FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 33-64820
AMERICO LIFE, INC.
(Exact name of registrant as specified in its charter)
MISSOURI
(State of other jurisdiction of incorporation or organization)
43-1627599
(I.R.S. Employer Identification No.)
1055 BROADWAY
KANSAS CITY, MISSOURI 64105
(Address of principal executive offices)
(816) 391-2000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the
latest practicable date.
Class and Title of Shares Outstanding
Capital Stock as of November 12, 1997
-------------- -----------------------
Common Stock, $1.00 Par Value 10,000
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands - unaudited)
<TABLE>
September 30, December 31,
1997 1996
----------------- -----------------
<S> <C> <C>
Assets
Investments:
Fixed maturities:
Held to maturity, at amortized cost (market: $866,662 and $847,832) $ 860,075 $ 857,451
Available for sale, at market (amortized cost: $647,153 and $671,792) 661,604 670,274
Equity securities, at market (cost: $40,599 and $33,341) 63,330 48,262
Investment in equity subsidiaries 21,631 18,078
Mortgage loans on real estate, net 166,781 184,326
Investment real estate, net 21,259 22,417
Policy loans 201,326 204,607
Other invested assets 18,527 13,437
-------------- ----------------
Total investments 2,014,533 2,018,852
Cash and cash equivalents 142,100 96,069
Accrued investment income 26,510 25,287
Amounts receivable from reinsurers 1,142,368 375,150
Other receivables 30,537 13,969
Deferred policy acquisition cost 91,711 72,438
Cost of business acquired 276,892 200,710
Other assets 35,480
----------------
28,235
Total assets $ 3,760,131 $ 2,830,710
============= ==============
Liabilities and stockholders' equity
Policyholder account balances $ 2,204,697 $ 1,466,959
Reserves for future policy benefits 817,047 681,545
Unearned policy revenues 36,728 32,128
Policy and contract claims 37,487 30,959
Other policyholder funds 79,252 81,442
Notes payable 133,220 133,312
Amounts payable to reinsurers 65,329 67,348
Deferred income taxes 52,238 43,195
Amounts due to affiliates 6,267 2,168
Amounts due to brokers 28,145 50,013
Other liabilities 65,872 34,619
--------------- ---------------
Total liabilities 3,526,282 2,623,688
Stockholders' equity:
Common stock ($1 par value; 30,000 shares authorized, 10,000 shares
issued and outstanding) 10 10
Additional paid-in capital 3,745 3,745
Net unrealized investment gains 48,963 37,189
Retained earnings 181,131 166,078
--------------- ---------------
Total stockholders' equity 233,849 207,022
Commitments and contingencies
Total liabilities and stockholders' equity $ 3,760,131 $ 2,830,710
============== ==============
</TABLE>
See notes to consolidated financial statements
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In Thousands, except per share amounts - unaudited)
<TABLE>
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Income:
Premiums and policy revenues $ 53,995 $ 42,394 $ 150,483 $
122,749
Net investment income 56,369 49,401 165,560 136,060
Net realized investment gains (losses) 611 822 4,063 (437)
Other income 6,028
455 7,739 904
--- ----- ---
Total income 117,003 93,072 327,845 259,276
Benefits and Expenses
Policyholder benefits:
Death benefits 31,001 22,752 87,098 70,295
Interest credited on universal life
and annuity policies 28,820 24,043 80,820 59,775
Other policyholder benefits 14,813 14,282 43,524 41,290
Change in reserves for future
policy benefits (4,755) (4,501) (12,339) (12,589)
Commissions 3,574 4,359 9,707 10,179
Amortization expense 10,310 8,299 28,419 21,651
Interest expense 3,051 3,062 9,084 9,110
Other operating expenses 21,791 12,718 57,439
-------------- -------------- ----------------
40,707
Total benefits and expenses 108,605 85,014 303,752 240,418
------------- -------------- --------------- ---------------
Income before provision for income
taxes 8,398 8,058 24,093 18,858
Provision for income taxes 2,734 2,766 7,540
--------------- -------------- ----------------
6,423
Net income $ 5,664 $ 5,292 $ 16,553 $ 12,435
============== ============== ================ ==============
Net income per common share $ 566.40 $ 529.20 $ 1,655.30 $ 1,243.50
============= ============= =============== ==========
</TABLE>
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands - unaudited)
<TABLE>
Nine Months
Ended September,
1997 1996
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 16,553 $ 12,435
------------- -------------
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization 31,552 24,071
Deferred policy acquisition costs (24,372) (14,743)
Undistributed earnings of equity subsidiaries (3,556) (3,812)
Distribution of earnings from equity subsidiaries - 6,000
Amortization of unrealized gains (5,319) (4,337)
(Increase) decrease in assets:
Accrued investment income 313 (368)
Amounts receivable from reinsurers (42,052) (44,286)
Other receivables (3,338) (4,596)
Other assets, net of depreciation and amortization 4,781 (583)
Increase (decrease) in liabilities:
Policyholder account balances 32,649 (4,347)
Reserves for future policy benefits and unearned policy revenues (40,177) (1,644)
Policy and contract claims (1,342) 7,559
Other policyholder funds (2,190) (7,515)
Amounts payable to reinsurers 2,971 (8,778)
Provision for deferred income taxes 2,812 4,874
Amounts due to affiliates (971) 4,895
Other liabilities 726 (612)
Net realized (gains) losses on investments sold (4,063) 437
Gain on sale of subsidiary (4,848) -
Amortization on bonds and mortgage loans 927 1,093
Other changes (7,559) (3,894)
---------------- ---------------
Total adjustments (63,056) (50,586)
--------------- --------------
Net cash used by operating activities $ (46,503) $ (38,151)
--------------- --------------
</TABLE>
See notes to consolidated financial statements
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
(In Thousands - unaudited)
<TABLE>
Nine Months
Ended September,
1997 1996
----------------- -----------------
<S> <C> <C>
Cash flows from investing activities
Purchases of fixed maturity investments $ (283,747) $ (181,465)
Purchases of other investments (79,451) (17,409)
Maturities or redemptions of fixed maturity investments 73,470 16,812
Sales of fixed maturity investments available for sale 339,663 181,684
Sale of equity securities 185,194 (1,254)
Payment for subsidiaries acquired, net of cash acquired (246,348) -
Receipt for subsidiary sold, net of cash sold 10,720 -
Mortgage loans originated (10,927) -
Sales of other investments 14,566 17,437
Repayments from mortgage loans 29,908 24,767
Change in due to broker (21,177) (40,809)
Change in policy loans 3,280 5,803
--------------- ---------------
Net cash provided by investing activities 15,151 5,566
-------------- ---------------
Cash flows from financing activities
Receipts credited to policyholder account balances 145,544 140,026
Return of policyholder account balances (66,374) (75,728)
Dividends paid (1,500) (1,500)
Repayments of notes payable (287)
----------------
(289)
Net cash provided by financing activities 77,383 62,509
-------------- --------------
Net increase in cash and cash equivalents 46,031 29,924
Cash and cash equivalents at beginning of period 96,069 58,996
-------------- --------------
Cash and cash equivalents at end of period $ 142,100 $ 88,920
============ =============
Supplemental schedule of non-cash investing and
financing activities
Acquisition of subsidiaries:
Fair value of assets acquired, net of cash acquired $ 947,498 $
-
Liabilities assumed (701,150)
-
Payments for subsidiaries acquired, net of cash acquired $ 246,348 $
============= =
-
</TABLE>
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1997 and
1996 (In Thousands, except per share
amounts-unaudited)
The following notes should be read in conjunction with the notes to the
consolidated financial statements contained in the Americo Life, Inc. ("the
Company") December 31, 1996 Form 10-K as filed with the Securities and Exchange
Commission.
1. ACCOUNTING POLICIES
The unaudited consolidated financial statements as of September 30, 1997 and for
the three and nine months ended September 30, 1997 and 1996 reflect all
adjustments, consisting of normal recurring adjustments, which are necessary for
a fair statement of financial position and results of operations on a basis
consistent with accounting principles described fully in Note 1 of the Company's
December 31, 1996 consolidated financial statements. The results of operations
for the three and nine months ended September 30, 1997 and 1996 are not
necessarily indicative of the results experienced for the full year 1996, nor
the results to be expected for the full year 1997.
In January 1997, the Company implemented Statement of Financial Accounting
Standards ("SFAS") No. 125 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities". SFAS No. 125 establishes new criteria
for determining whether a transfer of financial assets in exchange for cash or
other consideration should be accounted for as a sale or as a pledge of
collateral. The implementation of portions of this statement with respect to
accounting for pledged collateral, repurchase agreements and similar
transactions was deferred for one year by SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of the FASB Statement No. 125" issued in
December 1996. Implementation of these new accounting standards did not have a
material impact on the consolidated financial statements of the Company.
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings per Share" and SFAS No. 129, "Disclosure of Information about
Capital Structure". SFAS No. 128 specifies the computation, presentation and
disclosure requirements for earnings per share. SFAS No. 129 does not establish
new disclosure requirements, rather it codifies certain disclosure requirements
contained in other statements previously issued. These statements are effective
for financial statement periods ending after December 15, 1997. The
implementation of these statements is not expected to have an impact on the
consolidated financial statements of the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". SFAS No. 130 establishes standards for the reporting and display
of comprehensive income and its components in financial statements. SFAS No. 131
establishes new guidelines for public business enterprises to report financial
and descriptive information about their operating segments. These statements are
effective for financial statement periods beginning after December 15, 1997.
The preparation of financial statements requires management to make estimates
and assumptions that effect the reported amounts of assets and liabilities and
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.
<PAGE>
2. STOCKHOLDER'S EQUITY
Following are the components of net unrealized investment gains:
<TABLE>
Change in
Nine Months
Ended
September 30, December 31, September 30,
1997 1996 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Investment securities:
Fixed maturities available for sale $ 13,134 $ (681) $ 13,815
Fixed maturities reclassified from
available for sale to held to maturity 48,107 53,426 (5,319)
Equity securities 24,153 14,922 9,231
------------- ------------- -------------
85,394 67,667 17,727
Effect on other balance sheet accounts (11,373) (11,960) 587
Deferred income taxes (25,058) (18,518) (6,540)
------------- ------------- --------------
Net unrealized investment gains $ 48,963 $ 37,189 $ 11,774
============ ============ ============
</TABLE>
During the nine months ended September 30, 1997, the Company paid dividends to
Financial Holding Corporation (FHC) totaling $1,500.
3. ACQUISITION
On April 15, 1997 (the "Closing Date"), Great Southern Life Insurance Company
("Great Southern"), a wholly-owned subsidiary of the Company, acquired all of
the outstanding common stock of The Ohio State Life Insurance Company ("Ohio
State") and Investors Guaranty Life Insurance Company ("Investors") from Farmers
Group, Inc. pursuant to a stock purchase agreement dated January 21, 1997. The
purchase price was approximately $343.0 million. The acquisition of Ohio State
and Investors was accounted for using the purchase method of accounting. The
operating results of Ohio State and Investors after the date of acquisition are
included in the Company's statement of income for the three and nine months
ended September 30, 1997.
The assets acquired and liabilities assumed related to the acquisition of Ohio
State and Investors were as follows (in millions):
<TABLE>
<S> <C>
Assets acquired:
Fixed maturities $ 623.8
Equity securities 123.4
Cash and cash equivalents 90.2
Cost of business acquired 140.7
Other assets 59.6
---------------
$ 1,037.7
Liabilities assumed:
Policyholder account balances $ 521.4
Reserves for future policy benefits 132.3
Other liabilities 40.9
--------------
</TABLE>
$ 694.6
<PAGE>
On April 16, 1997, Ohio State and Investors entered into separate coinsurance
agreements to reinsure 100% of their insurance liabilities to an unaffiliated
insurance company (the "Reinsurer") in exchange for a ceding commission of
$146,000. On the same day, the Reinsurer and Great Southern entered into a
modified coinsurance agreement under which the Reinsurer ceded certain risks on
a 70% quota share basis on the same insurance liabilities to Great Southern. The
reinsurance agreements have the net effect of transferring 30% of the profits on
the Ohio State and Investors policies to the Reinsurer. Under the coinsurance
treaty, the assets supporting the insurance liabilities are retained by the
Reinsurer in an escrow account for the benefit of Great Southern. The Reinsurer
will receive 100% of the statutory profits from the reinsured policies until the
Reinsurer has recovered the initial ceding commission.
Ohio State and Investors transferred bonds and policy loans to the Reinsurer
equal to the statutory reserve liabilities less the ceding commission. The
policy liabilities remain the direct liabilities of Ohio State and Investors and
therefore remain on the Company's consolidated balance sheet. The assets
retained by the Reinsurer are included on the Company's consolidated balance
sheet as a receivable from the Reinsurer. The cost of business acquired asset
related to the acquired business has been reduced to reflect the net 30%
coinsurance.
The acquisition of Ohio State and Investors was funded by internal funds and the
proceeds of a $240,000 repurchase agreement. Upon receipt of the $146,000 ceding
commission from the Reinsurer, Ohio State and Investors paid dividends totaling
$200,000 to Great Southern. The repurchase agreement was closed
out in April 1997.
Summarized unaudited pro forma consolidated financial information of the Company
for the nine months ended September 30, 1997, assuming the transactions had
occurred on January 1, 1997 is as follows:
Total revenue $ 347,771
Net income $ 16,198
Net income per common share $ 1,619.80
4. SALE OF SUBSIDIARY
On August 29, 1997, Great Southern sold all of the outstanding common stock of
Loyalty Life Insurance Company ("Loyalty"), a wholly-owned subsidiary, for
$12,280, resulting in a gain of $4,800. The insurance business of Loyalty had
previously been reinsured to another subsidiary of the Company. As of the date
of sale, Loyalty had assets totaling $35.7 million and liabilities totaling
$28.3 million.
5. COMMITMENTS AND CONTINGENCIES
The Company's subsidiary, Great southern, is a defendant in lawsuits filed as
purported class actions asserting claims related to sales practices of certain
life insurance products. Great Southern intends to defend these cases
vigorously. The amount of any liability that may arise as a result of these
cases, if any, cannot be reasonably estimated at this time and no provision for
loss has been made in the accompanying financial statements.
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company entered into two transactions in 1996 and 1997 which affect the
comparability of the Company's results of operations for the three and nine
months ended September 30, 1997.
In July 1996, in connection with administrative agreements entered into with
Fremont General Corporation and Fremont Life Insurance Company ("Fremont Life"),
an unaffiliated company (the "Reinsurer") reinsured certain of the insurance
liabilities of Fremont Life on a coinsurance basis. The Reinsurer ceded certain
risks on these same liabilities to Great Southern Life Insurance Company ("Great
Southern") on a modified coinsurance basis. The invested assets related to the
reinsured business are owned by the Reinsurer. The Company has offset the
receivable from the Reinsurer against its liabilities under the modified
coinsurance agreement in the Company's consolidated financial statements at
September 30, 1997. At September 30, 1997, the reinsured liabilities, consisting
primarily of annuities and universal life policies, totaled $374.0 million. The
earnings from this transaction are included in the Company's results of
operations for the three and nine months ended September 30, 1997 and 1996.
In April 1997, Great Southern acquired all of the outstanding common stock of
The Ohio State Life Insurance Company ("Ohio State") and Investors Guaranty Life
Insurance Company ("Investors") from Farmers Group, Inc. pursuant to a stock
purchase agreement. The acquisition was accounted for using the purchase method
of accounting. In April 1997, Ohio State and Investors entered into separate
coinsurance agreements to reinsure 100% of their insurance liabilities to the
Reinsurer in exchange for a ceding commission of $145.7 million. On the same
day, the Reinsurer and Great Southern entered into a modified coinsurance
agreement under which the Reinsurer ceded certain risks on a 70% quota share
basis on the same insurance liabilities to Great Southern. At September 30,
1997, the insurance business of Ohio State and Investors, consisting primarily
of annuities and universal life policies, had aggregate insurance liabilities of
$678.0 million. The results of operations of this acquired business from the
date of the acquisition, less the net 30% coinsurance, are included in the
Company's results of operations for the three and nine months ended September
30, 1997.
The Fremont Life transaction and the Ohio State and Investors transactions will
hereinafter be referred to as the Acquisitions. The following table summarizes
the effects on the individual income statement components of the Fremont Life
transaction for the three and nine months ended September 30, 1997 and 1996 and
of the Ohio State and Investors transactions for the three and nine months ended
September 30, 1997 (in millions):
<TABLE>
Three and nine Three months Nine months
months ended ended ended
September 30, 1996 September 30, 1997 September 30, 1997
---------------------- --------------------- ----------------------
<S> <C> <C> <C>
Premiums and policy revenues $ 1.9 $ 14.5 $ 39.9
Net investment income 7.1 5.9 34.7
Other income - 1.1 2.3
Policyholder benefits 6.4 13.1 50.2
Commissions 2.1 1.0 2.0
Amortization expense .7 3.7 10.9
Other operating expenses - 5.1 8.9
</TABLE>
The other operating expenses in the above table include only the direct expense
related to providing administration of the policies and assets of the
Acquisitions. The other operating expenses shown do not include any allocation
of indirect or overhead expenses.
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Income before income taxes for the nine months ended September 30, 1997 was
$24.1 million compared to $18.9 million for the nine months ended September 30,
1996. The primary reasons for the net increase, excluding the impact of the
Acquisitions, were (i) an increase in net realized investment gains, (ii) a
decrease in amortization expense, and (iii) a gain on the disposition of a
subsidiary, partially offset by (iv) an increase in death benefits and (v) an
increase in other operating expenses. These items and other significant changes
in individual income statement components are discussed in more detail below.
Premiums and policy revenues. Premiums and policy revenues totaled $150.5
million for the nine months ended September 30, 1997 compared to $122.7 million
for the nine months ended September 30, 1996. Excluding the premiums and policy
revenues of the Acquisitions, premiums and policy revenues decreased $10.2
million from 1996 to 1997. This decrease is primarily due to the Company
currently writing small amounts of new traditional life insurance products and,
therefore, traditional life insurance premiums are decreasing as the amount of
in-force business decreases.
Net investment income. Net investment income totaled $165.6 million for the nine
months ended September 30, 1997 compared to $136.1 million for the nine months
ended September 30, 1996. Excluding the investment income related to the
Acquisitions, net investment income increased $1.8 million for the nine months
ended September 30, 1997 compared to the same period in 1996. The primary
reasons for the increase in net investment income are an increase in income of
equity subsidiaries and an increase in income on fixed maturity securities due
to changes in expected prepayment rates in 1996. Management continually
evaluates the expected prepayments of the mortgage-backed securities portfolio
to more accurately reflect expected paydowns on the securities as market
interest rates change. Expected prepayments in 1996 declined as interest rates
increased. As a result of changes in expected prepayments, net amortization of
premiums and accretion of discounts were reduced in 1996.
Net realized investment gains. The Company recorded net realized investment
gains of $4.1 million for the nine months ended September 30, 1997 compared to
net realized investment losses of $0.4 million for the same period in 1996.
During 1997, the Company recorded gains of $5.1 million from the sale of three
properties received in the disposition of GSSW, Limited Partnership in December
1996.
Other income. Other income increased $6.8 million from $0.9 million in 1996 to
$7.7 million in 1997. Excluding other income related to the Acquisitions, other
income increased $4.6 million from 1996 to 1997. The Company realized a gain of
$4.8 million in 1997 from the sale of Loyalty Life Insurance Company
("Loyalty"), a former wholly-owned subsidiary of the Company.
Policyholder benefits. Policyholder benefits increased $40.3 million to $199.1
million for the nine months ended September 30, 1997 from $158.8 million for the
nine months ended September 30, 1996. Excluding policyholder benefits related to
the Acquisitions, policyholder benefits decreased $3.5 million. For the nine
months ended September 30, 1997, lower surrender benefit payments on traditional
products and a reduced rate of reserve increases associated with the lower
premiums on traditional life products referred to above were offset by higher
death benefits payouts. The Company's death benefits for the nine months ended
September 30, 1997 were $3.7 million higher than for the same period in 1996.
Although it is too early to conclude that mortality experience will continue at
such a level, the Company has begun to review the source of the adverse
experience to determine whether an increase in cost of insurance charges is
warranted. It has been the Company's practice, where contractually permitted and
where market conditions allow, to change cost of insurance charges and such
charges are considered in amortization of cost of business acquired and deferred
policy acquisition cost assets. The Company is evaluating mortality results and
cost of insurance charges and their impact on the financial statements. Death
benefits for the three months ended September 30, 1997 returned to levels
expected by the Company and were lower than the levels experienced in the six
months ended June 30, 1997.
<PAGE>
Amortization expense. Amortization expense increased $6.7 million from $21.7
million in 1996 to $28.4 million in 1997. Excluding amortization expense related
to the Acquisitions, amortization expense decreased $3.4 million from 1996 to
1997. The higher amortization expense in 1996 primarily resulted from higher
policy lapses and surrenders during that period.
Other operating expenses. Other operating expenses increased $16.7 million to
$57.4 million for the nine months ended September 30, 1997 from $40.7 million in
1996. Excluding the other operating expenses related to the Acquisitions, other
operating expenses increased $7.8 million. The primary reasons for the increase
in operating expenses from 1996 to 1997 are expenses associated with a marketing
office opened in California in September 1996, increased depreciation expense in
1997 resulting from purchases of computer equipment in 1996, and increased
legal and professional fees in 1997.
Interest Expense. Interest expense totaled $9.1 million for both the nine months
ended September 30, 1997 and 1996. Average outstanding indebtedness was $133.3
million with an average cost of 9.05% for the nine months ended September 30,
1997 compared to an average outstanding balance of $133.4 million with an
average cost of 9.11% for the nine months ended September 30, 1996.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Income before income taxes for the three months ended September 30, 1997 was
$8.4 million compared to $8.1 million for the same period in 1996. This
increase, excluding the impact of the Acquisitions, is primarily due (i) a gain
on the disposition of a subsidiary, and (ii) a decrease in amortization expense,
offset by (iii) an increase in other operating expenses. These items and
significant changes in individual income statement components are discussed in
more detail below.
Premiums and policy revenues. Premiums and policy revenues increased to $54.0
million for the three months ended September 30, 1997 from $42.4 million for the
three months ended September 30, 1996. Excluding the Acquisitions, premiums and
policy revenues decreased $2.9 million primarily due to a decrease in
traditional life insurance premiums from the three months ended September 30,
1996 to the three months ended September 30, 1997.
Net investment income. Net investment income increased $7.0 million for the
three months ended September 30, 1997 from the three months ended September 30,
1996. Excluding the Acquisitions, net investment income decreased $1.0 million.
The primary reason for the decrease in net investment income is due to
discounted mortgage loans which paid off in 1996. The discounts totaling $1.0
million were realized as investment income at the time of loan repayment.
Other income. Other income increased $5.5 million from $0.5 million for three
months ended September 30, 1996 to $6.0 million for the three months ended
September 30, 1997. Excluding other income related to the Acquisitions, other
income increased $4.4 million from 1996 to 1997. The company realized a gain of
$4.8 million in 1997 from the sale of Loyalty.
Policyholder benefits. Policyholder benefits increased $13.3 million to $69.9
million for the three months ended September 30, 1997 from $56.6 million for the
three months ended September 30, 1996. Excluding the Acquisitions, policyholder
benefits for the three months ended September 30, 1996 to the three months ended
September 30, 1997 remained consistent.
<PAGE>
Amortization expense. Amortization expense increased $2.0 million to $10.3
million for the three months ended September 30, 1997 from $8.1 million for the
three months ended September 30, 1996. Excluding the Acquisitions, amortization
expense decreased $1.7 million from the three months ended September 30, 1996 to
the three months ended September 30, 1997. The higher amortization expense in
1996 resulted primarily from higher policy lapses and surrenders during that
period.
Other operating expense. Other operating expenses increased $9.1 million to
$21.8 million for the three months ended September 30, 1997 from $12.7 million
for the same period in 1996. Excluding the other operating expenses related to
the Acquisitions, other operating expenses increased $4.0 million due to costs
associated with a sales office opened in California in September 1996, increased
depreciation expense in 1997 resulting from purchases of computer equipment in
1996, development costs on marketing-related software, and increased
legal and professional fees in 1997.
FINANCIAL RESOURCES AND LIQUIDITY
The changes occurring in the Company's consolidated balance sheet from December
31, 1996 to September 30, 1997 primarily reflect the normal operations of the
Company's life insurance subsidiaries, the acquisition of Ohio State and
Investors, and the related reinsurance transactions discussed in Results of
Operations.
On April 15, 1997, the Company acquired all of the outstanding common stock of
Ohio State and Investors. See Note 3 to the consolidated financial statements
included elsewhere in this Form 10-Q for a discussion of this acquisition and
the effects of the acquisition and operations of the acquired companies on the
Company's financial resources and liquidity.
The quality of the Company's investment in fixed maturity investments at
September 30, 1997 remained consistent with December 31, 1996. Non-investment
grade securities totaled less than 0.8% of the Company's total fixed maturity
investments at September 30, 1997. The Company has not made any significant
changes to its investment philosophy during 1997.
The Company's net unrealized investment gains increased $11.8 million during the
first nine months of 1997. In addition to a $5.1 million increase in the net
unrealized investment gains on equity securities, the market values of the
Company's fixed maturity investment securities increased. The components of the
change during the nine months ended September 30, 1997 were (in millions):
Gross unrealized investment gains $ 17.7
Effect on insurance assets and liabilities (.6)
Deferred income tax effect (5.3)
------------------
$ 11.8
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. Legal Proceedings
As previously disclosed in the Company's December 31, 1996 Form 10-K, Great
Southern was named as defendant in a purported class action lawsuit brought by
two policyholders, Sharon K. Self and Johnnie W. Self, claiming damages
unspecified in amount, in connection with the sales of certain life insurance
policies. The class was never certified. The lawsuit has now been dismissed
pursuant to a settlement between Great Southern and the plaintiffs. The
cost of the settlement was insignificant to the Company.
Two substantially similar purported class action lawsuits relating to whole and
universal life sales practices were recently filed against Great Southern
(Harriett D. Mann and Dan C. Wynn v. Great Southern Life Insurance Company,
filed September 22, 1997, in the United States District Court for the Middle
District of Florida, and Yvonne H. Massey v. Great Southern Life Insurance
Company, Ralph Williams & Associates, Inc., and Ralph Williams, filed September
19, 1997, in the Circuit Court of Tuscaloosa County, Alabama). On October 15,
1997, prior to service of process on Great Southern and without any other
advance notice to Great Southern, the Alabama Circuit Court in the Massey case
entered an order granting plaintiff's ex parte motion for "conditional" class
certification. Great Southern intends to defend all of these cases vigorously.
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Incorporated by
reference from:
2.1(a) (2) Stock Purchase Agreement dated January 21, 1997 between
Great Southern Life Insurance Company and Farmers Group,
Inc.
2.1(b) (3) Amendment No. 1 to the Stock Purchase Agreement dated
April 15, 1997 by and between Farmers Group, Inc. and
Great Southern Life Insurance Company
2.1(c) (2) Form of Automatic Coinsurance Reinsurance Agreement
entered into between the Ohio State Life Insurance Company
and Employers Reassurance Corporation.
2.1(d) (2) Form of Automatic Coinsurance Reinsurance Agreement
entered into between Investors Guaranty Life Insurance
Company and Employers Reassurance Corporation.
2.1(e) (2) Modified Coinsurance Retrocession Agreement (Ohio State
Life Business) between Great Southern Life Insurance
Company and Employers Reassurance Corporation.
2.1(f) (2) Modified Coinsurance Retrocession Agreement (Investors
Guaranty Life Business) between Great Southern Life
Insurance Company and Employers Reassurance Corporation.
2.1(g) (2) Escrow Agreement (Ohio State Life/Investors Guaranty Life
Business) between Great Southern Life Insurance Company
and Employers Reassurance Corporation.
2.1(h) (2) Investment Management Agreement (Ohio State Life Business)
between the Registrant and Employers Reassurance
Corporation.
2.1(i) (2) Investment Management Agreement (Investors Guaranty Life
Business) between the Registrant and Employers Reassurance
Corporation.
3.1 (1) Restated Articles of Incorporation, as amended, of the
Registrant.
3.2 (1) Bylaws, as amended, of the Registrant.
<PAGE>
Item 6. (a) Continued
4.1 (2) Form of Amendment No. 1 to the Amended and Restated Credit
Agreement dated as of February 27, 1997, between the
Registrant and the Chase Manhattan Bank as Administrative
Agent.
27 Financial Data Schedule.
- --------- -------- ------------------------------------------------------------
(1) Registrant's Form S-4 (file No. 33-64820) filed
June 22, 1993.
(2) Registrant's December 31, 1996 Form 10-K.
(3) Registrant's Form 8-K dated as of April 15, 1997.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months ended September 30,
1997.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AMERICO LIFE, INC.
BY: /s/ Gary E. Jenkins
Name: Gary E. Jenkins
Title: Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
Date: November 14, 1997
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