FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998 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 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 August 12, 1998
------------- ---------------------
Common Stock $1.00 Par Value 10,000
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands - unaudited)
<TABLE>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Assets
Investments:
Fixed maturities:
Held to maturity, at amortized cost (market: $860,989 and $ 830,824 $ 851,823
$873,935)
Available for sale, at market (amortized cost: $734,327 and 761,711 761,084
$735,955)
Equity securities, at market (cost: $75,635 and $50,837) 110,642 78,949
Investment in equity subsidiaries 14,514 21,670
Mortgage loans on real estate, net 178,650 165,630
Investment real estate, net 18,945 27,630
Policy loans 198,344 200,137
Other invested assets 19,191 18,890
----------- -----------
Total investments 2,132,821 2,125,813
Cash and cash equivalents 96,323 36,859
Accrued investment income 27,041 27,620
Amounts receivable from reinsurers 1,463,681 1,429,679
Federal income taxes receivable 96 -
Other receivables 17,740 23,875
Deferred policy acquisition costs 88,005 87,840
Cost of business acquired 274,045 300,180
Other assets 34,028 29,370
----------- -----------
Total assets $ 4,133,780 $ 4,061,236
=========== ===========
Liabilities and stockholder's equity
Policyholder account balances $ 2,495,876 $ 2,486,436
Reserves for future policy benefits 852,871 881,583
Unearned policy revenues 30,283 36,063
Policy and contract claims 39,170 36,570
Other policyholder funds 88,171 75,960
Notes payable 132,716 132,884
Amounts payable to reinsurers 21,615 12,200
Federal income taxes payable - 164
Deferred income taxes 63,714 58,126
Due to broker 82,978 31,836
Amounts due to affiliates 5,487 3,137
Other liabilities 60,320 59,415
----------- -----------
Total liabilities 3,873,201 3,814,374
Stockholder's 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 56,592 56,973
Retained earnings 200,232 186,134
----------- -----------
Total stockholder's equity 260,579 246,862
----------- -----------
Commitments and contingencies
Total liabilities and stockholder's equity $ 4,133,780 $ 4,061,236
=========== ===========
</TABLE>
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts - unaudited)
<TABLE>
Three months Six months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income
Premiums and policy revenues $ 55,781 $ 55,164 $ 109,753 $ 96,488
Net investment income 55,640 59,583 111,727 109,191
Net realized investment gains 5,755 2,958 6,216 3,452
Other income 6,026 1,602 7,110 1,711
------------- ------------- ------------- -------------
Total income 123,202 119,307 234,806 210,842
Benefits and Expenses
Policyholder benefits:
Death benefits 25,702 29,986 55,601 56,097
Interest credited on universal life and
annuity products 26,960 28,879 53,626 52,000
Other policyholder benefits 15,983 15,271 28,662 28,711
Change in reserves for future policy benefits (6,343) (3,149) (12,320) (7,584)
Commissions 2,466 3,206 5,605 6,134
Amortization expense 17,348 11,449 32,481 18,109
Interest expense 2,988 3,026 5,973 6,033
Other operating expenses 21,398 20,360 42,510 35,647
------------- ------------- ------------- -------------
Total benefits and expenses 106,502 109,028 212,138 195,147
------------- ------------- ------------- -------------
Income before provision for income taxes 16,700 10,279 22,668 15,695
Provision for income taxes 5,671 3,154 7,570 4,806
------------- ------------- ------------- -------------
Net income $ 11,029 $ 7,125 $ 15,098 $ 10,889
============= ============= ============= =============
Net income per common share $ 110.29 $ 71.25 $ 150.98 $ 108.89
============ ============ ============ ============
</TABLE>
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands - unaudited)
<TABLE>
Six Months
Ended June 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities
Net income $ 15,098 $ 10,889
---------- ----------
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization 35,209 20,003
Deferred policy acquisition costs (20,327) (13,994)
Undistributed earnings of equity subsidiaries (1,165) (2,636)
Distribution of earnings from equity subsidiaries 8,323 -
Amortization of unrealized gains (52) (3,445)
(Increase) decrease in assets:
Accrued investment income 233 925
Amounts receivable from reinsurers (34,750) (40,752)
Other receivables 5,832 (4,023)
Other assets, net of amortization expense (6,092) 3,205
Increase (decrease) in liabilities:
Policyholder account balances 13,372 (8,270)
Reserves for future policy benefits and unearned policy revenues (26,081) 11,982
Policy and contract claims 2,599 (950)
Other policyholder funds 12,211 137
Amounts payable to reinsurers 9,415 3,966
Provision for deferred income taxes 4,185 1,560
Federal income taxes payable (260) 1,477
Amounts due to affiliates 1,361 5,235
Other liabilities 1,270 -
Net realized gains on investments sold (6,216) (3,452)
Gain on sale of subsidiary (4,855) -
Amortization on bonds and mortgage loans - 67
Other changes 3,982 (3,304)
----------- -----------
Total adjustments (1,806) (32,269)
----------- -----------
Net cash provided (used) by operating activities 13,292 (21,380)
----------- -----------
</TABLE>
(Continued)
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(In thousands - unaudited)
<TABLE>
Six Months
Ended June 30,
1998 1997
<S> <C> <C>
Cash flows from investing activities
Purchases of fixed maturity investments $ (121,694) $ (170,186)
Purchases of other investments (89,805) (50,827)
Mortgage loans originated (29,727) (335)
Maturities or redemptions of fixed maturity investments 31,394 40,061
Sales of fixed maturity available for sale investments 107,367 230,501
Sales of equity securities 56,269 147,944
Sales of other investments 13,256 14,567
Payment for subsidiaries acquired, net of cash acquired - (246,348)
Sale of subsidiary, net of cash sold 13,778 -
Repayments from mortgage loans 15,365 19,320
Change in due to brokers 51,142 (27,790)
Change in policy loans 3,786 2,621
----------- -----------
Net cash provided (used) by investing activities 51,131 (40,472)
----------- -----------
Cash flows from financing activities
Receipts credited to policyholder account balances 134,424 94,512
Return of policyholder account balances (138,356) (51,611)
Repayments of notes payable (27) (287)
Dividends paid (1,000) (1,000)
----------- -----------
Net cash provided (used) by financing activities (4,959) 41,614
----------- -----------
Net increase (decrease) in cash and cash equivalents 59,464 (20,238)
----------- -----------
Cash and cash equivalents at beginning of period 36,859 96,069
----------- -----------
Cash and cash equivalents at end of period $ 96,323 $ 75,831
=========== ===========
Supplemental schedule of non-cash investing and financial 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>
12
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 1998 and 1997
(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, 1997 Form 10-K as filed with the Securities and Exchange
Commission.
1. ACCOUNTING POLICIES
The unaudited consolidated financial statements as of June 30, 1998 and for the
three and six months ended June 30, 1998 and 1997 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, 1997 consolidated financial statements. The results of operations for the
three and six months ended June 30, 1998 and 1997 are not necessarily indicative
of the expected results for the full year 1998, nor the results experienced for
the year 1997.
In June 1997, the Financial Accounting Standards Board ("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, however SFAS No. 131
does not required disclosures for interim period financial statements in
1998. Comprehensive income for the three and six months ended June 30, 1998 and
1997 is as follows:
<TABLE>
Three Months Three Months Six Months Ended Six Months
Ended Ended June 30, 1998 Ended
-------------
June 30, 1998 June 30, 1997 June 30, 1997
------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $ 11,029 $ 7,125 $ 15,098 $ 10,889
Other comprehensive income (525) 10,024 (381) 4,400
--------- --------- --------- ---------
Comprehensive income $ 10,504 $ 17,149 $ 14,717 $ 15,289
========= ========= ========= =========
</TABLE>
In December 1997, the American Institute of Certified Public Accountants
("AICPA") approved Statement of Position ("SOP") 97-3, "Accounting by Insurance
and Other Enterprises for Insurance-Related Assessments." SOP 97-3 provides
guidance for determining when an entity should recognize a liability for
guaranty-fund and other insurance-related assessments and a related asset for
assessments that may be recovered through future premium tax offsets. The SOP is
effective for financial statements for fiscal years beginning after December 15,
1998, with early adoption encouraged. Management has not determined the effects,
if any, of adopting this SOP on the Company's consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 provides guidance related to
the accounting for derivative instruments and hedging activities focusing on the
recognition and measurement of derivative instruments. This statement is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. Adoption of this accounting standard will not have a material impact on
the consolidated financial statements of the Company.
The preparation of financial statements requires management to make estimates
and assumptions that affect 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. Previously
reported amounts for the prior year have in some instances been reclassified to
conform to the current year presentation.
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
2. STOCKHOLDER'S EQUITY
Following are the components of net unrealized investment gains:
<TABLE>
Six Months
June 30, December 31, Ended
1998 1997 June 30, 1998
---- ---- -------------
<S> <C> <C> <C>
Investment securities:
Fixed maturities available for sale $ 27,384 $ 25,129 $ 2,255
Fixed maturities reclassified from
available for sale to held to maturity 40,597 44,550 (3,953)
Equity securities 35,007 28,112 6,895
---------- ---------- ----------
102,988 97,791 5,197
Effect on other balance sheet accounts (17,104) (11,321) (5,783)
Deferred income taxes (29,292) (29,497) 205
---------- ---------- ----------
Net unrealized investment gains $ 56,592 $ 56,973 $ (381)
========== ========== ==========
</TABLE>
During the six months ended June 30, 1998, the Company paid dividends to
Financial Holding Corporation ("FHC") totaling $1,000.
3. COMMITMENTS AND CONTINGENCIES
The Company and/or its subsidiary, Great Southern Life Insurance Company ("Great
Southern"), are defendants in lawsuits filed as purported class actions
asserting claims related to sales practices of certain life insurance and
annuity products. The Company 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.
4. SALE OF SUBSIDIARY
On May 8, 1998, Great Southern sold all of the outstanding common stock of
Investors Guaranty Life Insurance Company ("Investors Guaranty"), a wholly-owned
subsidiary, for $14,793, resulting in a gain of $4,855. All of the insurance
business of Investors Guaranty is reinsured to an unaffiliated insurance
company under a coinsurance agreement and subsequently reinsured to Great
Southern under a modified coinsurance agreement on a 70% quota share basis.
These reinsurance agreements are unaffected by the sale. As of the date
of sale, Investors Guaranty had assets totaling $10.3 million and
liabilities totaling $0.4 million.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion analyzes signficant items affecting the results of
operations and the financial condition of the Company. In connection with the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, the Company cautions readers regarding certain forward-looking statements
contained in this report and in any other statements made by, or on behalf of,
the Company, whether or not in future filings with the Securities Exchange
Commission (the "SEC"). Forward-looking statements are statements not based on
historical information and which relate to future operations, strategies,
financial results, or other developments. Statements using verbs such as
"plan", "anticipate", "believe" or words of similar import generally involve
forward-looking statements. Without limiting the foregoing, forward-looking
statements include statements which represent the Company's beliefs concerning
future levels of sales and surrenders of the Company's products, investment
spreads and yields, or the earnings and profitability of the Company's
activities.
Forward-looking statements are necessarily based on estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Company's control
and many of which are subject to change. These uncertainties and contingencies
could cause actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. Whether or
not actual results differ materially from forward-looking statements may depend
on numerous foreseeable and unforeseeable developments. Some may be national in
scope, such as general economic conditions, changes in tax law and changes in
interest rates. Some may be related to the insurance industry generally, such
as pricing competition, regulatory developments and industry consolidation.
Others may relate to the Company specifically, such as credit, volatility and
other risks associated with the Company's investment portfolio. Investors are
also directed to consider other risks and uncertainties discussed in documents
filed by the Company with the SEC. The Company disclaims any obligation to
update forward-looking information. This discussion should be read in
conjunction with the accompanying consolidated financial statements and the
notes thereto.
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 Guaranty") 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 Guaranty 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 $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 June 30, 1998, the insurance business of Ohio
State and Investors Guaranty, consisting primarily of annuities and universal
life policies, had aggregate insurance liabilities of $654.4 million. The
results of operations of this business acquired in 1997, less the net 30%
coinsurance retained by the Reinsurer, are included in the Company's results of
operations for the three and six months ended June 30, 1998 and the three months
ended June 30, 1997.
The Ohio State and Investors Guaranty transaction will hereinafter be referred
to as the Acquisition. The following table summarizes the effects on the
individual income statement components of the Acquisition for the six months
ended June 30, 1998 and 1997 (in millions):
<TABLE>
Six Months Six Months
Ended Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Premiums and policy revenues $27.4 $13.6
Net investment income 13.2 7.3
Other income 2.0 1.6
Policyholder benefits 24.1 12.1
Commissions 0.1 0.8
Amortization expense 8.4 3.6
</TABLE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Income before income taxes for the six months ended June 30, 1998 was $22.7
million compared to $15.7 million for the six months ended June 30, 1997. The
primary reasons for the increase, excluding the impact of the Acquisition, were
(i) a gain on the sale of Investors Guaranty, (ii) lower death benefits and
(iii) an increase in net realized investment gains, partially offset by (iv) an
increase in amortization expense. The Company recorded $1.3 million related to
expenses for the relocation of its Columbus, Ohio operations during the three
months ended June 30, 1998. 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 $109.8
million for the six months ended June 30, 1998 compared to $96.5 million for the
six months ended June 30, 1997. Excluding the effect of the Acquisition,
premiums and policy revenues decreased $0.5 million from 1997 to 1998.
Traditional premiums decreased $1.6 million because lapses of the Company's
traditional policies exceeded the issues of new traditional policies. This
decrease was offset by an increase in policy revenues resulting from increased
surrender charges of $1.8 million from a closed block of annuity business.
Net investment income. Net investment income totaled $111.7 million for the six
months ended June 30, 1998 compared to $109.2 million for the six months ended
June 30, 1997. Excluding the effect of the Acquisition, net investment income
decreased $3.4 million due to a $1.2 million decrease in income from equity
subsidiaries.
Net realized investment gains. Net realized investment gains totaled $6.2
million for the six months ended June 30, 1998 compared to the $3.5 million for
the six months ended June 30, 1997. During 1998, the Company recorded gains of
$3.2 million from the sale of investment real estate.
Other income. Other income totaled $7.1 million for the six months ended June
30, 1998 compared to $1.7 million for the six months ended June 30, 1997. Other
income includes an administrative service fee paid to the Company associated
with the reinsurance of 30% of the Ohio State and Investors Guaranty policies.
Excluding the effect of the Acquisition, other income increased $5.0 million
from 1997 to 1998 resulting from a gain of $4.9 million in May 1998 from the
sale of Investors Guaranty.
Policyholder benefits. Policyholder benefits totaled $125.6 million for the six
months ended June 30, 1998 compared to $129.2 million for the six months ended
June 30, 1997. Excluding the effect of the Acquisition, policyholder benefits
decreased $15.6 million from 1997 to 1998. This decrease resulted primarily from
(i) a $7.2 million decrease in death benefits, (ii) a $3.7 million decrease in
interest credited on universal life and annuity fund balances, and (iii) a $4.5
million increase in the amount of benefit reserves released from 1997 to 1998
associated with the lower traditional premiums referred to above.
Amortization expense. Amortization expense totaled $32.5 million for the six
months ended June 30, 1998 compared to $18.1 million for the six months ended
June 30, 1997. Excluding the effect of the Acquisition, amortization expense
increased $9.6 million from 1997 to 1998. The higher amortization expense in
1998 resulted primarily from (i) increased surrenders in a closed block of
annuity business and (ii) increased amortization of deferred policy acquisition
costs on Great Southern's universal life insurance business.
Other operating expenses. Other operating expenses totaled $42.5 million for the
six months ended June 30, 1998 compared to $35.6 million for the six months
ended June 30, 1997. The increase resulted from the operations of Ohio State
and Investors Guaranty acquired in April 1997. This increase also includes $1.3
million of expenses related to the relocation of the Company's Columbus, Ohio
operations to other Company locations during 1998.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Income before income taxes for the three months ended June 30, 1998 was $16.7
million compared to $10.3 million for the three months ended June 30, 1997. The
primary reasons for the increase, were (i) an increase in realized investment
gains, (ii) a gain on the sale of Investors Guaranty and (iii) lower death
benefits, partially offset by (iv) an increase in amortization expense. The
Company also recorded $1.3 million of expenses related to the relocation of the
Company's Columbus, Ohio operations to other Company locations during the three
months ended June 30, 1998. 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 $55.8 million
for the three months ended June 30, 1998 compared to $55.2 million for the three
months ended June 30, 1997. Traditional premiums decreased $1.5 million because
lapses of the Company's traditional policies exceeded the issues of new
traditional policies. This decrease was offset by an increase in policy revenues
resulting from increased surrender charges of $2.3 million from a closed block
of annuity business acquired in 1996.
Net investment income. Net investment income totaled $55.6 million for the three
months ended June 30, 1998 compared to $59.6 million for the three months ended
June 30, 1997. This decrease was due to a decrease in income from equity
subsidiaries of $1.2 million.
Net realized investment gains. Net realized investment gains totaled $5.8
million for the three months ended June 30, 1998 compared to the $3.0 million
for the three months ended June 30, 1997. During 1998, the Company recorded
gains of $3.2 million from the sale of investment real estate.
Other income. Other income totaled $6.0 million for the three months ended June
30, 1998 compared to $1.6 million for the three months ended June 30, 1997.
Other income includes an administrative service fee paid to the Company
associated with the reinsurance of 30% of the Ohio State and Investors
Guaranty policies. The Company realized a gain of $4.9 million in May 1998
from the sale of Investors Guaranty.
Policyholder benefits. Policyholder benefits totaled $62.3 million for the three
months ended June 30, 1998 compared to $71.0 million for the three months ended
June 30, 1997. This decrease resulted primarily from (i) a $4.3 million decrease
in death benefits, (ii) a $1.9 million decrease in interest credited on
universal life and annuity fund balances, and (iii) a $3.2 million increase in
the amount of benefit reserves released from 1997 to 1998 associated with the
lower traditional premiums referred to above.
Amortization expense. Amortization expense totaled $17.3 million for the three
months ended June 30, 1998 compared to $11.4 million for the three months ended
June 30, 1997. The higher amortization expense in 1998 resulted primarily
from (i) increased surrenders in a closed block of annuity business and (ii)
increased amortization of deferred policy acquisition costs on Great Southern's
universal life insurance business.
Other operating expenses. Other operating expenses totaled $21.4 million for the
three months ended June 30, 1998 compared to $20.4 million for the three months
ended June 30, 1997. This increase includes $1.3 million of expenses related to
the relocation of the Company's Columbus, Ohio operations to other Company
locations during 1998.
FINANCIAL CONDITION AND LIQUIDITY
The changes occurring in the Company's consolidated balance sheet from December
31, 1997 to June 30, 1998 primarily reflect the normal operations of the
Company's life insurance subsidiaries.
The quality of the Company's investment in fixed maturity investments at June
30, 1998 remained consistent with December 31, 1997. Non-investment grade
securities totaled less than 2.0% of the Company's total fixed maturity
investments at June 30, 1998. The Company has not made any significant changes
to its investment philosophy during 1998.
The Company's net unrealized investment gains decreased $0.4 million during the
first six months of 1998. A $6.9 million increase in the gross unrealized
investment gains on equity securities was offset by the market value decline of
the Company's fixed maturity investment securities. The components of the change
during the six months ended June 30, 1998 were (in millions):
<TABLE>
<S> <C>
Gross unrealized investment gains $ 5.2
Effect on insurance assets and liabilities (5.8)
Deferred income tax effect 0.2
---------
$ (0.4)
</TABLE>
YEAR 2000
Many existing computer programs were designed and developed without regard to
the upcoming change in the century. If not corrected, many computer applications
could fail or create erroneous results by or at the year 2000. The Company is
dependent on computer systems and applications to conduct its business. The
Company's significant processing applications are maintained by an outside
vendor. Management and vendor representatives have developed a conversion plan
to prepare the Company's systems for year 2000 compliance. The cost of testing
and conversion of system applications is not expected to be material to the
Company, because much of the conversion programming will be the responsibility
of the outside vendor. Management believes that planned modifications to
existing systems and conversions to new systems will be complete before the
year 2000 and that year 2000 issues will not pose a significant problem
to the Company. The Company is initiating formal communications with its
outside business partners to determine the extent to which they will be
year 2000 compliant. Where practicable, the Company will assess and attempt
to mitigate its risks with respect to such third parties. The Company
is not able to estimate the effect, if any, on its results of operations from
the failure of such parties to be year 2000 compliant.
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. LEGAL PROCEEDINGS
From time to time the Company is party to litigation and arbitration proceedings
in the ordinary course of its business, none of which is expected to have a
material adverse effect on the Company.
As previously reported in the Company's December 31, 1997 Form 10-K, Great
Southern is a defendant in four purported class action lawsuits alleging
deceptive sales practices in the marketing of its whole life and universal life
insurance policies and seeking unspecified compensatory, punitive and/or treble
damages. On May 5, 1998, the U.S. Judicial Panel on Multidistrict Litigation
ordered that these lawsuits be transferred to the U.S. District Court for the
Northern District of Texas for consolidated pretrial proceedings. On August 10,
1998, the plaintiffs in these actions filed a consolidated amended complaint
adding the Company as a defendant. The Company intends to defend all of these
cases vigorously. There can be no assurance that the foregoing or any future
litigation relating to pricing and sales practices will not have a material
adverse effect on the Company.
On July 16, 1998, Great Southern, Fremont Life Insurance Company and Fremont
General Corporation were joined as defendants in a purported class action
lawsuit alleging fraud, unlawful business practices and violations of the
California Consumer Legal Remedy Act in connection with the sale of, and the
imposition of surrender charges under, deferred annuity contracts to
Californians aged 65 or older (Gularte v. Fremont Life Insurance Company, et.
al., Los Angeles Superior Court, Los Angeles, California). Plaintiff seeks
declaratory and injunctive relief and unspecified compensatory and punitive
damages. The Company has yet to file an answer, but it intends to defend this
case vigorously. There can be no assurance that this action will not have a
material adverse effect on the Company.
Great Southern and the Company, together with one of Great Southern's general
agents, Great American Life Underwriter ("GALU"), Entrepreneur Corporation,
Mercantile Life Insurance Company, American Planning Corporation and various
individuals, including certain officers of Great Southern Life and the Company,
are named defendants in an action that was certified as a class action on April
28, 1998 (Thibodeau et. al. V. Great American Life Underwriters, et. al.,
District Court, Dallas, Texas). Plaintiffs who were life insurance agents for
GALU, allege that they were defrauded by defendants into surrendering renewal
commissions in return for the promise of stock ownership in a company
(Entrepreneur Corporation) to be made public at some point in the future.
Plaintiffs claim actual and exemplary damages in an unspecified amount. The
Company and its officers intend to defend this case vigorously. There can be
no assurance that this action will not have a material adverse effect on the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.4 Stock Purchase Agreement dated February 27, 1998
between Great Southern Life Insurance Company
and John Hancock Mutual Life Insurance Company
(incorporated by reference from Exhibit 2.4 to
Registrant's Form 10-Q [File No. 33-64820] for
the quarter ended March 31, 1998).
3.1 Restated Articles of Incorporation, as amended,
of the Registrant (incorporated by reference from
Exhibit 3.1 to Registrant's Form S-4 [File No.
33-64820] filed June 22, 1993).
3.2 Bylaws, as amended, of the Registrant
(incorporated by reference from Exhibit 3.2 to
Registrant's Form S-4 [File No. 33-64820] filed
June 22, 1993).
4.2(c)(3) Amendment No. 2 dated April 6, 1998 to the
amended and restated credit agreement dated as of
February 27, 1997, between the Registrant and
The Chase Manhattan Bank as administrative agent
(incorporated by reference from Exhibit 4.2(c)(3)
to Registrant's Form 10-Q [File No. 33-64820]
for the quarter ended March 31, 1998).
4.2(c)(4) Amendment No. 3 dated April 30, 1998 to the
amended and restated credit agreement dated as of
February 27, 1997, between the Registrant and The
Chase Manhattan Bank as administrative agent
(incorporated by reference from Exhibit 4.2(c)(4)
to Registrant's Form 10-Q [File No. 33-64820] for
the quarter ended March 31, 1998).
27 Financial Data Schedule.
- ------------ ----------------- -----------------------------------------------
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months ended June 30,
1998.
<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: August 14, 1998
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