AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 2015
REGISTRATION NO. 333-_______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
MEMBERS LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
IOWA 6311 39-1236386
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
MEMBERS Life Insurance Company
2000 Heritage Way
Waverly, Iowa 50677
(319) 352-4090
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Ross Hansen, Esq.
MEMBERS Life Insurance Company
2000 Heritage Way
Waverly, Iowa 50677
(319) 352-4090
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPY TO:
Stephen E. Roth, Esq.
Thomas E. Bisset, Esq.
Sutherland Asbill & Brennan LLP
700 Sixth Street, NW, Suite 700
Washington, DC 20001
(202) 383-0100
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [X] Smaller reporting company [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH AMOUNT TO BE PROPOSED PROPOSED AMOUNT OF
CLASS OF SECURITIES REGISTERED MAXIMUM OFFERING MAXIMUM REGISTRATION FEE
TO BE REGISTERED PRICE AGGREGATE OFFERING
PER UNIT PRICE
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Single Premium * * $1 billion $116,200.00
Deferred Annuity
Contract
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* The maximum aggregate offering price is estimated solely for the purposes of
determining the registration fee. The amount to be registered and the proposed
maximum offering price per unit are not applicable since these securities are
not issued in predetermined amounts or units.
Pursuant to Rule 415(a)(6) under the Securities Act, the securities registered
pursuant to this Registration Statement include unsold securities previously
registered for sale pursuant to the Registrant's Registration Statement on Form
S-1 (File No. 333-186477), which was filed on February 6, 2013, amended on June
12, 2013 and August 2, 2013 and became effective on August 2, 2013
("Registration Statement No. 1"). Registration Statement No. 1 registered
securities of the Registrant with a maximum aggregate offering price of
$100,000,000 of which approximately $10,611,535 of such securities registered
on Registration Statement No. 1 remain unsold. Pursuant to Rule 415(a)(6) under
the Securities Act, the securities registered pursuant to this Registration
Statement also includes unsold securities previously registered for sale
pursuant to the Registrant's Registration Statement on Form S-1 (File No.
333-192603), which was filed on November 27, 2013, amended on December 20, 2013
and April 4, 2014 and became effective on April 30, 2014 ("Registration
Statement No. 2"). Registration Statement No. 2 registered securities of the
Registrant with a maximum aggregate offering price of $1,000,000,000 of which
approximately $589,388,466 of such securities registered on Registration
Statement No. 2 remain unsold. The unsold securities from Registration
Statement No. 1 and Registration Statement No. 2 (and associated filing fees
paid) are being carried forward to this Registration Statement. Pursuant to Rule
415(a)(6), the offering of unsold securities under the prior Registration
Statements will be deemed terminated as of the date of effectiveness of this
Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
MEMBERS(R) ZONE ANNUITY
ISSUED BY:
MEMBERS LIFE INSURANCE COMPANY
2000 HERITAGE WAY
WAVERLY, IOWA 50677
TELEPHONE NUMBER: 800-798-6600
OFFERED THROUGH: CUNA BROKERAGE SERVICES, INC.
This prospectus describes the MEMBERS(R) Zone Annuity, an individual or joint
owned, single premium deferred index annuity contract (the "Contract") issued by
MEMBERS Life Insurance Company (the "Company", "we", "us", or "our"). The
Contract is designed for individuals, corporations, financial institutions,
trusts, and certain retirement plans that qualify for special federal income tax
treatment, as well as those that do not qualify for such treatment. The Contract
offers you the ability to allocate your monies among two interest crediting
options, accumulate interest earnings under the Contract and receive income
payments. The Contract is not an investment in the stock market or in any
securities index.
You may purchase the Contract with a single Purchase Payment that is at least
$5,000. You may allocate your Purchase Payment among two options - the Secure
Account and the Growth Account (the "Risk Control Accounts"). For each Risk
Control Account, we credit interest based in part on the performance of the S&P
500 Price Index (the "Index") over a one-year period. We hold reserves for Index
Interest Rate Floor and Cap guarantees for amounts allocated to each Risk
Control Account in a separate account (the "Separate Account"). Our general
account assets are also available to meet the guarantees under the Contract as
well as our other general obligations. THE GUARANTEES IN THIS CONTRACT ARE
SUBJECT TO THE COMPANY'S FINANCIAL STRENGTH AND CLAIMS-PAYING ABILITY.
We may offer additional Risk Control Accounts in the future. Not all Risk
Control Accounts may be available in all markets where we offer the Contract.
If you surrender your Contract or take a partial withdrawal during the Initial
Index Period, we will apply a Surrender Charge and a Market Value Adjustment
("MVA") to the amount being surrendered or withdrawn that is in excess of the
free annual withdrawal amount unless you qualify for the Nursing Home or
Hospital waiver or terminal illness waiver, described in the prospectus. See
"fees and charges" on page 21, "market value adjustment" on page 18 and "access
to your money" on page 23. The MVA may be either positive or negative, which
means the MVA may increase or decrease the amount you receive upon surrender or
partial withdrawal.
THERE ARE RISKS ASSOCIATED WITH THE CONTRACT. These risks include liquidity
risks, investment risks, market risks, company risks, and interest rate risks.
Also, Surrender Charges and an MVA may apply for a number of years, so that the
Contract should only be purchased for the long-term. Under some circumstances,
you may receive less than your Purchase Payment under the Contract. In addition,
partial withdrawals and surrenders will be subject to income tax and may be
subject to a 10% Internal Revenue Service ("IRS") penalty tax if taken before
age 59 1/2. Accordingly, you should carefully consider your income and liquidity
needs before purchasing a Contract. Additional information about these risks
appears under "highlights" on page 4, "access to your money" on page 23, and
"federal income tax matters" on page 29.
Please note that you could lose significantly more than 10% of your investment
in the Contract. For example, if you invested $10,000 in the Contract and
allocated your investment to the Growth Account and the Index then declined by
10% or more in each of three consecutive years, your investment in the Contract
at the end of the third year would be equal to $7,290. If you surrendered the
Contract at the end of that third year, you would pay a Surrender Charge equal
to 8% of your investment or $525 which would leave you with $6,765. That amount
would be reduced further if a negative MVA applied. In addition, if you were age
59 1/2 or younger at the time of surrender, a ten percent tax penalty of $677
would apply and would reduce the amount you would have from the Contract to
$6,088. This example, however, does not take into account your ability to
allocate some or all of your initial investment to the Secure Account which has
a floor that protects amounts allocated to that Account
from declines in the Index. The example also does not take into account your
ability to transfer some or all of your investment to the Secure Account after
the first and second year.
We offer the Contract through CUNA Brokerage Services, Inc., which is the
principal underwriter. The principal underwriter is not required to sell any
specific number or dollar amount of Contracts but will use its best efforts to
sell the Contracts. There are no arrangements to place funds in an escrow,
trust, or similar account. This is a continuous offering.
This prospectus provides important information you should know before investing.
Please keep the prospectus for future reference.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
AN INVESTMENT IN THIS CONTRACT IS NOT A BANK DEPOSIT AND IS NOT
INSURED OR GUARANTEED BY ANY BANK OR BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
The date of this prospectus is May 1,2015
TABLE OF CONTENTS
GLOSSARY ..................................................................... 1
HIGHLIGHTS ................................................................... 4
How Your Contract Works .................................................. 4
Contract Charges.......................................................... 6
Change of Annuitant Endorsement Charge.................................... 7
Benefits of Your Contract................................................. 7
Risk Factors ............................................................. 8
Other Important Information You Should Know............................... 9
GETTING STARTED - THE ACCUMULATION PERIOD .................................... 10
Purchasing a Contract .................................................... 10
Tax-Free "Section 1035" Exchanges......................................... 10
Owner .................................................................... 11
Divorce................................................................... 11
Beneficiary .............................................................. 11
Right to Examine ......................................................... 11
ALLOCATING YOUR PURCHASE PAYMENT ............................................. 11
AUTOMATIC REBALANCE PROGRAM .................................................. 12
CONTRACT VALUE................................................................ 12
RISK CONTROL ACCOUNTS ........................................................ 13
MARKET VALUE ADJUSTMENT....................................................... 18
SURRENDER VALUE .............................................................. 21
FEES AND CHARGES ............................................................. 21
Surrender Charge ......................................................... 21
Change of Annuitant Endorsement Charge.................................... 22
Other Information ........................................................ 23
ACCESS TO YOUR MONEY.......................................................... 23
Partial Withdrawals ...................................................... 23
Free annual withdrawal amount. .................................. 23
Waiver of Surrender Charges...................................... 23
o Nursing Home or Hospital Waiver............................. 24
o Terminal Illness Waiver..................................... 24
Surrenders ............................................................... 24
Partial Withdrawal and Surrender Restrictions............................. 24
Right to Defer Payments................................................... 25
Bailout Provision ........................................................ 25
DEATH BENEFIT ................................................................ 25
Death of the Owner........................................................ 25
Death of Annuitant While the Owner is Living ............................. 26
Death Benefit Payment Options ............................................ 26
Death of Owner or Annuitant After the Payout Date......................... 26
Abandoned Property Requirements .......................................... 27
INCOME PAYMENTS - THE PAYOUT PERIOD........................................... 27
Payout Date .............................................................. 27
i
Terms of Income Payments.................................................. 27
INCOME PAYMENT OPTIONS........................................................ 28
Election of an Income Payment Option ..................................... 28
Options................................................................... 28
FEDERAL INCOME TAX MATTERS ................................................... 29
Tax Status of the Contracts .............................................. 29
Taxation of Non-Qualified Contracts ...................................... 29
Taxation of Qualified Contracts .......................................... 31
Federal Estate Taxes, Gift and Generation-Skipping Transfer Taxes......... 32
Medicare Tax ............................................................. 32
Same-Sex Spouses ......................................................... 32
Annuity Purchases By Nonresident Aliens and Foreign Corporations ......... 32
Possible Tax Law Changes ................................................. 33
OTHER INFORMATION ............................................................ 33
Distribution ............................................................. 33
Cyber Security ........................................................... 34
Authority to Change ...................................................... 34
Incontestability ......................................................... 34
Misstatement of Age or Gender............................................. 34
Conformity with Applicable Laws .......................................... 35
Reports to Owners......................................................... 35
Change of Address ........................................................ 35
Inquiries ................................................................ 35
CORPORATE HISTORY OF THE COMPANY ............................................. 35
Financial Information .................................................... 36
Investments............................................................... 36
Reinsurance............................................................... 36
Policy Liability and Accruals ............................................ 36
POTENTIAL RISK FACTORS THAT MAY AFFECT OUR BUSINESS AND OUR FUTURE
RESULTS....................................................................... 37
SELECTED FINANCIAL DATA....................................................... 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ................................................................... 42
Cautionary Statement Regarding Forward-Looking Information ............... 42
Overview ................................................................. 43
Critical Accounting Policies.............................................. 44
Financial Condition ...................................................... 50
MANAGEMENT ................................................................... 55
Directors and Executive Officers ......................................... 55
FINANCIAL STATEMENTS ......................................................... 63
APPENDIX A: EXAMPLES OF THE PARTIAL WITHDRAWALS, FULL SURRENDER, AND THE
MARKET VALUE ADJUSTMENT.......................................................A-1
THE CONTRACT MAY NOT BE AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL ANY CONTRACT AND IT IS NOT SOLICITING AN OFFER TO
BUY ANY CONTRACT IN ANY STATE IN WHICH THE OFFER OR SALE IS NOT PERMITTED. WE DO
NOT AUTHORIZE ANYONE TO PROVIDE ANY INFORMATION OR REPRESENTATIONS REGARDING THE
OFFERING DESCRIBED IN THIS PROSPECTUS OTHER THAN THE INFORMATION AND
REPRESENTATIONS CONTAINED IN THIS PROSPECTUS.
ii
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GLOSSARY
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We have tried to make this prospectus as understandable as possible. However,
in explaining how the Contract works, we have had to use certain terms that have
special meanings. We define these terms below.
ACCUMULATION PERIOD - The Accumulation Period is the period of time that: (a)
begins on the Contract Issue Date as stated on your contract data page; and (b)
continues until the Payout Date, unless the Contract is terminated.
ADJUSTED INDEX VALUE - The Initial Index Value adjusted for the Index Interest
Rate Cap or Index Interest Rate Floor for the current Contract Year.
ADMINISTRATIVE OFFICE - MEMBERS Life Insurance Company, 2000 Heritage Way,
Waverly, Iowa 50677. Phone: 1-800-798-6600.
AGE - Age as of last birthday.
ANNUITANT (JOINT ANNUITANT) - The natural person(s) whose life (or lives)
determines the amount of annuity payments under the Contract.
AUTOMATIC REBALANCE PROGRAM - A program to automatically transfer values between
the Risk Control Accounts to achieve the balance of Contract Value equal to the
allocation percentages you requested. The Automatic Rebalance Program is only in
effect during the Initial Index Period.
BAILOUT PROVISION - If the Index Interest Rate Cap for your Risk Control Account
is set below the bailout rate prominently displayed on your contract data page
attached to the front of the cover page of the Contract, the Bailout Provision
allows you to make a withdrawal of some or all of the Contract Value
attributable to that Risk Control Account without a Surrender Charge and without
any MVA during the Initial Index Period.
BENEFICIARY - The person(s) (or entity) you named to receive proceeds payable
due to the death of the Owner. Before the Payout Date, if no Beneficiary
survives the Owner, we will pay the Death Benefit proceeds to the Owner's
estate.
BUSINESS DAY - Any day both the Company and the New York Stock Exchange are open
for business. The Company is closed on the following holidays: New Year's Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The Company is closed on the day itself if those days fall Monday
through Friday, the day immediately preceding if those days fall on a Saturday,
and the day immediately following if those days fall on a Sunday.
COMPANY - MEMBERS Life Insurance Company; also referred to as "we", "our" and
"us".
CONTINGENT OWNER - A contingent owner assumes control of the Contract and
becomes the new Owner if the original Owner(s) dies before the Annuitant.
CONTRACT - The MEMBERS Zone Annuity, an individual or joint owned, single
premium deferred annuity contract issued by MEMBERS Life Insurance Company.
CONTRACT ANNIVERSARY - The same day and month as the Contract Issue Date for
each year the Contract remains in force.
CONTRACT ISSUE DATE - The date from which Contract Years and Contract
Anniversaries are determined. The Contract Issue Date is shown on your contract
data page.
CONTRACT VALUE - The current value of your annuity as provided under this
Contract during the Accumulation Period. Contract Value will be impacted by the
Credited Index Interest, which may be positive or negative.
CONTRACT YEAR - Any twelve-month period beginning on the Contract Issue Date or
Contract Anniversary and ending one day before the next Contract Anniversary.
CREDITED INDEX INTEREST - The amount of Index Interest credited on each Contract
Anniversary and at time of partial withdrawal, surrender, death and
annuitization. Credited Index Interest may be positive or negative and will
impact Contract Value.
CREDITED INDEX INTEREST RATE - The rate used to determine the index interest to
be applied to Contract Value.
DEATH BENEFIT - The Contract Value adjusted for Credited Index Interest as of
the date death benefits are payable. We do not apply the
1
Surrender Charge or MVA in determining the death benefit payable.
DUE PROOF OF DEATH - Proof of death satisfactory to us. Such proof may consist
of the following if acceptable to us: a) a certified copy of the death record;
b) a certified copy of a court decree reciting a finding of death; c) any other
proof satisfactory to us.
GENERAL ACCOUNT - All of the Company's assets other than the assets in the
Separate Account.
GOOD ORDER - All necessary documents and forms that are complete and in our
possession. To be in "Good Order," an instruction must be sufficiently clear so
that we do not need to exercise any discretion to follow such instructions and
any payment amount must meet our minimum requirements to complete the request.
We reserve the right to change, from time to time, our requirements for what
constitutes Good Order and which documents, forms and payment amounts are
required in order for us to complete your request. We will provide you a written
notice of any change in our requirements for what constitutes "Good Order" at
least 10 days in advance of such change.
HOSPITAL - A facility that is licensed and operated as a Hospital according to
the law of the jurisdiction in which it is located.
INCOME PAYMENT OPTION - An option to receive income payments during the Payout
Period.
INDEX - The S&P 500 Composite Stock Price or any substituted suitable
alternative index. See "addition or Substitution of an Index" for the criteria
we would use to identify a suitable alternative index.
INDEX INTEREST - Interest we calculate that is based in part on the performance
of an Index.
INDEX INTEREST RATE CAP - The maximum index interest rate that we may use to
determine Credited Index Interest. We may change this rate at the beginning of a
Contract Year.
INDEX INTEREST RATE FLOOR - The minimum index interest rate that we may use to
determine the Credited Index Interest. This rate will equal the initial Index
Interest Rate Floor shown on your contract data page and will not change during
the life of your Contract. The Index Interest Rate Floors for the Secure Account
and Growth Account are currently 0% and -10% respectively.
INITIAL INDEX VALUE - The index value as of the beginning of the current
Contract Year.
INITIAL INDEX PERIOD - The period beginning on the Contract Issue Date and
ending on the Initial Index Period Expiration Date. This period coincides with
the Surrender Charge Period. See "fees and charges" for more details.
INITIAL INDEX PERIOD EXPIRATION DATE - The last day of the Initial Index Period
which coincides with the expiration of the Surrender Charge Period.
INTERNAL REVENUE CODE - The Internal Revenue Code of 1986, as amended.
ISSUE DATE - The date on which we issue the Contract. We will only issue the
Contract on the 10th and 25th of each month.
MARKET VALUE ADJUSTMENT ("MVA") - An adjustment that we will make to the amount
you receive if you surrender the Contract or take a partial withdrawal during
the Initial Index Period. The MVA helps offset our costs and risks of owning
fixed income and other investments used to back the guarantees under your
Contract from the Contract Issue Date to the date you surrender the Contract or
take a partial withdrawal. The MVA may be either positive or negative. This
means that the MVA may increase or decrease the amount payable to you upon
surrender or partial withdrawal.
MARKET VALUE ADJUSTMENT INDEX (INDICES) - The index (indices) that we use to
determine the rates of interest used in calculating the MVA.
NON-QUALIFIED CONTRACT - An annuity contract that is independent of any formal
retirement or pension plan.
NURSING HOME - A facility that is licensed and operates as a nursing facility
according to the law of the jurisdiction in which it is located.
OWNER - The person(s) (or entity) who owns this Contract and whose death
determines the Death Benefit. If there are multiple Owners, each Owner will be a
joint Owner of the Contract and all references to Owner will mean joint Owners.
The Owner has all rights, title and interest in this Contract during the
Accumulation Period. The Owner may exercise all rights and options stated in
this Contract, subject to the rights of any irrevocable Beneficiary. The Owner
is also referred to as "you" or "your."
2
PAYEE - The person(s) (or entity) who receives income payments during the Payout
Period while the Annuitant is living. The Payee is the Owner, unless otherwise
designated. A minor cannot be the Payee.
PAYOUT DATE - The date we begin making income payments to the Payee from the
Contract.
PAYOUT PERIOD - The phase the Contract is in once income payments begin.
PURCHASE PAYMENT - The initial payment that we require to issue the Contract. We
do not allow any payments under the Contract after the initial Purchase Payment.
QUALIFIED CONTRACT - An annuity that is part of an individual retirement plan,
pension plan or employer-sponsored retirement program.
RISK CONTROL ACCOUNT - An interest crediting option to which you may allocate
your contract value.
RISK CONTROL ACCOUNT VALUE - The amount of Contract Value allocated to a Risk
Control Account.
SEPARATE ACCOUNT - A separate account that we established within our General
Account and under the laws of Iowa in which we hold reserves for our guarantees
under the Contract. Our other General Account assets are also available to meet
the guarantees under the Contract and our other general obligations. The portion
of the assets of the separate account equal to the reserves and other contract
liabilities with respect to the separate account will not be chargeable with
liabilities arising out of any other business we may conduct. The Separate
Account is not registered under the Investment Company Act of 1940.
SURRENDER CHARGE - The charge we assess when you surrender the Contract or make
a partial withdrawal of Contract Value during the Initial Index Period.
SURRENDER CHARGE PERIOD - The number of Contract Years beginning on the Contract
Issue Date during which we may assess a Surrender Charge and apply an MVA if you
surrender the Contract or take a partial withdrawal. This period coincides with
the Initial Index Period See "fees and charges - Surrender Charge" for more
details.
SURRENDER VALUE - The amount you are entitled to receive under this Contract, in
the event this Contract is terminated during the Accumulation Period. It is
equal to your Contract Value, less any Surrender Charges and adjusted for any
MVA.
UNADJUSTED INDEX VALUE - The closing value of the Index on a date on which we
calculated Index Interest. If the closing value of the Index is not published on
that date, we will use the closing value of the Index from the next day on which
the closing value of the Index is published.
WRITTEN REQUEST - A request in writing and in a form satisfactory to us signed
by the Owner and received at our Administrative Office. A Written Request may
also include a telephone or fax request for specific transactions that you make
under the terms of an executed telephone or fax authorization with original
signature, on file at our Administrative Office.
3
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HIGHLIGHTS
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The following is a "summary" of the key features of the Contract. This summary
does not include all of the information you should consider before purchasing a
Contract. You should carefully read the entire prospectus, which contains more
detailed information concerning the Contract and the Company before making an
investment decision.
HOW YOUR CONTRACT WORKS
Your Contract is an individual or joint owned, single premium deferred annuity
contract. There are two periods to your Contract, an Accumulation Period and a
Payout Period. Your Contract can help you save for retirement because it can
allow your Contract Value to earn interest on a tax-deferred basis and you can
later elect to receive retirement income for life or a period of years. You
generally will not pay taxes on your earnings until you withdraw them.
Note: When you purchase the Contract, you are not buying shares in a securities
index or shares of stock.
During the Accumulation Period of your Contract, you allocate your Contract
Value to the Risk Control Accounts, where interest is credited, if any, each
Contract Year based, in part, on the investment performance of the Index
(currently the S&P 500 Composite Stock Price Index), subject to an Index
Interest Rate Cap and Floor that is unique to each Risk Control Account. The S&P
500 Index is a stock market index based on the market capitalizations of 500
leading companies publicly traded in the U.S. stock market, as determined by
Standard & Poors. The Index can go up or down based on the stock prices of the
500 companies that comprise the Index. The Index does not include dividends paid
on the stocks comprising the Index and therefore does not reflect the full
investment performance of the underlying stocks. We set the Index Interest Rate
Caps at the Contract Issue Date and upon each Contract Anniversary. Credited
Index Interest may be less than zero, depending on the Risk Control Account you
elect. The Accumulation Period begins on the Contract Issue Date and continues
until the Payout Date.
During the Payout Period of your Contract, you can elect to receive income
payments by applying Contract Value to the Income Payment Options offered in
your Contract. The Payout Period begins on the Payout Date and continues while
income payments are paid.
Please call your registered representative or the Company at 1-800-798-6600 if
you have questions about how your Contract works.
PURCHASE PAYMENT
----------------
You may purchase the Contract with a single initial Purchase Payment of $5,000
or more. A Purchase Payment of $1,000,000 or more requires our approval. We do
not allow any payments under the Contract after the initial Purchase Payment.
Multiple Contracts owned by the same individual where the sum of the Purchase
Payments exceed $1,000,000 also require our approval.
ALLOCATION OPTIONS
------------------
There are two Risk Control Accounts, the Secure Account and the Growth Account,
among which you may allocate all or a portion of your Purchase Payment and
Contract Value. Both Risk Control Accounts are available as allocation options
during the Initial Index Period. Under your Contract, you choose the duration of
the Initial Index Period. We currently offer Initial Index Periods with
durations of 5, 7 or 10 years, but may reduce or increase the durations offered
from time to time for new contracts that we issue. After the Initial Index
Period, only the Secure Account will be available as an allocation option under
the Contract. The Growth Account is not available after the Initial Index
Period. For Contracts sold in the state of California, neither Risk Control
Account is available after the Initial Index Period. After the Initial Index
Period, the Owner must select either an Income Payment Option or a lump sum
payment of Contract Value.
4
You may allocate your Purchase Payment to either or both Risk Control Accounts
during the Initial Index Period, subject to the following restrictions. You must
specify the percentage of your Purchase Payment to be allocated to each Risk
Control Account on the Contract Issue Date. The amount you direct to a
particular Risk Control Account must be in whole percentages from 0% to 100% of
the Purchase Payment and your total allocation must equal 100% of the Purchase
Payment. If you do not indicate your allocations on the application, our
Administrative Office will attempt to contact your adviser and/or you for
clarification. We will not issue the Contract without your allocation
instructions.
Please note that at any time the Index Interest Rate Cap for your Risk Control
Account is less than the bailout rate specified on your contract data page, we
may, at our discretion, restrict transfer into that Risk Control Account. (See
"access to your money - Bailout Provision" for more details.)
The Index Interest Rate Floor is the minimum index interest rate that we may use
to determine Credited Index Interest. The Secure Account has an Index Interest
Rate Floor of 0%. Credited Index Interest for any Contract Year can never be
below 0%. This means that any negative investment performance of the Index over
the one-year period used in determining Credited Index Interest would not reduce
your Contract Value at the end of a Contract Year. The Secure Account provides
your Contract Value the most protection from negative investment performance of
the Index.
The Index Interest Rate Cap is the maximum index interest rate that we may use
to determine Credited Index Interest. The Index Interest Rate Cap for the Secure
Account will always be positive and will never be less than the minimum Index
Interest Rate Cap for the Secure Account equal to 1.0%.
On the other hand, the Growth Account has an Index Interest Rate Floor of -10%.
Credited Index Interest for any Contract Year can never be below -10%. This
means that negative investment performance of the Index over the one-year period
used in determining Credited Index Interest could result in negative Credited
Index Interest being credited that would reduce your Contract Value at the end
of the Contract Year. However, any negative Credited Index Interest would not
reduce your Contract Value in a Contract Year by more than 10% regardless of
whether the negative investment performance of the Index over the one-year
period was less than -10%. In return for accepting some risk of loss to your
Contract Value allocated to the Growth Account, the Index Interest Rate Cap
declared for the Growth Account would be higher than the Index Interest Rate Cap
declared for the Secure Account for the same Initial Index Period which allows
the potential for higher positive Credited Index Interest to be applied to your
Contract Value allocated to the Growth Account. The Index Interest Rate Cap for
the Growth Account will always be positive and will never be less than the
minimum Index Interest Rate Cap for the Growth Account equal to 1.0%.
WE RESERVE THE RIGHT TO ADD OR SUBSTITUTE THE INDEX. WE WILL SUBSTITUTE THE
INDEX IF THE INDEX IS DISCONTINUED OR CALCULATION OF THE INDEX IS MATERIALLY
CHANGED. IF WE SUBSTITUTE THE INDEX, THE PERFORMANCE OF THE NEW INDEX MAY DIFFER
FROM THE ORIGINAL INDEX. THIS, IN TURN, MAY AFFECT THE CREDITED INDEX INTEREST
YOU EARN.
RIGHT TO EXAMINE
----------------
The Contract provides for an initial "right to examine" period. The Owner may
reject the Contract for any reason by forwarding the Contract to us with a
Written Request at our Administrative Office within ten days of receiving it, or
such longer period as the state in which your Contract was issued may require.
If you exercise this "Right to Examine", the Contract will terminate and we will
refund your Purchase Payment. Some states may require that we refund the
Contract Value, which reflects interest, positive or negative, based on changes
in the Index. The state in which your Contract is issued will determine which
method we use. If your Contract is an IRA under the Internal Revenue Code, we
will refund your Purchase Payment. Refunds will not be subject to a Surrender
Charge or MVA and will be paid within seven Business days following our receipt
of the Contract.
5
REBALANCING / REALLOCATION
--------------------------
Upon each Contract Anniversary, after Credited Index Interest has been applied,
the Automatic Rebalance Program will reallocate your Contract Value between the
Risk Control Accounts based on your most recent allocation instructions that we
have on file or the allocation applied on the Contract Issue Date if no
additional allocation change requests have been made.
You may change your allocation of Contract Value between Risk Control Accounts
once each Contract Year. Any such change will take effect on the next Contract
Anniversary. Your request to change your allocation instructions must be
received at our Administrative Office at least two Business Days prior to your
Contract Anniversary for the instructions to be effective for that Contract
Anniversary. If we do not receive your Written Request in time for the next
Contract Anniversary, your instructions will be effective the following Contract
Anniversary.
Please note that at any time the Index Interest Rate Cap for your Risk Control
Account is less than the bailout rate specified on your contract data page, we
may, at our discretion, restrict transfers into that Risk Control Account and
may not reallocate your Contract Value between Risk Control Accounts under the
Automatic Rebalance Program. See "access to your money - Bailout Provision" for
more details.
WITHDRAWAL OPTIONS
------------------
The Contract offers the following liquidity features during the Accumulation
Period:
o Free annual withdrawal amount - Each Contract Year, beginning in
Contract Year 2, you may withdraw up to 10% of your Contract Value
determined as of the beginning of the Contract Year free of any
Surrender Charge or MVA. The free annual withdrawal amount may be larger
for certain Qualified Contracts to satisfy minimum distribution
requirements set forth in the Internal Revenue Code.
o Partial withdrawal option - You may take up to two withdrawals
each Contract Year beginning in Contract Year 2 to the beginning of the
Payout Period. We do not allow withdrawals in Contract Year 1. Amounts
withdrawn from your Contract Value in excess of the free annual
withdrawal amount in Contract Year 2 through the end of the Initial
Index Period, will be subject to a Surrender Charge and MVA.
o Full surrender option - You may surrender your Contract at any time
prior to beginning the Payout Period. Upon full surrender, Credited
Index Interest, a Surrender Charge, and an MVA may apply.
MARKET VALUE ADJUSTMENT (MVA)
-----------------------------
For partial withdrawals and upon full surrender of Contract Value in excess of
the free annual withdrawal amount during the Initial Index Period, we will apply
an MVA. The MVA can increase or decrease your amount withdrawn or the Surrender
Value, depending on how economic indicators have changed since your Contract was
issued (see "market value adjustment" section for more details). You may lose a
portion of your principal due to the MVA.
CONTRACT CHARGES
SURRENDER CHARGE
----------------
For partial withdrawals and surrenders during the Initial Index Period, we
deduct a Surrender Charge equal to a percentage of the Contract Value withdrawn
that is in excess of the free annual withdrawal amount (see the "fees and
charges" section for more details). We will deduct the Surrender Charge before
we apply any MVA. For an example of how we calculate the amount you receive when
you make a partial withdrawal during the Initial Index Period, see Examples 1
and 2 in "appendix a" to this prospectus.
6
SURRENDER CHARGE AND MARKET VALUE ADJUSTMENT HARDSHIP WAIVERS
-------------------------------------------------------------
We will not deduct a Surrender Charge or apply an MVA to a partial withdrawal or
surrender made in the case of the following life events:
o Confinement to a Nursing Home or Hospital for at least 180 consecutive
days; or
o Diagnosis of a terminal illness where life expectancy is 12 months or
less.
There are waiting periods and other restrictions that apply to these waivers,
which are discussed in greater detail in the "access to your money" section.
BAILOUT PROVISION
-----------------
We will set a bailout rate for each Risk Control Account. The bailout rate will
be prominently displayed on your contract data page attached to the front of the
cover page of the Contract and will not change during the Initial Index Period.
If the Index Interest Rate Cap for your Risk Control Account is set below the
bailout rate for that Risk Control Account, the Bailout Provision allows you to
make a withdrawal of some or all of the Contract Value attributable to that Risk
Control Account during the Initial Index Period without incurring any Surrender
Charge and without the application of any MVA during the 30-day period following
a Contract Anniversary. However, if you are age 59 1/2 or younger at the time of
such withdrawal, a 10% tax penalty may apply. At any time the Index Interest
Rate Cap for your Risk Control Account is less than the bailout rate specified
on your contract data page, we may, at our discretion, restrict transfers into
that Risk Control Account. See "access to your money - Bailout Provision" for
more details.
CHANGE OF ANNUITANT ENDORSEMENT CHARGE
If you change the Annuitant within the first two Contract Years, we reserve the
right to assess a fee to offset the expenses incurred. This fee will not exceed
$150 and will be assessed on a pro-rata basis proportional to your Contract
Value in the Risk Control Accounts.
INCOME OPTIONS
--------------
You have several income options to choose from during the Payout Period. Income
payments will start on the Payout Date, and continue based on the option you
elect.
DEATH BENEFIT
-------------
The Contract provides a Death Benefit during the Accumulation Period. The Death
Benefit is equal to the Contract Value adjusted for Credited Index Interest as
of the date Death Benefits are payable. We do not apply the Surrender Charge or
MVA in determining the Death Benefit payable.
BENEFITS OF YOUR CONTRACT
Your Contract offers you several benefits.
o TAX DEFERRAL - Your Contract provides for tax-deferred growth. This
may allow your Contract Value to grow faster because you earn interest
on Contract Value that otherwise may have been paid in taxes. Your
Contract Value may earn interest. The interest would compound within the
Contract and the Contract Value you may have otherwise paid in taxes
earns interest. Credited Index Interest earned generally is not taxed
until it is withdrawn. We will apply any Credited Indexed Interest
earned at the time of a partial withdrawal or surrender. You may use the
Contract with certain tax qualified retirement plans, including in Roth
IRA accounts. If your Contract is used with a Roth IRA or other Roth
account in a tax qualified retirement plan, Credited Index Interest may
not be taxed even when distributed. Please note, however, that tax
qualified retirement plans provide their own tax deferral or other tax
benefit; the purchase of this Contract does not provide additional tax
benefits beyond those provided in the qualified plan.
o FREE ANNUAL WITHDRAWALS AFTER FIRST CONTRACT YEAR - You may take a
maximum of two free annual withdrawals from your Contract Value each
Contract Year after the first Contract Year
7
during the Initial Index Period. In each such Contract Year,
you may withdraw up to 10% of Contract Value determined as of the
beginning of the Contract Year without the application of a Surrender
Charge or MVA on those amounts. Note that taxes and other penalties may
apply to free annual withdrawals and withdrawals may be restricted under
certain Qualified Contracts.
o DEATH BENEFIT - Your Contract provides a Death Benefit. Death
Benefit proceeds become payable to the Beneficiary upon our receipt of
Due Proof of Death of the Owner during the Accumulation Period (or the
first Owner to die if there are Joint Owners).
o PROTECTION FROM OUTLIVING YOUR INCOME - Your Contract provides you
with the opportunity to receive income payments during the Payout
Period. Annuitizing your Contract converts your Contract Value into a
stream of income which can be based on your life expectancy. Depending
upon the type of income benefit option you choose, annuitization of your
Contract can provide you with an income stream that you cannot outlive.
RISK FACTORS
Your Contract also has various risks associated with it. We list these risk
factors below, as well as other important information you should know before
purchasing a Contract.
o INDEX INTEREST CREDITING RISK - If the Index declines, it may or may
not reduce your Contract Value in a Risk Control Account. This depends
on the Risk Control Account to which you allocated your Contract Value.
Nevertheless, you always assume the investment risk that no Credited
Index Interest will be added to your Contract Value at the end of a
Contract Year. You also bear the risk that sustained declines in the
Index may result in Credited Index Interest not being credited to your
Accumulated Value for a prolonged period. If your Contract Value is
allocated to the Growth Account, you also assume the risk that we may
credit negative Credited Index Interest. This means that Contract Value
allocated to the Growth Account may decline. In addition, you assume the
risk that the Index Interest Rate Cap, the maximum index interest rate
that we may use to determine Credited Index Interest and which is set
annually, can be reduced to as little as 1.0%.
Please note that in an increasing interest rate environment,
the MVA could reduce the amount received to less than the protection
provided by the Index Interest Rate Floor.
o LIQUIDITY RISK - We designed your Contract to be a long-term
investment that you may use to help save for retirement. Your Contract
is not designed to be a short-term investment. While you are always
permitted to take two partial withdrawals from the Contract each
Contract Year after Contract Year 1 and to surrender the Contract at any
time, a surrender in Contract Year 1 and partial withdrawals and
surrenders in Contract Year 2 through the end of the Initial Index
Period in excess of the free annual withdrawal amount will be subject to
a Surrender Charge and MVA (if applicable). We may defer payments made
under this Contract for up to six months if the insurance regulatory
authority of the state in which we issued the Contract approves such
deferral.
o MARKET RISK - The historical performance of the Index should not
be taken as an indication of the future performance of the Index. While
the trading prices of the underlying stocks comprising the Index will
determine the level of the Index, it is impossible to predict whether
the level of the Index will fall or rise. Trading prices of the
underlying stocks comprising the Index will be influenced by complex and
interrelated economic, financial, regulatory, geographic, judicial,
political and other factors that can affect the capital markets
generally and the equity trading markets on which the underlying common
stocks are traded, and by various circumstances that can influence the
levels of the underlying common stocks in a specific market segment or
the level of a particular underlying stock.
8
o RISK THAT WE MAY ELIMINATE OR SUBSTITUTE AN INDEX - THERE IS NO GUARANTEE
THAT THE INDEX WILL BE AVAILABLE DURING THE ENTIRE TIME YOU OWN YOUR
CONTRACT. WE MAY REPLACE CURRENTLY AVAILABLE INDICES IF THEY ARE
DISCONTINUED OR THERE IS A MATERIAL CHANGE IN THE CALCULATION OF THE INDEX.
IF WE SUBSTITUTE THE INDEX, THE PERFORMANCE OF THE NEW INDEX MAY DIFFER FROM
THE ORIGINAL INDEX. THIS, IN TURN, MAY AFFECT THE CREDITED INDEX INTEREST
YOU EARN AND AFFECT HOW YOU WANT TO ALLOCATE CONTRACT VALUE BETWEEN
AVAILABLE RISK CONTROL ACCOUNTS. WE WILL NOT SUBSTITUTE THE INDEX UNTIL THE
NEW INDEX HAS BEEN APPROVED BY THE INSURANCE DEPARTMENT IN YOUR STATE. IF WE
SUBSTITUTE THE INDEX AND YOU DO NOT WISH TO ALLOCATE YOUR CONTRACT VALUE TO
THE RISK CONTROL ACCOUNTS AVAILABLE UNDER THE CONTRACT, YOU MAY SURRENDER
YOUR CONTRACT, BUT YOU MAY BE SUBJECT TO A SURRENDER CHARGE AND AN MVA,
WHICH MAY RESULT IN A LOSS OF PRINCIPAL AND CREDITED INDEX INTEREST.
We will notify you in your annual report of any addition of an index or
substitution or removal of the Index or otherwise in writing where it is
necessary to provide advance written notification of the change prior to
your Contract Anniversary. See "Addition or Substitution of an Index" for
more details.
Note: When you purchase the Contract, you are not buying shares in a
securities index or shares of stock.
o RISK CONTROL ACCOUNT TRANSFER RESTRICTION - At any time the Index Interest
Rate Cap for your Risk Control Account is less than the bailout rate
specified on your contract data page, we may, at our discretion, restrict
transfers into that Risk Control Account. In that event, you may not be able
to reallocate your Contract Value between the Secure Account and the Growth
Account. See "access to your money - Bailout Provision" for more details.
o CREDITOR AND SOLVENCY RISK - Our General Account assets support the
guarantees under the Contract and are subject to the claims of our
creditors. AS SUCH, THE GUARANTEES UNDER THE CONTRACT ARE SUBJECT TO OUR
FINANCIAL STRENGTH AND CLAIMS-PAYING ABILITY, AND THEREFORE, TO THE RISK
THAT WE MAY DEFAULT ON THOSE GUARANTEES. You need to consider our financial
strength and claims-paying ability in meeting the guarantees under the
Contract. You may obtain information on our financial condition by reviewing
our financial statements included in this prospectus. Additionally,
information concerning our business and operations is set forth in the
section of this prospectus entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
OTHER IMPORTANT INFORMATION YOU SHOULD KNOW
o NO OWNERSHIP RIGHTS - You have no ownership rights in the underlying
stocks comprising the Index. Purchasing the Contract is not equivalent to
investing in the underlying stocks comprising the Index. As the Owner of the
Contract, you will not have any ownership interest or rights in the
underlying stocks comprising the Index, such as voting rights, dividend
payments, or other distributions.
o NO AFFILIATION WITH INDEX OR UNDERLYING STOCKS - We are not affiliated
with the sponsor of the Index or the underlying stocks comprising that
Index. Consequently, the Index and the issuers of the underlying stocks
comprising the Index have no involvement with the Contract.
o POSSIBLE TAX LAW CHANGES - There always is the possibility that the tax
treatment of the Contract could change by legislation or otherwise. We have
the right to modify the Contract in response to legislative changes that
could diminish the favorable tax treatment that Owners receive. You should
consult a tax adviser with respect to legislative developments and their
effect on the Contract.
9
--------------------------------------------------------------------------------
GETTING STARTED - THE ACCUMULATION PERIOD
--------------------------------------------------------------------------------
The Contract is an individual or joint owned, single premium deferred annuity.
We describe your rights in your Contract below. Contracts issued in your state
may provide different features and benefits than those described in this
prospectus. A material difference may include the length of the right to examine
period, the amount of and ability to waive the Surrender Charge, the Payout
Date, or the availability of certain Income Payment Options. In addition,
certain benefit options may not be available in all states. We will include any
such state variations in your Contract. Your registered representative can
provide you with more information about those state variations.
PURCHASING A CONTRACT
We offer the Contract to individuals, certain retirement plans, and other
entities. To purchase a Contract, you and the Annuitant must be no older than
age 85.
We sell the Contract through registered representatives who also are agents of
the Company. To start the purchase process, you must submit an application to
your registered representative. The Purchase Payment must either be paid at the
Company's Administrative Office or delivered to your registered representative.
Your registered representative will then forward your completed application and
Purchase Payment (if applicable) to us. After we receive a completed
application, Purchase Payment, and all other information necessary to process a
purchase order, we will begin the process of issuing the Contract. There may be
delays in our processing of your application because of delays in receipt of
your application from the selling firm or because of delays in determining
whether your Contract is suitable to you. Any such delays will affect when we
issue your Contract.
IMPORTANT: YOU MAY USE THE CONTRACT WITH CERTAIN TAX QUALIFIED RETIREMENT PLANS.
THE CONTRACT INCLUDES ATTRIBUTES SUCH AS TAX DEFERRAL ON ACCUMULATED EARNINGS.
QUALIFIED RETIREMENT PLANS PROVIDE THEIR OWN TAX DEFERRAL BENEFIT; THE PURCHASE
OF THIS CONTRACT DOES NOT PROVIDE ADDITIONAL TAX DEFERRAL BENEFITS BEYOND THOSE
PROVIDED IN THE QUALIFIED RETIREMENT PLAN. ACCORDINGLY, IF YOU ARE PURCHASING
THIS CONTRACT THROUGH A QUALIFIED RETIREMENT PLAN, YOU SHOULD CONSIDER
PURCHASING THE CONTRACT FOR ITS OTHER FEATURES SUCH AS CREDITED INDEX INTEREST
THAT IS LOCKED-IN EACH CONTRACT YEAR, AND OTHER NON-TAX RELATED BENEFITS. PLEASE
CONSULT A TAX ADVISER FOR INFORMATION SPECIFIC TO YOUR CIRCUMSTANCES TO
DETERMINE WHETHER THE CONTRACT IS AN APPROPRIATE INVESTMENT FOR YOU.
If mandated by applicable law, including Federal laws designed to counter
terrorism and prevent money laundering, we may be required to reject your
Purchase Payment. We may also be required to provide additional information
about you or your Contract to government regulators. In addition, we may be
required to block an Owner's Contract and thereby refuse to honor any request
for transfers, partial withdrawals, surrender, income payments, and Death
Benefit payments, until instructions are received from the appropriate
government regulator.
TAX-FREE "SECTION 1035" EXCHANGES
You can generally exchange one annuity contract for another in a "tax-free
exchange" under Section 1035 of the Internal Revenue Code. Before making an
exchange, you should compare both contracts carefully. Remember that if you
exchange another contract for the one described in this prospectus, you might
have to pay a Surrender Charge or negative Market Value Adjustment on the
existing contract. If the exchange does not qualify for Section 1035 tax
treatment, you may have to pay federal income tax, including a possible penalty
tax, on your old contract. There will be a new Surrender Charge Period for this
Contract and other charges may be higher (or lower) and the benefits may be
different. There may be delays in our processing of the exchange. You should not
exchange another contract for this one unless you determine, after knowing all
the facts, that the exchange is in your best interest. In general, the person
selling you this Contract will earn a commission from us.
10
OWNER
Owner means the owner named in the application or any successor if ownership has
been assigned. The Owner names the Annuitant or Joint Annuitants. All rights may
be exercised by the Owner subject to the rights of any other Owner and any
irrevocably named Beneficiary.
Any change in Owner is subject to our acceptance and we reserve the right to
refuse such change on a non-discriminatory basis.
If an Owner who is a natural person dies during the Annuitant's lifetime, the
Beneficiary is entitled to the Death Benefit. The Death Benefit becomes payable
at the death of the Owner (if there are Joint Owners, the Death Benefit will
become payable after the first Joint Owner dies). If an Owner is not a natural
person and the Annuitant dies before the Payout Date, the Death Benefit will be
payable to the Beneficiary. If you have any questions concerning the criteria
you should use when choosing Annuitants under the Contract, consult your
registered representative.
DIVORCE
In the event of divorce, the former spouse must provide a copy of the divorce
decree (or a qualified domestic relations order if it is a qualified plan) to
us. The terms of the decree/order must identify the Contract and specify how the
Contract Value should be allocated among the former spouses.
BENEFICIARY
You name a Beneficiary when you apply for the Contract. At any time before the
Payout Date, you may change the Beneficiary by a Written Request sent to us, or
you may name one or more Beneficiaries. A change of Beneficiary will take effect
on the date the Written Request was signed. If there are multiple Owners, each
Owner must sign the Written Request. In addition, any irrevocable Beneficiary
must sign the Written Request. Any change is subject to payment or other actions
we took before we received the request to change the Beneficiary at our
Administrative Office.
Before the Payout Date, if no Beneficiary survives the Owner, we will pay the
Death Benefit proceeds to the Owner's estate (if Joint Owners, the surviving
Owner will receive the Death Benefit proceeds).
Use care when naming Beneficiaries. If you have any questions concerning the
criteria you should use when choosing Beneficiaries, consult your registered
representative.
RIGHT TO EXAMINE
You may cancel your Contract and return it to your registered representative or
to us within a certain number of days after you receive the Contract and receive
a refund of either the Purchase Payment you paid or your Contract Value
depending upon the state in which your Contract was issued. However, if your
Contract is an IRA under the Internal Revenue Code, we will refund your Purchase
Payment. Generally, you must return your Contract within 10 days of receipt,
but some states may permit a longer period for you to return your Contract.
--------------------------------------------------------------------------------
ALLOCATING YOUR PURCHASE PAYMENT
--------------------------------------------------------------------------------
PURCHASE PAYMENT
The minimum initial Purchase Payment for a Non-Qualified or Qualified Contract
is $5,000. Our approval is required for a Purchase Payment of $1,000,000 or
more. We do not allow any payments under the Contract after the initial Purchase
Payment.
11
PURCHASE PAYMENT ALLOCATION
You must specify the percentage of your Purchase Payment to be allocated to each
Risk Control Account on the Contract Issue Date. The amount you direct to a
particular Risk Control Account must be in whole percentages from 1% to 100% of
the Purchase Payment and your total allocation must equal 100% of the Purchase
Payment. You may allocate your Purchase Payment to either or both Risk Control
Accounts.
We will only issue the Contract on the 10th and 25th of each month (an "Issue
Date"). If we receive your Purchase Payment and all necessary paperwork to
process your Contract before the Issue Date, we will deposit your Purchase
Payment in our General Account. We then will transfer your Purchase Payment,
based on the allocation you specified, to the Risk Control Accounts on the
Contract Issue Date. Your Purchase Payment will begin to earn Index Interest, if
any, only after it has been allocated to a Risk Control Account(s).
--------------------------------------------------------------------------------
AUTOMATIC REBALANCE PROGRAM
--------------------------------------------------------------------------------
Each Contract Anniversary, during the Initial Index Period, we will
automatically rebalance your Contract Value among the Risk Control Accounts
based on your most recent allocation instructions that we have on file, or the
allocation applied on the Contract Issue Date if you have not made any
additional allocation change requests. This means, for example, that if your
allocation instructions require that 50% of your Contract Value be allocated to
the Secure Account and 50% of your Contract Value be allocated to the Growth
Account, we will transfer your Contract Values between those Accounts on the
Contract Anniversary so that 50% of your Contract Value has been allocated to
both the Secure Account and Growth Account following the transfer.
You may change your allocation of Contract Value between the Risk Control
Accounts once each Contract Year. Any new allocation change request will
supersede any prior allocation change requests you made. There are no limits on
the number of requests that you can make. However, your latest instructions will
take effect on the next Contract Anniversary. Your request must be received at
our Administrative Office at least two Business Days prior to your Contract
Anniversary for the new instructions to be effective for that Contract
Anniversary. If we do not receive your Written Request in time for the next
Contract Anniversary, your instructions will be effective on the following
Contract Anniversary.
Please note that at any time the Index Interest Rate Cap for your Risk Control
Account is less than the bailout rate specified on your contract data page, we
may, at our discretion, restrict transfers into that Risk Control Account and
may not reallocate your Contract Value between Risk Control Accounts under the
Automatic Rebalance Program. (See "access to your money - Bailout Provision" for
more details.)
--------------------------------------------------------------------------------
CONTRACT VALUE
--------------------------------------------------------------------------------
On the Contract Issue Date, your Contract Value equals the Purchase Payment.
Each Risk Control Account is established by an allocation of a portion or all of
your Purchase Payment to that Account. After the Contract Issue Date, during
the Accumulation Period, your Contract Value will equal the sum of the Risk
Control Account Values.
12
--------------------------------------------------------------------------------
RISK CONTROL ACCOUNTS
--------------------------------------------------------------------------------
You may allocate your Purchase Payment to one or both of the two Risk Control
Accounts we currently make available, the Secure Account and the Growth Account.
We hold reserves for the Index Interest Rate Floor and Cap guarantees for
amounts allocated to the Risk Control Accounts in the Separate Account. Our
General Account assets are also available to meet the guarantees under the
Contract as well as our other general obligations. The guarantees in this
Contract are subject to the Company's financial strength and claims-paying
ability.
We will apply Credited Index Interest to your Contract Value allocated to a Risk
Control Account on a Contract Anniversary based on the percentage change in the
Index during the Contract Year just completed, subject to the interest rate
calculation methodology, Index Interest Rate Cap, and Index Interest Rate Floor.
In the case of a partial withdrawal, surrender, annuitization or death of the
Owner that occurs during a Contract Year on a date other than a Contract
Anniversary, we will apply Credited Index Interest to your Contract Value
allocated to a Risk Control Account based on the percentage change in the Index
from the beginning of the Contract Year to the date of the partial withdrawal,
surrender, annuitization or death, as applicable, subject to the interest rate
calculation methodology, Index Interest Rate Cap and Index Interest Rate Floor.
Please note that the Index does not include dividends paid on the stocks
comprising the Index, and therefore does not reflect the full investment
performance of the underlying stocks.
WE RESERVE THE RIGHT TO ADD OR SUBSTITUTE THE INDEX. IF WE SUBSTITUTE THE INDEX,
THE PERFORMANCE OF THE NEW INDEX MAY DIFFER FROM THE ORIGINAL INDEX. THIS, IN
TURN, MAY AFFECT THE CREDITED INDEX INTEREST YOU EARN.
In the unlikely event that we substitute the Index, we will attempt to add a
suitable alternative index as a replacement to the Index on the same day that we
remove the Index. If we are unable to do so, so that there is a brief interval
between the date on which we remove the Index and add a suitable alternative
index as a replacement, your Contract Value will continue to be allocated to the
Risk Control Accounts. However, any Credited Index Interest we may credit your
Contract Value for that Contract Year will not reflect changes in the value of
the Index or the replacement index during that interim period. If you take a
partial withdrawal, surrender or annuitize the Contract, or die during the
interim period, we will apply Credited Index Interest to your Contract Value
allocated to a Risk Control Accounts based on the percentage change in the Index
from the beginning of the Contract Year to the date on which the Index became
unavailable under the Contract, subject to the interest rate calculation
methodology, Index Interest Rate Cap and Index Interest Rate Floor.
After the Initial Index Period, only the Secure Account will be available for
the allocation of your Contract Value.
Your Contract Value allocated to a Risk Control Account ("Risk Control Account
Value") equals:
o Your Risk Control Account Value as of the last Contract Anniversary;
PLUS
o Any Credited Index Interest applied to Risk Control Account Value
during the current Contract Year; MINUS
o Gross Withdrawals from your Risk Control Account Value (the sum of all
partial withdrawals taken since the last Contract Anniversary, which
includes all Surrender Charges and adjusted for any MVA).
Your Risk Control Account Value as of the last Contract Anniversary equals your
Risk Control Account Value at the beginning of the current Contract Year.
13
INTEREST RATE CALCULATION METHODOLOGY. Each Risk Control Account uses an annual
point-to-point interest rate calculation methodology to determine the amount of
Credited Index Interest. Under the annual point-to-point method, the Credited
Index Interest, if any, is measured based on the percentage change in the Index
over a Contract Year, a one year period. Credited Index Interest is subject to
an:
o Index Interest Rate Cap, which is the maximum rate that we will use in
the calculation of Credited Index Interest; and
o Index Interest Rate Floor, which is the minimum interest rate that we
will use in the calculation of Credited Index Interest.
CREDITED INDEX INTEREST. We use Credited Index Interest to calculate Contract
Value. We calculate Credited Index Interest on each Contract Anniversary and at
the time of partial withdrawal, surrender, death and annuitization. Credited
Index Interest is based on two factors: the Credited Index Interest Rate and
your Risk Control Account Value. Specifically, Credited Index Interest equals
the Credited Index Interest Rate multiplied by your Risk Control Account Value
as of the last Contract Anniversary. Examples of how the Credited Index
Interest Rate and Credited Index Interest are calculated are set forth on pages
16 and 17 of the prospectus.
The Credited Index Interest Rate for a Risk Control Account equals:
(A/B) - 1 where:
A = the Adjusted Index Value as of the current date; and
B = the later of the Adjusted Index Value as of the last partial withdrawal
taken in the current Contract Year. If no partial withdrawals have been taken in
the current Contract Year, this will be equal to the Initial Index Value.
YOU CAN FIND THE CREDITED INDEX INTEREST APPLIED TO YOUR CONTRACT VALUE ON THE
ANNUAL STATEMENT THAT WE WILL FORWARD TO YOU FOLLOWING YOUR CONTRACT
ANNIVERSARY. YOU MAY ALSO FIND THE CREDITED INDEX INTEREST THAT HAS ACCRUED TO
YOUR CONTRACT VALUE PRIOR TO A CONTRACT ANNIVERSARY BY CALLING THE CUSTOMER
SERVICE CENTER TOLL-FREE TELEPHONE NUMBER (800.798.6600) OR BY VIEWING ON-LINE
AT http://eservice.cunamutual.com.
ADJUSTED INDEX VALUE. The Adjusted Index Value depends on the Unadjusted Index
Value (or the last Adjusted Index Value in the case where one or more partial
withdrawals are made in a Contract Year). The Adjusted Index Value is
calculated each time Credited Index Interest is calculated. This can be as
frequently as daily and occurs on each Contract Anniversary or on any date when
a partial withdrawal, surrender, Death Benefit or annuitization is processed.
Unadjusted Index Value for a day on which we calculate Index Interest is the
closing value of the Index on that date. If the closing value of the Index is
not published on that date, we will use the closing value of the Index from the
next day on which the closing value of the Index is published if you made no
partial withdrawals during a Contract Year, we would calculate the Adjusted
Index Value as follows:
If the Unadjusted Index Value is greater than the Initial Index Value multiplied
by (1 + Index Interest Rate Cap), then the Adjusted Index Value will equal the
Initial Index Value multiplied by (1 + Index Interest Rate Cap).
If the Unadjusted Index Value is less than the Initial Index Value multiplied by
(1 + Index Interest Floor), then the Adjusted Index Value will equal the Initial
Index Value multiplied by (1 + Index Interest Rate Floor).
If the Unadjusted Index Value is less than the Initial Index Value multiplied by
(1 + Index Interest Rate Cap) but more than the Initial Index Value multiplied
by (1 + Index Interest Rate Floor), then the Adjusted Index Value will equal the
Unadjusted Index Value.
14
For example, assume the following:
o Initial Index Value = 1,000
o Index Interest Rate Cap = 15%
o Index Interest Rate Floor = -10%
At the time Credited Index Interest is calculated, the Adjusted Index Value will
be:
o Scenario 1: Unadjusted Index Value = 1,200
o 1,200 is greater than 1,150 (1,000 x (1 + 0.15)) so the Adjusted
Index Value is equal to 1,150.
o Scenario 2: Unadjusted Index Value = 850
o 850 is less than 900 (1,000 x (1 - 0.10)) so the Adjusted Index
Value is equal to 900.
o Scenario 3: Unadjusted Index Value = 1,100
o 1,100 is less than 1,150 (1,000 x (1 + 0.15)) and greater than
900 (1,000 x (1 - 0.10)) so the Adjusted Index Value is equal to
1,100.
The Adjusted Index Value will never exceed the Initial Index Value multiplied by
(1 + Index Interest Rate Cap) and will never be lower than the Initial Index
Value multiplied by (1 + Index Interest Rate Floor).
SETTING THE INDEX INTEREST RATE CAP AND THE INDEX INTEREST RATE FLOOR. We
consider various factors in determining the Index Interest Rate Caps and Index
Interest Rate Floors, including investment returns available at the time that we
issue the Contract, the costs of our risk management techniques, sales
commissions, administrative expenses, regulatory and tax requirements, general
economic trends, and competitive factors. We determine the Index Interest Rate
Cap and the Index Interest Rate Floor at our sole discretion. We set the Index
Interest Rate Cap at the beginning of each Contract Year and guarantee the Index
Interest Rate Cap for the duration of the Contract Year. We guarantee the Index
Interest Rate Floor for the life of your Contract.
SECURE ACCOUNT
--------------
If you choose to allocate all or a portion of your Purchase Payment or Contract
Value to the Secure Account, we will determine Credited Index Interest based on
the percentage change in the value of the Index from the Initial Index Value to
the Contract Anniversary (or date of partial withdrawal, surrender,
annuitization, or date of death of the Owner), subject to an Index Interest Rate
Cap and an Index Interest Rate Floor.
INDEX INTEREST RATE CAP FOR THE SECURE ACCOUNT. The Index Interest Rate Cap is
the maximum rate that we will use in the calculation of Credited Index Interest.
The initial Index Interest Rate Cap is shown on your contract data page. On the
first Contract Anniversary and on any subsequent Contract Anniversary, we will
declare an Index Interest Rate Cap which we guarantee for the next Contract
Year. We will forward advance written notice to you of the Index Interest Rate
Cap at least fifteen days prior to the start of that Contract Year. The notice
will also describe your right to transfer Contract Value between the Secure
Account and the Growth Account and your right to exercise the Bailout Provision,
if applicable. The Index Interest Rate Cap for the Secure Account will always
be positive and will never be less than the minimum Index Interest Rate Cap for
the Secure Account equal to 1.0%.
INDEX INTEREST RATE FLOOR FOR THE SECURE ACCOUNT. The Index Interest Rate Floor
for the Secure Account is zero. As a result, Credited Index Interest will never
be less than zero and your Contract Value in the Secure Account will never be
reduced by the application of Credited Index Interest.
15
GROWTH ACCOUNT
--------------
If you choose to allocate all or a portion of your Purchase Payment or Contract
Value to the Growth Account, we will determine Credited Index Interest based on
the percentage change in the value of the Index from the Initial Index Value to
the Contract Anniversary (or date of partial withdrawal, surrender,
annuitization, or date of death of the Owner), subject to an Index Interest Rate
Cap and an Index Interest Rate Floor. The Growth Account is not available after
the Initial Index Period Expiration Date.
INDEX INTEREST RATE CAP FOR THE GROWTH ACCOUNT. The Index Interest Rate Cap
is the maximum rate that we will use in the calculation of Credited Index
Interest. The initial Index Interest Rate Cap is shown on your contract data
page. On the first Contract Anniversary and on any subsequent Contract
Anniversary, we will declare an Index Interest Rate Cap which we guarantee for
the next Contract Year. We will forward advance written notice to you of the
Index Interest Rate Cap at least fifteen days prior to the start of that
Contract Year. The notice will also describe your right to transfer Contract
Value between the Secure Account and the Growth Account and your right to
exercise the Bailout Provision, if applicable. The Index Interest Rate Cap for
the Growth Account will always be positive and will never be less than the
minimum Index Interest Rate Cap for the Growth Account equal to 1.0%.
INDEX INTEREST RATE FLOOR FOR THE GROWTH ACCOUNT. The Index Interest Rate
Floor for the Growth Account is -10%. This means that your Credited Index
Interest could be negative, but it will never be less than -10% regardless of
whether the investment performance of the Index during the Contract Year is less
than -10%. If the Credited Index Interest is negative, your Contract Value in
the Growth Account would be reduced by the application of such negative Credited
Index Interest.
The following three examples illustrate how we credit Index Interest to the
Secure and Growth Accounts based on different levels of index performance. No
withdrawals are assumed to occur under these examples.
Example 1: This example illustrates the calculation of Credited Index
Interest when Index performance is greater than the Index Interest Rate Cap and
the Index Interest Rate Floor.
Assume the following information:
Prior Contract Anniversary: 9/30/2013
Initial Index Value: 1,000
Secure Account Value: $75,000
Index Interest Rate Floor: 0.00%
Index Interest Rate Cap: 4.00%
Growth Account Value: $25,000
Index Interest Rate Floor: -10.00%
Index Interest Rate Cap: 14.00%
-----------------------------------------------------
Contract Anniversary: 9/30/2014
Unadjusted Index Value: 1,200
The return on the Index is equal to the Unadjusted Index Value divided by the
Initial Index Value minus 1. In this example, the return on the Index is 20%
[(1.200/1.000)-1]. This is greater than the Index Interest Rate Cap and above
the Index Interest Rate Floor for both the Secure and Growth Accounts. Thus,
Index Interest for both Accounts is set at the cap level. Contract Value
allocated to the Secure Account is credited with 4% Index Interest and Contract
Value allocated to the Growth Account is credited with 14% Index Interest.
16
Example 2: This example illustrates the calculation of Credited Index
Interest when Index performance is less than the Index Interest Rate Cap and
greater than the Index Interest Rate Floor.
Assume the following information:
Prior Contract Anniversary: 9/30/2013
Initial Index Value: 1,000
Secure Account Value: $75,000
Index Interest Rate Floor: 0.00%
Index Interest Rate Cap: 4.00%
Growth Account Value: $25,000
Index Interest Rate Floor: -10.00%
Index Interest Rate Cap: 14.00%
-----------------------------------------------------
Contract Anniversary: 9/30/2014
Unadjusted Index Value: 1,030
The return on the Index is equal to the Unadjusted Index Value divided by the
Initial Index Value minus 1. In this example, the return on the Index is 3%
[(1.030/1.000)-1]. This is below the Index Interest Rate Cap and above the Index
Interest Rate Floor for both the Secure and Growth Accounts. Thus, Index
Interest for both accounts is equal to the return on the Index. Contract Value
allocated to the Secure Account is credited with 3% Index Interest and Contract
Value allocated to the Growth Account is credited with 3% Index Interest.
Example 3: This example illustrates the calculation of Credited Index
Interest when Index performance is less than the Index Interest Rate Floor.
Assume the following information:
Prior Contract Anniversary: 9/30/2013
Initial Index Value: 1,000
Secure Account Value: $75,000
Index Interest Rate Floor: 0.00%
Index Interest Rate Cap: 4.00%
Growth Account Value: $25,000
Index Interest Rate Floor: -10.00%
Index Interest Rate Cap: 14.00%
-----------------------------------------------------
Contract Anniversary: 9/30/2014
Unadjusted Index Value: 800
The return on the Index is equal to the Unadjusted Index Value divided by the
Initial Index Value minus 1. In this example, the return on the Index is -20%
[(800/1.000)-1]. This is below the Index Interest Rate Floor for both the Secure
and Growth Accounts. Thus, Index Interest for both Accounts is equal to the
Index interest Rate Floor for each Risk Control Account. Contract Value
allocated to the Secure Account is credited with 0% Index Interest and Contract
Value allocated to the Growth Account is credited with - 10% Index Interest.
This results in negative Credited Index Interest of -$2,500 being applied to the
Contract Value in the Growth Account and thus is a decline in the Contract Value
allocated to the Growth Account of $2,500. No Credited Index Interest would be
applied to Contract Value in the Secure Account and thus the Contract Value in
the Secure Account remains unchanged.
The Company retains the right to change the current Index Interest Rate Cap for
both the Secure and Growth Accounts at its discretion, subject to the minimum
Index Interest Rate Cap of 1.0%. The Company would consider the following
factors when determining whether to make such a change:
17
o significant changes in derivative, equity and/or fixed income instrument
valuations;
o increases in hedging costs that have a material impact on the Company's
ability to offer the Contract;
o derivative market changes that materially impact availability and
structure of hedging instruments;
o significant negative fixed income instrument default experience realized
by the Company;
o meaningful changes in Company and/or Contract cost structure due to
regulatory or other business management concerns; and
o material unanticipated Owner experience.
ADDITION OR SUBSTITUTION OF AN INDEX. There is no guarantee that the Index will
be available during the entire time you own your Contract. If: (i) the Index is
discontinued, or (ii) the calculation of an Index is changed substantially, we
may substitute a suitable similar broad based U.S. stock market index for the
original Index. If we substitute an index, the performance of the new Index may
differ from the original Index. This, in turn, may affect the Credited Index
Interest you earn. We will not substitute an index until that index has been
approved by the insurance department in your state. The selection criteria for a
suitable alternative Index includes the following:
o A sufficiently large market in exchange traded and/or over-the-counter
options, futures and similar derivative instruments based on the index
to allow the company to hedge Credited Index Interest Rates;
o The Index should be recognized as a broad based index that tracks the
U.S. stock market if it is replacing an index such as the S&P 500 Index;
and
o The publisher of the index must allow the Company to use the index in
contract and other materials for a reasonable fee.
Please note that we may add or substitute an Index associated with the Risk
Control Accounts by sending you written notice at your last known address
stating the effective date on which the Index will be added or substituted. We
will send you the notice in the annual report unless earlier written notice is
necessary.
--------------------------------------------------------------------------------
MARKET VALUE ADJUSTMENT ("MVA")
--------------------------------------------------------------------------------
If you surrender your Contract or take a partial withdrawal in excess of the
free annual withdrawal amount during the Initial Index Period, we will apply the
MVA to the amount being surrendered or withdrawn in excess of the free annual
withdrawal amount. No MVA will apply after the end of the Initial Index Period.
NOTE: THE MVA WILL EITHER INCREASE OR DECREASE THE AMOUNT YOU RECEIVE FROM A
PARTIAL WITHDRAWAL OR YOUR SURRENDER VALUE. YOU MAY LOSE A PORTION OF
YOUR PRINCIPAL DUE TO THE MVA REGARDLESS OF THE RISK CONTROL ACCOUNT TO
WHICH YOU ALLOCATED CONTRACT VALUE. YOU DIRECTLY BEAR THE INVESTMENT
RISK ASSOCIATED WITH AN MVA. YOU SHOULD CAREFULLY CONSIDER YOUR INCOME
NEEDS BEFORE PURCHASING THE CONTRACT.
PURPOSE OF THE MVA
The MVA is an adjustment that may be made to the amount you receive in excess of
the free annual withdrawal amount if you surrender the Contract during the
Initial Index Period or take a partial withdrawal in excess of the free annual
withdrawal amount during the Initial Index Period. In general, if interest rate
levels have increased at the time of surrender or partial withdrawal over their
levels at the time we issued the Contract, the MVA will be negative. Similarly,
in general, if interest rate levels have decreased at the time of surrender or
partial withdrawal over their levels at the time we issued the Contract, the MVA
will be positive. The MVA reflects in part the difference between the effective
yield of the Constant Maturity Treasury rate, a rate representing the average
yield of various Treasury securities, on the Contract Issue Date for a duration
equal to the Initial Index Period and the effective yield of the Constant
Maturity
18
Treasury rate for a duration equal to the remaining length of the Initial Index
Period at the time of surrender or partial withdrawal. In addition, the MVA
reflects in part the difference between the effective yield of the BofA Merrill
Lynch 1-10 Year US Corporate Constrained Index, Asset Swap Spread, a rate
representative of investment grade corporate debt credit spreads in the U.S., on
the Contract Issue Date and the effective yield of the BofA Merrill Lynch 1-10
Year US Corporate Constrained Index, Asset Swap Spread at the time of surrender
or partial withdrawal. The greater the difference in those effective yields,
respectively, the greater the effect the MVA will have. We will increase the
amount you will be paid from a partial withdrawal by the amount of any positive
MVA, and in the case of a surrender of the Contract, we will increase your
Surrender Value by the amount of any positive MVA. Conversely, we will decrease
the amount you will be paid from a partial withdrawal by the amount of any
negative MVA, and in the case of a surrender of the Contract, we will decrease
your Surrender Value by the amount of any negative MVA.
In general, if the Constant Maturity Treasury rate and BofA Merrill Lynch 1-10
Year US Corporate Constrained Index Asset Swap Spread have increased at the time
of surrender or partial withdrawal over their levels at the time we issued the
Contract, the MVA will be negative and will decrease the Surrender Value or
amount you receive from a partial withdrawal. Similarly, if the Constant
Maturity Treasury rate and BofA Merrill Lynch 1-10 Year US Corporate Constrained
Index, Asset Swap Spread have decreased at the time of surrender or partial
withdrawal over their levels at the time we issued the Contract, the MVA will be
positive and will increase the Surrender Value or amount you receive from a
partial withdrawal. The Company uses both the Constant Maturity Treasury rate
and BofA Merrill Lynch 1-10 Year US Corporate Constrained Index Asset Swap
Spread in determining any MVA since together both indices represent a broad mix
of investments whose values may be affected by changes in market interest rates.
The amount of the MVA also reflects in part the Credited Index Interest Rate
determined at the time of surrender or partial withdrawal. We use the Credited
Index Interest Rate to either decrease or increase the amount of the MVA. If the
Credited Index Interest Rate is positive, we divide the amount of the withdrawal
subject to the MVA by the Credited Index Interest Rate plus 1 which will
decrease the amount subject to the market value adjustment factor and therefore
reduce the amount of any positive or negative MVA. Conversely, if the Credited
Index Interest Rate is negative, we divide the amount of the withdrawal subject
to the MVA by the Credited Index Interest Rate plus 1 which will increase the
amount subject to the market value adjustment factor and therefore increase the
amount of any positive or negative MVA. If the Credited Index Interest Rate is
0%, we divide the amount of the withdrawal subject to the MVA by the Credited
Index Interest Rate plus 1 which will not change the amount subject to the
market value adjustment factor and therefore will not change the amount of any
positive or negative MVA. If the Index has increased since the date on which we
determined the Initial Index Value for the Current Contract Year, the Credited
Index Interest Rate will be positive. If the Index has decreased since the date
on which we determined the Initial Index Value for the Current Contract Year,
the Credited Index Interest Rate will be negative.
The MVA helps us offset our costs and risks of owning fixed income investments
and other investments we use to back the guarantees under your Contract from the
date we issue the Contract to the time of a surrender or partial withdrawal.
19
APPLICATION AND WAIVER
For each Risk Control Account, we will calculate the MVA as of the date we
receive your Written Request for surrender or partial withdrawal in Good Order
at our Administrative Office. If the MVA is positive, we will increase your
Surrender Value or amount you receive from a partial withdrawal by the amount of
the positive MVA. If the MVA is negative, we will decrease the Surrender Value
or amount you receive from a partial withdrawal by the amount of the negative
MVA.
We will NOT apply an MVA to:
1. free annual withdrawal amounts;
2. Death Benefit proceeds;
3. partial withdrawals that qualify for the Nursing Home or Hospital
waiver or terminal illness waiver, described in this prospectus;
4. withdrawals under the Bailout Provision;
5. partial withdrawals taken as required minimum distributions under the
Internal Revenue Code;
6. partial withdrawals or a surrender after the Initial Index Period; and
7. income payments during the Payout Period.
MVA FORMULA
An MVA is equal to the amount of the partial withdrawal or surrender in
excess of the free annual withdrawal amount (W) divided by 1 plus the
Credited Index Interest Rate (IIR*) then multiplied by the market value
adjustment factor (MVAF) minus 1 or (W/(1+IIR*))x(MVAF -1).
Where:
IIR* = Credited Index Interest Rate equal to (A/B) - 1 where:
A = The Adjusted Index Value; and
B = The Initial Index Value for the current Contract Year.
MVAF = ((1 + I + K)/(1 + J + L)) ^N where:
I = The Constant Maturity Treasury rate for a maturity
consistent with the Initial Index Period (shown on your
contract data page);
J = The Constant Maturity Treasury rate for a maturity
consistent with the remaining length of the Initial Index
Period;
(If there is no corresponding maturity of Constant
Maturity Treasury rate then the linear interpolation of
the Index with maturities closest to N will be used to
determine I and J.)
K = The BofA Merrill Lynch 1-10 Year US Corporate
Constrained Index, Asset Swap Spread as of the Contract
Issue Date (shown on your contract data page);
L = The BofA Merrill Lynch 1-10 Year US Corporate
Constrained Index, Asset Swap Spread as of the withdrawal
date; and
N = The number of years (whole and partial) from the
current date until the end of the Initial Index Period.
We determine I based on the Initial Index Period you have chosen. For example,
if you choose the 10-year Initial Index Period at issue, then I would
correspond to the 10-year Constant Maturity Treasury rate at the time we issue
the Contract. We determine J when you take a partial withdrawal or surrender.
For example, if you chose the 10-year Initial Index Period at issue and
surrender the Contract 2 years into the Initial Index Period, J would correspond
to the Constant Maturity Treasury rate consistent with the time remaining in the
Initial Index Period or 8 years (8 = 10 - 2). For I and J where there is no
Constant
20
Maturity Treasury rate declared, we will use linear interpolation between
declared Constant Maturity rates to determine I and J.
The value of K and L on any Business Day will be equal to the closing value of
the BofA Merrill Lynch 1-10 Year US Corporate Constrained Index, Asset Swap
Spread on the previous Business Day.
If the publication of any component of the Market Value Adjustment Indices is
discontinued or if the calculation of the Market Value Adjustment Indices is
changed substantially, we may substitute a new index for the discontinued or
substantially changed index, subject to approval by the insurance department in
your state. Before we substitute an index, we will notify you in writing of the
substitution.
For examples of how we calculate MVAs, see "appendix a" to this prospectus.
--------------------------------------------------------------------------------
SURRENDER VALUE
--------------------------------------------------------------------------------
If you surrender the Contract, you will receive the Surrender Value. The
Surrender Value is equal to your Contract Value, less any Surrender Charges
(described under the "fees and charges" section below), and adjusted for any
MVA.
--------------------------------------------------------------------------------
FEES AND CHARGES
--------------------------------------------------------------------------------
We assess the following fees and charges under the Contract.
SURRENDER CHARGE
If you surrender the Contract during the Accumulation Period or make a partial
withdrawal of your Contract Value during the Initial Index Period, we may assess
a Surrender Charge. Surrender Charges offset promotion, distribution expenses,
and investment risks born by the Company.
The amount of the Surrender Charge depends on the Initial Index Period that you
have chosen, the length of time you have owned your Contract, and the amount you
withdraw. The Surrender Charge amount is computed as a percentage of the amount
withdrawn in excess of the free annual withdrawal amount. The Surrender Charge
rates are as follows:
5-YEAR, 7- YEAR, AND 10-YEAR INITIAL INDEX PERIODS
----------------------------------------------------------------------------
IF YOU CHOOSE THE IF YOU CHOOSE THE IF YOU CHOOSE THE
5-YEAR PERIOD: 7-YEAR PERIOD: 10-YEAR PERIOD:
----------------------------------------------------------------------------
1 9% 1 9% 1 9%
----------------------------------------------------------------------------
2 9% 2 9% 2 9%
----------------------------------------------------------------------------
3 8% 3 8% 3 8%
----------------------------------------------------------------------------
4 7% 4 7% 4 7%
----------------------------------------------------------------------------
5 6% 5 6% 5 6%
----------------------------------------------------------------------------
6+ 0% 6 5% 6 5%
----------------------------------------------------------------------------
7 4% 7 4%
----------------------------------------------------------------------------
8+ 0% 8 3%
----------------------------------------------------------------------------
9 2%
----------------------------------------------------------------------------
10 1%
----------------------------------------------------------------------------
11+ 0%
----------------------------------------------------------------------------
IT IS IMPORTANT TO NOTE THAT WE ONLY ASSESS THE SURRENDER CHARGE AND APPLY AN
MVA DURING THE INITIAL INDEX PERIOD. THEREFORE, WHEN CHOOSING YOUR INITIAL INDEX
PERIOD, YOU SHOULD CAREFULLY CONSIDER THE LENGTH OF TIME YOU WOULD LIKE TO BE
SUBJECT TO THE SURRENDER CHARGE AND MVA. FOR MORE INFORMATION ON THE MVA, SEE
"MARKET VALUE ADJUSTMENT."
21
An Initial Index Period should be chosen based on an Owner's specific
investment, liquidity and retirement planning needs. For example, if you would
like the potential to earn the highest positive Credited Index Interest under
the Contract for as long as possible and do not foresee the need to make
withdrawals from the Contract, you may want to consider the 10-Year Initial
Index Period and allocate Contract Value to the Growth Account. In general, the
Index Interest Rate Cap for either the Secure Account or the Growth Account
increases with the duration of the Initial Index Period. In addition, in
general, the Index Interest Rate Cap for the Growth Account will exceed the
Index Interest Rate Cap for the Secure Account for the same Initial Index
Period. Also, it is important to keep in mind that the Growth Account is only
available during the Initial Index Period.
Conversely, if you would like the potential to earn positive Credited Index
Interest but also want to preserve your Contract Value and foresee the need to
make withdrawals in six or more years, you may want to consider the 5-Year
Initial Index Period and allocate Contract Value to the Secure Account.
We will deduct the Surrender Charge from your withdrawal proceeds. We will
deduct the Surrender Charge before we apply any MVA to your withdrawal proceeds.
For an example of how we calculate the amount you receive when you make a
partial withdrawal during the Initial Index Period, see Examples 1 and 2 in
"appendix a" to this prospectus.
We will not assess the Surrender Charge on:
o free annual withdrawal amounts;
o Death Benefit proceeds;
o partial withdrawals that qualify for the Nursing Home or Hospital
waiver or terminal illness waiver, described in this prospectus;
o withdrawals under the Bailout Provision;
o partial withdrawals taken as required minimum distributions under
the Internal Revenue Code;
o partial withdrawals or a surrender after the Initial Index
Period; and
o income payments during the Payout Period.
After the first Contract Anniversary and during the Initial Index Period, we
will provide you with a free annual withdrawal amount each year. We also may
waive the Surrender Charge in certain circumstances. For information on free
annual withdrawals and Surrender Charge waivers, see "access to your money."
CHANGE OF ANNUITANT ENDORSEMENT CHARGE
If you change the Annuitant within the first two Contract Years, we reserve the
right to assess a fee to offset the expenses incurred. This fee will not exceed
$150 and will be assessed on a pro-rata basis proportional to your Contract
Value in the Risk Control Accounts.
22
OTHER INFORMATION
We assume investment risks and costs in providing the guarantees under the
Contract. These investment risks include the risks we assume in providing the
floors to the Index Interest credited to the Risk Control Accounts, the
surrender rights available under the Contract, the Death Benefit and the income
benefits. We must provide the rates and benefits set forth in your Contract
regardless of how our General Account investments that support the guarantees we
provide perform. To help manage our investment risks, we engage in certain risk
management techniques. There are costs associated with those risk management
techniques. You do not directly pay the costs associated with our risk
management techniques. However, we take those costs into account when we set
rates and guarantees under your Contract.
--------------------------------------------------------------------------------
ACCESS TO YOUR MONEY
--------------------------------------------------------------------------------
PARTIAL WITHDRAWALS
At any time after the first Contract Anniversary and before the Payout Date you
may make two partial withdrawals each Contract Year. To make a partial
withdrawal, you must submit a Written Request in Good Order to our
Administrative Office. The written consent of all Owners and irrevocable
Beneficiaries must be obtained before we will process the partial withdrawal.
Your partial withdrawal request must specify the amount that is to be withdrawn
either as a total dollar amount or as a percentage of Contract Value. If a
Written Request in Good Order is received by 3:00 Central Standard Time, it will
be processed that day. If a Written Request in Good Order is received after 3:00
Central Standard Time, it will be processed on the next Business Day. We will
take the partial withdrawal pro-rata from your Contract Value in the Risk
Control Accounts based on your Contract Value as of the date we received your
Written Request in Good Order at our Administrative Office.
Partial withdrawals taken during the Initial Index Period may be subject to
Surrender Charges and an MVA. (see "fees and charges" and "Market Value
Adjustment"). Partial withdrawals may also be subject to income tax and, if
taken before age 59 1/2, an additional 10% federal penalty tax. You should
consult your tax adviser before taking a partial withdrawal. See "federal income
tax matters."
FREE ANNUAL WITHDRAWAL AMOUNT. After the first Contract Anniversary, we will
provide you with a free annual withdrawal amount each year during the Initial
Index Period. As long as the partial withdrawals you take during a Contract Year
do not exceed the free annual withdrawal amount, we will not assess a Surrender
Charge or apply an MVA.
The free annual withdrawal amount for a Contract Year equals 10% of your
Contract Value calculated as of the start of the Contract Year. If you make a
partial withdrawal of less than the free annual amount, the remaining free
annual withdrawal amount will be applied to any subsequent partial withdrawal
which occurs during the same Contract Year. Any remaining free annual withdrawal
amount will not carry over to a subsequent Contract Year.
If a partial withdrawal would cause your Surrender Value to be less than $2,000,
we will treat your request for partial withdrawal as a request for full
surrender of your Contract.
WAIVER OF SURRENDER CHARGES. We will not deduct a Surrender Charge or apply an
MVA in the case of a partial withdrawal or surrender where the Owner or
Annuitant qualifies for the Nursing Home or Hospital waiver or terminal illness
waiver, as described below. Before granting the waiver, we may request a second
opinion or examination of the Owner or Annuitant by one of our examiners. We
will bear the cost of such second opinion or examination. You may exercise this
waiver only once during the time you own the Contract.
23
o NURSING HOME OR HOSPITAL WAIVER. We will not deduct a Surrender Charge
or apply an MVA in the case of a partial withdrawal or surrender where
any Owner or Annuitant is confined to a licensed Nursing Home or
Hospital, and has been confined to such Nursing Home or Hospital for at
least 180 consecutive days after the latter of the Contract Issue Date
or the date of change of Owner or Annuitant. We may require
verification of confinement to the Nursing Home or Hospital.
The conditions that must be met are that:
o the confinement in a Nursing Home or Hospital is recommended by a
Physician who is duly licensed by the state to treat the injury
or sickness causing the confinement and who is not an employee of
the Nursing Home or Hospital where any Annuitant or Owner is
confined; and
o an additional free annual withdrawal amount request, accompanied
by written proof of confinement and the Physician's
recommendation, is received by us no later than 90 days following
the date that the qualifying confinement has ended.
o TERMINAL ILLNESS WAIVER. We will not deduct a Surrender Charge or apply
an MVA in the case of a partial withdrawal or surrender where any Owner
or Annuitant is diagnosed with a terminal illness and has a life
expectancy of 12 months or less. As proof, we may require a
determination of the terminal illness. Such determination must be
signed by the physician making the determination after the latter of
Contract Issue Date or the date of change of the Owner or Annuitant.
The physician may not be a member of your or the Annuitant's immediate
family.
Please see your Contract for more information.
The laws of your state may limit the availability of the Surrender Charge
waivers and may also change certain terms and/or benefits under the waivers. You
should consult your Contract for further details on these variations. Also, even
if you do not pay a Surrender Charge because of the waivers, you still may be
required to pay taxes or tax penalties on the amount withdrawn. You should
consult a tax adviser to determine the effect of a partial withdrawal on your
taxes.
NOTE: We do not pro-rate Credited Index Interest, the Index Interest Rate Floor
or the Index Interest Rate Cap in the event of the death of the Owner during or
after the Initial Index Period.
SURRENDERS
At any time before the Payout Date and before the death of the Owner, you may
surrender your Contract for the Surrender Value described above in "surrender
value." If a Written Request in Good Order is received by 3:00 Central Standard
Time, it will be processed that day. If a Written Request in Good Order is
received after 3:00 Central Standard Time, it will be processed on the next
Business Day.
To surrender your Contract, you must make a Written Request in Good Order to our
Administrative Office. The consent of all Owners and irrevocable Beneficiaries
must be obtained before the Contract is surrendered.
Surrender Charges and a MVA may apply to your Contract surrender. See "market
value adjustment" and "fees and charges." A surrender may also be subject to
income tax and, if taken before age 59 1/2, an additional 10% federal penalty
tax. You should consult a tax adviser before requesting a surrender. See
"federal income tax matters."
PARTIAL WITHDRAWAL AND SURRENDER RESTRICTIONS
Your right to make partial withdrawals and surrender the Contract is subject to
any restrictions imposed by any applicable law or employee benefit plan.
24
RIGHT TO DEFER PAYMENTS
We may defer payments we make under this Contract for up to six months if the
insurance regulatory authority of the state in which we issued the Contract
approves such deferral. We will apply interest to the deferred payments, if
required by state law.
We do not pro-rate Credited Index Interest, the Index Interest Rate Floor or the
Index Interest Rate Cap.
BAILOUT PROVISION
We will set a bailout rate for each Risk Control Account. The bailout rate will
be prominently displayed on your contract data page attached to the front of the
cover page of the Contract and will not change during the Initial Index Period.
The Bailout Provision allows you to make a withdrawal of the Contract Value
attributable to a Risk Control Account without incurring any Surrender Charge
and without the application of any MVA. Specifically, if the Index Interest Rate
Cap for your Risk Control Account is set below the bailout rate for that Risk
Control Account, the Bailout Provision allows you to make a withdrawal of some
or all of the Contract Value attributable to that Risk Control Account during
the Initial Index Period without incurring any Surrender Charge and without the
application of any MVA during the 30-day period following the Contract
Anniversary. We must receive your Written Request for a withdrawal of Contract
Value under the Bailout Provision in Good Order during the 30-day period
following the Contract Anniversary. With respect to such withdrawal, your
Contract Value will be reduced by the amount of the withdrawal. At any time the
Index Interest Rate Cap for your Risk Control Account is less than the bailout
rate specified on your contract data page, we may, at our discretion, restrict
transfer into that Risk Control Account.
WITHDRAWALS TAKEN UNDER THE BAILOUT PROVISION MAY HAVE TAX CONSEQUENCES. The tax
treatment of a withdrawal under the Bailout Provision depends on whether the
Contract is a Non-Qualified Contract or a Qualified Contract. Generally, for a
withdrawal from a Non-Qualified Contract, the amount received will be treated as
ordinary income subject to tax up to an amount equal to the excess (if any) of
the Contract Value immediately before the distribution over the Owner's
investment in the Contract. If the Contract is a Qualified Contract, a portion
of the withdrawal is taxable as ordinary income, based on the ratio of the
"investment in the contract" to the individual's total account balance or
accrued benefit under the retirement plan. If taken prior to age 59 1/2, a
withdrawal from either a Non-Qualified or a Qualified Contract may be subject to
an additional 10% federal tax penalty. See discussion of "Withdrawals" and
"Penalty Tax on Certain Withdrawals" under "Federal Income Tax Matters."
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DEATH BENEFIT
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DEATH OF THE OWNER
If the Owner dies before the Payout Date (if there are joint Owners, the Death
Benefit will become payable after the first joint Owner dies), a Death Benefit
will become payable to the Beneficiary. We will pay the Death Benefit after we
receive the following at our Administrative Office in a form and manner
satisfactory to us:
o Due Proof of Death of the Owner while the Contract is in force;
o our claim form from each Beneficiary, properly completed; and
o any other documents we require.
The Death Benefit will equal your Contract Value adjusted for the application of
any Credited Index Interest on the date we receive Due Proof of Death. If we
receive Due Proof of Death by 3:00 Central Standard Time, we will determine the
amount of the Death Benefit as of that day. If we receive Due Proof
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of Death after 3:00 Central Standard Time, we will determine the amount of the
Death Benefit as of the next Business Day.
No Surrender Charges or MVA will apply to the Death Benefit. NOTE: We do not
pro-rate Credited Index Interest, the Index Interest Rate Floor or the Index
Interest Rate Cap in the event of the death of the Contract Owner during or
after the Initial Index Period.
Within 60 days after we receive Due Proof of Death, the Beneficiary must elect
the payment method for the Death Benefit. Those options are described below. We
will pay the Death Benefit in a manner that complies with the requirements of
Section 72(s) or 401(a)(9) of the Internal Revenue Code, as applicable.
DEATH OF ANNUITANT WHILE THE OWNER IS LIVING
If the Annuitant dies during the Accumulation Period while the Owner is living
and no joint Annuitant has been named, the Owner will become the Annuitant,
until and unless we receive notice. If there are joint Annuitants, when an
Annuitant dies, the surviving joint Annuitant will become the sole Annuitant.
If the Owner is not a natural person and the last surviving Annuitant dies
before the Payout Date, the Death Benefit will be payable to the Beneficiary.
DEATH BENEFIT PAYMENT OPTIONS
The following rules apply to the payment of the Death Benefit under a
Non-Qualified Contract:
o SPOUSES - If the sole Beneficiary is the surviving spouse of the
deceased Owner, then he or she may choose to continue the Contract
and become the new Owner. At the death of the surviving spouse, this
provision may not be used again, even if that surviving spouse
remarries. In that case, the rules for non-spouses will apply. A
surviving spouse may also elect to receive the Death Benefit proceeds
in a lump sum, apply the proceeds to an Income Payment Option, or
receive the Death Benefit proceeds within five years of the date of
the Owner's death.
o NON-SPOUSES - If the Beneficiary is not the surviving spouse of the
deceased Owner, then this Contract cannot be continued. Instead, upon
the death of any Owner, the Beneficiary must choose one of the
following:
o Receive the Death Benefit in one lump sum following our receipt
of Due Proof of Death;
o Receive the Death Benefit (if the Beneficiary is a natural
person) pursuant to one of the Income Payment Options. Payments
under an Income Payment Option must begin within 1 year of the
Owner's death and must not extend beyond a period certain equal
to the Beneficiary's life expectancy; or
o Receive the Death Benefit within five years of the date of the
Owner's death.
Upon receipt of Due Proof of Death, the Beneficiary must instruct us how to
treat the proceeds subject to the distribution rules discussed above. Other
minimum distribution rules apply to Qualified Contracts.
DEATH OF OWNER OR ANNUITANT AFTER THE PAYOUT DATE
If an Annuitant dies during the Payout Period, remaining income payments, if
any, will be distributed as provided by the Income Payment Option in effect.
If an Owner dies after the start of income payout, any remaining income payments
will be distributed at least as rapidly as provided by the Income Payment Option
in effect.
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ABANDONED PROPERTY REQUIREMENTS
Every state has unclaimed property laws which generally declare annuity
contracts to be abandoned after a period of inactivity of three to five years
from the date the Death Benefit is due and payable. For example, if the payment
of a Death Benefit has been triggered, but, if after a thorough search, we are
still unable to locate the Beneficiary, or the Beneficiary does not come forward
to claim the Death Benefit in a timely manner, the Death Benefit will be paid to
the abandoned property division or unclaimed property office of the state in
which the Beneficiary or you last resided, as shown on our books and records, or
to our state of domicile. The "escheatment" is revocable, however, and the state
is obligated to pay the Death Benefit (without interest) if your Beneficiary
steps forward to claim it with the proper documentation. To prevent such
escheatment, it is important that you update your Beneficiary designations,
including addresses, if and as they change. To make such changes, please contact
us by writing to us or calling us at our Administrative Office.
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INCOME PAYMENTS - THE PAYOUT PERIOD
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PAYOUT DATE
When you purchase the Contract, we will set the Payout Date as the Contract
Anniversary following the Annuitant's 95th birthday. If there are Joint
Annuitants, we will set the Payout Date based on the age of the oldest Joint
Annuitant. For Contracts sold in the state of California, the Payout Date begins
30 days after the expiration of the Initial Index Period. Please refer to the
data page of your Contract for details.
You may change the Payout Date by sending a Written Request in Good Order to our
Administrative Office provided: (i) the request is made while an Owner is
living; (ii) the request is received at our Administrative Office at least 30
days before the anticipated Payout Date; and (iii) the requested Payout Date is
at least two years after the Contract Issue Date. Any such change is subject to
any maximum maturity age restrictions that may be imposed by law and cannot
extend past the Annuitant's 95th birthday or the original Payout Date.
TERMS OF INCOME PAYMENTS
We use fixed rates of interest to determine the amount of income payments
payable under the Income Payment Options. Income payments will vary; however,
depending on the number of Annuitants living on the Payout Date. Once income
payments begin, you cannot change the terms or method of those payments. We do
not apply a Surrender Charge or MVA to income payments.
If there is one Annuitant living on the Payout Date, we will apply your Contract
Value to provide for a Life Income Option with a 10-Year Guaranteed Period
Certain, unless you have elected an Income Payment Option before the Payout Date
or we are otherwise required under the Internal Revenue Code. If there are two
Annuitants living on the Payout Date, we will apply your Contract Value to a
Joint and Last Survivor Life Income Option with a 10-Year Guaranteed Period
Certain unless you have elected an Income Payment Option before the Payout Date
or we are otherwise required by the Internal Revenue Code. We describe the Life
Income Option and the Joint and Last Survivor Life Income Option under "income
payment options" below.
We will make the first income payment on the Payout Date. We may require proof
of age and sex of the Annuitant/Joint Annuitants before making the first income
payment. To receive income payments, the Annuitant/Joint Annuitant must be
living on the Payout Date and on the date that each subsequent payment is due as
required by the terms of the Income Payment Option. We may require proof from
time to time that this condition has been met.
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INCOME PAYMENT OPTIONS
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ELECTION OF AN INCOME PAYMENT OPTION
You and/or the Beneficiary may elect to receive one of the Income Payment
Options described under "Options" below. The Income Payment Option and
distribution, however, must satisfy the applicable distribution requirements of
Section 72(s) or 401(a)(9) of the Internal Revenue Code, as applicable.
The election of an Income Payment Option must be made by Written Request. The
election is irrevocable after the payments commence. The Payee may not assign or
transfer any future payments under any option.
The amount applied under each option must be at least $2,500, or the amount
required to provide an initial monthly income payment of $20.
We will make income payments monthly, quarterly, semiannually, or annually. We
will also furnish the amount of such payments on request. Payments that are less
than $20 will only be made annually.
If you do not specify an Income Payment Option in your application, the default
payment option will be Option 2 - Life Income Option with a 10-year guaranteed
period. You may change this payment option any time before payments begin on the
Payout Date.
OPTIONS
We offer the following Income Payment Options.
OPTION 1 -- INSTALLMENT OPTION. We will pay monthly income payments for a chosen
number of years, not less than 10, nor more than 30. If the Annuitant dies
before income payments have been made for the chosen number of years: (a) income
payments will be continued for the remainder of the period to the Payee; or (b)
the present value of the remaining income payments, computed at the interest
rate used to create the Option 1 rates, will be paid to the Payee or to the
Owner, if there is no surviving Payee. For purposes of the present value
calculation guaranteed rates will be used.
OPTION 2 -- LIFE INCOME OPTION -- GUARANTEED PERIOD CERTAIN. We will pay monthly
income payments for as long as the Annuitant lives. If the Annuitant dies before
all the income payments have been made for the guaranteed period certain: (a)
income payments will be continued for the remainder of the guaranteed period to
the Payee; or (b) the present value of the remaining income payments, computed
at the interest rate used to create the Option 2 rates, will be paid to the
Payee or to the Owner, if there is no surviving Payee. For purposes of the
present value calculation guaranteed rates will be used. The guaranteed periods
are 0 (life income only), 5, 10, 15, or 20 years.
OPTION 3 -- JOINT AND LAST SURVIVOR LIFE INCOME OPTION -- Guaranteed Period
Certain. We will pay monthly income payments for as long as either of the
Annuitants lives. If at the death of the second surviving Annuitant, income
payments have been made for less than 10 years: (a) income payments will be
continued for the remainder of the guaranteed period certain to the Payee; or
(b) the present value of the remaining income payments, computed at the interest
rate used to create the Option 3 rates, will be paid to the Payee or to the
Owner, if there is no surviving Payee. For purposes of the present value
calculation guaranteed rates will be used.
The options described above may not be offered in all states. Further, we may
offer other Income Payment Options. More than one option may be elected. If your
Contract is a Qualified Contract, not all options may satisfy required minimum
distribution rules. Consult a tax advisor. Option 2 and Option 3 pay monthly
income payments. We do allow partial annuitization.
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FEDERAL INCOME TAX MATTERS
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The following discussion is general in nature and is not intended as tax advice.
Each person concerned should consult a competent tax adviser. No attempt is made
to consider any applicable state or other income tax laws, any state and local
estate or inheritance tax, or other tax consequences of ownership or receipt of
distributions under a Contract.
When you invest in an annuity contract, you usually do not pay taxes on your
investment gains until you withdraw the money--generally for retirement
purposes. If you invest in an annuity as part of an individual retirement plan,
pension plan or employer-sponsored retirement program, your contract is called a
Qualified Contract. If your annuity is independent of any formal retirement or
pension plan, it is termed a Non-Qualified Contract. The tax rules applicable to
Qualified Contracts vary according to the type of retirement plan and the terms
and conditions of the plan. See "Non-Natural Person" below for a discussion of
Non-Qualified Contracts owned by persons such as corporations and trusts that
are not natural persons.
TAX STATUS OF THE CONTRACTS
Tax law imposes several requirements that annuities must satisfy in order to
receive the tax treatment normally accorded to annuity contracts.
REQUIRED DISTRIBUTIONS. In order to be treated as an annuity contract for
Federal income tax purposes, Section 72(s) of the Internal Revenue Code requires
any Non-Qualified Contract to contain certain provisions specifying how your
interest in the Contract will be distributed in the event of the death of an
Owner of the Contract. Specifically, section 72(s) requires that (a) if any
Owner dies on or after the annuity starting date, but prior to the time the
entire interest in the contract has been distributed, the entire interest in the
contract will be distributed at least as rapidly as under the method of
distribution being used as of the date of such Owner's death; and (b) if any
Owner dies prior to the annuity starting date, the entire interest in the
Contract will be distributed within five years after the date of such Owner's
death.
The Non-Qualified Contracts contain provisions that are intended to comply with
these Internal Revenue Code requirements, although no regulations interpreting
these requirements have yet been issued. We intend to review such provisions and
modify them if necessary to assure that they comply with the applicable
requirements when such requirements are clarified by regulation or otherwise.
Other rules may apply to Qualified Contracts.
TAXATION OF NON-QUALIFIED CONTRACTS
NON-NATURAL PERSON. If a non-natural person (e.g., a corporation or a trust)
owns a Non-Qualified Contract, the taxpayer generally must include in income any
increase in the excess of the account value over the investment in the Contract
(generally, the Purchase Payment or other consideration paid for the contract)
during the taxable year. There are some exceptions to this rule and a
prospective Owner that is not a natural person should discuss these with a tax
adviser.
The following discussion generally applies to Contracts owned by natural
persons.
WITHDRAWALS. When a withdrawal from a Non-Qualified Contract occurs, the amount
received will be treated as ordinary income subject to tax up to an amount equal
to the excess (if any) of the Contract Value, without adjustment for any
applicable Surrender Charge, immediately before the distribution over the
Owner's investment in the Contract (generally, the Purchase Payments or other
consideration paid for the Contract, reduced by any amount previously
distributed from the Contract that was not subject to tax) at that time. The
Contract Value immediately before a withdrawal may have to be increased by any
positive MVA that results from a withdrawal. There is, however, no definitive
guidance on the proper tax treatment of MVAs and you may want to discuss the
potential tax consequences of an MVA with your tax
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adviser. In the case of a surrender under a Non-Qualified Contract, the amount
received generally will be taxable only to the extent it exceeds the Owner's
investment in the Contract.
In the case of a withdrawal under a Qualified Contract, a ratable portion of the
amount received is taxable, generally based on the ratio of the "investment in
the contract" to the individual's total account balance or accrued benefit under
the retirement plan. The "investment in the contract" generally equals the
amount of any non-deductible Purchase Payment paid by or on behalf of any
individual. In many cases, the "investment in the contract" under a Qualified
Contract can be zero.
PENALTY TAX ON CERTAIN WITHDRAWALS. In the case of a distribution from a
Non-Qualified Contract, there may be an imposed federal tax penalty equal to ten
percent of the amount treated as income. In general, however, there is no
penalty on distributions if they are:
o made on or after the taxpayer reaches age 59 1/2;
o made on or after the death of an Owner;
o attributable to the taxpayer's becoming disabled; or
o made as part of a series of substantially equal periodic
payments for the life (or life expectancy) of the taxpayer.
Other exceptions may be applicable under certain circumstances and special rules
may be applicable in connection with the exceptions enumerated above. Exceptions
may apply to distributions from a Qualified Contract. You should consult a
qualified tax adviser.
INCOME PAYMENTS. Although tax consequences may vary depending on the payout
option elected under an annuity contract, a portion of each income payment is
generally not taxed and the remainder is taxed as ordinary income. The
non-taxable portion of an income payment is generally determined in a manner
that is designed to allow you to recover your investment in the contract ratably
on a tax-free basis over the expected stream of income payments, as determined
when income payments start. Once your investment in the contract has been fully
recovered, however, the full amount of each income payment is subject to tax as
ordinary income.
PARTIAL ANNUITIZATION. Under a new tax provision enacted in 2010, if part of an
annuity contract's value is applied to an annuity option that provides payments
for one or more lives or for a period of at least ten years, those payments may
be taxed as annuity payments instead of withdrawals. The payment options under
the Contract are intended to qualify for this "partial annuitization" treatment.
TAXATION OF DEATH BENEFIT PROCEEDS. Amounts may be distributed from a Contract
because of your death or the death of the Annuitant. Generally, such amounts are
includible in the income of the recipient as follows: (i) if distributed in a
lump sum, they are taxed in the same manner as surrender of the Contract, or
(ii) if distributed under a payout option, they are taxed in the same way as
income payments.
WITHHOLDING. Annuity distributions are generally subject to withholding for the
recipient's federal income tax liability. Recipients can generally elect,
however, not to have tax withheld from distributions.
MULTIPLE CONTRACTS. All Non-Qualified deferred annuity contracts that are issued
by us (or our affiliates) to the same Owner during any calendar year are treated
as one annuity contract for purposes of determining the amount includible in
such Owner's income when a taxable distribution occurs.
FURTHER INFORMATION. We believe that the contracts will qualify as annuity
contracts for Federal income tax purposes and the above discussion is based on
that assumption.
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TAXATION OF QUALIFIED CONTRACTS
The tax rules applicable to Qualified Contracts vary according to the type of
retirement plan and the terms and conditions of the plan. Your rights under a
Qualified Contract may be subject to the terms of the retirement plan itself,
regardless of the terms of the Qualified Contract. Adverse tax consequences may
result if you do not ensure that contributions, distributions and other
transactions with respect to the Contract comply with the law.
INDIVIDUAL RETIREMENT ANNUITIES (IRAs), as defined in Section 408 of the
Internal Revenue Code, permit individuals to make annual contributions of up to
the lesser of a specified dollar amount for the year or the amount of
compensation includible in the individual's gross income for the year. The
contributions may be deductible in whole or in part, depending on the
individual's income. Distributions from certain retirement plans may be "rolled
over" into an IRA on a tax-deferred basis without regard to these limits.
Amounts in the IRA (other than nondeductible contributions) are taxed when
distributed from the IRA. A 10% penalty tax generally applies to distributions
made before age 59 1/2, unless an exception applies. Distributions that are
rolled over to an IRA within 60 days are not immediately taxable, however only
one such rollover is permitted each year. Beginning in 2015, an individual can
make only one rollover from an IRA to another (or the same) IRA in any 12-month
period, regardless of the number of IRAs that are owned. The limit will apply by
aggregating all of an individual's IRAs, including SEP and SIMPLE IRAs as well
as traditional and Roth IRAs, effectively treating them as one IRA for purposes
of the limit. This limit does not apply to direct trustee-to-trustee transfers
or conversation to Roth IRAs.
ROTH IRAS, as described in Internal Revenue Code section 408A, permit certain
eligible individuals to contribute to make non-deductible contributions to a
Roth IRA in cash or as a rollover or transfer from another Roth IRA or other
IRA. A rollover from or conversion of an IRA to a Roth IRA is generally subject
to tax and other special rules apply. The Owner may wish to consult a tax
adviser before combining any converted amounts with any other Roth IRA
contributions, including any other conversion amounts from other tax years.
Distributions from a Roth IRA generally are not taxed, except that, once
aggregate distributions exceed contributions to the Roth IRA, income tax and a
10% penalty tax may apply to distributions made (1) before age 59 1/2 (subject
to certain exceptions) or (2) during the five taxable years starting with the
year in which the first contribution is made to any Roth IRA. A 10% penalty tax
may apply to amounts attributable to a conversion from an IRA if they are
distributed during the five taxable years beginning with the year in which the
conversion was made. Distributions that are rolled over to an IRA within 60 days
are not immediately taxable, however only one such rollover is permitted each
year. Beginning in 2015, an individual can make only one rollover from an IRA
to another (or the same) IRA in any 12-month period, regardless of the number of
IRAs that are owned. The limit will apply by aggregating all of an individual's
IRAs, including SEP and SIMPLE IRAs as well as traditional and Roth IRAs,
effectively treating them as one IRA for purposes of the limit. This limit does
not apply to direct trustee-to-trustee transfers or conversions to Roth IRAs.
SECTION 457 PLANS, while not actually providing for a qualified plan as that
term is normally used, provides for certain deferred compensation plans with
respect to service for state governments, local governments, political
subdivisions, agencies, instrumentalities and certain affiliates of such
entities, and tax exempt organizations. The Contract can be used with such
plans. Under such plans a participant may specify the form of investment in
which his or her participation will be made. Under a non-governmental plan, all
such investments, however, are owned by and are subject to, the claims of the
general creditors of the sponsoring employer.
OTHER TAX ISSUES. Qualified Contracts have minimum distribution rules that
govern the timing and amount of distributions. You should refer to your
retirement plan, adoption agreement, or consult a tax adviser for more
information about these distribution rules.
Distributions from Qualified Contracts generally are subject to withholding for
the Owner's federal income tax liability. The withholding rate varies according
to the type of distribution and the Owner's tax status. The Owner will be
provided the opportunity to elect not have tax withheld from distributions.
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"Eligible rollover distributions" from section 401(a), 403(b), and governmental
457 plans are subject to a mandatory federal income tax withholding of 20%. For
this purpose, an eligible rollover distribution is any distribution to an
employee (or employee' spouse or former spouse as Beneficiary or alternate
Payee) from such a plan, except certain distributions such as distributions
required by the Internal Revenue Code, distributions in a specified annuity
form, or hardship distributions. The 20% withholding does not apply, however, to
nontaxable distributions or if the employee chooses a "direct rollover" from the
plan to a tax-qualified plan, IRA or tax sheltered annuity or to a governmental
457 plan that agrees to separately account for rollover contributions.
FEDERAL ESTATE TAXES, GIFT AND GENERATION-SKIPPING TRANSFER TAXES
While no attempt is being made to discuss in detail the Federal estate tax
implications of the Contract, a purchaser should keep in mind that the value of
an annuity contract owned by a decedent and payable to a Beneficiary by virtue
of surviving the decedent is included in the decedent's gross estate. Depending
on the terms of the annuity contract, the value of the annuity included in the
gross estate may be the value of the lump sum payment payable to the Contingent
Owner or the actuarial value of the payments to be received by the Beneficiary.
Consult an estate planning adviser for more information.
Under certain circumstances, the Internal Revenue Code may impose a "generation
skipping transfer ("GST") tax" when all or part of an annuity contract is
transferred to, or a Death Benefit is paid to, an individual two or more
generations younger than the Owner. Regulations issued under the Internal
Revenue Code may require us to deduct the tax from your Contract, or from any
applicable payment, and pay it directly to the IRS. For 2015, the federal
estate tax, gift tax and GST tax exemptions and maximum rates are $5,430,000
and 40%, respectively.
The potential application of these taxes underscores the importance of seeking
guidance from a qualified adviser to help ensure that your estate plan
adequately addresses your needs and those of your beneficiaries under all
possible scenarios.
MEDICARE TAX
Distributions from non-qualified annuity policies will be considered "investment
income" for purposes of the newly enacted Medicare tax on investment income.
Thus, in certain circumstances, a 3.8% tax may be applied to some or all of the
taxable portion of distributions (e.g., earnings) to individuals whose income
exceeds certain threshold amounts. Please consult a tax advisor for more
information.
SAME-SEX SPOUSES
The Contract provides that upon your death, a surviving spouse may have certain
continuation rights that he or she may elect to exercise for the Contract's
Death Benefit and any joint-life coverage under an optional living benefit. All
Contract provisions relating to spousal continuation are available only to a
person who meets the definition of "spouse" under federal law. The U.S. Supreme
Court has held Section 3 of the federal Defense of Marriage Act (which
purportedly did not recognize same-sex marriages, even those which are permitted
under individual state laws) to be unconstitutional. Therefore, same-sex
marriages recognized under state law will be recognized for federal law
purposes. The Department of Treasury and Internal Revenue Service have recently
determined that for federal tax purposes, same-sex spouses will be determined
based on the law of the state in which the marriage was celebrated irrespective
of the law of the state in which the person resides. However, some uncertainty
remains regarding the treatment of same-sex spouses.
Consult a tax adviser for more information on this subject.
ANNUITY PURCHASES BY NONRESIDENT ALIENS AND FOREIGN CORPORATIONS
The discussion above provides general information regarding U.S. federal income
tax consequences to annuity purchasers that are U.S. citizens or residents.
Purchasers that are not U.S. citizens or residents will generally be subject to
U.S. federal withholding tax on taxable distributions from annuity contracts at
a
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30% rate, unless a lower treaty rate applies. In addition, such purchasers may
be subject to state and/or municipal taxes and taxes that may be imposed by the
purchaser's country of citizenship or residence. Additional withholding may
occur with respect to entity purchasers (including foreign corporations,
partnerships and trusts) that are not U.S. residents. Prospective purchasers are
advised to consult with a qualified tax adviser regarding U.S., state, and
foreign taxation with respect to an annuity contract purchase.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is always the
possibility that the tax treatment of the Contract could change by legislation
or otherwise. Consult a tax adviser with respect to legislative developments and
their effect on the Contract.
We have the right to modify the Contract in response to legislative changes that
could otherwise diminish the favorable tax treatment that annuity contract
owners currently receive. We make no guarantee regarding the tax status of any
contact and do not intend the above discussion as tax advice.
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OTHER INFORMATION
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DISTRIBUTION
We offer the Contract on a continuous basis. We have entered into a distribution
agreement with our affiliate, CUNA Brokerage Services, Inc., for the
distribution of the Contract. Contracts are sold by licensed insurance agents
(the "Selling Agents") in those states where the Contract may be lawfully sold.
Such Selling Agents will be registered representatives of CUNA Brokerage
Services, Inc. or other affiliated and unaffiliated broker-dealer firms (the
"Selling Broker-Dealers") registered under the Securities Exchange Act of 1934,
as amended (the "1934 Act"), who are members of the Financial Industry
Regulatory Authority, Inc. ("FINRA") and who have entered into selling
agreements with us and the principal underwriter, CUNA Brokerage Services, Inc.
We and/or our affiliates pay the Selling Broker-Dealers compensation for the
promotion and sale of the Contract. The Selling Agents who solicit sales of the
Contract typically receive a portion of the compensation paid by the Company to
the Selling Broker-Dealers in the form of commissions or other compensation,
depending on the agreement between the Selling Broker-Dealer and the Selling
Agent. The Selling Agents are also licensed as insurance agents by applicable
state insurance authorities and appointed as agents of the Company. Selling
Agents who are registered representatives of CUNA Brokerage Services, Inc. or
our affiliates are also eligible for various cash benefits, such as bonuses,
insurance benefits and financing arrangements, and non-cash items that we may
jointly provide with CUNA Brokerage Services, Inc. or our affiliates. Non-cash
items include conferences, seminars and trips (including travel, lodging and
meals in connection therewith), entertainment, merchandise and other similar
items. Sales of the Contracts may help registered representatives of CUNA
Brokerage Services, Inc. qualify for such benefits.
The amount and timing of commissions we may pay to Selling Broker-Dealers may
vary depending on the selling agreement and the contract sold but is not
expected to be more than 7.25% of the Purchase Payment. We may pay or allow
other promotional incentives or payments in the form of cash or other
compensation to the extent permitted by FINRA rules and other applicable laws
and regulations.
We also pay compensation to wholesaling broker-dealers or other firms or
intermediaries, including payments to affiliates of ours, in return for
wholesaling services such as providing marketing and sales support, product
training and administrative services to the Selling Agents of the Selling
Broker-Dealers. These allowances may be based on a percentage of the Purchase
Payment.
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In addition to the compensation described above, we may make additional cash
payments, in certain circumstances referred to as "override" compensations or
reimbursements to Selling Broker-Dealers in recognition of their marketing and
distribution, transaction processing and/or administrative services support.
These payments are not offered to all Selling Broker-Dealers, and the terms of
any particular agreement governing the payments may vary among Selling
Broker-Dealers depending on, among other things, the level and type of marketing
and distribution support provided. Marketing and distribution support services
may include, among other services, placement of the Company's products on the
Selling Broker-Dealers' preferred or recommended list, increased access to the
Selling Broker-Dealers' registered representatives for purposes of promoting
sales of our products, assistance in training and education of the Selling
Agents, and opportunities for us to participate in sales conferences and
educational seminars. The payments or reimbursements may be calculated as a
percentage of the particular Selling Broker-Dealer's actual or expected
aggregate sales of our indexed annuity contracts (including the Contract) and/or
may be a fixed dollar amount. Broker-dealers receiving these additional payments
may pass on some or all of the payments to the Selling Agent.
You should ask your Selling Agent for further information about what commissions
or other compensation he or she, or the Selling Broker-Dealer for which he or
she works, may receive in connection with your purchase of a Contract.
Commissions and other incentives or payments described above are not charged
directly to you. We intend to recoup commissions and other sales expenses
through fees and charges deducted under the Contract.
CYBER SECURITY
Our business is highly dependent upon the effective operation of our computer
systems and those of our business partners, so that our business is potentially
susceptible to operational and information security risks resulting from a
cyber-attack. These risks include, among other things, the theft, misuse,
corruption and destruction of data maintained online or digitally, denial of
service on websites and other operational disruption and unauthorized release of
confidential customer information. Cyber-attacks affecting us, CUNA Brokerage
Services, Inc., and intermediaries may adversely affect us and your Contract
Value. For instance, cyber-attacks may interfere with our processing of Contract
transactions, impact our ability to calculate Credited Index Interest, cause the
release and possible destruction of confidential Owner or business information,
impede order processing, subject us and/or CUNA Brokerage Services, Inc. and
intermediaries to regulatory fines and financial losses and/or cause
reputational damage. There can be no assurance that we or CUNA Brokerage
Services, Inc. will avoid losses affecting your Contract due to cyber-attacks or
information security breaches in the future.
AUTHORITY TO CHANGE
Only the President or Secretary of the Company may change or waive any of the
terms of your Contract. Any change must be in writing and signed by the
President or Secretary of the Company.
INCONTESTABILITY
We consider all statements in your application (in the absence of fraud) to be
representations and not warranties. We will not contest your Contract.
MISSTATEMENT OF AGE OR GENDER
If an Annuitant's date of birth or gender is misstated, we will adjust the
income payments under this Contract to be equal to the payout amount the
Contract would have purchased based on the Annuitant's correct date of birth
and/or gender. We will add any underpayments to the next payment. We will
subtract any overpayment from future payments. We will not credit or charge
any interest to any underpayment or overpayment.
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CONFORMITY WITH APPLICABLE LAWS
The provisions of the Contract conform to the minimum requirements of the state
of issue. The laws of the state of issue control any conflicting laws of any
other state in which the Owner may live on or after the Contract Issue Date. If
any provision of your Contract is determined not to provide the minimum benefits
required by the state in which the Contract is issued, such provision will be
deemed to be amended to conform or comply with such laws or regulations.
Further, the Company will amend the Contract to comply with any changes in law
governing the Contract or the taxation of benefits under the Contract.
REPORTS TO OWNERS
At least annually, we will mail a report to you at your last known address of
record, a report that will state the Contract Value, Surrender Value,
withdrawals made since the last report and any other information required by any
applicable law or regulation.
You also will receive confirmations of each financial transaction, such as
transfers, withdrawals, and surrenders.
CHANGE OF ADDRESS
You may change your address by writing to us at our Administrative Office. If
you change your address, we will send a confirmation of the address change to
both your old and new addresses.
INQUIRIES
You may make inquiries regarding your Contract by writing to us or calling us at
our Administrative Office.
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CORPORATE HISTORY OF THE COMPANY
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MEMBERS LIFE INSURANCE COMPANY
We are a wholly-owned indirect subsidiary of CMFG Life Insurance Company ("CMFG
Life") and a direct wholly-owned subsidiary of CUNA Mutual Investment
Corporation ("CMIC"). We were formed by CMFG Life on February 27, 1976, as a
stock life insurance company under the laws of the State of Wisconsin for the
purpose of writing credit disability insurance. The original name of the Company
was CUDIS Insurance Society, Inc. On August 3, 1989, the Company's name changed
to CUMIS Life Insurance, Inc., and was subsequently changed to its current name
on January 1, 1993. League Life Insurance Company (Michigan) merged into the
Company on January 1, 1992 and MEMBERS Life Insurance Company (Texas) merged
into the Company on January 1, 1993. The Company re-domiciled from Wisconsin to
Iowa on May 3, 2007. The Company is 100% owned by CMIC, which is in turn 100%
owned by CMFG Life. On February 17, 2012, we amended and restated our Articles
of Incorporation pursuant to which we amended our purpose to be the writing of
any and all of the lines of insurance and annuity business authorized by Iowa
Code Chapter 508 and any other line of insurance or annuity business authorized
by the laws of the State of Iowa.
CMFG Life is a stock insurance company organized on May 20, 1935 and domiciled
in Iowa. CMFG Life is one of the world's largest direct underwriters of credit
life and disability insurance, and is a major provider of qualified pension
products to credit unions. Further, CMFG Life and its affiliated companies
currently offer deferred and immediate annuities, individual term and permanent
life insurance, and accident and health insurance. In 2012, CMFG Life was
reorganized as a wholly-owned subsidiary of CUNA Mutual Holding Company, a
mutual holding company.
35
The Company is authorized to sell life, health, and annuity policies in all
states in the U.S. and the District of Columbia, except New York. In 2014,
approximately 63% and 22% of the premiums paid under policies issued by the
Company were generated in Michigan and Texas, respectively. No other state
accounts for more than 5% of the premiums paid under the Company's policies for
any year in the three years ended December 31, 2014. In 2014, approximately 12%
of annuities related to the Contract were generated Michigan. No other state
accounts for more than 10% of sales of the Contract paid to the Company for the
year ended December 31, 2014. As of December 31, 2014, we had more than $399
million in assets and we had more than $123 million of life insurance in force.
Currently, the Company primarily services existing blocks of individual and
group life policies. In addition, in August, 2013, the Company began issuing the
Contract under the name "MEMBERS Zone Annuity".
CMFG Life provides significant services required in the conduct of the Company's
operations. We have entered into the following two contracts for the
administration of our business:
o a Cost Sharing Agreement, pursuant to which CMFG Life performs
certain administrative functions related to agent licensing, payment
of commissions, actuarial services, annuity policy issuance and
service, accounting and financial compliance, market conduct, general
and informational services and marketing as well as share certain
resources and personnel with us;
o a Procurement and Disbursement and Billing and Collection Services
Agreement, pursuant to which CMFG Life provides certain procurement,
disbursement, billing and collection services.
You may write us at 2000 Heritage Way, Waverly, Iowa 50677-9202 or call us at
1-800-798-6600.
We share space with our parent, CMFG Life. CMFG Life occupies office space in
Madison, Wisconsin and Waverly, Iowa that is owned by CMFG Life and its
affiliates. Expenses associated with the facilities are allocated to us through
the Cost Sharing Agreement described above.
FINANCIAL INFORMATION
Our financial statements have been prepared in accordance with U.S. GAAP.
INVESTMENTS
Our investment portfolio consists primarily of fixed income securities.
REINSURANCE
We reinsure portions of our life insurance exposure with affiliated insurance
companies under traditional indemnity reinsurance arrangements. We entered into
a Coinsurance Agreement with CMFG Life in 2012. Under this agreement, we agreed
to cede 95% of all insurance in force, including annuity contracts, as of
October 31, 2012 to CMFG Life. In 2013 we entered into a second Coinsurance
Agreement to cede 100% of all insurance issued on and after January 1, 2013 to
CMFG Life. These agreements do not relieve us of our obligations to our
policyholders under contracts covered by these agreements. However, they do
transfer nearly all of the Company's underwriting profits and losses to CMFG
Life and require CMFG Life to indemnify the Company for nearly all of its
liabilities.
POLICY LIABILITIES AND ACCRUALS
The applicable accounting standards and state insurance laws under which we
operate require that we record policy liabilities to meet the future obligations
associated with all of our outstanding policies.
36
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POTENTIAL RISK FACTORS THAT MAY AFFECT OUR BUSINESS AND OUR FUTURE RESULTS
--------------------------------------------------------------------------------
ALTHOUGH ECONOMIC CONDITIONS BOTH DOMESTICALLY AND GLOBALLY HAVE CONTINUED TO
IMPROVE SINCE THE FINANCIAL CRISIS IN 2008, WE REMAIN VULNERABLE TO MARKET
UNCERTAINTY AND CONTINUED FINANCIAL INSTABILITY OF NATIONAL, STATE AND LOCAL
GOVERNMENTS. CONTINUED DIFFICULT CONDITIONS IN THE GLOBAL CAPITAL MARKETS AND
ECONOMY COULD DETERIORATE IN THE NEAR FUTURE AND AFFECT OUR FINANCIAL POSITION
AND OUR LEVEL OF EARNINGS FROM OUR OPERATIONS.
Markets in the United States and elsewhere experienced extreme volatility and
disruption since the second half of 2007, due in part to the financial stresses
affecting the liquidity of the banking system and the financial markets. This
volatility and disruption reached unprecedented levels in late 2008 and early
2009. The United States entered a severe recession and recovery was slow with
long-term. high unemployment rates and lower average household income levels.
One of the strategies used by the U.S. government to stimulate the economy has
been to keep interest rates low and increase the supply of United States
dollars. While these strategies have appeared to have had positive effects, any
future economic downturn or market disruption could negatively impact our
ability to invest our funds.
Specifically, if market conditions deteriorate in 2015 or beyond:
o our investment portfolio could incur other than temporary impairments;
o due to potential downgrades in our investment portfolio, we could be
required to raise additional capital to sustain our current business
in force and new sales of our annuity products, which may be
difficult in a distressed market. If capital would be available, it
may be at terms that are not favorable to us; or
o our liquidity could be negatively affected and we could be forced to
further limit our operations and our business could suffer, as we
need liquidity to pay our policyholder benefits and operating
expenses.
The principal sources of our liquidity are monthly settlements under the
coinsurance agreements with CMFG Life, annuity deposits, investment income,
proceeds from the sale, maturity and call of investments and capital
contributions from CMFG Life.
GOVERNMENTAL INITIATIVES INTENDED TO IMPROVE GLOBAL AND LOCAL ECONOMIES THAT
HAVE BEEN ADOPTED MAY NOT BE EFFECTIVE AND, IN ANY EVENT, MAY BE ACCOMPANIED BY
OTHER INITIATIVES, INCLUDING NEW CAPITAL REQUIREMENTS OR OTHER REGULATIONS, THAT
COULD MATERIALLY AFFECT OUR RESULTS OF OPERATIONS, FINANCIAL CONDITION AND
LIQUIDITY IN WAYS THAT WE CANNOT PREDICT.
We are subject to extensive laws and regulations that are administered and
enforced by a number of different regulatory authorities including state
insurance regulators, the National Association of Insurance Commissioners
("NAIC") and the Securities and Exchange Commission ("SEC"). Some of these
authorities are or may in the future consider enhanced or new regulatory
requirements intended to prevent future crises or otherwise assure the stability
of institutions under their supervision. These authorities may also seek to
exercise their supervisory or enforcement authority in new or more robust ways.
All of these possibilities, if they occurred, could affect the way we conduct
our business and manage our capital, and may require us to satisfy increased
capital requirements, any of which in turn could materially affect our results
of operations, financial condition and liquidity.
WE FACE POTENTIAL COMPETITION FROM COMPANIES THAT HAVE GREATER FINANCIAL
RESOURCES, BROADER ARRAYS OF PRODUCTS, HIGHER RATINGS AND STRONGER FINANCIAL
PERFORMANCE, WHICH MAY IMPAIR OUR
37
ABILITY TO ATTRACT NEW CUSTOMERS AND MAINTAIN OUR PROFITABILITY AND FINANCIAL
STRENGTH. IT MAY ALSO IMPAIR OUR ABILITY TO RETAIN CUSTOMERS WHICH COULD
INCREASE SURRENDERS AND IMPACT PROFITABILITY AND FINANCIAL STRENGTH.
We operate in a highly competitive industry. Many of our competitors are
substantially larger and enjoy substantially greater financial resources,
claims-paying ability and financial strength, broader and more diversified
product lines and more widespread distribution relationships. Our annuity
products compete with fixed indexed, traditional fixed rate and variable
annuities sold by other insurance companies and also with mutual fund products,
traditional bank investments and other investment and retirement funding
alternatives offered by asset managers, banks and broker-dealers. Our annuity
products also compete with products of other insurance companies, financial
intermediaries and other institutions based on a number of factors, including
crediting rates, policy terms and conditions, service provided to distribution
channels and policyholders, ratings, reputation and distribution compensation.
Our ability to compete will depend in part on rates of interest credited to
policyholder account balances or the parameters governing the determination of
index credits which is driven by our investment performance. We will not be able
to accumulate and retain assets under management for our products if our
investment results underperform the market or the competition, since such
underperformance likely would result in asset withdrawals and reduced sales.
We compete for distribution sources for our products. We believe that our
success in competing for distributors will depend on factors such as our
financial strength, the services we provide to, and the relationships we develop
with these distributors and offering competitive commission structures. Our
distributors will generally be free to sell products from whichever providers
they wish, which makes it important for us to continually offer distributors
products and services they find attractive. If our products or services fall
short of distributors' needs, we may not be able to establish and maintain
satisfactory relationships with distributors of our annuity products. Our
ability to compete will also depend in part on our ability to develop innovative
new products and bring them to market more quickly than our competitors. In
order for us to compete in the future, we will need to continue to bring
innovative products to market in a timely fashion. Otherwise, our revenues and
profitability could suffer.
THE LOSS OF KEY EMPLOYEES COULD DISRUPT OUR OPERATIONS.
Our success depends in part on the continued service of key executives within
our Company and our ability to attract and retain additional executives and
employees. The loss of key employees, or our inability to recruit and retain
additional qualified personnel, could cause disruption in our business and
prevent us from fully implementing our business strategies, which could
materially and adversely affect our business, growth and profitability.
CHANGES IN STATE AND FEDERAL REGULATION MAY AFFECT OUR PROFITABILITY.
We are subject to regulation under applicable insurance statutes, including
insurance holding company statutes, in the various states in which we transact
business. Insurance regulation is intended to provide safeguards for
policyholders rather than to protect shareholders of insurance companies or
their holding companies. As increased scrutiny has been placed upon the
insurance regulatory framework, a number of state legislatures have considered
or enacted legislative proposals that alter, and in many cases increase, state
authority to regulate insurance companies and holding company systems.
Regulators oversee matters relating to trade practices, policy forms, claims
practices, guaranty funds, types and amounts of investments, reserve adequacy,
insurer solvency, minimum amounts of capital and surplus, transactions with
related parties, changes in control and payment of dividends.
State insurance regulators and the NAIC continually reexamine existing laws and
regulations and may impose changes in the future.
38
We are subject to the NAIC's risk-based capital requirements which are intended
to be used by insurance regulators as an early warning tool to identify
deteriorating or weakly capitalized insurance companies for the purpose of
initiating regulatory action. We also may be required, under solvency or
guaranty laws of most states in which we do business, to pay assessments up to
certain prescribed limits to fund policyholder losses or liabilities for
insolvent insurance companies.
Although the federal government does not directly regulate the insurance
business, federal legislation and administrative policies in several areas,
including pension regulation, age and sex discrimination, financial services
regulation, securities regulation and federal taxation, can significantly affect
the insurance business. In addition, legislation has been enacted which could
result in the federal government assuming some role in the regulation of the
insurance industry.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
"Dodd-Frank Act") was enacted and signed into law, making extensive changes to
the laws regulating the financial services industry. Among other things, the
Dodd-Frank Act imposes a comprehensive new regulatory regime on the
over-the-counter ("OTC") derivatives marketplace and grants new joint regulatory
authority to the SEC and the U.S. Commodity Futures Trading Commission ("CFTC")
over OTC derivatives. While the SEC and CFTC continue to promulgate rules
required by the Dodd-Frank Act, most rules have been finalized and, as a result,
certain of the Company's derivatives operations are subject to, among other
things, new recordkeeping, reporting and documentation requirements and new
clearing requirements for certain swap transactions (currently, certain interest
rate swaps and index-based credit default swaps; cleared swaps require the
posting of margin to a clearinghouse via a futures commission merchant and, in
some case, to the futures commission merchant as well). In addition, non-cleared
derivatives entered into as part of the Company's derivatives operations will,
in the future, become subject to initial and variation margin requirements. On
September 3, 2014, the Board of Governors of the Federal Reserve System jointly
adopted, with certain federal banking regulators, referred to as the "Prudential
Regulators," re-proposed rules that would require certain derivatives market
participants to collect margin from, and post margin to, their counterparties.
Under the re-proposed rules, the Company would be considered a "financial
end-user" that, when facing the relevant market participants, are required to
post and collect variation margin in cash and, depending on their derivatives
exposure, may be required to post and collect initial margin. The CFTC
re-proposed substantially similar rules on September 17, 2014 that may also
affect certain of the Company's U.S. derivatives operations. Other regulatory
requirements may indirectly impact the Company. For example, non-U.S.
counterparties of the Company may also be subject to non-U.S. regulation of
their derivatives transactions with the Company. In addition, counterparties
regulated by the Prudential Regulators are subject to liquidity, leverage and
capital requirements that impact their derivatives transactions with the
Company. Collectively, these new requirements have increased the direct and
indirect costs of the Company's derivatives activities and may further increase
them in the future.
The Dodd-Frank Act also established a Federal Insurance Office ("FIO") under the
U.S. Treasury Department. Although the Federal Insurance Office was not granted
general supervisory authority over the insurance industry, it is authorized to,
among other things, (1) monitor all aspects of the insurance industry and of
lines of business other than certain health insurance, certain long-term care
insurance and crop insurance and (2) recommend changes to the state system of
insurance regulation to the U.S. Congress. The FIO is required to issue several
reports to Congress on the insurance industry, most notably, (i) a report on
"how to modernize and improve the system of insurance regulation in the United
States", and (ii) a report on "the breadth and scope of the global reinsurance
market and the critical role such market plays in supporting insurance in the
United States." The FIO issued its report on how to modernize and improve the
system of insurance regulation in the United States in December 2013. The report
details the strengths and weaknesses of the current insurance regulatory system
and makes recommendations in the areas of insurance sector solvency and
marketplace regulation. Although the report stops short of recommending direct
federal regulation of insurance, it does recommend significantly greater federal
involvement in a number of areas. In
39
December 2014, the FIO published its report on the breadth and scope of the
global reinsurance market. In this reinsurance report, the FIO indicates that
reinsurance collateral continues to be at the forefront of its thinking with
regard to potential direct federal involvement in insurance regulation.
Specifically, the FIO's report argues that federal officials are well-positioned
to make determinations regarding whether a foreign jurisdiction has sufficiently
effective regulation and, in doing so, consider other prudential issues pending
in the U.S. and between the U.S. and affected foreign jurisdictions. The
reinsurance report notes that work continues towards initiating negotiations for
covered agreements with leading reinsurance jurisdictions that may have the
effect of preempting inconsistent state laws. It remains to be seen whether, in
2015, one or more proposed "covered agreements" with major U.S. trading partners
(including possibly the entirety of the European Union), that trade collateral
reduction--and possibly more--for recognition of the U.S. system of insurance
regulation as equivalent, will be entered into. More generally, it remains to be
seen whether either of the FIO's reports will affect the manner in which
insurance and reinsurance are regulated in the U.S. and, thereby, the Company's
business.
The Dodd-Frank Act established a new federal council of financial regulators,
the Financial Stability Oversight Council ("Council"), which is charged with
identifying risks to the financial stability of the U.S. financial markets,
promoting market discipline, and responding to emerging threats to the stability
of the U.S. financial markets. The Council is empowered to make recommendations
to primary financial regulatory agencies regarding the application of new or
heightened standards and safeguards for financial activities or practices, and
certain participation in such activities, that threaten the stability of the
U.S. financial markets. In addition, the Council is authorized to determine
whether an insurance company is systematically significant and to recommend that
it should be subject to enhanced prudential standards and to supervision by the
Board of Governors of the Federal Reserve System. In April 2012, the Council
approved its final rule for designating non-bank financial companies as
systemically important financial institutions ("SIFI"). Under the final rule,
the Company's assets, liabilities and operations do not currently satisfy the
financial thresholds that serve as the first step of the three-stage process to
designate a non-bank financial company as a SIFI. Despite not being a SIFI, the
Company could potentially be subject to the orderly liquidation authority of the
Federal Deposit Insurance Corporation ("FDIC"), in accordance with Title II of
the Dodd-Frank Act. Title II of the Dodd-Frank Act provides that the FDIC, under
certain circumstances, may be appointed receiver of a "covered financial
company," which could include an insurance company, for purposes of liquidating
such company. This would apply to insurance companies in a limited context,
where the relevant state insurance regulator has failed to act within 60 days
after a determination has been made to subject the insurance company to the
FDIC's orderly liquidation authority, and resolution by the FDIC would be in
accordance with state insurance law.
CHANGES IN FEDERAL INCOME TAXATION LAWS MAY AFFECT SALES OF OUR PRODUCTS AND
PROFITABILITY.
The annuity products that we market generally provide the policyholder with
certain federal income tax advantages. For example, federal income taxation on
any increases in non-qualified annuity contract values (i.e., the "inside
build-up") is deferred until it is received by the policyholder. With other
savings and investments, such as certificates of deposit and taxable bonds, the
increase in value is generally taxed each year as it is earned.
From time to time, various tax law changes have been proposed that could have an
adverse effect on our business, including the elimination of all or a portion of
the income tax advantages for annuities. If legislation were enacted to
eliminate the tax deferral for annuities, such a change may have an adverse
effect on our ability to sell non-qualified annuities. Non-qualified annuities
are annuities that are not sold to a qualified retirement plan.
Distributions from non-qualified annuity policies have been considered
"investment income" for purposes of the Medicare tax on investment
income contained in the Health Care and Education Reconciliation Act of 2010. As
a result, in certain circumstances a 3.8% tax ("Medicare Tax") may be applied to
some or all of the taxable portion of distributions from non-qualified annuities
to individuals whose income exceeds certain threshold amounts. This new tax may
have an adverse effect on our ability to sell non-qualified annuities to
individuals whose income exceeds these threshold amounts and could accelerate
withdrawals due to this impending additional tax. The constitutionality of the
Health Care and Education Reconciliation Act of 2010 is currently the subject of
multiple litigation actions initiated by various state attorneys general, and
the Act is also the subject of several proposals in the US Congress for
amendment and/or repeal. The outcome of such litigation and legislative action
as it relates to the 3.8% Medicare Tax is unknown at this time.
WE FACE RISKS RELATING TO LITIGATION, INCLUDING THE COSTS OF SUCH LITIGATION,
MANAGEMENT DISTRACTION AND THE POTENTIAL FOR DAMAGE AWARDS, WHICH MAY ADVERSELY
IMPACT OUR BUSINESS.
We may become involved in litigation, both as a defendant and as a plaintiff,
relating to claims arising out of our operations in the normal course of
business. In addition, state regulatory bodies, such as state insurance
departments, the SEC, the Financial Industry Regulatory Authority, Inc.
("FINRA"), the Department of Labor, and other regulatory bodies regularly make
inquiries and conduct examinations or investigations of companies in the annuity
business concerning compliance with, among other things, insurance laws,
securities laws, the Employee Retirement Income Security Act of 1974, as
amended, and laws governing the activities of broker-dealers. Companies in the
annuity business have faced litigation, including class action lawsuits,
alleging improper product design, improper sales practices and similar claims.
There can be no assurance that any future litigation will not have a material
adverse effect on our business, financial condition or results of operations
through distraction of our management or otherwise.
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SELECTED FINANCIAL DATA
--------------------------------------------------------------------------------
The following selected financial data is derived from the Company's financial
statements and should be read in conjunction with the discussion under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The results of operations data for the years ended December 31,
2014, 2013 and 2012 and the balance sheet data as of December 31, 2014 and 2013
should be read in conjunction with our financial statements and related notes
appearing elsewhere in this prospectus. The
40
results for the past periods are not necessarily indicative of results that may
be expected for future periods. The Company entered into agreements in 2013 and
2012 which impact the Company's financial results. See the reinsurance footnote
within the Company's financial statements appearing elsewhere in this
prospectus.
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FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
RESULTS OF OPERATIONS DATA: 2014 2013 2012 2011 2010
---------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
REVENUES
Life and health premiums $ 127 $ 139 $ (20,459) $ 3,409 $ 3,744
Contract charges 24 46 460 501 533
Net investment income 278 176 1,928 2,175 2,090
Net realized gains on investments - - 4,319 119 245
Other income - 293 - - -
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Total revenues 429 654 (13,752) 6,204 6,612
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BENEFITS AND EXPENSES:
Life and health insurance claims
and benefits 112 179 (20,028) 2,268 2,261
Interest credited to policyholder
account balances 8 9 158 164 163
Operating and other expenses 137 86 1,087 1,040 827
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Total benefits and expenses 257 274 (18,783) 3,472 3,251
---------------------------------------------------------------------------------------------------------------
Income before income taxes 172 380 5,031 2,732 3,361
Income tax expense 11 249 1,679 921 1,074
---------------------------------------------------------------------------------------------------------------
Net income $ 161 $ 131 $ 3,352 $ 1,811 $ 2,287
---------------------------------------------------------------------------------------------------------------
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DECEMBER 31,
BALANCE SHEET DATA: 2014 2013 2012 2011 2010
---------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
ASSETS:
Total investments $ 13,313 $ 6,681 $ 8,691 $ 53,678 $ 50,145
Cash and cash equivalents 5,602 11,105 4,926 3,853 2,259
Reinsurance recoverable 25,199 25,525 26,391 - -
Assets on deposits 349,937 89,313 - - -
Total assets 399,381 138,582 47,405 64,248 62,416
LIABILITIES AND STOCKHOLDER'S EQUITY:
Claim and policy benefit reserves 22,368 23,196 24,112 23,974 24,896
Policyholder account balances 353,549 93,047 3,797 3,885 4,118
Total liabilities 380,166 119,481 28,281 28,212 29,408
Total stockholder's equity 19,215 19,101 19,124 36,036 33,008
---------------------------------------------------------------------------------------------------------------
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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Management's Discussion and Analysis of Financial Condition and Results of
Operations reviews our financial condition at December 31, 2014 and December 31,
2013; our results of operations for the years ended December 31, 2014, 2013 and
2012; and where appropriate, factors that may affect future financial
performance. This discussion should be read in conjunction with our financial
statements and notes thereto appearing elsewhere in this prospectus. The dollar
amounts disclosed in this Management's Discussion and Analysis of Financial
Condition and Results of Operations are "in thousands."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
All statements, trend analyses and other information contained in this
prospectus and elsewhere (such as in press releases, presentations by us, our
immediate parent CUNA Mutual Investment Corporation ("CMIC"), or CMFG Life
Insurance Company ("CMFG Life"), our management or oral statements) relative to
markets for our products and trends in our operations or financial results, as
well as other statements including words such as "anticipate", "believe",
"plan", "estimate", "expect", "intend", and other similar expressions,
constitute forward-looking statements. We caution that these statements may vary
from actual results and the differences between these statements and actual
results can be material. Accordingly, we cannot assure you that actual results
will not differ materially from those expressed or implied by the
forward-looking statements. Factors that could contribute to these differences
include, among other things:
o general economic conditions and other factors, including prevailing
interest rate levels and stock and credit market performance which may
affect (among other things) our ability to sell our products, our
ability to access capital resources and the costs associated
therewith, the fair value of our investments, which could result in
other than temporary impairments, and certain liabilities, and the
lapse rate and profitability of policies;
o customer response to new products and marketing initiatives;
o changes in the Federal income tax laws and regulations which may
affect the relative income tax advantages of our products;
o increasing competition in the sale of annuities;
o regulatory changes or actions, including those relating to regulation
of financial services affecting (among other things) bank and credit
union sales and underwriting of insurance products and regulation of
the sale, underwriting and pricing of products; and
o the risk factors or uncertainties listed in this prospectus.
For a detailed discussion of these and other factors that might affect our
performance see the sections entitled "Risk Factors and Other Important
Information You Should Know" and "Potential Risk Factors That May Affect Future
Results."
OVERVIEW
We are a wholly-owned indirect subsidiary of CMFG Life and a direct wholly-owned
subsidiary of CMIC. Our ultimate parent is CUNA Mutual Holding Company
("CMHC"), a mutual holding company organized under the laws of Iowa. On May 3,
2007, the Company re-domiciled from Wisconsin to Iowa. On February 17, 2012, we
amended and restated our Articles of Incorporation pursuant to which we amended
our purpose to be the writing of any and all of the lines of insurance and
annuity business authorized by Iowa Code Chapter 508 as authorized by the laws
of the State of Iowa.
The Company is authorized to sell life, health and annuity policies in all
states in the U.S. and the District of Columbia, except New York. In 2014,
approximately 63%, 22% and 5% of the premiums paid under
42
policies issued by the Company were generated in Michigan, Texas and California,
respectively. No other state accounts for more than 5% of the premiums paid
under the Company's policies for any year in the three years ended December 31,
2014. In 2014, approximately 12% of annuities related to the Contract were
generated in Michigan. No other state accounts for more than 10% of sales of the
Contract paid to the Company for the year ended December 31, 2014. As of
December 31, 2014 and 2013, we had more than $399 million and $138 million in
assets and we had more than $123 million and $147 million of life insurance in
force, respectively.
Currently, the Company primarily services existing blocks of individual and
group life policies and began marketing the Contract in August, 2013. We
distribute the Contract through multiple face-to-face distribution channels,
including:
o Managed Agents: employees of the Company who sell insurance and
investment products to members of credit unions that have contracted
with the Company and its affiliates to provide these services;
o Dual Employee Agents: employees of credit unions who sell insurance
and investment products to members of credit unions that have
contracted with the Company and its affiliates to provide these
services. These agents are registered representatives of the
Company's affiliated broker dealer; and
o Independent Agents: agents who also represent other insurance
companies and, along with or through an unaffiliated broker-dealer,
contract with the Company to offer its individual life insurance and
annuity products that are made available for distribution through
this channel.
We entered into a coinsurance agreement with CMFG Life in 2012. Under this
agreement, we agreed to cede 95% of all insurance in force as of October 31,
2012 to CMFG Life. In 2013, we entered into a second agreement to cede 100% of
all insurance issued on and after January 1, 2013 to CMFG Life. These
agreements do not relieve us of our obligations to our policyholders under
contracts covered by these agreements. However, they do transfer nearly all of
the Company's underwriting profits and losses to CMFG Life and require CMFG Life
to indemnify the Company for nearly all of its liabilities. As a result, the
Company believes its profitability going forward will be minimal.
CMFG Life provides significant services required in the conduct of the Company's
operations. CMFG Life allocates expenses to us on the basis of estimated time
spent by employees of CMFG Life on Company matters and the use of operational
resources. Management believes the allocations of expenses are reasonable and
that the results of the Company's operations may have materially differed in a
negative manner from the results reflected in the accompanying financial
statements if the Company did not have this relationship.
CRITICAL ACCOUNTING POLICIES
The increasing complexity of the business environment and applicable
authoritative accounting guidance requires us to closely monitor our accounting
policies. The following summary of our critical accounting policies is intended
to enhance your ability to assess our financial condition and results of
operations and the potential volatility due to changes in estimates.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
("GAAP") requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates and in some cases the difference could be
material. Investment valuations, embedded derivatives, claim and policyholder
benefit reserves and deferred tax asset valuation reserves are most affected by
the use of estimates and assumptions.
43
INVESTMENT VALUATION - Investments in debt securities are classified as
available for sale and are carried at fair value. Unrealized gains and losses on
investments in debt securities, net of federal income taxes, are included in
accumulated other comprehensive income as a separate component of stockholder's
equity.
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
The fair value hierarchy prioritizes the inputs to valuation techniques used to
measure fair value of assets and liabilities into three broad levels. The
Company has categorized its financial instruments, based on the degree of
subjectivity inherent in the valuation technique, as follows:
o Level 1: Inputs are directly observable and represent quoted prices
for identical assets or liabilities in active markets the Company has
the ability to access at the measurement date.
o Level 2: All significant inputs are observable, either directly or
indirectly, other than quoted prices included in Level 1, for the
asset or liability. This includes: (i) quoted prices for similar
instruments in active markets, (ii) quoted prices for identical or
similar instruments in markets that are not active, (iii) inputs
other than quoted prices that are observable for the instruments and
(iv) inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3: One or more significant inputs are unobservable and reflect
the Company's estimates of the assumptions that market participants
would use in pricing the asset or liability, including assumptions
about risk.
For purposes of determining the fair value of the Company's investments,
observable inputs are those inputs used by market participants in valuing
financial instruments, which are developed based on market data obtained from
independent sources. In the absence of sufficient observable inputs,
unobservable inputs, reflecting the Company's estimates of the assumptions
market participants would use in valuing investments, are developed based on the
best information available in the circumstances. The Company uses prices and
inputs that are current as of the measurement date. In some instances, valuation
inputs used to measure fair value fall into different levels of the fair value
hierarchy. The category level in the fair value hierarchy is determined based on
the lowest level input that is significant to the fair value measurement in its
entirety.
The hierarchy requires the use of market observable information when available
for assessing fair value. The availability of observable inputs varies by
investment. In situations where the fair value is based on inputs that are
unobservable in the market or on inputs from inactive markets, the determination
of fair value requires more judgment and is subject to the risk of variability.
The degree of judgment exercised by the Company in determining fair value is
typically greatest for investments categorized in Level 3.
Our assets and liabilities which are measured at fair value on a recurring basis
as of December 31, 2014 are presented below based on the fair value hierarchy
levels.
44
----------------------------------------------------------------------------------------------------------
ASSETS, AT FAIR VALUE LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
----------------------------------------------------------------------------------------------------------
Cash equivalents $ 3,681 $ - $ - $ 3,681
Debt securities:
U.S. government and agencies - 9,987 - 9,987
Mortgage-backed securities:
Residential mortgage-backed - 3,207 - 3,207
----------------------------------------------------------------------------------------------------------
Total debt securities - 13,194 - 13,194
Derivatives embedded in assets on
deposits - - 45,503 45,503
----------------------------------------------------------------------------------------------------------
Total assets $ 3,681 $ 13,194 $ 45,503 $ 62,378
----------------------------------------------------------------------------------------------------------
LIABILITIES, AT FAIR VALUE LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
Derivatives embedded in annuity contracts $ - $ - $ 45,503 $ 45,503
----------------------------------------------------------------------------------------------------------
Total liabilities $ - $ - $ 45,503 $ 45,503
----------------------------------------------------------------------------------------------------------
Our assets which are measured at fair value on a recurring basis as of December
31, 2013 are presented below based on the fair value hierarchy levels.
----------------------------------------------------------------------------------------------------------
ASSETS, AT FAIR VALUE LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
----------------------------------------------------------------------------------------------------------
Cash equivalents $ 10,336 $ - $ - $ 10,336
Debt securities:
U.S. government and agencies 2,556 - - $ 2,556
Mortgage-backed securities:
Residential mortgage-backed - 4,000 - 4,000
----------------------------------------------------------------------------------------------------------
Total debt securities 2,556 4,000 - 6,556
Derivatives embedded in assets on
deposits - - 8,652 8,652
----------------------------------------------------------------------------------------------------------
Total assets $ 12,739 $ 153 $ 8,652 $ 25,544
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
LIABILITIES, AT FAIR VALUE LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
----------------------------------------------------------------------------------------------------------
Derivatives embedded in annuity contracts $ - $ - $ 8,652 $ 8,652
----------------------------------------------------------------------------------------------------------
Total liabilities $ - $ - $ 8,652 $ 8,652
----------------------------------------------------------------------------------------------------------
OTHER-THAN-TEMPORARY INVESTMENT IMPAIRMENTS - Investment securities are reviewed
for other than temporary impairment ("OTTI") on an ongoing basis. The Company
creates a watchlist of securities based largely on the fair value of an
investment security relative to its cost basis. When the fair value drops below
the Company's cost, the Company monitors the security for OTTI. The
determination of
45
OTTI requires significant judgment on the part of the Company and depends on
several factors, including:
o the existence of any plans to sell the investment security;
o the extent to which fair value is less than book value;
o the underlying reason for the decline in fair value (credit concerns,
interest rates, etc.);
o the financial condition and near term prospects of the issuer/borrower,
including the ability to meet contractual obligations, relevant industry
trends and conditions;
o the Company's intent and ability to retain the investment for a period of
time sufficient to allow for an anticipated recovery in fair value;
o the Company's ability to recover all amounts due according to the
contractual terms of the agreements; and
o the Company's collateral position in the case of bankruptcy or
restructuring.
A debt security is considered other-than-temporarily impaired when the fair
value is less than the amortized cost basis and its value is not expected to
recover through the Company's holding period of the security. If a credit loss
exists, but the Company does not intend to sell the impaired debt security and
is not more likely than not to be required to sell before recovery, it is
required to bifurcate the impairment into the loss that is attributable to
credit and non-credit related risk. The credit portion of the OTTI is the
difference between the present value of the expected future cash flows and
amortized cost. Only the estimated credit loss amount is recognized in earnings,
with the remainder of the loss amount recognized in other comprehensive income.
If the Company intends to sell, at the time this determination is made, the
Company records a realized loss equal to the difference between the amortized
cost and fair value. The fair value of the other-than-temporarily impaired
security becomes its new cost basis. In determining whether an unrealized loss
is expected to be other than temporary, the Company considers, among other
factors, any plans to sell the security, the severity of impairment, financial
position of the issuer, recent events affecting the issuer's business and
industry sector, credit ratings, and the ability of the Company to hold the
investment until the fair value has recovered at least its original cost basis.
For securitized debt securities, the Company considers factors including
commercial and residential property changes in value that vary by property type
and location and average cumulative collateral loss rates that vary by vintage
year. These assumptions require the use of significant management judgment and
include the probability of issuer default and estimates regarding timing and
amount of expected recoveries. In addition, projections of expected future debt
security cash flows may change based upon new information regarding the
performance of the issuer and/or underlying collateral.
For certain securitized financial assets with contractual cash flows, the
Company is required to periodically update its best estimate of cash flows over
the life of the security. If the fair value of a securitized financial asset is
less than its cost or amortized cost and there has been a decrease in the
present value of the estimated cash flows since the last revised estimate,
considering both timing and amount, an OTTI charge is recognized. The Company
also considers its intent to retain a temporarily impaired security until
recovery. Estimating future cash flows involves judgment and includes both
quantitative and qualitative factors. Such determinations incorporate various
information and assessments regarding the future performance of the underlying
collateral. In addition, projections of expected future cash flows may change
based upon new information regarding the performance of the underlying
collateral.
Management has completed a review for other-than-temporarily impaired securities
at December 31, 2014, 2013 and 2012 and recorded no OTTI. As a result of the
subjective nature of these estimates, however, provisions may subsequently be
determined to be necessary as new facts emerge and a greater understanding of
economic trends develops. Consistent with the Company's practices, OTTI will be
recorded as appropriate and as determined by the Company's regular monitoring
procedures of additional facts.
46
DERIVATIVE FINANCIAL INSTRUMENTS - The Company issues single premium deferred
annuity contracts that contain embedded derivatives. Derivatives embedded within
non-derivative host contracts are separated from the host instrument when the
embedded derivative is not clearly and closely related to the host instrument.
Such embedded derivatives are recorded at fair value, and they are reported as
part of assets on deposit and policyholder account balances in the balance
sheets, with the change in the value being recorded in net realized investment
gains.
Changes in the fair value of the embedded derivative in assets on deposit offset
changes in the fair value of the embedded derivative in policyholder account
balances; both of these changes are included in net realized investment gains.
Accretion of the interest on assets on deposit offsets accretion of the interest
on the host contract; both of these activities are included in interest credited
on policyholder account balances.
REINSURANCE - Reinsurance premiums, claims and benefits, commission expense
reimbursements, and reserves related to reinsured business ceded are accounted
for on a basis consistent with the accounting for the underlying direct policies
that have been ceded and the terms of the reinsurance contracts. Premiums and
insurance claims and benefits in the statements of operations and comprehensive
income (loss) are reported net of the amounts ceded to other companies under
such reinsurance contracts. Ceded insurance reserves and ceded benefits paid
are included in reinsurance recoverables along with certain ceded policyholder
account balances which include mortality risk. A prepaid reinsurance asset is
also recorded for the portion of unearned premiums related to ceded policies.
The Company entered into a coinsurance agreement with CMFG Life as described in
the Overview of this Management's Discussion and Analysis. As consideration for
the reinsurance provided under this agreement, we transfer nearly all of our
revenues to CMFG Life. Specifically, CMFG Life receives 95% of all premiums and
insurance claims and benefits received on account of our existing business.
The Company entered into a second agreement with CMFG Life as described in the
Overview of this Management's Discussion and Analysis to cede 100% of its new
business, which includes investment type contracts such as the Contract.
Accordingly, the agreement is accounted for using the deposit method of
accounting.
ASSETS ON DEPOSIT - Assets on deposit represent the amount of policyholder
account balances related to the single premium deferred annuity contracts, an
investment type contract, that are ceded to CMFG Life. These investment type
contracts are accounted for on a basis consistent with the accounting for the
underlying contracts. Since the related product is an investment type contract,
the Company accounts for the reinsurance of these contracts using the deposit
method of accounting consistent with the terms of the reinsurance agreement with
CMFG Life. The related contract charges and interest credited to policyholder
account balances in the statements of operations and comprehensive income (loss)
are reported net of the amounts ceded under the agreement. See Note 7 of the
Notes to the Financial Statements appearing elsewhere in this prospectus for a
further discussion of the ceding agreement.
INSURANCE RESERVES - Life and health claim and policy benefit reserves consist
principally of future policy benefit reserves and reserves for estimates of
future payments on incurred claims reported but not yet paid and unreported
incurred claims. Such estimates are developed using actuarial principles and
assumptions based on past experience adjusted for current trends. Any change in
the probable ultimate liabilities is reflected in net income in the period in
which the change is determined.
When actual experiences indicate that existing contract liabilities, together
with the present value of future gross premiums will not be sufficient to
recover the present value of future benefits or recover unamortized deferred
acquisition costs, a premium deficiency will be recognized by either a reduction
in unamortized acquisition costs or an increase in liability of future benefits.
The Company entered into two agreements with CFMG Life as described in the
Overview of this Management's Discussion and Analysis. These agreements do not
relieve the Company of its obligations to its policyholders under contracts
covered by these agreements. However, they do transfer nearly all of
47
the Company's underwriting profits and losses to CMFG Life and require CMFG Life
to indemnify the Company for nearly all of its liabilities.
POLICYHOLDER ACCOUNT BALANCES - The Company recognizes a liability at the stated
account value for policyholder deposits that are not subject to significant
policyholder mortality or longevity risk and for universal life-type policies.
The account value equals the sum of the original deposit and accumulated
interest, less any withdrawals and expense charges. The average credited rate of
interest applied to the account values was 4.5% in 2014, 2013 and 2012. The
minimum guaranteed rate of interest that must be credited to such account values
for the life of those contracts is 4.5%.
The single premium deferred annuities, which are included in policyholder
account balances, have two risk control accounts, referred to as the Secure and
Growth Accounts; the Secure Account has annual credited interest rate floor of
0% and the Growth Account has an annual credited interest rate floor of -10%.
The Secure and Growth Accounts both have credited interest rate caps that vary
with issuance. Interest is credited at the end of each contract year during the
selected index term based on the allocation between risk control accounts and
the performance of an external index during that contract year. Performance of
both the Secure Account and the Growth Account is calculated based, in part, on
the performance of the S&P 500 Index. At the end of the initial index term, only
the Secure Account will be available as an option to the policyholder.
INCOME TAXES - The Company recognizes taxes payable or refundable and deferred
taxes for the tax consequences of differences between the financial reporting
and tax basis of assets and liabilities. Deferred tax assets and liabilities
are measured by applying the enacted tax rates to the difference between the
financial statement and tax basis of assets and liabilities. The Company records
current tax benefits and deferred tax assets utilizing a benefits-for-loss
approach. Under this approach, current benefits are realized and deferred tax
assets are considered realizable by the Company when realized or realizable by
the consolidated group of which the Company is a member even if the benefits
would not be realized on a stand-alone basis. The Company records a valuation
allowance for deferred tax assets if it determines it is more likely than not
that the asset will not be realized by the consolidated group. Deferred income
tax assets can be realized through future earnings, including, but not limited
to the generation of future income, reversal of existing temporary differences
and available tax planning strategies.
The Company is subject to tax-related audits. These audits may result in
additional tax assets or liabilities. In establishing tax liabilities, the
Company determines whether a tax position is more likely than not to be
sustained under examination by the appropriate taxing authority. Tax positions
that do not meet the more likely than not standard are not recognized. Tax
positions that meet this standard are recognized in the financial statements.
The Company is included in the consolidated federal income tax return of CUNA
Mutual Holding Company ("CMHC"), the Company's ultimate parent. The Company has
entered into a tax sharing agreement with CMHC and its subsidiaries. The
agreement provides for the allocation of expenses based on each subsidiary's
contribution to the consolidated federal income tax liability. Pursuant to the
agreement, subsidiaries that have incurred losses are reimbursed regardless of
the utilization of the loss in the current year. Federal income taxes
recoverable reported on the balance sheet are due from affiliates.
EXECUTIVE SUMMARY
The Company provides life and health insurance throughout the United States
servicing its existing blocks of individual and group life policies and began
marketing the Contract in August, 2013. The Company is managed as two reportable
business segments, (1) life and health and (2) annuities. See Note 10 of the
Notes to the Financial Statements appearing elsewhere in this prospectus for
information related to the two business segments.
48
In 2012, the Company entered into a reinsurance agreement with CMFG Life to cede
95% of its business inforce as of October 31, 2012. In 2013 it entered into a
second agreement with CMFG Life to cede 100% of any new business written. See
Note 7 of the Notes to the Financial Statements appearing elsewhere in this
prospectus for information on the 2012 and 2013 agreements.
The Company began distributing the Contract in 2013 which became the Company's
second reportable business segment. The Company's annuities segment, which
includes the Contract, is ceded 100% to CMFG Life under the 2013 ceding
agreement and accordingly does not impact the results of operations.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012.
Total revenues, which consisted mainly of premiums, net realized investment
gains and investment income, were $429, $654 and ($13,752) for the years ended
December 31, 2014, 2013 and 2012, respectively. The decrease in total revenues
in 2014 is reflective of a settlement received on investments that had
previously been sold along with fewer investments to generate investment income
in 2013. The increase in total revenues in 2013 is reflective of the reinsurance
agreement executed in 2012 and an increase in other income which is a settlement
received on investments that had previously been sold, partially offset by fewer
investments to generate investment income. Premium revenue was $127, $139 and
($20,459) for the years ended December 31, 2014, 2013 and 2012, respectively,
and consists of life and health direct (and ceded) written renewal premium. The
decrease in 2014 premium revenue is due to the gradual runoff of the Company's
life and health products. The increase in 2013 premium revenue is reflective of
the reinsurance agreement executed in 2012. Total net investment income was
$278, $176 and $1,928 for the years ended December 31, 2014, 2013 and 2012,
respectively, which represents an average yield earned of 1.4%, 1.1% and 3.9%
for the same periods, respectively. The increase in the Company's net investment
income in 2014 is due to a 22% increase in invested assets and the reduction of
investment expenses. The decrease in the Company's net investment income in 2013
is due to the Company having fewer investments after the transfer of investments
in 2012 related to the 2012 reinsurance agreement and the return of capital to
CMIC, with a total fair value of $44,587. The increase in average yield in 2014
is due to the Company increasing its invested assets in higher yielding
investments. The decrease in average yield in 2013 is due to the Company
investing in lower yielding assets. Net realized investment gains were $4,319
for the year ended December 31, 2012. There were no sales of investments in 2014
or 2013 that resulted in a realized gain or loss. The net realized investment
gains in 2012 were due to the transfer of investments to CMFG Life in payment of
ceded premium for the Company's coinsurance agreement on its inforce business
and on investments transferred for the Company's return of capital to CMIC.
Total benefits and expenses were $257, $274 and ($18,783) for the years ended
December 31, 2014, 2013 and 2012, respectively. The primary decrease in life and
health benefits in 2014 is due to fewer claims incurred by the Company in 2014.
The difference in life and health benefits and expenses in 2013 compared to 2012
is primarily due to benefits being ceded to CMFG Life in 2012 and an increase in
product launch expenses related to the Company's product, the Contract. Life and
health benefits totaled $112, $179 and ($20,028) for the years ended December
31, 2014, 2013 and 2012, respectively. The Company ceded $23,114 of life and
health benefits in 2012, leading to the increase in benefits in 2013 from 2012.
The Company's primary expense is the payment of claims related to life insurance
policies. Operating expenses totaled $137, $86 and $1,087 for the years ended
December 31, 2014, 2013 and 2012, respectively. CMFG Life provides significant
services required in the conduct of the Company's operations. Operating expenses
incurred by the Company that are specifically identifiable are borne by the
Company; other operating expenses are allocated from CMFG Life on the basis of
estimated time and usage studies. Operating expenses are primarily related to
and include employee costs such as wages and benefits, and credit union
reimbursements whereby the Company reimburses credit unions for certain
administrative expenses they incur in the production of new and renewal business
sold for the Company and other operating expenses such as rent, insurance and
utilities. The decrease in operating expenses in 2013 is due to the Company
receiving a commission from CMFG Life for all expenses related to the Contract.
49
Income tax expense is recorded at 35% offset by prior year tax expense or
benefits primarily related to interest on accrued refunds, resulting in an
effective tax rate of 6.4%, 65.5% and 33.4% for the years ended December 31,
2014, 2013 and 2012, respectively.
Net income was $161, $131 and $3,352 for the years ended December 31, 2014, 2013
and 2012, respectively. The larger 2012 net income was primarily due to a
significant increase in realized gains on investments transferred to CMFG Life
in payment of ceded premium and on investments transferred for the Company's
return of capital to CMIC.
FINANCIAL CONDITION
INVESTMENTS
Our investment strategy is based upon a strategic asset allocation framework
that considers the need to manage our General Account investment portfolio on a
risk-adjusted spread basis for the underwriting of contract liabilities and to
maximize return on retained capital. Our investment in bonds consists of
publicly traded corporate bonds, mortgage-backed securities, and U.S. Treasury
securities. While the investments are categorized as available for sale, we
generally hold our bond portfolio to maturity.
Insurance statutes regulate the type of investments that we are permitted to
purchase and limit the amount of funds that may be used for any one type of
investment. In light of these statutes and regulations and our business and
investment strategy, we generally seek to invest in United States government and
government-sponsored agency securities and debt securities rated investment
grade by established nationally recognized rating organizations or in securities
of comparable investment quality, if not rated.
The composition of our investment portfolio at December 31, 2014 and December
31, 2013 was as follows:
------------------------------------------------------------------------------------
DECEMBER 31,
---------------------------------------------
2014 % 2013 %
------------------------------------------------------------------------------------
Debt Securities $ 13,194 99.1% $ 6,556 98.2%
Policy loans 104 0.8 110 1.6
Receivable for securities sold 15 0.1 15 0.2
------------------------------------------------------------------------------------
Total investments $ 13,313 100.0% $ 6,681 100.0%
------------------------------------------------------------------------------------
The table below presents our total debt securities by type at December 31, 2013
and December 31, 2012.
------------------------------------------------------------------------------------
DECEMBER 31,
---------------------------------------------
2014 % 2013 %
------------------------------------------------------------------------------------
U.S. government and agencies $ 9,987 75.6% $ 2,556 39.0%
Mortgage-backed securities:
Residential mortgage-backed 3,207 24.4 4,000 61.0
------------------------------------------------------------------------------------
Total debt securities $13,194 100.0% $ 6,556 100.0%
------------------------------------------------------------------------------------
50
The amortized cost and estimated fair value of debt securities by contractual
maturity are shown below at December 31, 2014. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
----------------------------------------------------------------------------------------------
AMORTIZED COST ESTIMATED FAIR VALUE
----------------------------------------------------------------------------------------------
Due after one year through five years $ 9,888 $ 9,987
Mortgage-backed securities:
Residential mortgage-backed 2,966 3,207
----------------------------------------------------------------------------------------------
Total debt securities $ 12,854 $ 13,194
----------------------------------------------------------------------------------------------
We have classified our debt securities as available for sale. Available for sale
securities are reported at fair value and unrealized gains and losses, if any,
on these securities (net of income taxes) are included as a separate component
of stockholder's equity, thereby exposing stockholder's equity to volatility for
changes in the reported fair value of securities classified as available for
sale.
The Company had one debt security with a gross unrealized loss of $4 at December
31, 2014. We did not have any gross unrealized losses at December 31, 2013.
LIQUIDITY AND CAPITAL RESOURCES
We entered into a coinsurance agreement with CMFG Life in 2012. Under this
agreement, we agreed to cede 95% of all insurance in force as of October 31,
2012 to CMFG Life. In 2013, we entered into an agreement to cede 100% of all
insurance issued on and after January 1, 2013 to CMFG Life. These agreements do
not relieve us of our obligations to our policyholders under contracts covered
by these agreements. However, they do transfer nearly all of the Company's
underwriting profits and losses to CMFG Life and require CMFG Life to indemnify
the Company for nearly all of its liabilities.
As consideration for the reinsurance provided under these agreements, we
transfer nearly all of our revenues to CMFG Life. Specifically, CMFG Life
receives 95% and 100% of all premiums and other amounts received on account of
our existing business and new business, respectively. As additional
consideration, we transferred assets equal to approximately 95% of our reserves
as of October 31, 2012 to CMFG Life. CMFG Life pays us a monthly expense
allowance to reimburse the Company for expenses and costs incurred on account of
its insurance business.
While the reinsurance transactions have a minimal impact on our stockholder's
equity, they substantially diminish our net liabilities and greatly decrease the
amount of capital and liquidity needed within the Company. As a result, the
Company was able to return $18,000 of capital to its shareholder, CMIC, on
November 30, 2012. This reduction in capital was approved by the Iowa Insurance
Division on November 26, 2012.
Operating activities provided $1,327, $4,286 and $1,840 in net cash flow for the
years ended December 31, 2014, 2013, and 2012, respectively. The Company's
primary use of funds includes the payment of benefits and related operating
expenses. The decrease in cash flow in 2014 from 2013 was primarily due to the
receipt of tax receivables in 2013 and the non-renewal of business on the
Company's older policies. The increase in cash flow in 2013 from 2012 was
primarily due to the Company's new annuity product and the receipt of cash on
taxes from the Company's parent company. The Company's sources of funds include
renewal premiums and investment income.
Investing activities used $6,779 and $683 for the years ended December 31, 2014
and 2012, respectively, and provided $1,665 of net cash flow for the year ended
December 31, 2013 The Company's main investing activities include the purchase
and sale of debt securities. The Company purchased $7,535 of debt securities in
2014, contributing to the net use of cash. The increase in the cash
51
provided in 2013 was driven by the Company receiving proceeds on the sale of
debt securities and not making any purchases of investments in 2013. The funds
used in 2012 were due to the Company making purchases of debt securities in
2012.
The Company used $51 and $84 of net cash flow for financing activities for the
year ended December 31, 2014 and 2012, respectively, and financing activities
provided $228 of net cash flow for the year ended December 31, 2013. The
Company's main financing activities include the collection of deposits and
payment of withdrawals from policyholder's accounts. The Company had slightly
increasing withdrawals on policyholder account balances in 2014 from 2013
leading to cash being used in financing activities in 2014. The deposits on
policyholder account balances were offset by the assets on deposit which were
ceded to CMFG Life under the 2013 ceding agreement. The Company provided a
return of capital to its parent company of $18,000 in 2012 of which $296 was in
cash contributing to the decrease in cash provided in 2012.
Going forward, liquidity requirements will be met primarily through monthly
settlements under the coinsurance agreements with CMFG Life. We anticipate
receiving adequate cash flow from these settlements and our investment income to
meet our obligations. However, a primary liquidity concern going forward will be
the risk of an extraordinary level of early policyholder withdrawals. We include
provisions within our policies, such as surrender charges, that help limit and
discourage early withdrawals.
We believe that cash flows generated from sources above will be sufficient to
satisfy the near term liquidity requirements of our operations, including
reasonable foreseeable contingencies. However, we cannot predict future
experience regarding benefits and surrenders since benefit and surrender levels
are influenced by such factors as the interest rate environment, our claims
paying ability and our financial credit ratings.
Most funds we receive going forward, funds which we will receive as annuity
deposits, will be invested in high quality investments, those identified by the
Company as investment grade, to fund our future commitments. We believe that the
settlement we receive under the reinsurance agreements with CMFG Life, the
diversity of our investment portfolio and a concentration of investments in high
quality securities should provide sufficient liquidity to meet foreseeable cash
requirements. Although there is no present need or intent to dispose of our
investments, we could readily liquidate portions of our investments, if such a
need arose. Sales of available for sale securities in an unrealized loss
position are subject to other than temporary impairment considerations including
our intent to sell.
STATUTORY FINANCIAL DATA AND DIVIDEND RESTRICTIONS
We are a life and health insurer domiciled in Iowa. We file statutory basis
financial statements with regulatory authorities. Our statutory capital and
surplus was $18,366 and $17,829 as of December 31, 2014 and 2013, respectively.
Our statutory basis net income (loss) was ($1,792), ($1,562) and $3,259 for the
years ended December 31, 2014, 2013, and 2012, respectively.
We are subject to statutory regulations as to maintenance of equity and the
payment of dividends. Generally, ordinary dividends from an insurance subsidiary
to its parent company must meet notice requirements promulgated by the regulator
of the subsidiary's state of domicile ("Insurance Department"). Extraordinary
dividends, as defined by state statutes, must be approved by the Insurance
Department. Based on Iowa statutory regulations, the Company could pay dividends
of $1,836 during 2015, without prior approval of the Iowa Insurance Department.
Risk-based capital requirements promulgated by the National Association of
Insurance Commissioners require U.S. insurers to maintain minimum capitalization
levels that are determined based on formulas incorporating credit risk,
insurance risk, interest rate risk, and general business risk. At December 31,
2014 and 2013, the Company's adjusted capital exceeded the minimum
capitalization requirements.
52
CONTRACTUAL OBLIGATIONS
In December 2007, the Company entered into a Procurement and Disbursement and
Billing and Collection Services Agreement with CMFG Life and certain other
affiliated companies whereby CMFG Life has agreed to provide certain of our
operational requirements. In January 2008 the Company entered into a Cost
Sharing Agreement with CMFG Life and certain other affiliated companies.
Pursuant to this agreement, CMFG Life has agreed to provide the Company with
certain office and market services and personnel services. Additionally, we are
allocated a certain portion of the total compensation of each of our executive
officers and directors, based on various factors, the primary being the
estimated time allocated to providing services to the Company. In exchange for
providing these administrative functions and use of shared resources and
personnel, the Company reimburses CMFG Life for the cost of providing such
administrative functions, resources and personnel. The Company reimbursed CMFG
Life $5,641, $2,492, and $1,044 for these expenses for the years ended December
31, 2014, 2013 and 2012, respectively.
For detailed discussion of the management services agreement, the investment
advisory agreement and the coinsurance agreements, see "Certain Relationships
and Related Party Transactions."
Going forward, we may enter into financing transactions, lease agreements, or
other commitments in the normal course of our business.
The Company has the following future minimum estimated claim and benefit
payments as of December 31, 2014.
-----------------------------------------------------------------------------------
ESTIMATED FUTURE CLAIM
AND BENEFIT PAYMENTS
-----------------------------------------------------------------------------------
Due in one year or less $ 20,554
Due after one year through three years 47,496
Due after three years through five years 72,539
Due after five years 292,437
-----------------------------------------------------------------------------------
Total estimated payments $ 433,026
-----------------------------------------------------------------------------------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Given our limited operations in writing new business to date, we are not
currently subject to any material market risk exposures. However, in future
periods, we expect to have exposure to market risk through both our insurance
operations and investment activities, although a significant portion of this
risk will be reinsured by CMFG Life pursuant to the coinsurance agreements
discussed above. In addition, many of the measures described herein to offset
these market risks will be taken by CMFG Life as it will hold nearly all of the
assets related to our insurance business as a result of the coinsurance and
ceding agreements.
Interest rate risk will be our primary market risk exposure. Substantial and
sustained increases and decreases in market interest rates will affect the
profitability of our annuity products and the fair value of our investments.
Most of the interest rate risk is absorbed by CMFG Life under the agreements.
The profitability of most of our annuity products will depend on the spreads
between interest yield on investments and rates credited on the annuity
products. We will have the ability to adjust crediting rates (caps,
participation rates or asset fee rates for indexed annuities) on substantially
all of our annuity products at least annually (subject to minimum guaranteed
values). In addition, substantially all of our annuity products will have
surrender and withdrawal penalty provisions designed to encourage
53
persistency and to help ensure targeted spreads are earned. However, competitive
factors, including the impact of the level of surrenders and withdrawals, may
limit our ability to adjust or maintain crediting rates at levels necessary to
avoid narrowing of spreads under certain market conditions.
A major component of our interest rate risk management program is structuring
the general account investment portfolio with cash flow characteristics
consistent with the cash flow characteristics of our annuity products. We use
computer models to simulate cash flows expected from our existing business under
various interest rate scenarios. These simulations enable us to measure the
potential gain or loss in fair value of our interest rate-sensitive financial
instruments, to evaluate the adequacy of expected cash flows from our assets to
meet the expected cash requirements of our annuity products and to determine if
it is necessary to lengthen or shorten the average life and duration of our
investment portfolio. The "duration" of a security is the time weighted present
value of the security's expected cash flows and is used to measure a security's
sensitivity to changes in interest rates. When the durations of assets and
liabilities are similar, exposure to interest rate risk is minimized because a
change in value of assets should be largely offset by a change in the value of
liabilities. As of December 31, 2014, the Company's fixed debt investment
portfolio consisted of U.S. government and agency securities and residential
mortgage-backed securities with fair values of $9,987 and $3,207 respectively
and has an average duration of 15.1 years.
With respect to our indexed annuities, we intend to purchase call options on the
applicable indices to fund the annual index credits on such annuities. These
options will be primarily one-year instruments purchased to match the funding
requirements of the underlying policies. Fair value changes associated with
these investments should substantially be offset by an increase or decrease in
the amounts added to policyholder account balances for indexed products.
We also intend to utilize a hedging process in which we purchase options out of
the money to the extent of any anticipated annual index credits under the
indexed annuities. On the anniversary dates of the indexed annuities, we will
purchase new one-year call options to fund the next annual index credits. The
risk associated with these prospective purchases is the uncertainty of the cost,
which will determine whether we are able to earn our spread on our index
business. We will manage this risk through the terms of our annuities, which
will permit us to change caps, participation rates and asset fees, subject to
contractual features. By modifying caps, participation rates or asset fees, we
can limit option costs to budgeted amounts, except in cases where the
contractual features would prevent further modifications.
--------------------------------------------------------------------------------
MANAGEMENT
--------------------------------------------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are as follows:
NAME AGE POSITION
------------------------------------------ ------- ---------------------------
Robert N. Trunzo 59 President and Director
Steven R. Suleski 61 Secretary
Brian J. Borakove 36 Treasurer
Christopher J. Copeland 41 Director
Thomas J. Merfeld 57 Director
James M. Power 52 Director
M. Jeffrey Bosco 50 Director
54
All executive officers and directors are elected annually.
ROBERT N. TRUNZO has served as our President since May 30, 2009. Mr. Trunzo
was appointed director as of November 19, 2012. He also serves as the Executive
Vice President since 2005 and President since August, 2012 for CMFG Life. He
became President and CEO of CUNA Mutual Group effective January 1, 2014. Mr.
Trunzo has also served as the Executive Vice President of Frank F. Haack and
Associates, the largest insurance-benefits and property-casualty brokerage and
consulting firm in Wisconsin, from September, 2002 to June, 2005. Before joining
Frank F. Haack and Associates, Mr. Trunzo served as Secretary of Commerce under
Wisconsin Governor Tommy Thompson, where he directed Wisconsin's economic
development efforts. He has served on the board of directors of the U.S. Chamber
of Commerce. Additionally, he is a member of the American Council of Life
Insurers and sits on the Council's CEO Steering Committee on Retirement and
Financial Security.
STEVEN R. SULESKI has served as our Secretary and Senior Vice President
since February 1, 2012. He has served as Associate General Counsel for the past
13 years at CMFG Life, from March, 1999 to January, 2014. He serves as Chief
Governance Officer effective January, 2014 to present. Before joining the
Company, Mr. Suleski spent 12 years at Foley & Lardner, LLP, in Madison,
Wisconsin, where he was a partner specializing in securities law, mergers and
acquisitions and general corporate law.
BRIAN J. BORAKOVE has served as our Treasurer since November 19, 2012 and
VP-Corporate Treasurer since 2007 at CMFG Life. Prior to joining CMFG Life, he
was a Senior Manager, Investment Finance at Liberty Mutual Insurance in Boston,
Massachusetts from 2005 to 2007. Prior to joining Liberty Mutual Insurance, Mr.
Borakove served as a Senior Analyst, Treasury at FM Global in Johnston, Rhode
Island from 2003-2005. Mr. Borakove held various positions at State Street Bank
in Boston, Massachusetts from 2001-2003.
CHRISTOPHER J. COPELAND has been a director of the Company since January 1,
2015. He also serves as the Senior Vice President and Chief Actuary for CMFG
Life where he is responsible for leading the actuarial functions for CMFG Life.
Before joining CMFG Life, Mr. Copeland was a Senior Actuary in the Corporate
Risk Management department at AEGON USA in Cedar Rapids, Iowa. Mr. Copeland
began his career as an Actuarial Associate with Towers Perrin, Minneapolis,
Minnesota.
THOMAS J. MERFELD has been a director of the Company since February 16,
2011. He also has serves as the Senior Vice President and Chief Investment Risk
Officer for CMFG Life where he assesses, coordinates, and manages all investment
risks for CMFG Life. Mr. Merfeld served as head of asset/liability management
for MEMBERS Capital Advisors, an affiliate of the Company. Prior to joining CMFG
Life, Mr. Merfeld served as the Chief Financial Officer for Savers Life
Insurance Company in Kansas City, Missouri. Mr. Merfeld served an investment
analyst for Franklin Savings Association in Ottawa, Kansas. Mr. Merfeld served
as an assistant economist for the Federal Reserve Bank in Kansas City, Missouri.
JAMES M. POWER has been director of the Company since February 16, 2011.
Mr. Power has also served as the Senior Vice President, Chief Products Officer
for CMFG Life since August, 2005. Mr. Power spent seven years, from April, 1998
to April, 2005, with Fireman's Fund Insurance Company, ultimately serving as
that company's top regional executive in the Midwest. Mr. Power has more than 20
years of progressive leadership experience in strategic planning, underwriting,
marketing and agency and distribution management for Fortune 100 companies, as
well as other leading national insurance companies.
M. JEFFREY BOSCO has been a director of the Company since January 1, 2015.
He also serves as the Senior Vice President of Wealth Management for CMFG Life
where he leads overall business strategy and product management for CUNA
Brokerage Services, Inc. and CMFG Life's and affiliates family of annuity
products. Prior to joining CMFG Life in 2011, Mr. Bosco held a number of
positions at American Family Insurance Group, Madison, Wisconsin.
55
TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS
POLICY REGARDING RELATED PERSON TRANSACTIONS
It is our policy to enter into or ratify related person transactions only when
our Board of Directors determines that the transaction either is in, or is not
inconsistent with, our best interests, including but not limited to situations
where we may obtain products or services of a nature, quantity or quality, or on
other terms, that are not readily available from alternative sources or when we
provide products or services to related persons on an arm's length basis on
terms comparable to those provided to unrelated third parties or on terms
comparable to those provided to employees generally.
Therefore, we have adopted the following procedures for the review, approval or
ratification of related person transactions. For purposes of the related person
transaction policy, a related person transaction is a transaction, arrangement,
or relationship (or any series of similar transactions, arrangements, or
relationships) in which (i) we were, are or will be a participant, (ii) the
amount of the transaction, arrangement or relationship exceeds $120,000, and
(iii) in which a related person had, has or will have a direct or indirect
material interest in the transaction.
A related person means:
o any person who is, or at any time since the beginning of our last fiscal
year was, a member of our Board of Directors or an executive officer or
a nominee to become a member of our Board of Directors;
o any person who is known to be the beneficial owner of more than 5% of
any class of our voting securities;
o any immediate family member of any of the foregoing persons; or
o any firm, corporation, or other entity in which any of the foregoing
persons is employed or is a general partner or principal or in a similar
position or in which such person has a 5% or greater beneficial
ownership interest.
Any proposed transaction with a related person shall be consummated or amended
only if the following steps are taken:
o Counsel (either inside or outside) will assess whether the proposed
transaction is a related person transaction for purposes of this policy.
o If counsel determines that the proposed transaction is a related person
transaction, the proposed transaction shall be submitted to the Board of
Directors for consideration at the next meeting or, in those instances
in which counsel, in consultation with the President or the Treasurer,
determines that it is not practicable or desirable for us to wait until
the next committee meeting, to the President of the Company (who has
been delegated authority to act between meetings).
o The Board of Directors shall consider all of the relevant facts and
circumstances available, including (if applicable) but not limited to:
(i) the benefits to the Company; (ii) the impact on a director's
independence in the event the related person is a director, an immediate
family member of a director, or an entity in which a director is a
partner, shareholder, or executive officer; (iii) the availability of
other suppliers or customers for comparable products or services; (iv)
the terms of the transaction; and (v) the terms available to unrelated
third parties or to employees generally.
56
o The Board of Directors shall approve only those related person
transactions that are in, or are not inconsistent with, the best
interests of the Company and its shareholders, as the Board of Directors
determines in good faith. The Board of Directors, shall convey the
decision to counsel, who shall convey the decision to the appropriate
persons within the Company.
At the Board of Director's first meeting of each fiscal year, it shall review
any previously approved related person transactions that remain ongoing and have
a remaining term of more than six months or remaining amounts payable to or
receivable from the Company of more than $120,000. Based on all relevant facts
and circumstances, taking into consideration the Company's contractual
obligations, the Board of Directors shall determine if it is in the best
interests of the Company and its shareholders to continue, modify, or terminate
the related person transaction.
No member of the Board of Directors shall participate in any review,
consideration, or approval of any related person transaction with respect to
which such member or any of his or her immediate family members is the related
person.
CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
Except for the agreements noted below, there have been no transactions between
the Company and any related person since January 1, 2011, nor are any such
related person transactions currently being contemplated for which disclosure
would be required.
We entered into a coinsurance agreement with CMFG Life in 2012. Under this
agreement, we agreed to cede 95% of all insurance in force as of October 31,
2012 to CMFG Life. In 2013, we entered into a second coinsurance agreement to
cede 100% of all insurance issued on and after January 1, 2013 to CMFG Life.
These agreements do not relieve us of our obligations to our policyholders under
contracts covered by these agreements. However, they do transfer nearly all of
the Company's underwriting profits and losses to CMFG Life and require CMFG Life
to indemnify the Company for nearly all of its liabilities.
As consideration for the reinsurance provided under these agreements, we
transfer nearly all of our revenues to CMFG Life. Specifically, CMFG Life
receives 95% and 100% of all premiums and other amounts received on account of
our existing business and new business, respectively. As additional
consideration, we transferred assets equal to 95% of our reserves as of October
31, 2012 to CMFG Life. CMFG Life pays us a monthly expense allowance to
reimburse the Company for expenses and costs incurred on account of its
insurance business. For the years ended December 31, 2014, 2013 and 2012, we
ceded $2,486, $2,672 and $23,667, respectively. See Note 7 to the Financial
Statements appearing elsewhere in this prospectus.
In December 2007, the Company entered into a Procurement and Disbursement and
Billing and Collection Services Agreement with CMFG Life and certain other
affiliated companies whereby CMFG Life has agreed to provide certain of our
operational requirements. In January 2008 the Company entered into a Cost
Sharing Agreement with CMFG Life and certain other affiliated companies.
Pursuant to this agreement, CMFG Life has agreed to provide the Company with
certain office and market services and personnel services. Additionally, we are
allocated a certain portion of the total compensation of each of our executive
officers and directors, based on various factors, the primary being the
estimated time allocated to providing services to the Company. In exchange for
providing these administrative functions and use of shared resources and
personnel, the Company reimburses CMFG Life for the cost of providing such
administrative functions, resources and personnel. The Company reimbursed CMFG
Life $5,641, $2,492 and $1,044 for these expenses in 2014, 2013 and 2012,
respectively.
The Company has hired MEMBERS Capital Advisors, Inc. ("MCA") to provide
investment advisory services with respect to the Company's general account
assets. MCA, which is 100% owned by CMIC, manages substantially all of the
Company's invested assets in accordance with policies, directives and guidelines
established by the Company.
57
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors has not established any committees. Our Board of
Directors relies on the committees of CMFG Life's Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Board of Directors has not established a compensation committee. None of our
executive officers has served on the board of directors or compensation
committee (or other committee serving an equivalent function) of any other
entity whose executive officers served on our Board of Directors.
EXECUTIVE COMPENSATION
We share personnel with our parent company, CMFG Life, pursuant to a Cost
Sharing Agreement between CMFG Life and us. Our operational needs are met by
CMFG Life and certain of its affiliates pursuant to the Cost Sharing Agreement
and the CUNA Mutual Group Cost Sharing, Procurement, Disbursement, Billing and
Collection Agreement. Certain employees who provide services to us under such
agreement are CMFG Life executive officers or employees and are paid by CMFG
Life. Their compensation-related costs are allocated to us based on various
factors, the primary being the estimated time allocated to providing services to
us. The Company had not been issuing new policies for several years and the
primary business had been managing its block of existing business. As a result,
some of the current officers have not devoted any significant amounts of time to
the Company and its operations. The introduction of this product, the Contract,
and filing of this registration statement resulted in all officers and directors
devoting more time to the Company's business and more of their compensation-
related costs allocated to the Company based upon the increased time devoted to
development of this business. The dollar amounts disclosed in this Executive
Compensation are not "in thousands."
In order to help you understand our compensation-related costs, we have set
forth below a discussion of CMFG Life's compensation policies and programs as
such policies and programs relate to our named executive officers.
COMPENSATION DISCUSSION AND ANALYSIS. These compensation policies and programs
are designed to attract and retain highly qualified and motivated executive
officers and employees and encourage and reward achievement of annual and
long-term goals.
Federal income tax law limits deductibility of compensation in excess of $1
million paid to certain named executive officers unless this compensation
qualifies as "performance-based compensation." It is the intent of CMFG Life to
qualify its executives' compensation for deductibility under applicable tax
laws, while recognizing that there may be situations in which compensation for
executive officers may not be tax deductible.
NAMED EXECUTIVE OFFICERS. The primary elements of compensation for our named
executive officers, who are officers of and compensated by CMFG Life, include
base pay and incentive compensation.
BASE PAY. The Board of Directors of CUNA Mutual Holding Company, the parent of
CMFG Life, engages Mercer (US) Inc. ("Mercer") as a compensation consultant to
provide advice and data with respect to compensation bench-marking and market
practices for executives of CMFG Life. The most recent executive compensation
review was presented to the Compensation Committee of CUNA Mutual Holding
Company's Board of Directors by Mercer on May 7, 2013. Mercer develops a blended
market consensus base salary for each of the positions of the named executive
officers. Mercer utilizes proxy data and private survey data from selected peer
insurance companies public and private survey data from 2012 for the financial
service and insurance industries of companies.
58
The Company primarily services existing blocks of individual and group life
policies and began marketing the Contract in August, 2013. The amount of
compensation allocated to the Company for Mr. Trunzo in 2014, 2013 and 2012 was
$43,000, $5,800 and zero, respectively. The amount of compensation allocated to
the Company for Mr. Borakove for 2014, 2013 and 2012 was $2,600, $1,300 and
$800, respectively. This represents an allocation of gross wages and Corporate
Success Sharing Plan ("CSSP)" payment.
INCENTIVE COMPENSATION. Under the CSSP for 2015, an incentive compensation pool
is created if CMFG Life has positive earnings for the year. If CMFG Life meets
this objective, the Board of Directors of CUNA Mutual Holding Company ("Board")
determines the amount of the pool that may be paid to leadership and staff based
on CMFG Life performance, using the following guidelines and weighting factors:
Pre-Tax Operating Gain (as may be adjusted by the Board) 75% and Operating
Revenue 25%. Depending upon the level of CMFG Life's success as determined by
the Board, compensation is paid out of this pool as a percentage of the base
salary according to the level of individual performance. Our management and the
Board believe that this CSSP design creates the proper focus, flexibility and
alignment for maximizing short-term and long-term policyholder value creation to
benefit the policyholders who own CUNA Mutual Holding Company, the ultimate
parent of both CMFG Life and the Company.
The costs of the CSSP and other incentive programs and benefits that have been
allocated to the Company for the President for 2014 is $35,000. These
allocations increased as management has been required to devote more time to the
operations of the Company.
The costs of the CSSP and other incentive programs and benefits that have been
allocated to the Company for the Treasurer for 2014 is $1,000. These allocations
increased as management has been required to devote more time to the operations
of the Company.
There is an additional incentive program for senior management personnel of CMFG
Life, which includes some of the named executives, known as the Long Term
Incentive Plan ("LTIP"). This plan is formula driven like the CSSP plan and is
based upon CMFG Life meeting certain financial objectives but differs from the
CSSP plan because the payments are not based upon individual performance but on
whether or not CMFG Life meets the pre-determined corporate objectives.
At the time the performance goals for the different incentive plans were
approved by the Board of Directors, it was believed that the performance targets
reflected an appropriate degree of stretch but that they were attainable based
on successful execution of the Company's business plan and the realization of
macro-economic and market conditions reasonably aligned with the Company's near
term expectations.
CHANGE IN CONTROL, SEPARATION AND RETIREMENT ARRANGEMENTS. CMFG Life has a
written employment contract with Mr. Trunzo. None of the other named executive
officers have employment contracts or separation agreements with CMFG Life. No
costs associated with this employment contract have previously been allocated to
the Company.
NON-QUALIFIED DEFERRED COMPENSATION ARRANGEMENTS. CMFG Life permits eligible
employees to defer on an elective basis a specified portion of their base
salaries and incentive compensation. Any such deferrals must be made pursuant to
a non-qualified deferred compensation plan between the officer and the Company.
The investment of deferred amounts is directed by the individual officers and
the returns on such investments is reflected in the deferred account balance of
such officer. The balance of the deferred compensation accounts will be
distributed to each executive who has elected to make such deferrals upon his or
her death, disability or separation from service.
OTHER COMPENSATION. CMFG Life has a qualified 401(k) plan for all eligible
employees who are eligible after thirty days of employment and attainment of age
18. CMFG Life matches 100% of employee contributions to the plan up to 5% of the
employee's total compensation, subject to the limitations
59
specified in the Internal Revenue Code. CMFG Life also maintains a Supplemental
401(k) plan in which some of the named executive officers participate that
provides additional benefits and a company match within the limits prescribed by
the Internal Revenue Code. In addition to the 401(k) plan, all employees of CMFG
Life participate in a Defined Benefit Pension Plan. There is a non-qualified
plan to which CMFG Life contributes for some of the named executives amounts
that would otherwise be paid into the Defined Benefit Pension Plan but for
limitations on qualified plan contributions by CMFG Life. CMFG Life offers a
package of insurance benefits to all employees including health, dental,
long-term disability and life insurance. Some of the named executive officers
receive an annual retention payment which is a flat fee. Several of the named
executive officers receive perquisites including car allowances, use of Company
owned aircraft, travel to Company conventions for themselves and their spouse,
tax benefits and tax preparation fees.
COMPENSATION SUMMARY
The following table sets forth the allocated compensation based upon the
estimated percentage of time the following officers devote to the affairs of
MEMBERS Life Insurance Company for the 2012, 2013 and 2014 fiscal years:
------------------------------------------------------------------------------------------------
SALARY BONUS TOTAL**
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)
------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (j)
------------------------------------------------------------------------------------------------
Robert N. Trunzo, President and 2012 - - -
Director* 2013 $2,800 $ 3,000 $ 5,800
2014 $8,000 $35,000 $43,000
------------------------------------------------------------------------------------------------
Brian J. Borakove, Treasurer** 2012 $ 500 $ 300 $ 800
2013 $1,000 $ 300 $ 1,300
2014 $1,600 $ 1,000 $ 2,600
------------------------------------------------------------------------------------------------
* No costs associated with Mr. Trunzo's compensation were allocated to the
Company for 2012.
** Includes compensation paid by CMFG Life that was allocated to the Company for
service rendered by Mr. Borakove.
DIRECTOR COMPENSATION
The following directors of the Company are all officers of CMFG Life. The
Company's directors receive no compensation for their service as directors of
the Company but are compensated by CMFG Life for their services as officers of
that company. Accordingly, no costs were allocated to the Company for services
of these persons in their role as directors: Stephen W. Koslow, Thomas J.
Merfeld, James M. Power, and Richard R. Roy. Messrs. Koslow and Roy are no
longer directors of the Company effective December 31, 2014.
LEGAL PROCEEDINGS
Like other insurance companies, we routinely are involved in litigation and
other proceedings, including class actions, reinsurance claims and regulatory
proceedings arising in the ordinary course of our business. In recent years, the
life insurance and annuity industry, including us and our affiliated companies,
has been subject to an increase in litigation pursued on behalf of both
individual and purported classes of insurance and annuity purchasers,
questioning the conduct of insurance companies and their agents in the marketing
of their products. In addition, state and federal regulatory bodies, such as
state insurance departments and attorneys general, periodically make inquiries
and conduct examinations concerning compliance by us and others with applicable
insurance and other laws.
60
In connection with regulatory examinations and proceedings, government
authorities may seek various forms of relief, including penalties, restitution
and changes in business practices. The Company has established procedures and
policies to facilitate compliance with laws and regulations and to support
financial reporting. These actions are based on a variety of issues and involve
a range of the Company's practices. We respond to such inquiries and cooperate
with regulatory examinations in the ordinary course of business. In the opinion
of management, the ultimate liability, if any, resulting from all such pending
actions will not materially affect the financial statements of the Company.
IMPORTANT INFORMATION ABOUT THE INDEX
The Product is not sponsored, endorsed, sold or promoted by Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("BofA Merrill Lynch"). BofA Merrill Lynch
has not passed on the legality or suitability of, or the accuracy or adequacy of
descriptions and disclosures relating to, the Product, nor makes any
representation or warranty, express or implied, to the owners of Product or any
member of the public regarding the Product or the advisability of investing in
the Product, particularly the ability of the ("Indices") to track performance of
any market or strategy. BofA Merrill Lynch's only relationship to MEMBERS Life
Insurance Company ("Licensee") is the licensing of certain trademarks and trade
names and indices or components thereof. The Indices are determined, composed
and calculated by BofA Merrill Lynch without regard to the Licensee or the
Product or its holders. BofA Merrill Lynch has no obligation to take the needs
of the Licensee or the holders of the Product into consideration in determining,
composing or calculating the Indices. BofA Merrill Lynch is not responsible for
and has not participated in the determination of the timing of, prices of, or
quantities of the Product to be issued or in the determination or calculation of
the equation by which the Product is to be priced, sold, purchased, or redeemed.
BofA Merrill Lynch has no obligation or liability in connection with the
administration, marketing, or trading of the Product.
BOFA MERRILL LYNCH DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF
THE INDICES OR ANY DATA INCLUDED THEREIN AND BOFA MERRILL LYNCH SHALL HAVE NO
LIABILITY FOR ANY ERRORS, OMISSIONS, UNAVAILABILITY, OR INTERRUPTIONS THEREIN.
BOFA MERRILL LYNCH MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE
OBTAINED BY LICENSEE, HOLDERS OF THE PRODUCT OR ANY OTHER PERSON OR ENTITY FROM
THE USE OF THE INDICES OR ANY DATA INCLUDED THEREIN. BOFA MERRILL LYNCH MAKES NO
EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, WITH RESPECT TO THE
INDICES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN
NO EVENT SHALL BOFA MERRILL LYNCH HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE,
INDIRECT, INCIDENTAL, CONSEQUENTIAL DAMAGES, OR LOST PROFITS, EVEN IF NOTIFIED
OF THE POSSIBILITY OF SUCH DAMAGES.
THE BOFA MERRILL LYNCH MARKS ARE TRADEMARKS OF MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED OR ITS AFFILIATES AND HAVE BEEN LICENSED FOR USE BY MEMBERS
LIFE INSURANCE COMPANY.
The Product is not sponsored, endorsed, sold or promoted by Standard & Poor's, a
division of the McGraw-Hill companies, Inc. ("S&P"). S&P makes no representation
or warranty, express or implied, to the owners of the Product or any member of
the public regarding the advisability of investing in securities generally or in
the Product particularly or the ability of the S&P 500 Index to track general
stock market performance. S&P's only relationship to the Company is the
licensing of certain trademarks and trade names of S&P and of the S&P 500 Index
which is determined, composed and calculated by S&P without regard to the
Company or Product. S&P has no obligation to take the needs of the Company or
the owners of the Product into consideration in determining, composing or
calculating the S&P 500 Index. S&P is not responsible for and has not
participated in the determination of the prices and amount of the Product or the
timing of the issuance or sale of the Product or in determination or calculation
of the equation by which the Product is to be converted into cash. S&P has no
obligation or liability in connection with the administration, marketing or
trading of the Product.
61
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX
OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED,
AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT, OR ANY OTHER
PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN.
S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
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The S&P 500 Index is a stock market index based on the market capitalizations of
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Standard & Poors. The Index can go up or down based on the stock prices of the
500 companies that comprise the Index. The Index does not include dividends paid
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WE DO NOT FILE REPORTS UNDER THE 1934 ACT IN RELIANCE ON RULE 12H-7 UNDER THE
1934 ACT, WHICH PROVIDES AN EXEMPTION FROM THE REPORTING REQUIREMENTS OF
SECTIONS 13 AND 15 OF THE 1934 ACT.
62
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
63
MEMBERS LIFE INSURANCE COMPANY
FINANCIAL STATEMENTS AS OF DECEMBER 31, 2014 AND 2013
AND FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2014
AND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
INDEX TO
FINANCIAL STATEMENTS OF
MEMBERS LIFE INSURANCE COMPANY
--------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm ................................................................ 1
Balance Sheets as of December 31, 2014 and 2013 ........................................................................ 2
Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2014, 2013 and 2012 .......... 3
Statements of Stockholder's Equity for the Years Ended December 31, 2014, 2013 and 2012 ................................ 4
Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012 .......................................... 5
Notes to Financial Statements
Note 1--Nature of Business ................................................................................ 6
Note 2--Summary of Significant Accounting Policies ........................................................ 6
Note 3--Investments, Debt Securities ..................................................................... 12
Note 3--Investments, Net Investment Income ............................................................... 13
Note 3--Investments, Net Realized Investment Gains ....................................................... 14
Note 3--Investments, Other-Than-Temporary Investment Impairments ......................................... 14
Note 3--Investments, Net Unrealized Investment Gains ..................................................... 15
Note 3--Investments, Embedded Derivatives ................................................................ 15
Note 3--Investments, Assets Designated/Securities on Deposit ............................................. 16
Note 4--Fair Value ....................................................................................... 16
Note 5--Income Tax ....................................................................................... 23
Note 6--Related Party Transactions ....................................................................... 26
Note 7--Reinsurance ...................................................................................... 27
Note 8--Statutory Financial Data and Dividend Restrictions ............................................... 29
Note 9--Accumulated Other Comprehensive Income ........................................................... 30
Note 10--Business Segment Information .................................................................... 31
Note 11--Commitments and Contingencies ................................................................... 33
Note 12--Subsequent Events ............................................................................... 33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
MEMBERS Life Insurance Company
Madison, Wisconsin
We have audited the accompanying consolidated balance sheets of MEMBERS Life
Insurance Company (the "Company") as of December 31, 2014 and 2013, and the
related statements of operations and comprehensive income (loss), stockholder's
equity, and cash flows for each of the three years in the period ended December
31, 2014. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of MEMBERS Life Insurance Company as of
December 31, 2014 and 2013, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2014, in conformity
with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
March 13, 2015
MEMBERS LIFE INSURANCE COMPANY
Balance Sheets
December 31, 2014 and 2013
($ in 000s)
================================================================================
ASSETS 2014 2013
--------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
Debt securities, available for sale, at fair value
(amortized cost 2014 - $12,854; 2013 - $6,144) $ 13,194 $ 6,556
Policy loans 104 110
Receivable for securities sold 15 15
--------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 13,313 6,681
Cash and cash equivalents 5,602 11,105
Accrued investment income 80 64
Reinsurance recoverable from affiliate 25,199 25,525
Assets on deposit 349,937 89,313
Premiums receivable, net 28 32
Net deferred tax asset 440 611
Receivable from affiliate 2,765 2,865
Other assets and receivables 220 502
Federal income taxes recoverable from affiliate 1,797 1,884
--------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 399,381 $ 138,582
==========================================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
--------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Claim and policy benefit reserves - life and health $ 22,368 $ 23,196
Policyholder account balances 353,549 93,047
Unearned premiums 3 3
Payables to affiliates 1,292 870
Accounts payable and other liabilities 2,954 2,365
--------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 380,166 119,481
--------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDER'S EQUITY
Common stock, $5 par value, authorized 1,000 shares;
issued and outstanding 1,000 shares 5,000 5,000
Additional paid in capital 10,500 10,500
Accumulated other comprehensive income,
net of tax expense (2014 - $118; 2013 - $143) 222 269
Retained earnings 3,493 3,332
--------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 19,215 19,101
--------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 399,381 $ 138,582
==========================================================================================================================
--------------------------------------------------------------------------------
See accompanying notes to financial statements. 2
MEMBERS LIFE INSURANCE COMPANY
Statements of Operations and Comprehensive Income (Loss)
Years Ended December 31, 2014, 2013 and 2012
($ in 000s)
================================================================================
2014 2013 2012
--------------------------------------------------------------------------------------------------------------------------
REVENUES
Life and health premiums, net (Note 7) $ 127 $ 139 $ (20,459)
Contract charges, net (Note 7) 24 46 460
Net investment income 278 176 1,928
Net realized investment gains - - 4,319
Other income - 293 -
--------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 429 654 (13,752)
--------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Life and health insurance claims and
benefits, net (Note 7) 112 179 (20,028)
Interest credited to policyholder account balances, net (Note 7) 8 9 158
Operating and other expenses (Note 6) 137 86 1,087
--------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 257 274 (18,783)
--------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 172 380 5,031
Income tax expense 11 249 1,679
--------------------------------------------------------------------------------------------------------------------------
NET INCOME 161 131 3,352
--------------------------------------------------------------------------------------------------------------------------
Change in unrealized gains (losses), net of tax expense
(benefit) (2014 - ($25); 2013 - ($105); 2012 - $210) (47) (154) 390
Reclassification adjustment for (gains)
included in net income, net of tax (benefit) -
(2012 - ($1,429)) - - (2,654)
--------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE LOSS (47) (154) (2,264)
--------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME (LOSS) $ 114 $ (23) $ 1,088
==========================================================================================================================
--------------------------------------------------------------------------------
See accompanying notes to financial statements. 3
MEMBERS LIFE INSURANCE COMPANY
Statements of Stockholder's Equity
Years Ended December 31, 2014, 2013 and 2012
($ in 000s)
================================================================================
Accumulated
Additional other Retained Total
Common paid in comprehensive earnings stockholder's
stock capital income (deficit) equity
--------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2012 $ 5,000 $ 28,500 $ 2,687 $ (151) $ 36,036
Net income - - - 3,352 3,352
Return of capital to parent - (18,000) - - (18,000)
Other comprehensive (loss) - - (2,264) - (2,264)
--------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2012 5,000 10,500 423 3,201 19,124
Net income - - - 131 131
Other comprehensive (loss) - - (154) - (154)
--------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2013 5,000 10,500 269 3,332 19,101
Net income - - - 161 161
Other comprehensive (loss) - - (47) - (47)
--------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2014 $ 5,000 $ 10,500 $ 222 $ 3,493 $ 19,215
==========================================================================================================================
--------------------------------------------------------------------------------
See accompanying notes to financial statements. 4
MEMBERS LIFE INSURANCE COMPANY
Statements of Cash Flows
Years Ended December 31, 2014, 2013 and 2012
($ in 000s)
================================================================================
2014 2013 2012
--------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 161 $ 131 $ 3,352
Adjustments to reconcile net income
to net cash provided by operating activities:
Policyholder charges on investment type contracts (Note 7) (24) (46) (460)
Net realized investment gains - - (4,319)
Interest credited to policyholder account balances (Note 7) 8 9 158
Amortization of bond premium and discount 75 86 249
Amortization and write off of deferred charges 26 21 274
Premium deficiency - loss recognition event - - 742
Changes in other assets and liabilities
Accrued investment income (16) 9 74
Reinsurance recoverable (Note 7 non-cash disclosure) 326 611 (27)
Premiums receivable 4 2 11
Net deferred tax asset 197 675 3,501
Other assets 356 (1,079) 80
Federal income taxes recoverable from affiliate 87 1,892 (1,191)
Insurance reserves (828) (916) (604)
Unearned premiums - (1) (14)
Other liabilities 955 2,892 14
--------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,327 4,286 1,840
--------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of debt securities (7,535) - (4,976)
Proceeds on sale or maturity of debt securities 750 1,665 4,148
Net amounts received on policy loans 6 - 145
--------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (6,779) 1,665 (683)
--------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholder account deposits 252,273 89,726 361
Policyholder account withdrawals (3,581) (930) (158)
Assets on deposit - deposits (252,273) (89,382) -
Assets on deposit - withdrawals 3,531 813 -
Return of capital (Note 6 non-cash disclosure) - - (296)
Change in bank overdrafts (1) 1 9
--------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (51) 228 (84)
--------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS (5,503) 6,179 1,073
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 11,105 4,926 3,853
--------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,602 $ 11,105 $ 4,926
--------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH INFORMATION:
Cash received during the year for income taxes $ 273 $ 2,318 $ 629
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
See accompanying notes to financial statements. 5
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
NOTE 1: NATURE OF BUSINESS
MEMBERS Life Insurance Company ("MLIC" or the "Company") is a life and health
insurance stock company organized under the laws of Iowa and a wholly-owned
subsidiary of CUNA Mutual Investment Corporation ("CMIC"). CMIC is organized
under the laws of Wisconsin and is a wholly-owned subsidiary of CMFG Life
Insurance Company ("CMFG Life"), an Iowa life insurance company. CMFG Life and
its affiliated companies primarily sell insurance and other products to credit
unions and their members. The Company's ultimate parent is CUNA Mutual Holding
Company ("CMHC"), a mutual insurance holding company organized under the laws of
Iowa. In 2013, MLIC began selling single premium deferred annuity contracts to
credit union members through face-to-face and direct response distribution
channels. Prior to 2013, MLIC did not actively market new business; it primarily
serviced existing blocks of individual and group life policies. In January 2013,
the Company entered into a reinsurance agreement with CMFG Life to cede 100% of
any new business written. In October 2012, the Company entered into a
reinsurance agreement with CMFG Life and ceded 95% of its business in force.
MLIC is authorized to sell life, health and annuity policies in all states in
the U.S. and the District of Columbia, except New York. The following table
identifies states with premiums greater than 5% of total direct premium and
states with deposits on annuity contracts greater than 5% of total deposits:
================================================================================
Deposits on
Direct Life and Health Premium Annuity Contracts
--------------------------------------------------------------
2014 2013 2012 2014 2013
--------------------------------------------------------------------------------
Michigan 63% 64% 65% 12% 11%
Texas 22 22 21 8 *
California 5 5 * * *
Iowa * * * 8 17
Rhode Island * * * 8 6
Wisconsin * * * 7 7
Indiana * * * 6 6
Pennsylvania * * * 6 5
Florida * * * 5 *
Utah * * * * 5
================================================================================
*Less than 5%.
No other state represents more than 5% of the Company's premiums or deposits for
any year in the three years ended December 31, 2014.
CMFG Life provides significant services required in the conduct of the Company's
operations. Management believes allocations of expenses are reasonable, but the
results of the Company's operations may have materially differed from the
results reflected in the accompanying financial statements if the Company did
not have this relationship.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP").
--------------------------------------------------------------------------------
6
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates and in some cases the difference could be material. Investment
valuations, embedded derivatives, deferred tax asset valuation reserves, and
claim and policyholder benefit reserves are most affected by the use of
estimates and assumptions.
SEGMENT REPORTING
The Company is currently managed as two reportable business segments, (1) life
and health and (2) annuities. Prior to 2013 when the Company began selling
single premium deferred annuity contracts, the Company was managed as one
reportable business segment, life and health.
INVESTMENTS
DEBT SECURITIES: Investments in debt securities are classified as available for
sale and are carried at fair value. A debt security is considered
other-than-temporarily impaired when the fair value is less than the amortized
cost basis and its value is not expected to recover through the Company's
anticipated holding period of the security. If a credit loss exists, but the
Company does not intend to sell the impaired debt security and is not more
likely than not to be required to sell before recovery, it is required to
bifurcate the impairment into the loss that is attributable to credit and
non-credit related components. The credit portion of the other-than-temporary
impairment ("OTTI") is the difference between the present value of the expected
future cash flows and amortized cost. Only the estimated credit loss amount is
recognized in net realized investment gains, with the remainder of the loss
amount recognized in other comprehensive loss. If the Company intends to sell or
it is more likely than not that the Company will be required to sell before
anticipated recovery in value, the Company records a realized loss equal to the
difference between the amortized cost and fair value. The fair value of the
other-than-temporarily impaired security becomes its new cost basis. In
determining whether an unrealized loss is expected to be other than temporary,
the Company considers, among other factors, any plans to sell the security, the
severity of impairment, financial position of the issuer, recent events
affecting the issuer's business and industry sector, credit ratings, and the
intent and ability of the Company to hold the investment until the fair value
has recovered at least its cost basis.
Unrealized gains and losses on investments in debt securities, net of deferred
federal income taxes, are included in accumulated other comprehensive income as
a separate component of stockholder's equity.
POLICY LOANS: Policy loans are reported at their unpaid principal balance.
Valuation allowances are not established for policy loans, as they are fully
collateralized by the cash surrender value of the underlying insurance policies.
Any unpaid principal or interest on the loan is deducted from the cash surrender
value or the death benefit prior to settlement of the insurance policy. Policy
loans that were allocated to CMFG Life as payment for the 2012 reinsurance
agreement are $1,975 and $2,091 at December 31, 2014 and 2013, respectively.
NET INVESTMENT INCOME: Interest income related to mortgage-backed and other
structured securities is recognized on an accrual basis using a constant
effective yield method, based on anticipated prepayments and the estimated
economic life of the securities. When estimates of prepayments change, the
effective yield is recalculated to reflect actual payments to date and
anticipated future payments and such adjustments are reflected in net investment
income. Prepayment assumptions for loan-backed bonds and structured securities
are based on industry averages or internal estimates. Interest income related to
non-structured securities is recognized on an accrual basis using a constant
effective yield method. Discounts and premiums on debt securities are amortized
over the estimated lives of the respective securities on an effective yield
basis.
--------------------------------------------------------------------------------
7
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
NET REALIZED GAINS AND LOSSES: Realized gains and losses on the sale of
investments are determined on a specific identification basis and are recorded
on the trade date.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company issues single premium deferred annuity contracts that contain
embedded derivatives. Derivatives embedded within non-derivative host contracts
are separated from the host instrument when the embedded derivative is not
clearly and closely related to the host instrument. Such embedded derivatives
are recorded at fair value, and they are reported as part of assets on deposit
and policyholder account balances in the balance sheets, with the change in the
value being recorded in net realized investment gains. See Note 3, Investments-
Embedded Derivatives for additional information.
Changes in the fair value of the embedded derivative in assets on deposit offset
changes in the fair value of the embedded derivative in policyholder account
balances; both of these changes are included in net realized investment gains.
Accretion of the interest on assets on deposit offsets accretion of the interest
on the host contract; both of these amounts are included in interest credited on
policyholder account balances.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include unrestricted deposits in financial
institutions with maturities of 90 days or less. The Company recognizes a
liability in accounts payable and other liabilities for the amount of checks
issued in excess of its current cash balance. The change in this overdraft
amount is recognized as a financing activity in the Company's statement of cash
flows.
RECOGNITION OF INSURANCE REVENUE AND RELATED BENEFITS
Term-life and whole-life insurance premiums are recognized as premium income
when due. Policy benefits for these products are recognized in relation to the
premiums so as to result in the recognition of profits over the expected lives
of the policies and contracts.
Amounts collected on policies not subject to significant mortality or longevity
risk, such as the Company's single premium deferred annuity contracts, are
considered investment contracts and are recorded as increases in policyholder
account balances. Revenues from investment contracts principally consist of net
investment income and contract charges such as expense and surrender charges.
Expenses for investment contracts consist of interest credited to contracts,
benefits incurred in excess of related policyholder account balances and policy
maintenance costs. Because the Company has entered into an agreement with CMFG
Life to cede 100% of this business, these revenues and expenses are ceded and do
not impact the statement of operations and comprehensive income (loss). See Note
7, Reinsurance for additional information on this agreement.
OTHER INCOME
Other income in 2013 is a settlement received on investments that had previously
been sold.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring insurance business that are directly related to the
successful acquisition of new and renewal business are deferred to the extent
that such costs are expected to be recoverable from future profits. Such costs
principally include commissions and sales costs, direct response advertising
costs, premium taxes, and certain policy issuance and underwriting costs. Costs
deferred on term-life and whole-life insurance products, deferred policy
acquisition costs ("DAC"), are amortized in proportion to the ratio of the
annual premium to the total anticipated premiums generated. Due to the age of
the existing block of policies all DAC has been fully amortized as of December
31, 2014 and 2013 and there was no amortization expense in 2014, 2013 or 2012.
Acquisition costs on the Company's single premium deferred annuity contracts are
reimbursed through a ceding
--------------------------------------------------------------------------------
8
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
commission by CMFG Life, which assumes all deferrable costs as part of its
agreement to assume 100% of this business from the Company. See Note 7,
Reinsurance for additional information on this agreement.
INSURANCE RESERVES
Life and health claim and policy benefit reserves consist principally of future
policy benefit reserves and reserves for estimates of future payments on
incurred claims reported but not yet paid and unreported incurred claims. Such
estimates are developed using actuarial principles and assumptions based on past
experience adjusted for current trends. Any change in the probable ultimate
liabilities is reflected in net income in the period in which the change is
determined.
When actual experience indicates that existing contract liabilities, together
with the present value of future gross premiums will not be sufficient to
recover the present value of future benefits or recover unamortized deferred
acquisition costs, a premium deficiency will be recognized by either a reduction
in unamortized acquisition costs or an increase in the liability for future
benefits. The Company recognized $742 of additional reserves due to a loss
recognition event in 2012. There was no premium deficiency in 2014 or 2013.
POLICYHOLDER ACCOUNT BALANCES
The Company recognizes a liability at the stated account value for policyholder
deposits that are not subject to significant policyholder mortality or longevity
risk and for universal life-type policies. The account value equals the sum of
the original deposit and accumulated interest, less any withdrawals and expense
charges. The average credited rate was 4.5% in 2014, 2013 and 2012. The future
minimum guaranteed interest rate during the life of the contracts is 4.5%.
The single premium deferred annuities, which are included in policyholder
account balances, have two risk control accounts, referred to as the Secure and
Growth Accounts; the Secure Account has a yearly credited interest rate floor of
0% and the yearly Growth Account floor is -10%. The Secure and Growth Accounts
both have credited interest rate caps that vary with issuance. Interest is
credited at the end of each contract year during the selected index term based
on the allocation between risk control accounts and the performance of an
external index during that contract year. The growth account is based on the S&P
500 Index. At the end of the initial index term only the Secure Account will be
available as an option to the policyholder. The average annualized credited rate
was 1.10% and .72% in 2014 and 2013, respectively.
ACCOUNTS PAYABLE AND OTHER LIABILITIES
The Company issues annuity contracts on the 10th and 25th of each month. The
Company recognizes a liability on contracts for which it has received cash, but
has not issued a policy.
REINSURANCE
Reinsurance premiums, claims and benefits, commission expense reimbursements,
and reserves related to reinsured business ceded are accounted for on a basis
consistent with the accounting for the underlying direct policies that have been
ceded and the terms of the reinsurance contracts. Premiums and insurance claims
and benefits in the statements of operations and comprehensive income (loss) are
reported net of the amounts ceded to other companies under such reinsurance
contracts. Ceded insurance reserves and ceded benefits paid are included in
reinsurance recoverables along with certain ceded policyholder account balances,
which include mortality risk. A prepaid reinsurance asset is also recorded for
the portion of unearned premiums related to ceded policies.
--------------------------------------------------------------------------------
9
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
ASSETS ON DEPOSIT
Assets on deposit represent the amount of policyholder account balances related
to the single premium deferred annuity contracts (investment-type contracts)
that are ceded to CMFG Life. These investment-type contracts are accounted for
on a basis consistent with the accounting for the underlying contracts. Since
the related product is an investment-type contract, the Company accounts for the
reinsurance of these contracts using the deposit method of accounting consistent
with the terms of the ceding agreement. The related contract charges and
interest credited to policyholder account balances in the statements of
operations and comprehensive income (loss) are reported net of the amounts ceded
under the agreement. See Note 7 for a further discussion of the ceding
agreement.
INCOME TAXES
The Company recognizes taxes payable or refundable and deferred taxes for the
tax consequences of differences between the financial reporting and tax basis of
assets and liabilities. Deferred tax assets and liabilities are measured by
applying the enacted tax rates to the difference between the financial statement
and tax basis of assets and liabilities. The Company records current tax
benefits and deferred tax assets utilizing a benefits-for-loss approach. Under
this approach, current benefits are realized and deferred tax assets are
considered realizable by the Company when realized or realizable by the
consolidated group of which the Company is a member even if the benefits would
not be realized on a stand-alone basis. The Company records a valuation
allowance for deferred tax assets if it determines it is more likely than not
that the asset will not be realized by the consolidated group. Deferred income
tax assets can be realized through future earnings, including, but not limited
to, the generation of future income, reversal of existing temporary differences
and available tax planning strategies.
The Company is subject to tax-related audits. These audits may result in
additional tax assets or liabilities. In establishing tax liabilities, the
Company determines whether a tax position is more likely than not to be
sustained under examination by the appropriate taxing authority. Tax positions
that do not meet the more likely than not standard are not recognized. Tax
positions that meet this standard are recognized in the financial statements
within net deferred tax assets or liabilities or federal income taxes
recoverable or payable.
ACCOUNTING STANDARDS UPDATES PENDING ADOPTION
In May 2014, the Financial Accounting Standards Board ("FASB") issued a
comprehensive new revenue recognition standard, Accounting Standards Update
("ASU") No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). This
ASU must be applied retrospectively beginning in 2017 and early adoption is not
permitted. The new guidance will supersede nearly all existing revenue
recognition guidance by establishing a five step, principles-based process;
however, it will not impact the accounting for insurance contracts, leases,
financial instruments, and guarantees. For those contracts that are impacted by
the new guidance, ASU 2014-09 will require an entity to recognize revenue upon
the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in
exchange for those goods and services. The Company is currently evaluating the
impact of ASU 2014-09 on its financial statements.
In November 2014, the FASB issued ASU No. 2014-16, Determining Whether the Host
Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More
Akin to Debt or to Equity ("ASU 2014-16"), effective in 2016. This ASU does not
change the current criteria in GAAP for determining when separation of certain
embedded derivative features in a hybrid financial instrument is required.
Entities will continue to evaluate whether the economic characteristics and
risks of the embedded derivative feature are clearly and closely related to
those of the host contract, among other relevant criteria. The amendments
clarify how current GAAP should be interpreted in evaluating the economic
characteristics and risks of a host contract in a hybrid financial instrument
that is issued in the form of a share. Specifically, the amendments clarify that
an entity should consider all relevant terms and features--including the
embedded derivative feature being evaluated for bifurcation--in evaluating the
nature of the host contract. Furthermore, the amendments clarify that no single
term or feature would necessarily determine the economic characteristics and
risks of the host contract. Rather, the nature of the
--------------------------------------------------------------------------------
10
MEMBERS Life INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
host contract depends upon the economic characteristics and risks of the entire
hybrid financial instrument. The Company is currently evaluating the impact of
ASU 2014-16 but does not expect it to have a material impact on its financial
statements. ASU 2014-16 must be applied to existing hybrid financial instruments
as of the beginning of a reporting period on a modified retrospective basis;
full retrospective application is permitted.
--------------------------------------------------------------------------------
11
NOTE 3: INVESTMENTS
DEBT SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
values, as reported on the balance sheet, of debt securities at December 31,
2014 are as follows:
===============================================================================================================
AMORTIZED GROSS UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------------------------------------------------------------------------------------------------------------
U.S. government and agencies $ 9,888 $ 103 $ (4) $ 9,987
Mortgage-backed securities:
Residential mortgage-backed 2,966 241 - 3,207
---------------------------------------------------------------------------------------------------------------
Total debt securities $ 12,854 $ 344 $ (4) $ 13,194
===============================================================================================================
The amortized cost, gross unrealized gains and losses, and estimated fair
values, as reported on the balance sheet, of debt securities at December 31,
2013 are as follows:
===============================================================================================================
AMORTIZED GROSS UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------------------------------------------------------------------------------------------------------------
U.S. government and agencies $ 2,403 $ 153 $ - $ 2,556
Mortgage-backed securities:
Residential mortgage-backed 3,741 259 - 4,000
---------------------------------------------------------------------------------------------------------------
Total debt securities $ 6,144 $ 412 $ - $ 6,556
===============================================================================================================
No investments were non-income producing in 2014 or 2013.
--------------------------------------------------------------------------------
12
MEMBERS Life INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
The amortized cost and estimated fair values of investments in debt securities
at December 31, 2014, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because certain borrowers have
the right to call or prepay obligations with or without call or prepayment
penalties. Because of the potential for prepayment on mortgage-backed
securities, such securities have not been displayed in the table below by
contractual maturity.
=============================================================================================================
AMORTIZED ESTIMATED
COST FAIR VALUE
-------------------------------------------------------------------------------------------------------------
Due after one year through five years $ 9,888 $ 9,987
Mortgage-backed securities:
Residential mortgage-backed 2,966 3,207
-------------------------------------------------------------------------------------------------------------
Total debt securities $ 12,854 $ 13,194
=============================================================================================================
NET INVESTMENT INCOME
Sources of investment income for the years ended December 31 are summarized as
follows:
==============================================================================================================
2014 2013 2012
--------------------------------------------------------------------------------------------------------------
Gross investment income:
Debt securities $ 304 $ 275 $ 1,829
Policy loans 8 8 165
Other investments - 6 39
--------------------------------------------------------------------------------------------------------------
Total gross investment income 312 289 2,033
Investment expenses (34) (113) (105)
--------------------------------------------------------------------------------------------------------------
Net investment income $ 278 $ 176 $ 1,928
==============================================================================================================
--------------------------------------------------------------------------------
13
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
NET REALIZED INVESTMENT GAINS
Net realized investment gains for the years ended December 31 are summarized as
follows:
===============================================================================================================
2014 2013 2012
---------------------------------------------------------------------------------------------------------------
Debt securities
Gross gains on sales $ - $ - $ 4,319
---------------------------------------------------------------------------------------------------------------
Net realized investment gains $ - $ - $ 4,319
===============================================================================================================
Net realized investment gains in 2012 were due to the transfer of investments to
CMFG Life in payment of ceded premium for the Company's coinsurance agreement
(see Note 7), the transfer of investments to CMIC for the return of capital (see
Note 6) and on sales. Proceeds from the sale of debt securities were $1,757 in
2012. There were no sales or transfers of debt securities in 2014 or 2013 that
resulted in a realized investment gain or loss.
OTHER-THAN-TEMPORARY INVESTMENT IMPAIRMENTS
Investment securities are reviewed for OTTI on an ongoing basis. The Company
creates a watchlist of securities based largely on the fair value of an
investment security relative to its cost basis. When the fair value drops below
the Company's cost, the Company monitors the security for OTTI. The
determination of OTTI requires significant judgment on the part of the Company
and depends on several factors, including, but not limited to:
o The existence of any plans to sell the investment security.
o The extent to which fair value is less than book value.
o The underlying reason for the decline in fair value (credit concerns,
interest rates, etc.).
o The financial condition and near term prospects of the issuer/borrower,
including the ability to meet contractual obligations, relevant industry
trends and conditions.
o The Company's intent and ability to retain the investment for a period
of time sufficient to allow for an anticipated recovery in fair value.
o The Company's ability to recover all amounts due according to the
contractual terms of the agreements.
o The Company's collateral position in the case of bankruptcy or
restructuring.
A debt security is considered other-than-temporarily impaired when the fair
value is less than the amortized cost basis and its value is not expected to
recover through the Company's anticipated holding period of the security. If a
credit loss exists, but the Company does not intend to sell the impaired debt
security and is not more likely than not to be required to sell before recovery,
it is required to bifurcate the impairment into the loss that is attributable to
credit and non-credit related risk. The credit portion of the OTTI is the
difference between the present value of the expected future cash flows and
amortized cost. Only the estimated credit loss amount is recognized in earnings,
with the remainder of the loss amount recognized in other comprehensive loss. If
the Company intends to sell, at the time this determination is made, the Company
records a realized loss equal to the difference between the amortized cost and
fair value. The fair value of the other-than-temporarily impaired security
becomes its new cost basis. In determining whether an unrealized loss is
expected to be other than temporary, the Company considers, among other factors,
any plans to sell the security, the severity of impairment, financial position
of the issuer, recent events affecting the issuer's business and industry
sector, credit ratings, and the ability of the Company to hold the investment
until the fair value has recovered at least its cost basis.
--------------------------------------------------------------------------------
14
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
For securitized debt securities, the Company considers factors including,
commercial and residential property changes in value that vary by property type
and location and average cumulative collateral loss rates that vary by vintage
year. These assumptions require the use of significant management judgment and
include the probability of issuer default and estimates regarding timing and
amount of expected recoveries. In addition, projections of expected future debt
security cash flows may change based upon new information regarding the
performance of the issuer and/or underlying collateral.
For certain securitized financial assets with contractual cash flows, the
Company is required to periodically update its best estimate of cash flows over
the life of the security. If the fair value of a securitized financial asset is
less than its cost or amortized cost and there has been a decrease in the
present value of the estimated cash flows since the last revised estimate,
considering both timing and amount, an OTTI charge is recognized. The Company
also considers its intent to retain a temporarily impaired security until
recovery. Estimating future cash flows involves judgment and includes both
quantitative and qualitative factors. Such determinations incorporate various
information and assessments regarding the future performance of the underlying
collateral. In addition, projections of expected future cash flows may change
based upon new information regarding the performance of the underlying
collateral.
Management has completed a review for other-than-temporarily impaired securities
at December 31, 2014, 2013 and 2012 and recorded no OTTI. As a result of the
subjective nature of these estimates, however, provisions may subsequently be
determined to be necessary as new facts emerge and a greater understanding of
economic trends develops. Consistent with the Company's practices, OTTI will be
recorded as appropriate and as determined by the Company's regular monitoring
procedures of additional facts.
NET UNREALIZED INVESTMENT GAINS
The components of net unrealized investment gains included in accumulated other
comprehensive income at December 31 were as follows:
===========================================================================================================
2014 2013 2012
-----------------------------------------------------------------------------------------------------------
Debt securities $ 340 $ 412 $ 671
Deferred income taxes (118) (143) (248)
-----------------------------------------------------------------------------------------------------------
Net unrealized investment gains $ 222 $ 269 $ 423
===========================================================================================================
At December 31, 2014, the Company owned one debt security with a fair value of
$7,526 in an unrealized loss position of $4 for less than twelve months. The
Company did not have any gross unrealized losses at December 31, 2013 or 2012.
EMBEDDED DERIVATIVES
The Company issues single premium deferred annuity contracts that contain
embedded derivatives. Such embedded derivatives are required to be separated
from their host contracts and recorded at fair value. The fair value of the
embedded derivatives, which are reported as part of assets on deposit and
policyholder account balances in the balance sheets, were an asset of $45,503
and a liability of $45,503, respectively, as of December 31, 2014 and an asset
of $8,652 and a liability of $8,652, respectively, as of December 31, 2013. The
increase in fair value related to embedded derivatives from the date of deposit
was $9,581 and $592 for the years ended December 31, 2014 and 2013,
respectively. Because the Company has entered into an agreement with CMFG Life
to cede 100% of this business, this expense is ceded and does not impact the
statement of operations and comprehensive income (loss).
--------------------------------------------------------------------------------
15
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
ASSETS DESIGNATED/SECURITIES ON DEPOSIT
Iowa law requires that assets equal to a life insurer's "legal reserve" must be
designated for the Iowa Department of Commerce, Insurance Division. The legal
reserve is equal to the net present value of all outstanding policies and
contracts involving life contingencies. At December 31, 2014 and 2013, debt
securities, policy loans and cash with a carrying value of $11,512 and $4,846,
respectively, were accordingly designated for Iowa. Other regulatory
jurisdictions require cash and securities to be deposited for the benefit of
policyholders. Pursuant to these requirements, securities with a fair value of
$1,854 and $1,941 were on deposit with other regulatory jurisdictions as of
December 31, 2014 and 2013, respectively.
NOTE 4: FAIR VALUE
The Company uses fair value measurements to record fair value of certain assets
and liabilities and to estimate fair value of financial instruments not recorded
at fair value but required to be disclosed at fair value. Certain financial
instruments, such as insurance policy liabilities other than investment-type
contracts are excluded from the fair value disclosure requirements.
VALUATION HIERARCHY
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
The fair value hierarchy prioritizes the inputs to valuation techniques used to
measure fair value of assets and liabilities into three broad levels. The
Company has categorized its financial instruments, based on the degree of
subjectivity inherent in the valuation technique, as follows:
o Level 1: Inputs are directly observable and represent quoted prices for
identical assets or liabilities in active markets the Company has the
ability to access at the measurement date.
o Level 2: All significant inputs are observable, either directly or
indirectly, other than quoted prices included in Level 1, for the asset
or liability. This includes: (i) quoted prices for similar instruments
in active markets, (ii) quoted prices for identical or similar
instruments in markets that are not active, (iii) inputs other than
quoted prices that are observable for the instruments and (iv) inputs
that are derived principally from or corroborated by observable market
data by correlation or other means.
o Level 3: One or more significant inputs are unobservable and reflect the
Company's estimates of the assumptions that market participants would
use in pricing the asset or liability, including assumptions about risk.
For purposes of determining the fair value of the Company's assets and
liabilities, observable inputs are those inputs used by market participants in
valuing financial instruments, which are developed based on market data obtained
from independent sources. In the absence of sufficient observable inputs,
unobservable inputs, reflecting the Company's estimates of the assumptions
market participants would use in valuing financial assets and liabilities, are
developed based on the best information available in the circumstances. The
Company uses prices and inputs that are current as of the measurement date. In
some instances, valuation inputs used to measure fair value fall into different
levels of the fair value hierarchy. The category level in the fair value
hierarchy is determined based on the lowest level input that is significant to
the fair value measurement in its entirety.
The hierarchy requires the use of market observable information when available
for assessing fair value. The availability of observable inputs varies by
investment. In situations where the fair value is based on inputs that are
unobservable in the market or on inputs from inactive markets, the determination
of fair value requires more judgment and is subject to the risk of variability.
The degree of judgment exercised by the Company in determining fair value is
typically greatest for investments categorized in Level 3. Transfers in and out
of level
--------------------------------------------------------------------------------
16
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
categorizations are reported as having occurred at the end of the quarter in
which the transfer occurred. Therefore, for all transfers into Level 3, all
realized gains and losses and all changes in unrealized gains and losses in the
fourth quarter are not reflected in the Level 3 rollforward table.
VALUATION PROCESS
The Company is responsible for the determination of fair value and the
supporting assumptions and methodologies. The Company gains assurance on the
overall reasonableness and consistent application of valuation methodologies and
inputs and compliance with accounting standards through the execution of various
processes and controls designed to provide assurance that the Company's assets
and liabilities are appropriately valued.
The Company has policies and guidelines that require the establishment of
valuation methodologies and consistent application of such methodologies. These
policies and guidelines govern the use of inputs and price source hierarchies
and provide controls around the valuation processes. These controls include
appropriate review and analysis of prices against market activity or indicators
of reasonableness, approval of price source changes, price overrides,
methodology changes and classification of fair value hierarchy levels. The
valuation policies and guidelines are reviewed and updated as appropriate.
For fair values received from third parties or internally estimated, the
Company's processes are designed to provide assurance that the valuation
methodologies and inputs are appropriate and consistently applied, the
assumptions are reasonable and consistent with the objective of determining fair
value, and the fair values are appropriately recorded. The Company performs
procedures to understand and assess the methodologies, process and controls of
valuation service providers. In addition, the Company may validate the
reasonableness of fair values by comparing information obtained from valuation
service providers or brokers to other third party valuation sources for selected
securities. When using internal valuation models, these models are developed by
the Company's investment group using established methodologies. The models
including key assumptions are reviewed with various investment sector
professionals, accounting, operations, compliance and risk management. In
addition, when fair value determinations are expected to be more variable, the
Company validates them through reviews by members of management who have
relevant expertise and who are independent of those charged with executing
investment transactions.
TRANSFERS BETWEEN LEVELS
There were two U.S. government and agency securities totaling $2,556 transferred
from Level 1 to Level 2 during the year ended December 31, 2014. The transfer
occurred due to a change in the availability of the observable inputs. There
were no other transfers in 2014. There were no transfers between levels during
the year ended December 31, 2013.
--------------------------------------------------------------------------------
17
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
FAIR VALUE MEASUREMENT - RECURRING BASIS
The following table summarizes the Company's assets and liabilities that are
measured at fair value on a recurring basis as of December 31, 2014.
==============================================================================================================
ASSETS, AT FAIR VALUE LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------------------------------------------------------------------------------------------------------
Cash equivalents(1) $ 3,681 $ - $ - $ 3,681
Debt securities:
U.S. government and agencies - 9,987 - 9,987
Mortgage-backed securities:
Residential mortgage-backed - 3,207 - 3,207
--------------------------------------------------------------------------------------------------------------
Total debt securities - 13,194 - 13,194
Derivatives embedded in assets on deposit - - 45,503 45,503
--------------------------------------------------------------------------------------------------------------
Total assets $ 3,681 $ 13,194 $ 45,503 $ 62,378
==============================================================================================================
==============================================================================================================
LIABILITIES, AT FAIR VALUE LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------------------------------------------------------------------------------------------------------
Derivatives embedded in annuity contracts $ - $ - $ 45,503 $ 45,503
--------------------------------------------------------------------------------------------------------------
Total liabilities $ - $ - $ 45,503 $ 45,503
==============================================================================================================
(1)Excludes cash of $1,921 that is not subject to fair value accounting.
--------------------------------------------------------------------------------
18
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
The following table summarizes the Company's assets that are measured at fair
value on a recurring basis as of December 31, 2013.
==============================================================================================================
ASSETS, AT FAIR VALUE LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------------------------------------------------------------------------------------------------------
Cash equivalents(1) $ 10,336 $ - $ - $ 10,336
Debt securities:
U.S. government and agencies 2,556 - - 2,556
Mortgage-backed securities:
Residential mortgage-backed - 4,000 - 4,000
--------------------------------------------------------------------------------------------------------------
Total debt securities 2,556 4,000 - 6,556
Derivatives embedded in assets on deposit - - 8,652 8,652
--------------------------------------------------------------------------------------------------------------
Total assets $ 12,892 $ 4,000 $ 8,652 $ 25,544
==============================================================================================================
==============================================================================================================
LIABILITIES, AT FAIR VALUE LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------------------------------------------------------------------------------------------------------
Derivatives embedded in annuity contracts $ - $ - $ 8,652 $ 8,652
--------------------------------------------------------------------------------------------------------------
Total liabilities $ - $ - $ 8,652 $ 8,652
==============================================================================================================
(1)Excludes cash of $769 that is not subject to fair value accounting.
The Company had no assets or liabilities that required a fair value adjustment
on a non-recurring basis as of December 31, 2014 or 2013.
--------------------------------------------------------------------------------
19
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
CHANGES IN FAIR VALUE MEASUREMENT
The following table sets forth the values of assets and liabilities classified
as Level 3 within the fair value hierarchy at December 31, 2014.
=====================================================================================================================
TOTAL REALIZED/UNREALIZED
GAIN (LOSS) INCLUDED IN:
----------------------------------------------------
BALANCE BALANCE
JANUARY 1, DECEMBER 31,
2014 PURCHASES MATURITIES EARNINGS(1) 2014
---------------------------------------------------------------------------------------------------------------------
Derivatives embedded
in assets on deposit $ 8,652 $ 27,522 $ (252) $ 9,581 $ 45,503
---------------------------------------------------------------------------------------------------------------------
Total assets $ 8,652 $ 27,522 $ (252) $ 9,581 $ 45,503
=====================================================================================================================
Derivatives embedded
in annuity contracts $ 8,652 $ 27,522 $ (252) $ 9,581 $ 45,503
---------------------------------------------------------------------------------------------------------------------
Total liabilities $ 8,652 $ 27,522 $ (252) $ 9,581 $ 45,503
=====================================================================================================================
(1) Included in net income is realized gains and losses associated with embedded derivatives.
The following table sets forth the values of assets and liabilities classified
as Level 3 within the fair value hierarchy at December 31, 2013.
=================================================================================================================
TOTAL REALIZED/UNREALIZED
GAIN (LOSS) INCLUDED IN:
---------------------------------------------------
BALANCE BALANCE
JANUARY 1, DECEMBER 31,
2013 PURCHASES MATURITIES EARNINGS(1) 2013
=================================================================================================================
Derivatives embedded
in assets on deposit $ - $ 8,080 $ (20) $ 592 $ 8,652
-----------------------------------------------------------------------------------------------------------------
Total assets $ - $ 8,080 $ (20) $ 592 $ 8,652
=================================================================================================================
Derivatives embedded
in annuity contracts $ - $ 8,080 $ (20) $ 592 $ 8,652
-----------------------------------------------------------------------------------------------------------------
Total liabilities $ - $ 8,080 $ (20) $ 592 $ 8,652
=================================================================================================================
(1) Included in net income is realized gains and losses associated with embedded derivatives.
DETERMINATION OF FAIR VALUES
The Company determines the estimated fair value of its investments using
primarily the market approach and the income approach. The use of quoted prices
and matrix pricing or similar techniques are examples of market approaches,
while the use of discounted cash flow methodologies is an example of the income
approach.
--------------------------------------------------------------------------------
20
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
A summary of valuation techniques for classes of financial assets and
liabilities by fair value hierarchy level are as follows:
Level 1 Measurements
--------------------
Cash equivalents: Consists of money market funds; valuation is based on the
closing price as of the balance sheet date.
U.S. government and agencies: Consists of U.S. Treasury securities and
debentures (non-mortgage-backed securities/asset-backed securities) issued by
agencies of the U.S. government. Valuation is based on unadjusted quoted prices
for identical assets in active markets that the Company can access at the
measurement date.
Level 2 Measurements
--------------------
U.S. government and agencies: Certain U.S. Treasury securities and debentures
issued by agencies of the U.S. government are valued based on observable inputs
such as the U.S. Treasury yield curve, market indicated spreads and quoted
prices for identical assets in markets that are not active and/or similar assets
in markets that are active.
Residential mortgage-backed securities: Valuation is principally based on
observable inputs including quoted prices for similar assets in markets that are
active and observable market data.
For the majority of assets classified as Level 2 investments, the Company values
the assets using third-party pricing sources, which generally rely on quoted
prices for similar assets in markets that are active and observable market data.
Level 3 Measurements
--------------------
Derivatives embedded in assets on deposit and annuity contracts: The Company
offers single premium deferred annuity contracts with certain caps and floors
which represent a minimum and maximum amount that could be credited to a
contract during that contract year based on the performance of an external
index. These embedded derivatives are measured at fair value separately from the
host deposit asset and annuity contract.
In estimating the fair value of the embedded derivative, the Company attributes
a present value to the embedded derivative equal to the discounted sum of the
excess cash flows of the index related fund value over the minimum fund value.
The current year portion of the embedded derivative is adjusted for known market
conditions. The discount factor at which the embedded derivative is valued
contains an adjustment for the Company's own credit and risk margins for
unobservable non-capital market inputs. The Company's own credit adjustment is
determined taking into account its A.M. Best rating as well as its claims paying
ability.
These derivatives may be more costly than expected in volatile or declining
equity markets. Changes in market conditions include, but are not limited to,
changes in interest rates, equity indices, default rates and market volatility.
Changes in fair value may be impacted by changes in the Company's own credit
standing. Lastly, changes in actuarial assumptions regarding policyholder
behavior (such as full or partial withdrawals varying from expectations) and
risk margins related to non-capital market inputs may result in significant
fluctuations in the fair value of the derivatives. See Embedded Derivatives
within Note 3, Investments for the impact to net income.
--------------------------------------------------------------------------------
21
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
The following table presents information about significant unobservable inputs
used in Level 3 embedded derivative assets and liabilities measured at fair
value developed by internal models as of December 31, 2014 and 2013:
=============================================================================================================
PREDOMINANT SIGNIFICANT RANGE OF VALUES - UNOBSERVABLE INPUT
VALUATION METHOD UNOBSERVABLE INPUT 2014 2013
-------------------------------------------------------------------------------------------------------------
DERIVATIVES EMBEDDED IN SINGLE
PREMIUM DEFERRED ANNUITIES AND
RELATED ASSETS ON DEPOSIT
-------------------------------------------------------------------------------------------------------------
Discounted cash flow Lapse rates 2% to 4% with an 2% to 15% with an
excess lapse rate at excess lapse rate at the
the end of the index end of the index period
period of 95%. period of 58%.
-------------------------------------------------------------------------
Company's own 60 - 90 basis points 83 - 133 basis points
credit and risk margin added on to discount added on to discount
rate rate
=============================================================================================================
FAIR VALUE MEASUREMENTS FOR FINANCIAL INSTRUMENTS NOT REPORTED AT FAIR VALUE
Accounting standards require disclosure of fair value information about certain
on- and off-balance sheet financial instruments which are not recorded at fair
value on a recurring basis for which it is practicable to estimate that value.
The following methods and assumptions were used by the Company in estimating the
fair value disclosures for significant financial instruments:
Level 1 Measurements
--------------------
Cash: The carrying amount for this instrument approximates its fair value due to
its short term nature and is based on observable inputs.
Level 2 Measurements
--------------------
Assets on deposit and Investment-type contracts: Assets on deposit and
investment-type contracts include single premium deferred annuity contracts,
excluding the related embedded derivative. In most cases, the fair values are
determined by discounting expected liability cash flows and require profit
margins using the year-end swap curve plus a spread equivalent to a cost of
funds for insurance companies based on observable inputs.
--------------------------------------------------------------------------------
22
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
NOT PRACTICABLE TO ESTIMATE FAIR VALUE
Policy loans: The Company believes it is not practicable to determine the fair
value of its policy loans since there is no stated maturity and policy loans are
often repaid by reductions to policy benefits.
The carrying amounts and estimated fair values of the Company's financial
instruments which are not measured at fair value on a recurring basis at
December 31 are as follows:
===================================================================================================================
2014 2013
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE LEVEL AMOUNT FAIR VALUE LEVEL
-------------------------------------------------------------------------------------------------------------------
Financial instruments
recorded as assets:
Cash $ 1,921 $ 1,921 1 $ 769 $ 769 1
Policy loans 104 n/a n/a 110 n/a n/a
Assets on deposit 304,434 294,710 2 80,661 79,227 2
Financial instruments
recorded as liabilities:
Investment-type contracts 304,434 294,710 2 80,661 79,227 2
===================================================================================================================
NOTE 5: INCOME TAX
The Company is included in the consolidated federal income tax return filed by
CMHC, the Company's ultimate parent. The Company has entered into a tax sharing
agreement with CMHC and its subsidiaries. The agreement provides for the
allocation of tax expense based on each subsidiary's contribution to the
consolidated federal income tax liability. Pursuant to the agreement,
subsidiaries that have incurred losses are reimbursed regardless of the
utilization of the loss in the current year. Federal income taxes recoverable
reported on the balance sheet are due from affiliates.
INCOME TAX EXPENSE
Income tax expense for the years ended December 31 is as follows:
=================================================================================================
2014 2013 2012
-------------------------------------------------------------------------------------------------
Current tax (benefit) $ (186) $ (426) $ (1,822)
Deferred tax expense 197 675 3,501
-------------------------------------------------------------------------------------------------
Total income tax expense $ 11 $ 249 $ 1,679
=================================================================================================
--------------------------------------------------------------------------------
23
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
RECONCILIATION TO U.S. TAX RATE
Income tax expense differs from the amount computed by applying the U.S. federal
corporate income tax rate of 35% to income before income taxes due to the items
listed in the following reconciliation:
==========================================================================================================
2014 2013 2012
-------------------------------------------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
----------------------------------------------------------------------------------------------------------
Tax expense computed at
federal corporate tax rate $ 60 35.0% $ 133 35.0% $ 1,761 35.0%
Income tax expense (benefit)
related to prior years (41) (23.9) 116 30.5 (82) (1.6)
Other (8) (4.7) - -
----------------------------------------------------------------------------------------------------------
Total income tax expense $ 11 6.4% $ 249 65.5% $ 1,679 33.4%
==========================================================================================================
DEFERRED INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial statement
purposes and the amounts for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities at December 31, 2014 and 2013 are
as follows:
===========================================================================================================
2014 2013
-----------------------------------------------------------------------------------------------------------
Deferred tax assets
Policy liabilities and reserves $ 81 $ 118
Investments 276 536
Accrued expenses 26 -
Deferred policy acquisition costs 230 157
Other 3 14
-----------------------------------------------------------------------------------------------------------
Gross deferred tax assets 616 825
-----------------------------------------------------------------------------------------------------------
Deferred tax liabilities
Unrealized investment gains 118 143
Deferred and uncollected premium 58 1
Other - 70
-----------------------------------------------------------------------------------------------------------
Gross deferred tax liabilities 176 214
-----------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 440 $ 611
===========================================================================================================
--------------------------------------------------------------------------------
24
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
VALUATION ALLOWANCE
The Company considered the need for a valuation allowance with respect to its
gross deferred tax assets as of December 31, 2014 and 2013, and based on that
evaluation, the Company has determined it is more likely than not all deferred
tax assets as of December 31, 2014 and 2013 will be realized. Therefore, a
valuation allowance was not established.
UNRECOGNIZED TAX BENEFITS
A reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
=============================================================================================================
2014 2013 2012
-------------------------------------------------------------------------------------------------------------
Balance at January 1 $ 7 $ 46 $ 153
Additions for prior years' tax positions - - 4
Reductions for prior years' tax positions (6) (39) (2)
Reductions for settlements - - (96)
Reductions for expiration of statutes - - (13)
-------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 1 $ 7 $ 46
=============================================================================================================
There were no unrecognized tax benefits as of December 31, 2014 and 2013 that,
if recognized, would affect the effective tax rate in future periods. Management
does not anticipate a material change to the Company's uncertain tax positions
during 2015.
The Company recognizes interest and penalties accrued related to unrecognized
tax benefits in income tax expense in the statements of comprehensive income
(loss). During the years ended December 31, 2013 and 2012, the Company
recognized additions (reductions) of $1 and ($54) in interest and penalties,
respectively. The Company did not recognize any additions or (reductions) in
interest and penalties for the year ended December 31, 2014. The Company had
accrued $7 and $7 for the payment of interest and penalties at December 31, 2014
and 2013, respectively.
The Company is included in a consolidated U.S. federal income tax return filed
by CMHC. The Company is also included in income tax returns filed in various
states. For the major jurisdictions where it operates, the Company is generally
no longer subject to income tax examinations by tax authorities for years ended
before 2008.
OTHER TAX ITEMS
As of December 31, 2014 and 2013, the Company did not have any capital loss,
operating loss or credit carryforwards.
--------------------------------------------------------------------------------
25
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
NOTE 6: RELATED PARTY TRANSACTIONS
In the normal course of business, there are various transactions between the
Company and other related entities. In certain circumstances, expenses such as
those related to sales and marketing, administrative, operations, other support
and infrastructure costs are shared between the companies. Expenses incurred
that are specifically identifiable with a particular company are borne by that
company; other expenses are allocated among the companies on the basis of time
and usage studies. The Company reimbursed CMFG Life $5,641, $2,492 and $1,044
for these expenses in 2014, 2013 and 2012, respectively; which are included in
operating and other expenses.
The Company hires MEMBERS Capital Advisors, Inc. ("MCA") for investment advisory
services. MCA, which is 100% owned by CMIC, manages substantially all of the
Company's invested assets in accordance with policies, directives and guidelines
established by the Company. The Company recorded MCA investment management fees
totaling $34, $113 and $105 for the years ended December 31, 2014, 2013 and
2012, respectively, which are included as a reduction to net investment income.
The Company utilizes CUNA Brokerage Services, Inc. ("CBSI"), which is 100% owned
by CMIC, to distribute its single premium deferred annuity and recorded a
commission expense for this service of $10,853 and $4,256 in 2014 and 2013,
respectively, which are included in operating and other expenses. This expense
is entirely offset by commission income the Company receives from CMFG Life as
part of the 2013 reinsurance agreement.
Amounts receivable/payable from/to affiliates are shown in the following table:
================================================================================================
2014 2013
------------------------------------------------------------------------------------------------
Receivable from:
CMFG Life $ 2,765 $ 2,865
------------------------------------------------------------------------------------------------
Total $ 2,765 $ 2,865
================================================================================================
Payable to:
CUNA Brokerage Services, Inc. $ 1,290 $ 854
CMFG Life - 6
MEMBERS Capital Advisors, Inc. 2 10
------------------------------------------------------------------------------------------------
Total $ 1,292 $ 870
================================================================================================
Amounts receivable from CMFG Life at December 31, 2014 and 2013 are primarily
for purchases of annuities when a CMFG Life policyholder has surrendered their
policy for the purchase of a single premium deferred annuity and in 2014
receivables for the cession of death claims related to the Company's single
premium deferred annuity.
On November 30, 2012, the Company returned capital to CMIC of $18,000, which
consisted of $296 in cash and $17,704 in fair value of debt securities, which
resulted in a realized gain of $1,414.
See Note 7 regarding reinsurance and other agreements entered into by the
Company and CMFG Life.
--------------------------------------------------------------------------------
26
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
NOTE 7: REINSURANCE
The Company entered into an agreement with its affiliate, CMFG Life, effective
January 1, 2013 to cede 100% of its new business, which includes investment-type
contracts for its single premium deferred annuity and are accounted for using
the deposit method of accounting. The Company had $349,937 and $89,313 of assets
on deposit for these contracts as of December 31, 2014 and 2013, respectively.
The Company had related liabilities of $349,937 and $89,313, respectively which
are included in policyholder account balances in the balance sheets. The
Company receives a commission equal to 100% of its actual expenses incurred for
this business, which was $14,861 and $6,425 for the year ended December 31, 2014
and 2013, respectively.
On October 31, 2012, the Company ceded 95% of its insurance policies in force
pursuant to a reinsurance agreement with CMFG Life; ongoing renewal premiums and
related policy benefits are also ceded to CMFG Life at the same proportion under
this contract. As a result of this agreement, the Company ceded $23,121 of
earned premiums, $22,637 of benefits, $3,762 of policyholder account balances
and recorded a reinsurance recoverable of $26,399 as of October 31, 2012.
Substantially all the premiums were paid to CMFG Life by transferring net
invested assets with a fair value of $26,883, recognizing a gain of $2,848. The
difference between the assets and liabilities transferred to CMFG Life of $484
was recorded as a prepaid reinsurance asset and is being amortized to expense
over the estimated fifteen year remaining life of the reinsured policies.
Subsequently, the Company expensed $270 of the prepaid reinsurance asset as it
determined that a portion of the cost was unrecoverable. The Company is also
reimbursed for 95% of expenses incurred in the provision of policyholder and
benefit payment services, and insurance taxes and charges on a go forward basis
under this contract.
MLIC did not have any other reinsurance agreements at December 31, 2014 or 2013
and the entire reinsurance recoverable balance of $25,199 and $25,525,
respectively, was due from CMFG Life. The recoverable balances are not
collateralized and the Company retains the risk of loss in the event CMFG Life
is unable to meet its obligations assumed under the reinsurance agreements. CMFG
Life is rated A (excellent) by A.M. Best Company and MLIC believes the risk of
non-collection is remote.
--------------------------------------------------------------------------------
27
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
The effects of reinsurance on contract charges, interest credited to
policyholder accounts, premiums and on claims, benefits, and losses incurred for
the years ended December 31 are as follows:
========================================================================================================
2014 2013 2012
--------------------------------------------------------------------------------------------------------
Amount of policies in force $ 123,223 $ 147,371 $ 163,937
--------------------------------------------------------------------------------------------------------
Premiums:
Direct - written $ 2,613 $ 2,811 $ 3,208
Direct - change in unearned - - -
--------------------------------------------------------------------------------------------------------
Direct - earned 2,613 2,811 3,208
--------------------------------------------------------------------------------------------------------
Ceded to affiliate - written (2,482) (2,671) (23,714)
Ceded to affiliate - change in unearned (4) (1) 47
--------------------------------------------------------------------------------------------------------
Ceded to affiliate - earned (2,486) (2,672) (23,667)
--------------------------------------------------------------------------------------------------------
Premiums - written, net 131 140 (20,506)
Premiums - change in unearned, net (4) (1) 47
--------------------------------------------------------------------------------------------------------
Premiums, net $ 127 $ 139 $ (20,459)
========================================================================================================
Contract charges:
Direct $ 472 $ 461 $ 460
Ceded to affiliate (448) (415) -
--------------------------------------------------------------------------------------------------------
Contract charges, net $ 24 $ 46 $ 460
========================================================================================================
Claims, benefits and losses incurred:
Direct $ 1,883 $ 2,953 $ 3,086
Ceded to affiliate (1,771) (2,774) (23,114)
--------------------------------------------------------------------------------------------------------
Claims, benefits and losses, net $ 112 $ 179 $ (20,028)
========================================================================================================
Interest credited to policyholder account balances:
Direct $ 2,457 $ 320 $ 158
Ceded to affiliate (2,449) (311) -
--------------------------------------------------------------------------------------------------------
Interest credited to policyholder account balances, net $ 8 $ 9 $ 158
========================================================================================================
--------------------------------------------------------------------------------
28
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
NOTE 8: STATUTORY FINANCIAL DATA AND DIVIDEND RESTRICTIONS
The Company is a life and health insurer and is domiciled in Iowa. The Company
files statutory-basis financial statements with insurance regulatory
authorities. The Company did not use any permitted practices in 2014, 2013 or
2012. Certain statutory basis financial information for MLIC is presented in the
table below as of and for the years ended December 31.
==============================================================================================================
STATUTORY BASIS STATUTORY BASIS
CAPITAL AND SURPLUS NET INCOME (LOSS)
2014 2013 2014 2013 2012
--------------------------------------------------------------------------------------------------------------
MLIC $ 18,366 $ 17,829 $ (1,792) $ (1,562) $ 3,259
==============================================================================================================
The Company is subject to statutory regulations as to maintenance of equity and
the payment of dividends. Generally, ordinary dividends from an insurance
subsidiary to its parent company must meet notice requirements promulgated by
the regulator of the subsidiary's state of domicile ("Insurance Department").
Extraordinary dividends, as defined by state statutes, must be approved by the
Insurance Department. Based on Iowa statutory regulations, the Company could pay
dividends up to $1,836 during 2015, without prior approval of the Insurance
Department.
Risk-based capital ("RBC") requirements promulgated by the National Association
of Insurance Commissioners require U.S. insurers to maintain minimum
capitalization levels that are determined based on formulas incorporating credit
risk, insurance risk, interest rate risk, and general business risk. The
adequacy of the Company's actual capital is evaluated by a comparison to the RBC
results, as determined by the formula. At December 31, 2014 and 2013, the
Company's adjusted capital exceeded the minimum requirements.
--------------------------------------------------------------------------------
29
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
NOTE 9: ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of accumulated comprehensive income, net of tax, are as follows:
===========================================================================================================
ACCUMULATED
UNREALIZED OTHER
INVESTMENT COMPREHENSIVE
GAINS INCOME
-----------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2012 $ 2,687 $ 2,687
Change in unrealized holding gains,
net of tax - ($1,219) (2,264) (2,264)
-----------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2012 423 423
Change in unrealized holding gains,
net of tax - ($105) (154) (154)
-----------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2013 269 269
Change in unrealized holding gains,
net of tax - ($25) (47) (47)
-----------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2014 $ 222 $ 222
===========================================================================================================
RECLASSIFICATION ADJUSTMENTS
Accumulated other comprehensive income includes amounts related to unrealized
investment gains (losses) which were reclassified to net income.
Reclassifications from Accumulated other comprehensive income for the years
ended December 31 are included in the following table:
==============================================================================================================
2014 2013 2012
--------------------------------------------------------------------------------------------------------------
Reclassifications from accumulated other comprehensive income
Unrealized gains (losses) on available-for-sale
securities included in net realized investment losses $ - $ - $ (4,083)
--------------------------------------------------------------------------------------------------------------
Total reclassifications from accumulated
other comprehensive income - - (4,083)
Tax expense (benefit) - - (1,429)
--------------------------------------------------------------------------------------------------------------
Net reclassification from accumulated
other comprehensive income $ - $ - $ (2,654)
==============================================================================================================
--------------------------------------------------------------------------------
30
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
NOTE 10: BUSINESS SEGMENT INFORMATION
The following table sets forth financial information regarding the Company's two
reportable business segments for the year ended December 31, 2014.
==============================================================================================================
Life and
Year ended or as of December 31, 2014 Health Annuities Total
--------------------------------------------------------------------------------------------------------------
REVENUES
Life and health premiums, net $ 127 $ - $ 127
Contract charges 24 - 24
Net investment income 278 - 278
Net realized investment gains - - -
Other income - - -
--------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 429 - 429
--------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Life and health insurance claims and benefits, net 112 - 112
Interest credited to policyholder account balances 8 - 8
Operating and other expenses 137 - 137
--------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 257 - 257
--------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 172 - 172
Income tax expense 11 - 11
--------------------------------------------------------------------------------------------------------------
NET INCOME 161 - 161
Change in unrealized (losses), net of tax (benefit) (47) - (47)
--------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE (LOSS) (47) - (47)
--------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 114 $ - $ 114
==============================================================================================================
REINSURANCE RECOVERABLE FROM AFFILIATE $ 25,199 $ - $ 25,199
ASSETS ON DEPOSIT - 349,937 349,937
CLAIM AND POLICY BENEFIT RESERVES - LIFE AND HEALTH 22,035 333 22,368
POLICYHOLDER ACCOUNT BALANCES 3,612 349,937 353,549
==============================================================================================================
--------------------------------------------------------------------------------
31
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
The following table sets forth financial information regarding the Company's two
reportable business segments for the year ended December 31, 2013.
==============================================================================================================
Life and
Year ended or as of December 31, 2013 Health Annuities Total
--------------------------------------------------------------------------------------------------------------
REVENUES
Life and health premiums, net $ 139 $ - $ 139
Contract charges 46 - 46
Net investment income 176 - 176
Net realized investment gains - - -
Other income 293 - 293
--------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 654 - 654
--------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Life and health insurance claims and benefits, net 179 - 179
Interest credited to policyholder account balances 9 - 9
Operating and other expenses 86 - 86
--------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 274 - 274
--------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 380 - 380
Income tax expense 249 - 249
--------------------------------------------------------------------------------------------------------------
NET INCOME 131 - 131
Change in unrealized (losses), net of tax (benefit) (154) - (154)
--------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE (LOSS) (154) - (154)
--------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE (LOSS) $ (23) $ - $ (23)
==============================================================================================================
REINSURANCE RECOVERABLE FROM AFFILIATE $ 25,525 $ - $ 25,525
ASSETS ON DEPOSIT - 89,313 89,313
CLAIM AND POLICY BENEFIT RESERVES - LIFE AND HEALTH 23,196 - 23,196
POLICYHOLDER ACCOUNT BALANCES 3,734 89,313 93,047
==============================================================================================================
The Company had one reportable business segment, life and health, for the year
ended December 31, 2012.
--------------------------------------------------------------------------------
32
MEMBERS LIFE INSURANCE COMPANY
Notes to Financial Statements
($ in 000s)
================================================================================
NOTE 11: COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
Like other members of the insurance industry, the Company is occasionally a
party to a number of lawsuits and other types of proceedings, some of which may
involve claims for substantial or indeterminate amounts. These actions are based
on a variety of issues and involve a range of the Company's practices. The
Company has established procedures and policies to facilitate compliance with
laws and regulations and to support financial reporting.
In connection with regulatory examinations and proceedings, government
authorities may seek various forms of relief, including penalties, restitution
and changes in business practices. The Company may not be advised of the nature
and extent of relief sought until the final stages of the examination or
proceeding. In the opinion of management, the ultimate liability, if any,
resulting from all such pending actions will not materially affect the financial
statements of the Company.
NOTE 12: SUBSEQUENT EVENTS
The Company evaluated subsequent events through the date the financial
statements were issued. During this period, there were no significant subsequent
events that required adjustment to or disclosure in the accompanying financial
statements.
--------------------------------------------------------------------------------
33
--------------------------------------------------------------------------------
APPENDIX A: EXAMPLES OF PARTIAL WITHDRAWALS AND FULL SURRENDER WITH APPLICATION
OF SURRENDER CHARGE AND MARKET VALUE ADJUSTMENT
--------------------------------------------------------------------------------
EXAMPLE 1 - PARTIAL WITHDRAWAL WITH A NEGATIVE MARKET VALUE ADJUSTMENT ("MVA")
------------------------------------------------------------------------------
Assume the following information at the last Contract Anniversary (9/1/2013):
------------------------------------------------------------------------------------------------------------------------------
Initial Initial S&P 500
Risk Control Risk Control Index Index Index (Initial Index Value) x (1 + (Initial Index Value) x (1 +
Account Account Allocation Rate Floor Rate Cap Value Index Interest Rate Floor) Index Interest Rate Cap)
------------------------------------------------------------------------------------------------------------------------------
Secure 75% 0% 3.50% 1,000.00 1,000.00 1,035.00
Account
------------------------------------------------------------------------------------------------------------------------------
Growth 25% -10% 14.00% 1,000.00 900.00 1,140.00
Account
------------------------------------------------------------------------------------------------------------------------------
Total Contract Value = $100,000
10-Year Initial Index Period
I = 10-Year Constant Maturity Treasury Rate = 3.50%
K = The BofA Merrill Lynch 1-10 Year US Corporate
Constrained Index Asset Swap Spread = 1.00%
----------------------------------------------------
Assume the following information at the time of partial withdrawal (3/1/2015):
Gross partial withdrawal = $50,000.00
Unadjusted S&P 500 Index Value = 1,200.00
J = 8.5 Year Constant Maturity Treasury Rate = 4.00%
L = The BofA Merrill Lynch 1-10 Year US Corporate
Constrained Index Asset Swap Spread = 1.50%
N = Years Remaining in Initial Index Period = 8.50 Years
Surrender Charge Percent = 9.00%
A-1
We take the following steps to determine the net partial withdrawal amount
(excluding taxes) payable to the Owner from each Risk Control Account in
connection with a partial withdrawal resulting in a negative MVA.
FIRST, we determine Credited Index Interest and Contract Value for each
Risk Control Account at the time of the partial withdrawal. With respect
to the Secure Account, because the Unadjusted Index Value is greater than
the Initial Index Value multiplied by the sum of 1 + Index Interest Rate
Cap, Credited Index Interest equals the Contract Value held in the Secure
Account ($75,000) multiplied by the Initial Index Rate Cap (3.50%) or
$2,625.00. We then add the Credited Index Interest ($2,625.00) to the
Contract Value in the Secure Account ($75,000) to determine the Contract
Value in the Secure Account at the time of partial withdrawal ($77,625.00).
We follow the same steps in determining Credited Index Interest and
Contract Value for the Growth Account at the time of the partial
withdrawal. With respect to the Growth Account, because the Unadjusted
Index Value is greater than the Initial Index Value multiplied by the sum
of 1 + Index Interest Rate Cap, Credited Index Interest equals the
Contract Value held in the Secure Account ($25,000) multiplied by the
Initial Index Rate Cap (14.00%) or $3,500.00. We then add the Credited
Index Interest ($3,500.00) to the Contract Value in the Secure Account
($25,000) to determine the Contract Value in the Growth Account at the
time of partial withdrawal ($28,500).
SECOND, we determine the free annual withdrawal amount available in
connection with a partial withdrawal from each Risk Control Account at the
time of the partial withdrawal. We determine the free annual withdrawal
amount for each Risk Control Account on a proportional basis based on the
Contract Value held in each Risk Control Account. The free annual
withdrawal amount is equal to 10% of the Contract Value at the beginning
of the Contract Year ($100,000.00) or $10,000. We determine the portion of
the free annual withdrawal amount available from the Secure Account by
calculating the percentage of Contract Value held in the Secure Account.
We divide the Secure Account Value ($77,625.00) by the sum of the Secure
Account Value ($77,625.00) and the Growth Account Value ($28,500.00). The
result is then multiplied by the free annual withdrawal amount (10,000.00)
to determine the free annual withdrawal amount available in connection
with a withdrawal from the Secure Account ($7,314.49).
We follow the same steps in determining the free annual withdrawal amount
available in connection with a partial withdrawal from the Growth Account
at the time of the partial withdrawal. We determine the portion of the
free annual withdrawal amount available from the Growth Account by
calculating the percentage of Contract Value held in the Growth Account.
We divide the Growth Account Value ($28,500.00) by the sum of the Secure
Account Value ($77,625.00) and the Growth Account Value ($28,500.00). The
result is then multiplied by the free annual withdrawal amount
($10,000.00) to determine the free annual withdrawal amount available in
connection with a withdrawal from the Growth Account ($2,685.51).
THIRD, we calculate the amount of the partial withdrawal to be taken from
each Risk Control Account. We determine the gross partial withdrawal
amount for each Risk Control Account on a proportional basis based on the
Contract Value held in each Risk Control Account. We determine the portion
of the gross partial withdrawal to be taken from the Secure Account by
multiplying the percentage of Contract Value held in the Secure Account by
the gross partial withdrawal amount) ($50,000.00), which equals $36,572.44.
A-2
We follow the same steps in determining the amount of the gross partial
withdrawal to be taken from the Growth Account at the time of the partial
withdrawal. We determine the portion of the gross partial withdrawal to be
taken from the Growth Account by multiplying the percentage of Contract
Value held in the Growth Account by the gross partial withdrawal amount
($50,000.00), which equals $13,427.56.
FOURTH, we determine the amount of the gross partial withdrawal that may be
subject to a Surrender Charge and MVA for each Risk Control Account. We do
this by subtracting the free annual withdrawal amount available from the
Risk Control Account from the gross partial withdrawal amount for the Risk
Control Account. For the Secure Account, the gross partial withdrawal
amount ($36,572.44) minus the portion of free annual withdrawal amount
available from the Secure Account in connection with the partial withdrawal
($7,314.49) equals $29,257.95. For the Growth Account, the gross partial
withdrawal amount ($13,427.56) minus the portion of free annual withdrawal
amount available from the Growth Account in connection with the partial
withdrawal ($2,685.51) equals $10,742.05.
FIFTH, we determine the amount of the Surrender Charge that would be
deducted from the gross partial withdrawal amount for each Risk Control
Account. We do this by multiplying the amount of the gross partial
withdrawal that may be subject to a Surrender Charge by the applicable
Surrender Charge percentage for each Risk Control Account. For the Secure
Account, the amount of the gross partial withdrawal subject to a Surrender
Charge ($29,257.95) multiplied by the Surrender Charge percentage (9%)
equals $2,633.22. For the Growth Account, the amount of the gross partial
withdrawal subject to a Surrender Charge ($10,742.05) multiplied by the
Surrender Charge percentage (9%) equals $966.78. The total Surrender
Charge deducted in connection with the partial withdrawal equals $3,600.00
($2,633.22 plus $966.78).
SIXTH, we determine the MVA that would be applied to the gross partial
withdrawal amount for each Risk Control Account. For each Risk Control
Account, we do this by dividing the amount of the gross partial withdrawal
that may be subject to an MVA by the sum of 1 plus the cumulative Index
Interest Rate credited to date in the current Contract Year and multiply
the result by the Market Value Adjustment factor ("MVAF"). (The MVAF is
equal to (((1 + I + K) / (1 + J + L))^N) - 1 and for this example is equal
to -0.0778.) For the Secure Account, we would divide $29,257.95 by 1.035
then multiply the result by -0.0778 which equals a negative MVA of
$2,198.25. For the Growth Account, we would divide $10,742.05 by 1.14 then
multiply the result by -0.0778 which equals a negative MVA of $732.75. The
total MVA applied in connection with the partial withdrawal is a negative
MVA of $2,931.00 (-$2,198.25 plus -$732.75).
The amount of the net partial withdrawal paid the Owner from each Risk
Control Account equals the gross partial withdrawal amount less the
Surrender Charge and MVA. For the Secure Account, that equals $36,572.44 -
$2,633.22 - $2,198.25 or $31,740.97. For the Growth Account, that equals
$13,427.56 - $966.78 - $732.75 or $11,728.03. The total net partial
withdrawal paid the Owner is $43,469.00 ($31,740.97 plus $11,728.03).
The Contract Value remaining in each Risk Control Account after the partial
withdrawal equals the Contract Value in the Risk Control Account at the
beginning of the Contract Year plus any Credited Indexed Interest and less
the gross partial withdrawal amount. For the Secure Account, that equals
A-3
$75,000.00 + $2,625.00 - $36,572.44 or $41,052.56. For the Growth Account,
that equals $25,000 + $3,500.00 - $13,427.56 or $15,072.44. The total
Contract Value in both Risk Control Accounts after the partial withdrawal
is $56,125.00 ($41,052.56 plus $15,072.44).
EXAMPLE 2 - PARTIAL WITHDRAWAL WITH POSITIVE MVA
------------------------------------------------
Assume the following information at the last Contract Anniversary (9/1/2013):
------------------------------------------------------------------------------------------------------------------------------
Initial Initial S&P 500
Risk Control Risk Control Index Index Index (Initial Index Value) x (1 + (Initial Index Value) x (1 +
Account Account Allocation Rate Floor Rate Cap Value Index Interest Rate Floor) Index Interest Rate Cap)
------------------------------------------------------------------------------------------------------------------------------
Secure 75% 0% 3.50% 1,000.00 1,000.00 1,035.00
Account
------------------------------------------------------------------------------------------------------------------------------
Growth 25% -10% 14.00% 1,000.00 900.00 1,140.00
Account
------------------------------------------------------------------------------------------------------------------------------
Total Contract Value = $100,000
10-Year Initial Index Period
I = 10-Year Constant Maturity Treasury Rate = 3.50%
K = The BofA Merrill Lynch 1-10 Year US Corporate
Constrained Index Asset Swap Spread = 1.00%
-------------------------------------------------------------------
Assume the following information at the time of partial withdrawal (3/1/2015):
Gross partial withdrawal = $50,000.00
Unadjusted S&P 500 Index Value = 1,200.00
J = 8.5-Year Constant Maturity Treasury Rate = 3.00%
L = The BofA Merrill Lynch 1-10 Year US Corporate
Constrained Index Asset Swap Spread = 0.85%
N = Years Remaining in Initial Index Period = 8.50
Surrender Charge Percent = 9.00%
A-4
We take the following steps to determine the net partial withdrawal amount
(excluding taxes) payable to the Owner from each Risk Control Account in
connection with a partial withdrawal resulting in a positive MVA.
FIRST, we determine Credited Index Interest and Contract Value for each
Risk Control Account at the time of the partial withdrawal. With respect
to the Secure Account, because the Unadjusted Index Value is greater than
the Initial Index Value multiplied by the sum of 1 + the Index Interest
Rate Cap, Credited Index Interest equals the Contract Value held in the
Secure Account ($75,000) multiplied by the Initial Index Rate Cap (3.50%)
or $2,625.00. We then add the Credited Index Interest ($2,625.00) to the
Contract Value in the Secure Account ($75,000) to determine the Contract
Value in the Secure Account at the time of partial withdrawal ($77,625.00).
We follow the same steps in determining Credited Index Interest and
Contract Value for the Growth Account at the time of the partial
withdrawal. With respect to the Growth Account, because the Unadjusted
Index Value is greater than the Initial Index Value multiplied by the sum
of 1 + Index Interest Rate Cap, Credited Index Interest equals the
Contract Value held in the Growth Account ($25,000) multiplied by the
Initial Index Rate Cap (14.00%) or $3,500.00. We then add the Credited
Index Interest ($3,500.00) to the Contract Value in the Growth Account
($25,000) to determine the Contract Value in the Growth Account at the
time of partial withdrawal ($28,500).
SECOND, we determine the free annual withdrawal amount available in
connection with a partial withdrawal from each Risk Control Account at the
time of the partial withdrawal. We determine the free annual withdrawal
amount for each Risk Control Account on a proportional basis based on the
Contract Value held in each Risk Control Account. The free annual
withdrawal amount is equal to 10% of the Contract Value at the beginning
of the Contract Year ($100,000.00) or $10,000. We determine the portion of
the free annual withdrawal amount available from the Secure Account by
calculating the percentage of Contract Value held in the Secure Account.
We divide the Secure Account Value ($77,625.00) by the sum of the Secure
Account Value ($77,625.00) and the Growth Account Value ($28,500.00). The
result is then multiplied by the free annual withdrawal amount $10,000.00)
to determine the free annual withdrawal amount available in connection
with a withdrawal from the Secure Account ($7,314.49).
We follow the same steps in determining the free annual withdrawal amount
available in connection with a partial withdrawal from the Growth Account
at the time of the partial withdrawal. We determine the portion of the
free annual withdrawal amount available from the Growth Account by
calculating the percentage of Contract Value held in the Growth Account.
We divide the Growth Account Value ($28,500.00) by the sum of the Secure
Account Value ($77,625.00) and the Growth Account Value ($28,500.00). The
result is then multiplied by the free annual withdrawal amount $10,000.00)
to determine the free annual withdrawal amount available in connection
with a withdrawal from the Growth Account ($2,685.51).
THIRD, we calculate the amount of the partial withdrawal to be taken from
each Risk Control Account. We determine the gross partial withdrawal
amount for each Risk Control Account on a proportional basis based on the
Contract Value held in each Risk Control Account. We determine the portion
of the gross partial withdrawal to be taken from the Secure Account by
multiplying the percentage of Contract Value held in the Secure Account
A-5
(73.14%) by the gross partial withdrawal amount ($50,000.00) to determine
the amount of the partial withdrawal to be taken from the Secure Account
($36,572.44).
We follow the same steps in determining the amount of the gross partial
withdrawal to be taken from the Growth Account at the time of the partial
withdrawal. We determine the portion of the gross partial withdrawal to be
taken from the Growth Account by multiplying the percentage of Contract
Value held in the Growth Account (26.86%) by the gross partial withdrawal
amount ($50,000.00) to determine the amount of the partial withdrawal to
be taken from the Growth Account ($13,427.56).
FOURTH, we determine the amount of the gross partial withdrawal that may
be subject to a Surrender Charge and MVA for each Risk Control Account.
We do this by subtracting the free annual withdrawal amount available from
the Risk Control Account from the gross partial withdrawal amount for the
Risk Control Account. For the Secure Account, the gross partial withdrawal
amount ($36,572.44) minus the portion of free annual withdrawal amount
available from the Secure Account in connection with the partial
withdrawal ($7,314.49) equals $29,257.95. For the Growth Account, the
gross partial withdrawal amount ($13,427.56) minus the portion of free
annual withdrawal amount available from the Growth Account in connection
with the partial withdrawal ($2,685.51) equals $10,742.05.
FIFTH, we determine the amount of the Surrender Charge that would be
deducted from the gross partial withdrawal amount for each Risk Control
Account. We do this by multiplying the amount of the gross partial
withdrawal that may be subject to a Surrender Charge by the applicable
Surrender Charge percentage for each Risk Control Account. For the Secure
Account, the amount of the gross partial withdrawal subject to a Surrender
Charge ($29,257.95) multiplied by the Surrender Charge percentage (9%)
equals $2,633.22. For the Growth Account, the amount of the gross partial
withdrawal subject to a Surrender Charge ($10,742.05) multiplied by the
Surrender Charge percentage (9%) equals $966.78. The total Surrender
Charge deducted in connection with the partial withdrawal equals $3,600.00
($2,633.22 plus $966.78).
SIXTH, we determine the MVA that would be applied to the gross partial
withdrawal amount for each Risk Control Account. For each Risk Control
Account, we do this by dividing the amount of the gross partial withdrawal
that may be subject to an MVA by the sum of 1 plus the cumulative Index
Interest Rate credited to date in the current Contract Year and multiply
the result by the Market Value Adjustment factor ("MVAF"). (The MVAF is
equal to (((1 + I + K) / (1 + J + L))^N) - 1 and for this example is equal
to 0.0545.) For the Secure Account, we would divide $29,257.95 by 1.035
then multiply the result by 0.0545 which equals a positive MVA of
$1,539.72. For the Growth Account, we would divide $10,742.05 by 1.14 then
multiply the result by 0.0545 which equals a positive MVA of $513.24. The
total MVA applied in connection with the partial withdrawal is a positive
MVA of $2,052.96 ($1,539.72 plus $513.24).
The amount of the net partial withdrawal paid the Owner from each Risk
Control Account equals the gross partial withdrawal amount less the
Surrender Charge plus the MVA. For the Secure Account, that equals
$36,572.44 - $2,633.22 + $1,539.72 or $35,478.94. For the Growth Account,
that equals $13,427.56 - $966.78 + $513.24 or $12,974.02. The total net
partial withdrawal paid the Owner is $48,452.96 ($35,478.94 plus
$12,974.02).
A-6
The Contract Value remaining in each Risk Control Account after the
partial withdrawal equals the Contract Value in the Risk Control Account
at the beginning of the Contract Year plus any Credited Indexed Interest
and less the gross partial withdrawal amount. For the Secure Account, that
equals $75,000.00 + $2,625.00 - $36,572.44 or $41,052.56. For the Growth
Account, that equals $25,000 + $3,500.00 - $13,427.56 or $15,072.44. The
total Contract Value in both Risk Control Accounts after the partial
withdrawal is $56,125.00 ($41,052.56 plus $15,072.44).
A-7
EXAMPLE 3 - FULL SURRENDER OF CONTRACT ON FIRST DAY OF SECOND CONTRACT YEAR WITH
-------------------------------------------------------------------------------
NEGATIVE MVA
------------
Assume the following information at Contract Issue (9/1/2013):
------------------------------------------------------------------------------------------------------------------------------
Initial Initial S&P 500
Risk Control Risk Control Index Index Index (Initial Index Value) x (1 + (Initial Index Value) x (1 +
Account Account Allocation Rate Floor Rate Cap Value Index Interest Rate Floor) Index Interest Rate Cap)
------------------------------------------------------------------------------------------------------------------------------
Secure 75% 0% 3.50% 1,000.00 1,000.00 1,035.00
Account
------------------------------------------------------------------------------------------------------------------------------
Growth 25% -10% 14.00% 1,000.00 900.00 1,140.00
Account
------------------------------------------------------------------------------------------------------------------------------
Purchase Payment = $100,000
10-Year Initial Index Period
I = 10-Year Constant Maturity Treasury Rate = 3.50%
K = The BofA Merrill Lynch 1-10 Year US Corporate
Constrained Index Asset Swap Spread = 1.00%
-------------------------------------------------------------------
Assume at time of first Contract Anniversary (9/1/2014):
Unadjusted S&P 500 Index Value = 950.00
The Unadjusted S&P 500 Index Value on the last day of the first Contract
Anniversary is equal to the Unadjusted S&P 500 Index Value on the first day of
the second Contract Anniversary.
J = 9-Year Constant Maturity Treasury Rate = 4.00%
L = The BofA Merrill Lynch 1-10 Year US Corporate
Constrained Index Asset Swap Spread = 1.50%
N = Years Remaining in Initial Index Period = 9.00
Surrender Charge Percent = 9.00%
A-8
We take the following steps to determine the Surrender Value (excluding taxes)
payable to the Owner from each Risk Control Account in connection with a full
surrender of the Contract. For purposes of this example, we assume the surrender
takes place on the first day of the second Contract Year.
Upon the Contract Anniversary, we calculate and apply Credited Index
Interest to each Risk Control Account. The Automatic Rebalancing Program
then transfers Contract Value between the Risk Control Accounts in
accordance with the Owner's most recently communicated allocation
instructions. First, we determine Credited Index Interest and Contract
Value for each Risk Control Account on the Contract Anniversary. With
respect to the Secure Account, because the Unadjusted Index Value is less
than the Initial Index Value multiplied by the sum of 1 + the Index
Interest Rate Floor, no Credited Index Interest would be credited to
Contract Value held in the Secure Account ($75,000). With respect to the
Growth Account, because the Unadjusted Index Value is greater than the
Initial Index Value multiplied by the sum of 1 + Index Interest Rate Floor
and the Unadjusted Index Value is less than the Initial Index Value
multiplied by the sum of 1 + Index Interest Rate Cap, we would apply
Credited Index Interest to Contract Value held in the Growth Account
($25,000). Because the Unadjusted Index Value is less than the Initial
Index Value, we will credit negative Credited Index Interest to the
Contract Value held in the Growth Account. The negative Credited Index
Interest we will credit equals the Contract Value held in the Growth
Account ($25,000) multiplied by the Unadjusted Index Value (950) divided
by Initial Index Value (1,000) minus 1 or -$1,250.00. We then apply the
negative Credited Index Interest (-$1,250.00) to the Contract Value in the
Growth Account ($25,000) to determine the Contract Value in the Growth
Account on the Contract Anniversary ($23,750).
The Automatic Rebalancing Program then transfers Contract Value between
-----------------------------------------------------------------------
the Risk Control Accounts as noted in the chart below:
------------------------------------------------------
Before Rebalancing:
Risk Control Account Account Value Percentage
-------------------- ------------- ----------
Secure $75,000.00 75.95%
Growth $23,750.00 24.05%
------------------------------------------------
Contract Value $98,750.00 100.00%
After Rebalancing:
Risk Control Account Account Value Percentage
-------------------- ------------- ----------
Secure $74,062.50 75.00% (-$937.50)
Growth $24,687.50 25.00% (+$937.50)
Contract Value $98,750.00 100.00%
Second, we determine the free annual withdrawal amount available in
connection with a full surrender from each Risk Control Account at the
time of surrender. We determine the free annual withdrawal amount for
each Risk Control Account on a proportional basis based on the Contract
Value held in each Risk Control Account. The free annual withdrawal
amount is equal to 10% of the Contract Value at the beginning of the
Contract Year ($98,750.00) or $9,875.00. We determine the portion of the
free annual withdrawal amount available from the Secure Account by
calculating the percentage of Contract Value held in the Secure Account.
We divide the Secure Account Value ($74,062.50) by the sum of the Secure
Account Value
A-9
($74,062.50) and the Growth Account Value ($24,687.50). The result is then
multiplied by the free annual withdrawal amount $9,875.00) to determine
the free annual withdrawal amount available from the Secure Account
($7,406.25) in connection with the surrender of the Contract.
We follow the same steps in determining the free annual withdrawal amount
available from the Growth Account at the time of surrender. We determine
the portion of the free annual withdrawal amount available from the Growth
Account by calculating the percentage of Contract Value held in the Growth
Account. We divide the Growth Account Value ($24,687.50) by the sum of the
Secure Account Value ($74,062.50) and the Growth Account Value
($24,687.50). The result is then multiplied by the free annual withdrawal
amount $9,875.00) to determine the free annual withdrawal amount available
from the Growth Account ($2,468.75).
THIRD, we determine the amount of the withdrawal that may be subject to a
Surrender Charge and MVA for each Risk Control Account. We do this by
subtracting the free annual withdrawal amount available from the Contract
Value in the Risk Control Account. For the Secure Account, the Secure
Account Value ($74,062.50) minus the portion of free annual withdrawal
amount available from the Secure Account in connection with the surrender
($7,406.25) equals $66,656.25. For the Growth Account, the Growth Account
Value ($24,687.50) minus the portion of free annual withdrawal amount
available from the Growth Account in connection with the surrender
($2,468.75) equals $22,218.75.
FOURTH, we determine the amount of the Surrender Charge that would be
deducted from the Contract Value in each Risk Control Account. We do this
by multiplying the amount of the Contract Value that may be subject to a
Surrender Charge by the applicable Surrender Charge percentage for each
Risk Control Account. For the Secure Account, the Secure Account Value
subject to a Surrender Charge ($66,656.25) multiplied by the Surrender
Charge percentage (9%) equals $5,999.06. For the Growth Account, the
Growth Account Value subject to a Surrender Charge ($22,218.75) multiplied
by the Surrender Charge percentage (9%) equals $1,999.69. The total
Surrender Charge deducted in connection with the surrender of the Contract
equals $7,998.75 ($5,999.06 plus $1,999.69).
FIFTH, we determine the MVA that would be applied to the Contract Value in
each Risk Control Account. For each Risk Control Account, we do this by
dividing the amount of the Contract Value that may be subject to an MVA by
the sum of 1 plus the cumulative Index Interest Rate credited to date in
the current Contract Year and multiply the result by the Market Value
Adjustment factor ("MVAF"). (The MVAF is equal to (((1 + I + K) / (1 + J +
L))^N) - 1 and for this example is equal to -0.0821.) For the Secure
Account, we would divide $66,656.25 by 1.00 then multiply the result by
-0.0821 which equals a negative MVA of $5,475.42. For the Growth Account,
we would divide $22,218.75 by 1.00 then multiply the result by -0.0821
which equals a negative MVA of $1,825.14. The total MVA applied in
connection with the surrender of the Contract is a negative MVA of
$7,300.56 ($5,475.42 plus $1,825.14).
The net amount paid the Owner from the surrender of the Contract from each
Risk Control Account equals the Contract Value in the Risk Control Account
less the Surrender Charge and the MVA. For the Secure Account, that equals
$74,062.50 - $5,999.06 - $5,475.42 or $62,588.02. For the Growth Account,
that equals $24,687.50 - $1,999.69 - $1,825.14 or $20,862.67. The total
net amount paid the Owner from the surrender of the Contract is $83,450.69
($62,588.02 plus $20,862.67). Following the surrender of the Contract,
there would be no Contract Value remaining under the Contract.
A-10
MEMBERS Life Insurance Company
2000 Heritage Way
Waverly, IA 50677
1-800-798-6600
Dealer Prospectus Delivery Obligations
All dealers that effect transactions in these securities are required to deliver
a prospectus.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*
The expenses for the issuance and distribution of the Contracts, other than any
underwriting discounts and commissions, are as follows:
Securities and Exchange Commission Registration Fees $ 116,200
Printing and engraving $ 42,796
Accounting fees and expenses $ 65,900
Legal fees and expenses $ 7,000
Miscellaneous $ 5,000
TOTAL EXPENSES $ 236,896
=========
------------------------
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 490.202 of the Iowa Business Corporation Act (the "IBCA"), provides that
a corporation's articles of incorporation may contain a provision eliminating or
limiting the personal liability of a director to the corporation or its
shareholders for monetary damages for any action taken, or failure to take
action, as a director, except liability for (1) the amount of a financial
benefit received by a director to which the director is not entitled, (2) an
intentional infliction of harm on the Company or the shareholders, (3) a
violation of Section 490.833 of the IBCA or (4) an intentional violation of
criminal law.
Further, Section 490.851 of the IBCA provides that a corporation may indemnify
its directors who may be party to a proceeding against liability incurred in the
proceeding by reason of such person serving in the capacity of director, if such
person has acted in good faith and in a manner reasonably believed by the
individual to be in the best interests of the corporation, if the director was
acting in an official capacity, and in all other cases that the individual's
conduct was at least not opposed to the best interests of the corporation, and
in any criminal proceeding if such person had no reasonable cause to believe the
individual's conduct was unlawful or the director engaged in conduct for which
broader indemnification has been made permissible or obligatory under a
provision of the articles of incorporation. The indemnity provisions under
Section 490.851 do not apply (i) in the case of actions brought by or in the
right of the corporation except for reasonable expenses incurred in connection
with the proceeding if it is determined that the director has met the relevant
standard of conduct set forth above or (ii) in connection with any proceedings
with respect to conduct for which the director was adjudged liable on the basis
that the director received a financial benefit to which the director was not
entitled, whether or not involving action in the director's official capacity.
In addition, Section 490.852 of the IBCA provides mandatory indemnification of
reasonable expenses incurred by a director who is wholly successful in defending
any action in which the director was a party because the director is or was a
director of the corporation. A director who is a party to a proceeding because
the person is a director may also apply for court-ordered indemnification and
advance of expenses under Section 490.854 of the IBCA.
Section 490.853 of the IBCA provides that a corporation may, before final
disposition of a proceeding, advance funds to pay for or reimburse the
reasonable expenses incurred by a director who is a party to a proceeding
because such person is a director if the director delivers the following to the
corporation: (1) a written affirmation that the director has met the standard of
conduct described above or that the proceeding involved conduct for which
liability has been eliminated under the corporation's articles of
incorporation and (2) the director's written undertaking to repay any funds
advanced if the director is not entitled to mandatory indemnification under
Section 490.852 of the IBCA and it is ultimately determined that the director
has not met the standard of conduct described above.
Under Section 490.856 of the IBCA, a corporation may indemnify and advance
expenses to an officer of the corporation who is a party to a proceeding because
such person is an officer, to the same extent as a director. In addition, if the
person is an officer but not a director, further indemnification may be provided
by the corporation's articles of incorporation or bylaws, a resolution of the
board of directors or by contract, except liability for (1) a proceeding by or
in the right of the corporation other than for reasonable expenses incurred in
connection with the proceeding and (2) conduct that constitutes receipt by the
officer of a financial benefit to which the officer is not entitled, an
intentional infliction of harm on the corporation or the shareholders or an
intentional violation of criminal law. Such indemnification is also available to
an officer who is also a director if the basis on which the officer is made a
party to a proceeding is an act taken or a failure to take action solely as an
officer.
Our Amended and Restated Articles of Incorporation provide that our directors
will not be liable to us or our shareholders for money damages for any action
taken, or any failure to take any action, as a director, except liability for
(1) the amount of a financial benefit received by a director to which the
director is not entitled, (2) an intentional infliction of harm on the Company
or the shareholders, (3) a violation of Section 490.833 of the IBCA or (4) an
intentional violation of criminal law.
Our Amended and Restated Articles of Incorporation also provide that we
indemnify each of our directors or officers for any action taken, or any failure
to take any action, as a director or officer except liability for (1) the amount
of a financial benefit received by a director to which the director is not
entitled, (2) an intentional infliction of harm on the Company or the
shareholders, (3) a violation of Section 490.833 of the IBCA or (4) an
intentional violation of criminal law. Additionally, the Company is required to
exercise all of its permissive powers as often as necessary to indemnify and
advance expenses to its directors and officers to the fullest extent permitted
by law.
Our Bylaws also provide indemnification to our directors on the same terms as
the indemnification provided in our Amended and Restated Articles of
Incorporation. Our Bylaws also provide for advances of expenses to our directors
and officers. The indemnification provisions of our Bylaws are not exclusive of
any other right which any person seeking indemnification may have or acquire
under any statute, our Amended and Restated of Incorporation or any agreement,
vote of stockholders or disinterested directors or otherwise.
Section 490.857 of the IBCA provides that a corporation may purchase and
maintain insurance on behalf of a person who is a director or officer of a
corporation, or who, while a director or officer of a corporation, serves at the
corporation's request as a director, officer, partner, trustee, employee or
agent of another domestic or foreign corporation, partnership, joint venture,
trust, employee benefit plan or other entity, against liability asserted against
or incurred by that person in that capacity or arising from that person's status
as a director or officer, whether or not the corporation would have the power to
indemnify or advance expenses to that person against the same liability under
the IBCA. As permitted by and in accordance with Section 490.857 of the IBCA, we
maintain insurance coverage for our officers and directors as well as insurance
coverage to reimburse us for potential costs for indemnification of directors
and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS.
(1) (i) Distribution Agreement dated June 11, 2013. Incorporated herein by
reference to Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-1, filed June 12, 2013. (File No. 333-186477)
(ii) Selling Agreement. Incorporated herein by reference to
Pre-Effective Amendment No. 1 to the Registration Statement on
Form S-1, filed June 12, 2013. (File No. 333-186477)
(iii) Distribution Agreement dated September 9, 2013. Incorporated
herein by reference to the initial filing of the Registration
Statement on Form S-1, filed November 27, 2013. (File No. 333-
192603)
(3) (i) Articles of Incorporation of MEMBERS Life Insurance Company.
Incorporated herein by reference to the initial filing of the
Registration Statement on Form S-1, filed February 6, 2013. (File
No. 333-186477)
(ii) Bylaws of MEMBERS Life Insurance Company. Incorporated herein by
reference to the initial filing of the Registration Statement on
Form S-1, filed February 6, 2013. (File No. 333-186477)
(4) (i) Forms of Contract. Incorporated herein by reference to
Pre-Effective Amendment No. 1 to the Registration Statement on
Form S-1, filed June 12, 2013. (File No. 333-186477)
(ii) Form of Application. Incorporated herein by reference to
Pre-Effective Amendment No. 1 to the Registration Statement on
Form S-1, filed June 12, 2013. (File No. 333-186477)
(iii) Form of Change of Annuitant Endorsement. Incorporated herein by
reference to Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-1, filed June 12, 2013. (File No. 333-186477)
(iv) Form of Roth IRA Endorsement. Incorporated herein by reference to
Pre-Effective Amendment No. 1 to the Registration Statement on
Form S-1, filed June 12, 2013. (File No. 333-186477)
(v) Form of IRA Endorsement. Incorporated herein by reference to
Pre-Effective Amendment No. 1 to the Registration Statement on
Form S-1, filed June 12, 2013. (File No. 333-186477)
(vi) Form of Amendment to Application Endorsement. Incorporated herein
by reference to Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-1, filed June 12, 2013. (File No. 333-186477)
(vii) Bailout Provision Rider. Incorporated herein by reference to
Pre-Effective Amendment No. 2 to the Registration Statement on
Form S-1, filed August 2, 2013. (File No. 333-186477)
(5) Legality Opinion. (filed herewith)
(10) Material Contracts
(i) Coinsurance Agreement dated October 31, 2012. Incorporated herein
by reference to Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-1, filed June 12, 2013. (File No. 333-186477)
(ii) Coinsurance Agreement dated January 1, 2013. Incorporated herein
by reference to Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-1, filed June 12, 2013. (File No. 333-186477)
(a) First Amendment to Coinsurance Agreement dated January 1,
2014. Incorporated herein by reference to Post-Effective
Amendment No. 1 to the Registration Statement on Form S-1,
filed April 4, 2014. (File No. 333-192603)
(iii) Cost Sharing Agreement. Incorporated herein by reference to
Pre-Effective Amendment No. 1 to the Registration Statement on
Form S-1, filed June 12, 2013. (File No. 333-186477)
(a) Expense Sharing Agreement dated December 31, 2013.
Incorporated herein by reference to Post-Effective
Amendment No. 1 to the Registration Statement on Form S-1,
filed April 4, 2014. (File No. 333-192603)
(b) Amended and Restated Expense Sharing Agreement dated
January 1, 2015. (filed herewith)
(iv) Investment Advisory Agreement. Incorporated herein by reference to
Pre-Effective Amendment No. 1 to the Registration Statement on
Form S-1, filed June 12, 2013. (File No. 333-186477)
(a) Amendment to Investment Advisory Agreement dated January
15, 2014. . Incorporated herein by reference to
Post-Effective Amendment No. 1 to the Registration
Statement on Form S-1, filed April 4, 2014. (File No.
333-192603)
(b) Amended and Restated Investment Advisory Agreement dated
January 1, 2015. (filed herewith)
(v) Procurement and Disbursement and Billing and Collection Services
Agreement. Incorporated herein by reference to Pre-Effective
Amendment No. 1 to the Registration Statement on Form S-1, filed
June 12, 2013. (File No. 333-186477)
(a) Amendment to Procurement and Disbursement and Billing and
Collection Services Agreement. Incorporated herein by
reference to Post-Effective Amendment No. 1 to the
Registration Statement on Form S-1, filed April 4, 2014.
(File No. 333-192603)
(b) CUNA Mutual Group Cost Sharing, Procurement, Disbursement,
Billing and Collection Agreement dated January 1, 2015.
(filed herewith)
(23) (i) Consent of Ross D. Hansen. (See exhibit 5)
(ii) Consent of Deloitte & Touche LLP independent registered public
accounting firm. (filed herewith)
(24) Powers of Attorney. (filed herewith)
101.INS XBRL Instance Document. (filed herewith)
101.SCH XBRL Taxonomy Extension Schema (filed herewith)
101.CAL XBRL Taxonomy Extension Calculation Linkbase (filed herewith)
101.DEF XBRL Taxonomy Definition Linkbase (filed herewith)
101.LAB XBRL Taxonomy Extension Label Linkbase (filed herewith)
101.PRE XBRL Taxonomy Extension Presentation Linkbase (filed herewith)
ITEM 17. UNDERTAKINGS.
(A) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low
or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4) That, for the purpose of determining liability under the Securities Act of
1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of
a registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify any statement
that was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to such
date of first use.
(5) That, for the purpose of determining liability of the registrant under the
Securities Act of 1933 to any purchaser in the initial distribution of the
securities, the undersigned registrant undertakes that in a primary offering of
securities of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell such securities
to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned
registrant relating to the offering required to be filed pursuant
to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by
or on behalf of the undersigned registrant or used or referred to
by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the
offering containing material information about the undersigned
registrant or its securities provided by or on behalf of the
undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by
the undersigned registrant to the purchaser.
(B) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in that Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, MEMBERS Life
Insurance Company has duly caused this registration statement to be signed on
its behalf by the undersigned, duly authorized, in the City of Madison, and
State of Wisconsin on the 25 day of March, 2015.
MEMBERS Life Insurance Company
By: /s/Robert N. Trunzo
-----------------------------
Robert N. Trunzo, President
*Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons on March 25, 2015 in
the capacities indicated.
NAME TITLE DATE
---- ----- ----
*
President/Director March 25, 2015
------------------------------------------
Robert N. Trunzo
*
Treasurer March 25, 2015
------------------------------------------
Brian J. Borakove
*
Director March 25, 2015
------------------------------------------
Christopher J. Copeland
*
Director March 25, 2015
------------------------------------------
Thomas J. Merfeld
*
Director March 25, 2015
------------------------------------------
James M. Power
*
Director March 25, 2015
------------------------------------------
M. Jeffrey Bosco
* By: /s/Ross D. Hansen As Attorney-in-Fact
------------------ pursuant to
Ross D. Hansen powers of attorney
EXHIBIT LIST
(5) Legality Opinion.
(10)(iii) (b) Amended and Restated Expense Sharing Agreement dated January 1,
2015.
(10)(iv)(b) Amended and Restated Investment Advisory Agreement dated January 1,
2015.
(10)(v)(b) CUNA Mutual Group Cost Sharing, Procurement, Disbursement, Billing
and Collection Agreement dated January 1, 2015.
(23)(ii) Consent of Deloitte & Touche LLP independent registered public
accounting firm.
(24) Powers of Attorney.
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.DEF XBRL Taxonomy Definition Linkbase
101.LAB XBRL Taxonomy Extension Label Linkbase
101.PRE XBRL Taxonomy Extension Presentation Linkbase