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 September 30, 1997
-------------------
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.
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(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 29,624,624 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 October 31, 1997.
Exhibit Index - Page 23 Page 1 of 26
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
QUARTERLY REPORT ON FORM 10-Q FOR PERIOD ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996
Consolidated Income Statements for the Three Months and
Nine Months Ended September 30, 1997 and 1996
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1996
Consolidated Statement of Stockholders' Equity for the
Nine Months Ended September 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>
September 30 December 31
1997 1996
------------ ------------
Unaudited
ASSETS
<S> <C> <C>
Assets:
Investments $12,281.7 $11,537.9
Cash and cash equivalents 1,263.7 875.8
Accrued investment income 162.5 146.8
Deferred policy acquisition costs 211.7 250.4
Value of insurance in force 52.0 70.8
Deferred distribution costs 111.0 114.4
Intangible assets 201.0 205.4
Other assets 137.2 134.7
Separate account assets 1,262.0 1,091.5
------------ -----------
$15,682.8 $14,427.7
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policyholder balances $12,071.9 $11,637.5
Notes payable to affiliates 229.0 229.0
Payable for investments purchased and
loaned 675.1 211.2
Other liabilities 299.0 267.1
Separate account liabilities 1,212.5 1,017.7
------------ ------------
Total liabilities 14,487.5 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 14.4 13.8
------------ ------------
Stockholders' Equity:
Common stock, par value $.01; authorized
100,000,000 shares, issued and outstanding
29,617,090 shares in 1997 and 28,705,015
shares in 1996 0.3 0.3
Additional paid-in capital 857.0 835.3
Net unrealized investment gains 101.1 74.4
Retained earnings 224.9 141.4
Unearned compensation (2.4) 0.0
------------ ------------
Total stockholders' equity 1,180.9 1,051.4
------------ ------------
$15,682.8 $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 Nine Months Ended
September 30 September 30
----------------------- ----------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment income $212.0 $201.7 $632.2 $580.7
Interest credited to
policyholders (150.9) (146.0) (445.4) (420.3)
----------- ----------- ----------- -----------
Investment spread 61.1 55.7 186.8 160.4
----------- ----------- ----------- -----------
Net realized investment gains 6.1 0.7 22.1 2.8
----------- ----------- ----------- -----------
Fee income:
Investment advisory and
administrative fees 56.1 49.6 161.8 144.8
Distribution and service fees 12.6 11.3 36.6 33.0
Transfer agency fees 12.3 11.4 35.6 32.6
Surrender charges and net
commissions 9.5 8.7 27.0 25.8
Separate account fees 4.7 4.9 12.7 12.0
----------- ----------- ----------- -----------
Total fee income 95.2 85.9 273.7 248.2
----------- ----------- ----------- -----------
Expenses:
Operating expenses (77.8) (71.5) (229.2) (205.2)
Amortization of deferred
policy acquisition costs (18.3) (15.4) (54.0) (44.4)
Amortization of deferred
distribution costs (8.5) (7.8) (25.4) (22.0)
Amortization of value of
insurance in force (2.2) (2.4) (7.3) (6.0)
Amortization of intangible
assets (3.7) (3.8) (10.2) (12.1)
Interest expense, net (4.1) (5.0) (13.0) (15.0)
----------- ----------- ----------- -----------
Total expenses (114.6) (105.9) (339.1) (304.7)
----------- ----------- ----------- -----------
Pretax income 47.8 36.4 143.5 106.7
Income tax expense (14.9) (11.7) (45.6) (35.1)
----------- ----------- ----------- -----------
Net income $32.9 $24.7 $97.9 $71.6
=========== =========== =========== ===========
Net income per share $1.05 $0.82 $3.17 $2.40
=========== =========== =========== ===========
Common stock and common
stock equivalents 31,019,911 29,708,119 30,678,095 29,527,352
=========== =========== =========== ===========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Unaudited
<CAPTION>
Nine Months Ended
September 30
---------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $97.9 $71.6
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 54.3 50.4
Interest credited to policyholders 445.4 420.3
Net realized investment gains (22.1) (2.8)
Net amortization on investments 22.0 15.6
Change in deferred policy acquisition costs (10.3) (16.4)
Net change in other assets and liabilities, net of
effect of acquisitions (15.4) (102.4)
--------- ---------
Net cash provided by operating activities 571.8 436.3
--------- ---------
Cash flows from investing activities:
Investments purchased available for sale (3,006.4) (3,116.5)
Investments sold available for sale 1,414.2 760.5
Investments matured available for sale 1,230.5 927.4
Change in policy loans, net (15.0) (23.0)
Change in mortgage loans, net 4.6 6.1
Acquisitions, net of cash acquired 0.0 (38.4)
--------- ---------
Net cash used in investing activities (372.1) (1,483.9)
--------- ---------
Cash flows from financing activities:
Withdrawals from policyholder accounts (948.9) (807.5)
Deposits to policyholder accounts 738.4 1,849.7
Securities lending 415.9 194.9
Change in revolving credit facility (20.0) (4.0)
Exercise of stock options 6.2 1.4
Dividends paid (3.5) (2.9)
Other 0.1 0.0
--------- ---------
Net cash provided by financing activities 188.2 1,231.6
--------- ---------
Increase in cash and cash equivalents 387.9 184.0
Cash and cash equivalents at beginning of period 875.8 875.3
--------- ---------
Cash and cash equivalents at end of period $1,263.7 $1,059.3
========= =========
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
Common stock
issued in
Independent
acquisition 0.0 2.5 0.0 0.0 0.0 2.5
Proceeds from
exercise of
stock options 0.0 6.2 0.0 0.0 0.0 6.2
Unearned
compensation 0.0 2.6 0.0 0.0 (2.4) 0.2
Accretion to
face value of
preferred stock 0.0 0.0 0.0 (0.6) 0.0 (0.6)
Common stock
dividends 0.0 10.3 0.0 (13.1) 0.0 (2.8)
Preferred
stock dividends 0.0 0.0 0.0 (0.7) 0.0 (0.7)
Change in net
unrealized
investment gains 0.0 0.0 26.7 0.0 0.0 26.7
Common stock
issued to
401-K plan 0.0 0.1 0.0 0.0 0.0 0.1
Net income 0.0 0.0 0.0 97.9 0.0 97.9
------- -------- ---------- -------- --------- ----------
Balance,
September
30, 1997 $0.3 $857.0 $101.1 $224.9 ($2.4) $1,180.9
======= ======== ========== ======== ========= ==========
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 nine months ended September 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 63% of the Company's income before interest expense,
amortization of intangible assets, net realized gains or losses and income
taxes for the nine months ended September 30, 1997 and 1996 was
attributable to the Company's annuity insurance business, with the
remaining 37% attributable to the Company's asset management activities.
3. Investments
Investments, all of which pertain to the Company's annuity insurance
operations, were comprised of the following (in millions):
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------ ------------
<S> <C> <C>
Fixed maturities $11,207.3 $10,718.6
Mortgage loans 62.4 67.0
Policy loans 547.8 532.8
Other invested assets 421.0 183.6
Equity securities 43.2 35.9
------------ ------------
Total $12,281.7 $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 45 outstanding swap agreements with an
aggregate notional principal amount of $2.6 billion and 39 outstanding
swap agreements with an aggregate notional principal amount of $2.3
billion, as of September 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
September 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 $321.5 million and
$109.6 million as of September 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, 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 $1.11 and $0.86
for the third quarters of 1997 and 1996, respectively. For the first nine
months of 1997 and 1996, basic earnings per share would have been $3.34
and $2.52, 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 August 1997, the FASB issued a draft of an accounting standard
entitled "Accounting for Derivative Instruments and for Hedging Activities."
This accounting standard, 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
accounting standard 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. The Company is evaluating the impact of
the proposed accounting standard.
8. Subsequent Event
On November 12, 1997, the Company's Board of Directors authorized a
three-for-two stock split effected in the form of a 50% stock dividend
payable on December 10, 1997 to stockholders of record on November 26,
1997.
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Net Income was $32.9 million or $1.05 per share for the quarter ended
September 30, 1997 compared to $24.7 million or $0.82 per share for the
quarter ended September 30, 1996. For the first nine months of 1997, net
income was $97.9 million or $3.17 per share compared to $71.6 million or
$2.40 per share for the first nine months of 1996. These increases resulted
from higher investment spread, higher net realized investment gains, higher
fee income, and lower interest expense, net. Partially offsetting these
items were increased operating expenses, amortization expense, and income tax
expense.
Pretax Income was $47.8 million for the quarter ended September 30, 1997
compared to $36.4 million for the quarter ended September 30, 1996. For the
first nine months of 1997, pretax income was $143.5 million compared to
$106.7 million for the first nine months of 1996. These increases resulted
from higher investment spread, higher net realized investment gains, higher
fee income, and lower interest expense, net. 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 $61.1 million for the quarter ended September 30, 1997
compared to $55.7 million for the quarter ended September 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 September 30, 1997 was
1.80% compared to 1.85% for the quarter ended September 30, 1996. For the
first nine months of 1997, investment spread was $186.8 million compared to
$160.4 million for the first nine months of 1996. The investment spread
percentage was 1.89% for the first nine months of 1997 compared to 1.85% for
the first nine months of 1996.
Investment income was $212.0 million for the quarter ended September 30,
1997 compared to $201.7 million for the quarter ended September 30, 1996. The
increase of $10.3 million in 1997 compared to 1996 primarily relates to a
$19.8 million increase as a result of the higher level of invested assets,
partially offset by a $9.5 million decrease resulting from a lower average
investment yield. The third quarter of 1997 included $13.6 million of S&P 500
Index call option amortization expense compared to $4.3 million for the third
quarter of 1996. The average investment yield was 6.82% for the quarter ended
September 30, 1997 compared to 7.16% for the quarter ended September 30,
1996. For the first nine months of 1997, investment income was $632.2 million
compared to $580.7 million for the first nine months of 1996. The increase of
$51.5 million in 1997 compared to 1996 primarily relates to a $73.6 million
increase as a result of the higher level of average invested assets,
partially offset by a $22.1 million decrease resulting from a lower average
investment yield. The first nine months of 1997 included $31.2 million of S&P
500 Index call option amortization expense compared to $7.8 million for the
first nine months of 1996. The average investment yield was 6.91% for the
first nine months of 1997 compared to 7.18% for the first nine months of 1996.
Interest credited to policyholders totaled $150.9 million for the quarter
ended September 30, 1997 compared to $146.0 million for the quarter ended
September 30, 1996. The increase of $4.9 million in 1997 compared to 1996
primarily relates to a $12.9 million increase as a result of a higher level
of average policyholder balances, partially offset by an $8.0 million
decrease resulting from a lower average interest credited rate. Policyholder
balances averaged $12.0 billion (including $10.7 billion of fixed annuities
and $1.3 billion of equity-indexed annuities) for the quarter ended September
30, 1997 compared to $11.0 billion (including $10.5 billion of fixed
annuities and $0.5 billion of equity-indexed annuities) for the quarter ended
September 30, 1996. The average interest credited rate was 5.02% (5.52% on
fixed annuities and 0.85% on equity-indexed annuities) for the quarter ended
September 30, 1997 compared to 5.31% (5.53% on fixed annuities and 0.85% on
equity-indexed annuities) for the quarter ended September 30, 1996.
Keyport's equity-indexed annuities credit interest to the policyholder at a
"participation rate" equal to a portion (ranging for existing policies from
60% to 95%) of the change in value of the S&P 500 Index. Keyport's
equity-indexed annuities also provide a full guarantee of principal plus
interest at 0.85% annually. For each of the periods presented the interest
credited to equity-indexed policyholders related to the participation rate
was offset by investment income recognized on the S&P 500 Index call options
resulting in a 0.85% net credited rate. For the first nine months of 1997,
interest credited was $445.4 million compared to $420.3 million for the
first nine months of 1996. The increase of $25.1 million in 1997 compared
to 1996 primarily relates to a $50.0 million increase as a result of a higher
level of average policyholder balances, partially offset by a $24.9 million
decrease resulting from a lower average interest credited rate. Policyholder
balances averaged $11.8 billion (including $10.7 billion of fixed annuities
and $1.1 billion of equity-indexed annuities)for the first nine months of 1997
compared to $10.5 billion (including $10.2 billion of fixed annuities and
$0.3 billion of equity-indexed annuities) for the first nine months of 1996.
The average interest credited rate was 5.02% (5.44% on fixed annuities
and 0.85% on equity-indexed annuities) for the first nine months of 1997
compared to 5.33% (5.47% on fixed annuities and 0.85% on equity-indexed
annuities) for the first nine months of 1996.
Average Investments (computed without giving effect to SFAS 115),
including a portion of the Company's cash and cash equivalents, were $12.4
billion for the quarter ended September 30, 1997 compared to $11.3 billion
for the quarter ended September 30, 1996. For the first nine months of 1997,
such average investments were $12.2 billion compared to $10.8 billion for the
first nine 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
September 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 $6.1 million for the quarter ended
September 30, 1997 compared to $0.7 million for the quarter ended September
30, 1996. For the first nine months of 1997, net realized investment gains
were $22.1 million compared to $2.8 million for the first nine 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 $12.7 million and gains on redemption
of seed money investments in separate account mutual funds sponsored by the
Company of $7.7 million. In addition, there were $1.7 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
primarily attributable to sales of general corporate securities.
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 $56.1 million for
the quarter ended September 30, 1997 compared to $49.6 million for the
quarter ended September 30, 1996. For the first nine months of 1997,
investment advisory and administrative fees were $161.8 million compared to
$144.8 million for the first nine 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 $38.4 billion for the
quarter ended September 30, 1997 compared to $34.0 billion for the quarter
ended September 30, 1996. For the first nine months of 1997, average
fee-based assets were $36.9 billion compared to $33.3 billion for the first
nine months of 1996. These increases during 1997 compared to 1996 resulted
primarily from market appreciation of $3.7 billion and net sales, including
reinvested dividends, of $0.4 billion for the twelve months ended September
30, 1997. Investment advisory and administrative fees were 0.58% of average
fee-based assets under management for the quarters ended September 30, 1997
and 1996. For the first nine months of 1997 and 1996, such percentages were
also 0.58%.
<PAGE>
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 September 30
--------------------
1997 1996
-------- --------
<S> <C> <C>
Mutual Funds:
Intermediary-distributed $16.6 $15.7
Direct-marketed 7.2 6.6
Closed-end 2.2 1.9
Variable annuity 1.3 1.1
--------- ---------
27.3 25.3
Wealth Management 6.4 5.0
Institutional 5.4 4.7
--------- ---------
Total Fee-Based Assets Under
Management* $39.1 $35.0
========== ========
______________
* As of September 30, 1997 and 1996, Keyport's
insurance assets of $12.8 billion and $11.9
billion, respectively, bring total assets under
management to $51.9 billion and $46.9 billion,
respectively.
</TABLE>
<TABLE>
Changes in Fee-Based Assets Under Management
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Fee-based assets under
management - beginning $37.5 $33.9 $35.9 $31.9
Sales and reinvestments 1.9 1.9 5.2 5.8
Redemptions and withdrawals (1.5) (1.5) (5.0) (4.2)
Acquisitions 0.0 0.0 0.0 0.4
Market appreciation 1.2 0.7 3.0 1.1
--------- --------- --------- ---------
Fee-based assets under
management - ending $39.1 $35.0 $39.1 $35.0
========= ========= ========= =========
</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 $12.6 million for the quarter ended September
30, 1997 compared to $11.3 million for the quarter ended September 30, 1996.
For the first nine months of 1997, distribution and service fees were $36.6
million compared to $33.0 million for the first nine 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 0.71% and 0.69% for the quarters ended September
30, 1997 and 1996, respectively. For the first nine 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 $12.3 million on average assets of $24.8 billion for the quarter
ended September 30, 1997 and $11.4 million on average assets of $22.7 billion
for the quarter ended September 30, 1996. For the first nine months of 1997,
transfer agency fees were $35.6 million on average assets of $24.1 billion
and $32.6 million on average assets of $22.3 billion for the first nine
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% for the quarters ended September 30, 1997 and 1996. For
the first nine 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 annuity policyholder balances, and redemptions of the
intermediary-distributed mutual funds which were sold with contingent
deferred sales charges; b) the distribution of the Company's
intermediary-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 $9.5 million for the quarter
ended September 30, 1997 compared to $8.7 million for the quarter ended
September 30, 1996. For the first nine months of 1997, total surrender
charges and net commissions were $27.0 million compared to $25.8 million for
the first nine months of 1996.
Surrender charges on fixed 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 $5.5 million for
the quarter ended September 30, 1997 and $4.6 million for the quarter ended
September 30, 1996. For the first nine months of 1997, surrender charges were
$15.6 million compared to $14.5 million for the first nine months of 1996. On
an annualized basis, annuity withdrawals represented 10.9% and 11.6% of the
total average annuity policyholder and separate account balances for the
quarters ended September 30, 1997 and 1996, respectively. For the first nine
months of 1997 and 1996, the corresponding percentages were 11.0% and 10.7%,
respectively. Excluding surrenders from the older block of annuities
acquired in the F&G Life transaction, the withdrawal percentages were 10.3%
and 9.5% for the quarters ended September 30, 1997 and 1996, respectively.
For the first nine months of 1997 and 1996, such percentages were 9.9% and
10.0%, respectively.
Net commissions were $4.0 million for the quarter ended September 30, 1997
compared to $4.1 million for the quarter ended September 30, 1996. For the
first nine months of 1997, net commissions were $11.4 million compared to
$11.3 million for the first nine months of 1996.
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 $4.7 million for the quarter ended September 30,
1997 compared to $4.9 million for the quarter ended September 30, 1996. Such
fees represented 1.61% and 2.07%, respectively, of average variable annuity
and variable life separate account balances. For the first nine months of
1997, separate account fees were $12.7 million compared to $12.0 million for
the first nine months of 1996. For the first nine months of 1997 and 1996,
such percentages were 1.56% and 1.72%, respectively.
Operating Expenses primarily represent compensation, marketing, and other
general and administrative expenses. These expenses were $77.8 million for
the quarter ended September 30, 1997 compared to $71.5 million for the
quarter ended September 30, 1996. The increase in 1997 compared to 1996 was
largely due to increases in marketing expenses of $3.1 million relating to
mutual fund sales and the launch in July 1997 of the Company's Newport
Greater China Fund. Operating expenses expressed as a percent of average
total assets under management were 0.61% for the quarter ended September 30,
1997 compared to 0.63% for the quarter ended September 30, 1996. For the
first nine months of 1997, operating expenses were $229.2 million compared to
$205.2 million for the first nine months of 1996. The increase in 1997
compared to 1996 was largely due to increases in compensation of $12.0
million and to marketing expenses of $5.8 million relating to mutual fund
sales, including the Newport Greater China Fund. Operating expenses
expressed as a percent of average total assets under management were 0.62%
for the first nine months of 1997 and 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 $18.3
million for the quarter ended September 30, 1997 compared to $15.4 million
for the quarter ended September 30, 1996. For the first nine months of 1997,
amortization of deferred policy acquisitions was $54.0 million compared to
$44.4 million for the first nine 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 and indexed
products and the increased sales of variable annuity products. Amortization
expense represented 29.95% and 27.65% of investment spread for the quarters
ended September 30, 1997 and 1996, respectively. For the first nine months of
1997 and 1996, the corresponding percentages were 28.91% and 27.68%,
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 $8.5 million for the
quarter ended September 30, 1997 compared to $7.8 million for the quarter
ended September 30, 1996. For the first nine months of 1997, amortization of
deferred distribution costs was $25.4 million compared to $22.0 million for
the first nine 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 $2.2
million for the quarter ended September 30, 1997 compared to $2.4 million for
the quarter ended September 30, 1996. For the first nine months of 1997,
amortization of value of insurance in force totaled $7.3 million compared to
$6.0 million for the first nine months of 1996. The first nine months of
1997 included increased amortization of $4.2 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 $3.7 million for the quarter ended
September 30, 1997 compared to $3.8 million for the quarter ended September
30, 1996. For the first nine months of 1997, amortization of intangible
assets was $10.2 million compared to $12.1 million for the first nine 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 $4.1 million for the quarter ended September 30,
1997 compared to $5.0 million for the quarter ended September 30, 1996. For
the first nine months of 1997, interest expense, net was $13.0 million
compared to $15.0 million for the first nine months of 1996. The decrease in
1997 was due to lower interest expense related to Colonial's credit facility
which is utilized to finance the sale of shares of the mutual funds it
sponsors which have contingent deferred sales charges and to higher interest
income which is netted against interest expense.
Income Tax Expense was $14.9 million or 31.2% of pretax income for the
quarter ended September 30, 1997 compared to $11.7 million or 32.1% of pretax
income for the quarter ended September 30, 1996. For the first nine months of
1997, income tax expense was $45.6 million or 31.8% of pretax income compared
to $35.1 million, or 32.9% of pretax income for the first nine months of
1996. Substantially all the federal income tax expense related to the
Company's annuity insurance business.
Effective July 18, 1997, the Company is no longer included in the
consolidated tax return of Liberty Mutual Insurance Company. The Company
will be required to file a separate life return and a consolidated non-life
return. The Company does not expect this change to have a material effect
on its financial condition or its results of operations.
Financial Condition
Stockholders' Equity as of September 30, 1997 was $1.181 billion compared
to $1.051 billion as of December 31, 1996. Net income for the first nine
months of 1997 was $97.9 million, and cash dividends on the Company's
preferred and common stock totaled $3.5 million. Common stock totaling $6.2
million and $2.5 million was issued in connection with the exercise of stock
options and for earn-out stock payments related to the acquisition of
Independent, respectively. An increase in net unrealized investment gains,
net of adjustments to deferred policy acquisition costs and value of
insurance in force, during the nine month period increased stockholders'
equity by $26.7 million.
Book Value Per Share amounted to $39.87 at September 30, 1997 compared to
$36.63 at December 31, 1996. Excluding net unrealized gains on investments,
book value per share amounted to $36.46 at September 30, 1997 and $34.04 at
December 31, 1996. As of September 30, 1997, there were 29.6 million common
shares outstanding compared to 28.7 million shares as of December 31, 1996.
Investments not including cash and cash equivalents, totaled $12.3 billion
at September 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 September 30, 1997 and
December 31, 1996 reflected net unrealized gains of $327.5 million and $229.8
million, respectively, relating to its fixed maturity and equity portfolios.
Approximately $10.8 billion, or 96.7%, of the fixed maturities investments
at September 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 September 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 $13.4 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.
<PAGE>
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 86% of the
Company's fixed annuity policyholder balances were subject to surrender
charges at September 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 September 30, 1997, the effective duration of the Company's
fixed maturities investments (including certain cash and cash equivalents)
was approximately 2.8. Effective duration is a common measure for the price
sensitivity of a fixed-income portfolio to changes in interest rates. It
measures the approximate percentage change in the market value of a portfolio
when interest rates change by 100 basis points. This measure includes the
impact of estimated changes in portfolio cash flows from features such as
prepayment and bond calls.
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 45 outstanding swap agreements with an
aggregate notional principal amount of $2.6 billion and 39 outstanding swap
agreements with an aggregate notional principal amount of $2.3 billion, as of
September 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 September 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
$321.5 million and $109.6 million as of September 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 September 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 September 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.
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. In the Company's annuity insurance operations, liquidity
needs and financial resources pertain to the management of the general
account assets and policyholder balances. 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. 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 and, in the case of
Colonial, from its credit facility used to finance sales of mutual fund
shares sold with contingent deferred sales charges.
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 September 30, 1997, $10.1 billion, or 75.4%, 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.
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 $1.11 and $0.86 for the third
quarters of 1997 and 1996, respectively. For the first nine months of 1997
and 1996, basic earnings per share would have been $3.34 and $2.52,
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 $8.5 billion of policyholder liabilities as of September
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 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 September 30, the Company
sponsored 67 open-end mutual funds, as well as 7 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 $1.6
billion of assets under management as of September 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 Fund had $475.6 million of
assets under management and over 100,000 shareholders of record as of
September 30, 1997. The Company introduced the first equity-indexed
annuity product to the marketplace. At September 30, 1997, the
Company's equity-indexed annuity policyholder balance was $1.4 billion.
The Company's equity-indexed annuity sales during the nine months ended
September 30, 1997 and 1996 were $390.0 million and $474.9 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 September 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 nine months ended
September 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.
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 September
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: November 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 Nine Months Ended
September 30 September 30
----------------------- -----------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Primary net income per common
share:
Net income $32.9 $24.7 $97.9 $71.6
Less: cumulative preferred
dividends 0.2 0.2 0.7 0.7
----------- ----------- ----------- -----------
Net income available for
common shareholders $32.7 $24.5 $97.2 $70.9
=========== =========== =========== ===========
Weighted average shares
outstanding 29,395,824 28,416,294 29,071,280 28,120,214
Common stock equivalents 1,624,087 1,291,825 1,606,815 1,407,138
----------- ----------- ----------- -----------
Total 31,019,911 29,708,119 30,678,095 29,527,352
=========== =========== =========== ===========
Primary net income per common
share $1.05 $0.82 $3.17 $2.40
=========== =========== =========== ===========
Fully diluted net income per
common share:
Net income $32.9 $24.7 $97.9 $71.6
=========== =========== =========== ===========
Weighted average shares
outstanding 29,395,824 28,416,294 29,071,280 28,120,214
Common stock equivalents 1,647,629 1,291,825 1,785,688 1,407,138
Convertible preferred stock 345,286 346,045 345,420 346,056
----------- ----------- ----------- -----------
Total 31,388,739 30,054,164 31,202,388 29,873,408
=========== =========== =========== ===========
Fully diluted net income per
common share $1.05 $0.82 $3.14 $2.40
=========== =========== =========== ===========
</TABLE>
<TABLE>
LIBERTY FINANCIAL COMPANIES, INC.
EXHIBIT 12 - Statement re Computation of Ratios
($ in millions)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Earnings:
Pretax income $47.8 $36.4 $143.5 $106.7
Add fixed charges:
Interest on indebtedness 5.3 5.7 16.2 17.2
Portion of rent representing
the interest factor 1.0 1.1 3.1 3.2
Preferred stock dividends 0.2 0.2 0.7 0.7
Accretion to face value
of redeemable convertable
preferred stock 0.2 0.2 0.6 0.6
--------- --------- --------- ---------
Income as adjusted $54.5 $43.6 $164.1 $128.4
========= ========= ========= =========
Fixed charges:
Interest on indebtedness $5.3 $ 5.7 $16.2 $ 17.2
Portion of rent representing
the interest factor 1.0 1.1 3.1 3.2
Preferred stock dividends 0.2 0.2 0.7 0.7
Accretion to face value of
redeemable convertible
preferred stock 0.2 0.2 0.6 0.6
--------- --------- --------- ---------
Total fixed charges $6.7 $ 7.2 $20.6 $ 21.7
========= ========= ========= =========
Ratio of earnings to fixed
charges 8.13x 6.06x 7.97x 5.92x
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 11,207
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 43
<MORTGAGE> 62
<REAL-ESTATE> 0
<TOTAL-INVEST> 12,282
<CASH> 1,264
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 212
<TOTAL-ASSETS> 15,683
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 12,072
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 229
0
14
<COMMON> 0
<OTHER-SE> 1,181
<TOTAL-LIABILITY-AND-EQUITY> 15,683
0
<INVESTMENT-INCOME> 632
<INVESTMENT-GAINS> 22
<OTHER-INCOME> 274
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 54
<UNDERWRITING-OTHER> 229
<INCOME-PRETAX> 144
<INCOME-TAX> 46
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 98
<EPS-PRIMARY> 3.17
<EPS-DILUTED> 3.14
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
