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 March 31, 1997
--------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ---------- to ----------
Commission file number: 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 ororganization)
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 28,922,816 shares of the registrant's Common Stock, $.01 par
value, and 327,160 shares of the registrant's Series A Convertible Preferred
Stock, $.01 par value, outstanding as of April 30, 1997.
Exhibit Index - Page 18 Page 1 of 21
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
QUARTERLY REPORT ON FORM 10-Q FOR PERIOD ENDED MARCH 31, 1997
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996
Consolidated Income Statements for the Three Months Ended
March 31, 1997 and 1996
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1997 and 1996
Consolidated Statement of Stockholders' Equity for the
Three Months Ended March 31, 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 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
<PAGE>
<TABLE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(in millions)
<CAPTION>
March 31 December 31
1997 1996
-------- -----------
Unaudited
ASSETS
<S> <C> <C>
Assets:
Investments $11,541.5 $11,537.9
Cash and cash equivalents 1,123.5 875.8
Accrued investment income 156.7 146.8
Deferred policy acquisition costs 321.9 250.4
Value of insurance in force 85.9 70.8
Deferred distribution costs 113.2 114.4
Intangible assets 199.9 205.4
Other assets 127.2 134.7
Separate account assets 1,088.9 1,091.5
--------- ---------
$14,758.7 $14,427.7
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policyholder balances $11,687.7 $11,637.5
Notes payable to affiliates 229.0 229.0
Payable for investments purchased and
loaned 517.5 211.2
Other liabilities 230.2 267.1
Separate account liabilities 1,037.5 1,017.7
--------- ---------
Total liabilities 13,701.9 13,362.5
--------- ---------
Series A redeemable convertible preferred
stock, par value $.01; authorized, issued and
outstanding 327,340 shares in 1997 and 1996 14.0 13.8
--------- ---------
Stockholders' Equity:
Common stock, par value $.01; authorized
100,000,000 shares, issued and outstanding
28,904,131 shares in 1997 and 28,705,015 shares
in 1996 0.3 0.3
Additional paid-in capital 840.1 835.3
Net unrealized investment gains 30.7 74.4
Retained earnings 171.7 141.4
--------- ---------
Total stockholders' equity 1,042.8 1,051.4
--------- ---------
$14,758.7 $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
March 31
--------------------------
1997 1996
---- ----
<S> <C> <C>
Investment income $ 208.0 $ 189.2
Interest credited to policyholders (147.3) (138.1)
----------- -----------
Investment spread 60.7 51.1
----------- -----------
Net realized investment gains 12.9 3.8
----------- -----------
Fee income:
Investment advisory and administrative fees 53.1 46.4
Distribution and service fees 12.1 10.6
Transfer agency fees 11.8 10.4
Surrender charges and net commissions 8.5 7.7
Separate account fees 3.9 3.5
----------- -----------
Total fee income 89.4 78.6
----------- -----------
Expenses:
Operating expenses (75.8) (65.9)
Amortization of deferred policy acquisition
costs (16.3) (14.1)
Amortization of deferred distribution costs (8.2) (6.8)
Amortization of value of insurance in force (3.2) (1.7)
Amortization of intangible assets (3.2) (3.7)
Interest expense, net (4.5) (5.0)
----------- -----------
Total expenses (111.2) (97.2)
----------- -----------
Pretax income 51.8 36.3
Income tax expense (16.8) (12.5)
----------- -----------
Net income $ 35.0 $ 23.8
=========== ===========
Net income per share $ 1.14 $ 0.81
=========== ===========
Common stock and common stock equivalents 30,490,150 29,262,329
=========== ===========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Unaudited
<CAPTION>
Three Months Ended
March 31
------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 35.0 $ 23.8
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 18.2 14.8
Interest credited to policyholders 147.3 138.1
Net realized investment gains (12.9) (3.8)
Net amortization (accretion) on investments (8.1) 1.5
Change in deferred policy acquisition costs (0.6) (1.6)
Net change in other assets and liabilities,
net of effect of acquisitions (18.0) (42.7)
-------- --------
Net cash provided by operating activities 160.9 130.1
-------- --------
Cash flows from investing activities:
Investments purchased available for sale (717.6) (544.0)
Investments sold available for sale 45.0 92.7
Investments matured available for sale 671.1 300.6
Change in policy loans, net (6.0) (4.2)
Change in mortgage loans, net 1.7 1.7
Acquisitions, net of cash acquired 0.0 (7.1)
-------- --------
Net cash used in investing activities (5.8) (160.3)
-------- --------
Cash flows from financing activities:
Withdrawals from policyholder accounts (299.4) (252.6)
Deposits to policyholder accounts 202.3 218.9
Securities lending 194.9 198.0
Change in revolving credit facility (5.5) 3.0
Exercise of stock options 1.3 0.2
Dividends paid (1.0) (0.9)
-------- --------
Net cash provided by financing activities 92.6 166.6
-------- --------
Increase in cash and cash equivalents 247.7 136.4
Cash and cash equivalents at beginning of period 875.8 875.3
-------- --------
Cash and cash equivalents at end of period $1,123.5 $1,011.7
======== ========
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 Stockholders'
Stock Capital Gains Earnings Equity
------ ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance
December 31, 1996 $0.3 $835.3 $74.4 $141.4 $1,051.4
Proceeds from
exercise of stock
options 0.0 1.3 0.0 0.0 1.3
Accretion to face
value of preferred
stock 0.0 0.0 0.0 (0.2) (0.2)
Common stock
dividends 0.0 3.5 0.0 (4.3) (0.8)
Preferred stock
dividends 0.0 0.0 0.0 (0.2) (0.2)
Change in net
unrealized
investment gains 0.0 0.0 (43.7) 0.0 (43.7)
Net income 0.0 0.0 0.0 35.0 35.0
---- ------ ----- ------ --------
Balance,
March 31, 1997 $0.3 $840.1 $30.7 $171.7 $1,042.8
==== ====== ===== ====== ========
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, although the Company
believes the disclosures in these consolidated financial statements are
adequate to present fairly the information contained herein. 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
ended March 31, 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. The principal reclassifications relate to the presentation of
investment spread (the amount by which net investment income exceeds interest
credited to policyholder balances) and the components of the Company's fee
income. These reclassifications were made to provide additional information
with respect to the Company's major sources of revenue.
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, and Newport
Pacific Management, Inc. ("Newport"), an investment advisor to mutual funds
and institutional accounts specializing in Asian equity markets. The asset
management business derives fee income from investment products and services.
Approximately 64.7% of the Company's operating earnings for the three
months ended March 31, 1997 was attributable to the Company's annuity
insurance business, with the remaining 35.3% attributable to the Company's
asset management activities. This compares to approximately 58.5% and 41.5%,
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>
March 31 December 31
1997 1996
-------- -----------
<S> <C> <C>
Fixed maturities $10,683.7 $10,718.6
Mortgage loans 65.3 67.0
Policy loans 538.8 532.8
Other invested assets 216.3 183.6
Equity securities 37.4 35.9
--------- ---------
Total $11,541.5 $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. 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 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 $1.21 and $0.85 for the first quarters of 1997 and 1996,
respectively. The calculation of diluted earnings per share under SFAS 128
for these quarters would not materially differ from the calculation of fully
diluted earnings per share.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Results of Operations
Net Income was $35.0 million or $1.14 per share in the first quarter of 1997
compared to $23.8 million or $0.81 per share in the first quarter of 1996. The
improvement of $11.2 million in 1997 compared to 1996 resulted from higher
investment spread, higher fee income, and higher net realized investment gains.
Partially offsetting these items were increased operating expenses, amortization
expense, and income tax expense.
Pretax Income was $51.8 million in the first quarter of 1997 compared to
$36.3 million in the first quarter of 1996. The higher pretax income in 1997
compared to 1996 resulted from higher investment spread, higher fee income, and
higher net realized investment gains. Partially offsetting these increases were
the higher 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 $60.7 million in the first quarter of 1997 compared to
$51.1 million in the first quarter of 1996. The amount by which the average
yield on investments exceeds the average interest credited rate on policyholder
balances is the investment spread percentage. Such investment spread percentage
in the first quarter of 1997 was 1.90% compared to 1.82% in the first quarter of
1996. Assuming a constant interest rate environment, the Company anticipates
that the investment spread percentage in 1997 will be comparable to 1996.
Investment income was $208.0 million in the first quarter of 1997 compared to
$189.2 million in the first quarter of 1996. The increase of $18.8 million in
1997 compared to 1996 primarily relates to a $27.4 million increase as a result
of the higher level of average invested assets, partially offset by an $8.6
million decrease resulting from a lower average investment yield. The average
investment yield was 6.94% in the first quarter of 1997 compared to 7.27% in the
first quarter of 1996.
Interest credited to policyholders totaled $147.3 million in the first
quarter of 1997 compared to $138.1 million in the first quarter of 1996. The
increase of $9.2 million in 1997 compared to 1996 primarily relates to a $19.5
million increase as a result of a higher level of average policyholder balances,
partially offset by a $10.3 million decrease resulting from a lower average
interest credited rate. Policyholder balances averaged $11.7 billion in the
first quarter of 1997 compared to $10.2 billion in the first quarter of 1996.
The average interest credited rate was 5.04% in the first quarter of 1997
compared to 5.45% in the first quarter of 1996.
Average Investments (computed without giving effect to SFAS 115), including a
portion of the Company's cash and cash equivalents, were $12.0 billion in the
first quarter of 1997 compared to $10.4 billion in the first quarter of 1996.
The increase of $1.6 billion in 1997 compared to 1996 primarily relates to the
$0.9 billion coinsurance agreement entered into with Fidelity & Guaranty Life
Insurance during the third quarter of 1996 (the "F&G Life transaction") and the
investment of portfolio earnings for the twelve months ended March 31, 1997 of
$0.8 billion.
Net Realized Investment Gains were $12.9 million in the first quarter of 1997
compared to $3.8 million in the first quarter of 1996. The net realized
investment gains in 1997 included gains on the sales of fixed maturity
investments of $7.2 million and gains on sales of other invested assets in
separate account mutual funds sponsored by the Company of $5.7 million. These
sales were made to maximize total return. The net realized investment gains in
1996 were attributable to sales of the Company's fixed maturity investments
which were made to maximize total return.
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 $53.1 million in the first
quarter of 1997 compared to $46.4 million in the first quarter of 1996. The
increase of $6.7 million in 1997 compared to 1996 primarily reflects a higher
level of average fee-based assets under management.
Average fee-based assets under management were $35.8 billion in the first
quarter of 1997 compared to $32.5 billion in the first quarter of 1996. The
increase of $3.3 billion during 1997 compared to 1996 resulted primarily from
market appreciation of $1.8 billion and net sales of $1.2 billion for the twelve
months ended March 31, 1997. In addition, approximately $0.3 billion in
fee-based assets under management were acquired during this twelve month period.
Investment advisory and administrative fees were 0.59% of average fee-based
assets under management in the first quarter of 1997 and 0.57% in the first
quarter of 1996. This increase in the effective fee rate in the first quarter of
1997 was primarily due to the increased proportion of higher fee-based mutual
fund assets under management.
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 March 31
--------------
1997 1996
---- ----
<S> <C> <C>
Mutual Funds:
Broker-distributed $15.6 $15.7
Direct-marketed 6.2 5.4
Closed-end 1.9 1.8
Variable annuity 1.1 1.0
----- -----
24.8 23.9
Wealth Management 5.5 4.4
Institutional 4.5 4.4
----- -----
Total Fee-Based Assets Under Management* $34.8 $32.7
===== =====
- --------------
* As of March 31, 1997, Keyport's investments of $12.2 billion bring total
assets under management to $47.0 billion.
</TABLE>
<TABLE>
Changes in Fee-Based Assets Under Management
<CAPTION>
As of March 31
--------------
1997 1996
---- ----
<S> <C> <C>
Fee-based assets under management - beginning $35.9 $31.9
Sales and reinvestments 1.9 1.9
Redemptions and withdrawals (2.1) (1.2)
Market appreciation (depreciation) (0.9) 0.1
----- -----
Fee-based assets under management - ending $34.8 $32.7
===== =====
</TABLE>
Distribution and Service Fees are based on the market value of the Company's
broker-distributed mutual funds. Distribution fees of 0.75% are earned on the
average assets attributable to such funds sold without front-end sales loads,
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 $12.1
million in the first quarter of 1997 compared to $10.6 million in the first
quarter of 1996. The increase of $1.5 million in 1997 compared to 1996 was
primarily attributable to the higher asset levels of mutual funds without
front-end sales loads. As a percentage of the corresponding weighted average
assets, distribution and service fees approximated 0.71% in 1997 and 0.70% in
1996.
Transfer Agency Fees are based on the market value of assets managed in the
Company's broker-distributed and direct-marketed mutual funds. Such fees were
$11.8 million on average assets of $23.6 billion in the first quarter of 1997
and $10.4 million on average assets of $21.8 billion in the first quarter of
1996. The increase of $1.4 million in 1997 compared to 1996 was primarily due to
higher average assets in direct-marketed mutual funds. As a percentage of total
average mutual fund assets under management, transfer agency fees were
approximately 0.20% and 0.19% in the first quarters of 1997 and 1996,
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 without
front-end sales loads; 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 investment
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 $8.5 million in the first quarter of 1997
compared to $7.7 million in the first quarter 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 $4.8 million and $4.9
million in the first quarters of 1997 and 1996, respectively. Total fixed,
indexed and variable annuity withdrawals represented 11.2% and 9.8% of the total
average annuity policyholder and separate account balances in the first
quarters of 1997 and 1996, respectively. The percentage increase in 1997 was
primarily attributable to surrenders of annuities acquired in the F&G Life
transaction; excluding these surrenders, the withdrawal percentage in 1997 was
9.4%.
Net commissions were $3.7 million in the first quarter of 1997 and $2.8
million in the first quarter of 1996. The increase in 1997 compared to 1996 was
primarily attributable to the acquisition of Independent Holdings, Inc.
("Independent") in March 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 $3.9 million in the first quarter of 1997 compared to $3.5
million in the first quarter of 1996. Such fees represented 1.55% and 1.52% of
average variable annuity and variable life separate account balances in 1997 and
1996, respectively.
Operating Expenses primarily represent compensation, marketing, and other
general and administrative expenses. These expenses were $75.8 million in the
first quarter of 1997 compared to $65.9 million in the first quarter of 1996.
The increase in 1997 compared to 1996 was primarily due to increases in
compensation of $6.3 million, in marketing expenses of $1.4 million relating to
mutual fund sales and to the acquisition of Independent which increased
operating expenses by $1.6 million, partially offset by a first quarter 1996
$1.9 million restructuring charge. Operating expenses expressed as a percent of
average total assets under management were 0.63% and 0.60% in the first quarters
of 1997 and 1996, respectively.
Amortization of Deferred Policy Acquisition Costs was $16.3 million in the
first quarter of 1997 compared to $14.1 million in the first quarter of 1996.
The increase in amortization in the first quarter of 1997 compared to 1996 was
primarily due to the growth of business in force associated with fixed, indexed
and variable annuity sales. Amortization expense represented 0.62% and 0.64% of
the total average policyholder and separate account balances in 1997 and 1996,
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 without
front-end sales loads. Amortization was $8.2 million in the first quarter of
1997 compared to $6.8 million in the first quarter of 1996. The increase in 1997
was primarily attributable to the continuing sales of such fund shares during
1997 and 1996.
Amortization of Value of Insurance in Force totaled $3.2 million in the first
quarter of 1997 compared to $1.7 million in the first quarter of 1996. The
increase in amortization in 1997 compared to 1996 was primarily due to $1.5
million of amortization relating to the F&G Life transaction.
Amortization of Intangible Assets was $3.2 million in the first quarter of
1997 compared to $3.7 million in the first quarter of 1996. The decrease in 1997
was primarily attributable to certain assets becoming fully amortized in the
third quarter of 1996 which reduced amortization by $1.0 million, partially
offset by an increase of $0.4 million in amortization relating to the
acquisition of Independent.
Interest Expense was $4.5 million in the first quarter of 1997 compared to
$5.0 million in the first quarter of 1996. The decrease of $0.5 million is
principally due to higher interest income which is netted against interest
expense.
Income Tax Expense was $16.8 million or 32.4% of pretax income in the first
quarter of 1997 compared to $12.5 million, or 34.3% of pretax income in the
first quarter of 1996. Substantially all the federal income tax expense related
to the Company's annuity insurance business.
Financial Condition
Stockholders' Equity as of March 31, 1997 was $1.04 billion compared to $1.05
billion as of December 31, 1996. Net income in the first quarter of 1997 was
$35.0 million, and cash dividends on the Company's preferred and common stock
totaled $1.0 million. Common stock totaling $1.3 million was issued in
connection with the exercise of stock options. A decrease in net unrealized
investment gains, net of taxes and adjustments to deferred policy acquisition
costs and value of insurance in force, during the period decreased stockholders'
equity by $43.7 million.
Book Value Per Share amounted to $36.08 at March 31, 1997 compared to $36.63
at December 31, 1996. Excluding net unrealized gains on investments, book value
per share amounted to $35.01 at March 31, 1997 and $34.04 at December 31, 1996.
As of March 31, 1997, there were 28.9 million common shares outstanding compared
to 28.7 million shares as of December 31, 1996.
Investments not including cash and cash equivalents, totaled $11.5 billion as
of March 31, 1997 and December 31, 1996. The Company's total investments at
March 31, 1997 reflected net unrealized gains of $78.3 million. At December 31,
1996, such net unrealized investment gains were $229.8 million. The decrease in
net unrealized gains in the first quarter of 1997 principally reflects the
higher interest rates at the end of the first quarter.
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.
Approximately $10.4 billion, or 97.2%, of the fixed maturities investments at
March 31, 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 ("NAIC"). At March 31, 1997, the
carrying value of investments in below investment grade securities totaled
$991.5 million, or 7.9% of total investments (including certain cash and cash
equivalents) of $12.6 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 disintermediation. 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 adequate risk-adjusted returns consistent with the investment
objectives of effective asset-liability duration management, 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 a predictable spread between what it earns on its
assets and what it pays on its policyholder balances by investing principally in
fixed maturities. The Company's fixed-rate and equity indexed products
incorporate surrender charges to encourage persistency, discourage withdrawals
and make the cost of its policyholder balances more predictable. Approximately
85.0% of the Company's fixed and indexed annuity policyholder balances were
subject to surrender charges at March 31, 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 rate paid on policyholder balances under a
variety of possible future interest rate scenarios. At March 31, 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, the Company utilizes interest rate
swap agreements ("swap 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. At March 31, 1997, the Company had 41 outstanding swap agreements
with an aggregate notional principal amount of $2.3 billion. These agreements
mature in various years through 2001. In addition, with respect to the Company's
indexed annuity, the Company buys call options on the S&P 500 Index to manage
its obligation to provide returns based upon this Index. At March 31, 1997, the
Company had call options with an estimated fair value of $131.2 million.
There are risks associated with some of the techniques the Company uses to
match its assets and liabilities. The primary risk associated with swap
agreements is the risk associated with counterparty nonperformance. The Company
believes that the counterparties to its swap agreements are financially
responsible and that the counterparty risk associated with these transactions is
minimal. In addition, swap agreements have interest rate risk. However, these
swap agreements hedge fixed-rate assets; any interest rate movements that
adversely affect the market value of swap agreements would be more than offset
by changes in the market values of such fixed rate assets.
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 declines in value may be other than temporary. 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.
<PAGE>
Liquidity
The Company is a holding company whose liquidity needs include the following:
(i) operating expenses; (ii) debt service; (iii) dividends on 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).
Regulatory authorities permit dividend payments from Keyport to the Company
up to the lesser of (i) 10% of statutory surplus as of the preceding December 31
or (ii) the net gain from operations for the preceding fiscal year. As of March
31, 1997, Keyport could pay dividends of up to $42.5 million without the
approval of the Department of Business Regulation of the State of Rhode Island.
As of March 31, 1997 under its credit facility, Colonial could pay dividends of
up to $26.5 million. In April 1997, this Facility was renewed and various terms
were revised. Under the revised terms of the Facility, Colonial could pay
dividends up to $87.2 million as of March 31, 1997.
Based upon the historical cash flow of the Company, the Company's current
financial condition and 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, 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 (assuming Liberty Mutual continues to
participate in the Dividend Reinvestment Plan) its intentions to pay dividends
on the Common Stock. The Company's cash flow may be influenced by, among other
things, general economic conditions, realized investment gains and losses, the
interest rate environment, the level of assets under management, market changes,
regulatory changes and tax law changes.
Each of the Company's business segments has its own liquidity needs and
financial resources. 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. 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 net investment income, annuity premiums
and deposits, 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 March 31,
1997, $9.2 billion of Keyport's investments, including short-term 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. However, Keyport
believes that liquidity to fund 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. 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 instance, 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, the Financial Accounting Standards Board 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 $1.21 and $0.85 for the
first quarters of 1997 and 1996, respectively. The calculation of diluted
earnings per share under SFAS 128 for these quarters would not materially differ
from the calculation of fully diluted earnings per share.
<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 March 31,
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: May 14, 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
March 31
------------------
1997 1996
---- ----
<S> <C> <C>
Primary net income per common share:
Net income $ 35.0 $ 23.8
Less: cumulative preferred dividends 0.2 0.2
----------- -----------
Net income available for common
shareholders $ 34.8 $ 23.6
=========== ===========
Weighted average shares outstanding 28,775,797 27,781,577
Common stock equivalents 1,714,353 1,480,752
----------- -----------
Total 30,490,150 29,262,329
=========== ===========
Primary net income per common share $ 1.14 $ 0.81
=========== ===========
Fully diluted net income per common share:
Net income $ 35.0 $ 23.8
=========== ===========
Weighted average shares outstanding 28,775,797 27,781,577
Common stock equivalents 1,714,353 1,486,397
Convertible preferred stock 345,638 346,062
----------- -----------
Total 30,835,788 29,614,036
=========== ===========
Fully diluted net income per common share $ 1.14 $ 0.80
=========== ===========
</TABLE>
<TABLE>
LIBERTY FINANCIAL COMPANIES, INC.
EXHIBIT 12 - Statement re Computation of Ratios
($ in millions)
<CAPTION>
Three Months Ended
March 31
------------------
1997 1996
---- ----
<S> <C> <C>
Earnings:
Pretax income $51.8 $36.3
Add fixed charges:
Interest on indebtedness 5.5 5.7
Portion of rent representing
the interest factor 1.1 1.1
Preferred stock dividends 0.2 0.2
Accretion to face value of redeemable
convertible preferred stock 0.2 0.2
----- ------
Income as adjusted $58.8 $43.5
===== ======
Fixed charges:
Interest on indebtedness $ 5.5 $ 5.7
Portion of rent representing
the interest factor 1.1 1.1
Preferred stock dividends 0.2 0.2
Accretion to face value of redeemable
convertible preferred stock 0.2 0.2
----- ------
Total fixed charges $ 7.0 $ 7.2
===== ======
Ratio of earnings to fixed charges 8.40x 6.04x
===== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 10,684
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 37
<MORTGAGE> 65
<REAL-ESTATE> 0
<TOTAL-INVEST> 11,542
<CASH> 1,124
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 322
<TOTAL-ASSETS> 14,759
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 11,688
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 229
0
14
<COMMON> 0
<OTHER-SE> 1,043
<TOTAL-LIABILITY-AND-EQUITY> 14,759
0
<INVESTMENT-INCOME> 208
<INVESTMENT-GAINS> 13
<OTHER-INCOME> 89
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 16
<UNDERWRITING-OTHER> 76
<INCOME-PRETAX> 52
<INCOME-TAX> 17
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.14
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
