FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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 August 11, 2000
------------- ---------------------
Common Stock $1.00 Par Value 10,000
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands - unaudited)
<TABLE>
June 30, December 31,
2000 1999
<S> <C> <C>
Assets
Investments:
Fixed maturities:
Held to maturity, at amortized cost (market: $741,892 and
$821,335) $ 777,986 $ 852,908
Available for sale, at market (amortized cost: $1,071,198 and
$985,854 1,009,680 925,997
Equity securities, at market (cost: $45,266 and $33,467) 86,683 73,448
Investment in equity subsidiaries 13,884 12,141
Mortgage loans on real estate, net 225,983 227,601
Investment real estate, net 28,976 28,516
Policy loans 194,199 209,979
Other invested assets 31,003 30,429
----------- -----------
Total investments 2,368,394 2,361,019
Cash and cash equivalents 42,321 122,788
Accrued investment income 30,793 31,764
Amounts receivable from reinsurers 1,210,544 1,140,206
Amounts due from affiliates 777 7,710
Other receivables 70,041 42,596
Deferred policy acquisition costs 213,048 212,860
Cost of business acquired 199,329 219,490
Other assets 48,203 49,729
----------- -----------
Total assets $ 4,183,450 $ 4,188,162
=========== ===========
Liabilities and stockholder's equity
Policyholder account balances $ 2,609,323 $ 2,599,627
Reserves for future policy benefits 816,354 822,940
Unearned policy revenues 52,417 60,279
Policy and contract claims 34,052 37,821
Other policyholder funds 119,752 119,664
Notes payable 102,494 111,165
Amounts payable to reinsurers 27,382 48,749
Federal income taxes 41 -
Deferred income taxes 45,457 40,531
Due to brokers 69,661 53,010
Other liabilities 75,807 68,262
----------- -----------
Total liabilities 3,952,740 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 19,154 19,159
Retained earnings 207,801 202,400
----------- -----------
Total stockholder's equity 230,710 225,314
----------- -----------
Commitments and contingencies
Total liabilities and stockholder's equity $ 4,183,450 $ 4,188,162
=========== ===========
</TABLE>
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts - unaudited)
<TABLE>
Three Months Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income
Premiums and policy revenues $ 55,816 $ 55,036 $ 111,978 $ 114,137
Net investment income 55,464 59,380 113,120 117,812
Net realized investment gains (losses) 386 (1,280) (4,867) (1,355)
Other income 3,490 1,440 5,107 3,117
------------- ------------- ------------- -------------
Total income 115,156 114,576 225,338 233,711
Benefits and Expenses
Policyholder benefits:
Death benefits 27,500 28,353 57,754 64,929
Interest credited on universal life and
annuity products 28,985 27,729 56,470 54,469
Other policyholder benefits 15,205 14,692 30,287 27,488
Change in reserves for future policy benefits (5,272) (7,290) (9,731) (13,142)
Commissions 2,497 2,456 5,327 5,627
Amortization expense 17,043 17,233 33,845 36,091
Interest expense 2,541 2,971 5,246 5,939
Other operating expenses 18,999 21,555 36,363 44,702
------------- ------------- ------------- -------------
Total benefits and expenses 107,498 107,699 215,561 226,103
------------- ------------- ------------- -------------
Income before provision for income taxes 7,658 6,877 9,777 7,608
Provision for income taxes 2,720 2,142 3,376 2,107
------------- ------------- ------------- -------------
Net income $ 4,938 $ 4,735 $ 6,401 $ 5,501
============= ============= ============= =============
Net income per common share $ 493.80 $ 473.50 $ 640.10 $ 550.10
============ ============ ============ ============
</TABLE>
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands - unaudited)
<TABLE>
Six Months
Ended June 30,
2000 1999
<S> <C> <C>
Cash flows from operating activities
Net income $ 6,401 $ 5,501
---------- ----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 35,551 39,647
Deferred policy acquisition costs (41,720) (27,767)
Undistributed earnings of equity subsidiaries (173) (1,616)
Distribution of earnings from equity subsidiaries - 120
Amortization of unrealized gains (3,992) (3,682)
(Increase) decrease in assets:
Accrued investment income 971 (100)
Amounts receivable from reinsurers 52,084 39,239
Other receivables (104) 690
Other assets, net of amortization expense (812) (8,614)
Increase (decrease) in liabilities:
Policyholder account balances (42,343) (42,354)
Reserves for future policy benefits and unearned policy revenues (3,121) (15,441)
Policy and contract claims (3,770) (10,847)
Other policyholder funds 87 9,211
Amounts payable to reinsurers (21,366) 21,928
Provision for deferred income taxes 4,923 (1,532)
Federal income taxes payable 41 22
Amounts due to affiliates 6,933 (5,360)
Other liabilities 7,545 10,173
Net realized losses on investments sold 4,867 1,355
Amortization on bonds and mortgage loans 1,198 2,357
Other changes (1,556) (1,239)
------------ ------------
Total adjustments (4,757) 6,190
------------ -----------
Net cash provided by operating activities 1,644 11,691
----------- -----------
</TABLE>
(Continued)
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(In thousands - unaudited)
<TABLE>
Six Months
Ended June 30,
2000 1999
<S> <C> <C>
Cash flows from investing activities
Purchases of fixed maturity investments $ (473,852) $ (213,523)
Purchases of other investments (116,192) (72,490)
Mortgage loans originated (6,531) (29,815)
Maturities or redemptions of fixed maturity investments 81,082 6,697
Sales of fixed maturity available for sale investments 335,298 207,435
Sales of fixed maturity held to maturity investments 54,576 -
Sales of equity securities 101,113 55,076
Sales of other investments 1,118 -
Transfer of cash on disposition of block of insurance business (100,001) -
Repayments from mortgage loans 8,459 13,005
Change in due to brokers (20,515) 2,342
Change in policy loans 3,334 (1,472)
----------- -----------
Net cash used by investing activities (132,111) (32,745)
----------- -----------
Cash flows from financing activities
Receipts credited to policyholder account balances 244,269 198,242
Return of policyholder account balances (184,769) (123,644)
Repayments of notes payable (8,500) (9,156)
Dividends paid (1,000) (1,000)
----------- -----------
Net cash provided by financing activities 50,000 64,442
----------- -----------
Net increase (decrease) in cash and cash equivalents (80,467) 43,388
----------- -----------
Cash and cash equivalents at beginning of period 122,788 68,219
----------- -----------
Cash and cash equivalents at end of period $ 42,321 $ 111,607
=========== ===========
</TABLE>
<PAGE>
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 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 June 30, 2000 and for the
three and six months ended June 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 six months ended June 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 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. 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 six months ended June 30, 2000 and
1999 is as follows:
<TABLE>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net income $ 4,938 $ 4,735 $ 6,401 $ 5,501
Other comprehensive loss (2,102) (9,303) (5) (23,568)
--------- --------- --------- ---------
Comprehensive income (loss) $ 2,836 $ (4,568) $ 6,396 $ (18,067)
========= ========= ========= =========
</TABLE>
Following are the components of net unrealized investment gains (losses) which
comprise accumulated other comprehensive income:
<TABLE>
Six Months
June 30, December 31, Ended
2000 1999 June 30, 2000
---- ---- -------------
<S> <C> <C> <C>
Investment securities:
Fixed maturities available for sale $ (55,347) $ (62,186) $ 6,839
Fixed maturities reclassified from
available for sale to held to maturity 29,485 33,482 (3,997)
Equity securities 41,417 39,981 1,436
---------- ---------- ----------
15,555 11,277 4,278
Effect on other balance sheet accounts 12,698 16,984 (4,286)
Deferred income taxes (9,099) (9,102) 3
---------- ---------- ----------
Net unrealized investment gains $ 19,154 $ 19,159 $ (5)
========== ========== ==========
</TABLE>
<PAGE>
During both the six months ended June 30, 2000 and 1999, the Company paid
dividends to Financial Holding Corporation ("FHC") totaling $1,000.
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 newly-filed
cross-claim by a co-defendant remains 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 school teachers 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.
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
Six months ended June 30,
------------------------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $186,836 $203,428 $27,660 $ 19,520 $2,236 $ 3,225 $8,606 $ 7,538 $225,338 $233,711
Income (loss)
before income 23,408 23,887 4,353 898 463 2,259 (18,447) (19,436) 9,777 7,608
taxes
</TABLE>
<TABLE>
Three months ended June 30,
------------------------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $93,232 $98,186 $14,153 $ 10,638 $703 $ 1,816 $7,068 $ 3,936 $115,156 $114,576
Income (loss)
before income 12,830 14,071 2,741 975 219 1,113 (8,132) (9,282) 7,658 6,877
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>
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
----------------------- ------------------------ ------------------------
Six months ended June 30,
-------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues $186.8 $203.4 $27.7 $19.5 $2.2 $3.2
Income before income taxes 23.4 23.9 4.4 0.9 0.5 2.3
</TABLE>
<TABLE>
Three months ended June 30,
-------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues $93.2 $98.2 $14.2 $10.6 $0.7 $1.8
Income before income taxes 12.8 14.1 2.7 1.0 0.2 1.1
</TABLE>
<PAGE>
Life insurance operations. Income before income taxes for the six months ended
June 30, 2000 was $23.4 million compared to $23.9 million for the six months
ended June 30, 1999. This decrease in profits is primarily due to higher
amortization in 2000 on the closed blocks of annuity business. This higher
amortization was due to higher surrenders in 2000 compared to 1999. This
decrease in profits was offset by lower death benefits, net of reserves for
policy benefits released on traditional death benefits.
Income before income taxes for the three months ended June 30, 2000 was $12.8
million compared to $14.1 million for the three months ended June 30, 1999. This
decrease in profits is due to higher amortization in 2000 on the closed blocks
of annuity business. This amortization was due to higher surrenders in 2000
compared to 1999.
Asset accumulation products operations. Income before income taxes for the six
months ended June 30, 2000 was $4.4 million compared to $0.9 million for the six
months ended June 30, 1999. This increase was due primarily to (i) a $1.4
million increase in surrender charge revenue resulting from higher surrenders in
2000, (ii) a $0.7 million increase in other policy revenues, and (iii) a $0.2
million decrease in death benefits.
Income before income taxes for the three months ended June 30, 2000 were $2.7
million compared to $1.0 million for the three months ended June 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 six and three
month periods ended June 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 six months ended
June 30, 2000 increased $1.0 million from the same period in 1999 due to a (i) a
$2.9 million decrease in advisory and data processing fees paid to FHC and (ii)
a general reduction in the level of operating expenses due to cost controls
implemented in 2000, offset by (iii) a $3.5 million increase in realized
investment losses.
Income before income taxes for the three months ended June 30, 2000 increased
$1.2 million from the same period in 1999 due primarily to a general reduction
in 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 individual income statement
components of this business for the six and three months ended June 30, 1999 (in
millions):
<TABLE>
Six Months Three Months
Ended Ended
June 30, 1999 June 30, 1999
- ------------- -------------
<S> <C> <C>
Premiums and policy revenues $ 7.6 3.7
Net investment income 4.2 2.0
Policyholder benefits 7.0 3.7
Amortization expense 2.1 1.2
</TABLE>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Income before income taxes for the six months ended June 30, 2000 was $9.8
million compared to $7.6 million for the six months ended June 30, 1999.
Excluding the effects of net realized investment losses, income before income
taxes increased $5.7 million for this same period from $9.0 million to $14.7
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.
Premiums and policy revenues. Premiums and policy revenues totaled $112.0
million for the six months ended June 30, 2000 compared to $114.1 million for
the six months ended June 30, 1999. Excluding the effect of the
payroll-deduction business, premiums and policy revenues increased $5.5 million.
Premiums from traditional life insurance business increased $4.2 million for the
six months ended June 30, 2000 compared to the six months ended June 30, 1999.
First year premiums on life insurance sold in the preneed market totaled $7.0
million during 2000. As sales in this market began in the fourth quarter of
1999, there were no comparable premiums in the six months ended June 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 $1.3
million from 1999 to 2000. This increase was primarily due to a $2.2 million
increase in policy revenues, of which the majority relates to surrender charge
revenue, from the Company's asset accumulation business and an increase of $1.3
million in surrender charges from a closed block of annuity business, offset by
a decrease in administrative charges on the Company's universal life business of
$3.0 million.
Net investment income. Net investment income totaled $113.1 million for the six
months ended June 30, 2000 compared to $117.8 million for the six months ended
June 30, 1999. Net investment income decreased due to (i) the transfer of the
invested assets supporting the payroll-deduction business which was sold
effective January 1, 2000, and (ii) a $2.3 million decrease in net investment
income on investments held by the Reinsurer, offset by (iii) an increase in net
investment income on the Company's remaining bond portfolio, (iv) a $0.6 million
increase in mortgage loan net investment income, and (v) a $0.9 million increase
in net investment income related to a reduction in the unrecovered ceding
commission due to the Reinsurer.
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 $203.5 million in 1999 to
$227.1 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
$3.0 million decrease in net investment income on a closed block of annuity
business. The decrease in investment income and the associated $2.3 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 $4.9
million for the six months ended June 30, 2000 compared to net realized
investment losses of $1.4 million for the six months ended June 30, 1999. In
2000, the Company realized losses of $1.9 million on common stocks and losses of
$3.4 million on fixed maturity investments. Offsetting these losses were $0.4
million of realized gains related to real estate ventures. In 1999, the Company
realized losses of $2.8 million on common stock, offset by realized gains of
$1.4 million on fixed maturity investments.
Included in 2000 and 1999 realized investment losses were $3.5 and $0.6 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
Policyholder benefits. Policyholder benefits totaled $134.8 million for the six
months ended June 30, 2000 compared to $133.7 million for the six months ended
June 30, 1999. Excluding the effect of the payroll-deduction business,
policyholder benefits increased $8.1 million. This increase resulted from a (i)
$5.0 million increase in interest credited on universal life and annuity fund
balances, (ii) a $2.9 million increase in other policyholder benefits, and (iii)
a $3.4 million decrease in reserve reduction, offset by a (iv) $3.2 million
decrease in death benefits.
Interest credited on fund balances increased $6.8 million due to increased fund
values related to the asset accumulation business. This increase was partially
offset by a $2.3 million decrease 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 a closed block
of traditional life business. The reserve reduction decrease in 2000 was
primarily due to increased traditional life premiums. The decrease in death
benefits was offset by a $0.7 million reduction in reserves for future policy
benefits released on traditional life insurance death benefits.
Amortization expense. Amortization expense totaled $33.8 million for the six
months ended June 30, 2000 compared to $36.1 million for the six months ended
June 30, 1999. Excluding the effect of the payroll-deduction business,
amortization expense decreased $0.2 million. Amortization expense related to the
Company's universal life insurance business decreased $2.7 million. This
decrease was due primarily to decreased administrative charges on this block of
business. Offsetting this decrease was a $2.7 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.
Other operating expenses. Other operating expenses totaled $36.4 million for the
six months ended June 30, 2000 compared to $44.7 million for the six months
ended June 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, resulting in a $2.9 million decrease in other operating expenses 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 decreased
operating expenses by $3.4 million during 2000 compared to 1999.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Income before income taxes for the three months ended June 30, 2000 was $7.7
million compared to $6.9 million for the three months ended June 30, 1999.
Excluding the effects of net realized investment gains and losses, income before
income taxes decreased $0.9 million for this same period from $8.2 million to
$7.3 million. The primary reasons for the decrease in profit from 1999 to 2000
were (i) lower investment income from non-life insurance subsidiaries, offset by
(ii) lower operating expenses resulting from cost controls implemented in 2000.
Premiums and policy revenues. Premiums and policy revenues totaled $55.8 million
for the three months ended June 30, 2000 compared to $55.0 million for the three
months ended June 30, 1999. Excluding the effect of the payroll-deduction
business, premiums and policy revenues increased $4.5 million. Premiums from
traditional life insurance business increased $1.4 million for the three months
ended June 30, 2000 compared to the three months ended June 30, 1999. First year
premiums on life insurance sold in the preneed market totaled $3.4 million
during 2000. As sales in this market began in the fourth quarter of 1999, there
were no comparable premiums in the three months ended June 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 $3.7
million from 1999 to 2000. This increase was primarily due to (i) a $1.3 million
increase in administrative charges on the Company's universal life business,
(ii) a $0.7 million increase in policy revenues, of which the majority relates
to surrender charge revenue, from the Company's asset accumulation business, and
(iii) an increase of $1.1 million in surrender charges from a closed block of
annuity business.
Net investment income. Net investment income totaled $55.5 million for the three
months ended June 30, 2000 compared to $59.4 million for the three months ended
June 30, 1999. Net investment income decreased due to (i) investment income on
assets transferred which support the payroll-deduction business sold effective
January 1, 2000, and (ii) a $1.2 million decrease in net investment income on
investments held by the Reinsurer offset by (iii) an increase in net investment
income on the Company's remaining bond portfolio, (iv) a $0.3 million increase
in mortgage loan net investment income, and (v) a $0.6 million increase in net
investment income related to a reduction in the unrecovered ceding commission
due to the Reinsurer.
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 $201.8 million in 1999 to
$226.8 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
$1.4 million decrease in net investment income on a closed block of annuity
business. The decrease in investment income and the associated $1.2 million
decrease of interest credited on the policyholder fund values resulted from
lower aggregate fund values.
Net realized investment gains ( losses). Net realized investment gains totaled
$0.4 million for the three months ended June 30, 2000 compared to net realized
investment losses of $1.3 million for the three months ended June 30, 1999. In
2000, the Company realized losses of $1.0 million on common stocks offset by
gains of $1.4 million on fixed maturity investments. In 1999, the Company
realized losses of $2.4 million on common stock, offset by realized gains of
$1.1 million on fixed maturity investments.
Included in 2000 and 1999 realized investment gains (losses) were $1.1 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.
Policyholder benefits. Policyholder benefits totaled $66.4 million for the three
months ended June 30, 2000 compared to $63.5 million for the three months ended
June 30, 1999. Excluding the effect of the payroll-deduction business,
policyholder benefits increased $6.6 million. This increase resulted from a (i)
a $3.4 million increase in interest credited on universal life and annuity fund
balances, (ii) a $2.0 million increase in other policyholder benefits, and (iii)
a $2.0 million decrease in reserve reduction, offset by a (iv) $0.8 million
decrease in death benefits.
Interest credited on fund balances increased $4.3 million due to increased
assets related to the asset accumulation business. This increase was partially
offset by a $1.2 million decrease 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 decrease in 2000 was primarily
due to increased traditional life premiums. The decrease in death benefits was
offset by a $0.7 million reduction in reserves for future policy benefits
released on traditional life insurance death benefits.
Amortization expense. Amortization expense totaled $17.0 million for the three
months ended June 30, 2000 compared to $17.2 million for the three months ended
June 30, 1999. Excluding the effect of the payroll-deduction business,
amortization expense increased $1.0 million. Amortization expense related to a
closed block of annuity business increased $2.0 million. The increase was offset
by a $0.8 million decrease in amortization on the Company's universal life
insurance business.
Other operating expenses. Other operating expenses totaled $19.0 million for the
three months ended June 30, 2000 compared to $21.6 million for the three months
ended June 30, 1999.
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 decreased operating expenses
by $1.1 million during 2000 compared to 1999.
FINANCIAL CONDITION AND LIQUIDITY
The changes occurring in the Company's consolidated balance sheet from December
31, 1999 to June 30, 2000 primarily reflect the normal operations of the
Company's life insurance subsidiaries.
The quality of the Company's investment in fixed maturity investments at June
30, 2000 remained consistent with December 31, 1999. Non-investment grade
securities totaled less than 3% of the Company's total fixed maturity
investments at June 30, 2000. The Company has not made any significant changes
to its investment philosophy during 2000.
The Company's net unrealized investment gains at June 30, 2000 were comparable
to December 31, 1999. A $2.8 million increase in the gross unrealized investment
gains on the Company's fixed maturity investment securities due to a market
value increase and a $1.5 million increase in the gross unrealized investment
gains on equity securities were offset by a $4.3 million decrease of the effect
on other balance sheet accounts. The components of the change during the six
months ended June 30, 2000 were (in millions):
<TABLE>
<S> <C>
Gross unrealized investment gains $ 4.3
Effect on insurance assets and liabilities (4.3)
Deferred income tax effect -
-------
$ -
</TABLE>
During the three months ended June 30, 2000, the Company's life insurance
subsidiaries purchased $8.5 million of the Company's outstanding senior
subordinated notes.
During the three months ended June 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 report on Form 10-Q for the quarter ended
March 31, 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. 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 and set it for trial on October 30, 2000. 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. Defendants have petitioned for review by
the California Supreme Court.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The quantitative and qualitative disclosures about market risk are contained in
the "Financial Condition and Liquidity" section of Management's Discussion and
Analysis of Financial Condition and Results of Operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Restated Articles of Incorporation, as amended, of the Registrant
(incorporated by reference from Exhibit 3.1 to Registrant's Form S-4
[File No. 33-64820] filed June 22, 1993).
3.2 Bylaws, as amended, of the Registrant (incorporated by reference from
Exhibit 3.2 to Registrant's Form S-4 [File No. 33-64820] filed June 22,
1993).
27 Financial Data Schedule.
------------ ----------------- ------------------------------------------------
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months ended June 30,
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: August 11, 2000
