We entered into a lease on March 31, 1997, for approximately 16,000 square feet in a warehouse located at 2525 North Shadeland, Indianapolis, Indiana which expires on July 1, 2002. This lease will either be renegotiated or a new lease will be entered into in 2002.
Savers Marketing leases approximately 6,000 square feet in an office building located at 8064 North Point Boulevard, Winston-Salem, North Carolina, under the terms of a lease, which expires on March 31, 2002. This lease is scheduled to be renegotiated by April 1, 2002 under approximately the same terms as the prior lease.
Selected Historical Financial Data (a) (Dollars in Thousands, Except Per Share Amounts and Shares Outstanding)
Premium income		$ 9,476 $ 9,474 $10,381 $14,479(d) 7,100 Investment activity Net investment income 59,000 50,776 43,612 33,589 29,197 Call option gains (losses) (5,906) (7,603) 1,209 632 -- Net realized investment gains (losses)	 (11,134) (4,492) 78 353 396 Total revenues		 75,356	 70,067 70,254 63,275 46,855 Interest expense and financing costs	 3,492 3,417 3,385 2,955 2,381 Total benefits and expenses			 73,566	 63,663 62,856 56,964 43,593 Income before income taxes and extraordinary gain (loss)		 	 1,790	 6,404 7,398 6,311 3,262 Net income		 1,780	 5,267 5,272	 4,681 2,645
PER SHARE DATA: Net income	 $.23 $.68 $.69 $.68 $.54 Net income, assuming dilution			 .23 .66 .65	 .62 .48 Book value per common share		 9.30	 8.34 6.85 8.64 8.88
OTHER DATA: Operating income (c) 7,329 7,333 5,221 4,448 2,384 Operating cash flows 7,990 935 2,853 207 7,696
(a)	Comparison of consolidated financial information is significantly affected by the acquisitions of Savers Life on March 12, 1998 and Midwestern Life on October 30, 1998.
(b)	The ratio of earnings to fixed charges is calculated by dividing earnings (income before federal income taxes, extraordinary loss and preferred stock dividends plus interest expense and policyholder interest) by fixed charges (interest expense on mortgage payable, notes payable and trust preferred securities, dividends on preferred stock and policyholder interest). The "Earnings to fixed charges, excluding policyholder interest" ratios do not include interest credited to policyholder accounts of $30.2 million, $21.3 million, $25.7 million, $19.8 million and $16.3 million for the years ended December 31, 2001, 2000, 1999, 1998 and 1997, respectively. "Earnings to fixed charges, excluding policyholder interest" may not be comparable to similarly titled measures used by other companies.
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 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 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 our ability to sell products, the market value of our investments and the lapse rate and profitability of our policies.
* Our ability to achieve anticipated levels of operational efficiencies at recently acquired companies, as well as through other cost-saving initiatives.
* Changes in the federal income tax laws and regulation which may affect the relative tax advantages of some of our products.
* The risk factors or uncertainties listed from time to time in any document incorporated by reference herein.
U.S. Product Profitability. The long-term profitability of life insurance and annuity products depends on the accuracy of the actuarial assumptions that underlie the pricing of such products. Actuarial calculations for such insurance products, and the ultimate profitability of such products, are based on four major factors: 1) persistency, 2) mortality, 3) return on cash invested by the insurer during the life of the policy and 4) expenses of acquiring and administering the policies.
Interest spreads represent a major profit source on interest sensitive life and annuity products, so margins on these products are sensitive to interest rate fluctuations. In general, we are able to maintain spreads by adjusting credited interest rates for changes in our earned rates, subject to competitive and timing constraints. However, there are corollary effects of interest rate changes.
Rising interest rates result in a decline in the market value of assets, and also tend to result in increased policyholder surrenders as other investment options become relatively more attractive. The effect of increased surrenders is to reduce earnings over the long term (current period earnings effect may vary depending on the level of surrender charges and DAC/PVP assets). In addition, increasing interest rates give rise to disintermediation risk, the risk that assets must be sold at depressed values in order to fund increased surrender payments. This risk is mitigated by properly matching assets and liabilities.
The average expected remaining life of Standard Life's traditional life and annuity business in force at December 31, 2001 was 6.9 years. This calculation was determined based upon our actuarial models and assumptions as to expected persistency and mortality. Persistency is the extent to which insurance policies sold are maintained by the insured. The persistency of life insurance and annuity products is a critical element of their profitability. However, a surrender charge often applies in the early contract years and declines to zero over time.
Deferred Acquisition Costs. Insurance policies issued after the purchase date of a company will generate significant costs that vary directly with and relate to the acquisition of the new business. Under GAAP accounting rules, these acquisition costs on new policies are to be capitalized and recorded as deferred acquisition costs ("DAC"). For interest sensitive life and annuity products, the DAC asset is amortized in proportion to estimated gross profits over the life of the contract. Virtually all of our DAC is a result of writing annuity products.
Amortization of DAC related to operations was $10.7 million, $8.7 million and $4.6 million for the years ended December 31, 2001, 2000 and 1999, respectively. The increase in current year amortization expense resulted primarily from the emergence of gross profits from business sold in recent years. Future expected amortization of DAC, assuming no new business after December 31, 2001 and current assumptions, is as follows (in thousands):
Gross amortization $17,769 $17,393 $15,337 $13,222 $11,237 Interest accumulation 4,996	 3,891 2,982 2,334 1,861 Net amortization	 $12,773	 $13,502	$12,355 $10,888 $ 9,376
Accounting for Equity-Indexed Annuities. Revenues and expenses for equity-indexed annuities are recognized in accordance with the SFAS No. 97 model, described above. Policy liabilities for equity-indexed annuities are computed in accordance with SFAS No. 133 which requires that an equity-indexed annuity liability be bifurcated into a "host contract" and a "derivative contract". The host contract liability is a book value liability providing for the equity-indexed annuity policy's guaranteed benefits. The derivative contract liability is a market value liability providing for the equity-linked benefits available in the policy. The derivative liability includes a liability for equity-linked benefits accruing during the current contract year, as well as liability amounts for future equity benefits which have not yet been granted.
Accounting for Payout Annuities. Payout annuities with no life contingent payments, which comprise the majority of our payout annuities in force and the majority of new payout annuity sales, are accounted as investment contracts in accordance with FAS No. 97. Revenues consist of investment income, and expenses consist of the imputed interest credits to policies as well as operating costs for policy administration. An initial policy liability is established as initial premium less acquisition costs. The imputed credited rate is the rate which equates this net premium to the guaranteed payments. After issue, the liability changes by the amount of imputed interest credits and benefit payments.
Payout annuities with payments contingent on the survival of the annuitant are accounted as limited-payment contracts in accordance with FAS No. 60, with revenue recognition, expense recognition, and liabilities computed as described above for traditional life products.
Income before extraordinary loss				 1,780 5,626 5,272 Extraordinary loss, net of $185 tax benefit	 -- (359) --
Our 2001 net income was $1.8 million, or 23 cents per diluted share, down 65% per share over the comparable 2000 period. The results for 2001 were impacted by 1) an increase in the Company's effective tax rate resulting in $.6 million; 2) an increase in net realized investment losses, less related amortization and taxes, attributable to the sale of Enron bonds and write-downs on the value of collateralized debt obligations due to increased default rates from the economic slow down of $3.8 million; 3) litigation settlement costs of $.3 million, and 4) reduced spread on interest sensitive products of $.4 million. These above decreases in net income were somewhat offset by paid life insurance claims, less related reserves, of $.9 million. No extraordinary losses occurred in the current year.
Our 2000 net income was $5.3 million, or 66 cents per diluted share, up 2% per share over the comparable 1999 period. The results for 2000 include increases for 1) net investment spread, the difference between the investment income earned on our investments less the interest we credit to our policyholders, of $21.8 million compared to $19.1 million, 2) separate account margin, separate account fees less related amortization, of $5.7 million compared to $2.8 million and 3) a lower marginal tax rate due to the utilization of our net operating loss carryforwards. These increases were offset by 1) paid life insurance claims less related reserves of $6.0 million compared to $4.7 million, 2) net realized investment losses less related amortization and taxes, of $1.7 million, and 3) an extraordinary loss of $.4 million in the 2000 period.
Benefits and claims 	 7,087 13,795 11,807 Interest credited to interest sensitive annuities and other financial products			 30,227 21,335 25,728 Amortization			 8,931 9,703 6,313 Commission expenses	 9,262 1,918 735 Other operating expenses	 11,166 10,684 11,668 Interest expense and financing costs	 3,492 3,417 3,385
Net realized investment gains (losses), net of related amortization	 (6,546) (2,164) 78
* Premium deposits for 2001 increased $126.0 million or 64%, to $322.5 million. Deferred annuities increased $83.5 million or 88%, to $178.2 million. Single premium immediate annuities and other deposits increased $48.6 million or 175%, to $76.4 million.
The increase relates to 1) an expanded geographical presence, 2) favorable agent retention, 3) enhanced presence in the single premium immediate annuity market, 4) the development of an interactive agent website and 5) an A.M. Best rating of B++ (Very Good).
* Premium income for 2001 remained constant at $9.4 million. Effective August 2001, we suspended the active marketing of life products indefinitely, however we continue to manage our in force life business.
* Premium income for 2000 decreased $.8 million or 8%, to $9.4 million, which is primarily the result of a decline in ordinary life policies in force due to lapse and surrender.
* During 2000, policy income increased $1.4 million or 20% to $8.2 million. The increase primarily relates to $1.6 million of surrender income received as a result of 1) reducing crediting rates on certain flexible premium deferred annuity products and 2) general market conditions, offset by 3) lower cost of insurance income.
* During 2000, net investment income increased $7.1 million or 16% to $50.3 million. Average cash and invested assets, at book value, increased by $95.7 million or 15% due to the growth in insurance liabilities from annuity sales in recent periods.
* The net investment yield earned on our average invested assets was 7.14%, 7.26% and 7.13% for the years ended 2001, 2000 and 1999, respectively. Investment yields fluctuate from period to period and include changes in the general interest rate environment.
See also "Call option losses" and "Interest credited to interest sensitive annuities and other financial products" for additional information regarding the impact of our equity-indexed products.
Fee and other income consist of fee income related to servicing unaffiliated blocks of business, experience refunds, and commission income.
* Benefits and claims in 2000 increased $2.0 million or 17%, to $13.8 million. This increase includes 1) additional reserves needed as a result of increased traditional life premiums and 2) unfavorable mortality experience of $1.3 million compared to the 1999 period.
* In 2001, interest credited increased $8.9 million or 42%, to $30.2 million due to increased average interest sensitive liabilities of $159.2 million or 25% compared to the 2000 period. In addition, interest credited increased $3.7 million as a result of market value changes of call options supporting our equity-indexed products.
* Amortization in 2000 increased $3.4 million or 54%, to $9.7 million. This increase relates to 1) additional amortization of deferred acquisition costs, 2) increased business in force and 3) the recognition of additional profits for the period. Additional profits were recognized from 1) the realization of profits from increased annuity sales in recent periods and 2) the realization of profits from surrender income of deferred annuities.
* In 2000, other operating expenses decreased $1.0 million or 8%, to $10.7 million. The decrease is due to continued efficiencies achieved through the assimilation of recent acquisitions.
* In 2000, interest expense and financing costs remained at $3.4 million. Average borrowings for the period declined $3.2 million, however, they were offset by an increased interest rate for the period.
The weighted average interest rate for the 2001 and 2000 periods was 10.47% and 10.76%, respectively.
Net realized investment gains (losses), net of related amortization fluctuate from period to period and generally arise when securities are sold in response to changes in the investment environment. Realized investment gains (losses) may affect the timing of the amortization of deferred acquisition costs and the amortization of the present value of future profits.
Statement of Operations: Premium income		 $ 57 $ 41 $ 100 Net investment income	 461 498 445 Separate account fees	 8,851 7,728 3,941
General: Our international operations include revenues earned and expenses incurred from abroad, primarily Europe, and include fees collected on our deposits from unit-linked assurance products. The profitability for this segment primarily depends on the amount of our separate account assets under management, the management fee charged on those assets and management of our operating expenses.
Amortization includes the amortization of deferred acquisition costs, such as sales commissions and other costs, directly related to selling new business and foreign exchange translation.
* Amortization increased $2.1 million in 2001 to $4.2 million as a result of applying actual experience to deferred acquisition cost amortization and from amortizing deferred acquisition costs associated with increased sales of recent periods, and is offset by a corresponding increase in deferred revenue amortization.
* Amortization increased $.9 million in 2000 to $2.1 million due to amortizing deferred acquisition costs associated with increased sales of recent periods.
* The impact of foreign exchange translation increased amortization $.5 million in 2001 and $.9 million in 2000.
* Commission expenses were $.2 million and $12 thousand for the years ended December 31, 2001 and 2000. Due to the nature of our business, most incurred commissions are deferred.
Other operating expenses consist of general operating expenses, including salaries, net of deferrable amounts.
* Other operating expenses increased $.1 million or 3% in 2001, to $3.1 million as a result of new systems, depreciation and related costs. The number of separate account contracts administered increased 41% to 7,052 in 2001.
* Net realized investment losses, for 2001 were $.8 million due to the sale of a security reflecting changes in market conditions.
Foreign currency translation comparisons between 2001, 2000, and 1999 are impacted by the strengthening and weakening of the U.S. dollar relative to foreign currencies, primarily the Luxembourg franc and the Euro. The impact of these translations has been quantified on fees from separate accounts and amortization.
Pursuant to the management services agreement, Premier Life (Luxembourg) paid $1.2 million during 2001 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). In 2002, we are expected to receive management fees of $1.2 million from Premier Life (Luxembourg).
Equipment Rental Fees. In 2001 we charged subsidiaries $1.1 million for the use of our equipment. In 2002, we are expected to receive $1.1 million of rental income from Standard Life.
Tax Sharing Payments. Effective January 1, 2000 we entered into a tax sharing agreement with Savers Marketing Corporation and Standard Management International that allocates the consolidated federal income tax liability. During 2001, Savers Marketing and Standard Management International paid $.5 million and $.8 million, respectively, in accordance with this agreement.
The following are the characteristics of our mortgage payable, notes payable and trust preferred securities, including estimated required payments in 2002.
The following are characteristics of our mortgage payable agreement at December 31, 2001:
* principal and interest payments: $56 thousand dollars per month through December, 2011;
* note may be prepaid on or before January, 2005 at 105% and declining to 101% after December, 2008.
* interest payments required in 2002 based on current balances will be $.7 million.
* may be redeemed on or after August 9, 2006 at $10 per security plus accumulated and unpaid distributions;
General: On a consolidated basis we reported net cash provided by operations of $8.0 and $.9 million for 2001 and 2000, respectively. Although deposits received on our interest-sensitive annuities and other financial products are not included in cash flow from operations under GAAP, these funds are available. Cash provided by operations plus net deposits received, less net account balances returned to policyholders on interest sensitive annuities and other financial products, resulted in positive cash flow of $222.0 and $108.2 million for 2001 and 2000, respectively. Cash generated on a consolidated basis is available only to the extent that it is generated at the holding company level or is available through interest, dividends, management fees or other payments from our subsidiaries.
At March 1, 2002, we had "parent company only" cash and short-term investments of $.9 million. These funds are available for general corporate purposes. Our "parent company only" operating expenses (not including interest expense) were $4.3 million and $4.5 million for 2001 and 2000, respectively.
U.S. Insurance Operations. The principal liquidity requirements of Standard Life are its 1) contractual obligations to policyholders, 2) surplus debenture interest, dividends, management fees and rental fees to Standard Management and 3) 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 annuity products. These sources of liquidity for Standard Life significantly exceed scheduled uses. Liquidity is also affected by unscheduled benefit payments including death benefits, 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 rating and events in the industry that affect policyholders' confidence. In April 2001, Standard Life received a rating from A.M. Best of B++, or "very good" category. As rationale for this rating, A.M. Best noted Standard Life's continued business growth, improved operating results during 2000 and increased fee income received from administration.
Statutory surplus is computed according to rules prescribed by the National Association of Insurance Commissioners as modified by the Indiana Department of Insurance, or the state in which our insurance subsidiaries do business. Statutory accounting rules are different from GAAP and are intended to reflect a more conservative perspective. With respect to new business, statutory accounting practices require that: 1) acquisition costs (primarily commissions and policy issue costs) and 2) reserves for future guaranteed principal payments and interest in excess of statutory rates, be expensed in the year the new business is written. These items cause a reduction in statutory surplus or surplus strain in the year written for many insurance products. We design our products to minimize such first-year losses, but certain products continue to cause a statutory loss in the year written. For each product, we control the amount of net new premiums written to manage the effect of such surplus strain. Our long-term growth goals contemplate continued growth in our insurance businesses. To achieve these growth goals, our U.S. insurance subsidiaries will need to increase statutory surplus. Additional statutory surplus may be secured through various sources such as internally generated statutory earnings, infusions with funds generated through our debt or equity offerings, or mergers with other life insurance companies. If additional capital is not available from one or more of these sources, we believe that we could reduce surplus strain through the use of reinsurance or through reduced writing of new business.
We believe that the operational cash flow of Standard Life will be sufficient to meet our anticipated needs for 2002. As of December 31, 2001, Standard Life had statutory capital and surplus for regulatory purposes of $43.9 million. As the annuity business produced by Standard Life increases, Standard Life expects 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 $215.0 million for 2001 and $92.9 million for 2000. If the need arises for cash, which is not readily available, additional liquidity could be obtained from the sale of invested assets.
International Operations. The amount of dividends that may be paid by Standard Management International without regulatory approval is limited to its accumulated earnings. Standard Management International and Premier Life (Luxembourg) were not permitted to pay dividends in 2001 and 2000 due to accumulated losses. Premier Life (Bermuda) paid a dividend of $.3 million in 2000. We do not anticipate receiving dividends from Standard Management International in 2002.
We operate in a highly competitive environment and are in direct competition with a large number of insurance companies, many of which offer a greater number of products through a greater number of agents and have greater resources. In addition, we may be subject, from time to time, to new competition resulting from additional private insurance carriers introducing products similar to those offered by us. Moreover, as a result of recent federal legislation, commercial banks, insurance companies, and investment banks may now combine, provided certain requirements are satisfied, and we expect to encounter increased competition from these providers of financial services. This competitive environment could result in lower premiums, loss of sales and reduced profitability.
Our success also depends upon the continued contributions of key officers and employees. Should one or more of these individuals leave or otherwise become unavailable for any reason, business and results of operations could be materially adversely affected. See "Business of Standard Management-Employees."
Financial results could suffer if our A.M. Best ratings are downgraded.
The National Association of Insurance Commissioners, or NAIC, and state insurance regulators continually reexamine existing laws and regulations and their application to insurance companies. Changes in the NAIC or state regulations, including, for example, changes in the risk-based capital requirements which are determined by the NAIC and state regulators, could affect the ability of our subsidiaries to pay dividends to us which could affect our ability to make payments to you.
We are able to assume insurance risks beyond the level which our capital and surplus would support by transferring substantial portions of risks to other, larger insurers through reinsurance contracts. Approximately 45% of our life insurance in force and 5% of our annuity policy liabilities have risks that we have reinsured through reinsurance contracts. However, these reinsurance arrangements leave us exposed to credit risk, which exists because reinsurance does not fully relieve us of our liability to our insureds for the portion of the risks ceded to reinsurers. This liability may exceed our established reserves which would have a significant negative affect on our net income. In addition, reinsurance may not continue to be available to us at commercially reasonable rates. If reinsurance is not available to us in the future, the amounts we reserve as liabilities for payment of claims would significantly increase and the amount and value of policies we sell would significantly decrease, which would have a material adverse effect on our business and operating results.
Our earnings are significantly dependent upon the extent to which the actual claims received by our subsidiaries is consistent with the actuarial practices and assumptions we use in establishing reserves for the payment of benefit claims. To the extent that the actual claims experience of our subsidiaries exceeds our established reserves, our operating income would be negatively affected, resulting in an adverse affect on our earnings.
Volatility in benefit claims is common in the life insurance industry. Our benefits and claims were $28 million and $20 million for the years 2001 and 2000 respectively. While our reserves have been sufficient to cover policy claims in the past and we attempt to limit the risk by carefully underwriting new policies and sharing risks with reinsurance companies, we may still experience a period of higher than anticipated benefit claims that exceeds our established reserves. If this were to happen, it could result in increased operating losses.