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 September 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 November 12, 1999
------------- -----------------------
Common Stock $1.00 Par Value 10,000
<PAGE>
2
AMERICO LIFE, INC. AND SUBSIDIARIESCONSOLIDATED
BALANCE SHEET(In thousands - unaudited)
<TABLE>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Assets
Investments:
Fixed maturities:
Held to maturity, at amortized cost (market: $855,761 and
$914,672) $ 877,441 $ 876,594
Available for sale, at market (amortized cost: $916,988 and
$893,664) 882,248 925,191
Equity securities, at market (cost: $49,262 and $42,201) 90,804 89,022
Investment in equity subsidiaries 11,785 9,669
Mortgage loans on real estate, net 212,185 190,074
Investment real estate, net 28,874 28,606
Policy loans 212,485 210,173
Other invested assets 18,709 17,066
----------- -----------
Total investments 2,334,531 2,346,395
Cash and cash equivalents 109,666 68,219
Accrued investment income 35,219 31,862
Amounts receivable from reinsurers 1,142,130 1,207,197
Other receivables 76,906 36,529
Deferred policy acquisition costs 187,023 131,574
Cost of business acquired 227,404 247,125
Amounts due from affiliate 2,414 -
Other assets 47,186 36,913
----------- -----------
Total assets $ 4,162,479 $ 4,105,814
=========== ===========
Liabilities and stockholder's equity
Policyholder account balances $ 2,560,306 $ 2,501,113
Reserves for future policy benefits 829,024 833,917
Unearned policy revenues 53,004 36,332
Policy and contract claims 37,329 45,467
Other policyholder funds 121,547 106,241
Notes payable 123,463 132,533
Amounts payable to reinsurers 33,138 28,199
Deferred income taxes 45,414 63,600
Due to broker 69,223 36,275
Amounts due to affiliates - 3,085
Other liabilities 58,674 61,872
----------- -----------
Total liabilities 3,931,122 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 27,307 60,499
Retained earnings 200,295 192,926
----------- -----------
Total stockholder's equity 231,357 257,180
----------- -----------
Commitments and contingencies
Total liabilities and stockholder's equity $ 4,162,479 $ 4,105,814
=========== ===========
</TABLE>
See notes to financial consolidated statements
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,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Income
Premiums and policy revenues $ 56,024 $ 51,714 $ 170,161 $ 161,467
Net investment income 57,358 55,440 175,170 167,167
Net realized investment gains (losses) (826) 2,102 (2,181) 8,318
Other income 1,486 2,213 4,603 9,323
------------- ------------- ------------- -------------
Total income 114,042 111,469 347,753 346,275
Benefits and expenses
Policyholder benefits:
Death benefits 29,591 26,427 94,520 82,028
Interest credited on universal life and
annuity products 28,210 25,495 82,679 79,121
Other policyholder benefits 11,503 13,581 38,991 42,243
Change in reserves for future policy benefits (3,710) (5,580) (16,852) (17,900)
Commissions 924 3,480 6,551 9,085
Amortization expense 19,315 28,037 55,406 60,518
Interest expense 2,866 3,098 8,805 9,071
Other operating expenses 21,039 21,157 65,741 63,667
------------- ------------- ------------- -------------
Total benefits and expenses 109,738 115,695 335,841 327,833
------------- ------------- ------------- -------------
Income (loss) before provision for
income taxes 4,304 (4,226) 11,912 18,442
Provision for income taxes 936 (2,004) 3,043 5,566
------------- ------------- ------------- -------------
Net income (loss) $ 3,368 $ (2,222) $ 8,869 $ 12,876
============= ============= ============= =============
Net income (loss) per common share $ 336.80 $ (222.20) $ 886.90 $ 1,287.60
============= ============= ============= =============
</TABLE>
See notes to financial consolidated statements
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands - unaudited)
<TABLE>
Nine Months
Ended September 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 8,869 $ 12,876
---------- ----------
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization 50,646 64,099
Deferred policy acquisition costs (45,513) (28,908)
Undistributed earnings of equity subsidiaries (2,235) (1,623)
Distribution of earnings from equity subsidiaries 120 8,323
Amortization of unrealized gains (5,448) (866)
(Increase) decrease in assets:
Accrued investment income (3,357) (2,502)
Amounts receivable from reinsurers 59,741 60,424
Other receivables (477) (14,751)
Other assets, net of amortization expense (3,996) (8,680)
Increase (decrease) in liabilities:
Policyholder account balances (73,870) 31,417
Reserves for future policy benefits and unearned policy revenues (5,612) (47,969)
Policy and contract claims (8,138) (1,197)
Other policyholder funds 15,306 16,226
Amounts payable to reinsurers 4,940 4,989
Provision for deferred income taxes (278) 4,164
Federal income tax payable (668) (380)
Amounts due to affiliates (5,499) (13,631)
Other liabilities (3,197) (10,247)
Net realized losses (gains) on investments sold 2,181 (8,318)
Gain on sale of subsidiary - (4,855)
Amortization on bonds and mortgage loans 2,215 522
Other changes (7,311) (4,485)
----------- -----------
Total adjustments (30,450) 41,752
----------- -----------
Net cash provided (used) by operating activities (21,581) 54,628
----------- -----------
(Continued)
</TABLE>
See notes to financial consolidated statements
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(In thousands - unaudited)
<TABLE>
Nine Months
Ended September 30
1999 1998
---- ----
<S> <C> <C>
Cash flows from investing activities
Purchases of fixed maturity investments $ (297,107) $ (227,174)
Purchases of other investments (101,492) (104,929)
Mortgage loans originated (39,598) (44,207)
Maturities or redemptions of fixed maturity investments 14,950 32,378
Sales of fixed maturity available for sale investments 256,967 171,397
Sales of equity securities 91,812 92,296
Sales of other investments - 13,256
Sale of subsidiary, net of cash sold - 13,778
Repayments from mortgage loans 17,878 18,333
Change in due to brokers (5,876) 17,386
Change in policy loans (2,313) 5,452
----------- -----------
Net cash used by investing activities (64,779) (12,034)
----------- -----------
Cash flows from financing activities
Receipts credited to policyholder account balances 320,662 197,096
Return of policyholder account balances (182,275) (201,888)
Repayments of notes payable (9,080) (69)
Dividends paid (1,500) (1,500)
----------- -----------
Net cash provided (used) by financing activities 127,807 (6,361)
----------- -----------
Net increase in cash and cash equivalents 41,447 36,233
----------- -----------
Cash and cash equivalents at beginning of period 68,219 36,858
----------- -----------
Cash and cash equivalents at end of period $ 109,666 $ 73,091
=========== ===========
</TABLE>
See notes to financial consolidated statements
<PAGE>
11
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 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 September 30, 1999 and for
the three and nine months ended September 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 nine months ended September 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 Company's 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 is not expected to have a significant
impact on the Company's consolidated financial statements.
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 nine months ended September 30,
1999 and 1998 is as follows:
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income (loss) $ 3,368 $ (2,222) $ 8,869 $ 12,876
Other comprehensive losses (9,624) (1,107) (33,192) (1,488)
--------- --------- --------- ---------
Comprehensive income (loss) $ (6,256) $ (3,329) $ (24,323) $ 11,388
========= ========= ========= =========
</TABLE>
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
Following are the components of net unrealized investment gains (losses) which
comprise accumulated other comprehensive income:
<TABLE>
Nine Months
September 30, December 31, Ended
1999 1998 September 30, 1999
---- ---- ------------------
<S> <C> <C> <C>
Investment securities:
Fixed maturities available for sale $ (34,740) $ 29,200 $ (63,940)
Fixed maturities reclassified from
available for sale to held to maturity 30,872 36,509 (5,637)
Equity securities 41,542 47,172 (5,630)
----------- ----------- -----------
37,674 112,881 (75,207)
Effect on other balance sheet accounts 3,123 (21,019) 24,142
Deferred income taxes (13,490) (31,363) 17,873
----------- ----------- -----------
Net unrealized investment gains $ 27,307 $ 60,499 $ (33,192)
=========== =========== ===========
</TABLE>
During the nine months ended September 30, 1999, the Company paid dividends to
Financial Holding Corporation (FHC) totaling $1,500.
3. COMMITMENTS AND CONTINGENCIES
Two of the Company's subsidiaries, Great Southern Life Insurance Company ("Great
Southern") and The College Life Insurance Company of America ("College"), are
defendants 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 are also 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 College,
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, because the Company does not produce such information
internally. <TABLE>
Life Insurance Asset Non-Life Reconciling Consolidated
Operations Accumulation Insurance Items Totals
Products Investments
Operations
Nine months ended September 30,
------------------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $299,564 $312,364 $30,360 $ 10,711 $ 4,740 $ 6,408 $ 13,089 $16,792 $347,753 $346,275
Income (loss)
before income 33,828 44,852 (80) 1,850 3,263 5,537 (25,099) (33,797) 11,912 18,442
taxes
</TABLE>
<TABLE>
Three months ended September 30,
------------------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 96,136 $102,136 $ 10,840 $ 3,957 $ 1,515 $ 1,093 $ 5,551 $ 4,283 $114,042 $111,469
Income (loss)
before income 9,941 13,317 (978) 470 1,004 881 (5,663) (18,894) 4,304 (4,226)
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
RESULTS OF OPERATIONS
The following discussion analyzes significant items affecting the results of
operations and the financial condition of the Company. This discussion should be
read in conjunction with the accompanying consolidated financial statements and
the notes thereto.
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.
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
----------------------- ------------------------ ------------------------
Nine months ended September 30,
-------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues $299.6 $312.4 $30.4 $10.7 $4.7 $6.4
Income before income taxes 33.8 44.9 (0.1) 1.9 3.3 5.5
</TABLE>
<TABLE>
Three months ended September 30,
-------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues $96.3 $102.1 $10.8 $4.0 $1.5 $1.1
Income before income taxes 9.9 13.3 (1.0) 0.5 1.0 0.9
</TABLE>
<PAGE>
Life insurance operations. Income before income taxes for the nine months ended
September 30, 1999 was $33.8 million compared to $44.9 million for the nine
months ended September 30, 1998. This decrease in profits is primarily due to a
$11.9 million increase in death benefits.
Income before income taxes for the three months ended September 30, 1999 was
$9.9 million compared to $13.3 million for the three months ended September 30,
1998. This decrease in profits is primarily due to a $2.7 million increase in
death benefits.
Asset accumulation products operations. Income before income taxes for the nine
and three month periods ended September 30, 1999 was comparable to the same
periods in 1998.
Non-life insurance investments. Income before income taxes for the nine month
period ended September 30, 1999 decreased from the same period in 1998 due to a
$3.2 million gain from the sale of investment real estate in June 1998. Income
before income taxes for the three month period ended September 30, 1999 was
comparable to the same period in 1998.
Reconciling items. Significant reconciling items of the segment revenues and
income before income taxes shown in Note 4 to the consolidated financial
statements 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).
Losses before income taxes for the nine month period ended September 30, 1999
decreased from the same periods in 1998 due to a (i) a $10.5 million increase in
net realized investment losses offset by a related $9.8 million decrease in
amortization expense, (ii) a $2.5 million increase in net investment income
related to a reduction in the unrecovered ceding commission due to an
unaffiliated reinsurer (the "Reinsurer"), and (iii) a $5.0 million decrease in
advisory and data processing fees paid to FHC, offset by (iv) a $4.9 million
gain from the sale of a subsidiary in 1998.
Losses before income taxes for the three month period ended September 30, 1999
decreased from the same periods in 1998 due to (i) a $2.9 million increase in
net realized investment losses offset by a related $9.8 million decrease in
amortization expense, (ii) a $0.8 million increase in net investment income
related to a reduction in the unrecovered ceding commission due to the
Reinsurer, and (iii) a $2.1 million decrease in advisory and data processing
fees paid to FHC.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Income before income taxes for the nine months ended September 30, 1999 was
$11.9 million compared to $18.4 million for the nine months ended September 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, and
(ii) higher death benefits in 1999, partially offset by (iii) lower advisory and
data processing fees paid to FHC in 1999, and (iv) increased net investment
income in 1999 related to a reduction in the unrecovered ceding commission due
an unaffiliated reinsurer (the "Reinsurer"). Net realized investment gains in
1998 includes $9.8 million of gains on sales from investments held by the
Reinsurer. The effect on income before income taxes of these gains was offset by
$9.8 million of amortization expense relating to these gains.
Premiums and policy revenues. Premiums and policy revenues totaled $170.2
million for the nine months ended September 30, 1999 compared to $161.5 million
for the nine months ended September 30, 1998. Premiums from traditional life
insurance business for the nine months ended September 30, 1999 were comparable
to the nine months ended September 30, 1998. Policy revenues increased $10.1
million from 1998 to 1999. Of this increase, $6.0 million resulted from asset
accumulation business acquired in October of 1998 in conjunction with the
Company acquiring the 50% of College Insurance Group, Inc. ("CIG") not
previously owned and the recapture of business which was previously ceded to
an unaffiliated insurance company. In addition, administrative charges on the
Company's universal life insurance business increased $4.9 million. The
increase in these charges was offset by increased amortization expense on this
block of business. These increases were offset by a $3.7 million decrease in
surrender charges from a closed block of annuity business.
<PAGE>
Net investment income. Net investment income totaled $175.2 million for the nine
months ended September 30, 1999 compared to $167.2 million for the nine months
ended September 30, 1998. Net investment income increased due to (i) an increase
in net investment income on the Company's bond portfolio, (ii) a $1.5 million
increase in mortgage loan net investment income, and (iii) a $2.5 million
increase in net investment income related to a reduction in the unrecovered
ceding commission due to the Reinsurer, offset by a $9.4 million decrease in net
investment income on investments held by the Reinsurer.
The increase related to the Company's bond portfolio is primarily due to
increased assets owned resulting from the acquisition of the asset accumulation
business in October 1998.
The increase related to the Company's mortgage loan portfolio is due to an
increase in the average mortgage loan balance from $185.9 million in 1998 to
$214.1 million in 1999. This increase is offset by a decrease in the average
yield of the portfolio from 1998 to 1999.
The decrease related to investments held by the Reinsurer is due primarily to a
$5.6 million decrease in net investment income on a closed block of annuity
business. The interest credited on fund values for this business decreased $3.7
million.
Net realized investment gains (losses). Net realized investment losses totaled
$2.2 million for the nine months ended September 30, 1999 compared to net
realized investment gains of $8.3 million for the nine months ended September
30, 1998. During 1998, the Company recorded gains of $3.2 from the sale of
investment real estate. Also, the Company realized gains of $9.8 million in 1998
on sales of investments held by the Reinsurer. As described below, the sale of
investments held by the Reinsurer resulted in increased amortization of cost of
business acquired assets. Excluding the $9.8 million of gains described above,
the Company realized losses of $1.5 million in 1998 compared to losses of $2.2
million in 1999. There were no sales of investments held by Reinsurer in 1999
and no impact on amortization from other gains realized in 1999.
Other income. Other income totaled $4.6 million for the nine months ended
September 30, 1999 compared to $9.3 million for the nine months ended September
30, 1998. In May 1998, the Company realized a gain of $4.9 million from the sale
of Investors Guaranty.
Policyholder benefits. Policyholder benefits totaled $199.3 million for the nine
months ended September 30, 1999 compared to $185.5 million for the nine months
ended September 30, 1998. This increase resulted primarily from a $12.5 million
increase in death benefits. Interest credited on universal life and annuity fund
balances also increased $3.5 million. The increase in interest credited is
comprised of (i) a $12.5 million increase in interest credited on fund balances
related to asset accumulation business acquired in October 1998, offset by (ii)
a $5.6 million decrease in interest credited on a closed block of annuity
business due to reduced fund values and (iii) a decrease in interest credited on
other interest-sensitive products due to a reduction in rates made in response
to market conditions. The decrease in interest credited on the closed block of
annuity business was offset by the related decrease in net investment income
earned.
Amortization expense. Amortization expense totaled $55.4 million for the nine
months ended September 30, 1999 compared to $60.5 million for the nine months
ended September 30, 1998. Amortization expense decreased $5.1 million primarily
due to amortization expense related to realized gains in 1998 on sales from a
bond portfolio held by the Reinsurer. The amortization expense in 1998 related
to the realized bond gains totaled $9.8 million, offsetting the effect on income
before taxes of the realized gains. Excluding the amortization expense related
to these gains, amortization expense increased $4.7 primarily due to the
Copmany's universal life insurance business.
Other operating expenses. Other operating expenses totaled $65.7 million for the
nine months ended September 30, 1999 compared to $63.7 million for the nine
months ended September 30, 1998.
Other operating expenses increased in 1998 due to the acquisition of the 50% of
CIG not previously owned and the recapture of business which was previously
ceded to an unaffilited insurance company. The increased marketing expenses
of CIG were partially offset by external revenues of the acquired entities and
a reduction in commission expense as a result of the elimination of commissions
which the Company was paying to these entities prior to their acquisition.
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 $5.0 million decrease in other operating expenses in
1999.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Income before income taxes for the three months ended September 30, 1999 was
$4.3 million compared to a loss of $4.2 million for the three months ended
September 30, 1998. The primary reasons for the increase in profit from 1998 to
1999 were (i) a decrease in realized investment losses, (ii) lower advisory and
data processing fees paid to FHC and (iii) increased net investment income
related to a reduction in the unrecovered ceding commission due the Reinsurer,
offset by (iv) higher death benefits. Net realized investment gains in 1998
includes $9.8 million of gains on sales from investments held by the Reinsurer.
The effect on income before income taxes of these gains was offset by $9.8
million of amortization expense relating to those gains. Therefore, the effect
on income before income taxes from net realized investment losses in 1998 was
$7.7 million.
Premiums and policy revenues. Premiums and policy revenues totaled $56.0 million
for the three months ended September 30, 1999 compared to $51.7 million for the
three months ended September 30, 1998. Premiums from traditional life insurance
business for the three months ended September 30, 1999 were comparable to the
three months ended September 30, 1998. Policy revenues increased $4.8 million
from 1998 to 1999. Policy revenues increased $2.4 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 $57.4 million for the three
months ended September 30, 1999 compared to $55.4 million for the three months
ended September 30, 1998. Net investment income increased due to (i) an increase
in net investment income on the Company's bond portfolio, (ii) a $0.9 million
increase in mortgage loan net investment income, and (iii) a $0.9 million
increase in net investment income related to a reduction in the unrecovered
ceding commission due to the Reinsurer, offset by (iv) a $4.0 million decrease
in net investment income on investments held by the Reinsurer.
The increase in net investment income related to the Company's bond portfolio is
primarily due to increased assets owned resulting from the acquisition of the
asset accumulation business in October 1998.
The increase related to the Company's mortgage loan portfolio is due to an
increase in the average mortgage loan balance from $192.6 million in 1998 to
$224.7 million in 1999. This increase was offset by a decrease in the average
yield of the portfolio from 1998 to 1999.
The decrease related to investments held by the Reinsurer is due primarily to a
$2.1 million decrease in net investment income on a closed block of annuity
business. The interest credited on fund values for this business decreased $1.5
million.
Net realized investment gain (losses). Net realized investment losses totaled
$0.8 million for the three months ended September 30, 1999 compared to net
realized investment gains of $2.1 million for the three months ended September
30, 1998. During 1998, the Company realized gains of $9.8 million on sales of
investments held by the Reinsurer. Excluding the $9.8 million of gains described
above, the Company realized losses of $7.7 million in 1998 compared to losses of
$0.8 million in 1999. These remaining losses relate to sales of bonds and common
stock investments.
Policyholder benefits. Policyholder benefits totaled $65.6 million for the three
months ended September 30, 1999 compared to $59.9 million for the three months
ended September 30, 1998. This increase resulted from a (i) $3.2 million
increase in death benefits and (ii) a $3.1 million increase in interest credited
on universal life and annuity fund balances. Interest credited on fund balances
increased $4.9 million due to the acquisition of the asset accumulation business
in October 1998.
<PAGE>
Amortization expense. Amortization expense totaled $19.3 million for the three
months ended September 30, 1999 compared to $28.0 million for the three months
ended September 30, 1998. Amortization expense decreased primarily due to
realized gains in 1998 on sales from a bond portfolio held by the Reinsurer.
The increase in amortization expense in 1998 related to the realized
bond gains totaled $9.8 million, offsetting the effect on income before
taxes of the realized gains. Excluding the amortization expense related to these
gains, amortization expense was comparable between quarters.
Other operating expenses. Other operating expenses totaled $21.0 million for the
three months ended September 30, 1999 compared to $21.2 million for the three
months ended September 30, 1998.
Other operating expenses increased due to the expenses associated with the
acquisition of CIG and related entities as described above. The increased
marketing expenses were partially offset by external revenues of the
acquired entities and a reduction in commission expense as a result of the
elimination of commissions which the Company was paying to these entities prior
to their acquisition.
Offsetting the increase above, 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 September 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
September 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 September 30, 1999. The Company has not made any significant
changes to its investment philosophy during 1999.
The Company's net unrealized investment gains decreased $33.2 million during the
first nine months of 1999. The gross unrealized investment gains on the
Company's fixed maturity investment securities decreased $69.6 million due to a
market value decline and the gross unrealized investment gains on equity
securities decreased $5.6 million. The components of the change during the nine
months ended September 30, 1999 were (in millions): <TABLE>
<S> <C>
Gross unrealized investment gains $ (75.2)
Effect on insurance assets and liabilities 24.1
Deferred income tax effect 17.9
---------
$ (33.2)
</TABLE>
During the nine months ended September 30, 1999, changes in the interest rate
environment did not adversely affect the Company's position. 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.
<PAGE>
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 in the final stages of testing and are being upgraded or replaced when
necessary for Year 2000 readiness. This will be completed by November 30, 1999.
The Company's imbedded systems, such as phone switches, have been upgraded based
on the appropriate vendors recommendation and are believed to be completely Year
2000 ready. 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 have been developed
and are under constant review for critical business processes and functions in
the event that they or 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 specific 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 September 1999 related to its Year 2000
project is $260,000. It is expected additional expenses will total $90,000 for
the remainder of 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 Reports on Form 10-Q for the quarters ended
March 31, 1999 and June 30, 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 September 15, 1999, plaintiff filed a notice of appeal from this
judgment to the California Court of Appeals. Also included among these matters
was Alexander v. Fremont General Corporation, et al., U.S. District Court for
the Central District of California. On September 14, 1999, this suit was
dismissed without prejudice to plaintiff's refiling the action in California
state court.
On August 16, 1999, a purported class action lawsuit (Pritzker v. The College
Life Insurance Company of America, and Loyalty Life Insurance Company, U.S.
District Court for the District of Massachusetts) was filed against the
Company's subsidiary, The College Life Insurance Company of America ("College"),
and former subsidiary, Loyalty Life Insurance Company. Plaintiff alleges
misrepresentations, breach of contract, and other wrongful conduct in connection
with the imposition of increased cost of insurance charges under certain
universal life policies assumed by defendants. Plaintiff also alleges defendants
paid less than the minimum guaranteed interest due under such policies. The suit
seeks actual and punitive damages, restitutionary and injunctive relief and an
accounting. Defendants deny plaintiff's allegations of wrongdoing and intend to
vigorously defend themselves.
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.
<PAGE>
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(incorporated by reference from
Exhibit 4.7 to Registrant's Form 10-Q [file No. 33-64820]for the
quarter ended June 30, 1999).
10.5(a)* Amendment, effective January 1, 1999, to the Data Processing Agreement
dated January 1, 1993, between the Registrant and Financial Holding
Corporation.
10.7(c)* Third Amendment, effective January 1, 1999, to the Advisory Agreement
dated September 17, 1993 by and between the Registrant and Financial
Holding Corporation.
27 Financial Data Schedule.
- ------------ ----------------- ----------------------------------------------
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months ended September 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: November 12, 1999
724712.3
Exhibit 10.5 (a)
AMENDMENT TO
DATA PROCESSING SERVICES AGREEMENT
This Amendment to Data Processing Services Agreement (the "Amendment")
is made as of January 1, 1999, by and between Americo Life, Inc., a Missouri
corporation ("Americo"), and Financial Holding Corporation, a Missouri
corporation ("FHC").
WHEREAS, Americo and FHC are parties to that certain Data Processing
Services Agreement dated as of January 1, 1993 (the "Agreement"); and
WHEREAS, the parties wish to amend Section 3 of the Agreement (Fees and
Expenses) regarding the charges and fees to be paid by Americo to FHC for the
services rendered by FHC;
WHEREAS, FHC is a party to a Services Agreement dated as of August 1,
1994, with CSC Continuum Inc., as amended by Amendment Number One dated as of
April 1, 1998, pursuant to which CSC provides certain data processing services
to FHC (as amended, the "CSC Agreement");
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows, effective as of January 1, 1999:
1. Base Charge Amendment. Section 3.01 of the Agreement is hereby
amended so that the rate of fees and charges (or "Base Charge" as that term is
defined under the Agreement) paid by Americo to FHC from time to time shall be
equal to the sum of (a) that rate amount paid by FHC to CSC under the terms of
the CSC Agreement (found in Schedule B, Policy Fees, and Schedule C, Rates for
Other Services), plus (b) any costs directly incurred by FHC in providing data
processing services to Americo and its subsidiaries.
2. Adjustment Amendment. Section 3.01 of the Agreement is hereby
amended so that Americo and FHC shall annually review the Base Charge and to
make adjustments as necessary. The Base Charge due to FHC shall not exceed the
fees and charges contained in this Agreement prior to any amendments.
Except as herein amended, the Agreement shall remain in full force and
effect without change.
<PAGE>
724712.3
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
AMERICO LIFE, INC. FINANCIAL HOLDING CORPORATION
By /s/ Donna H. Kinnaird By /s/ Gary E. Jenkins
Name Donna H. Kinnaird Name Gary E. Jenkins
Title Sr. V.P. and COO Title V.P., CFO and Treasurer
724742.3
Exhibit 10.7 (c)
THIRD AMENDMENT TO ADVISORY AGREEMENT
This Third Amendment to Advisory Agreement (the "Amendment") is made as
of January 1, 1999, by and between Americo Life, Inc., a Missouri corporation
("Americo"), and Financial Holding Corporation, a Missouri corporation ("FHC").
WHEREAS, Americo and FHC are parties to that certain Advisory Agreement
dated as of January 1, 1993, as amended (the "Agreement"); and
WHEREAS, the parties desire to amend Section 6 of the Agreement
regarding compensation to be paid by Americo to FHC;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows, effective as of January 1, 1999:
1. Amendment. Section 6 of the Agreement is hereby amended so
that, as amended, it shall read in its entirety as follows:
6. Compensation.
(a) For the services to be rendered by the Adviser as provided
in Section 2 of this Agreement, the Company shall pay to the Adviser a
quarterly fee based on the total statutory value of the Companies'
investible assets as of the end of the most recent fiscal quarter
computed as follows:
<TABLE>
<S> <C> <C>
(i) Bonds.............................................. 0.0375%
(ii) Preferred Stocks................................... 0.2500%
(iii) Common Stocks...................................... 0.2500%
(iii) Other Mortgages Loans.............................. 0.0375%
(iv) Real estate........................................ 0.0375%
(v) Policy Loans....................................... 0.0000%
(vi) Premium Notes...................................... 0.0000%
(vii) Collateral Loans................................... 0.0000%
(viii) Cash w/o Short-term Investments.................... 0.0375%
(ix) MM Instruments (Short-term)........................ 0.0375%
(x) Receivable for Securities.......................... 0.0375%
(xi) Other Invested Assets.............................. 0.0375%
(xii) Aggregate Asset Write Ins.......................... 0.0375%
</TABLE>
<PAGE>
2
724742.3
(b) All such quarterly fees will be payable in advance within
ten (10) business days after the date of this Agreement and the last
day of each fiscal quarter thereafter.
In the event of commencement of this Agreement on a date other
then the first day of a fiscal quarter of the Companies, the fees
provided in this paragraph 6 shall be pro rated based on the number of
days remaining in the then current fiscal quarter as a percentage of
the total number of days in such quarter.
(c) Company and Adviser shall annually review the fees and
charges that Company pays to Adviser for data processing services and
to make adjustments as necessary. The fees and charges due to Adviser
shall not exceed the fees and charges contained in this Agreement prior
to any amendments.
Except as herein amended, the Agreement shall remain in full force and
effect without change.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
AMERICO LIFE, INC. FINANCIAL HOLDING CORPORATION
By /s/ Donna H. Kinnaird By /s/ Gary E. Jenkins
Name Donna H. Kinnaird Name Gary E. Jenkins
Title Sr. V.P. and COO Title V.P., CFO and Treasurer
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000908139
<NAME> Americo Life, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.00
<DEBT-HELD-FOR-SALE> 882,248
<DEBT-CARRYING-VALUE> 877,441
<DEBT-MARKET-VALUE> 855,761
<EQUITIES> 90,804
<MORTGAGE> 212,185
<REAL-ESTATE> 28,874
<TOTAL-INVEST> 2,334,531
<CASH> 109,666
<RECOVER-REINSURE> 1,142,130
<DEFERRED-ACQUISITION> 187,023
<TOTAL-ASSETS> 4,162,479
<POLICY-LOSSES> 3,389,330
<UNEARNED-PREMIUMS> 53,004
<POLICY-OTHER> 37,329
<POLICY-HOLDER-FUNDS> 121,547
<NOTES-PAYABLE> 123,463
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,162,479
170,161
<INVESTMENT-INCOME> 175,170
<INVESTMENT-GAINS> (2,181)
<OTHER-INCOME> 4,603
<BENEFITS> 199,338
<UNDERWRITING-AMORTIZATION> 55,406
<UNDERWRITING-OTHER> 65,741
<INCOME-PRETAX> 11,912
<INCOME-TAX> 3,043
<INCOME-CONTINUING> 8,869
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,869
<EPS-BASIC> 886.90
<EPS-DILUTED> 886.90
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
