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, 2000 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, 2000
------------- -----------------------
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>
September 30, December 31,
2000 1999
<S> <C> <C>
Assets
Investments:
Fixed maturities:
Held to maturity, at amortized cost (market: $736,604 and
$821,335) $ 760,721 $ 852,908
Available for sale, at market (amortized cost: $1,123,147 and
$985,854) 1,081,370 925,997
Equity securities, at market (cost: $63,323 and $33,467) 127,191 73,448
Investment in equity subsidiaries 14,049 12,141
Mortgage loans on real estate, net 242,420 227,601
Investment real estate, net 30,378 28,516
Policy loans 194,630 209,979
Other invested assets 34,192 30,429
----------- -----------
Total investments 2,484,951 2,361,019
Cash and cash equivalents 38,304 122,788
Accrued investment income 32,721 31,764
Amounts receivable from reinsurers 1,169,154 1,140,206
Amounts due from affiliates 15,385 7,710
Other receivables 143,956 42,596
Deferred policy acquisition costs 217,581 212,860
Cost of business acquired 189,243 219,490
Other assets 48,658 49,729
----------- -----------
Total assets $ 4,339,953 $ 4,188,162
=========== ===========
Liabilities and stockholder's equity
Policyholder account balances $ 2,621,301 $ 2,599,627
Reserves for future policy benefits 813,990 822,940
Unearned policy revenues 51,749 60,279
Policy and contract claims 36,034 37,821
Other policyholder funds 113,247 119,664
Notes payable 102,557 111,165
Amounts payable to reinsurers 33,019 48,749
Federal income taxes 76 -
Deferred income taxes 56,838 40,531
Due to brokers 184,177 53,010
Other liabilities 73,917 68,262
----------- -----------
Total liabilities 4,086,905 3,962,848
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 37,990 19,159
Retained earnings 211,303 202,400
----------- -----------
Total stockholder's equity 253,048 225,314
----------- -----------
Commitments and contingencies
Total liabilities and stockholder's equity $ 4,339,953 $ 4,188,162
=========== ===========
</TABLE>
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,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Income
Premiums and policy revenues $ 56,881 $ 56,024 $ 168,858 $ 170,161
Net investment income 54,507 57,358 167,627 175,170
Net realized investment losses (1,095) (826) (5,961) (2,181)
Other income 2,872 1,486 7,979 4,603
----------- ----------- ----------- -----------
Total income 113,165 114,042 338,503 347,753
Benefits and Expenses
Policyholder benefits:
Death benefits 23,896 29,591 81,649 94,520
Interest credited on universal life and
annuity products 29,366 28,210 85,837 82,679
Other policyholder benefits 13,660 11,503 43,947 38,991
Change in reserves for future policy benefits (4,241) (3,710) (13,972) (16,852)
Commissions 862 924 4,651 6,551
Amortization expense 18,888 19,315 52,733 55,406
Interest expense 2,425 2,866 7,671 8,805
Other operating expenses 22,489 21,039 60,390 65,741
----------- ----------- ----------- -----------
Total benefits and expenses 107,345 109,738 322,906 335,841
----------- ---------- ----------- -----------
Income before provision for income taxes 5,820 4,304 15,597 11,912
Provision for income taxes 1,818 936 5,194 3,043
----------- ----------- ----------- -----------
Net income $ 4,002 $ 3,368 $ 10,403 $ 8,869
=========== =========== =========== ===========
Net income per common share $ 400.20 $ 336.80 $ 1,040.30 $ 886.90
========== ========== ========== ==========
</TABLE>
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands - unaudited)
<TABLE>
Nine Months
Ended September 30,
2000 1999
<S> <C> <C>
Cash flows from operating activities
Net income $ 10,403 $ 8,869
-------- --------
Adjustments to reconcile net income to net cash provided by (used by) operating
activities:
Depreciation and amortization 55,507 50,646
Deferred policy acquisition costs (60,357) (45,513)
Undistributed earnings of equity subsidiaries (338) (2,235)
Distribution of earnings from equity subsidiaries - 120
Amortization of unrealized gains (4,728) (5,448)
(Increase) decrease in assets:
Accrued investment income (958) (3,357)
Amounts receivable from reinsurers 89,184 59,741
Other receivables 274 (477)
Other assets, net of amortization expense (1,845) (3,996)
Increase (decrease) in liabilities:
Policyholder account balances (55,939) (73,870)
Reserves for future policy benefits and unearned policy revenues (4,174) (5,612)
Policy and contract claims (1,788) (8,138)
Other policyholder funds (6,417) 15,306
Amounts payable to reinsurers (15,729) 4,940
Provision for deferred income taxes 6,167 (278)
Federal income taxes payable 76 (668)
Affiliate balances (7,674) (5,499)
Other liabilities 5,654 (3,197)
Net realized losses on investments sold 5,961 2,181
Amortization on bonds and mortgage loans 2,029 2,215
Other changes (2,816) (7,311)
---------- ----------
Total adjustments 2,089 (30,450)
--------- ----------
Net cash provided by (used by) operating activities 12,492 (21,581)
--------- ----------
</TABLE>
(Continued)
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(In thousands - unaudited)
<TABLE>
Nine Months
Ended September 30,
2000 1999
<S> <C> <C>
Cash flows from investing activities
Purchases of fixed maturity investments $ (980,855) $ (297,107)
Purchases of other investments (188,185) (101,492)
Mortgage loans originated (25,688) (39,598)
Maturities or redemptions of fixed maturity investments 94,103 14,950
Sales of fixed maturity available for sale investments 786,929 256,967
Sales of fixed maturity held to maturity investments 54,576 -
Sales of equity securities 149,624 91,812
Sales of other investments 1,526 -
Transfer of cash on disposition of block of insurance business (100,001) -
Repayments from mortgage loans 11,162 17,878
Change in due to brokers 18,215 (5,876)
Change in policy loans 2,900 (2,313)
----------- -----------
Net cash used by investing activities (175,694) (64,779)
----------- -----------
Cash flows from financing activities
Receipts credited to policyholder account balances 354,436 320,662
Return of policyholder account balances (265,718) (182,275)
Repayments of notes payable (8,500) (9,080)
Dividends paid (1,500) (1,500)
----------- -----------
Net cash provided by financing activities 78,718 127,807
----------- -----------
Net increase (decrease) in cash and cash equivalents (84,484) 41,447
----------- -----------
Cash and cash equivalents at beginning of period 122,788 68,219
----------- -----------
Cash and cash equivalents at end of period $ 38,304 $ 109,666
=========== ===========
</TABLE>
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
13
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2000 and 1999
(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, 1999 Form 10-K as filed with the Securities and Exchange
Commission.
1. ACCOUNTING POLICIES
The unaudited consolidated financial statements as of September 30, 2000 and for
the three and nine months ended September 30, 2000 and 1999 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, 1999 consolidated financial statements. The results of operations
for the three and nine months ended September 30, 2000 and 1999 are not
necessarily indicative of the expected results for the full year 2000, nor the
results experienced for the year 1999.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 138,
"Accounting for Certain Derivative Investments and Certain Hedging Activities -
an Amendment of FASB Statement 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. Management does not believe that adoption of this accounting standard will
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 nine months ended September 30,
2000 and 1999 is as follows:
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 4,002 $ 3,368 $ 10,403 $ 8,869
Other comprehensive income (loss) 18,836 (9,624) 18,831 (33,192)
--------- --------- --------- ---------
Comprehensive income (loss) $ 22,838 $ (6,256) $ 29,234 $ (24,323)
========= ========= ========= =========
</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
2000 1999 September 30, 2000
---- ---- ------------------
<S> <C> <C> <C>
Investment securities:
Fixed maturities available for sale $ (44,213) $ (62,186) $ 17,973
Fixed maturities reclassified from
available for sale to held to maturity 28,754 33,482 (4,728)
Equity securities 63,869 39,981 23,888
---------- ---------- ----------
48,410 11,277 37,133
Effect on other balance sheet accounts 8,822 16,984 (8,162)
Deferred income taxes (19,242) (9,102) (10,140)
---------- ---------- ----------
Net unrealized investment gains $ 37,990 $ 19,159 $ 18,831
========== ========== ==========
</TABLE>
During both the nine months ended September 30, 2000 and 1999, the Company paid
dividends to Financial Holding Corporation ("FHC") totaling $1,500.
3. COMMITMENTS AND CONTINGENCIES
The Company and Great Southern Life Insurance Company ("Great Southern") were
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. On July 26, 2000, the
court approved a class action settlement pursuant to which Great Southern paid
$1.1 million to settle the claims asserted by the plaintiff class. A cross-claim
by a co-defendant regarding the same issues remains pending. Some members of the
class appealed the trial court's approval of the settlement, which appeal is
also pending.
Great Southern is a defendant in a certified class action and Great Southern and
two other subsidiaries, The College Life Insurance Company of America
("College") and Ohio State Life Insurance Company, are defendants in lawsuits
filed as purported class actions asserting claims related to sales practices and
premiums charged in connection with certain life insurance products and sales
practices in connection with annuity products. The Company and certain
subsidiaries, including College, also are defendants in a purported class action
asserting claims in connection with the marketing and administration of deferred
annuity and life insurance products sold to schoolteachers and others. The
Company intends to defend these cases vigorously.
The Company and its subsidiaries named in the pending actions referred to above
deny any allegations of wrongdoing and intend to defend the actions vigorously.
Although plaintiffs in these actions generally are seeking indeterminate
amounts, including punitive and treble damages, such amounts could be large.
Although there can be no assurances, at the present time the Company does not
anticipate that the amounts in the settlements described above and the ultimate
liability arising from such pending litigation, after consideration of amounts
provided in the consolidated financial statements, will have a material adverse
effect on the financial condition of the Company.
<PAGE>
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, 1999 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
Nine months ended September 30,
------------------------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $278,021 $299,564 $ 42,547 $ 30,360 $ 3,123 $ 4,740 $ 14,812 $13,089 $ 338,503 $347,753
Income (loss)
before income 39,498 33,828 5,188 (80) 1,379 3,263 (30,468) (25,099) 15,597 11,912
taxes
Three months ended September 30,
------------------------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Revenues $ 91,185 $ 96,136 $ 14,887 $ 10,840 $ 887 $ 1,515 $ 6,206 $ 5,551 $ 113,165 $114,042
Income (loss)
before income 16,090 9,941 835 (978) 616 1,004 (11,721) (5,663) 5,820 4,304
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).
5. DISPOSITION OF A BLOCK OF LIFE INSURANCE BUSINESS
In May 2000, the Company entered into an agreement to permanently reinsure a
block of payroll-deduction life insurance business to an unaffiliated company on
an indemnity coinsurance basis using an effective date of January 1, 2000.
However, the policy liabilities remain as direct liabilities to the Company in
the accompanying consolidated financial statements. As of the effective date,
liabilities associated with these policies totaled $138.5 million. Under the
reinsurance agreement, the Company transferred cash assets totaling $100.0
million and miscellaneous assets totaling $17.1 million to the unaffiliated
reinsurer. In addition, the Company removed deferred policy acquisition costs
totaling $20.3 million from its consolidated financial statements in conjunction
with this disposition. In order to fund the cash transfer, the Company sold
fixed maturity held to maturity investments with an amortized cost of $54.6
million and realized net investment losses of $0.3 million on those sales. For a
period of at least three years, the Company will continue to service these
policies for a fee paid by the reinsurer. This transaction has no significant
effect on the Company's consolidated financial position or results of
operations.
<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. 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
----------------------- ------------------------ ------------------------
Nine months ended September 30,
-------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues $278.0 $299.6 $42.5 $30.4 $3.1 $4.7
Income before income taxes 39.5 33.8 5.2 (0.1) 1.4 3.3
Three months ended September 30,
-------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Revenues $91.2 $96.1 $14.9 $10.8 $0.9 $1.5
Income before income taxes 16.1 9.9 0.8 (1.0) 0.6 1.0
</TABLE>
<PAGE>
Life insurance operations. Income before income taxes for the nine months ended
September 30, 2000 was $39.5 million compared to $33.8 million for the nine
months ended September 30, 1999. This increase in profits is primarily due to a
$12.0 million decrease in death benefits, net of reserves for policy benefits
released on traditional death benefits. This increase in profits is offset by
higher amortization of cost of business acquired assets on the closed blocks of
annuity business in 2000 due to higher surrenders in 2000.
Income before income taxes for the three months ended September 30, 2000 was
$16.1 million compared to $9.9 million for the three months ended September 30,
1999. This increase in profits is due to a $6.4 million decrease in death
benefits, net of reserves for policy benefits released on traditional death
benefits.
Asset accumulation products operations. Income before income taxes for the nine
months ended September 30, 2000 was $5.2 million compared to a loss before
income taxes of $0.1 million for the nine months ended September 30, 1999. This
increase was due primarily to (i) a $2.4 million increase in surrender charge
revenue resulting from higher surrenders in 2000, (ii) a $0.6 million increase
in other policy revenues, and (iii) a $0.1 million decrease in death benefits.
Income before income taxes for the three months ended September 30, 2000 was
$0.8 million compared to a loss before income taxes of $1.0 million for the
three months ended September 30, 1999. This increase is primarily due to a $0.9
million increase in surrender charge revenue resulting from higher surrenders in
2000.
Non-life insurance investments. Income before income taxes for the nine and
three month periods ended September 30, 2000 decreased from the same periods in
1999 due to a reduction in income from the Company's investment in an equity
subsidiary.
Reconciling items. 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 related to reconciling items for the nine months
ended September 30, 2000 decreased $5.4 million from the same period in 1999 due
primarily to (i) a $3.8 million increase in realized investment losses, and (ii)
a $3.1 million increase in costs associated with the settlement of an individual
lawsuit, offset by (iii) a general reduction in the level of operating expenses
due to cost controls implemented in 2000.
Income before income taxes for the three months ended September 30, 2000
decreased $6.4 million from the same period in 1999 due primarily to (i) a $0.4
million increase in realized investment losses and (ii) a $3.1 million increase
in costs associated with the settlement of an individual lawsuit, offset by
(iii) a general reduction in the level of operating expenses due to cost
controls implemented in 2000.
DISPOSITION OF A BLOCK OF LIFE INSURANCE BUSINESS
In May 2000, the Company entered into an agreement to permanently reinsure a
block of payroll-deduction life insurance business to an unaffiliated company on
an indemnity coinsurance basis using an effective date of January 1, 2000.
However, the policy liabilities remain as direct liabilities to the Company in
the accompanying consolidated financial statements. As of the effective date,
liabilities associated with these policies totaled $138.5 million. Under the
reinsurance agreement, the Company transferred cash assets totaling $100.0
million and miscellaneous assets totaling $17.1 million to the unaffiliated
reinsurer. In addition, the Company removed deferred policy acquisition costs
totaling $20.3 million from its consolidated financial statements in conjunction
with this disposition. In order to fund the cash transfer, the Company sold
fixed maturity held to maturity investments with an amortized cost of $54.6
million and realized net investment losses of $0.3 million on those sales. For a
period of at least three years, the Company will continue to service these
policies for a fee paid by the reinsurer. This transaction has no significant
effect on the Company's consolidated financial position or results of
operations.
<PAGE>
The following table summarizes the effects on the income statement components of
this business for the nine and three months ended September 30, 1999 (in
millions):
<TABLE>
Nine Months Three Months
Ended Ended
September 30, 1999 September 30, 1999
<S> <C> <C>
Premiums and policy revenues $ 11.4 $ 3.7
Net investment income 6.1 2.0
Policyholder benefits 10.8 3.7
Amortization expense 3.2 1.2
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
Income before income taxes for the nine months ended September 30, 2000 was
$15.6 million compared to $11.9 million for the nine months ended September 30,
1999. Excluding the effects of net realized investment losses, income before
income taxes increased $7.5 million for this same period from $14.1 million to
$21.6 million. The primary reasons for the increase in profit from 1999 to 2000
were (i) lower death benefits, (ii) lower operating expenses resulting from cost
controls implemented in 2000, and (iii) lower advisory and data processing fees
paid to FHC, offset by (iv) higher costs associated with litigation and (v)
lower income from an equity subsidiary.
Premiums and policy revenues. Premiums and policy revenues totaled $168.9
million for the nine months ended September 30, 2000 compared to $170.1 million
for the nine months ended September 30, 1999. Excluding the effect of the
payroll-deduction business, premiums and policy revenues increased $10.2
million. Premiums from traditional life insurance business increased $9.3
million for the nine months ended September 30, 2000 compared to the nine months
ended September 30, 1999. First year premiums on life insurance sold in the
preneed market totaled $11.3 million during 2000. As sales in this market began
in the fourth quarter of 1999, there were no comparable premiums in the nine
months ended September 30, 1999. The increase in preneed business was offset by
a decrease in premiums from the remainder of the Company's inforce traditional
life insurance business. Policy revenues from interest-sensitive life and
annuity products increased $0.9 million from 1999 to 2000. This increase was
primarily due to (i) a $3.1 million increase in policy revenues, of which the
majority relates to surrender charge revenue from the Company's asset
accumulation business, and (ii) a $0.8 million increase in surrender charges
related to a closed block of annuity business offset by (iii) a decrease in
administrative charges on the Company's universal life business of $2.3 million.
Net investment income. Net investment income totaled $167.6 million for the nine
months ended September 30, 2000 compared to $175.2 million for the nine months
ended September 30, 1999 . Net investment income decreased due to (i) the
transfer of the invested assets supporting the payroll-deduction business which
was reinsured effective January 1, 2000, (ii) a $3.1 million decrease in net
investment income on investments held by the Reinsurer, (iii) a $1.9 million
decrease in income from an equity subsidiary, offset by (iv) an increase in net
investment income on the Company's remaining bond portfolio, and (v) a $0.9
million increase in mortgage loan net investment income.
The increased investment income related to the Company's bond portfolio is
primarily due to an increase in assets supporting the asset accumulation
business from sales in the Company's Americo Retirement Services sales division.
The increase in investment income related to the Company's mortgage loan
portfolio is due to an increase in the average mortgage loan balance from $214.9
million in 1999 to $238.2 million in 2000. This increase was offset by a
decrease in the average yield of the portfolio from 1999 to 2000.
The decrease related to investments held by the Reinsurer is due primarily to a
$3.3 million decrease in net investment income on a closed block of annuity
business. The decrease in investment income and the associated $3.4 million
decrease of interest credited on the policyholder fund values resulted from
lower aggregate fund values.
Net realized investment losses. Net realized investment losses totaled $6.0
million for the nine months ended September 30, 2000 compared to of $2.2 million
for the nine months ended September 30, 1999. In 2000, the Company realized
losses of $5.5 million on common stocks and losses of $0.5 million on the sale
of fixed maturity investments. In 1999, the Company realized losses of $3.4
million on common stock, offset by realized gains of $1.5 million on fixed
maturity investments.
Included in 2000 and 1999 realized investment losses were $5.9 and $1.7 million,
respectively, of realized losses on short positions held on common stocks and
bonds by the Company. There was a like amount of increase in market value on the
related long positions which was included in unrealized investment gains in
stockholder's equity.
Other income. Other income totaled $8.0 million for the nine months ended
September 30, 2000 compared to $4.6 million for the nine months ended September
30, 1999. The increase primarily relates to a service fee received during 2000
from the reinsurer of a block of payroll-deduction life insurance business. The
Company reinsured this business effective January 1, 2000; therefore, no such
fee was received during 1999.
Policyholder benefits. Policyholder benefits totaled $197.5 million for the nine
months ended September 30, 2000 compared to $199.3 million for the nine months
ended September 30, 1999. Excluding the effect of the payroll-deduction
business, policyholder benefits increased $9.0 million. This increase resulted
from a (i) $7.7 million increase in interest credited on universal life and
annuity fund balances, (ii) a $4.9 million increase in other policyholder
benefits, and (iii) a $2.8 million decrease in reserve reduction, offset by a
(iv) $6.6 million decrease in death benefits.
Interest credited on fund balances increased $11.2 million due to increased fund
values related to the asset accumulation business. This increase was partially
offset by a $3.4 million decrease in interest credited on a closed block of
annuity business resulting from lower aggregate fund values. Other policyholder
benefits increased primarily due to an increase in surrender benefits on closed
blocks of traditional life business. The reserve reduction decrease in 2000 was
due to increased traditional life premiums and a $1.6 million reduction in
reserves for future policy benefits released on traditional life insurance death
benefits.
Amortization expense. Amortization expense totaled $52.7 million for the nine
months ended September 30, 2000 compared to $55.4 million for the nine months
ended September 30, 1999. Excluding the effect of the payroll-deduction
business, amortization expense increased $0.5 million. Amortization expense
related to the Company's universal life insurance business decreased $3.8
million due primarily to decreased administrative charges on this block of
business. Offsetting this decrease was a $3.3 million increase in amortization
expense related to a closed block of annuity business. The increase was
partially due to increased surrender charge revenue on this block of business.
In addition, amortization expense related to preneed business totaled $2.9
million. As sales in this market began in the 4th quarter of 1999, there was no
amortization in the nine months ended September 30, 1999.
Other operating expenses. Other operating expenses totaled $60.4 million for the
nine months ended September 30, 2000 compared to $65.7 million for the nine
months ended September 30, 1999.
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 by $2.5 million in 2000 compared to 1999. In addition, during 1999 the
Company reviewed the levels of general expenses in all of its operating and
corporate departments. The Company identified sources of expense savings through
increased cost controls which have reduced operating expenses by $4.4 million
during 2000 compared to 1999. Offsetting these decreases was an increase of $3.1
million in costs associated with the settlement of a lawsuit brought by a single
policyholder.
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Income before income taxes for the three months ended September 30, 2000 was
$5.8 million compared to $4.3 million for the three months ended September 30,
1999. Excluding the effects of net realized investment gains and losses, income
before income taxes increased $1.8 million for this same period from $5.1
million to $6.9 million. The primary reasons for the increase in profit from
1999 to 2000 were (i) lower death benefits and (ii) lower operating expenses
resulting from cost controls implemented in 2000, offset by (ii) higher
operating expenses due to costs associated with litigation.
Premiums and policy revenues. Premiums and policy revenues totaled $56.9 million
for the three months ended September 30, 2000 compared to $56.0 million for the
three months ended September 30, 1999. Excluding the effect of the
payroll-deduction business, premiums and policy revenues increased $4.6 million.
Premiums from traditional life insurance business increased $5.4 million for the
three months ended September 30, 2000 compared to the three months ended
September 30, 1999. First year premiums on life insurance sold in the preneed
market totaled $4.2 million during the three months ended September 30, 2000. As
sales in this market began in the fourth quarter of 1999, there were no
comparable premiums in the three months ended September 30, 1999. In addition,
premiums from the remainder of the Company's inforce traditional life insurance
business increased. Policy revenues from interest sensitive life and annuity
products decreased $0.8 million from 1999 to 2000. This decrease was primarily
due to (i) a decrease of $1.2 million in surrender charges from a closed block
of annuity business, offset by (ii) a $0.6 million increase in policy revenues,
of which the majority relates to surrender charge revenue, from the Company's
asset accumulation business.
Net investment income. Net investment income totaled $54.5 million for the three
months ended September 30, 2000 compared to $57.4 million for the three months
ended September 30, 1999. Net investment income decreased due to (i) investment
income on assets transferred which support the payroll-deduction business
reinsured effective January 1, 2000, and (ii) a $1.7 million decrease in net
investment income on investments held by the Reinsurer offset by (iii) a $0.3
million increase in mortgage loan net investment income, and (iv) an increase in
net investment income on the Company's remaining bond portfolio.
The increased investment income related to the Company's bond portfolio is
primarily due to an increase in assets supporting the asset accumulation
business from sales in the Company's Americo Retirement Services sales division.
The increase related to the Company's mortgage loan portfolio is due to an
increase in the average mortgage loan balance from $209.6 million in 1999 to
$234.2 million in 2000. This increase was offset by a decrease in the average
yield of the portfolio from 1999 to 2000.
The decrease related to investments held by the Reinsurer is due primarily to a
$1.3 million decrease in net investment income on a closed block of annuity
business. The decrease in investment income and the associated $1.1 million
decrease of interest credited on the policyholder fund values resulted from
lower aggregate fund values.
Net realized investment losses. Net realized investment losses totaled $1.1
million for the three months ended September 30, 2000 compared to $0.8 million
for the three months ended September 30, 1999. In 2000, the Company realized
losses of $1.2 million on common stocks offset by gains of $0.1 million on the
sale of fixed maturity investments. In 1999, the Company realized losses of $1.0
million on the sale of common stock, offset by realized gains of $0.2 million on
fixed maturity investments.
Included in 2000 and 1999 realized investment losses were $1.6 million of
realized investment losses and $2.8 million of realized investment gains,
respectively, on short positions held on common stocks and bonds by the Company.
There was a like amount of change in market value on the related long positions
which was included in unrealized investment gains in stockholder's equity.
<PAGE>
Other income. Other income totaled $2.9 million for the three months ended
September 30, 2000 compared to $1.5 million for the three months ended September
30, 1999. The increase primarily relates to a service fee received during 2000
from the reinsurer of a block of payroll-deduction life insurance business. The
Company reinsured this business effective January 1, 2000; therefore, no such
fee was received during 1999.
Policyholder benefits. Policyholder benefits totaled $62.7 million for the three
months ended September 30, 2000 compared to $65.6 million for the three months
ended September 30, 1999. Excluding the effect of the payroll-deduction
business, policyholder benefits increased $0.8 million. This increase resulted
from a (i) a $2.7 million increase in interest credited on universal life and
annuity fund balances, (ii) a $2.2 million increase in other policyholder
benefits, offset by (iii) a $3.4 million decrease in death benefits and, (iv) a
$0.5 million increase in reserve reduction.
Interest credited on fund balances increased $3.6 million due to increased
assets related to the asset accumulation business. This increase was partially
offset by a $1.1 million decrease in interest credited on a closed block of
annuity business resulting from lower fund values. Other policyholder benefits
increased primarily due to an increase in surrender benefits on a closed block
of traditional life business. The reserve reduction increase in 2000 was
primarily due to (i) increased surrender benefits on traditional life business
offset by (ii) increased traditional life premiums.
Amortization expense. Amortization expense totaled $18.9 million for the three
months ended September 30, 2000 compared to $19.3 million for the three months
ended September 30, 1999. Excluding the effect of the payroll-deduction
business, amortization expense increased $0.8 million. Amortization expense
related to a closed block of annuity business increased $0.5 million.
Other operating expenses. Other operating expenses totaled $22.5 million for the
three months ended September 30, 2000 compared to $21.0 million for the three
months ended September 30, 1999 .
Other operating expenses increased $3.1 million during 2000 due to costs
associated with the settlement of a lawsuit brought by a single policyholder.
This increase was offset by other operating expense reductions. During 1999 the
Company reviewed the levels of general expenses in all of its operating and
corporate departments. The Company identified sources of expense savings through
increased cost controls which have reduced operating expenses by $1.0 million
for the three months ended September 30, 2000 compared to 1999.
FINANCIAL CONDITION AND LIQUIDITY
The changes occurring in the Company's consolidated balance sheet from December
31, 1999 to September 30, 2000 primarily reflect the normal operations of the
Company's life insurance subsidiaries as well as the disposition of the block of
payroll-deduction life insurance business as discussed elsewhere herein.
The quality of the Company's investment in fixed maturity investments at
September 30, 2000 remained consistent with December 31, 1999. Non-investment
grade securities totaled less than 3% of the Company's total fixed maturity
investments at September 30, 2000. The Company has not made any significant
changes to its investment philosophy during 2000.
<PAGE>
The Company's net unrealized investment gains increased $18.8 million from
December 31, 1999 to September 30, 2000. The components of the change were as
follows (in millions):
<TABLE>
<S> <C>
Investment securities:
Fixed maturities available for sale $ 18.0
Fixed maturities reclassified from
available for sale to held to maturity (4.7)
Equity securities 23.9
37.2
Effect on other balance sheet accounts (8.3)
Deferred income taxes (10.1)
Net unrealized investment gains $ 18.8
=========
</TABLE>
During the three months ended September 30, 2000, 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, 1999 Form 10-K regarding the Company's exposure to market risk.
<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, 1999, and the Company's reports on Form 10-Q for the quarters ended
March 31, 2000 and June 30, 2000, regarding certain legal proceedings to which
the Company and/or certain of its subsidiaries are parties.
Included among those matters reported in the Form 10-K was Thibodeau, et al. v.
Great American Life Underwriters, et al., District Court, Dallas County, Texas.
On July 26, 2000, the Court approved a class action settlement pursuant to which
Great Southern paid $1.1 million to settle the claims asserted by the plaintiff
class. The Company does not believe the costs of implementing the settlement,
after consideration of amounts provided in the consolidated financial
statements, will have a material adverse effect on the financial condition of
the Company. Some members of the class appealed the trial court's approval of
the settlement, which is pending. Shortly before the settlement was approved by
the Court, a co-defendant named in the lawsuit, Norman T. Faircloth, filed a
cross-claim against several of the other defendants, including the Company,
Great Southern, Great American Life Underwriters, Inc., Entrepreneur Corp., and
certain officers of Great Southern and the Company. The cross-claim asserts
claims similar to those asserted by the plaintiffs in the underlying lawsuit,
and seeks similar relief including actual damages, treble and punitive damages,
emotional distress damages and an accounting. The cross-claim is brought by a
single individual and does not seek relief on behalf of a class or any other
persons. The Court has severed this cross-claim. The Company intends to defend
the cross-claim vigorously.
Also included among the matters reported in the 10-K was McCulley v. Great
Southern Life Insurance Company, et al., U.S. District Court of the Northern
District of Texas. As previously reported, on April 18, 2000, the Court approved
the settlement previously described pursuant to which Great Southern paid class
counsel's fees and expenses in the amount of $275,000 and agreed to provide free
insurance for one year to class members who timely submit an application for a
new universal life policy and satisfy Great Southern's underwriting
requirements. The Company does not believe the costs of implementing the
settlement, after consideration of amounts provided in the consolidated
financial statements, will have a material adverse effect on the financial
condition of the Company.
Also included among the matters reported in the Form 10-K was Gularte v. Fremont
Life Insurance Company, Fremont General Corporation and Great Southern, Los
Angeles Superior Court, Los Angeles, California, a purported class action in
which plaintiff challenged under various theories the lawfulness of a surrender
charge imposed under a deferred annuity contract. As previously reported, on
April 2, 1999, the trial court entered judgment dismissing with prejudice the
action against all defendants including Great Southern. On May 31, 2000, the
California Court of Appeals affirmed the dismissal of plaintiff's fraud and
reformation claims, but reversed the dismissal of claims alleging
unconscionability, breach of covenant of good faith and fair dealing, and
statutory unfair business practices. The California Supreme Court denied
defendant's petition for review, and the case has been remanded to the trial
court for further proceedings.
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).
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,
2000.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AMERICO LIFE, INC.
BY: /s/ Gary E. Jenkins
Name: Gary E. Jenkins
Title: Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
Date: November 14, 2000
