SMC is in the process of constructing a new domestic home office of 58,000 square feet at 10689 North Pennsylvania Avenue, Indianapolis, Indiana which is projected to be completed in May 2001.
International Operations. SMI entered into a lease on November 17, 1997 for approximately 4,500 square feet in an office building located at 13A, rue de Bitbourg, L-1273 Luxembourg, Grand Duchy of Luxembourg which expires on November 16, 2003.
Year Ended December 31 2000	 1999	 1998 1997 1996 STATEMENT OF OPERATIONS DATA:
BALANCE SHEET DATA (at year end): Invested assets $760,444 $648,503 $592,123 $398,782 $370,138 Assets held in separate accounts 520,439 319,973 190,246 148,064 128,546 Total assets	 1,470,457 1,150,977 956,150 668,992 628,413 Long-term debt, notes payable and capital lease obligations	 31,500 34,500 35,000 26,141 20,697 Preferred stock	 6,530 6,530 6,530 -- 1,757 Shareholders' equity 62,899 53,360 66,042 43,313 39,919 Shareholders' equity, excluding unrealized gain (loss) on securities available for sale		 72,542 69,219 64,382 41,142 40,665 Ratio of debt to total capitalization (d)	 28% 31% 33% 39% 33%
Notes to SMC Selected Historical Financial Data (Dollars in Thousands, Except Per Share Amounts)
(b)	Operating income represents income before extraordinary gains (losses), excluding net realized investment gains (losses) (less income taxes (benefits) and amortization relating to such gains (losses)), and gain on disposal of subsidiary.
(c)	Represents income from continuing operations (including realized investment gains and (losses)) before income taxes, and extraordinary items plus fixed charges. Fixed charges represent total interest expense.
(d)	Total capitalization is the sum of SMC's debt (long-term debt, notes payable and capital lease obligations), and redeemable preferred stock and shareholders' equity (excluding unrealized gains and losses.)
(f)	Includes Medicare supplement premiums of $6.0 million related to the Savers Life acquisition. This business was sold effective July 1, 1998.
All statements, trend analyses, and other information contained in this Annual Report on Form 10-K or any document incorporated by reference herein relative to markets for the Company's products and trends in the Company's operations or financial results, as well as other statements including words such as "anticipate", "believe", "plan", "estimate", "expect", "intend" and other similar expressions, constitute forward- looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, but are not limited to:
General economic conditions and other factors, including prevailing interest rate levels, and stock market performance, which may affect the ability of the Company to sell its products, the market value of the Company's investments and the lapse rate and profitability of the Company's policies.
The Company's ability to achieve anticipated levels of operational efficiencies at recently acquired companies, as well as through other cost-saving initiatives.
Mortality, morbidity and other factors which may affect the profitability of the Company's insurance products.
Regulatory changes or actions, including those relating to regulation of financial services affecting bank sales and underwriting of insurance products, regulation of the sale, underwriting and pricing of insurance products.
The discount rate selected may affect subsequent earnings in those instances where the purchase price of the policies exceeds the value of net assets acquired (including the value of future profits discounted at the selected interest rate). Selection of a lower (or higher) discount rate will increase (or decrease) the portion of the purchase price assigned to the present value of future cash flows and will result in an offsetting decrease (or increase) in the amount of the purchase price assigned to goodwill. The effect on subsequent earnings caused by this variation in purchase price allocation will depend on the characteristics of the policies purchased. Use of a lower rate may result in an increase in reported earnings in the early years after an acquisition followed by a decrease in earnings in later years.
Amortization of DAC related to operations was $9.7 million, $4.6 million, and $3.3 million for the years ended December 31, 2000, 1999 and 1998, respectively. The increase in current year amortization expense resulted primarily from increased amortization of DAC as gross profits from business sold in recent years began to emerge. DAC is generally amortized over the expected lives of the policies, a period of approximately 20 years. Interest is being accumulated at the projected crediting rate on the policies. DAC is increased for the estimated effect of realizing unrealized investment losses and decreased for the estimated effect of realizing unrealized investment gains. The offset to these amounts is recorded directly to shareholders' equity, net of taxes. Future expected amortization of DAC for the next five years before the effect of net realized and unrealized gains and losses, based on DAC at December 31, 2000 and current assumptions, is as follows (in thousands):
Accounting for Annuities and Universal and Interest-Sensitive Life Products. The Company primarily accounts for its annuity, universal and interest-sensitive life policy deposits in accordance with Statement of Financial Accounting Standards No. ("SFAS No. 97"), "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses on the Sale of Investments." Under SFAS No. 97, a benefit reserve is established at the time of policy issuance in an amount equal to the deposits received. Thereafter, the benefit reserve is adjusted for any additional deposits, interest credited and partial or complete withdrawals. Revenues for annuities and universal and interest-sensitive life policies, other than certain non-interest sensitive annuities, consist of policy charges for surrenders and partial withdrawals, mortality and administration, and investment income earned. These revenues do not include the annuity, universal and interest-sensitive life policy deposits. Expenses related to these products include interest credited to policyowner account balances, operating costs for policy administration, amortization of DAC and mortality costs in excess of account balances.
Accounting for Unit-linked Products. Separate account assets and liabilities are maintained primarily for contracts of which the majority represents unit-linked products where benefits on surrender and maturity are not guaranteed. They generally represent funds held in accounts to meet specific investment objectives of policyholders who bear the investment risk. Investment income and investment gains and losses accrue directly to these policyholders. SMC earns income from the investment management fee it charges on these unit-linked contracts, which ranges from .8% to 1.2% of the value of the underlying separate accounts.
Consolidated operating income before income taxes 			 8,568 7,320 5,958 Applicable income taxes related to operating income			 1,594 2,099 1,510
Applicable income taxes (benefits) related to realized investment gains (losses)	 (457) 27 120
Consolidated realized investment gains (losses) after taxes (benefits)	 (1,707) 51 233
Premiums and deposits collected: Traditional life	 $ 15,429 $ 12,990 $ 8,392 Medicare supplement	 -- -- 5,992 Subtotal - traditional and Medicare supplement premiums 15,429 12,990 14,384 FPDA's	 94,699 98,678 58,072 Equity-indexed annuities	 73,122 59,348 16,858 SPIA's and other deposits	 27,802 5,872 3,537 Universal and interest-sensitive life					 866 1,778 3,391
Premium income 			 $ 15,429 $ 12,990 $14,384 Policy income				 8,204 6,826 6,529
Net investment income			 42,675 44,376 33,721 Fee and other income	 5,980 4,207 3,068
Benefits and claims 	 20,045 14,516 13,310 Interest credited to interest sensitive annuities and other financial products			 21,080 25,728 19,775 Amortization			 9,703 6,313 4,755 Other operating expenses	 12,603 12,403 13,207 Interest expense and financing costs				 3,417 3,385 2,955
Net realized investment gains (losses), net of related amortization	 (2,164) 78 353
General: This segment consists of revenues earned and expenses incurred from U.S. operations which includes deposits and/or income from annuity products (primarily FPDA's), equity-indexed products, SPIA's, universal life products and traditional life products. This segment has been significantly impacted by the acquisitions of Savers Life, effective March 12, 1998, and Midwestern Life, effective October 30, 1998. The profitability for this segment is primarily a function of its investment spread earned (i.e. the excess of investment earnings over interest credited on annuity and universal life deposits), persistency of the in force business, mortality experience and management of operating expenses.
Premium deposits consist of FPDA's, equity-indexed annuities, SPIA's, interest-sensitive annuities and other financial products that do not incorporate significant mortality features. For GAAP these premium deposits are not shown as premium income in the income statement. Furthermore, a change in premium deposits in a single period does not directly cause operating income to change, although continued increases or decreases in premiums may affect the growth rate of total assets on which investment spreads are earned.
Premium deposits for 1999, received from the sale of FPDA's, Equity-indexed annuities, interest sensitive annuities and other financial products, increased $83.8 million or 102%, to $165.7 million. The increase relates to i) an increase in the agency base achieved through the recruitment of high volume agents and larger managing general agencies, ii) expansion of geographical concentration, iii) the full year impact of an equity-indexed product introduced in 1998, which contributed $46.6 million of deposits for the period, and iv) the introduction of three equity-indexed annuity products in 1999, which contributed $12.7 million of deposits for the period.
Premium income consists of premiums earned from i) traditional life products, ii) annuity business that incorporates significant mortality features, and iii) Medicare supplement premiums for the 1998 period.
Life premiums were up $4.6 million or 55% in 1999, to $13.0 million. The increase was primarily the result of renewal premiums from Midwestern Life's traditional life block of $3.5 million and first year premiums of existing traditional life products of $.8 million.
Policy income represents i) mortality charges and administrative fees earned on universal life products, and ii) surrender charges earned as a result of terminated universal life and annuity policies.
During 1999 policy income increased $.3 million or 5%, to $6.8 million. The increase is due to i) mortality charges of a new universal life product and ii) surrender charges on certain FPDA products which is primarily the result of lowering credited rates on those products.
During 2000, net investment income decreased $1.7 million or 4%, to $42.7 million. Average invested assets, at book value, increased by $96.2 million or 15% due to the growth in insurance liabilities from premium sales of recent periods. Net investment income was negatively impacted by $7.6 million due to the change in the market value of call options hedging equity-indexed products.
The net investment yield earned on average invested assets was 7.28%, 7.15% and 7.48% for 2000, 1999 and 1998, respectively. Investment yields fluctuate from period to period primarily due to changes in the general interest rate environment.
During 2000 fee and other income increased $1.8 million or 42%, to $6.0 million. This increase includes i) $1.4 million of commission income from administrative agreements, including the Savers Marketing administrative agreement, and ii) $.4 million of other income related to a recovery under a keyman insurance policy.
During 1999 fee and other income increased $1.1 million or 37%, to $4.2 million. This increase was due to commission income that related to the Savers Marketing administrative agreement and the marketing efforts associated with the management of that business.
Benefits and claims include i) paid life insurance claims, ii) benefits from annuity policies that incorporate significant mortality features and, iii) changes in future policy reserves. Throughout the Company's history, it has experienced both periods of higher and lower benefit claims. Such volatility is not uncommon in the life insurance industry and, over extended periods of time, periods of higher claim experience tend to offset periods of lower claim experience.
Benefits and claims in 2000 increased $5.5 million or 38%, to $20.0 million. This increase includes i) additional reserves needed as a result of increased traditional life premiums and other deposits that incorporate mortality features and ii) additional mortality benefits of $1.5 million compared to the 1999 period.
In 2000, interest credited decreased $4.6 million or 18%, to $21.1 million. This decrease consists of a $7.6 million decline in the market value of liabilities supporting equity- indexed products. This decrease was offset by increased interest credited due to larger average interest sensitive liabilities of $100.1 million or 17% for the period, including a $61.4 million increase from equity-indexed products.
The weighted average credited rate was 4.90%, 4.89% and 5.25 % in 2000, 1999 and 1998, respectively.
Amortization includes i) amortization related to the present value of polices purchased from acquired insurance business, ii) amortization of deferred acquisition costs related to capitalized costs of insurance business sold, and iii) amortization of goodwill and organizational costs.
Other operating expenses consist of general operating expenses, including salaries, and commission expenses, net of deferrable amounts.
In 2000 interest expense and financing costs remained at $3.4 million. Average borrowings for the period declined $2.7 million, however, they were offset by an increased interest rate for the period.
Net realized investment losses, net of related costs and amortization, for 2000 were $2.2 million, which is reduced by $2.3 million of deferred acquisition cost amortization. Approximately 68% of the gross losses for 2000 are related to fixed maturity securities that have a decline in fair value that is considered other than temporary. These securities are considered to be in substantive default (i.e. default as to interest and principal). The Company maintains a high quality investment portfolio with 94% of its fixed maturity securities being classified as investment grade securities.
Premiums and deposits collected: Traditional life			 $ 41 $ 100 $ 95 Separate account deposits	 170,514 55,192 42,536
Premium income		 $ 41 $ 100 $ 95 Net investment income	 498 445 500 Separate account fees			 7,728 3,941 2,884 Amortization of negative goodwill	 -- -- 1,388 Other income				 --	 -- 353
General: International operations include revenues earned and expenses incurred from abroad, primarily Europe, and include fees collected on deposits from unit-linked products. The profitability for this segment primarily depends on the amount of separate account assets under management, the management fee charged on those assets and management of operating expenses.
Net investment income represents income earned on corporate assets such as cash, short-term investments and fixed securities.
Amortization increased $.9 million in 2000 to $2.1 million and increased $.5 million in 1999 to $1.2 million. These increases are due to amortizing deferred acquisition costs associated with increased sales of recent periods.
Other operating expenses increased $.8 million or 38% in 2000, to $3.0 million primarily due to costs associated with international business growth. The number of separate account contracts administered increased 48% to 4,989 in 2000 and 10% to 3,380 in 1999.
SMC instituted a program to repurchase its common stock in order to increase the market value of the stock. At December 31, 2000, Standard Management is authorized to repurchase 724,790 additional shares of SMC Common Stock under this program.
At March 15, 2001, Standard Management had "parent company only" cash and short-term investments of $.4 million. These funds are available to Standard Management for general corporate purposes. Standard Management's "parent company only" operating expenses (not including interest expense) were $4.5 million and $4.7 million for 2000 and 1999, respectively.
The following are characteristics of the Subordinated Debt Agreement at December 31, 2000:
Interest rate is greater of i) 10% per annum or ii) six month London Inter-Bank Offered Rate ("LIBOR") plus 1.5%
Interest payments required in 2001 based on December 31, 2000 balances will be $1.1 million
Refer to Note 5 to the consolidated financial statements for additional information.
Dividends paid from Standard Life to Standard Management are limited by laws applicable to insurance companies. As an Indiana domiciled insurance company, Standard Life may pay a dividend or distribution from its surplus profits, without the prior approval of the Commissioner of the IDOI, if the dividend or distribution, together with all other dividends and distributions paid within the preceding twelve months, does not exceed the greater of i) net gain from operations or ii) 10% of surplus, in each case as shown in its preceding annual statutory financial statements. In 2001, Standard Life can pay dividends of approximately $4.4 million without regulatory approval.
Pursuant to the management services agreement, Premier Life (Luxembourg) paid Standard Management $.3 million during 2000 and $.2 million during 1999 for certain management, technical support and administrative services. The agreement provides that it may be modified or terminated by either Standard Management or Premier Life (Luxembourg).
Equipment Rental Fees. In 2000 and 1999, Standard Management charged subsidiaries $1.1 million and $1.0 million, respectively, for the use of equipment owned by Standard Management.
U.S. Insurance Operations. The principal liquidity requirements of Standard Life are its contractual obligations to policyholders, dividend, rent, management fee and surplus debenture interest payments to Standard Management and other operating expenses. The primary source of funding for these obligations has been cash flow from premium income, net investment income, investment sales and maturities and sales of FPDA's and equity-indexed products. These sources of liquidity for Standard Life significantly exceed scheduled uses. Liquidity is also affected by unscheduled benefit payments including death benefits and policy withdrawals and surrenders. The amount of withdrawals and surrenders is affected by a variety of factors such as renewal interest crediting rates, interest rates for competing products, general economic conditions, Standard Life's A.M. Best ratings (currently rated "B+") and events in the industry that affect policyholders' confidence.
Management believes that the operational cash flow of Standard Life will be sufficient to meet its anticipated needs for 2001. As of December 31, 2000, Standard Life had statutory capital and surplus for regulatory purposes of $43.9 million compared to $43.7 million at December 31, 1999. As the life insurance and annuity business produced by Standard Life increases, Standard Life expects to continue to satisfy statutory capital and surplus requirements through statutory profits and through additional capital contributions by Standard Management. Net cash flow from operations on a statutory basis of Standard Life, after payment of benefits and operating expenses, was $95.4 million and $91.4 million for 2000 and 1999, respectively. If the need arises for cash, which is not readily available, additional liquidity could be obtained from the sale of invested assets.
International Operations. SMI dividends are limited to its accumulated earnings without regulatory approval. SMI and Premier Life (Luxembourg) were not permitted to pay dividends in 2000 and 1999 due to accumulated losses. Premier Life (Bermuda) paid a dividend of $.3 million in 2000 and $.8 million in 1999 to SMI and no dividends in 1998. SMC does not anticipate dividends from SMI in 2001.
SMC's management believes that the ability to compete is dependent upon, among other things, the ability to retain and attract independent general agents to market products and the ability to develop competitive products that also are profitable. Although management believes that good relationships with our independent general agents exist, competition for those agents among insurance companies is intense. SMC's independent general agents typically represent other insurance companies and may sell products that compete with our products. See "Business of SMC- Competition."
SMC's success also depends upon the continued contributions of key officers and employees. Should one or more of these individuals leave or otherwise become unavailable to us for any reason, business and results of operations could be materially adversely affected. See "Business of SMC-Employees."
SMC's success depends on the performance of others. SMC's results may be affected by the performance of others because of entering into various arrangements involving other parties. For instance, many products are sold through independent distribution channels and arise from arrangements with unrelated marketing organizations. As with all financial services companies, the ability to conduct business is dependent upon consumer confidence in the industry and its products. Actions of competitors, and financial difficulties of other companies in the industry, could undermine consumer confidence and adversely affect business results.
Financial results could suffer if the value of investments decreases due to factors beyond SMC's control. SMC's invested assets are subject to customary risks of credit defaults and changes in market values. The value of the Company's investment portfolio depends in part on the financial condition of the companies in which it has made investments. Factors that my affect the overall market value of invested assets include interest rate levels, financial market performance, and general economic conditions, as well as particular circumstances affecting the businesses of individual companies.
SMC could be forced to sell illiquid investments at a loss to cover policyholder withdrawals. Many products allow policyholders and contract holders to withdraw their funds under defined circumstances. SMC manages its liabilities and configures its investment portfolio to provide and maintain sufficient liquidity to support anticipated withdrawal demands, contract benefits and maturities. While a significant amount of liquid assets are owned, certain portions of assets are relatively illiquid. Unanticipated withdrawal or surrender activity could, under some circumstances, compel SMC to dispose of illiquid assets on unfavorable terms, which could have an adverse effect.
Because a significant portion of SMC's annuity contracts are surrenderable, any substantial increase in the level of surrenders could negatively affect financial results. As of February 28, 2001, approximately 91.7% or $598.6 million of annuity contracts in force (measured by statutory reserves) were surrenderable. Approximately 8.3% of those contracts or approximately $54.5 million of annuity contracts in force (measured by statutory reserves) are surrenderable without charge. Changes in prevailing interest rates, ratings or other factors which result in or lead to significant levels of surrenders of existing annuity contracts could have a material adverse effect upon SMC's financial condition and results of operations. Surrenders result in a reduction of invested assets that earn investment income and a reduction of policyholder account balances that credit interest. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
management may not be able to manage the combined entity effectively or to make acquisitions and grow our business internally at the same time.
The timing, size or success of any future acquisitions cannot be predicted, nor the ability to integrate any acquired businesses, or their associated capital requirements. In addition, SMC may not be able to obtain acquisition financing when required, or such financing may only be available on terms and conditions that are unacceptable. SMC's failure to address the above issues, could cause financial results to suffer.
Foreign Currency Risk. SMI policyholders invest in assets denominated in a wide range of currencies. As policyholders are not permitted to invest directly in options, futures and derivatives, their investment and currency risk is limited to premiums they have paid. Although policyholders effectively bear the currency risk, SMI could be exposed to currency fluctuations if currencies within the conventional investment portfolio or certain actuarial reserves are mismatched. In order to minimize this risk, SMI continually matches the assets and liabilities of the portfolio and the reserves. In addition, Premier Life's (Luxembourg) shareholder's equity is denominated in Luxembourg francs. Premier Life (Luxembourg) does not hedge currency risk because its shareholder's equity will remain in Luxembourg francs for the foreseeable future, thus, no significant realized foreign exchange gains or losses are anticipated. At December 31, 2000, there was a $2.4 million unrealized loss from foreign currency translation.
Possibility of Future Dilution of Ownership and Voting Power. The SMC Board of Directors has the authority to issue up to .9 million additional shares of preferred stock and 11.0 million additional shares of common stock. The board's authority under SMC's charter typically does not require stockholder approval unless it is otherwise required for a particular transaction. Although SMC is not currently involved in any life insurance acquisitions, the Company regularly investigates such opportunities and could issue additional shares of SMC common or preferred stock in connection with an acquisition.
Uncertainties Regarding Intangible Assets. Included in SMC's December 31, 2000 financial statements are certain assets that are primarily valued, for financial statement purposes, on the basis of management assumptions. These assets include items such as:
deferred acquisition costs; present value of future profits; costs in excess of net assets acquired; and organization and deferred debt issuance costs.
The value of these assets reflected in the December 31, 2000 balance sheet total $124.6 million or 8.5% of SMC's assets. SMC has established procedures to periodically review the assumptions used to value these assets and determine the need to make adjustments of such values in SMC's consolidated financial statements. SMC has determined that the assumptions used in the initial valuation of the assets are consistent with the current operations of SMC as of December 31, 2000.
Financial Services Deregulation. The U.S. Congress is currently considering a number of legislative proposals intended to reduce or eliminate restrictions on affiliations among financial services organizations. The recently passed GLB Act would allow banks to own or affiliate with insurers and securities firms. An increased presence of banks in the life insurance and annuity businesses may increase competition in these markets. The Company cannot predict the impact of these proposals on the earnings of the Company.