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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended: June 30, 1996
Commission file number: 33-67268
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ARM FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 61-1244251
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
239 S. FIFTH STREET, 12TH FLOOR
LOUISVILLE, KENTUCKY 40202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 582-7900
Indicate by check mark whether the registrant (i) 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 (ii) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
As of June 30, 1996, 23,775 and 1,000 shares of the registrant's Class A
and Class B common stock, respectively, were outstanding, all of which are
privately owned and not traded on a public market.
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Exhibit Index is on page 26
TABLE OF CONTENTS
Item Page
- ---- ----
PART I. FINANCIAL INFORMATION
1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets--June 30, 1996
and December 31, 1995............................................ 3
Condensed Consolidated Statements of Operations--
Six and Three Months Ended June 30, 1996 and 1995................ 5
Condensed Consolidated Statements of Cash Flows--
Six Months Ended June 30, 1996 and 1995.......................... 6
Notes to Condensed Consolidated Financial Statements.............. 7
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 11
PART II. OTHER INFORMATION
1. Legal Proceedings.................................................. 24
6. Exhibits and Reports on Form 8-K................................... 24
Signatures......................................................... 25
Exhibit Index...................................................... 26
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CARRYING AMOUNT FAIR VALUE
-------------------------- -------------------------
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
(In thousands) 1996 1995 1996 1995
- --------------------------------------------------------------------- -------------------------
(Unaudited) (Unaudited)
ASSETS
Cash and investments:
Fixed maturities available-for-sale, at
fair value (amortized cost: June 30,
1996-$2,854,061; December 31,
1995-$2,490,843) $2,812,843 $2,547,909 $2,812,843 $2,547,909
Equity securities, at fair value (cost:
June 30, 1996-$16,345;
December 31, 1995-$10,756) 16,331 11,751 16,331 11,751
Mortgage loans on real estate 41,593 43,943 41,593 43,943
Policy loans 120,315 117,528 120,315 117,528
Cash and cash equivalents 57,489 76,896 57,489 76,896
-------------------------- -------------------------
Total cash and investments 3,048,571 2,798,027 3,048,571 2,798,027
Assets held in separate accounts 954,964 809,927 954,964 809,927
Accrued investment income 35,513 36,382 35,513 36,382
Value of insurance in force 66,165 51,051 118,715 98,977
Deferred policy acquisition costs 50,947 43,113 -- --
Goodwill 7,880 8,124 7,880 8,124
Deferred federal income taxes 46,845 19,776 44,599 48,642
Other assets 24,033 27,180 24,033 27,180
-------------------------- -------------------------
Total assets $4,234,918 $3,793,580 $4,234,275 $3,827,259
========================== =========================
3
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
CARRYING AMOUNT FAIR VALUE
-------------------------- -------------------------
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
(In thousands) 1996 1995 1996 1995
- ----------------------------------------------------------------------- -------------------------
(Unaudited) (Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Customer deposits $3,062,628 $2,708,260 $3,007,618 $2,742,209
Customer deposits in separate accounts 949,052 808,345 949,052 808,345
Long-term debt 40,000 40,000 40,000 40,000
Payable for investment securities
purchased 12,856 8,538 12,856 8,538
Accounts payable and accrued expenses 11,699 15,496 11,699 15,496
Other liabilities 12,788 24,950 12,788 24,950
-------------------------- -------------------------
Total liabilities 4,089,023 3,605,589 4,034,013 3,639,538
Contingencies
Shareholders' equity:
Preferred stock, $25.00 stated value 50,000 50,000
Class A common stock, $.01 par value,
23,775 and 23,770 shares issued,
respectively * *
Class B common stock, $.01 par value,
1,000 shares issued * *
Additional paid-in capital 124,456 124,425
Net unrealized gains (losses) on
available-for-sale securities (21,709) 28,530
Retained-earnings deficit (6,852) (14,964)
--------------------------
Total shareholders' equity 145,895 187,991 200,262 187,721
-------------------------- -------------------------
Total liabilities and shareholders' equity $4,234,918 $3,793,580 $4,234,275 $3,827,259
========================== =========================
* Less than $1,000.
See accompanying notes.
4
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
(Dollars in thousands, except per share amounts) 1996 1995 1996 1995
- ------------------------------------------------------------------------------ ---------------------------
Investment income $ 117,863 $ 84,963 $ 62,670 $ 45,371
Interest credited on customer deposits (86,012) (64,282) (44,897) (34,133)
--------------------------- ---------------------------
Net investment spread 31,851 20,681 17,773 11,238
Fee income:
Variable annuity fees 5,024 3,158 2,662 1,684
Asset management fees 2,711 1,131 1,196 678
Other fee income 628 228 343 145
-------------------------- ---------------------------
Total fee income 8,363 4,517 4,201 2,507
Other income and expenses:
Surrender charges 2,890 1,115 1,320 549
Operating expenses (15,187) (10,369) (7,830) (5,237)
Commissions, net of deferrals (1,197) (490) (653) (299)
Interest expense on long-term debt (1,531) (1,673) (744) (697)
Amortization:
Deferred policy acquisition costs (3,105) (1,291) (1,418) (709)
Value of insurance in force (4,481) (2,486) (2,424) (1,481)
Acquisition-related deferred charges (251) (2,444) (125) (1,378)
Goodwill (244) (47) (122) (47)
Other, net (2,640) (410) (1,971) (224)
-------------------------- ---------------------------
Total other income and expenses (25,746) (18,095) (13,967) (9,523)
Realized investment gains (losses) (1,217) 2,694 (814) 5,205
-------------------------- ---------------------------
Income before federal income taxes 13,251 9,797 7,193 9,427
Federal income tax expense (2,763) (4,938) (1,190) (4,742)
-------------------------- ---------------------------
Net income 10,488 4,859 6,003 4,685
Dividends on preferred stock (2,376) (2,376) (1,188) (1,188)
-------------------------- ---------------------------
Net income applicable to common shareholders $ 8,112 $ 2,483 $ 4,815 $ 3,497
========================== ==========================
Net income per common share $ 327.44 $ 149.33 $ 194.35 $ 191.54
========================== ===========================
Average common shares outstanding 24,774 16,628 24,775 18,257
========================== ===========================
See accompanying notes.
5
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(In thousands) 1996 1995
- -------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 88,554 $ 55,456
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:
Purchases (1,526,142) (704,791)
Maturities and redemptions 118,596 45,315
Sales 1,044,921 622,198
Other investments:
Purchases (33,153) (5,133)
Maturities and redemptions 2,351 18,513
Sales 27,394 --
Policy loans, net (2,787) (2,633)
Purchase of assets held in separate accounts (132,932) (101,912)
Proceeds from sale of assets held in separate accounts 40,272 18,127
Cash and cash equivalents acquired in excess of purchase price
paid for substantially all assets of SBM Company -- 36,490
=========================
Cash flows used in investing activities (461,480) (73,826)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- 63,505
Stock issuance costs -- (2,000)
Amounts received from customers 597,998 155,368
Amounts paid to customers (230,095) (188,105)
Increase (decrease) in repurchase agreement liability (12,008) 24,007
Preferred stock dividends (2,376) (2,376)
-------------------------
Cash flows provided by financing activities 353,519 50,399
-------------------------
Net change in cash and cash equivalents (19,407) 32,029
Cash and cash equivalents at beginning of period 76,896 45,855
-------------------------
Cash and cash equivalents at end of period $ 57,489 $ 77,884
=========================
See accompanying notes.
6
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six month and three month periods ended June
30, 1996 are not necessarily indicative of those to be expected for the year
ended December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the annual report on Form
10-K of ARM Financial Group, Inc. (the "Company") for the year ended December
31, 1995.
Certain amounts from prior periods have been reclassified to conform to the
current period presentation. These reclassifications had no effect on previously
reported net income or shareholders' equity.
2. FAIR VALUE BALANCE SHEETS
The consolidated balance sheets include a dual presentation of carrying
amount and fair value balances. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," fixed maturities classified as available-for-sale
are reported at fair value in the carrying amount balance sheets; however,
corresponding customer deposits are reported at historical values. In contrast,
in the fair value balance sheets both assets and liabilities are reported at
fair value. As permitted by SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments," the fair value balance sheets are presented as a
supplemental disclosure to provide a more meaningful picture of the Company's
financial position.
SFAS No. 107 requires disclosure of fair value information about all
financial instruments, including insurance liabilities classified as investment
contracts, unless specifically exempted. The accompanying fair value balance
sheets reflect fair values for those financial instruments specifically covered
by SFAS No. 107, along with fair value amounts for other assets and liabilities
for which disclosure is permitted but not required.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
7
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the aggregate fair value amounts presented do not
necessarily represent the underlying value of the Company.
The Company seeks to reduce its exposure to changing interest rates through
the management of duration, convexity and cash flow characteristics of both
assets and liabilities while maintaining liquidity redundancies (i.e., sources
of liquidity in excess of projected liquidity needs). As a result, fair values
of the Company's assets and liabilities will tend to respond similarly to
changes in interest rates. Consequently, the Company believes that it will have
only limited volatility in its "fair value" adjusted shareholders' equity,
although volatility cannot be completely eliminated.
The following methods and assumptions were used in estimating fair values:
Fixed Maturities and Equity Securities
Fair values for fixed maturities and equity securities are based on quoted
market prices, where available. For fixed maturities for which a quoted market
price is not available, fair values are estimated using internally calculated
estimates or quoted market prices of comparable instruments.
Mortgage Loans on Real Estate
Pursuant to the terms of the acquisition of certain of the Company's
insurance operations, payments of principal and interest on substantially its
entire current mortgage loan portfolio are guaranteed by The National Mutual
Life Association of Australasia Limited ("National Mutual"). Principal received
in excess of statutory book value is to be returned to National Mutual.
Accordingly, book value is deemed to be fair value for these mortgage loans.
Policy Loans
The carrying amount of policy loans approximates their fair value.
Cash and Cash Equivalents and Accrued Investment Income
The carrying amount of cash and cash equivalents and accrued investment
income approximates their fair value given the short-term nature of these
assets.
Assets Held in Separate Accounts and Customer Deposits in Separate Accounts
Fair value of assets held in separate accounts is based on the quoted
market prices of the underlying mutual funds for assets invested in variable
options. The fair value of assets held in separate accounts invested in
guaranteed rate options is primarily based on quoted market prices of fixed
maturity securities. The fair value of customer deposits in separate accounts is
based on the account values of the underlying policies, plus or minus market
value adjustments applicable to certain customers who are guaranteed a fixed
rate of return.
Goodwill
The carrying amount of goodwill approximates fair value.
8
Deferred Federal Income Taxes
The deferred federal income tax asset and related valuation allowance were
adjusted for federal income tax which may be incurred as a result of the
differences between the estimated fair values and carrying amounts of the assets
and liabilities.
Customer Deposits and Value of Insurance In Force
The fair value of customer deposits for structured settlements and
immediate annuities is based on discounted cash flow calculations using a
current market yield rate for assets with similar durations (i.e., indexed to
the U.S. Treasury yield curve). The fair value of customer deposits for
structured settlements and immediate annuities represents the fair values of
those insurance policies as a whole which implicitly eliminates the
corresponding value of insurance in force. The fair value amounts of the
remaining customer deposits, primarily deferred annuities, single premium
endowments, and guaranteed investment contracts ("GICs"), represent the account
values of the underlying contracts before applicable surrender charges. The fair
value of the value of insurance in force represents the estimated present value
of future profits for all customer deposits, excluding those related to
structured settlements and immediate annuities, assuming a discount rate of 13%.
Deferred policy acquisition costs do not appear on the fair value presentation
because those values are implicitly considered in the determination of the fair
value of the corresponding customer deposits and value of insurance in force.
Long-Term Debt
The carrying amount of long-term debt approximates fair value.
Other Assets and Liabilities
The fair values of other assets and liabilities are reported at their
financial statement carrying amounts.
3. FEDERAL INCOME TAXES
Federal income taxes are different from the amount determined by
multiplying pretax earnings by the expected federal income tax rate of 35%.
The differences are primarily attributable to changes in valuation allowances
related to deferred federal income tax assets.
9
4. STATUTORY INFORMATION
Following is a reconciliation of income based on statutory accounting
practices prescribed or permitted by insurance regulatory authorities for the
Company's insurance subsidiaries with net income reported in the accompanying
condensed consolidated statements of operations:
SIX MONTHS ENDED
JUNE 30,
-----------------
(In thousands) 1996 1995
- ----------------------------------------------------------------------------------------
Insurance subsidiaries (statutory-basis)/(1)/ $18,680 $14,116
Non-insurance companies/(2)/ (608) (628)
-----------------
Consolidated statutory-basis pretax operating income 18,072 13,488
Reconciling items:
Deferral of policy acquisition costs, net of amortization 7,071 7,304
Adjustments to customer deposits (329) (4,137)
Adjustments to invested asset carrying values at acquisition date (435) (247)
Amortization of value of insurance in force (4,481) (2,486)
Amortization of interest maintenance reserve (2,165) (2,070)
Amortization of goodwill (244) (47)
Amortization of acquisition-related deferred charges (251) (2,444)
Interest expense on long-term debt (1,531) (1,673)
Realized investment gains (losses) (1,217) 2,694
Federal income tax expense (2,763) (4,938)
Other (1,239) (585)
------------------
Consolidated GAAP-basis net income $10,488 $ 4,859
=================
- -------------------------------
/(1)/ Insurance company general account and separate account statutory-
basis pretax income excluding realized gains and losses as reported
to insurance regulatory authorities.
/(2)/ Non-insurance company pretax loss excluding amortization of
acquisition-related deferred charges, interest expense on long-term
debt and realized investment gains and losses.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company specializes in the asset accumulation business, providing
retail and institutional customers with products designed to serve the growing
retirement and long-term savings markets as well as providing other asset
management services. At June 30, 1996, the Company had approximately $6.6
billion of assets under management.
The Company's revenues are derived from its spread-based business and
its fee-based business. The products and services of the spread-based and fee-
based businesses are sold in two principal markets, the retail and institutional
markets. In the spread-based line of business the Company earns a spread between
what it earns on invested assets and what it credits to customer accounts. In
the fee-based line of business the Company receives a fee for managing
customers' deposits.
The following discussion compares the Company's results of operations
for the six and three months ended June 30, 1996 and 1995. As the Company
acquired substantially all the assets and business operations of SBM Company
("SBM") effective May 31, 1995, the results of operations for the six and three
months ended June 30, 1996 include the acquired SBM operations for the entire
period. Results of operations for the six and three months ended June 30, 1995
include only one month of earnings related to acquired SBM operations.
Therefore, results of the current periods are not completely comparable with
results of the prior corresponding periods.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 Compared with Six Months Ended June 30, 1995
Net income during the six months ended June 30, 1996 was $10.5 million
compared to $4.9 million for the six months ended June 30, 1995. Operating
earnings (net income applicable to common shareholders excluding realized
investment gains and losses net of taxes) were $8.9 million and $0.7 million for
the six months ended June 30, 1996 and 1995, respectively. The increase in
operating earnings is primarily attributable to an increase in net investment
spread due to ongoing asset/liability management and deposit growth from the
acquisition of the SBM business operations and, to a lesser extent, additional
sales of spread-based products. In addition, fee income increased as a result of
a growing base of variable annuity deposits and institutional assets under
management. Such increases in revenues were partially offset by increases in
operating and amortization expenses.
Annualized spread-based operating earnings were 1.01% and 0.92% of average
spread-based assets under management of $3.05 billion and $2.13 billion during
the six months ended June 30, 1996 and 1995, respectively. This increase in
spread-based margins is primarily attributable to ongoing asset/liability
management, which generated higher net investment spreads. Annualized fee-based
operating earnings were 0.18% and 0.20% of average fee-based assets under
management of $2.92 billion and $1.54 billion during the six months ended June
30, 1996 and 1995, respectively.
11
Fee-based margins for the 1996 period were essentially flat compared to the
prior period resulting from a relatively consistent mix of variable annuity
deposits and other assets under management which generate fee income.
Net investment spread, which is the difference between income earned on
investments and interest credited on customer deposits, increased to $31.9
million during the six months ended June 30, 1996 from $20.7 million during the
six months ended June 30, 1995. These amounts reflect the net investment spread
of 2.05% and 1.85% during the six months ended June 30, 1996 and 1995,
respectively, between the Company's annualized investment yield on average cash
and investments and the annualized average rate credited on customer deposits.
The Company's investment income increased to $117.9 million during the six
months ended June 30, 1996 from $85.0 million during the six months ended June
30, 1995. These amounts represent annualized investment yields of 7.70% and
7.89% on average cash and investments of $3.06 billion and $2.15 billion during
the six months ended June 30, 1996 and 1995, respectively. The decrease in
annualized investment yields on cash and investments primarily relates to a
significant increase in sales of GICs, the proceeds of which are invested in
securities of shorter duration (which generally have lower investment yields)
than many of the Company's other investments.
Interest credited on customer deposits increased to $86.0 million during
the six months ended June 30, 1996 from $64.3 million during the six months
ended June 30, 1995. These amounts represent annualized average rates of
interest credited on customer deposits of 5.65% and 6.04% on average customer
deposits of $3.04 billion and $2.13 billion during the six months ended June 30,
1996 and 1995, respectively. The decrease in annualized average rates of
interest credited on customer deposits resulted from the Company's decision to
reset crediting rates during the second half of 1995 consistent with an overall
declining interest rate environment during that period.
Fee income increased to $8.4 million during the six months ended June 30,
1996 from $4.5 million during the six months ended June 30, 1995. This increase
is in part attributable to variable annuity fees which are based on the market
value of assets supporting the mutual fund options of variable annuity customer
deposits in separate accounts. Variable annuity fees increased to $5.0 million
during the six months ended June 30, 1996 from $3.2 million during the six
months ended June 30, 1995 principally due to asset growth from the receipt of
variable annuity deposits and, to a lesser extent, from a market-driven increase
in the value of existing variable annuity deposits invested in mutual funds.
Fee-based variable annuity deposits increased to $749.2 million at June 30, 1996
from $477.6 million at June 30, 1995. In addition, asset management fees earned
by ARM Capital Advisors, Inc. ("ARM Capital Advisors") on off-balance sheet
assets in private accounts increased to $2.7 million during the six months ended
June 30, 1996 from $1.1 million during the six months ended June 30, 1995. This
increase in asset management fees reflects a significant increase in the average
fair value of off-balance sheet assets managed due to sales. The average fair
value of off-balance sheet assets managed by the Company was $1.9 billion during
the six months ended June 30, 1996 compared to $1.1 billion during the six
months ended June 30, 1995.
12
Assets under management by type of product and service as of June 30, 1996
and December 31, 1995 were as follows:
JUNE 30, 1996 DECEMBER 31, 1995
--------------------------------------------------
PERCENT OF PERCENT OF
(Dollars in millions) AMOUNT TOTAL AMOUNT TOTAL
- ----------------------------------------------------------------------------------------------------------------------
Spread-based:
Retail (fixed annuity, guaranteed rate option and face-
amount certificate deposits) $2,634.8 40% $2,716.2 50%
Institutional (GIC deposits) 586.0 9 143.2 3
-------------------------------------------------
Total spread-based 3,220.8 49 2,859.4 53
Fee-based:
Retail (mutual fund options of variable annuity deposits
and off-balance sheet mutual fund assets managed) 984.1 15 845.7 16
Institutional (off-balance sheet assets managed in
private accounts and deposits under marketing
partnerships) 2,358.2 35 1,598.0 29
-------------------------------------------------
Total fee-based 3,342.3 50 2,443.7 45
Corporate and other (primarily cash and investments in
excess of customer deposits) 55.7 1 101.0 2
-------------------------------------------------
Total assets under management $6,618.8 100% $5,404.1 100%
=================================================
The increase in spread-based deposits was attributable to sales of GICs
to institutional customers. The increase in the fee-based line of business is
primarily attributable to deposits under new investment management contracts
managed by ARM Capital Advisors. The Company continues to develop its fee-based
line of business, as reflected in its growth as a percentage of total assets
under management and, additionally, to diversify its spread-based and fee-based
products and services and expand their associated channels of distribution.
Sales for spread-based products include premiums and deposits received
under products issued by the Company's insurance and face-amount certificate
subsidiaries. Sales for fee-based products and services include premiums and
deposits for the mutual fund options of variable annuity products issued by the
Company's insurance subsidiaries and the amount of new off-balance sheet assets
managed by ARM Capital Advisors.
Sales by market and type of business for the six months ended June 30, 1996
and 1995 were as follows:
SIX MONTHS ENDED
JUNE 30,
-------------------
(In millions) 1996 1995
- ------------------------------------------------------------------------
Retail:
Spread-based $ 31.2 $ 64.0
Fee-based 127.5 65.4
-------------------
Total retail 158.7 129.4
Institutional:
Spread-based 441.3 25.0
Fee-based 822.5 350.6
-------------------
Total institutional 1,263.8 375.6
-------------------
Total sales $ 1,422.5 $ 505.0
===================
13
The increase in retail sales is attributable to sales of fee-based mutual
fund options of variable annuities due, in part, to the continuing strong stock
market returns during the first half of 1996 and marketing efforts. This
increase was somewhat offset by lower retail sales of spread-based fixed annuity
products due to greater industry-wide competition from banks and other financial
services institutions for savings products primarily as a result of a U.S.
Treasury yield curve that was generally flatter during the first half of 1996
relative to the first half of 1995. A flattened yield curve tends to weaken
sales of retail spread-based products due to increased competition from short-
term instruments such as bank certificates of deposit and money market funds
because the difference between short-term and intermediate-term market interest
rates decreases. The Company believes that the recent steepening of the yield
curve during the second quarter of 1996 may stimulate the demand for retail
spread-based fixed annuity products in the future. Expanded distribution
channels developed by the Company benefited sales of institutional spread-based
products (i.e., GICs), which accumulate interest based on short-term rates. The
Company's GIC products are issued mainly through a marketing partnership with
another insurance company. The increase in institutional fee-based sales is
primarily attributable to deposits in private accounts by new customers of ARM
Capital Advisors. The Company's strategy is to broaden its mix of products,
services and distribution channels to enable it to achieve its target sales
within different interest rate environments.
Net surrenders of annuity products issued by the Company's insurance
subsidiaries were $173.5 million and $153.4 million during the six months ended
June 30, 1996 and 1995, respectively. Of these amounts, $54.4 million and $8.0
million, respectively, can be attributed to business acquired from SBM,
primarily fixed annuities. Surrender charge income increased to $2.9 million
during the six months ended June 30, 1996 from $1.1 million during the six
months ended June 30, 1995, due to higher average surrender charges associated
with SBM products compared to other products of the Company's insurance
subsidiaries and to the overall increase in the volume of surrenders. Policies
issued by the Company's insurance subsidiaries include lapse protection
provisions that provide a deterrent against surrenders when interest rates rise.
These provisions can include surrender charges and market value adjustments on
annuity withdrawals. During the period that surrender charges are assessable,
generally the first five to seven years after a policy is issued, surrenders are
relatively low. The surrender and withdrawal activity during the six months
ended June 30, 1995 and 1996 was generally expected by the Company due to the
level of customer deposits written several years ago that were subject to
declining or expiring surrender charges and the Company's strategy of
maintaining investment spreads. During the third quarter of 1994, and continuing
to-date, the Company began implementing programs designed to reduce surrender
activity and improve persistency. During the six months ended June 30, 1996 and
1995, through one such program, $9.6 million and $9.8 million, respectively, of
new annuity contracts were issued to customers that had initiated a withdrawal
request. The Company excludes this activity from its net surrenders and sales
disclosures because such amounts have no impact on net cash flow. Other programs
involve direct contact with customers and are designed to inform customers of
the financial strength of the Company and its insurance subsidiaries and to
describe other product offerings available.
Operating expenses increased to $15.2 million during the six months ended
June 30, 1996 from $10.4 million during the six months ended June 30, 1995. The
increase is primarily attributable to the inclusion of six months of incremental
operating expenses related to the acquired SBM
14
operations in the 1996 results versus one month for the comparable 1995 period,
as well as the expansion of distribution channels.
Amortization of deferred policy acquisition costs related to operations was
$3.1 million and $1.3 million during the six months ended June 30, 1996 and
1995, respectively. This increase is the result of growth in the deferred policy
acquisition cost asset as variable costs of selling and issuing the Company's
insurance subsidiaries' products (primarily first-year commissions) are deferred
and then amortized over the expected life of the policy.
Amortization of value of insurance in force related to operations
increased to $4.5 million during the six months ended June 30, 1996 from $2.5
million during the six months ended June 30, 1995. The increase is primarily
related to amortization of the value of insurance in force established as an
asset by the Company on May 31, 1995 in connection with the acquisition of SBM's
insurance subsidiary.
Amortization of acquisition-related deferred charges was $0.3 million and
$2.4 million during the six months ended June 30, 1996 and 1995, respectively.
The decrease is primarily attributable to the accelerated amortization during
the third quarter of 1995 of certain costs and charges deferred during 1993 and
1994. During the third quarter of 1995, Company management determined that
changes in facts and circumstances had resulted in a change in their original
estimate of the periods benefited by these costs and charges. As a result of
this change in estimate, the remaining unamortized balances of these deferred
costs and charges were fully amortized as of September 30, 1995, resulting in
lower amortization in future periods.
Realized investment losses, which are reported net of related amortization
of deferred policy acquisition costs and value of insurance in force, were $1.2
million during the six months ended June 30, 1996 compared to realized
investment gains of $2.7 million during the six months ended June 30, 1995. Such
realized investment gains and losses were interest-rate related and attributable
to the ongoing management of the Company's fixed maturity securities classified
as available-for-sale which can result in period-to-period swings in realized
investment gains and losses since securities are sold during both rising and
falling interest rate environments. The ongoing management of securities is a
significant component of the Company's asset/liability management strategy. The
ongoing portfolio management process involves evaluating the various asset
sectors (i.e., security types and industry classes) and individual securities
comprising the Company's investment portfolios and, based on market yield rates,
repositioning holdings from relatively overvalued sectors to undervalued ones
with the aim of improving cash flows. The Company endeavors to accomplish this
repositioning without materially changing the overall credit, asset duration and
convexity characteristics of its portfolios.
Federal income tax expense was $2.8 million and $4.9 million for the six
months ended June 30, 1996 and 1995, respectively, reflecting effective tax
rates of 20.9% and 50.4%. The lower effective tax rate in 1996 resulted
primarily from the recognition of benefits associated with certain deferred tax
assets established in connection with the Company's acquisition of Integrity
Life Insurance Company and National Integrity Life Insurance Company
(collectively, the "Integrity Companies") on November 26, 1993 for which a full
valuation allowance was originally provided. These deferred
15
tax benefits are being recognized based on the taxable income generated by the
Integrity Companies' in the post-acquisition period and projections of future
taxable income.
Three Months Ended June 30, 1996 Compared with Three Months Ended June 30,
1995
Net income during the second quarter of 1996 was $6.0 million compared to
$4.7 million for the second quarter of 1995, and operating earnings were $5.3
million and $0.1 million, respectively. The increase in operating earnings is
primarily attributable to an increase in net investment spread due to ongoing
asset/liability management and deposit growth from the acquisition of the SBM
business operations and, to a lesser extent, additional sales of spread-based
products. In addition, fee income increased as a result of a growing base of
variable annuity deposits and institutional assets under management. Such
increases in revenues were partially offset by increases in operating and
amortization expenses.
Net investment spread increased to $17.8 million in the second quarter of
1996 from $11.2 million in the second quarter of 1995. These amounts reflect the
net investment spread of 2.14% and 1.94% in the second quarters of 1996 and
1995, respectively, between the Company's annualized investment yield on average
cash and investments and the annualized average rate credited on customer
deposits. The Company's investment income increased to $62.7 million in the
second quarter of 1996 from $45.4 million in the second quarter of 1995. These
amounts represent annualized investment yields of 7.83% and 7.96% on average
cash and investments of $3.20 billion and $2.28 billion during the second
quarters of 1996 and 1995, respectively. The decrease in annualized investment
yields on cash and investments primarily relates to a significant increase in
sales of GICs, the proceeds of which are invested in securities of shorter
duration than many of the Company's other investments.
Interest credited on customer deposits increased to $44.9 million in the
second quarter of 1996 from $34.1 million in the second quarter of 1995. These
amounts represent annualized average rates of interest credited on customer
deposits of 5.69% and 6.02% on average customer deposits of $3.16 billion and
$2.27 billion during the second quarters of 1996 and 1995, respectively. The
decrease in annualized average rates of interest credited on customer deposits
resulted from the Company's decision to reset crediting rates during the second
half of 1995 consistent with an overall declining interest rate environment
during that period.
Fee income increased to $4.2 million in the second quarter of 1996 from
$2.5 million in the second quarter of 1995. Variable annuity fees increased to
$2.7 million in the second quarter of 1996 from $1.7 million in the second
quarter of 1995 principally due to asset growth from the receipt of variable
annuity deposits and, to a lesser extent, from a market-driven increase in the
value of existing variable annuity deposits invested in mutual funds. In
addition, asset management fees earned by ARM Capital Advisors on off-balance
sheet assets in private accounts increased to $1.2 million in the second quarter
of 1996 from $0.7 million in the second quarter of 1995. This increase in asset
management fees reflects a significant increase in the average fair value of
off-balance sheet assets managed due primarily to sales. The average fair value
of off-balance sheet assets managed by the Company was $2.1 billion during the
second quarter of 1996 compared to $1.4 billion in the second quarter of 1995.
16
Sales by market and type of business for the three months ended June 30,
1996 and 1995 were as follows:
THREE MONTHS ENDED
JUNE 30,
-------------------------
(In millions) 1996 1995
- --------------------------------------------------------------------------------
Retail:
Spread-based $ 19.2 $ 33.9
Fee-based 66.8 38.4
-------------------------
Total retail 86.0 72.3
Institutional:
Spread-based 201.8 25.0
Fee-based 392.6 294.1
-------------------------
Total institutional 594.4 319.1
-------------------------
Total sales $ 680.4 $ 391.4
=========================
The increase in retail sales is attributable to sales of fee-based mutual
fund options of variable annuities due, in part, to the continuing strong market
returns during the second quarter of 1996 and marketing efforts. This increase
was somewhat offset by lower retail sales of spread-based fixed annuity products
due to greater industry-wide competition from banks and other financial services
institutions for savings products. Expanded distribution channels developed by
the Company benefited sales of spread-based institutional products. The increase
in institutional fee-based sales is primarily attributable to deposits in
private accounts by new customers of ARM Capital Advisors.
Net surrenders of annuity products issued by the Company's insurance
subsidiaries were $85.2 million and $87.9 million in the second quarters of 1996
and 1995, respectively. Of these amounts, $27.8 million and $8.0 million,
respectively, can be attributed to business acquired from SBM, primarily fixed
annuities. Surrender charge income increased to $1.3 million in the second
quarter of 1996 from $0.5 million in the second quarter of 1995, due to higher
average surrender charges associated with SBM products compared to other
products of the Company's insurance subsidiaries.
Operating expenses increased to $7.8 million in the second quarter of 1996
from $5.2 million in the second quarter of 1995. The increase is primarily
attributable to the inclusion of three months of incremental operating expenses
related to the acquired SBM operations in the 1996 results versus one month for
the comparable 1995 period, as well as the expansion of distribution channels.
Amortization of deferred policy acquisition costs related to operations was
$1.4 million and $0.7 million during the three months ended June 30, 1996 and
1995, respectively. This increase is the result of growth in the deferred policy
acquisition cost asset as variable costs of selling and issuing the Company's
insurance subsidiaries' products are deferred and then amortized over the
expected life of the policy.
17
Amortization of value of insurance in force related to operations increased
to $2.4 million in the second quarter of 1996 from $1.5 million in the second
quarter of 1995. The increase was primarily related to amortization of the value
of insurance in force established as an asset by the Company on May 31, 1995 in
connection with the acquisition of SBM's insurance subsidiary.
Amortization of acquisition-related deferred charges was $0.1 million and
$1.4 million in the second quarters of 1996 and 1995, respectively. During the
third quarter of 1995, Company management determined that changes in facts and
circumstances had resulted in a change in their original estimate of the periods
benefited by these costs and charges. As a result of this change in estimate,
the remaining unamortized balances of certain costs and charges deferred during
1993 and 1994 were fully amortized as of September 30, 1995, resulting in lower
amortization in future periods.
Realized investment losses were $0.8 million in the second quarter of 1996
compared to realized investment gains of $5.2 million in the second quarter of
1995. Such realized investment gains and losses were interest-rate related and
attributable to the ongoing management of the Company's fixed maturity
securities classified as available-for-sale which can result in period-to-period
swings in realized investment gains and losses since securities are sold during
both rising and falling interest rate environments.
Federal income tax expense was $1.2 million and $4.7 million for the three
months ended June 30, 1996 and 1995, respectively, reflecting effective tax
rates of 16.5% and 50.3%. The lower effective tax rate in the second quarter of
1996 resulted primarily from the recognition of benefits associated with certain
deferred tax assets established in connection with the Company's acquisition of
the Integrity Companies on November 26, 1993 for which a full valuation
allowance was originally provided.
ASSET PORTFOLIO REVIEW
The Company primarily invests in securities with fixed maturities with the
objective of providing reasonable returns while limiting credit and liquidity
risks. At amortized cost, fixed maturities at June 30, 1996 totaled $2.9
billion, compared with $2.5 billion at December 31, 1995, representing
approximately 92% and 90%, respectively, of total cash and investments. The
increase primarily resulted from the investment of the proceeds from sales of
GIC products.
18
The Company's cash and investments as of June 30, 1996 are detailed as
follows:
AMORTIZED COST
--------------
PERCENT OF ESTIMATED
(Dollars in millions) AMOUNT TOTAL FAIR VALUE
- --------------------------------------------------------------------------
Fixed maturities:
Corporate securities $ 1,057.5 34% $ 1,030.2
U.S. Treasury securities
and obligations of 130.7 4 129.6
U.S. government agencies
Other government securities 109.1 3 113.7
Asset-backed securities 249.6 8 246.9
Mortgage-backed
securities ("MBSs"):
Agency pass-throughs 109.0 3 109.1
Collateralized mortgage
obligations ("CMOs"):
Agency 455.0 15 447.9
Non-agency 726.3 24 716.5
Interest only and residual 16.9 1 19.0
-------------------------------------------
Total fixed maturities 2,854.1 92 2,812.9
Equity securities (i.e.,
non-redeemable preferred
stock) 16.3 1 16.3
Mortgage loans on real
estate 41.6 1 41.6
Policy loans 120.3 4 120.3
Cash and cash equivalents 57.5 2 57.5
-------------------------------------------
Total cash and investments $ 3,089.8 100% $ 3,048.6
===========================================
Agency pass-through certificates are MBSs which represent an undivided
interest in a specific pool of residential mortgages. The payment of principal
and interest is guaranteed by the U.S. government or U.S. government agencies.
CMOs are pools of mortgages that are segregated into sections, or tranches,
which provide prioritized retirement of bonds rather than a pro rata share of
principal return in the pass-through structure. The underlying mortgages of
agency CMOs are guaranteed by the U.S. government or U.S. government agencies.
MBSs are subject to risks associated with prepayments of the underlying
mortgage loans. Prepayments cause these securities to have actual maturities
different from those expected at the time of purchase. Securities that have an
amortized cost that is greater than par (i.e., purchased at a premium) that are
backed by mortgages that prepay faster than expected will incur a reduction in
yield or a loss, versus an increase in yield or a gain if the mortgages prepay
slower than expected. Those securities that have an amortized cost that is less
than par (i.e., purchased at a discount) that are backed by mortgages that
prepay faster than expected will generate an increase in yield or a gain, versus
a decrease in yield or a loss if the mortgages prepay slower than expected. The
reduction or increase in yields may be partially offset as funds from
prepayments are reinvested at current interest rates. The degree to which a
security is susceptible to either gains or losses is influenced by the
difference between its amortized cost and par, the relative sensitivity of the
underlying mortgages backing the assets to prepayments in a changing interest
rate environment and the repayment priority of the securities in the overall
securitization structure. The Company has limited its exposure during periods of
accelerated prepayments, as the gross unamortized premiums and unaccrued
discounts
19
of MBSs was $27.1 million and $49.2 million, respectively, at June 30, 1996.
Although the interest rate environment has experienced significant volatility
during 1995 and the first half of 1996, prepayments and extensions of cash flows
from MBSs have not materially affected investment income of the Company.
The Company also manages prepayment exposure on CMO holdings by
diversifying not only within the more stable CMO tranches, but across
alternative collateral classes such as commercial mortgages and Federal Housing
Administration project loans, which are generally less volatile than agency-
backed, residential mortgages. Additionally, prepayment sensitivity is evaluated
and monitored giving full consideration to the collateral characteristics such
as weighted average coupon rate, weighted average maturity and the prepayment
history of the specific loan pool.
Total cash and investments were 93% investment grade or equivalent as of
June 30, 1996 and December 31, 1995. Investment grade securities are those
classified as 1 or 2 by the National Association of Insurance Commissioners
("NAIC") or, where such classifications are not available, having a rating on
the scale used by Standard & Poor's Corporation ("S&P") of BBB- or above. Yields
available on non-investment grade securities are generally higher than are
available on investment grade securities. However, credit risk is greater with
respect to such non-investment grade securities. The Company attempts to reduce
the risks associated with non-investment grade securities by limiting the
exposure to any one issuer and by closely monitoring the creditworthiness of
such issuers. Additionally, the Company's investment portfolio has minimal
exposure to real estate, non-indemnified mortgage loans and common equity
securities, which represent less than 1% of cash and investments as of June 30,
1996. As of June 30, 1996, the book value of securities in the Company's
investment portfolios which had defaulted on principal or interest payments was
$0.7 million. However, in July 1996 the Company sold such securities at cost.
At June 30, 1996 the ratings assigned by the NAIC and comparable S&P
ratings on the Company's fixed maturity portfolio and the percent of total cash
and investments are as follows:
AMORTIZED COST
NAIC Designation ----------------------------
(Comparable S&P Rating) PERCENT OF ESTIMATED
(Dollars in millions) AMOUNT TOTAL FAIR VALUE
- --------------------------------------------------------------------------------
1 (AAA,AA,A) $1,908.4 62% $1,886.1
2 (BBB) 719.5 23 707.2
3 (BB) 146.5 5 143.1
4 (B) 79.0 2 75.8
5 (CCC,CC,C) -- -- --
6 (CI,D) 0.7 -- 0.7
--------------------------------------------
Total fixed maturities $2,854.1 92% $2,812.9
============================================
As of January 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The Company classifies its
entire fixed maturities portfolio as available-for-sale. Fixed maturities
classified as available-for-sale are carried at fair value and changes in fair
value, net of related value of insurance in force and deferred policy
20
acquisition cost amortization and deferred income taxes, are charged or credited
directly to shareholders' equity.
The general decline in interest rates during 1995 and subsequent rise in
interest rates during the first half of 1996 resulted in unrealized losses on
available-for-sale securities which totaled $21.7 million (net of $7.9 million
of related amortization of deferred policy acquisition costs and value of
insurance in force and $11.6 million of deferred income taxes) at June 30, 1996,
compared to unrealized gains of $28.5 million (net of $14.2 million of related
amortization of deferred policy acquisition costs and value of insurance in
force and $15.4 million of deferred income taxes) at December 31, 1995. This
change in net unrealized gains and losses on available-for-sale securities for
the six months ended June 30, 1996 decreased reported shareholders' equity by
$50.2 million as compared to an increase of $133.5 million for the year ended
December 31, 1995. This volatility in reported shareholders' equity occurs as a
result of SFAS No. 115, which requires some assets to be carried at fair value
while all liabilities and other assets are carried at historical values. At June
30, 1996 and December 31, 1995, shareholders' equity excluding the effects of
SFAS No. 115 was $167.6 million and $159.5 million, respectively.
The Company manages assets and liabilities in a closely integrated manner,
with the aim of reducing the volatility of investment spreads during a changing
interest rate environment. As a result, shareholders' equity for changes in the
fair value of the Company's fixed maturities and equity securities without
reflecting offsetting changes in the value of the Company's liabilities or other
assets creates volatility in reported shareholders' equity but does not always
reflect the underlying economics of the Company's business. The Company's
accompanying consolidated financial statements include fair value balance sheets
which demonstrate that the general rise in interest rates during the first half
of 1996 did not have a material effect on the financial position of the Company
when all assets and liabilities are adjusted to fair values.
Mortgage loans on real estate represented 1% and 2% of total cash and
investments at June 30, 1996 and December 31, 1995, respectively. Pursuant to
the terms of the acquisition of certain of the Company's insurance operations,
National Mutual has indemnified the Company with respect to principal (up to
100% of the investments' year-end 1992 statutory book value) and interest with
respect to approximately 99% of these loans at June 30, 1996. In support of its
indemnification obligations, National Mutual placed $23.0 million into escrow in
favor of the Company's insurance subsidiaries, which will remain available until
the subject commercial and agricultural loans have been paid in full.
Assets held in separate accounts at June 30, 1996 totaled $955.0 million,
compared to $809.9 million at December 31, 1995. The $145.1 million increase
primarily resulted from the receipt of variable annuity deposits and from a
market-driven increase in the value of existing variable annuity deposits
invested in mutual funds.
21
LIQUIDITY AND FINANCIAL RESOURCES
Holding Company Operations
The Company's principal need for liquidity has historically consisted of
debt service obligations under its bank financing agreement, dividend payments
on its preferred stock and operating expenses not absorbed by management fees
charged to its subsidiaries. The Company is dependent on dividends or other
distributions from its insurance subsidiaries and fee income generated by ARM
Capital Advisors, its asset management subsidiary, and other non-insurance
operations to meet ongoing cash needs, including amounts required to pay
dividends on its preferred stock.
The ability of the Company's insurance subsidiaries to pay dividends and
enter into agreements with affiliates is limited by state insurance laws. During
the first half of 1996, the Company received dividends of $11.0 million from
Integrity Life Insurance Company. The amount remaining in 1996 that the
Company's insurance subsidiaries can transfer in the form of dividends to the
Company is limited to $6.6 million. The Company had cash and unaffiliated
investments of $6.4 million at June 30, 1996. In addition, $20.0 million was
available on unused bank lines of credit at June 30, 1996.
Insurance Subsidiaries Operations
The sources of liquidity of the Company's insurance subsidiaries are
investment income and proceeds from maturities and redemptions of investments.
The principal uses of such funds are benefits, withdrawals and loans associated
with the various customer deposits, commissions, operating expenses and the
purchase of new investments.
The Company develops cash flow projections under a variety of interest rate
scenarios developed by the Company. The Company attempts to structure asset
portfolios so that the interest and principal payments, along with other fee
income, are more than sufficient to cover the cash outflows for benefits,
withdrawals, and expenses under the expected scenarios developed by the Company.
In addition, the Company maintains other liquid assets and aims to meet
unexpected cash requirements (with the projected cash inflows and liquid assets
being approximately double the expected cash outflows) without exposure to
material realized losses during a higher interest rate environment. These other
liquid assets include cash and cash equivalents and high-grade floating-rate
securities held by both the Company and its insurance subsidiaries. The Company
also has $20 million available on unused bank lines of credit.
During the six months ended June 30, 1996 and 1995, the Company met its
liquidity needs entirely by cash flows from operating activities and principal
payments and redemptions of investments. At June 30, 1996, cash and cash
equivalents totaled $57.5 million compared to $76.9 million at December 31,
1995. The Company's aim is to manage its cash and cash equivalents position so
as to satisfy short-term liquidity needs. In connection with this management of
cash and cash equivalents, the Company may invest idle cash in short-duration
fixed maturities to capture additional yield when short-term liquidity
requirements permit.
22
The Company generated cash flows of $88.6 million and $55.5 million from
operating activities during the six months ended June 30, 1996 and 1995,
respectively. These cash flows resulted principally from investment income, less
commissions and operating expenses. Proceeds from sales, maturities and
redemptions of investments generated $1,193.3 million and $686.0 million in cash
flows during the six months ended June 30, 1996 and 1995, respectively, which
were offset by purchases of investments of $1,559.3 million and $709.9 million,
respectively. An increase in investment purchases and sales activity during the
first half of 1996 compared to 1995 reflects the Company's ongoing management of
its fixed maturity portfolio which has increased in size due to the acquisition
of the SBM businesses.
FORWARD-LOOKING STATEMENTS
The statement of the Company's belief as to the stimulation of future
demand for retail spread-based fixed annuity products under the heading "Results
of Operations" is a forward-looking statement. Factors that could cause actual
results to differ materially from this forward-looking statement include, but
are not limited to, a change in population demographics, development of
alternative investment products, a change in economic conditions, and changes in
current federal income tax laws.
23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As a consequence of the acquisition of State Bond and Mortgage Life
Insurance Company ("SBM Life") on June 14, 1995, and SBM Life's merger with and
into Integrity Life Insurance Company ("Integrity") on December 31, 1995,
Integrity became a party to a marketing agreement (the "Agreement") with Multico
Marketing Corporation ("Multico"). In reliance upon the Agreement, Integrity
eliminated commissions to Multico on new product sales on a prospective basis
effective July 1, 1995. Multico filed a lawsuit in the United States District
Court for the Western District of Kentucky against Integrity on February 23,
1996, alleging breach of contract and breach of the covenant of good faith and
fair dealing, and seeking a trial by jury and damages of approximately $61
million. Integrity filed a counterclaim against Multico seeking a declaration
that Integrity's actions in revising commissions did not constitute a breach of
contract, and recovery of commissions, fees, trailers, overwrites and bonuses
paid to Multico in the amount of approximately $9.3 million. Discovery is
proceeding between the parties. On May 23, 1996, Integrity filed a motion for
summary judgement in the litigation. While the Company believes that the Multico
action is without merit, there can be no assurance that Integrity will prevail
in the litigation.
Except for the Multico lawsuit discussed above, the Company and its
subsidiaries are currently involved only in routine legal and administrative
proceedings incidental to the conduct of their businesses. The Company believes
that none of these proceedings will have a material adverse effect on the
financial condition or results of operations of the Company or its subsidiaries.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months
ended June 30, 1996.
Exhibits
See Exhibit Index on page 26 of this report.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on August 12, 1996.
ARM FINANCIAL GROUP, INC.
By: /s/EDWARD L. ZEMAN
--------------------------------
Edward L. Zeman
Executive Vice President-Chief
Financial Officer
(Principal Financial Officer)
By: /s/ BARRY G. WARD
--------------------------------
Barry G. Ward
Controller (Principal Accounting
Officer)
25
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
EXHIBIT INDEX
================================================================================
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
10.1 Lease made as of June 14, 1996, by and between Northwestern National
Life Insurance Company and ARM Financial Group, Inc.
10.2 Fourth Amendment to the Credit Agreement dated as of June 28, 1996.
27 Financial Data Schedule (electronic filing only).
26