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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1999
Commission file number: 001-12294
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.)
515 WEST MARKET STREET
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 (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes / / No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Date Class Shares Outstanding
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May 3, 1999 A 23,825,768
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Carrying Amount Fair Value
------------------------------- -----------------------------
March 31, December 31, March 31, December 31,
(IN THOUSANDS) 1999 1998 1999 1998
----------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
ASSETS
Cash and investments:
Fixed maturities, available-for-sale, at fair value
(amortized cost: March 31, 1999-$6,467,699;
December 31, 1998-$6,036,275) $ 6,175,587 $ 5,812,330 $ 6,175,587 $ 5,812,330
Equity securities, at fair value (cost: March 31,
1999-$33,559; December 31, 1998-$33,559) 33,020 31,745 33,020 31,745
Mortgage loans on real estate 13,649 14,554 13,649 14,554
Policy loans 130,848 129,163 130,848 129,163
Cash and cash equivalents 279,941 525,316 279,941 525,316
-------------------------------- -----------------------------
Total cash and investments 6,633,045 6,513,108 6,633,045 6,513,108
Assets held in separate accounts:
Guaranteed 1,248,353 1,255,198 1,248,353 1,255,198
Nonguaranteed 1,735,767 1,641,005 1,735,767 1,641,005
Accrued investment income 65,704 59,099 65,704 59,099
Deferred policy acquisition costs 137,381 125,589 -- --
Value of insurance in force 58,307 49,651 -- --
Deferred federal income taxes 141,233 115,199 105,968 99,459
Receivable for investment securities sold -- 3,885 -- 3,885
Goodwill 5,065 5,348 5,065 5,348
Other assets 17,525 18,182 17,525 18,182
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Total assets $ 10,042,380 $ 9,786,264 $ 9,811,427 $ 9,595,284
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2
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
Carrying Amount Fair Value
------------------------------- -------------------------------
March 31, December 31, March 31, December 31,
(IN THOUSANDS) 1999 1998 1999 1998
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(Unaudited) (Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Customer deposits $ 6,751,175 $ 6,600,498 $ 6,544,904 $ 6,463,082
Customer deposits in separate accounts:
Guaranteed 1,242,845 1,240,348 1,196,324 1,193,429
Nonguaranteed 1,735,767 1,641,005 1,655,631 1,565,080
Long-term debt 38,000 38,000 38,000 38,000
Accounts payable and accrued expenses 20,095 20,117 20,095 20,117
Payable for investment securities purchased 43,866 -- 43,866 --
Payable to reinsurer 6,468 6,935 6,468 6,935
Other liabilities 25,563 28,928 25,563 28,928
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Total liabilities 9,863,779 9,575,831 9,530,851 9,315,571
Contingencies
Shareholders' equity:
Preferred stock: Series A fixed/adjustable
rate cumulative (5.575%) 75,000 75,000
Common stock: Class A; 23,825,768 and 23,704,411
shares issued and outstanding, respectively 238 237
Additional paid-in capital 219,743 218,268
Retained earnings 66,660 55,253
Accumulated other comprehensive income from net
unrealized losses on available-for-sale securities (183,040) (138,325)
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Total shareholders' equity 178,601 210,433 280,576 279,713
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Total liabilities and shareholders' equity $ 10,042,380 $ 9,786,264 $ 9,811,427 $ 9,595,284
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SEE ACCOMPANYING NOTES.
3
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31,
---------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998
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Investment income $ 136,468 $ 104,406
Interest credited on customer deposits (107,089) (81,680)
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Net investment spread 29,379 22,726
Fee income:
Variable annuity fees 6,121 4,426
Other fee income 531 232
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Total fee income 6,652 4,658
Other income and expenses:
Surrender charges 1,360 1,334
Operating expenses (10,544) (7,550)
Commissions, net of deferrals (418) (598)
Interest expense on debt (712) (617)
Amortization:
Deferred policy acquisition costs (4,364) (2,724)
Value of insurance in force (1,413) (1,531)
Acquisition-related deferred charges and goodwill (152) (220)
Non-recurring charges -- (3,570)
Other, net (1,489) (593)
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Total other income and expenses (17,732) (16,069)
Realized investment gains (losses) (351) 5,165
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Income before income taxes 17,948 16,480
Income tax expense (4,543) (5,499)
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Net income 13,405 10,981
Dividends on preferred stock (1,045) (1,188)
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Net income applicable to common shareholders $ 12,360 $ 9,793
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Net income per common share (basic) $ 0.52 $ 0.42
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Net income per common and common equivalent share (diluted) $ 0.51 $ 0.40
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Cash dividends paid per common share $ 0.04 $ 0.02
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SEE ACCOMPANYING NOTES.
4
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31,
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(IN THOUSANDS) 1999 1998
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CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 92,701 $ 60,234
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:
Purchases (928,870) (2,105,306)
Maturities and redemptions 192,705 202,755
Sales 338,246 1,617,874
Other investments:
Maturities, redemptions and sales 1,041 412
Policy loans, net (1,685) (186)
Transfers (to) from insurance subsidiaries' separate accounts:
Purchase of assets held in separate accounts (87,631) (112,026)
Proceeds from sale of assets held in separate accounts 66,714 37,657
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Cash flows used in investing activities (419,480) (358,820)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Amounts received from customers 492,785 565,728
Amounts paid to customers (410,433) (149,143)
Net proceeds from issuance of common stock 1,517 --
Change in payable to reinsurer (467) (470)
Dividends on preferred stock (1,045) (1,188)
Dividends on common stock (953) (468)
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Cash flows provided by financing activities 81,404 414,459
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Net increase (decrease) in cash and cash equivalents (245,375) 115,873
Cash and cash equivalents at beginning of period 525,316 228,206
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Cash and cash equivalents at end of period $ 279,941 $ 344,079
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SEE ACCOMPANYING NOTES.
5
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
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 three months ended March 31, 1999 are not
necessarily indicative of those to be expected for the year ending December 31,
1999. 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, 1998.
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 additional information on 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 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 methods and assumptions used in estimating fair value were
consistently applied.
The Company's management of interest rate risk aims to reduce its exposure
to changing interest rates through a close matching of duration, convexity and
cash flow characteristics of
6
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.
3. INCOME TAXES
Income tax expense differs from that computed using 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.
4. EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share," requires companies to present basic
and, if applicable, diluted earnings per share ("EPS"), instead of primary and
fully diluted EPS. Basic EPS excludes dilution and is computed by dividing net
income applicable to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if options to issue common stock were exercised into
common stock.
The following is a reconciliation of the number of shares used in the basic
and diluted EPS computations:
Three Months Ended March 31,
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1999 1998
--------------------------------- ---------------------------------
Weighted Weighted
Average Per Share Average Per Share
(SHARES IN THOUSANDS) Shares Amount Shares Amount
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Basic EPS 23,813 $ 0.52 23,322 $ 0.42
Effect of dilutive stock options 530 (0.01) 1,030 (0.02)
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Diluted EPS 24,343 $ 0.51 24,352 $ 0.40
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5. SEGMENT INFORMATION
The Company currently has four reportable segments: retail spread products
and options (fixed and indexed annuities and face-amount certificates);
institutional spread products (funding agreements, guaranteed investment
contracts ("GICs") and certificates); retail variable fund options (fee-based
variable annuity mutual fund options); and corporate and other. The Company's
corporate and other segment includes earnings on surplus assets of the Company's
7
subsidiaries and holding company cash and investments, fee income from marketing
partnerships and broker-dealer operations, unallocated amortization expenses,
and various corporate expenditures that are not allocated to retail and
institutional products. Income tax expense and preferred stock dividends are not
allocated to any segment.
The Company's reportable segments are based on the earnings characteristics
of the product or service and the markets through which the product or service
is sold. The reportable segments are each managed separately because the impact
of fluctuating interest rates and changes in the equity market environment
affects each segments' products and services differently. The Company evaluates
performance based on operating earnings. Operating earnings represents net
income applicable to common shareholders excluding, net of tax, realized
investment gains and losses and non-recurring charges.
8
Revenues and earnings by segment for the three months ended March 31, 1999
and 1998 are as follows:
Three Months Ended March 31,
-----------------------------------
(IN THOUSANDS) 1999 1998
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REVENUES
Retail spread products and options $ 54,346 $ 55,508
Institutional spread products 79,971 46,966
Retail variable fund options 6,121 4,426
Corporate and other 2,682 2,164
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Consolidated total revenues (investment income and fee income) $ 143,120 $ 109,064
-----------------------------------
-----------------------------------
EARNINGS
Retail spread products and options $ 8,332 $ 10,517
Institutional spread products 10,512 4,182
Retail variable fund options 2,025 1,601
Corporate and other (2,570) (1,415)
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Pretax operating earnings (before preferred stock dividends) 18,299 14,885
Income taxes on operations (4,666) (3,691)
Preferred stock dividends (1,045) (1,188)
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Operating earnings 12,588 10,006
Realized investment gains (losses), net of tax (228) 3,357
Non-recurring charges - (3,570)
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Net income applicable to common shareholders $ 12,360 $ 9,793
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6. COMPREHENSIVE INCOME
The components of comprehensive income (loss), net of related tax, for the
three months ended March 31, 1999 and 1998 are as follows:
Three Months Ended March 31,
-----------------------------------
(IN THOUSANDS) 1999 1998
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Net income $ 13,405 $ 10,981
Net unrealized losses on available-for-sale securities (44,715) (19,474)
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Comprehensive income (loss) $ (31,310) $ (8,493)
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-----------------------------------
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company specializes in the growing asset accumulation business with
particular emphasis on retirement savings and investment products. The Company's
products and services are sold in two principal markets, retail and
institutional, through a broad spectrum of distribution channels. The Company
derives its earnings from the investment spread and fee income generated by the
assets it manages. The Company groups its operations into three operating
segments (retail spread products and options, institutional spread products and
retail variable fund options) and a corporate segment, based on the market
through which the products or services are sold and the earnings characteristics
of the products or services.
The Company earns a spread between what is earned on invested assets and
what is credited to customer accounts with its retail spread products and
options segment (primarily fixed and indexed annuities) and institutional spread
products segment (funding agreements, GICs and certificates). The Company
receives a fee in exchange for managing customers' deposits, and the customers
accept the investment risk with its retail variable fund options segment
(variable annuity mutual fund options). Fee-based business is less capital
intensive than the spread businesses and provides the Company with diversified
sources of income. The Company believes that market forces and population
demographics are producing and will continue to generate strong consumer demand
for long-term savings and retirement products, including retail fixed, indexed
and variable annuity products. In addition, the Company expects to benefit from
the growing institutional marketplace by developing new products and
applications for existing and new markets.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998.
Net income during the first quarter of 1999 was $13.4 million compared to
$11.0 million for the first quarter of 1998. Operating earnings (net income
applicable to common shareholders excluding, net of tax, realized investment
gains and losses and non-recurring charges) were $12.6 million and $10.0 million
for the first quarter of 1999 and 1998, respectively. The increase in operating
earnings is primarily attributable to an increase in net investment spread and
variable annuity fees due to the growth of assets under management which
increased from $7.5 billion at March 31, 1998 to $10.1 billion at March 31,
1999.
Annualized pretax operating earnings for the retail spread products and
options segment were 1.18% and 1.49% of average assets under management of $2.81
billion and $2.82 billion during the first quarter of 1999 and 1998,
respectively. Annualized pretax operating earnings for the institutional spread
products segment were 0.83% and 0.60% of average assets under management of
$5.06 billion and $2.80 billion during the first quarter of 1999 and 1998,
respectively. Annualized pretax operating earnings for the retail variable fund
options segment
10
(fee business) were 0.49% and 0.53% of average assets under management of
$1.65 billion and $1.20 billion during the first quarter of 1999 and 1998,
respectively.
Net investment spread for the three months ended March 31, 1999 and 1998
was as follows:
Three Months Ended March 31,
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(IN THOUSANDS) 1999 1998
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Investment income $136,468 $104,406
Interest credited on customer deposits (107,089) (81,680)
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Net investment spread $ 29,379 $ 22,726
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The increase in net investment spread is attributable to the increase in
average spread-based customer deposits, which were $7.9 billion in the first
quarter of 1999 compared to $5.6 billion in the first quarter of 1998.
Annualized investment spread rates for the Company's two spread-based
operating segments for the three months ended March 31, 1999 and 1998 were as
follows:
Three Months Ended March 31,
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1999 1998
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Retail spread products and options segment:
Investment yield 7.83% 7.99%
Average credited rate (5.81%) (5.81%)
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Investment spread rate 2.02% 2.18%
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Institutional spread products segment:
Investment yield 6.42% 6.79%
Average credited rate (5.36%) (5.98%)
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Investment spread rate 1.06% 0.82%
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Investment income on cash and investments in excess of customer deposits
(i.e., consolidated surplus assets) was $2.2 million and $1.9 million for the
first quarter of 1999 and 1998, respectively.
The decrease in investment yields in 1999 for both spread-based operating
segments is primarily attributable to lower overall market interest rates and a
flatter U.S. Treasury yield curve during the last year. Investment yields for
the institutional spread products segment are generally lower than the retail
spread products and options segment because the proceeds from institutional
spread product sales are invested in securities of shorter duration (which
generally have lower investment yields) than the Company's other investment
portfolios. Investments in securities of a relatively shorter duration for the
institutional spread products segment are necessary to match, within a targeted
range, the average duration of institutional spread product deposits.
11
The average credited rate pattern is dependent upon the general trend of
market interest rates, frequency of credited rate resets and business mix. For
institutional spread products, crediting rates are reset monthly or quarterly
based on London Interbank Offered Rates ("LIBOR"), plus a premium, and
semi-annually or annually for certain fixed annuities. The Federal Reserve's
easing of interest rates late in 1998, followed by a decline in LIBOR,
contributed to the decrease in the average credited rate for institutional
spread products.
Variable annuity fees, which are based on the market value of the mutual
fund assets supporting variable annuity customer deposits in nonguaranteed
separate accounts, increased to $6.1 million in the first quarter of 1999 from
$4.4 million in the first quarter of 1998. This increase is primarily
attributable to asset growth from the receipt of variable annuity deposits and
from a stock market driven increase in the value of existing variable annuity
deposits invested in mutual funds.
Assets under management by business segment as of March 31, 1999 and 1998
were as follows:
March 31,
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1999 1998
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Percent of Percent of
(DOLLARS IN MILLIONS) Amount Total Amount Total
- ------------------------------------------------------------------------------------- ----------------------------
Retail spread products and options (primarily fixed
annuity deposits) $ 2,888.2 29% $ 2,815.4 37%
Institutional spread products (funding agreement, GIC
and certificate deposits) 5,090.6 50 2,989.6 40
Retail variable fund options (variable annuity
deposits invested in mutual funds) 1,701.2 17 1,302.1 17
Corporate and other:
Off-balance sheet deposits under marketing
partnership arrangements 224.9 2 233.7 3
Cash and investments in excess of customer deposits 219.4 2 190.6 3
---------------------------- ---------------------------
Total assets under management $ 10,124.3 100% $ 7,531.4 100%
---------------------------- ---------------------------
---------------------------- ---------------------------
The increase in total assets under management was primarily attributable to
sales of floating rate funding agreements and certificates to institutional
customers and retail variable fund options and the investment performance of
variable fund options due to strong stock market returns. The Company manages
the mix of its business by monitoring various economic factors and responding to
market opportunities as they present themselves. This approach, which may
produce changes in the mix of business from one reporting period to the next, is
intended by management to enhance the Company's long-term profitability. In
addition, the Company's product mix is impacted by current market conditions,
actions of rating agencies and other competitive factors.
12
Sales represent premiums and deposits received for products offered through
the Company's insurance and certificate subsidiaries. Sales by market and type
of product for the three months ended March 31, 1999 and 1998 were as follows:
Three Months Ended March 31,
----------------------------------
(In millions) 1999 1998
--------------------------------------------------------------------------------------------------------------------
Retail:
Spread products $ 121.7 $ 33.3
Variable products:
Spread options 34.0 16.5
Fund options 51.9 71.7
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Total variable products 85.9 88.2
----------------------------------
Total retail 207.6 121.5
Institutional:
Spread products 290.5 447.2
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Total sales $ 498.1 $ 568.7
----------------------------------
----------------------------------
Total retail sales gained momentum during the first quarter of 1999 with an
increase of approximately 71% over the corresponding prior period. This growth
is attributable to an increase in marketing efforts to broaden and strengthen
the Company's retail franchise. This included successful efforts to expand and
diversify the Company's retail market presence by increasing the number of
producers. Additionally, a modest increase in intermediate-term market interest
rates in 1999, combined with higher credit spreads to U.S. Treasury securities,
enhanced the attractiveness of the Company's retail spread products relative to
competing products, such as money market funds and bank certificates. Also, the
decrease in institutional sales is due to uneven patterns of institutional
deposits throughout the year, lower institutional sales targets and the lowering
of a financial strength rating of one of the Company's primary institutional
partners (discussed below).
Effective April 16, 1999, the Company completed the acquisition of the
assets and operations of Financial Marketing Group, Inc., FMG Distributors, Inc.
and FMG Advisors, Inc. (collectively, "FMG"), one of the nation's largest
independent marketers of variable and fixed annuities and a key distributor of
the Company's products. The acquisition significantly expands the Company's
in-house retail distribution capabilities and secures this distribution company.
The acquisition of FMG enhances the Company's ability to penetrate the
broker-dealer market by providing the Company with direct access to over 350
broker-dealer firms. The acquisition also significantly enhances in-house
efforts to provide quality service to the broker-dealers selling the Company's
fixed and variable annuity products. The combination of FMG's sales desk
operations with the Company's operations expand distribution capabilities,
enhance the Company's ability to promote products and support the Company's
efforts to serve producers.
13
Net surrenders of retail spread and variable annuity products and options
issued by the Company's insurance subsidiaries were $96.5 million for the first
quarter of 1999, compared to $79.7 million for the first quarter of 1998.
Surrender charge income increased to $1.4 million in the first quarter of 1999,
from $1.3 million in the first quarter of 1998. Retail products issued by the
Company's insurance subsidiaries generally include lapse protection provisions
that provide a deterrent to surrenders. 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 first quarter of 1998 and 1999 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. The Company attempts to
reduce retail surrender activity and improve persistency through various
programs.
The Company experienced institutional surrenders of $218.5 million
(excluding scheduled interest payments) primarily due to the March 5, 1999,
lowering of a financial strength rating of one of its primary institutional
partners, General American Life Insurance Company. Although surrenders as a
result of the lower rating were higher than historical periods, surrenders were
limited to only 4% of the Company's institutional business with this partner,
due to the Company's strong underwriting process and the strength of its
relationships with its institutional customers. While the Company cannot be
certain, it does not believe that any further significant redemptions will
occur as a result of the lowering of the rating. The Company experienced
minimal withdrawals by institutional customers during the first quarter of
1998.
Actions of rating agencies with respect to the Company's insurance
subsidiaries, its significant business partners or its competitors may impact
sales and surrender levels of the Company's products. As a result, if any of the
Company's insurance subsidiaries' or significant business partners' ratings are
lowered, or if the ratings of the Company's competitors improve and those of the
Company's insurance subsidiaries or significant business partners do not, the
ability of the Company to distribute its products and the persistency of its
existing business could be adversely affected.
Operating expenses were $10.5 million in the first quarter of 1999,
compared to $7.6 million in the first quarter of 1998. Operating expenses for
the first quarter of 1999 included increased spending to strengthen the in-house
investment department and on technology infrastructure to enhance retail
franchise Internet applications. In addition, the first quarter of 1999 included
a one-time transition cost of slightly less than $1 million for the Company's
change of investment managers to BlackRock Financial Management, Inc.
("BlackRock").
Amortization of deferred policy acquisition costs related to operations was
$4.4 million and $2.7 million in the first quarter of 1999 and 1998,
respectively. This increase was primarily the result of growth in the deferred
policy acquisition cost asset due to additional sales of fixed, indexed and
variable annuity products. Variable costs of selling and issuing the Company's
insurance subsidiaries' products (primarily commissions and certain policy
issuance and marketing costs) are deferred and then amortized over the expected
life of the contracts.
14
Amortization of value of insurance in force related to operations was $1.4
million and $1.5 million for the first quarter of 1999 and 1998, respectively.
The decrease in amortization related to operations is attributable to the
decrease in the value of insurance in force asset, excluding the effects of
SFAS No. 115.
The Company recorded non-recurring charges of $3.6 million in the first
quarter of 1998 as part of a retirement package for John Franco, the Company's
former Co-Chairman and Co-Chief Executive Officer.
Other expenses, net, increased to $1.5 million in 1999, from $0.6 million
in 1998. The increase is primarily attributable to higher mortality related
costs in 1999.
Realized investment losses, which are reported net of related amortization of
deferred policy acquisition costs and value of insurance in force, were $0.4
million during the first quarter of 1999 compared to realized investment gains
of $5.2 million during the first quarter of 1998. Such period to period changes
in realized investment gains or losses are a result of the Company's ongoing
management of its fixed maturity securities classified as available-for-sale,
since securities may be sold during both rising and falling interest rate
environments. Such ongoing management of its securities is a significant
component of the Company's asset/liability management strategy. In its attempt
to achieve desired objectives, the Company continually evaluates the prospective
total returns of various asset sectors (security types and industry classes),
and repositions its portfolio by purchasing securities in sectors perceived to
be undervalued and selling securities in sectors perceived to be overvalued or
fairly valued. The Company attempts to accomplish this repositioning with the
objective of increasing the prospective future cash flows from its asset
portfolio relative to its anticipated liability cash outflows, while at the same
time maintaining specified targets for portfolio duration, convexity, liquidity,
and overall credit quality. These targets are set and periodically re-examined
with the objective of ensuring that prospective cash flows from the Company's
asset portfolio will exceed anticipated liability cash outflows under a wide
range of economic and market conditions, including changes in interest rates and
market liquidity. The success of the Company in meeting this objective is not
reflected by changes from period to period in its realized and unrealized
investment gains and losses, which principally result from changes in market
interest rates since the time that securities were initially purchased, and do
not reflect corresponding changes in the economic value of the Company's
liabilities.
Income tax expense was $4.5 million and $5.5 million in the first quarter
of 1999 and 1998, respectively, reflecting effective tax rates of 25.3% and
33.4% as a percentage of pretax income. If the 1998 nonrecurring charge was
added back to pretax income, the effective tax rate for 1998 would have been
27.4%. A tax benefit was not recognized for the charge because a full valuation
allowance was provided on the Company's non-life net operating loss
carryforwards. The effective tax rates of 25.3% for 1999 and 27.4% for 1998 (as
adjusted) are below the federal income tax rate of 35%, primarily as a result of
the recognition of benefits associated with certain deferred tax assets
established in connection with the Company's acquisition of the Integrity
Companies in 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 earning reasonable returns while limiting credit and liquidity
risks. At amortized cost, fixed maturities at March 31, 1999 totaled $6.5
billion, compared with $6.0 billion at December 31, 1998, representing
approximately 93% and 90% of total cash and investments, respectively.
15
The Company's cash and investments as of March 31, 1999 are detailed as
follows:
Amortized Cost
--------------------------
Percent Estimated
(DOLLARS IN MILLIONS) Amount of Total Fair Value
--------------------------------------------------------------------------------------------------------------------
Fixed maturities:
Corporate securities $3,043.7 43.9% $2,878.0
Mortgage-backed securities:
Collateralized mortgage obligations:
Non-agency 1,986.1 28.7 1,927.1
Agency 382.1 5.5 367.1
Agency pass-throughs 18.2 0.3 18.2
Asset-backed securities 573.5 8.3 540.8
U.S. Treasury securities and obligations of U.S. government agencies 402.9 5.8 389.6
Other government securities (primarily foreign) 61.2 0.9 54.8
----------------------------------------
Total fixed maturities 6,467.7 93.4 6,175.6
Equity securities (i.e., non-redeemable preferred stock) 33.6 0.5 33.0
Mortgage loans on real estate 13.7 0.2 13.7
Policy loans 130.8 1.9 130.8
Cash and cash equivalents 279.9 4.0 279.9
----------------------------------------
Total cash and investments $6,925.7 100.0% $6,633.0
----------------------------------------
----------------------------------------
Collateralized mortgage obligations ("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 as in the agency
pass-through structure. The underlying mortgages of agency CMOs are guaranteed
by the U.S. government or U.S. government agencies. At March 31, 1999, of the
Company's non-agency CMO investments (on an amortized cost basis), 78% used
mortgage loans or mortgage loan pools (primarily residential in nature), letters
of credit, agency mortgage pass-through securities, and other types of credit
enhancement as collateral. The remaining 22% of the non-agency CMOs used
commercial mortgage loans as collateral.
The Company manages prepayment exposure on CMO holdings by diversifying not
only within the more stable CMO tranches, but also 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 collateral. Mortgage-backed securities ("MBSs") are subject to risks
associated with prepayments of the underlying collateral pools. Prepayments
cause these securities to have actual maturities different from those projected
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
16
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 had gross
unamortized premiums and unaccreted discounts of MBSs of $14.8 million and $12.7
million, respectively, at March 31, 1999.
Asset-backed securities ("ABS") are securitized bonds which can be backed
by, but not limited to, collateral such as home equity loans, second mortgages,
automobile loans and credit card receivables. At March 31, 1999, home equity
loan collateral represented 35% of the Company's investments in the ABS market.
The typical structure of an ABS provides for favorable yields, high credit
rating and stable prepayments.
Total cash and investments (on an amortized cost basis) were 95% investment
grade or equivalent at both March 31, 1999 and December 31, 1998. 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 and 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 exposure to any one issuer and by closely monitoring the
credit worthiness of such issuers. Additionally, the Company has a diversified
portfolio of dollar denominated bonds issued in the U.S. by foreign governments,
banks and corporations, including a limited exposure to the Asian and Latin
American markets. At March 31, 1999, such foreign securities represented 9% of
the Company's cash and investments (on an amortized cost basis), with Asian and
Latin American securities representing 2.7% of total cash and investments. The
Company's investments in foreign securities were 81% investment grade at March
31, 1999. The Company reduces the risks associated with buying foreign
securities by limiting the exposure to both issuer and country. The Company
closely monitors the creditworthiness of such issuers and the stability of each
country. The Company's investment portfolio has minimal exposure to real estate,
mortgage loans and common equity securities, which represented less than 0.2% of
cash and investments as of March 31, 1999.
The Company analyzes its investment portfolio, including below investment
grade securities, at least quarterly in order to determine if its ability to
realize the carrying value on any investment has been impaired. For fixed
maturity and equity securities, if impairment in value is determined to be other
than temporary (i.e., if it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the security), the
cost basis of the impaired security is written down to fair value, which becomes
the security's new cost basis. The amount of the write-down is included in
earnings as a realized loss. Future events may occur, or additional or updated
information may be received, which may necessitate future write-downs of
17
securities in the Company's portfolio. Significant write-downs in the
carrying value of investments could materially adversely affect the Company's
net income in future periods.
At March 31, 1999, the ratings assigned by the NAIC and comparable S&P
ratings on the Company's fixed maturity portfolio were as follows:
Amortized Cost
-------------------------
NAIC S&P Percent Estimated
Designation Comparable Rating Amount of Total Fair Value
- ---------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
1 AAA, AA, A $3,669.9 56.8% $3,544.2
2 BBB 2,485.3 38.4 2,369.6
3 BB 189.7 2.9 164.6
4 B 118.2 1.8 95.3
5 CCC, CC, C 4.6 0.1 1.9
6 CI, D - - -
--------------------------------------
Total fixed maturities $6,467.7 100.0% $6,175.6
--------------------------------------
--------------------------------------
Pursuant to SFAS No. 115, 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 acquisition cost
amortization and deferred income taxes, are charged or credited directly to
shareholders' equity and classified as accumulated other comprehensive income
from net unrealized gains and losses on available-for-sale securities.
Net unrealized losses on available-for-sale securities totaled $183.0
million (net of $31.9 million of related capitalization of deferred policy
acquisition costs and value of insurance in force and $98.1 million of deferred
income tax benefit) at March 31, 1999, compared to net unrealized losses of
$138.3 million (net of $20.6 million of related capitalization of deferred
policy acquisition costs and value of insurance in force and $74.5 million of
deferred income tax benefit) at December 31, 1998. The unrealized losses on
available-for-sale securities at December 31, 1998 were attributable to
volatility in the bond market during 1998. Economic contractions in Asia, Latin
America and Russia created a "flight to quality," mainly U.S. Treasury
securities, which decreased values in the rest of the bond market as a result of
the widening of yield spreads on bonds (i.e., the yield on an investment above
the yield of a U.S. Treasury security with a similar duration). In addition,
during the fourth quarter of 1998, the liquidity in the bond market diminished
which further depressed bond prices. During the first quarter of 1999, the
overall level of interest rates increased further causing the additional
unrealized losses as of March 31, 1999. Even in this environment the Company
continues to meet overall investment objectives because of its integrated
asset/liability management approach.
18
The change in net unrealized gains and losses on available-for-sale
securities for the three months ended March 31, 1999 decreased reported
shareholders' equity by $44.7 million as compared to a decrease of $158.6
million for the year ended December 31, 1998. This volatility in reported
shareholders' equity occurred as a result of SFAS No. 115, which requires that
available-for-sale securities be carried at fair value while other assets and
all liabilities are carried at historical values. At March 31, 1999 and December
31, 1998, shareholders' equity excluding the effects of SFAS No. 115 was $361.6
million and $348.8 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, adjusting shareholders' equity for
changes in the fair value to 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.
Assets held in the Company's guaranteed separate accounts (on an amortized
cost basis) include $1.27 billion and $1.25 billion of cash and investments at
March 31, 1999 and December 31, 1998, respectively, of which approximately 91%
and 94% were fixed maturities. Total guaranteed separate account cash and
investments were 96% and 97% investment grade at March 31, 1999 and December 31,
1998, respectively. Separate accounts are investment accounts maintained by an
insurer to which funds have been allocated for certain products under provisions
of relevant state law. The investments in each separate account are maintained
separately from those in other separate accounts and from the insurer's general
account.
On March 9, 1999, the Company named BlackRock as the core fixed income
manager for the Company's investment portfolio. BlackRock provides the Company
with investment management services for a broad range of asset classes and
investment strategies.
BlackRock, headquartered in New York City, is majority-owned by PNC Bank
Corp., one of the largest diversified financial services companies in the U.S.
As of December 31, 1998, BlackRock managed $131 billion of assets on behalf of
individual and institutional investors worldwide. As one of the largest
independent managers of insurance assets in the nation, BlackRock has combined
its capital markets capabilities with its sophisticated proprietary investment
technology to customize service on behalf of insurers in the U.S. and abroad.
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 common and preferred stock, operating expenses not absorbed by management
fees charged to its subsidiaries, and corporate development expenditures. The
Company is dependent on dividends from Integrity Life Insurance Company
("Integrity") and management and service fee income from the Company's
subsidiaries to meet ongoing cash needs, including amounts required to pay
dividends on its common and preferred stock.
19
The ability of the Company's insurance subsidiaries to pay dividends and
enter into agreements with affiliates for the payment of services or other fees
is limited by state insurance laws. During the first quarter of 1999, the
Company did not receive dividends from Integrity. The maximum dividend payments
that may be made by Integrity to the Company during 1999 without the prior
approval of the Ohio Insurance Director are $37.8 million. The Company had cash
and investments at the holding company level of $36.4 million at March 31, 1999.
In addition, the Company has a $75.0 million syndicated bank credit facility of
which $37.0 million was available to the Company at March 31, 1999.
To support the operations of its subsidiaries, the Company may from time to
time make capital contributions to its subsidiaries. In April 1999, the Company
made a capital contribution of $2.0 million to 312 Certificate Company, one of
its subsidiaries.
The Company continues to evaluate the level of capital required to support
its business lines. The Company must maintain capital levels that satisfy the
requirements of rating agencies, regulators and others for safety and deposit
protection of customers and risk-adjusted returns for shareholders. If
additional capital becomes necessary the Company will consider various capital
and financing strategies including, but not limited to reinsurance and debt or
equity offerings. There can be no assurance that the Company would be successful
in these efforts.
INSURANCE SUBSIDIARIES OPERATIONS
The primary 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 customer deposits, commissions, operating expenses, and
the purchase of new investments.
The Company develops cash flow projections under a variety of interest rate
scenarios generated 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 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.
During 1998, Integrity entered into total yield swap transactions with two
of its subsidiaries, 312 Certificate Company ("312 CC") and 212 Certificate
Company ("212 CC"). The swap transactions generally provide that Integrity
guarantees certain levels of book yield and asset fair values in 312 CC and 212
CC, and if these levels are not maintained, Integrity would be required to make
payments under the swaps to 312 CC or 212 CC.
In addition, substantially all of the Company's institutional customer
deposits are subject to various investment and other guidelines, including
investment fair value levels, which if not met could require accelerated
withdrawal of the deposits. If this were to occur, the Company might need to
sell securities to fund the withdrawals and depending on interest rates and bond
values a
20
realized loss could be incurred. In addition, the withdrawals would result
in a decrease in assets under management and would have an adverse effect on
future earnings.
During the first quarter of 1999 and 1998, the Company met its liquidity
needs entirely by cash flows from operating activities and principal payments
and redemptions of investments. At March 31, 1999, cash and cash equivalents
totaled $279.9 million compared to $525.3 million at December 31, 1998. The
Company's aim is to manage its cash and cash equivalents position in order 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.
The Company generated cash flows of $92.7 million and $60.2 million from
operating activities during the first quarter of 1999 and 1998, respectively.
These cash flows resulted principally from investment income, less commissions
and operating expenses. Proceeds from sales, maturities and redemptions of
investments generated $0.5 billion and $1.8 billion in cash flows during the
first quarter of 1999 and 1998, respectively, which were offset by purchases of
investments of $0.9 billion and $2.1 billion.
EFFECTS OF INTEREST RATE CHANGES
The Company's retail and institutional spread businesses are subject to
several inherent risks arising from movements in interest rates, especially if
the Company fails to anticipate or respond to such movements. First, interest
rate changes can cause compression of the Company's net spread between interest
earned on investments and interest credited on customer deposits, thereby
adversely affecting the Company's results. Second, if interest rate changes
produce an unanticipated increase in surrenders of the Company's spread-based
products, the Company may be forced to sell investment assets at a loss in order
to fund such surrenders. Finally, changes in interest rates can have significant
effects on the performance of the Company's portfolio of MBSs, including its
CMOs, as a result of changes in the prepayment rate of the loans underlying such
securities.
The Company will experience spread compression when it is unable to
maintain the margin between its investment earnings and its crediting rates.
When interest rates rise, the Company may not be able to replace the assets in
its investment portfolio with sufficient higher-yielding assets to fund higher
crediting rates or to maintain full profit margins without assuming excessive
asset side risk. As a result, the Company may experience either a decrease in
sales and an increase in surrenders where it is able to maintain its spread by
not raising its crediting rates, or spread compression if it is willing or
contractually required to increase its crediting rates. Conversely, when
interest rates fall, the Company would have to reinvest the cash received from
its investments (i.e., interest and payments of principal upon maturity or
redemption) in the lower-yielding instruments then available. If the Company
chose not to or was unable (i.e., due to guaranteed minimum or fixed crediting
rates or limitations on the frequency of crediting-rate resets) to reduce the
crediting rate on its spread-based products or acquire relatively higher-risk
securities yielding higher rates of return, spread compression would occur.
If, as a result of interest rate increases, the Company were unable or
chose not to raise its crediting rates to keep them competitive, the Company
might experience a decrease in sales and
21
increase in surrenders. If the Company lacked sufficient liquidity, the
Company might have to sell investment securities to fund associated surrender
payments. Because the value of such securities would likely have decreased in
response to the increase in interest rates, the Company would realize a loss on
such sales. Although certain of the Company's products contain market value
adjustment features which approximate and transfer such loss to the customer if
the selected time horizon for the fixed return investment is terminated prior to
maturity, there can be no assurance that the Company would be fully insulated
from realizing any losses on sales of its securities. In addition, regardless of
whether the Company realizes an investment loss, surrenders would produce a
decrease in invested assets, with an adverse effect on future earnings
therefrom.
The Company follows asset/liability strategies that are designed to
mitigate the effect of interest rate changes on the Company's profitability.
However, there can be no assurance that management will be successful in
implementing such strategies and achieving adequate investment spreads.
Significant amounts of the Company's customer deposits are held by a relatively
small number of institutions. Such concentrations may impair the ability of the
Company to mitigate the effect of interest rate changes.
YEAR 2000
The Company has undertaken a Year 2000 project that includes all of its
subsidiaries. The Company has completed the assessment phase of the project for
all production applications, hardware (personal computers and servers), system
software, vendors, facilities, and business partners. Although the Company is
still receiving information from a few vendors and business partners and
assessing various logistic concerns with its facilities, the Company's major
production systems are substantially Year 2000 compliant. Where Year 2000
problems were found, the necessary upgrades and repairs have begun and are
scheduled for completion no later than September 30, 1999.
The Company is also conducting certification testing. Certification
testing, which serves to verify that the results of repairs and assessments
have been completed for all mission critical production systems and the few
problems that were discovered have been repaired and re-tested. The Company's
Year 2000 project is well underway and management believes that it will be
Year 2000 compliant by September 30, 1999. However, as a precaution, the
Company is developing a contingency and business resumption plan to address
various logistic concerns with its facilities. The contingency and business
resumption plan is also scheduled for completion no later than September 30,
1999.
Although the Company anticipates no major interruption of business
activities, that will be dependent, in part, upon the activity of third parties.
Even though the Company has assessed and continues to assess third party issues,
it has no direct ability to influence the compliance actions of such parties.
Accordingly, while the Company believes its actions in this regard should have
the effect of reducing Year 2000 risks, it is unable to eliminate them or to
estimate the ultimate effect Year 2000 risks will have on the Company's
operations.
22
The cost of the Company's Year 2000 initiatives has not been and is not
expected to be material to the Company's results of operations or financial
condition.
The estimated date on which the Company believes it will complete its Year
2000 compliance efforts, and the expenses related to the Company's Year 2000
compliance efforts are based upon management's best estimates, which were based
on assumptions of future events, including the availability of certain
resources, third party modification plans and other factors. There can be no
assurance that these results and estimates will be achieved and the actual
results could materially differ from those anticipated.
FORWARD-LOOKING STATEMENTS
Except for historical information, certain matters discussed herein, are
forward-looking statements that involve risks and uncertainties, including
(without limitation) the Company's belief as to its competitive position in the
industry, its strategy and ability to manage asset/liability risk and other
factors affecting its business, including Year 2000 compliance. In particular,
the statements of the Company's belief as to the growth of the long-term savings
and retirement market, the stimulation of future demand for the long-term
savings and retirement products and the statement regarding the level of future
redemptions of institutional spread deposits are forward-looking statements.
Factors that could cause actual results to differ materially from the
forward-looking statements related to the demand for fixed, indexed, and
variable annuity products include, but are not limited to, a change in
population demographics, development of alternative investment products, a
change in economic or competitive conditions, and changes in current federal
income tax and insurance laws and regulations. In addition, there can be no
assurance that (i) the Company has correctly identified and assessed all of the
factors affecting its business; (ii) the publicly available and other
information on which the Company has based its analyses is complete or correct;
(iii) the Company's analyses are correct; or (iv) the Company's strategy, which
is based in part on these analyses, will be successful.
23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently involved in no material legal or administrative
proceedings. The Company's 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 impact to the financial position or results of operations of
the Company or its subsidiaries.
ITEM 5. OTHER INFORMATION
On April 29, 1999, the Board of Directors by unanimous written consent
declared a quarterly dividend of 4 cents with respect to each share of the Class
A common stock and $2.7875 with respect to each share of the Series A preferred
stock. Both dividends are scheduled to be paid on June 15, 1999, to shareholders
of record on May 28, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the first quarter of
1999.
EXHIBITS (ELECTRONIC FILING ONLY)
10.1 Amendment No. 2 to the ARM Financial Group, Inc. 1998 Non-Employee
Director Stock Option Plan (Filed herewith).
10.2 Amendment No. 2 to the ARM Financial Group, Inc. 1997 Equity
Incentive Plan (Filed herewith).
27 Financial Data Schedule.
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 May 12, 1999.
ARM FINANCIAL GROUP, INC.
By: /s/ EDWARD L. ZEMAN
---------------------
Edward L. Zeman
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ BARRY G. WARD
-------------------
Barry G. Ward
Controller
(Principal Accounting Officer)
25