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, 1999 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, 1999
------------- ---------------------
Common Stock $1.00 Par Value 10,000
<PAGE>
See notes to consolidated financial statements
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands - unaudited)
<TABLE>
June 30, December 31,
1999 1998
<S> <C> <C>
Assets
Investments:
Fixed maturities:
Held to maturity, at amortized cost (market: $838,482 and
$914,672) $ 844,728 $ 876,594
Available for sale, at market (amortized cost: $924,332 and
$893,664) 897,262 925,191
Equity securities, at market (cost: $58,768 and $42,201) 109,148 89,022
Investment in equity subsidiaries 11,165 9,669
Mortgage loans on real estate, net 206,983 190,074
Investment real estate, net 28,715 28,606
Policy loans 211,645 210,173
Other invested assets 16,664 17,066
----------- -----------
Total investments 2,326,310 2,346,395
Cash and cash equivalents 111,607 68,219
Accrued investment income 31,963 31,862
Amounts receivable from reinsurers 1,167,957 1,207,197
Amounts due from affiliates 2,274 -
Other receivables 89,683 36,529
Deferred policy acquisition costs 172,375 131,574
Cost of business acquired 235,281 247,125
Other assets 43,309 36,913
----------- -----------
Total assets $ 4,180,759 $ 4,105,814
=========== ===========
Liabilities and stockholder's equity
Policyholder account balances $ 2,533,356 $ 2,501,113
Reserves for future policy benefits 819,864 833,917
Unearned policy revenues 50,187 36,332
Policy and contract claims 34,619 45,467
Other policyholder funds 115,452 106,241
Notes payable 123,929 132,533
Amounts payable to reinsurers 50,127 28,199
Deferred income taxes 49,927 63,600
Due to brokers 93,118 36,275
Amounts due to affiliates - 3,085
Other liabilities 72,067 61,872
----------- -----------
Total liabilities 3,942,646 3,848,634
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
Accumulated other comprehensive income 36,931 60,499
Retained earnings 197,427 192,926
----------- -----------
Total stockholder's equity 238,113 257,180
----------- -----------
Commitments and contingencies
Total liabilities and stockholder's equity $ 4,180,759 $ 4,105,814
=========== ===========
</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,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income
Premiums and policy revenues $ 55,036 $ 55,781 $ 114,137 $ 109,753
Net investment income 59,380 55,640 117,812 111,727
Net realized investment gains (losses) (1,280) 5,755 (1,355) 6,216
Other income 1,440 6,026 3,117 7,110
------------- ------------- ------------- -------------
Total income 114,576 123,202 233,711 234,806
Benefits and Expenses
Policyholder benefits:
Death benefits 28,353 25,702 64,929 55,601
Interest credited on universal life and
annuity products 27,729 26,960 54,469 53,626
Other policyholder benefits 14,692 15,983 27,488 28,662
Change in reserves for future policy benefits (7,290) (6,343) (13,142) (12,320)
Commissions 2,456 2,466 5,627 5,605
Amortization expense 17,233 17,348 36,091 32,481
Interest expense 2,971 2,988 5,939 5,973
Other operating expenses 21,555 21,398 44,702 42,510
------------- ------------- ------------- -------------
Total benefits and expenses 107,699 106,502 226,103 212,138
------------- ------------- ------------- -------------
Income before provision for income taxes 6,877 16,700 7,608 22,668
Provision for income taxes 2,142 5,671 2,107 7,570
------------- ------------- ------------- -------------
Net income $ 4,735 $ 11,029 $ 5,501 $ 15,098
============= ============= ============= =============
Net income per common share $ 473.50 $ 1,102.90 $ 550.10 $ 1,509.80
============ ============ ============ ============
</TABLE>
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands - unaudited)
<TABLE>
Six Months
Ended June 30,
1999 1998
<S> <C> <C>
Cash flows from operating activities
Net income $ 5,501 $ 15,098
---------- ----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 39,647 35,209
Deferred policy acquisition costs (27,767) (20,327)
Undistributed earnings of equity subsidiaries (1,616) (1,165)
Distribution of earnings from equity subsidiaries 120 8,323
Amortization of unrealized gains (3,682) (52)
(Increase) decrease in assets:
Accrued investment income (100) 233
Amounts receivable from reinsurers 39,239 (34,750)
Other receivables 690 5,832
Other assets, net of amortization expense (8,614) (6,092)
Increase (decrease) in liabilities:
Policyholder account balances (42,354) 13,372
Reserves for future policy benefits and unearned policy revenues (15,441) (26,081)
Policy and contract claims (10,847) 2,599
Other policyholder funds 9,211 12,211
Amounts payable to reinsurers 21,928 9,415
Provision for deferred income taxes (1,532) 4,185
Federal income taxes payable 22 (260)
Amounts due to affiliates (5,360) 1,361
Other liabilities 10,173 1,270
Net realized (gains) losses on investments sold 1,355 (6,216)
Gain on sale of subsidiary - (4,855)
Amortization on bonds and mortgage loans 2,357 -
Other changes (1,239) 3,982
------------ -----------
Total adjustments 6,190 (1,806)
----------- -----------
Net cash provided by operating activities 11,691 13,292
----------- -----------
</TABLE>
(Continued)
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(In thousands - unaudited)
<TABLE>
Six Months
Ended June 30,
1999 1998
<S> <C> <C>
Cash flows from investing activities
Purchases of fixed maturity investments $ (213,523) $ (121,694)
Purchases of other investments (72,490) (89,805)
Mortgage loans originated (29,815) (29,727)
Maturities or redemptions of fixed maturity investments 6,697 31,394
Sales of fixed maturity available for sale investments 207,435 107,367
Sales of equity securities 55,076 56,269
Sales of other investments - 13,256
Sale of subsidiary, net of cash sold - 13,778
Repayments from mortgage loans 13,005 15,365
Change in due to brokers 2,342 51,142
Change in policy loans (1,472) 3,786
----------- -----------
Net cash provided (used) by investing activities (32,745) 51,131
----------- -----------
Cash flows from financing activities
Receipts credited to policyholder account balances 198,242 134,424
Return of policyholder account balances (123,644) (138,356)
Repayments of notes payable (9,156) (27)
Dividends paid (1,000) (1,000)
----------- -----------
Net cash provided (used) by financing activities 64,442 (4,959)
----------- -----------
Net increase in cash and cash equivalents 43,388 59,464
----------- -----------
Cash and cash equivalents at beginning of period 68,219 36,859
----------- -----------
Cash and cash equivalents at end of period $ 111,607 $ 96,323
=========== ===========
</TABLE>
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 1999 and 1998
(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, 1998 Form 10-K as filed with the Securities and Exchange
Commission.
1. ACCOUNTING POLICIES
The unaudited consolidated financial statements as of June 30, 1999 and for the
three and six months ended June 30, 1999 and 1998 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, 1998 consolidated financial statements. The results of operations for the
three and six months ended June 30, 1999 and 1998 are not necessarily indicative
of the expected results for the full year 1999, nor the results experienced for
the year 1998.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") approved Statement of Position ("SOP") No. 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. The adoption of this SOP did not have a material effect on
the consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("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,
2000. Adoption of this accounting standard will not have a significant 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.
2. STOCKHOLDER'S EQUITY
Comprehensive income (loss) for the three and six months ended June 30, 1999 and
1998 is as follows:
<TABLE>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net income $ 4,735 $ 11,029 $ 5,501 $ 15,098
Other comprehensive income (loss) (9,303) (525) (23,568) (381)
--------- --------- --------- ---------
Comprehensive income (loss) $ (4,568) $ 10,504 $ (18,067) $ 14,717
========= ========= ========= =========
</TABLE>
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
Following are the components of net unrealized investment gains (losses) which
comprise accumulated other comprehensive income:
<TABLE>
Six Months
June 30, December 31, Ended
1999 1998 June 30, 1999
---- ---- -------------
<S> <C> <C> <C>
Investment securities:
Fixed maturities available for sale $ (27,070) $ 29,200 $ (56,270)
Fixed maturities reclassified from
available for sale to held to maturity 32,184 36,509 (4,325)
Equity securities 50,380 47,172 3,208
---------- ---------- ----------
55,494 112,881 (57,387)
Effect on other balance sheet accounts 110 (21,019) 21,129
Deferred income taxes (18,673) (31,363) 12,690
---------- ---------- ----------
Net unrealized investment gains $ 36,931 $ 60,499 $ (23,568)
========== ========== ==========
</TABLE>
During the six months ended June 30, 1999, the Company paid dividends to
Financial Holding Corporation ("FHC") totaling $1,000.
3. COMMITMENTS AND CONTINGENCIES
The Company's subsidiary, Great Southern Life Insurance Company ("Great
Southern"), is a defendant in lawsuits filed as purported class actions
asserting claims related to sales practices and premiums charged for certain
life insurance products. The Company and Great Southern also are defendants with
other parties in a class action lawsuit brought by agents of one of Great
Southern's general agents alleging that they were defrauded into surrendering
renewal commissions in return for a promise of stock ownership in a company to
be taken public at some point in the future. The Company and certain
subsidiaries, including The College Life Insurance Company of America, also are
defendants in a purported class action alleging various misrepresentations,
deceptive practices and statutory violations in connection with the marketing
and administration of deferred annuity and life insurance products sold to
school teachers and others. 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. SEGMENT INFORMATION
The table below presents information about the reported revenues and income
before provision for income taxes for the Company's reportable segments as
defined in the Company's December 31, 1998 Form 10-K. Asset information by
segment is not reported, since the Company does not produce such information
internally.
<TABLE>
Life Insurance Asset Non-Life Reconciling Consolidated
Operations Accumulation Insurance Items Totals
Products Investments
Operations
Six months ended June 30,
------------------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $203,428 $210,228 $ 19,520 $ 6,754 $ 3,225 $ 5,315 $ 7,538 $12,509 $233,711 $234,806
Income (loss)
before income 23,887 31,535 898 1,380 2,259 4,656 (19,436) (14,903) 7,608 22,668
taxes
</TABLE>
<TABLE>
Three months ended June 30,
------------------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $98,186 $105,501 $ 10,638 $ 3,540 $ 1,816 $ 4,047 $ 3,936 $10,114 $114,576 $123,202
Income (loss)
before income 14,071 16,595 975 561 1,113 3,711 (9,282) (4,167) 7,608 16,700
taxes
</TABLE>
Significant reconciling items shown in the above table which are not allocated
to specific segments include interest expense and a portion of (i) net
investment income, (ii) operating expenses and (iii) net realized investment
gains (losses).
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion analyzes significant 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 and 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. 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.
SEGMENT RESULTS
Revenues and income before provision for income taxes for the Company's
operating segments, as defined by Statement of Financial Accounting Standard No.
131, "Financial Reporting for Segments of a Business Enterprise", is summarized
as follows (in millions):
<TABLE>
Life Insurance Asset Accumulation Non-Life
Operations Products Operations Insurance Investments
----------------------- ------------------------ ------------------------
Six months ended June 30,
-------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues $203.4 $210.2 $19.5 $6.8 $3.2 $5.3
Income before income taxes 23.9 31.5 0.9 1.4 2.3 4.7
Three months ended June 30,
-------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
Revenues $98.2 $105.5 $10.6 $3.5 $1.8 $4.0
Income before income taxes 14.1 16.6 1.0 0.6 1.1 3.7
</TABLE>
<PAGE>
Life insurance operations. Income before income taxes for the six months
ended June 30, 1999 was $23.9 million compared to $31.5 million for the six
months ended June 30, 1998. This decrease in profits is primarily due to a $7.8
million increase in death benefits.
Income before income taxes for the three months ended June 30, 1999 was
$14.1 million compared to $16.6 million for the three months ended June 30,
1998. This decrease in profits is primarily due to a $2.5 million increase in
death benefits.
Asset accumulation products operations. Income before income taxes for the
six and three month periods ended June 30, 1999 was comparable to the same
periods in 1998.
Non-life insurance investments. Income before income taxes for the six and
three month periods ended June 30, 1999 decreased from the same periods in 1998
which included a $3.2 million gain from the sale of investment real estate in
1998.
Significant reconciling items of the segment revenues and income before
income taxes shown in the above table which are not allocated to specific
segments include interest expense and a portion of (i) net investment income,
(ii) operating expenses and (iii) net realized investment gains (losses). Income
before income taxes for the six months and three months ended June 30, 1999
decreased from the same periods in 1998 due to a $4.9 million gain from the sale
of a subsidiary in 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Income before income taxes for the six months ended June 30, 1999 was $7.6
million compared to $22.7 million for the six months ended June 30, 1998. The
primary reasons for the decrease were (i) a gain on the sale of Investors
Guaranty Life Insurance Company ("Investors Guaranty") in 1998, (ii) higher
death benefits and (iii) a decrease in net realized investment gains, offset by
(iv) lower advisory and data processing fees paid to Financial Holding
Corporation ("FHC"), (v) increased profitability of the Company's non-life
insurance investments, and (vi) increased net investment income related to a
reduction in the unrecovered ceding commission due an unaffiliated reinsurer
(the "Reinsurer").
Premiums and policy revenues. Premiums and policy revenues totaled $114.1
million for the six months ended June 30, 1999 compared to $109.8 million for
the six months ended June 30, 1998. Premiums from traditional life insurance
business for the six months ended June 30, 1999 were comparable to the six
months ended June 30, 1998. Policy revenues increased $5.2 million from 1998 to
1999. Policy revenues increased $3.5 million from asset accumulation business
acquired in October of 1998 in conjunction with the Company acquiring the 50% of
College Insurance Group, Inc. not previously owned and the recapture of business
which was previously ceded to an unaffiliated insurance company.
Net investment income. Net investment income totaled $117.8 million for the six
months ended June 30, 1999 compared to $111.7 million for the six months ended
June 30, 1998. The increase in net investment income is primarily due to the
acquisition of the asset accumulation business in October 1998. Net investment
income also increased $1.6 million related to a reduction in the unrecovered
ceding commission due the Reinsurer. In addition, income from non-life insurance
investments increased $0.8 million.
Net realized investment gains. Net realized investment losses totaled $1.4
million for the six months ended June 30, 1999 compared to net realized
investment gains of $6.2 million for the six months ended June 30, 1998. During
1998, the Company recorded gains of $3.2 million from the sale of investment
real estate.
Other income. Other income totaled $3.1 million for the six months ended June
30, 1999 compared to $7.1 million for the six months ended June 30, 1998. In May
1998, the Company realized a gain of $4.9 million from the sale of Investors
Guaranty.
<PAGE>
Policyholder benefits. Policyholder benefits totaled $133.7 million for the six
months ended June 30, 1999 compared to $125.6 million for the six months ended
June 30, 1998. This increase resulted primarily from a $9.3 million increase in
death benefits. Interest credited on universal life and annuity fund balances
remained comparable between periods; however, (i) interest credited increased
$7.4 million due to the acquisition of the asset accumulation business in
October 1998, (ii) interest credited on the Company's closed block of annuity
business decreased $3.6 million due to reduced fund values, and (iii) interest
credited on other interest-sensitive products decreased due to a reduction in
rates made in response to market conditions. The decrease in interest credited
on the Company's closed block of annuity business was offset by the related
decrease in net investment income earned on the reduced fund values of the
annuity business
Amortization expense. Amortization expense totaled $36.1 million for the six
months ended June 30, 1999 compared to $32.5 million for the six months ended
June 30, 1998. Amortization expense increased $3.6 million primarily due to
increased amortization of deferred policy acquisition costs on Great Southern's
universal life insurance business.
Other operating expenses. Other operating expenses totaled $44.7 million for the
six months ended June 30, 1999 compared to $42.5 million for the six months
ended June 30, 1998.
The increase in other operating expenses results primarily from the expenses
associated with marketing entities purchased and insurance business acquired in
October 1998. The increased marketing expenses were partially offset by
external revenues of the marketing entities and a reduction in commissions
expense as a result of the elimination of commissions which the Company was
paying to these entities prior to their acquisition.
In addition, the Company amended its advisory agreement and its data processing
agreement with FHC in June 1999. The effect of these amendments was to lower the
fees paid to FHC, resulting in a $1.3 million decrease in other operating
expenses in 1999.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Income before income taxes for the three months ended June 30, 1999 was $6.9
million compared to $16.7 million for the three months ended June 30, 1998. The
primary reasons for the decrease were (i) a decrease in realized investment
gains, (ii) higher death benefits and (iii) a gain on the sale of Investors
Guaranty in May 1998, offset by (iv) lower advisory and data processing fees
paid to FHC, and (v) increased net investment income related to a reduction in
the unrecovered ceding commission due the Reinsurer.
Premiums and policy revenues. Premiums and policy revenues totaled $55.0 million
for the three months ended June 30, 1999 compared to $55.8 million for the three
months ended June 30, 1998. Premiums from traditional life insurance business
for the three months ended June 30, 1999 were comparable to the three months
ended June 30, 1998. Policy revenues decreased $0.4 million from 1998 to 1999.
Policy revenues increased $2.2 million from asset accumulation business acquired
in October of 1998 in conjunction with the Company acquiring the 50% of College
Insurance Group, Inc. not previously owned and the recapture of business which
was previously ceded to an unaffiliated insurance company. This increase was
offset by a $1.7 million decrease in surrender charges from a closed block of
annuity business.
Net investment income. Net investment income totaled $59.4 million for the three
months ended June 30, 1999 compared to $55.6 million for the three months ended
June 30, 1998. This increase was primarily due to the acquisition of the asset
accumulation business in October 1998. Net investment income also increased $1.1
million related to a reduction in the unrecovered ceding commission due the
Reinsurer.
Net realized investment gains. Net realized investment losses totaled $1.3
million for the three months ended June 30, 1999 compared to net realized
investment gains of $5.8 million for the three months ended June 30, 1998.
During 1998, the Company recorded gains of $3.2 million from the sale of
investment real estate.
Other income. Other income totaled $1.4 million for the three months ended June
30, 1999 compared to $6.0 million for the three months ended June 30, 1998. In
May 1998, the Company realized a gain of $4.9 million from the sale of Investors
Guaranty.
<PAGE>
Policyholder benefits. Policyholder benefits totaled $63.5 million for the three
months ended June 30, 1999 compared to $62.3 million for the three months ended
June 30, 1998. This increase resulted primarily from a $2.7 million increase in
death benefits. Interest credited on universal life and annuity fund balances
remained comparable between periods; however, (i) interest credited increased
$4.1 million due to the acquisition of the asset accumulation business in
October 1998, (ii) interest credited on the Company's closed block of annuity
business decreased $1.5 million due to reduced fund values, and (iii) interest
credited on other interest-sensitive products decreased due to a reduction in
rates made in response to market conditions. The decrease in interest credited
on the Company's closed block of annuity business was offset by the related
decrease in net investment income earned on the reduced fund values of the
annuity business.
Other operating expenses. Other operating expenses totaled $21.5 million for the
three months ended June 30, 1999 compared to $21.4 million for the three months
ended June 30, 1998.
The increase in other operating expenses results primarily from the expenses
associated with marketing entities purchased and insurance business acquired in
October 1998. The increased marketing expenses were partially offset by
external revenues of the marketing entities and a reduction in commissions
expense as a result of the elimination of commissions which the Company was
paying to these entities prior to their acquisition.
In addition, the Company amended its advisory agreement and its data processing
agreement with FHC in June 1999. The effect of these amendments was to lower the
fees paid to FHC, resulting in a $1.7 million decrease in other operating
expenses in 1999.
FINANCIAL CONDITION AND LIQUIDITY
The changes occurring in the Company's consolidated balance sheet from December
31, 1998 to June 30, 1999 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, 1999 remained consistent with December 31, 1998. Non-investment grade
securities totaled less than 0.2% of the Company's total fixed maturity
investments at June 30, 1999. The Company has not made any significant changes
to its investment philosophy during 1999.
The Company's net unrealized investment gains decreased $23.6 million during the
first six months of 1999. A $60.6 million decrease in the gross unrealized
investment gains on the Company's fixed maturity investment securities due to a
market value decline were offset by a $3.2 million increase in the gross
unrealized investment gains on equity securities. The components of the change
during the six months ended June 30, 1999 were (in millions):
<TABLE>
<S> <C>
Gross unrealized investment gains $ (57.4)
Effect on insurance assets and liabilities 21.1
Deferred income tax effect 12.7
---------
$ (23.6)
</TABLE>
During the three months ended June 30, 1999, changes in the interest rate
environment did not adversely affect the Company's financial condition. These
rate changes did not materially affect disclosures included in the Company's
December 31, 1998 Form 10-K regarding the Company's exposure to market risk.
YEAR 2000 READINESS
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 has developed a comprehensive Year 2000 plan that management
believes has identified potential processing issues and allow the Company to
take any necessary corrective actions before problems arise. A committee,
comprised of a cross section of key employees from all business areas, was
formed to execute, test and implement the remediation plan. The Company's
remediation plan is comprised of six phases. These phases are (i) a complete
inventory of systems which the Company utilizes, (ii) an initial assessment of
Year 2000 preparedness for each identified system, (iii) the development of a
plan to remediate appropriate systems, (iv) the remediation of systems, (v) the
testing of systems, and (vi) the implementation into production of systems.
Because the Company's administration systems are outsourced to a third party
vendor, the Company is coordinating the Year 2000 plan with its outsource
provider. This provider has contractual responsibility for the Year 2000
remediations of the Company's administration systems.
The Company met its milestone of having all administration systems prepared for
Year 2000 processing by December 31, 1998. These systems are used by the Company
to process its insurance business, including premium receipts and claim
payments. Currently, all administrative systems have been renovated and the
Company, working with it's outsource provider, has tested all Year 2000
remediations and has placed these tested systems into production use. All
internal and corporate systems, such as file servers and desktop systems, are
now scheduled to be Year 2000 ready by September 30, 1999. Approximately 95% of
these systems have been assessed for Year 2000 readiness and substantially all
of these are believed to be Year 2000 ready. The Company's imbedded systems,
such as phone switches, will be upgraded, as necessary, during 1999. The
affected systems have been identified. If the Company fails to successfully
complete a significant portion of the Year 2000 plan, such failure may have a
material adverse impact on the Company's financial condition. Currently,
management considers the possibility of such a failure to be unlikely; however,
contingency plans are being developed for critical business processes in the
event that our business partners are unable to meet their Year 2000 preparedness
commitments.
A major part of the Company's Year 2000 plan relates to other business entities
on which the Company is reliant to conduct its operations. The aforementioned
Year 2000 committee has identified key business partners, customers, vendors and
suppliers to participate in a survey program. These business entities are
comprised of entities which impact many companies across the country in varied
industries, as well as entities with more limited customers. Entities serving
customers nationwide include the federal government, the banking system, the
postal service, national brokerage firms, stock exchanges, and national
overnight delivery providers. Local entities include the Company's reinsurers,
banks, computer hardware vendors, payroll processor, public utilities and phone
companies. After identifying the entities, the Company sent surveys to each
requesting information related to Year 2000 readiness. Management developed
a database to track survey responses and is monitoring key business partners
with follow-up requests to ensure that these entities are meeting their
remediation plan timetables. If the Company believes a problem may exist, an
appropriate contingency plan will be developed to minimize any effect on the
Company. The Company is specifically reliant upon the federal government for
various functions including mail delivery of customer correspondence, national
banking activities and electronic list bill premium processing for government
employees. The federal government's policy is to not respond to Year 2000
surveys, so the Company, like most organizations, has assumed the operations
of the federal government will not be significantly affected by Year 2000
problems. If problems do arise, the operations of the Company may be
materially adversely impacted.
The Company incurred expense through June 1999 related to this project is
$200,000. It is expected additional expenses will total $250,000 during 1999. As
these expenses are not significant to the Company's overall information
technology budget, this remediation plan will be funded from the Company's
normal operating cash flows. The remediation costs are nominal due to the
Company's service agreement with its third party provider. At this point in
time, other information systems projects have not suffered due to Year 2000
compliance efforts so as not to have an adverse effect on the Company's
operations.
The estimates and conclusions herein contain forward-looking statements and are
based on management's best estimates of future events. Risks to completing the
plan include the availability of trained personnel, management's ability to
discover and correct the potential Year 2000 sensitive problems which could have
a serious impact on specific facilities, and the ability of suppliers and
customers to bring their systems into Year 2000 compliance.
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. LEGAL PROCEEDINGS
Reference is made to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 and its Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999 regarding certain legal proceedings to which the Company and/or
certain of its subsidiaries are parties. Included among those matters was
Gularte v. Fremont Life Insurance Co., et. al., Los Angeles Superior Court, Los
Angeles, California. On August 2, 1999, the court entered judgment dismissing
with prejudice the action against Great Southern and all other defendants.
On July 2, 1999, a purported class action lawsuit (Notzon v. The College Life
Insurance Company of America, et. al., 111th District Court, Webb County, Texas)
was filed against the Company, The College Life Insurance Company of America and
several of its officers, directors and other affiliated parties, several other
subsidiaries of the Company and several other defendants. Plaintiff's claims
against the various defendants include allegations of various
misrepresentations, deceptive trade practices and statutory violations in
connection with the marketing and administration of deferred annuity and life
insurance products sold to school teachers and others. The suit seeks actual,
rescissory, treble and punitive damages, as well as injunctive and declaratory
relief. On August 5, 1999, the suit was removed to the U.S. District Court for
the Southern District of Texas, Laredo Division. The Company denies plaintiff's
allegations of wrongdoing and intends to vigorously defend itself.
On August 5, 1999, Great Southern was served with a summons and first amended
complaint in a purported class action lawsuit filed in the U.S. District Court
for the Central District of California (Alexander v. Fremont General
Corporation, Fremont Life Insurance Co. and Great Southern Life Insurance Co.).
Plaintiff alleges misrepresentations and other wrongful conduct in connection
with the imposition of increased cost of insurance charges under certain
universal life policies assumed or issued by Fremont Life Insurance Company, and
which were subsequently assumed by Great Southern. The suit seeks actual and
punitive damages, as well as injunctive and restitutionary relief. Great
Southern denies plaintiff's allegations of wrongdoing and intends to vigorously
defend itself.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The quantitative and qualitative disclosures about market risk are contained in
the "Financial Condition and Liquidity" section of Management's Discussion and
Analysis of Financial Condition and Results of Operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
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).
4.7* Amended and Restated Surplus Debenture No. 007, dated January 1, 1999,
in the amount of $30,880,000 made by United Fidelity Life Insurance
Company payable to the Registrant.
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,
1999.
<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 13, 1999
658658.1
August 11, 1999
No. 007 $30,880,000
UNITED FIDELITY LIFE INSURANCE COMPANY
SURPLUS DEBENTURE
Originally dated July 10, 1995, amended and restated as of January 1, 1999
EXPRESSLY CONDITIONED UPON, SUBJECT TO AND contingent upon the
terms, conditions, limitations, contingencies and provisions as hereinafter set
forth in this Debenture, FOR VALUE RECEIVED, United Fidelity Life Insurance
Company, a corporation organized and existing under the laws of the State of
Texas (hereinafter called "UFL"), does hereby agree to pay to Americo Life, Inc.
("Americo"), or its order, from the surplus funds identified below, the sum of
THIRTY MILLION EIGHT HUNDRED EIGHTY THOUSAND DOLLARS ($30,880,000), being the
unpaid principal amount of this suplus debenture as of January 1, 1999, with
interest on the unpaid principal balance thereof from January 15, 1999 until
paid, both principal and interest payable at Dallas County, Texas, only as
hereinafter provided. This Debenture, both principal and interest, shall, except
as otherwise provided herein, be payable only out of the available surplus of
UFL in excess of $22,000,000, to be determined as herein provided. Terms not
otherwise defined herein are defined in paragraph 8 hereof.
Interest on the principal balance hereof from time to time
remaining unpaid shall be payable in advance at a rate of 9 1/4% per annum,
hereinafter referred to as "the Rate".
Subject to, conditioned upon and as provided in paragraph (2)
below, interest shall be payable annually in advance on the first day of each
Interest Period. Subject to, conditioned upon and as provided in paragraph (4)
below, principal payments shall be made annually each January 15, beginning
January 15, 1999, based on the following schedule:
<TABLE>
<S> <C> <C> <C>
1999 866,000 2008 1,095,000
2000 906,000 2009 1,167,000
2001 950,000 2010 612,000
2002 4,746,000 2011 0
2003 4,795,000 2012 0
2004 4,848,000 2013 0
2005 3,904,000 2014 0
2006 964,000 2015 5,000,000
2007 1,027,000
</TABLE>
(1) On the first day of each Interest Period, the Board of
Directors of UFL, or its Executive Committee acting in the absence of the
Board of Directors, shall calculate the
<PAGE>
658658.1
-5-
August 11, 1999
surplus of UFL as of the end of the immediately preceding calendar quarter in
accordance with accounting practices required or permitted by the Texas
Department of Insurance.
(2) Subject to the conditions and provisions in paragraphs
(5) and (6) hereof, and provided the surplus of UFL exceeds $22,000,000 as of
the end of the immediately preceding calendar quarter as determined by the
calculation required in paragraph (1) above, UFL shall have a liability to
Americo for and shall, on each date specified in Paragraph (1) hereof, pay to
Americo, as interest hereon, an amount equal to the lesser of (i) the interest
due on such date under this Surplus Debenture, or (ii) the amount by which the
surplus of UFL exceeds $22,000,000 as of such calculation date.
(3) Subject to the conditions and provisions in paragraph
(6) hereof, and if, at the time the calculation required in paragraph (1)
above is made, the surplus of UFL does not exceed $22,000,000 by an additional
amount sufficient to pay all of the interest due under this Surplus Debenture,
after making the partial payment as provided in paragraph (2) above, the
amount of remaining due but unpaid interest shall not be a liability of UFL,
but shall bear interest at the Rate then in effect and shall be carried
forward and paid on the next interest payment date as provided herein.
(4) Subject to the conditions and provisions in paragraphs
(5) and (6) hereof, and provided the surplus of UFL exceeds the sum of
$22,000,000, plus an amount equal to all interest due hereon as of the date
for which the calculation required in Paragraph (1) above is made, UFL shall
have a liability to Americo for, and shall, on the dates specified in
paragraph (1) hereof, pay to Americo an annual installment of principal equal
to the lesser of (i) the amount specified in the principal schedule in the
third paragraph hereof, or (ii) the amount by which the surplus of UFL, after
the payment of interest due hereon, exceeds $22,000,000, all as of such
calculation date. Each annual installment of principal becoming due and
payable hereunder shall be either the amount specified in the principal
schedule in the third paragraph hereof or such lesser amount as may be paid
hereunder in accordance with the provisions hereof and paragraph (5) below.
(5) Subject to the conditions and provisions in paragraph
(6) hereof, if, at the time the calculation required in paragraph (1) above is
made, the surplus of UFL does not exceed $22,000,000 by an additional amount
sufficient to pay all interest due hereon, plus the full amount of the annual
installment of principal payable on such date, UFL shall only have a liability
for and shall only make such partial payment of such lesser amount as will not
reduce its surplus below $22,000,000 with such partial payment of such lesser
amount being applied first to interest due hereon, and the remainder thereof,
if any, being applied to principal payment. The unpaid portion of such
installment of principal payment shall not be a liability of UFL, but shall be
carried forward until the next principal payment date on which such unpaid
principal may be paid without reducing the surplus of UFL below $22,000,000 as
provided herein.
(6) Notwithstanding any of the foregoing provisions to the
contrary, if at the time the calculation required in paragraph (1) above is
made, should the Board of Directors of UFL, or its Executive Committee acting in
the absence of the Board of Directors, determine that the surplus of UFL exceeds
$22,000,000, but that such surplus is not of a sufficient amount in excess of
$22,000,000 so as to permit either an interest or principal payment hereon,
either total or partial, without jeopardizing UFL's status as a licensed insurer
or its right to transact business in Texas or elsewhere, because of the
so-called "risk-based capital" requirements of the Texas Department of
Insurance, or other state insurance regulating authority, or any similar
financial regulatory requirement of UFL, the Board of Directors of UFL, or its
Executive Committee acting in the absence of the Board of Directors, may, at its
sole discretion, defer any such interest or principal payment, total or partial,
in which event neither such interest nor such principal payment shall become a
liability of UFL or be paid to Americo
(7) Provided the surplus of UFL exceeds the sum of
$22,000,000, plus an amount equal to all principal and interest due hereon as of
the date for which the calculation required in Paragraph (1) above is made, UFL
may on any of the dates specified in Paragraph (1) hereof prepay all or a
portion of the unpaid principal amount hereof in an amount not to exceed the
amount by which the surplus of UFL, after the payment of principal and interest
due hereon, exceeds $22,000,000, all as of such calculation date. Any such
prepayment shall be applied to the amounts specified on the principal schedule
in the third paragraph hereof in the inverse order of maturity. No interest
shall be paid in advance under paragraph 2 on any such date on the amount of
principal that is prepaid on such date.
(8) For purposes of this Surplus Debenture, the term
"Interest Period" means a twelve month period commencing
on January 15 and ending on the succeeding January 15 of the following year.
The initial Interest Period hereunder shall commence January 15,1999; and
"surplus" means the sum of:
(1) "aggregate write-ins for special surplus funds;"
(2) "Special surplus funds";
(3) "Gross paid in and contributed debentures";
(4) "gross paid in and contributed surplus";
(5) "unassigned funds (surplus)";
(6) "aggregate write-ins for other than special surplus funds";
(7) any amounts required to be carried as liabilities with respect to
outstanding surplus debentures of UFL; and
(8) any similar item or entry having the same effect as any of items
(i)-(vii);
as reflected in the Annual Statement of UFL filed with the Texas Department of
Insurance of the State of Texas as of December 31 of each year, or the statutory
quarterly financial statement form as adopted by the Texas Department of
Insurance, whichever is appropriate to the particular payment hereunder.
(9) The obligation of UFL to pay this Surplus Debenture shall
be strictly construed, and shall not be or constitute either a legal or
financial statement liability of UFL or a claim against any of its assets,
except as specifically provided for herein, and in no event shall this Surplus
Debenture be considered or treated as a current or fixed liability or obligation
of UFL as defined under the insurance laws and regulations of the State of
Texas, except and only to the limited extent of each payment of interest or
principal that becomes due and payable as provided hereunder.
(10) In the event of liquidation or receivership of UFL, the
unpaid principal balance of this Surplus Debenture, plus any unpaid interest
thereon, shall become immediately due and payable to Americo and shall be
superior to and in preference of the rights and claims of stockholders of UFL;
provided, however, that all obligations, rights, and claims hereunder are
expressly subordinated to the claim of any supervisor, conservator, or receiver
of UFL appointed by the Commissioner of Insurance of the State of Texas, and the
claims of all other creditors, other than stockholders of UFL.
(11) All payments made hereunder shall be credited first to
interest which may be due and unpaid, if any, and the balance of such payment
shall be credited to the principal amount hereof.
(12) Nothing herein contained shall be construed as
prohibiting UFL from merging or consolidating with another corporation or from
selling or reinsuring any part or all of its business, or from acquiring all or
any part of the assets of any other corporation. In the event UFL shall be
consolidated or merged into another corporation or shall sell substantially all
of its assets to any other corporation, the corporation into which UFL is
consolidated or merged or to which the assets of UFL are transferred, shall
expressly assume the liability of UFL hereunder.
(13) No recourse shall be had for the payment of the principal
of, or the interest of this Surplus Debenture, or for any claims based hereon or
otherwise in respect hereof, against any incorporator, stockholder, officer, or
director, past, present or future, of UFL; such liability, the acceptance of and
as a part of the consideration for the issuance hereof, being expressly
released.
(14) By acceptance and as part of the consideration for the
issuance hereof, the above-named payee and any holder hereof expressly
acknowledges that it has been informed and has knowledge that this Surplus
Debenture has not been registered under the Securities Act of 1933, as amended,
or the Securities Act or Blue Sky laws of any state, and that UFL has issued
this Surplus Debenture pursuant to exemptions from registration available under
such acts. The above-named payee and any holder hereof further expressly
acknowledges and agrees that it is acquiring this Surplus Debenture for
investment purposes and not with a view toward a public distribution hereof and
that this Surplus Debenture may not be sold or otherwise transferred in the
absence of an effective registration statement with respect hereto or an
exemption from registration under the Securities Act of 1933, as amended, or any
other applicable securities law.
(15) If this Surplus Debenture is collected through judicial
proceedings, UFL agrees, subject to conditions and restrictions contained
herein, to pay reasonable attorneys' fees to the holder with respect to legal
services performed in such collection.
Dated as of the 1st day of January, 1999.
<PAGE>
UNITED FIDELITY LIFE INSURANCE COMPANY
By:_____________________________
Gary L. Muller, President
Attest:
- --------------------------
Major W. Park, Jr., Secretary
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000908139
<NAME> Americo Life, Inc.
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.00
<DEBT-HELD-FOR-SALE> 897,262
<DEBT-CARRYING-VALUE> 844,728
<DEBT-MARKET-VALUE> 838,482
<EQUITIES> 109,148
<MORTGAGE> 206,983
<REAL-ESTATE> 28,715
<TOTAL-INVEST> 2,326,310
<CASH> 111,607
<RECOVER-REINSURE> 1,167,957
<DEFERRED-ACQUISITION> 172,375
<TOTAL-ASSETS> 4,180,759
<POLICY-LOSSES> 3,353,220
<UNEARNED-PREMIUMS> 50,187
<POLICY-OTHER> 34,619
<POLICY-HOLDER-FUNDS> 115,452
<NOTES-PAYABLE> 123,929
0
0
<COMMON> 10
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,180,759
114,137
<INVESTMENT-INCOME> 117,812
<INVESTMENT-GAINS> (1,355)
<OTHER-INCOME> 3,117
<BENEFITS> 133,744
<UNDERWRITING-AMORTIZATION> 36,091
<UNDERWRITING-OTHER> 44,702
<INCOME-PRETAX> 7,608
<INCOME-TAX> 2,107
<INCOME-CONTINUING> 5,501
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,501
<EPS-BASIC> 550.10
<EPS-DILUTED> 550.10
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
