Net decrease of valuation allowance... -- -- (545) Other, net............................ 13 13 (5) ------- ------- -------- Provision for income taxes............... $ 2,303 $ 3,858 $ 4,643 ======= ======= ========
15 18 JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS NOTE 11 -- INCOME TAXES (CONTINUED) The significant temporary differences included in the net deferred income tax asset as of December 31, 1995 and 1996 are as follows (dollars in thousands):
YEAR ENDED DECEMBER 31, ---------------------- 1995 1996 ---------- ---------- Deferred income tax assets: Policy reserves and other insurance items....... $ 23,626 $ 22,841 Net operating loss carryforward................. 2,485 2,503 Other deductible temporary differences.......... 327 401 -------- -------- Deferred income tax assets................... 26,438 25,745 -------- -------- Deferred income tax liabilities: Deferred policy acquisition costs and value of insurance inforce.............................. (13,806) (14,170) Market discount on bonds and other investment items........................................ (2,056) (2,901) Other taxable temporary differences............. (21) (423) -------- -------- Deferred income tax liabilities............. (15,883) (17,494) -------- -------- Unrealized (gains) losses and related deferred acquisition costs allocated to equity.............. (7,266) (2,926) -------- -------- Valuation allowance................................ (1,637) (1,092) -------- -------- Net deferred income tax asset.................. $ 1,652 $ 4,233 ======== =======
Net deferred income tax assets are included in other assets in the accompanying balance sheets. Approximately $7.1 million of net operating loss carry-forwards ("NOLs") remain as of December 31, 1996 which expire through the year 2010. The utilization of these NOLs, which were acquired in connection with the purchase of ACL, is limited to the taxable earnings of the Company and is further subject to an annual limitation of $0.6 million. Future utilization of these net operating loss carry-forwards may also be affected by the sale of the Company to SunAmerica. Management believes, based on the Company's earnings history and its future expectations, that the Company will have sufficient taxable income in future years to realize the net deferred income tax asset. In evaluating the expectation of sufficient future taxable income, management considered the future reversal of temporary differences and available tax planning strategies that could be implemented, if required. Except as noted below, a valuation allowance was not required as of December 31, 1996 and 1995 as it was management's assessment that, based on available information, it is not more likely than not that any or all of the deferred tax asset will not be realized. A valuation allowance will be established if there is a change in management's assessment of the amount of the net deferred income tax asset that is expected to be realized. However, a valuation allowance of $1.6 million was established in 1995 in order to reflect uncertainties associated with the utilization of certain tax benefits acquired in connection with the purchase of ACL. During 1996, the valuation allowance was reduced by $0.5 million as a result of management's reevaluation of the uncertainties associated with the utilization of certain tax benefits acquired in connection with the purchase of ACL. Prior to 1994, the Company was permitted to exclude from taxable income those amounts determined under a formula established by provisions of the Internal Revenue Code of 1954, as amended. At December 31, 1996, the Company had accumulated untaxed income of approximately $0.3 million (tax effect of $0.1 million). Although such amounts are taxable under certain circumstances, management does not intend to take, or fail to take, any action that would cause all or part of these amounts to be included in taxable income; accordingly, deferred income taxes have not been provided on these amounts. 16 19 JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS NOTE 12 -- FAIR VALUE OF FINANCIAL INSTRUMENTS At December 31, 1996, the Company has approximately $49.5 million in their "shareholder's surplus" tax account from which dividend distributions can me made without incurring federal income taxes. The Company made federal income taxes payments of approximately $1.7 million, $4.8 million and $3.8 million for the years ended December 31, 1996, 1995 and 1994, respectively. The carrying value and estimated fair value of the Company's financial assets and financial liabilities at December 31, 1995 and 1996 are as follows (dollars in thousands):
DECEMBER 31, 1995 DECEMBER 31, 1996 -------------------- ------------------- CARRYING FAIR CARRYING FAIR VALUATION VALUE VALUE VALUE VALUE METHOD -------- ---------- -------- --------- ---------- Financial assets: Held-to-maturity securities: Publicly traded............ $160,695 $ 166,828 $139,296 $141,889 (1) Private placements......... 45,095 46,898 80,774 81,008 (2) Available-for-sale securities: Publicly traded............ 787,165 787,165 870,304 870,304 (1) Private placements......... 25,774 25,774 25,276 25,276 (2) Trading account securities.... 2,060 2,060 999 999 (1) Mortgage Loans: Performing.................. 223,771 236,987 233,537 243,525 (3) Non-performing.............. 1,594 1,594 3,075 3,075 (4) Restructured on other than market terms.............. 506 506 493 493 (4) Policy loans and other notes receivable ............... 8,448 8,448 8,937 8,937 (5) Cash and cash equivalents..... 40,291 40,291 44,408 44,408 (5) Accrued investment income..... 14,761 14,761 16,072 16,072 (5) Financial liabilities: Investment contracts with defined maturities.... 37,608 37,864 38,385 38,402 (6) Investment contracts with no defined maturities.... 1,201,724 1,135,630 1,319,221 1,253,710 (7)
(1) Fair value is based on publicly quoted market prices. (2) Fair value is estimated using publicly quoted market prices for similar securities and adjusting by a spread which is reevaluated monthly, and approximates the spread on similar securities which the Company has purchased. (3) Fair value is estimated using the discounted cash flow method, using interest rates currently offered for similar loans to borrowers with similar credit ratings. (4) Fair value is based on external and internal appraisals less an allowance for estimated sales costs. (5) Carrying value approximates fair value. (6) Fair value is estimated based upon the discounted cash flow method, using interest rates currently offered for similar contracts. (7) Fair value is defined as the amount payable on demand. NOTE 13 -- STOCKHOLDER'S EQUITY The Company is limited by state insurance department regulations as to the amount of dividends and other payments that may be paid to its parent or affiliates. Dividends generally require regulatory approval. Loans and advances are limited to certain prescribed maximums in various jurisdictions and, in any event, require "arms-length" terms. 17 20 JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS NOTE 13 -- STOCKHOLDER'S EQUITY (CONTINUED) Accounting practices used to prepare statutory financial statements for regulatory filings of stock life insurance companies differ from GAAP. Material differences in these accounting practices include: value of insurance in force, deferred policy acquisition costs, goodwill, statutory non-admitted assets and deferred federal income taxes are recognized under GAAP accounting, while asset valuation and interest maintenance reserves are not; certain reinsurance agreements are accounted for as reinsurance for statutory purposes and as financing transactions under GAAP; premiums for universal life and investment-type products are recognized as revenues for statutory purposes and as deposits to policyholders' accounts under GAAP; investments in the Company's trading and available-for-sale accounts are carried at market value under GAAP and amortized cost under statutory reporting; and different assumptions are used in calculating future policyholders' benefits for statutory and GAAP purposes. The following reconciles capital and surplus and net income determined in accordance with accounting practices prescribed or permitted by the state insurance department with stockholder's equity and net income on a GAAP basis (dollars in thousands): Stockholder's Equity
DECEMBER 31, -------------------- 1995 1996 -------- -------- Capital and surplus, on basis of statutory accounting practices, as filed with insurance regulatory authorities $ 55,865 $ 64,803 Value of insurance in force ................... 597 245 Deferred policy acquisition costs ............. 47,013 47,799 Goodwill ...................................... 8,518 8,019 Net unrealized gain on investments ............ 13,449 5,413 Adjustment in policy and claim liabilities .... (56,441) (54,915) Net deferred income tax assets ................ 8,920 7,142 Statutory investment reserves ................. 8,922 10,440 Other, net........................................ 108 (338) -------- --------- Stockholders equity, on basis of generally accepted accounting principles ......................... $ 86,951 $ 88,608 ======== =========
Net Income
DECEMBER 31, ------------------------------ 1994 1995 1996 --------- --------- --------- Net income, on basis of statutory accounting practices, as filed with insurance regulatory authorities......................... $ 7,605 $ 3,242 $10,439 Change in unrealized gain (loss) on trading portfolio............................. (2,844) 305 (34) Amortization of purchased intangibles........... (1,105) (931) (850) Capitalization and amortization of deferred policy acquisition costs...................... 10,526 7,130 785 Adjustment of policy and claim liabilities...... (11,606) (2,981) 1,457 Reverse effect of statutory investment reserves (368) (244) 140 Deferred income taxes........................... 981 (707) (1,779) Mortgage delinquency reserves................... 519 (135) (334) Other, net...................................... (10) 949 (131) ------- ------- ------- Net income, on basis of generally accepted accounting principles.......................... $ 3,698 $ 6,628 $ 9,693 ======= ======= =======
18 21 JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS NOTE 14 -- LEASES The Company leases office space, office equipment and computer equipment under various operating leases with remaining terms ranging up to 4 years. The Company has no material capital leases. Under operating leases that have initial or remaining non-cancelable lease terms in excess of one year, approximate aggregate annual minimum rentals are as follows (dollars in thousands):
GROSS RENTALS ------- 1997............................. $ 451 1998............................. 393 1999............................. 389 2000............................. 127 Later years...................... -- ------- Total minimum future rentals. $ 1,360 =======
Rental expense, which includes operating expenses associated with leased office space, for the years ended December 31, 1994, 1995, and 1996 approximately $0.6 million, $0.7 million and $0.6 million, respectively. NOTE 15 -- RELATED PARTY TRANSACTIONS The Company receives certain services from affiliates, and incurs charges under intercompany service agreements. Under such agreements, the Company incurred the following charges during 1994, 1995 and 1996, respectively: o $0.6 million, $0.5 million and $0.9 million for data processing services performed by John Alden Systems Company. o $0.8 million, $1.1 million and $1.0 million for investment related services provided by John Alden Asset Management Company. o $0.2 million, $0.1 million and $0.2 million for actuarial and administrative services provided by JALIC. Until March 31, 1997, employees of JANY participated in, and the Company contributed to, the JALIC retirement pension and non-pension postretirement benefit plans. The Company's share of the accumulated benefit obligations of these plans was approximately $0.5 million and $0.5 million at December 31, 1995 and 1996, respectively. During 1994 and 1995, the Company received capital contributions from JALIC of $2.0 million and $5.5 million, respectively. As described in Note 2, the Company was included in a consolidated federal income tax return filed by JAFCO on behalf of all its subsidiaries. JANY had a federal income tax payable of approximately $0.6 million at December 31, 1996 and a federal income tax recoverable of approximately $0.6 million at December 31, 1995. Under the tax sharing agreement, the Company made payments to JALIC during 1994, 1995 and 1996 in the amount of $3.8 million, $4.8 million and $1.7 million, respectively. 19 22 JOHN ALDEN LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS NOTE 16 -- COMMITMENTS AND CONTINGENCIES The Company is routinely involved in litigation incidental to its businesses. It is management's opinion that the aggregate liability arising from the disposition of all such pending litigation will not have a material adverse effect on the Company's financial position, results of operations or cash flows. EX-99.2 3 SUNAMERICA INC. STATEMENT OF ASSETS ACQUIRED AND LIABILITIES ASSUMED IN THE COINSURANCE PORTION OF THE JOHN ALDEN TRANSACTION MARCH 31, 1997 ASSETS ACQUIRED Cash (net of cash purchase price allocation of $113,282) $ 212,843,000 Investments 3,259,306,000 Accrued investment income 34,393,000 Deferred acquisition cost 301,107,000 -------------- Total assets acquired $3,807,649,000 ============== LIABILITIES ASSUMED Accumulated value of fixed annuity contracts $3,797,774,000 Other liabilities 9,875,000 -------------- Total liabilities assumed $3,807,649,000 ============== See accompanying notes -1- SUNAMERICA INC. NOTES TO STATEMENT OF ASSETS ACQUIRED AND LIABILITLIES ASSUMED IN THE COINSURANCE PORTION OF THE JOHN ALDEN TRANSACTION 1. Description of the Transaction. On March 31, 1997, SunAmerica Inc. (the "Company"), through its wholly owned subsidiary, SunAmerica Life Insurance Company, completed the acquisition of all of the outstanding capital stock of John Alden Life Insurance Company of New York ("John Alden New York") and a block of annuity contracts from John Alden Life Insurance Company ("John Alden Life") for a total cash consideration of $238,282,000 (the "John Alden Transaction"). As part of the transaction, SunAmerica Life Insurance Company acquired approximately $3,800,000,000 of fixed annuity contracts from John Alden Life. The transfer of assets necessary to support these annuity liabilities was effected pursuant to a 100% coinsurance agreement entered into by John Alden Life and SunAmerica Life Insurance Company. Under a 100% coinsurance agreement, the coinsurer agrees to indemnify the issuing insurer for all of its obligations under the revelant annuity contracts. However, the issuing insurer remains the only party obligated to the insured party. In consideration for its indemnification, the coinsurer receives assets, usually composed of cash and/or marketable securities, in an amount equal to the annuity liabilities, computed on a statutory basis, less a negotiated fee. In the coinsurance portion of the John Alden Transaction, the allocated purchase was $113,282,000. The acquisition has been accounted for by using the purchase method of accounting, and, accordingly, all assets and liabilities presented in the accompanying Statement of Assets Acquired and Liabilities Assumed in the Coinsurance Portion of the John Alden Transaction (the "Statement") have been stated at their estimated fair values to present the balance sheet impact of assuming the fixed annuity liabilities of John Alden Life as of March 31, 1997. The Statement does not include the accounts of John Alden New York. -2- 2. Investments Investments acquired, at March 31, 1997, are summarized as follows: Weighted Average Fair Yield to Value Maturity ----- -------- Bonds, notes and redeemable preferred stocks $2,232,450,000 7.38% Commercial mortgage loans 767,858,000 9.18 Residential mortgage loans 254,539,000 8.05 Policy loans 4,459,000 6.00 -------------- ----- Total $3,259,306,000 7.85% ============== ===== All of the portfolio of bonds, notes and redeemable preferred stocks acquired have been designated by the Company as available to be sold in response to changes in market interest rates, changes in prepayment risk, the Company's need for liquidity and other similar factors. A summary of the fair value of bonds, notes and redeemable preferred stocks acquired, at March 31, 1997, by major category follows: Securities of the United States Government $ 6,256,000 Securities of public utilities 139,125,000 Corporate bonds and notes 576,598,000 Redeemable preferred stocks 81,801,000 Mortgage-backed sceurities 1,231,216,000 Other aset-backed securities 197,454,000 -------------- Total $2,232,450,000 ============== -3- 2. Investments (continued) A summary of the fair value of bonds, notes and redeemable preferred stocks acquired, at March 31, 1997, by contractual maturity follows: Due in one year or less $ 18,869,000 Due after one year through five years 344,940,000 Due after five years through ten years 483,017,000 Due after ten years 154,408,000 Mortgage-backed securities 1,231,216,000 -------------- Total $2,232,450,000 ============== Actual maturities of bonds, notes and redeemable preferred stocks acquired will differ from those shown above due to prepayments and redemptions. At March 31, 1997, no single investment acquired exceeded 10% of the Company's consolidated shareholders' equity. At March 31, 1997, bonds having a fair value of $286,000 were not rated investment grade by nationally recognized credit rating authorities. At March 31, 1997, mortgage loans were collateralized by properties located in 46 states, and loans totaling approximately 14% of the aggregate fair value of mortgage loans were secured by properties located in each of California and Florida. At March 31, 1997, the fair value of investments in default as to the payment of principal or interest was $973,000. 3. Deferred Acquisition Cost An amount equal to the sum of the allocated purchase price and the fair value of the related net liabilities assumed in the coinsurance transaction has been recorded as Deferred Acquisition Cost in the accompanying Statement. Such amount, totaling $301,107,000 at March 31, 1997, will be amortized, with interest, in relation to the incidence of estimated gross profits to be realized over the estimated lives of the annuity contracts assumed. Estimated gross profits are composed of net interest income, net realized investment gains and losses, surrender charges and direct administrative expenses. The deferred acquisition cost attributable to the coinsurance transaction is substantially less than a computation of the present value of estimated future gross profits discounted at the applicable current average crediting rate. -4- 4. Fixed Annuity Contracts The fair value of fixed annuity contracts assumed and related average crediting rates are summarized by denomination ranges as follows: Weighted Average Crediting Denomination Range Value Rate ------------------ ----- --------- $ 0 - $ 10,000 $ 301,639,000 5.52% $ 10,000 - $ 50,000 1,603,512,000 5.58 $ 50,000 - $100,000 942,302,000 5.60 Greater than $100,000 749,512,000 5.66 -------------- ----- 3,596,965,000 5.60% Annuitized contracts 200,809,000 7.00 -------------- ----- Total $3,797,774,000 5.67% ============== ===== The fair value of fixed annuity contracts assummed are summarized by applicable surrender charge as follows: Surrender Charge Value --------- ----- 0% $ 413,839,000 1 410,135,000 2 278,809,000 3 304,180,000 4 415,745,000 5 345,558,000 6 466,465,000 7 766,272,000 8 141,562,000 Greater than 8% 54,400,000 Not surrenderable 200,809,000 -------------- Total $3,797,774,000 ============== -5- REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of SunAmerica Inc. In our opinion, the accompanying statement of assets acquired and liabilities assumed in the coinsurance portion of the John Alden transaction presents fairly, in all material respects, the assets acquired and liabilities assumed by SunAmerica Life Insurance Company, a wholly owned subsidiary of SunAmerica Inc., in the coinsurance transaction at March 31, 1997 in conformity with generally accepted accounting principles. This financial statement is the responsibility of the Company's management; our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit of this statement in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether this financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. Price Waterhouse LLP Los Angeles, California June 11, 1997 -6- EX-99.3 4 PRO FORMA CONDENSED INCOME STATEMENT FOR THE YEAR ENDED SEPTEMBER 30, 1996 (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) Historical Results of John Alden Life Insurance Co. of New York Pro Forma Adjustments ------------------------------------ ------------------------------- SunAmerica Estimated Pro Forma As Reported Deduct Add Full-Year Results for the For the Quarter Quarter Results of for the Year ended Year Ended Ended Ended Coinsurance Other Year Ended 9/30/96 12/31/96 12/31/96 12/31/95 Transaction Adjustments 9/30/96 ------------ ---------- --------- -------- ------------ ----------- ---------- Investment income $ 1,254,288 $ 99,813 $ (25,921) $ 23,937 $ 283,381 (1) $ (15,488)(4) $1,620,010 Interest expense (761,532) (73,598) 18,902 (19,378) (215,334)(2) -- (1,050,940) ----------- --------- --------- -------- ------------ ----------- ----------- Net investment income 492,756 26,215 (7,019) 4,559 68,047 (15,488) 569,070 Net realized investment losses (30,314) (654) 825 (128) -- -- (30,271) Fee income 220,428 -- -- -- -- -- 220,428 General and adminis- trative expenses (212,701) (14,243) 3,617 (3,956) -- -- (227,283) Amortization of deferred acquisition costs (108,176) (8,772) 2,343 (1,696) (26,750) (3) 5,475 (5) (137,576) Other income (expense), net 30,034 11,790 (4,442) 3,803 -- -- 41,185 ----------- ---------- --------- --------- ------------ ---------- ----------- Pretax income 392,027 14,336 (4,676) 2,582 41,297 (10,013) 435,553 Income tax benefit (expense) (117,600) (4,643) 1,127 (959) (14,454) (6) 3,505 (6) (133,024) ----------- ---------- ---------- --------- ----------- ---------- ----------- Net income $ 274,427 $ 9,693 $ (3,549) $ 1,623 $ 26,843 $ (6,508) $ 302,529 =========== ========== ========= ========= =========== ========== =========== Earnings per share $ 1.95 $ 2.16 =========== =========== -1- See accompanying explanatory notes.
SUNAMERICA INC. PRO FORMA CONDENSED INCOME STATEMENT EXPLANATORY NOTES FOR THE YEAR ENDED SEPTEMBER 30, 1996 (1) To record investment income on assets received (before deduction of the allocated purchase price) in the coinsurance transaction at 7.85%, the weighted average yield to maturity on the assets on the date of acquisition. (2) To record interest expense on the assumed annuity contracts at 5.67%, the weighted average rate credited to contract holders on the date of assumption. (3) To record amortization of the deferred acquisition cost arising from this transaction based upon the investment income and interest expense recorded above, as described in Notes (1) and (2), and the Registrant's estimate of related future gross profits. (4) To reflect lost interest income on the $238,282,000 purchase price at the Registrant's average short-term portfolio yield of 6-1/2%. (5) To eliminate amortization recorded by John Alden Life Insurance Company of New York ("John Alden New York"), and record $2,650,000 of pro forma amortization of the deferred acquisition cost arising from the John Alden New York portion of the transaction based upon the gross profits recorded by John Alden New York for the year and the Registrant's estimate of related future gross profits. (6) To record the income tax effect of the pro forma adjustments at the statutory rate of 35%. -2- EX-99.4 5 PRO FORMA CONDENSED INCOME STATEMENT FOR THE SIX MONTHS ENDED MARCH 31, 1997 (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) Historical Results of John Alden Life Insurance Company of New York Pro Forma Adjustments -------------------------- ------------------------------ SunAmerica Pro Forma As Reported Estimated Results for the For the Add the Six-Month for the Six Months Quarter Quarter Results of Six Months Ended Ended Ended Coinsurance Other Ended 3/31/97 3/31/97 12/31/96 Transaction Adjustments 03/31/97 ----------- -------- --------- ----------- ----------- ----------- Investment Income $ 764,221 $ 25,579 $ 25,921 $ 141,691 (1) $ (7,744)(4) $ 949,668 Interest expense (468,548) (19,179) (18,902) (107,667)(2) -- (614,296) ----------- -------- --------- ----------- ---------- ----------- Net investment income 295,673 6,400 7,019 34,024 (7,744) 335,372 Net realized investment losses (18,746) (849) (825) -- -- (20,420) Fee income 126,331 -- -- -- -- 126,331 General and adminis- trative expenses (120,872) (2,858) (3,617) -- -- (127,347) Amortization of deferred acquisition costs (60,413) (2,407) (2,343) (13,375)(3) 3,425 (5) (75,113) Other income (expense), net 16,829 1,852 4,442 -- -- 23,123 ----------- -------- --------- ----------- ---------- ----------- Pretax income 238,802 2,138 4,676 20,649 (4,319) 261,946 Income tax benefit (expense) (71,600) (793) (1,127) (7,227)(6) 1,512 (6) (79,235) ----------- --------- --------- ----------- ---------- ----------- Net income $ 167,202 $ 1,345 $ 3,549 $ 13,422 $ (2,807) $ 182,711 =========== ========= ========= =========== ========== =========== Earnings per share $ 1.20 $ 1.32 =========== =========== -1- See accompanying explanatory notes.
SUNAMERICA INC. PRO FORMA CONDENSED INCOME STATEMENT EXPLANATORY NOTES FOR THE SIX MONTHS ENDED MARCH 31, 1997 (1) To record investment income on assets received (before deduction of the allocated purchase price) in the coinsurance transaction at 7.85%, the weighted average yield to maturity on the assets on the date of acquisition. (2) To record interest expense on the assumed annuity contracts at 5.67%, the weighted average rate credited to contract holders on the date of assumption. (3) To record amortization of the deferred acquisition cost arising from this transaction based upon the investment income and interest expense recorded above, as described in Notes (1) and (2), and the Registrant's estimate of related future gross profits. (4) To reflect lost interest income on the $238,282,000 purchase price at the Registrant's average short-term portfolio yield of 6-1/2%. (5) To eliminate amortization recorded by John Alden Life Insurance Company of New York ("John Alden New York"), and record $1,325,000 of pro forma amortization of the deferred acquisition cost arising from the John Alden New York portion of the transaction based upon the gross profits recorded by John Alden New York for the six-month period and the Registrant's estimate of related future gross profits. (6) To record the income tax effect of the pro forma adjustments at the statutory rate of 35%. -2- -----END PRIVACY-ENHANCED MESSAGE-----