SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 1-13654
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LIBERTY FINANCIAL COMPANIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3260640
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
600 Atlantic Avenue, Boston, Massachusetts 02210-2214
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(Address of principal executive offices) (Zip Code)
(617) 722-6000
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(Registrant's telephone number, including area code)
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(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. [ X ] Yes [ ] No
There were 29,384,398 shares of the registrant's Common Stock, $.01 par
value, and 327,006 shares of the registrant's Series A Convertible Preferred
Stock, $.01 par value, outstanding as of July 31, 1997.
Exhibit Index - Page 25 Page 1 of 28
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
QUARTERLY REPORT ON FORM 10-Q FOR PERIOD ENDED JUNE 30, 1997
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996
Consolidated Income Statements for the Three Months and
Six Months Ended June 30, 1997 and 1996
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1997 and 1996
Consolidated Statement of Stockholders' Equity for the
Six Months Ended June 30, 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Part II. OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
<PAGE>
<TABLE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(in millions)
<CAPTION>
June 30 December 31
1997 1996
----------- -----------
Unaudited
ASSETS
<S> <C> <C>
Assets:
Investments $12,032.6 $11,537.9
Cash and cash equivalents 1,309.6 875.8
Accrued investment income 163.0 146.8
Deferred policy acquisition costs 253.3 250.4
Value of insurance in force 65.7 70.8
Deferred distribution costs 109.8 114.4
Intangible assets 201.6 205.4
Other assets 122.7 134.7
Separate account assets 1,171.1 1,091.5
--------- ---------
$15,429.4 $14,427.7
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policyholder balances $11,942.0 $11,637.5
Notes payable to affiliates 229.0 229.0
Payable for investments purchased and
loaned 738.5 211.2
Other liabilities 269.3 267.1
Separate account liabilities 1,117.6 1,017.7
--------- ---------
Total liabilities 14,296.4 13,362.5
--------- ---------
Series A redeemable convertible preferred
stock, par value $.01; authorized, issued and
outstanding 327,006 shares in 1997 and
327,340 shares in 1996 14.2 13.8
--------- ---------
Stockholders' Equity:
Common stock, par value $.01; authorized
100,000,000 shares, issued and outstanding
29,118,449 shares in 1997 and 28,705,015
shares in 1996 0.3 0.3
Additional paid-in capital 847.6 835.3
Net unrealized investment gains 76.6 74.4
Retained earnings 196.9 141.4
Unearned compensation (2.6) 0.0
--------- ---------
Total stockholders' equity 1,118.8 1,051.4
--------- ---------
$15,429.4 $14,427.7
========= =========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED INCOME STATEMENTS
(in millions, except share and per share data)
Unaudited
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Investment income $ 212.2 $ 189.8 $ 420.2 $ 379.0
Interest credited to
policyholders (147.2) (136.2) (294.5) (274.3)
---------- ----------- ----------- ----------
Investment spread 65.0 53.6 125.7 104.7
---------- ----------- ----------- ----------
Net realized investment gains
(losses) 3.1 (1.7) 16.0 2.1
---------- ----------- ----------- ----------
Fee income:
Investment advisory and
administrative fees 52.6 48.8 105.7 95.2
Distribution and service fees 11.9 11.1 24.0 21.7
Transfer agency fees 11.5 10.8 23.3 21.2
Surrender charges and net
commissions 9.0 9.4 17.5 17.1
Separate account fees 4.1 3.6 8.0 7.1
---------- ----------- ----------- ----------
Total fee income 89.1 83.7 178.5 162.3
---------- ----------- ----------- ----------
Expenses:
Operating expenses (75.6) (67.8) (151.4) (133.7)
Amortization of deferred policy
acquisition costs (19.4) (14.9) (35.7) (29.0)
Amortization of deferred
distribution costs (8.7) (7.4) (16.9) (14.2)
Amortization of value of
insurance in force (1.9) (1.9) (5.1) (3.6)
Amortization of intangible assets (3.3) (4.6) (6.5) (8.3)
Interest expense, net (4.4) (5.0) (8.9) (10.0)
---------- ----------- ----------- ----------
Total expenses (113.3) (101.6) (224.5) (198.8)
---------- ----------- ----------- ----------
Pretax income 43.9 34.0 95.7 70.3
Income tax expense (13.9) (10.9) (30.7) (23.4)
---------- ----------- ----------- ----------
Net income $ 30.0 $ 23.1 $ 65.0 $ 46.9
========== =========== =========== ==========
Net income per share $ 0.97 $ 0.77 $ 2.11 $ 1.58
========== =========== =========== ==========
Common stock and common stock
equivalents 30,630,884 29,611,394 30,564,803 29,436,900
========== ========== ========== ==========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Unaudited
<CAPTION>
Six Months Ended
June 30
----------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 65.0 $ 46.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 35.9 32.0
Interest credited to policyholders 294.5 274.3
Net realized investment gains (16.0) (2.1)
Net amortization on investments 16.3 2.2
Change in deferred policy acquisition costs (5.2) (9.8)
Net change in other assets and liabilities, net of
effect of acquisitions (9.1) (53.5)
-------- --------
Net cash provided by operating activities 381.4 290.0
-------- --------
Cash flows from investing activities:
Investments purchased available for sale (2,225.3) (1,315.9)
Investments sold available for sale 975.7 478.7
Investments matured available for sale 969.7 680.0
Change in policy loans, net (13.8) (13.5)
Change in mortgage loans, net 3.4 4.0
Acquisitions, net of cash acquired 0.0 (7.1)
-------- --------
Net cash used in investing activities (290.3) (173.8)
-------- --------
Cash flows from financing activities:
Withdrawals from policyholder accounts (631.8) (548.2)
Deposits to policyholder accounts 507.6 572.1
Securities lending 478.8 90.1
Change in revolving credit facility (12.5) 0.0
Exercise of stock options 2.7 1.2
Dividends paid (2.1) (1.9)
-------- --------
Net cash provided by financing activities 342.7 113.3
-------- --------
Increase in cash and cash equivalents 433.8 229.5
Cash and cash equivalents at beginning of period 875.8 875.3
-------- --------
Cash and cash equivalents at end of period $1,309.6 $1,104.8
======== ========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in millions)
Unaudited
<CAPTION>
Net
Additional Unrealized Total
Common Paid-In Investment Retained Unearned Stockholders'
Stock Capital Gains Earnings Comp. Equity
------- --------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December
31, 1996 $0.3 $835.3 $74.4 $141.4 $ 0.0 $1,051.4
Proceeds from
exercise of
stock options 0.0 2.7 0.0 0.0 0.0 2.7
Unearned
compensation 0.0 2.6 0.0 0.0 (2.6) 0.0
Accretion to
face value of
preferred stock 0.0 0.0 0.0 (0.4) 0.0 (0.4)
Common stock
dividends 0.0 7.0 0.0 (8.6) 0.0 (1.6)
Preferred
stock dividends 0.0 0.0 0.0 (0.5) 0.0 (0.5)
Change in net
unrealized
investment gains 0.0 0.0 2.2 0.0 0.0 2.2
Net income 0.0 0.0 0.0 65.0 0.0 65.0
---- ------ ----- ------ ----- --------
Balance,
June 30, 1997 $0.3 $847.6 $76.6 $196.9 $(2.6) $1,118.8
==== ====== ===== ====== ===== ========
See accompanying notes.
</TABLE>
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
1. General
The accompanying unaudited consolidated financial statements include all
adjustments, consisting of normal recurring accruals, that management
considers necessary for a fair presentation of the Company's financial
position and results of operations as of and for the interim periods
presented. Certain footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Therefore, these
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements contained in the Company's 1996
Annual Report to Stockholders. The results of operations for the three months
and six months ended June 30, 1997 are not necessarily indicative of the
results to be expected for the full year. Certain prior period amounts in the
accompanying unaudited consolidated income statements have been reclassified
to conform to the current period presentation.
2. Industry Segment Information
The Company is an asset accumulation and management company which operates
in two industry segments: retirement-oriented insurance (principally
annuities) and asset management. The annuity insurance business is conducted
at Keyport Life Insurance Company ("Keyport"). Keyport generates investment
spread income from the investment portfolio which supports policyholder
balances associated with its fixed and indexed annuity business and its
closed block of single premium whole life insurance. The annuity insurance
business also derives fee income from the administration of fixed, indexed
and variable annuity contracts. The asset management business is conducted
principally at The Colonial Group, Inc. ("Colonial"), an investment advisor,
distributor and transfer agent to mutual funds, Stein Roe & Farnham
Incorporated ("Stein Roe"), a diversified investment advisor, Newport Pacific
Management, Inc. ("Newport"), an investment advisor to mutual funds and
institutional accounts specializing in Asian equity markets, and Liberty
Asset Management Company ("LAMCO"), an investment advisor to mutual funds.
The asset management business derives fee income from investment products and
services.
Approximately 65% of the Company's income before interest expense,
amortization of intangible assets, net realized gains or losses and income
taxes for the six months ended June 30, 1997 was attributable to the
Company's annuity insurance business, with the remaining 35% attributable to
the Company's asset management activities. This compares to approximately 60%
and 40%, respectively, during the year earlier period.
3. Investments
Investments, all of which pertain to the Company's annuity insurance
operations, were comprised of the following (in millions):
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
----------- -----------
<S> <C> <C>
Fixed maturities $11,051.4 $10,718.6
Mortgage loans 63.6 67.0
Policy loans 546.6 532.8
Other invested assets 330.1 183.6
Equity securities 40.9 35.9
--------- ---------
Total $12,032.6 $11,537.9
========= =========
</TABLE>
The Company's general investment policy is to hold fixed maturity assets
for long-term investment and, accordingly, the Company does not have a
trading portfolio. To provide for maximum portfolio flexibility and enable
appropriate tax planning, the Company classifies its entire fixed maturities
investments as "available for sale" which are carried at estimated fair
value.
4. Other Financial Instruments
As a component of its investment strategy and to reduce its exposure to
interest rate risk, the Company utilizes interest rate swap agreements ("swap
agreements") and interest rate cap agreements ("cap agreements") to match
assets more closely to liabilities. Swap agreements are agreements to
exchange with a counterparty interest rate payments of differing character
(e.g., fixed-rate payments exchanged for variable-rate payments) based on an
underlying principal balance (notional principal) to hedge against interest
rate changes. The Company currently utilizes swap agreements to reduce asset
duration and to better match interest rates earned on longer-term fixed rate
assets with interest rates credited to policyholders. The Company had 43
outstanding swap agreements with an aggregate notional principal amount of
$2.4 billion and 39 outstanding swap agreements with an aggregate notional
principal amount of $2.3 billion, as of June 30, 1997 and December 31, 1996,
respectively.
Cap agreements are agreements with a counterparty which require the
payment of a premium for the right to receive payments for the difference
between the cap interest rate and a market interest rate on specified future
dates based on an underlying principal balance (notional principal) to hedge
against rising interest rates. The Company had interest rate cap agreements
with an aggregate notional amount of $450.0 million as of June 30, 1997 and
December 31, 1996.
With respect to the Company's equity-indexed annuity, the Company buys
call options on the Standard & Poor's 500 Composite Stock Index ("S&P 500
Index") to hedge its obligation to provide returns based upon this index. The
Company had call options with a book value of $241.3 million and $109.6
million as of June 30, 1997 and December 31, 1996, respectively.
Hedge accounting is applied after the Company determines that the items
to be hedged expose it to interest rate or price risk, designates the
instruments as hedges, and assesses whether the instruments reduce the
indicated risks through the measurement of changes in the value of the
instruments and the items being hedged at both inception and throughout the
hedge period. From time to time, interest rate swap agreements, cap
agreements, and call options are terminated. If the terminated position was
accounted for as a hedge, realized gains or losses are deferred and amortized
over the remaining lives of the hedged assets or liabilities. Conversely, if
the terminated position was not accounted for as a hedge, or the assets and
liabilities that were hedged no longer exist, the position is "marked to
market," and realized gains or losses are immediately recognized in income.
The net differential to be paid or received on interest rate swap
agreements is recognized as a component of net investment income. Premiums
paid for interest rate cap agreements are deferred and amortized to net
investment income on a straight-line basis over the terms of the agreements.
The unamortized premium is included in other invested assets. Amounts earned
on interest rate cap agreements are recorded as an adjustment to net
investment income. Interest rate swap agreements and cap agreements hedging
investments designated as available for sale are adjusted to fair value with
the resulting unrealized gains and losses included in stockholders' equity.
Premiums paid on call options are amortized to net investment income over
the terms of the contracts. The call options are included in other invested
assets and are carried at amortized cost plus intrinsic value, if any, of the
call options as of the valuation date. Changes in intrinsic value of the call
options are recorded as an adjustment to interest credited to policyholders.
There are risks associated with some of the techniques the Company uses
to match its assets and liabilities. The primary risk associated with swap,
cap, and call option agreements is the risk associated with counterparty
nonperformance. The Company believes that the counterparties to its swap,
cap, and call option agreements are financially responsible and that the
counterparty risk associated with these transactions is minimal.
5. Unearned Compensation
Under the Company's 1995 Stock Incentive Plan, certain key employees were
granted a total of 61,000 restricted shares of Common Stock on May 14, 1997.
Holders of restricted stock have all the rights of other shareholders,
subject to certain restrictions and forfeiture provisions. Restrictions on
the shares expire no more than six years after the date of award, or earlier
if certain stock price targets are met.
Unearned compensation of $2.6 million was recorded at the date of award
based on the market value of the shares. Unearned compensation, which is
shown as a separate component of stockholders' equity, is being amortized to
expense over a period of four years.
6. Net Income Per Share
Net income per share is calculated by dividing applicable net income by
the weighted average number of shares of common stock outstanding during each
period, adjusted for the incremental shares attributable to common stock
equivalents. Common stock equivalents consist primarily of outstanding
employee stock options. In calculating net income per share, net income is
reduced by convertible preferred stock dividend requirements. Such preferred
stock earns cumulative dividends at the annual rate of $2.875 per share and
is redeemable at the option of the Company, subject to certain conditions,
anytime after March 24, 1998. At the time of issuance, the convertible
preferred stock was determined not to be a common stock equivalent.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"), which is required to be adopted for periods ending after
December 15, 1997. SFAS 128 replaces primary and fully diluted earnings per
share with basic and diluted earnings per share. Basic earnings per share is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share is computed similarly to fully diluted earnings per share.
Assuming that SFAS 128 had been implemented, basic earnings per share would
have been $1.03 and $0.81 for the second quarters of 1997 and 1996,
respectively. For the first six months of 1997 and 1996, basic earnings per
share would have been $2.23 and $1.66, respectively. The calculation of
diluted earnings per share under SFAS 128 for each of these periods would not
materially differ from the calculation of fully diluted earnings per share.
7. Recent Accounting Proposal
In June 1996, FASB issued an exposure draft of an accounting standard
entitled "Accounting for Derivative and Similar Financial Instruments and for
Hedging Activities." This exposure draft, if adopted in the form in which it
was issued, would require companies to report derivatives on the balance
sheet at fair value with changes in fair value recorded in income or equity.
The exposure draft also would change the accounting for derivatives used in
hedging strategies from traditional deferral accounting to a current
recognition approach which could impact a company's income statement and
balance sheet and expand the definition of a derivative instrument.
Management expects that this accounting standard, in whatever form, will not
be effective until 1999. FASB's Rules of Procedure require that, prior to
approving a new accounting standard, extensive "due process" be followed.
FASB requests written comments from interested parties on an exposure draft
and also may hold public hearings. This exposure draft has drawn criticism
primarily because the required accounting treatment would not match the
perceived economic effect of such hedging strategies. As a result of, among
other things, the concerns and criticisms in comment letters and at public
hearings held on this exposure draft, the Company is unable to predict the
form that the final accounting standard, if adopted, may take and believes it
would be inappropriate to speculate on the effects of any such adoption at
this time.
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Net Income was $30.0 million or $0.97 per share for the quarter ended June
30, 1997 compared to $23.1 million or $0.77 per share for the quarter ended June
30, 1996. For the first six months of 1997, net income was $65.0 million or
$2.11 per share compared to $46.9 million or $1.58 per share for the first six
months of 1996. These increases resulted from higher investment spread and
higher fee income. In addition, the six month 1997 period included higher net
realized investment gains. The quarter ended June 30, 1997 included net realized
investment gains of $3.1 million compared to net realized investment losses of
$1.7 million for the quarter ended June 30, 1996. Partially offsetting these
items were increased operating expenses, amortization expense related to
deferred policy acquisition costs and deferred distribution costs, and income
tax expense.
Pretax Income was $43.9 million for the quarter ended June 30, 1997 compared
to $34.0 million for the quarter ended June 30, 1996. For the first six months
of 1997, pretax income was $95.7 million compared to $70.3 million for the first
six months of 1996. These increases resulted from higher investment spread,
higher fee income, and higher net realized investment gains. Partially
offsetting these increases were the higher operating and amortization expenses
referred to above.
Investment Spread is the amount by which investment income earned on the
Company's investments exceeds interest credited on policyholder balances.
Investment spread was $65.0 million for the quarter ended June 30, 1997 compared
to $53.6 million for the quarter ended June 30, 1996. The amount by which the
average yield on investments exceeds the average interest credited rate on
policyholder balances is the investment spread percentage. The investment spread
percentage for the quarter ended June 30, 1997 was 1.98% compared to 1.90% for
the quarter ended June 30, 1996. For the first six months of 1997, investment
spread was $125.7 million compared to $104.7 million for the first six months of
1996. The investment spread percentage was 1.95% for the first six months of
1997 compared to 1.86% for the first six months of 1996.
Investment income was $212.2 million for the quarter ended June 30, 1997
compared to $189.8 million for the quarter ended June 30, 1996. The increase of
$22.4 million in 1997 compared to 1996 primarily relates to a $28.0 million
increase as a result of the higher level of invested assets, partially offset by
a $5.6 million decrease resulting from a lower average investment yield. The
average investment yield was 6.97% for the quarter ended June 30, 1997 compared
to 7.19% for the quarter ended June 30, 1996. For the first six months of 1997,
investment income was $420.2 million compared to $379.0 million for the first
six months of 1996. The increase of $41.2 million in 1997 compared to 1996
primarily relates to a $55.5 million increase as a result of the higher level of
average invested assets, partially offset by a $14.3 million decrease resulting
from a lower average investment yield. The average investment yield was 6.96%
for the first six months of 1997 compared to 7.23% for the first six months of
1996.
Interest credited to policyholders totaled $147.2 million for the quarter
ended June 30, 1997 compared to $136.2 million for the quarter ended June 30,
1996. The increase of $11.0 million in 1997 compared to 1996 primarily relates
to an $18.8 million increase as a result of a higher level of average
policyholder balances, partially offset by a $7.8 million decrease resulting
from a lower average interest credited rate. Policyholder balances averaged
$11.8 billion for the quarter ended June 30, 1997 compared to $10.3 billion for
the quarter ended June 30, 1996. The average interest credited rate was 4.99%
for the quarter ended June 30, 1997 compared to 5.29% for the quarter ended June
30, 1996. For the first six months of 1997, interest credited was $294.5 million
compared to $274.3 million for the first six months of 1996. The increase of
$20.2 million in 1997 compared to 1996 primarily relates to a $38.4 million
increase as a result of a higher level of average policyholder balances,
partially offset by an $18.2 million decrease resulting from a lower average
interest credited rate. Policyholder balances averaged $11.7 billion for the
first six months of 1997 compared to $10.2 billion for the first six months of
1996. The average interest credited rate was 5.01% for the first six months of
1997 compared to 5.37% for the first six months of 1996.
Average Investments (computed without giving effect to SFAS 115), including a
portion of the Company's cash and cash equivalents, were $12.2 billion for the
quarter ended June 30, 1997 compared to $10.6 billion for the quarter ended June
30, 1996. For the first six months of 1997, such average investments were $12.1
billion compared to $10.5 billion for the first six months of 1996. These
increases primarily relate to a 100 percent coinsurance agreement with respect
to a $954.0 million block of single premium deferred fixed annuities ("SPDAs")
entered into with Fidelity & Guaranty Life Insurance Company ("F&G Life") during
the third quarter of 1996 and the investment of portfolio earnings for the
twelve months ended June 30, 1997 of $0.8 billion. Under the F&G Life
transaction, the investment risk of the policies was transferred to Keyport,
while F&G Life continues to administer the policies.
Net Realized Investment Gains were $3.1 million for the quarter ended June
30, 1997 compared to net realized investment losses of $1.7 million for the
quarter ended June 30, 1996. For the first six months of 1997, net realized
investment gains were $16.0 million compared to $2.1 million for the first six
months of 1996. Sales of fixed maturity investments generally are made to
maximize total return. The net realized investment gains in 1997 included gains
on the sales of fixed maturity investments of $8.1 million and gains on
redemption of seed money investments in separate account mutual funds sponsored
by the Company of $7.4 million. In addition, there were $0.5 million in gains
related to sales of general corporate securities in the Company's asset
management operations. The net realized investment gains in 1996 were
attributable to sales of fixed maturity investments.
Investment Advisory and Administrative Fees are based on the market value of
assets managed for mutual funds, wealth management and institutional investors.
Investment advisory and administrative fees were $52.6 million for the quarter
ended June 30, 1997 compared to $48.8 million for the quarter ended June 30,
1996. For the first six months of 1997, investment advisory and administrative
fees were $105.7 million compared to $95.2 million for the first six months of
1996. The increase in 1997 compared to 1996 primarily reflects a higher level of
average fee-based assets under management.
Average fee-based assets under management were $36.1 billion for the quarter
ended June 30, 1997 compared to $33.4 billion for the quarter ended June 30,
1996. For the first six months of 1997, average fee-based assets were $36.1
billion compared to $33.0 billion for the first six months of 1996. These
increases during 1997 compared to 1996 resulted primarily from market
appreciation of $3.3 billion and net sales of $0.3 billion for the twelve months
ended June 30, 1997. Investment advisory and administrative fees were 0.58% of
average fee-based assets under management for the quarters ended June 30, 1997
and 1996. For the first six months of 1997 and 1996, such amounts were 0.59% and
0.58%, respectively. This increase in the effective fee rate in 1997 was
primarily due to the increased proportion of assets under management in funds
with relatively higher fees.
The amount of fee-based assets under management is affected by product sales
and redemptions and by changes in the market values of such assets under
management. Fee-based assets under management and changes in such assets are set
forth in the tables below (in billions).
<TABLE>
Fee-Based Assets Under Management
<CAPTION>
As of June 30
-------------
1997 1996
---- ----
<S> <C> <C>
Mutual Funds:
Intermediary-distributed $16.3 $15.6
Direct-marketed 6.9 6.1
Closed-end 2.1 1.9
Variable annuity 1.2 1.0
----- -----
26.5 24.6
Wealth Management 6.0 4.7
Institutional 5.0 4.6
----- -----
Total Fee-Based Assets Under Management* $37.5 $33.9
===== =====
- --------------
* As of June 30, 1997 and 1996, Keyport's insurance assets of $12.5 billion and
$10.8 billion, respectively, bring total assets under management to $50.0
billion and $44.7 billion, respectively.
</TABLE>
<TABLE>
Changes in Fee-Based Assets Under Management
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Fee-based assets under management - beginning $34.8 $32.7 $35.9 $31.9
Sales and reinvestments 1.4 2.0 3.3 3.9
Redemptions and withdrawals (1.4) (1.4) (3.5) (2.7)
Acquisitions 0.0 0.3 0.0 0.4
Market appreciation 2.7 0.3 1.8 0.4
----- ----- ----- -----
Fee-based assets under management - ending $37.5 $33.9 $37.5 $33.9
===== ===== ===== =====
</TABLE>
Distribution and Service Fees are based on the market value of the Company's
intermediary-distributed mutual funds. Distribution fees of 0.75% are earned on
the average assets attributable to such funds sold with contingent deferred
sales charges, and service fees of 0.25% (net of amounts passed on to selling
brokers) are earned on the total of such average mutual fund assets. These fees
totaled $11.9 million for the quarter ended June 30, 1997 compared to $11.1
million for the quarter ended June 30, 1996. For the first six months of 1997,
distribution and service fees were $24.0 million compared to $21.7 million for
the first six months of 1996. These increases in 1997 compared to 1996 were
primarily attributable to the higher asset levels of mutual funds with
contingent deferred sales charges. As a percentage of the corresponding weighted
average assets, distribution and service fees approximated 0.70% and 0.69% for
the quarters ended June 30, 1997 and 1996, respectively. For the first six
months of 1997 and 1996, such percentages were 0.70% and 0.69%, respectively.
Transfer Agency Fees are based on the market value of assets managed in the
Company's intermediary-distributed and direct-marketed mutual funds. Such fees
were $11.5 million on average assets of $23.5 billion for the quarter ended June
30, 1997 and $10.8 million on average assets of $22.4 billion for the quarter
ended June 30, 1996. For the first six months of 1997, transfer agency fees were
$23.3 million on average assets of $23.7 billion and $21.2 million on average
assets of $22.1 billion for the first six months of 1996. These increases in
1997 compared to 1996 were primarily due to higher average assets in
direct-marketed mutual funds. As a percentage of average mutual fund assets
under management, transfer agency fees were approximately 0.20% and 0.19% for
the quarters ended June 30, 1997 and 1996, respectively. For the first six
months of 1997 and 1996, such percentages were 0.20% and 0.19%, respectively.
Surrender Charges and Net Commissions are revenues earned on: a) the early
withdrawal of fixed, indexed and variable annuity policyholder balances, and
redemptions of the broker-distributed mutual funds which were sold with
contingent deferred sales charges; b) the distribution of the Company's
broker-distributed mutual funds (net of the substantial portion of such
commissions that is passed on to the selling brokers); and c) the sales of
non-proprietary products in the Company's bank marketing businesses (net of such
commissions that are paid to the Company's client banks and brokers). Total
surrender charges and net commissions were $9.0 million for the quarter ended
June 30, 1997 compared to $9.4 million for the quarter ended June 30, 1996. For
the first six months of 1997, total surrender charges and net commissions were
$17.5 million compared to $17.1 million for the first six months of 1996.
Surrender charges on fixed, indexed and variable annuity withdrawals
generally are assessed at declining rates applied to policyholder withdrawals
during the first five to seven years of the contract; contingent deferred sales
charges on mutual fund redemptions are assessed at declining rates on amounts
redeemed during the first six years. Such charges totaled $5.3 million for the
quarter ended June 30, 1997 and $5.0 million for the quarter ended June 30,
1996. For the first six months of 1997, surrender charges were $10.1 million
compared to $9.9 million for the first six months of 1996. Total fixed, indexed
and variable annuity withdrawals represented 10.9% and 10.8% of the total
average annuity policyholder and separate account balances for the quarters
ended June 30, 1997 and 1996, respectively. For the first six months of 1997 and
1996, the corresponding percentages were 11.0% and 10.3%, respectively. The
percentage increases in the three month and six month 1997 periods were
primarily attributable to surrenders of annuities acquired in the F&G Life
transaction; excluding these surrenders, the withdrawal percentages in 1997 were
9.9% and 9.7%, respectively.
Net commissions were $3.7 million for the quarter ended June 30, 1997
compared to $4.4 million for the quarter ended June 30, 1996. The decrease of
$0.7 million in 1997 compared to 1996 resulted largely from a $0.4 million
decrease related to lower sales of Colonial A-Shares. For the first six months
of 1997, net commissions were $7.4 million compared to $7.2 million for the
first six months of 1996. The increase of $0.2 million in 1997 compared to 1996
resulted largely from higher net commissions for the Company's bank marketing
businesses of $1.3 million primarily attributable to the acquisition of
Independent Holdings, Inc. ("Independent") in March 1996 offset by a $0.9
million decrease related to lower sales of Colonial A-Shares.
Separate Account Fees are primarily mortality and expense charges earned on
variable annuity and variable life policyholder balances. These fees, which are
based on the market values of the assets supporting the contracts in separate
accounts, were $4.1 million for the quarter ended June 30, 1997 compared to $3.6
million for the quarter ended June 30, 1996. Such fees represented 1.50% and
1.52%, respectively, of average variable annuity and variable life separate
account balances. For the first six months of 1997, separate account fees were
$8.0 million compared to $7.1 million for the first six months of 1996. Such
fees represented 1.52% of average variable annuity and variable life separate
account balances in both 1997 and 1996.
Operating Expenses primarily represent compensation, marketing, and other
general and administrative expenses. These expenses were $75.6 million for the
quarter ended June 30, 1997 compared to $67.8 million for the quarter ended June
30, 1996. The increase in 1997 compared to 1996 was primarily due to increases
in compensation of $5.2 million and in marketing expenses of $1.4 million
relating to mutual fund sales. Operating expenses expressed as a percent of
average total assets under management were 0.63% for the quarter ended June 30,
1997 compared to 0.62% for the quarter ended June 30, 1996. For the first six
months of 1997, operating expenses were $151.4 million compared to $133.7
million for the first six months of 1996. The increase in 1997 compared to 1996
was primarily due to increases in compensation of $11.5 million, in marketing
expenses of $2.0 million relating to mutual fund sales and to the acquisition of
Independent which increased operating expenses by $1.7 million, partially offset
by a first quarter 1996 $1.9 million restructuring charge related to the
consolidation of the Company's bank marketing operations. Operating expenses
expressed as a percent of average total assets under management were 0.63% for
the first six months of 1997 and 0.62% for the first six months of 1996.
Amortization of Deferred Policy Acquisition Costs relates to the costs of
acquiring new business which vary with, and are primarily related to, the
production of new annuity business. Such costs include commissions, costs of
policy issuance and underwriting and selling expenses. Amortization was $19.4
million for the quarter ended June 30, 1997 compared to $14.9 million for the
quarter ended June 30, 1996. For the first six months of 1997, amortization of
deferred policy acquisitions was $35.7 million compared to $29.0 million for the
first six months of 1996. The increase in amortization in 1997 compared to 1996
was primarily related to the increase in investment spread from the growth of
business in force associated with fixed, indexed and variable annuity products.
Amortization expense represented 29.9% and 27.7% of investment spread for the
quarters ended June 30, 1997 and 1996, respectively. For the first six months of
1997 and 1996, the corresponding percentages were 28.4% and 27.7%, respectively.
Amortization of Deferred Distribution Costs relates to the deferred sales
commissions acquired in connection with the Colonial acquisition in the first
quarter of 1995 and the distribution of mutual fund shares sold with contingent
deferred sales charges. Amortization was $8.7 million for the quarter ended June
30, 1997 compared to $7.4 million for the quarter ended June 30, 1996. For the
first six months of 1997, amortization of deferred distribution costs was $16.9
million compared to $14.2 million for the first six months of 1996. The
increases in 1997 were primarily attributable to the continuing sales of such
fund shares during 1997 and 1996.
Amortization of Value of Insurance in Force relates to the
actuarially-determined present value of projected future gross profits from
policies in force at the date of acquisition. Amortization totaled $1.9 million
for each of the quarters ended June 30, 1997 and 1996. The quarter ended June
30, 1997 included increased amortization of $1.5 million related to the F&G Life
transaction offset by decreased amortization related to a change in mortality
assumptions. For the first six months of 1997, amortization of value of
insurance in force totaled $5.1 million compared to $3.6 million for the first
six months of 1996. The first six months of 1997 included increased amortization
of $3.0 million related to the F&G Life transaction partially offset by
decreased amortization related to a change in mortality assumptions.
Amortization of Intangible Assets relates to goodwill and certain
identifiable intangible assets arising from business combinations accounted for
as purchases. Amortization was $3.3 million for the quarter ended June 30, 1997
compared to $4.6 million for the quarter ended June 30, 1996. For the first six
months of 1997, amortization of intangible assets was $6.5 million compared to
$8.3 million for the first six months of 1996. The decrease in 1997 was
primarily attributable to certain assets becoming fully amortized in the third
quarter of 1996.
Interest Expense, Net was $4.4 million for the quarter ended June 30, 1997
compared to $5.0 million for the quarter ended June 30, 1996. For the first six
months of 1997, interest expense was $8.9 million compared to $10.0 million for
the first six months of 1996. The decrease in 1997 was principally due to higher
interest income which is netted against interest expense.
Income Tax Expense was $13.9 million or 31.7% of pretax income for the
quarter ended June 30, 1997 compared to $10.9 million or 32.3% of pretax income
for the quarter ended June 30, 1996. For the first six months of 1997, income
tax expense was $30.7 million or 32.1% of pretax income compared to $23.4
million, or 33.3% of pretax income for the first six months of 1996.
Substantially all the federal income tax expense related to the Company's
annuity insurance business.
Financial Condition
Stockholders' Equity as of June 30, 1997 was $1.119 billion compared to
$1.051 billion as of December 31, 1996. Net income for the first six months of
1997 was $65.0 million, and cash dividends on the Company's preferred and common
stock totaled $2.1 million. Common stock totaling $2.7 million was issued in
connection with the exercise of stock options. An increase in net unrealized
investment gains, net of adjustments to deferred policy acquisition costs and
value of insurance in force, during the six month period increased stockholders'
equity by $2.2 million.
Book Value Per Share amounted to $38.42 at June 30, 1997 compared to $36.63
at December 31, 1996. Excluding net unrealized gains on investments, book value
per share amounted to $35.79 at June 30, 1997 and $34.04 at December 31, 1996.
As of June 30, 1997, there were 29.1 million common shares outstanding compared
to 28.7 million shares as of December 31, 1996.
Investments not including cash and cash equivalents, totaled $12.0 billion at
June 30, 1997 compared to $11.5 billion at December 31, 1996. The increase
primarily reflects general account investment earnings.
The Company manages the substantial majority of its invested assets
internally. The Company's general investment policy is to hold fixed maturity
assets for long-term investment and, accordingly, the Company does not have a
trading portfolio. To provide for maximum portfolio flexibility and appropriate
tax planning, the Company classifies its entire fixed maturities investments as
"available for sale" and accordingly carries such investments at fair value. The
Company's total investments at June 30, 1997 and December 31, 1996 reflected net
unrealized gains of $231.3 million and $229.8 million, respectively, relating to
its fixed maturity and equity portfolios.
Approximately $10.7 billion, or 97.1%, of the fixed maturities investments at
June 30, 1997, was rated by Standard & Poor's Corporation, Moody's Investors
Service or under comparable statutory rating guidelines established by the
National Association of Insurance Commissioners. At June 30, 1997, the carrying
value of investments in below investment grade securities totaled $1.0 billion,
or 7.7% of total investments (including certain cash and cash equivalents) of
$13.2 billion. Below investment grade securities generally provide higher yields
and involve greater risks than investment grade securities because their issuers
typically are more highly leveraged and more vulnerable to adverse economic
conditions than investment grade issuers. In addition, the trading market for
these securities may be more limited than for investment grade securities.
Management of the Company's Investments
Asset-liability duration management is utilized by the Company to minimize
the risks of interest rate fluctuations and policyholder withdrawals. The
Company believes that its fixed and indexed policyholder balances should be
backed by investments, principally comprised of fixed maturities, that generate
predictable rates of return. The Company does not have a specific target rate of
return. Instead, its rates of return vary over time depending on the current
interest rates, the slope of the yield curve and the excess at which fixed
maturities are priced over the yield curve. Its portfolio strategy is designed
to achieve acceptable risk-adjusted returns by effectively managing portfolio
liquidity and credit quality.
The Company conducts its investment operations to closely match the duration
of the assets in its investment portfolio and its policyholder balances. The
Company seeks to achieve an acceptable spread between what it earns on its
assets and interest credited on its policyholder balances by investing
principally in fixed maturities. The Company's fixed-rate products incorporate
surrender charges to encourage persistency and make the cost of its policyholder
balances more predictable. Approximately 85.9% of the Company's fixed annuity
policyholder balances were subject to surrender charges at June 30, 1997.
As part of its asset-liability management discipline, the Company conducts
detailed computer simulations that model its fixed-maturity assets and
liabilities under commonly used stress-test interest rate scenarios. Based on
the results of these computer simulations, the investment portfolio has been
constructed with a view toward maintaining a desired investment spread between
the yield on portfolio assets and the interest credited on policyholder balances
under a variety of possible future interest rate scenarios. At June 30, 1997,
the effective duration of the Company's fixed maturities investments (including
certain cash and cash equivalents) was approximately 2.8 years.
As a component of its investment strategy and to reduce its exposure to
interest rate risk, the Company utilizes interest rate swap agreements and
interest rate cap agreements to match assets more closely to liabilities. Swap
agreements are agreements to exchange with a counterparty interest rate payments
of differing character (e.g. fixed-rate payments exchanged for variable-rate
payments) based on an underlying principal balance (notional principal) to hedge
against interest rate changes. The Company currently utilizes swap agreements to
reduce asset duration and to better match interest earned on longer-term fixed
rate assets with interest credited to policyholders. The Company had 43
outstanding swap agreements with an aggregate notional principal amount of $2.4
billion and 39 outstanding swap agreements with an aggregate notional principal
amount of $2.3 billion, as of June 30, 1997 and December 31, 1996, respectively.
Cap agreements are agreements with a counterparty which require the payment
of a premium for the right to receive payments for the difference between the
cap interest rate and a market interest rate on specified future dates based on
an underlying principal balance (notional principal) to hedge against rising
interest rates. The Company had interest rate cap agreements with an aggregate
notional amount of $450.0 million as of June 30, 1997 and December 31, 1996.
With respect to the Company's equity-indexed annuity, the Company buys call
options on the S&P 500 Index to hedge its obligation to provide returns based
upon this index. The Company had call options with a book value of $241.3
million and $109.6 million as of June 30, 1997 and December 31, 1996,
respectively.
There are risks associated with some of the techniques the Company uses to
match its assets and liabilities. The primary risk associated with swap, cap,
and call option agreements is counterparty nonperformance. The Company believes
that the counterparties to its swap, cap, and call option agreements are
financially responsible and that the counterparty risk associated with these
transactions is minimal. In addition, swap agreements have interest rate risk
and call options have stock market risk. However, the swap agreements hedge
fixed-rate assets; the Company expects that any interest rate movements that
adversely affect the market value of swap agreements would be offset by changes
in the market values of such fixed rate assets. Similarly, the call options
hedge the Company's obligations to provide returns on equity-indexed annuities
based upon the S&P 500 Index, and the Company believes that any stock market
movements that adversely affect the market value of S&P 500 Index call options
would be substantially offset by a reduction in policyholder liabilities.
However, there can be no assurance that these hedges will be effective in
offsetting the potentially adverse effects of changes in S&P 500 Index levels.
Keyport's profitability could be adversely affected if the value of its S&P 500
Index call options increase less than (or decrease more than) the value of the
guarantees made to equity-indexed policyholders.
The Company routinely reviews its portfolio of investment securities. The
Company identifies monthly any investments that require additional monitoring,
and carefully reviews the carrying value of such investments at least quarterly
to determine whether specific investments should be placed on a nonaccrual basis
and to determine whether declines in value may be other than temporary. There
were no non-income producing investments in the Company's fixed maturity
portfolio at June 30, 1997 or December 31, 1996. In making these reviews, the
Company principally considers the adequacy of collateral (if any), compliance
with contractual covenants, the borrower's recent financial performance, news
reports, and other externally generated information concerning the borrower's
affairs. In the case of publicly traded fixed maturities investments, management
also considers market value quotations if available.
Liquidity
The Company is a holding company whose liquidity needs include the following:
(i) operating expenses; (ii) debt service; (iii) dividends on the preferred
stock and Common Stock; (iv) acquisitions; and (v) working capital where needed
to its operating subsidiaries. The Company's principal sources of cash are
dividends from its operating subsidiaries, and, in the case of funding for
acquisitions and certain long-term capital needs of its subsidiaries, long-term
borrowings (which to date have been from affiliates of Liberty Mutual Insurance
Company).
Current Rhode Island insurance law applicable to Keyport permits the payment
of dividends or distributions, which, together with dividends and distributions
paid during the preceding 12 months, do not exceed the lesser of (i) 10% of
Keyport's statutory surplus as of the preceding December 31 or (ii) Keyport's
statutory net gain from operations for the preceding fiscal year. Any proposed
dividend in excess of this amount is called an "extraordinary dividend" and may
not be paid until it is approved by the Commissioner of Insurance of the State
of Rhode Island. As of June 30, 1997, the amount of dividends that Keyport could
pay without such approval was $42.5 million. However, Keyport has not paid any
dividends since its acquisition in 1988. The terms of Colonial's existing senior
credit facility place certain limitations on Colonial's ability to pay
dividends. Under the terms of the facility (as amended in April 1997), Colonial
could pay dividends of up to $95.6 million as of June 30, 1997.
Based upon the historical cash flow of the Company, the Company's current
financial condition, the Company's expectation that there will not be a material
adverse change in the results of operations of the Company and its subsidiaries
during the next twelve months and the assumption that LFC Holdings, Inc. will
continue to participate in the Dividend Reinvestment Plan, the Company believes
that cash flow provided by operating activities over this period will provide
sufficient liquidity for the Company to meet its working capital, capital
investment and other operational cash needs, its debt service obligations, its
obligations to pay dividends on the Preferred Stock, and its intentions to pay
dividends on the Common Stock. The Company anticipates that it would require
external sources of liquidity in order to finance material acquisitions where
the purchase price is not paid in equity.
Each of the Company's business segments has its own liquidity needs and
financial resources. The Company expects that, based upon their historical cash
flow and current prospects, its operating subsidiaries will be able to meet
their liquidity needs from internal sources. In the Company's annuity insurance
operations, liquidity needs and financial resources pertain to the management of
the general account assets and policyholder balances. Keyport uses cash for the
payment of annuity and life insurance benefits, operating expenses and policy
acquisition costs, and the purchase of investments. Keyport generates cash from
annuity premiums and deposits, net investment income, and from maturities of
fixed investments. Annuity premiums, maturing investments and net investment
income have historically been sufficient to meet Keyport's cash requirements.
Keyport monitors cash and cash equivalents in an effort to maintain sufficient
liquidity and has strategies in place to maintain sufficient liquidity in
changing interest rate environments. Consistent with the nature of its
obligations, Keyport has invested a substantial amount of its general account
assets in readily marketable securities. As of June 30, 1997, $10.0 billion, or
75.2%, of Keyport's general account investments are considered readily
marketable. To the extent that unanticipated surrenders cause Keyport to sell
for liquidity purposes a material amount of securities prior to their maturity,
such surrenders could have a material adverse effect on the Company. Although no
assurances can be given, Keyport believes that liquidity to fund anticipated
withdrawals would be available through incoming cash flow, the sale of
short-term or floating-rate instruments or investment securities in its short
duration portfolio, thereby precluding the sale of fixed maturity investments in
a potentially unfavorable market. In the Company's asset management business,
liquidity needs and financial resources pertain to the investment management and
distribution of mutual funds, wealth management and institutional accounts.
Effects of Inflation
Inflation has not had a material effect on the Company's consolidated results
of operations to date. The Company manages its investment portfolio in part to
reduce its exposure to interest rate fluctuations. In general, the market value
of the Company's fixed maturity portfolio increases or decreases in inverse
relationship with fluctuations in interest rates, and the Company's net
investment income increases or decreases in direct relationship with interest
rate changes. For example, if interest rates decline, the Company's fixed
maturity investments generally will increase in market value, while net
investment income will decrease as fixed maturity investments mature or are sold
and the proceeds are reinvested at reduced rates. However, inflation may result
in increased operating expenses that may not be readily recoverable in the
prices of the services charged by the Company.
Recent Accounting Pronouncement
In February 1997, FASB issued Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("SFAS 128"), which is required to be adopted for
periods ending after December 15, 1997. SFAS 128 replaces primary and fully
diluted earnings per share with basic and diluted earnings per share. Basic
earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed similarly to fully diluted
earnings per share. Assuming that SFAS 128 had been implemented, basic earnings
per share would have been $1.03 and $0.81 for the second quarters of 1997 and
1996, respectively. For the first six months of 1997 and 1996, basic earnings
per share would have been $2.23 and $1.66, respectively. The calculation of
diluted earnings per share under SFAS 128 for each of these periods would not
materially differ from the calculation of fully diluted earnings per share.
<PAGE>
Item 5. Other Information
Set forth below is a description of the Company's business. The following
business description is not required in this report, but is included to assist
investors and analysts. For a more complete description, see the Company's
Registration Statement on Form S-3 (No. 333-29315) including the Company's
Prospectus contained therein dated July 17, 1997.
BUSINESS
Liberty Financial is a leading asset accumulation and management company. The
Company is a leader in each of its two core product lines - retirement-oriented
insurance products and investment management products. Retirement-oriented
insurance products consist substantially of annuities, and investment management
products consist of mutual funds, wealth management and institutional asset
management. The Company sells its products through multiple distribution
channels, including brokerage firms, banks and other depository institutions,
financial planners and insurance agents, as well as directly to investors.
Multiple Asset Accumulation Products. The Company sells a full range of
retirement-oriented insurance products, grouped by whether they provide fixed,
indexed or variable returns to policyholders. Substantially all of these
products currently are annuities that are written by Keyport. Annuities are
insurance products which provide a tax-deferred means of accumulating savings
for retirement needs, as well as a tax-efficient source of income in the payout
period. The Company's principal fixed annuity products are SPDAs, which
represented $8.6 billion of policyholder liabilities as of June 30, 1997. In
addition to SPDAs, Keyport also sells equity-indexed and variable annuities.
Equity-indexed annuities are an innovative product first introduced to the
marketplace by the Company when it began selling its KeyIndex(R) product in
1995. An equity-indexed annuity credits interest to the policyholder at a
"participation rate" equal to a portion of the change in value of a specified
equity index (in the case of KeyIndex, the Standard & Poor's 500 Composite Stock
Index).
The Company has four operating units engaged in investment management:
Colonial, Stein Roe, Newport and LAMCO, each of which carries strong brand name
recognition in the markets it serves. As of June 30, the Company sponsored 67
open-end mutual funds, as well as seven closed-end funds. The open-end funds
consist of 36 intermediary-distributed Colonial mutual funds, 20 direct-marketed
Stein Roe funds and 11 other funds included among the investment options
available under the Company's variable annuities. The closed-end funds consist
of five Colonial funds and two LAMCO funds.
Multiple Distribution Channels. Liberty Financial sells its products through
multiple distribution channels. The Company distributes its products through all
the major third party intermediary channels, including brokerage firms, banks
and other depository institutions, financial planners and insurance agents. To
capitalize on the growing importance of banks and other depository institutions
as intermediaries for its products, the Company also operates its own
distribution unit which sells mutual funds and annuities through such entities.
Certain of the Company's products are also sold directly to investors, including
its mutual funds sold without a sales load, wealth management and institutional
asset management products. The Company believes that it is one of the few asset
accumulators with a significant presence in both the intermediary and direct
channels.
Business Strategy. The Company's business strategy has four interrelated
elements:
Diversification. The Company believes that the diversification in its
products and distribution channels allows it to accumulate assets in
different market cycles, thereby reducing earnings volatility. Within its
two core product lines, the Company sells a range of products that serve
individuals at different stages of their life and earnings cycle. This mix
also is designed to include products that will be in demand under a
variety of economic and market conditions. Similarly, the Company reaches
customers through a variety of distribution channels. Diversification of
distribution channels allows the Company to reach many segments of the
marketplace and lessens its dependence on any one source of assets.
Innovation. Liberty Financial believes that product and distribution
innovations are essential in order to grow its asset base and meet the
ever changing financial needs of its customers. The Company believes that
it has an impressive track record in such innovations. For example,
Newport created the first U.S.-based mutual fund to focus exclusively on
the "Tiger" countries of Asia. This fund had $1.9 billion of assets under
management as of June 30, 1997. The Stein Roe Young Investor Fund was the
first mutual fund to be coupled with an educational program to teach young
people about investing, while offering parents an excellent device to save
for educational and other family needs. The Stein Roe Young Investor(R)
Fund had $417.3 million of assets under management and over 100,000
shareholders of record as of June 30, 1997. The Company introduced the
first equity-indexed annuity product to the marketplace. At June 30, 1997,
the Company's equity-indexed annuity policyholder balance was $1,159.0
million. The Company's equity-indexed annuity sales during the six months
ended June 30, 1997 and during 1996 were $242.9 million and $655.2
million, respectively. The Company is also recognized as a leader in
electronic commerce on the Internet. For example, in early 1997, the
Company introduced a new Web site for Stein Roe funds which incorporates
state-of-the-art security and customization features.
Integration. Liberty Financial actively promotes integration of its
operating units and believes that such efforts will enable it to
accumulate additional assets by leveraging distribution capabilities and
to reduce expenses by consolidating redundant back office functions. For
example, upon the Company's acquisition of Newport in April, 1995,
Colonial assumed the marketing, sales, service and administration of
Newport's flagship Tiger Fund, which was rebranded under the Colonial
name. In conjunction with Colonial's sales efforts, the Colonial Newport
Tiger Fund's assets have more than tripled from April, 1995 to June 30,
1997. The availability of the Colonial Newport Tiger Fund has facilitated
new intermediary distribution relationships for Colonial, including
approximately 6,000 new broker relationships. Stein Roe manages a
substantial portion of Keyport's general account assets and together with
Colonial and Newport manages certain of the funds underlying Keyport's
variable annuity products. Colonial's transfer agency operations perform
these functions for the Stein Roe funds. The Company's bank distribution
unit was the largest distributor of Keyport's annuities both during the
six months ended June 30, 1997 and during 1996, and the second and third
largest distributor, respectively, of the Colonial funds during such
periods.
Acquisitions. Where appropriate, the Company seeks acquisitions that
provide additional assets, new or complementary investment management
capabilities, distribution capabilities or other integration or
diversification opportunities in its core product areas. Acquisitions are
an integral part of Liberty Financial's business strategy. Stein Roe
(acquired in 1986), Keyport (acquired in 1988), Colonial (acquired in
1995), Newport (acquired in 1995) and major components of the Company's
bank distribution unit (including Independent, acquired in 1996) all
joined Liberty Financial by acquisition. The Company has also made asset
acquisitions, including most recently a coinsurance agreement with respect
to a $954.0 million block of SPDAs entered into in August, 1996. Current
areas of focus for the Company's acquisition efforts include the
following: mutual funds, with particular focus on equities and foreign
markets; other new or complementary investment skills; additional
distribution capabilities; wealth management firms that can be integrated
into Stein Roe and can leverage and expand Stein Roe's franchise in the
wealth management market; and blocks of annuity assets that can be
purchased or coinsured. While the Company is constantly evaluating
acquisition opportunities, as of the date of this filing the Company has
not entered into any definitive agreement for a material acquisition.
The Company's business strategy is based on its belief that its products have
attractive growth prospects due to important demographic and economic trends.
These trends include the need for the aging baby boom generation to increase
savings and investment, lower public confidence in the adequacy of government
and employer-provided retirement benefits, longer life expectancies, and rising
health care costs. The Company believes that its product mix and distribution
strength are well suited to exploit these demographic and economic trends and
will help the Company maintain and enhance its position as a leading asset
accumulation and management company.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement re Computation of Per Share Earnings
12 Statement re Computation of Ratios
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended June 30,
1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIBERTY FINANCIAL COMPANIES, INC.
/s/ J. Andy Hilbert
-------------------------------------
J. Andy Hilbert
(Duly Authorized Officer and
Chief Financial Officer)
Date: August 13, 1997
<PAGE>
Exhibit Index
Exhibit No. Description Page
- ----------- ----------- ----
11 Statement re Computation of Per Share Earnings
12 Statement re Computation of Ratios
27 Financial Data Schedule
<TABLE>
LIBERTY FINANCIAL COMPANIES, INC.
EXHIBIT 11 - Statement re Computation of Per Share Earnings
(in millions, except share and per share amounts)
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary net income per common share:
Net income $ 30.0 $ 23.1 $ 65.0 $ 46.9
Less: cumulative preferred
dividends 0.3 0.3 0.5 0.5
---------- ---------- ---------- ----------
Net income available for
common shareholders $ 29.7 $ 22.8 $ 64.5 $ 46.4
========== ========= ========== ==========
Weighted average shares
outstanding 28,952,759 28,159,518 28,864,767 27,970,547
Common stock equivalents 1,678,125 1,451,876 1,700,036 1,466,353
---------- ---------- ---------- ----------
Total 30,630,884 29,611,394 30,564,803 29,436,900
========== ========== ========== ==========
Primary net income per common
share $ 0.97 $ 0.77 $ 2.11 $ 1.58
========== ========== ========== ==========
Fully diluted net income per common share:
Net income $ 30.0 $ 23.1 $ 65.0 $ 46.9
========== ========= ========== ==========
Weighted average shares
outstanding 28,952,759 28,159,518 28,864,767 27,970,547
Common stock equivalents 1,869,455 1,513,687 1,896,456 1,546,353
Convertible preferred stock 345,341 346,060 345,488 346,060
---------- ---------- ---------- ----------
Total 31,167,555 30,019,265 31,106,711 29,862,960
========== ========== ========== ==========
Fully diluted net income per
common share $ 0.96 $ 0.77 $ 2.09 $ 1.57
========== ========== ========== ==========
</TABLE>
<TABLE>
LIBERTY FINANCIAL COMPANIES, INC.
EXHIBIT 12 - Statement re Computation of Ratios
($ in millions)
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Pretax income $ 43.9 $ 34.0 $ 95.7 $ 70.3
Add fixed charges:
Interest on indebtedness 5.4 5.8 10.9 11.5
Portion of rent
representing the interest
factor 1.0 1.0 2.1 2.1
Preferred stock dividends 0.3 0.3 0.5 0.5
Accretion to face value
of redeemable convertible
preferred stock 0.2 0.2 0.4 0.4
------ ------ ------ ------
Income as adjusted $ 50.8 $ 41.3 $109.6 $ 84.8
====== ====== ====== ======
Fixed charges:
Interest on indebtedness $ 5.4 $ 5.8 $ 10.9 $ 11.5
Portion of rent
representing the interest
factor 1.0 1.0 2.1 2.1
Preferred stock dividends 0.3 0.3 0.5 0.5
Accretion to face value of
redeemable convertible
preferred stock 0.2 0.2 0.4 0.4
------ ------ ------ ------
Total fixed charges $ 6.9 $ 7.3 $ 13.9 $ 14.5
====== ====== ====== ======
Ratio of earnings to fixed
charges 7.36x 5.66x 7.88x 5.85x
====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 11,051
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 41
<MORTGAGE> 64
<REAL-ESTATE> 0
<TOTAL-INVEST> 12,033
<CASH> 1,310
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 253
<TOTAL-ASSETS> 15,429
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 11,942
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 229
0
14
<COMMON> 0
<OTHER-SE> 1,119
<TOTAL-LIABILITY-AND-EQUITY> 15,429
0
<INVESTMENT-INCOME> 420
<INVESTMENT-GAINS> 16
<OTHER-INCOME> 179
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 36
<UNDERWRITING-OTHER> 151
<INCOME-PRETAX> 96
<INCOME-TAX> 31
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65
<EPS-PRIMARY> 2.11
<EPS-DILUTED> 2.09
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
