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, 1999
------------------
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 or organization)
600 Atlantic Avenue, Boston, Massachusetts 02210-2214
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(Address of principal executive offices) (Zip Code)
(617) 722-6000
- --------------------------------------------------------------------------------
(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 47,279,457 shares of the registrant's Common Stock, $.01 par
value, and 324,759 shares of the registrant's Series A Convertible Preferred
Stock, $.01 par value, outstanding as of October 31, 1999.
Exhibit Index - Page 23 Page 1 of 25
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
QUARTERLY REPORT ON FORM 10-Q FOR PERIOD ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998
Consolidated Income Statements for the Three Months and
Nine Months Ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998
Consolidated Statement of Stockholders' Equity for the
Nine Months Ended September 30, 1999
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(in millions)
September 30 December 31
1999 1998
------------- -------------
Unaudited
ASSETS
Assets:
Investments $ 12,215.5 $ 12,598.3
Cash and cash equivalents 1,258.9 984.1
Accrued investment income 176.2 161.0
Deferred policy acquisition costs 647.4 407.6
Deferred distribution costs 153.9 130.2
Intangible assets 287.2 292.8
Other assets 258.3 179.6
Separate account assets 2,849.6 1,765.5
---------- ----------
$ 17,847.0 $ 16,519.1
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policyholder balances $ 12,075.6 $ 12,504.1
Notes payable 536.9 486.4
Payable for investments purchased
and loaned 835.5 240.4
Other liabilities 321.6 278.4
Separate account liabilities 2,790.4 1,723.2
---------- ----------
Total liabilities 16,560.0 15,232.5
---------- ----------
Series A redeemable convertible preferred
stock, par value $.01; authorized, issued
and outstanding 324,759 shares in 1999 and
1998 15.8 15.3
---------- ----------
Stockholders' Equity:
Common stock, par value $.01; authorized
100,000,000 shares, issued and outstanding
47,262,707 shares in 1999 and 46,384,015
shares in 1998 0.5 0.5
Additional paid-in capital 918.8 901.5
Retained earnings 406.3 346.4
Accumulated other comprehensive income (loss) (49.3) 27.2
Unearned compensation (5.1) (4.3)
---------- ----------
Total stockholders' equity 1,271.2 1,271.3
---------- ----------
$ 17,847.0 $ 16,519.1
========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED INCOME STATEMENTS
(in millions, except per share data)
Unaudited
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Investment income $ 197.9 $ 202.7 $ 601.2 $ 612.4
Interest credited to policyholders (131.3) (143.3) (395.5) (425.6)
--------- --------- --------- ---------
Investment spread 66.6 59.4 205.7 186.8
--------- --------- --------- ---------
Net realized investment gains
(losses) (12.7) 4.2 (27.4) 4.0
--------- --------- --------- ---------
Fee income:
Investment advisory and
administrative fees 68.2 58.4 202.6 174.5
Distribution and service fees 15.3 13.2 45.3 39.0
Transfer agency fees 13.1 11.9 38.8 36.6
Surrender charges and net
commissions 9.6 8.2 27.0 26.2
Separate account fees 8.7 5.4 23.0 15.5
--------- --------- --------- ---------
Total fee income 114.9 97.1 336.7 291.8
--------- --------- --------- ---------
Expenses:
Operating expenses (89.1) (78.5) (268.3) (238.5)
Amortization of deferred policy
acquisition costs (22.8) (16.7) (69.5) (56.7)
Amortization of deferred
distribution costs (10.2) (9.8) (29.4) (27.9)
Amortization of intangible assets (5.0) (3.6) (15.1) (10.7)
Interest expense, net (4.6) (2.7) (15.6) (10.5)
--------- --------- --------- ---------
Total expenses (131.7) (111.3) (397.9) (344.3)
--------- --------- --------- ---------
Pre-tax income 37.1 49.4 117.1 138.3
Income tax expense (12.5) (15.9) (41.8) (43.6)
--------- --------- --------- ---------
Net income $ 24.6 $ 33.5 $ 75.3 $ 94.7
========= ========= ========= =========
Net income per share - basic $ 0.52 $ 0.73 $ 1.60 $ 2.08
========= ========= ========= =========
Net income per share - assuming
dilution $ 0.51 $ 0.71 $ 1.57 $ 2.00
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Unaudited
Nine Months Ended
September 30
---------------------
1999 1998
--------- ---------
Cash flows from operating activities:
Net income $ 75.3 $ 94.7
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 56.8 54.3
Interest credited to policyholders 395.5 425.6
Net realized investment losses (gains) 27.4 (4.0)
Net amortization on investments 61.6 101.9
Change in deferred policy acquisition costs (13.4) (25.8)
Net change in other assets and liabilities (57.8) (26.1)
--------- ---------
Net cash provided by operating activities 545.4 620.6
--------- ---------
Cash flows from investing activities:
Investments purchased available for sale (4,032.8) (5,207.4)
Investments sold available for sale 3,903.7 4,060.6
Investments matured available for sale 110.8 938.2
Change in policy loans, net (10.9) (24.8)
Change in mortgage loans, net 42.1 4.3
Acquisitions, net of cash acquired 0.0 (96.4)
Other (7.0) 11.3
--------- ---------
Net cash provided by (used in) investing activities 5.9 (314.2)
--------- ---------
Cash flows from financing activities:
Withdrawals from policyholder accounts (1,570.8) (1,371.6)
Deposits to policyholder accounts 640.4 1,089.3
Securities lending 603.1 (25.0)
Change in notes payable 50.5 97.0
Exercise of stock options 5.0 5.8
Dividends paid (4.7) (4.4)
--------- ---------
Net cash used in financing activities (276.5) (208.9)
--------- ---------
Increase in cash and cash equivalents 274.8 97.5
Cash and cash equivalents at beginning of period 984.1 1,290.1
--------- ---------
Cash and cash equivalents at end of period $ 1,258.9 $ 1,387.6
========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in millions)
Unaudited
Accum.
Other
Addit'l Comprehen. Total
Common Paid-In Retained Income Unearned Stockhldrs'
Stock Capital Earnings (Loss) Compen. Equity
------- ------- -------- ---------- --------- ----------
Balance,
December 31,
1998 $0.5 $901.5 $346.4 $27.2 $(4.3) $1,271.3
Effect of
stock-based
compensation
plans 7.2 (0.8) 6.4
Accretion to face
value of preferred
stock (0.6) (0.6)
Common stock
dividends 10.1 (14.1) (4.0)
Preferred stock
dividends (0.7) (0.7)
Net income 75.3 75.3
Other comprehensive
income (loss),
net of tax (76.5) (76.5)
------- ------- -------- ---------- --------- ----------
Balance,
September 30,
1999 $0.5 $918.8 $406.3 $(49.3) $(5.1) $1,271.2
======= ======= ======== ========== ========= ==========
See accompanying notes to consolidated financial statements.
<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 1998
Form 10-K. The results of operations for the three months and nine months
ended September 30, 1999 are not necessarily indicative of the results to be
expected for the full year. Certain previously reported amounts have been
reclassified to conform with the current period presentation.
2. Segment Information
The Company is an asset accumulation and management company with two
reportable 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 at Liberty
Funds Group, an investment advisor (through its subsidiary Colonial
Management Associates), distributor and transfer agent to mutual funds, Stein
Roe & Farnham Incorporated, a diversified investment advisor, Newport Pacific
Management, Inc., an investment advisor to mutual funds and institutional
accounts specializing in Asian equity markets, Crabbe Huson Group, Inc.
("Crabbe Huson"), an investment advisor to mutual funds and institutional
accounts, Progress Investment Management Company ("Progress"), an investment
advisor to institutional accounts, and Liberty Asset Management Company, an
investment advisor to mutual funds. The asset management business derives fee
income from investment products and services.
The Company's reportable segments offer different products and are each
managed separately. Information by reportable segment is shown below (in
millions):
Three Months Ended Nine Months Ended
September 30 September 30
------------------- ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Statement of Operations Data
Revenues (excluding net realized
investment gains and losses):
Annuity:
Unaffiliated $215.5 $214.6 $648.6 $649.8
Intersegment (3.5) (2.3) (10.3) (7.5)
-------- -------- -------- --------
Total annuity 212.0 212.3 638.3 642.3
-------- -------- -------- --------
Asset management:
Unaffiliated 97.3 85.2 289.3 254.4
Intersegment 3.5 2.3 10.3 7.5
-------- -------- -------- --------
Total asset management 100.8 87.5 299.6 261.9
-------- -------- -------- --------
Total revenues (excluding net
realized investment gains
and losses) $312.8 $299.8 $937.9 $904.2
======== ======== ======== ========
<PAGE>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Income before income taxes:
Annuity:
Income before amortization
of intangible assets $43.0 $39.1 $127.9 $114.2
Amortization of intangible assets (0.3) (0.3) (0.9) (0.9)
-------- -------- -------- --------
Subtotal annuity 42.7 38.8 127.0 113.3
-------- -------- -------- --------
Asset management:
Income before amortization
of intangible assets 22.7 17.1 65.9 59.9
Amortization of intangible assets (4.6) (3.2) (14.0) (9.6)
-------- -------- -------- --------
Subtotal asset management 18.1 13.9 51.9 50.3
-------- -------- -------- --------
Other:
Loss before amortization of
intangible assets (10.9) (7.4) (34.2) (29.1)
Amortization of intangible assets (0.1) (0.1) (0.2) (0.2)
-------- -------- -------- --------
Subtotal other (11.0) (7.5) (34.4) (29.3)
-------- -------- -------- --------
Income before net realized
investment gains (losses)
and income taxes 49.8 45.2 144.5 134.3
Net realized investment gains
(losses) (12.7) 4.2 (27.4) 4.0
-------- -------- -------- --------
Total income before income taxes $37.1 $49.4 $117.1 $138.3
======== ======== ======== ========
3. Investments
Investments were comprised of the following (in millions):
September 30 December 31
1999 1998
----------- ------------
Fixed maturities $10,755.5 $11,277.2
Equity securities 25.8 24.6
Policy loans 589.6 578.9
Other invested assets 844.6 717.6
----------- ------------
Total $12,215.5 $12,598.3
=========== ============
The Company's general investment policy is to hold fixed maturity
securities 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 portfolio of
fixed maturity securities as "available for sale" and accordingly carries
such investments at fair value.
<PAGE>
4. Net Income Per Share
The following table sets forth the computation of net income per
share-basic and net income per share-assuming dilution:
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Numerator (in millions)
Net income $24.6 $33.5 $75.3 $94.7
Less: preferred stock dividends (0.2) (0.2) (0.7) (0.7)
---------- ---------- ---------- ----------
Numerator for net income per
share - basic - income available
to common stockholders 24.4 33.3 74.6 94.0
Plus: income impact of assumed
conversions Preferred stock
dividends 0.2 0.2 0.7 0.7
---------- ---------- ---------- ----------
Numerator for net income per
share - assuming dilution -
income available to common
stockholders after assumed
conversions $24.6 $33.5 $75.3 $94.7
Denominator
Denominator for net income per
share - basic - weighted
average shares 46,867,054 45,440,311 46,599,909 45,110,661
Effect of dilutive securities:
Employee stock options 727,461 1,339,023 686,173 1,651,337
Convertible preferred stock 514,370 514,493 514,368 516,090
Common stock issuable as
contingent purchase price 55,486 0 35,222 0
---------- ---------- ---------- ----------
Dilutive potential common shares 1,297,317 1,853,516 1,235,763 2,167,427
---------- ---------- ---------- ----------
Denominator for net income
per share - assuming
dilution 48,164,371 47,293,827 47,835,672 47,278,088
========== ========== ========== ==========
Net income per share - basic $0.52 $0.73 $1.60 $2.08
========== ========== ========== ==========
Net income per share - assuming $0.51 $0.71 $1.57 $2.00
dilution ========== ========== ========== ==========
5. Comprehensive Income (Loss)
Comprehensive income (loss) was comprised of the following (in millions):
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
1999 1998 1999 1998
--------- -------- --------- --------
Net income $24.6 $33.5 $75.3 $94.7
Other comprehensive loss, net of tax:
Change in net unrealized investment
losses (30.0) (30.8) (76.5) (28.3)
--------- -------- --------- --------
Comprehensive income (loss) $(5.4) $2.7 $(1.2) $66.4
========= ======== ========= ========
<PAGE>
6. Recent Accounting Pronouncement
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133
"Accounting for Derivative Instruments and Hedging Activities" was issued.
This statement standardizes the accounting for derivative instruments and the
derivative portion of certain other contracts that have similar
characteristics by requiring that an entity recognize those instruments at
fair value. This statement also requires a new method of accounting for
hedging transactions, prescribes the type of items and transactions that may
be hedged, and specifies detailed criteria to be met to qualify for hedge
accounting. In June 1999, SFAS No. 137 "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133" was issued. SFAS No. 137 defers for one year the effective date of SFAS
No. 133. This statement now will apply to all fiscal quarters of all fiscal
years beginning after June 15, 2000. Earlier adoption is permitted. Upon
adoption, the Company will be required to record a cumulative effect
adjustment to reflect this accounting change. At this time, the Company has
not completed its analysis and evaluation of the requirements and the impact
of this statement.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Net Income was $24.6 million or $0.51 per share for the quarter ended
September 30, 1999 compared to $33.5 million or $0.71 per share for the quarter
ended September 30, 1998. For the first nine months of 1999, net income was
$75.3 million or $1.57 per share compared to $94.7 million or $2.00 per share
for the first nine months of 1998. These decreases resulted largely from net
realized investment losses in 1999 compared to net realized investment gains in
1998. Operating expenses, amortization expense and interest expense, net also
increased. Partially offsetting these items were higher investment spread and
fee income. Income tax expense decreased for 1999 compared to 1998. However, the
effective tax rate was significantly higher in 1999 compared to 1998.
Pre-tax Income was $37.1 million for the quarter ended September 30, 1999
compared to $49.4 million for the quarter ended September 30, 1998. For the
first nine months of 1999, pre-tax income was $117.1 million compared to $138.3
million for the first nine months of 1998. These decreases resulted largely from
net realized investment losses in 1999 compared to net realized investment gains
in 1998. Operating expenses, amortization expense and interest expense, net also
increased. Partially offsetting these items were higher investment spread and
fee income.
Investment Spread is the amount by which investment income earned on the
Company's investments exceeds interest credited on policyholder balances.
Investment spread was $66.6 million for the quarter ended September 30, 1999
compared to $59.4 million for the quarter ended September 30, 1998. 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, 1999 was 1.90%
compared to 1.63% for the quarter ended September 30, 1998. For the first nine
months of 1999, investment spread was $205.7 million compared to $186.8 million
for the first nine months of 1998. The investment spread percentage was 1.93%
for the first nine months of 1999 compared to 1.76% for the first nine months of
1998.
Investment income was $197.9 million for the quarter ended September 30, 1999
compared to $202.7 million for the quarter ended September 30, 1998. The
decrease of $4.8 million in 1999 compared to 1998 includes a $2.5 million
decrease resulting from a lower average investment yield and a $2.3 million
decrease as a result of a lower level of average invested assets. The 1999
investment income was net of $19.8 million of S&P 500 Index call option
amortization expense related to the Company's equity-indexed annuities compared
to $17.9 million in 1998. The average investment yield was 6.20% for the quarter
ended September 30, 1999 compared to 6.27% for the quarter ended September 30,
1998. For the first nine months of 1999, investment income was $601.2 million
compared to $612.4 million for the first nine months of 1998. The decrease of
$11.2 million in 1999 compared to 1998 primarily relates to a $20.2 million
decrease resulting from a lower average investment yield, partially offset by a
$9.0 million increase as a result of a higher level of average invested assets.
The 1999 investment income was net of $58.6 million of S&P 500 Index call option
amortization expense related to the Company's equity-indexed annuities compared
to $53.1 million in 1998. The average investment yield was 6.20% for the first
nine months of 1999 compared to 6.41% for the first nine months of 1998.
Interest credited to policyholders totaled $131.3 million for the quarter
ended September 30, 1999 compared to $143.3 million for the quarter ended
September 30, 1998. The decrease of $12.0 million in 1999 compared to 1998
primarily relates to a $10.5 million decrease resulting from a lower average
interest credited rate, as well as a $1.5 million decrease as a result of a
lower level of average policyholder balances. Policyholder balances averaged
$12.2 billion (including $10.0 billion of fixed products, consisting of fixed
annuities and the closed block of single premium whole life insurance, and $2.2
billion of equity-indexed annuities) for the quarter ended September 30, 1999
compared to $12.4 billion (including $10.6 billion of fixed products and $1.8
billion of equity-indexed annuities) for the quarter ended September 30, 1998.
The average interest credited rate was 4.30% (5.00% on fixed products and 0.85%
on equity-indexed annuities) for the quarter ended September 30, 1999 compared
to 4.64% (5.31% on fixed products and 0.85% on equity-indexed annuities) for the
quarter ended September 30, 1998. Keyport's equity-indexed annuities credit
interest to the policyholder at a "participation rate" equal to a portion
(ranging for existing policies from 40% 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 if held to term, 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 1999, interest credited to policyholders totaled $395.5 million
compared to $425.6 million for the first nine months of 1998. The decrease of
$30.1 million in 1999 compared to 1998 primarily relates to a $34.8 million
decrease resulting from a lower average interest credited rate, partially offset
by a $4.7 million increase as a result of a higher level of average policyholder
balances. Policyholder balances averaged $12.3 billion (including $10.2 billion
of fixed products, consisting of fixed annuities and the closed block of single
premium whole life insurance, and $2.1 billion of equity-indexed annuities) for
the first nine months of 1999 compared to $12.2 billion (including $10.5 billion
of fixed products and $1.7 billion of equity-indexed annuities) for the first
nine months of 1998. The average interest credited rate was 4.27% (5.00% on
fixed products and 0.85% on equity-indexed annuities) for the first nine months
of 1999 compared to 4.65% (5.31% on fixed products and 0.85% on equity-indexed
annuities) for the first nine months of 1998.
Average investments in the Company's general account (computed without giving
effect to Statement of Financial Accounting Standards No. 115), including a
portion of the Company's cash and cash equivalents, were $12.8 billion for the
quarter ended September 30, 1999 compared to $12.9 billion for the quarter ended
September 30, 1998. For the first nine months of 1999, such average investments
were $12.9 billion compared to $12.7 billion for the first nine months of 1998.
This increase was primarily due to the reinvestment of portfolio earnings for
the twelve months ended September 30, 1999.
Net Realized Investment Gains (Losses) were $(12.7) million for the quarter
ended September 30, 1999 compared to $4.2 million for the quarter ended
September 30, 1998. For the first nine months of 1999, net realized investment
gains (losses) were $(27.4) million compared to $4.0 million for the first nine
months of 1998. The net realized investment losses in 1999 included losses of
$(5.7) million for the quarter and $(8.7) million for the nine months for
certain fixed maturity investments where the decline in value was determined to
be other than temporary.
Investment Advisory and Administrative Fees are based on the market value of
assets managed for mutual funds, private capital management and institutional
investors. Investment advisory and administrative fees were $68.2 million for
the quarter ended September 30, 1999 compared to $58.4 million for the quarter
ended September 30, 1998. For the first nine months of 1999, investment advisory
and administrative fees were $202.6 million compared to $174.5 million for the
first nine months of 1998. These increases during 1999 compared to 1998
primarily reflect a higher level of average fee-based assets under management.
Average fee-based assets under management were $48.6 billion for the quarter
ended September 30, 1999 compared to $40.7 billion for the quarter ended
September 30, 1998. For the first nine months of 1999, average fee-based assets
under management were $48.0 billion compared to $40.2 billion for the first nine
months of 1998. These increases during 1999 compared to 1998 resulted from
market appreciation and net sales for the twelve months ended September 30,
1999. Investment advisory and administrative fees were 0.56% and 0.57% of
average fee-based assets under management for the quarters ended September 30,
1999 and 1998, respectively. For the first nine months of 1999 and 1998, such
percentages were 0.56% and 0.58%, respectively.
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).
<PAGE>
Fee-Based Assets Under Management
As of September 30
---------------------
1999 1998
--------- ---------
Mutual Funds:
Intermediary-distributed $17.5 $16.7
Direct-marketed 6.1 6.5
Closed-end 2.5 2.2
Variable annuity 1.8 1.2
--------- ---------
27.9 26.6
Private Capital Management 8.2 7.0
Institutional 11.9 10.7
--------- ---------
Total Fee-Based Assets Under Management* $48.0 $44.3
========= =========
- --------------
* As of September 30, 1999 and 1998, Keyport's insurance assets of $13.4
billion and $13.2 billion, respectively, bring total assets under management
to $61.4 billion and $57.5 billion, respectively.
Changes in Fee-Based Assets Under Management
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Fee-based assets under management $49.1 $41.0 $47.9 $38.7
- beginning
Sales and reinvestments 3.2 2.1 9.0 6.2
Redemptions and withdrawals (2.5) (1.6) (8.3) (4.7)
Acquisitions 0.0 5.4 0.0 5.4
Market appreciation (depreciation) (1.8) (2.6) (0.6) (1.3)
--------- --------- --------- ---------
Fee-based assets under management $48.0 $44.3 $48.0 $44.3
- ending ========== ========= ========== =========
Distribution and Service Fees are based on the market value of the Company's
intermediary-distributed mutual funds. Distribution fees of 0.75% are generally
earned on the average assets attributable to such funds sold with 12b-1
distribution fees and contingent deferred sales charges and service fees of
0.25% (net of amounts passed on to selling brokers) are generally earned on the
total of such average mutual fund assets. These fees totaled $15.3 million for
the quarter ended September 30, 1999 compared to $13.2 million for the quarter
ended September 30, 1998. For the first nine months of 1999, distribution and
service fees were $45.3 million compared to $39.0 million for the first nine
months of 1998. These increases during 1999 compared to 1998 were primarily
attributable to the higher asset levels of mutual funds with 12b-1 distribution
fees and contingent deferred sales charges. As a percentage of
intermediary-distributed average mutual fund assets, distribution and service
fees were approximately 0.35% and 0.33% for the quarters ended September 30,
1999 and 1998, respectively. For the first nine months of 1999 and 1998, such
percentages were 0.35% and 0.32%, respectively.
Transfer Agency Fees are based on the market value of assets managed in the
Company's intermediary-distributed, direct-marketed and variable annuity mutual
funds. Such fees were $13.1 million on average assets of $26.0 billion for the
quarter ended September 30, 1999 and $11.9 million on average assets of $24.4
billion for the quarter ended September 30, 1998. For the first nine months of
1999, transfer agency fees were $38.8 million on average assets of $26.1 billion
and $36.6 million on average assets of $24.8 billion for the first nine months
of 1998. As a percentage of total average assets under management, transfer
agency fees were approximately 0.20% for the quarters ended September 30, 1999
and 1998. For each of the first nine months of 1999 and 1998, such percentages
were also 0.20%.
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 12b-1 distribution
fees and 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
commissions that are paid to the Company's client banks and brokers). Total
surrender charges and net commissions were $9.6 million for the quarter ended
September 30, 1999 compared to $8.2 million for the quarter ended September 30,
1998. For the first nine months of 1999, total surrender charges and net
commissions were $27.0 million compared to $26.2 million for the first nine
months of 1998.
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 generally
during the first six years. Such charges totaled $6.5 million for the quarter
ended September 30, 1999 and $5.5 million for the quarter ended September 30,
1998. For the first nine months of 1999, surrender charges were $18.0 million
compared to $17.3 million for the first nine months of 1998. Total annuity
withdrawals represented 15.2% and 12.4% of the total average annuity
policyholder and separate account balances for the quarters ended September 30,
1999 and 1998, respectively. For the first nine months of 1999 and 1998, the
corresponding percentages were 14.4% and 13.7%, respectively. Net commissions
were $3.1 million for the quarter ended September 30, 1999 and $2.7 million for
the quarter ended September 30, 1998. For the first nine months of 1999, net
commissions were $9.0 million compared to $8.9 million for the first nine months
of 1998.
Separate Account Fees are primarily mortality and expense charges earned on
variable annuity and variable life policyholder balances. These fees, which are
primarily based on the market values of the assets in separate accounts
supporting the contracts, were $8.7 million for the quarter ended September 30,
1999 compared to $5.4 million for the quarter ended September 30, 1998. For the
first nine months of 1999, separate account fees were $23.0 million compared to
$15.5 million for the first nine months of 1998. Such fees represented 1.31% and
1.54% of average institutional, variable annuity and variable life separate
account balances for the quarters ended September 30, 1999 and 1998,
respectively. For the first nine months of 1999 and 1998, such percentages were
1.29% and 1.50%, respectively.
Operating Expenses primarily represent compensation, marketing, and other
general and administrative expenses. These expenses were $89.1 million for the
quarter ended September 30, 1999 compared to $78.5 million for the quarter ended
September 30, 1998. For the first nine months of 1999, operating expenses were
$268.3 million compared to $238.5 million for the first nine months of 1998.
These increases during 1999 compared to 1998 were primarily due to the
acquisitions of Crabbe Huson and Progress in the second half of 1998 and to
increases in compensation and marketing expenses. Operating expenses expressed
as a percent of average total assets under management were 0.58% for the quarter
ended September 30, 1999 compared to 0.59% for the quarter ended September 30,
1998. For the first nine months of 1999 and 1998, such percentages were 0.59%
and 0.60%, respectively.
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 $22.8
million for the quarter ended September 30, 1999 compared to $16.7 million for
the quarter ended September 30, 1998. For the first nine months of 1999,
amortization of deferred policy acquisition costs was $69.5 million compared to
$56.7 million for the first nine months of 1998. The increase during 1999
compared to 1998 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 30.3% and 25.8% of investment spread and separate account fees for
the quarters ended September 30, 1999 and 1998, respectively. For the first nine
months of 1999 and 1998, the corresponding percentages were 30.4% and 28.0%,
respectively.
Amortization of Deferred Distribution Costs relates to the distribution of
mutual fund shares sold with 12b-1 distribution fees and contingent deferred
sales charges. Amortization was $10.2 million for the quarter ended September
30, 1999 compared to $9.8 million for the quarter ended September 30, 1998. For
the first nine months of 1999, amortization of deferred distribution costs was
$29.4 million compared to $27.9 million for the first nine months of 1998. These
increases during 1999 compared to 1998 were primarily attributable to the
continuing sales of such fund shares during 1999 and 1998.
Amortization of Intangible Assets relates to goodwill and certain
identifiable intangible assets arising from business combinations accounted for
as purchases. Amortization was $5.0 million for the quarter ended September 30,
1999 compared to $3.6 million for the quarter ended September 30, 1998. For the
first nine months of 1999, amortization of intangible assets was $15.1 million
compared to $10.7 million for the first nine months of 1998. These increases in
amortization in 1999 compared to 1998 were primarily related to acquisitions
completed in the second half of 1998.
Interest Expense, Net was $4.6 million for the quarter ended September 30,
1999 compared to $2.7 million for the quarter ended September 30, 1998. For the
first nine months of 1999, interest expense, net was $15.6 million compared to
$10.5 million for the first nine months of 1998. Interest expense primarily
consists of interest on debt and interest on the Liberty Funds Group revolving
credit facility which is utilized to finance deferred sales commissions paid in
connection with the distribution of mutual fund shares sold with 12b-1
distribution fees and contingent deferred sales charges. Interest expense was
net of interest income of $4.3 million and $2.5 million for the quarters ending
September 30, 1999 and 1998, respectively. For the first nine months of 1999 and
1998, interest expense was net of interest income of $11.2 million and $5.0
million, respectively.
Income Tax Expense was $12.5 million or 33.7% of pre-tax income for the
quarter ended September 30, 1999 compared to $15.9 million, or 32.2% of pre-tax
income for the quarter ended September 30, 1998. For the first nine months of
1999, income tax expense was $41.8 million or 35.7% of pre-tax income compared
to $43.6 million, or 31.5% of pre-tax income for the first nine months of 1998.
The significantly lower effective tax rate on pre-tax income in 1998 was
primarily related to a reduction in the deferred tax asset valuation allowance
on federal net operating loss carryforwards.
Financial Condition
Stockholders' Equity was $1.27 billion as of September 30, 1999 and December
31, 1998. Net income for the first nine months of 1999 was $75.3 million and
cash dividends on the Company's preferred and common stock totaled $4.7 million.
Common stock totaling $5.1 million was issued in connection with the exercise of
stock options and awards of nonvested stock. A decrease in accumulated other
comprehensive income which consists of net unrealized investment losses, net of
adjustments to deferred policy acquisition costs and income taxes, during the
period decreased stockholders' equity by $76.5 million.
Book Value Per Share amounted to $26.90 at September 30, 1999 compared to
$27.41 at December 31, 1998. Excluding net unrealized gains or losses on
investments, book value per share amounted to $27.94 at September 30, 1999 and
$26.82 at December 31, 1998. As of September 30, 1999, there were 47.3 million
common shares outstanding compared to 46.4 million shares as of December 31,
1998.
Investments not including cash and cash equivalents, totaled $12.2 billion at
September 30, 1999 compared to $12.6 billion at December 31, 1998.
The Company manages the majority of its invested assets internally. The
Company's general investment policy is to hold fixed maturity securities 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 portfolio of fixed maturity
securities as "available for sale" and accordingly carries such investments at
fair value. The Company's total investments at September 30, 1999 and December
31, 1998 reflected net unrealized (losses) gains of $(230.7) million and $105.3
million, respectively, relating to its fixed maturity and equity portfolios.
Approximately $11.3 billion, or 82.3%, of the Company's general account and
certain separate account investments at September 30, 1999, were 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 September 30, 1999, the carrying value of investments
in below investment grade securities represented 8.8% of general account and
certain separate account investments. 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.
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 declines in value that 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 maturity
securities, management also considers market value quotations if available. As
of September 30, 1999, the carrying value of fixed maturity securities that were
non-income producing was $14.6 million.
Derivatives
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.
Interest rate 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 interest rate 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 65 and 42 outstanding interest rate
swap agreements with an aggregate notional principal amount of $2.8 billion and
$2.4 billion as of September 30, 1999 and December 31, 1998, respectively.
Interest rate 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 $250.0 million as of September 30, 1999 and
December 31, 1998.
With respect to the Company's equity-indexed annuities, the Company buys call
options and futures on the S&P 500 Index to hedge its obligations to provide
returns based upon this index. The Company had call options with a carrying
value of $515.4 million and $535.7 million as of September 30, 1999 and December
31, 1998, respectively. The Company had futures with a carrying value of $11.3
million and $(0.6) million as of September 30, 1999 and December 31, 1998,
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 non-performance. 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. Futures contracts trade on organized exchanges and
therefore have minimal credit risk. In addition, swap and cap agreements have
interest rate risk and call options and futures have stock market risk. These
swap and cap agreements hedge fixed-rate assets and the Company expects that any
interest rate movements that adversely affect the market value of swap and cap
agreements would be offset by changes in the market values of such fixed rate
assets. However, there can be no assurance that these hedges will be effective
in offsetting the potential adverse effects of changes in interest rates.
Similarly, the call options and futures 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 and futures 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. The Company's profitability
could be adversely affected if the value of its swap and cap agreements increase
less than (or decrease more than) the change in the market value of its fixed
rate assets and/or if the value of its S&P 500 Index call options and futures
increase less than (or decrease more than) the value of the guarantees made to
equity-indexed policyholders.
In June 1998, Statement of Financial Accounting Standards No. 133 "Accounting
for Derivative Instruments and Hedging Activities" was issued. This statement
standardizes the accounting for derivative instruments and the derivative
portion of certain other contracts that have similar characteristics by
requiring that an entity recognize those instruments at fair value. This
statement also requires a new method of accounting for hedging transactions,
prescribes the type of items and transactions that may be hedged, and specifies
detailed criteria to be met to qualify for hedge accounting. In June 1999, SFAS
No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133" was issued. SFAS No. 137 defers
for one year the effective date of SFAS No. 133. This statement now will apply
to all fiscal quarters of all fiscal years beginning after June 15, 2000.
Earlier adoption is permitted. Upon adoption, the Company will be required to
record a cumulative effect adjustment to reflect this accounting change. At this
time, the Company has not completed its analysis and evaluation of the
requirements and the impact of this statement.
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 by 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, short-term and
long-term borrowings and offerings of preferred and common stock.
In April, 1999, the Company replaced its $60.0 million revolving credit
facility, which was utilized to finance sales commissions paid by Liberty Funds
Group in connection with the distribution of mutual fund shares sold with 12b-1
distribution fees and contingent deferred sales charges, with a new $150.0
million revolving credit facility (the "Facility") to be used for the same
purpose. This new five year Facility is secured by such 12b-1 distribution fees
and contingent deferred sales charges. Interest accrues on the outstanding
borrowings under the Facility at a rate determined by sales of highly rated
commercial paper backed in part by the security interest in such fees and
charges. At September 30, 1999, the interest paid on borrowings under the
Facility was at the rate of 5.54% per annum.
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, 1999, the amount of dividends that Keyport
could pay without such approval was $49.1 million. Keyport paid dividends
totaling $15.0 million during the first nine months of 1999. Future regulatory
changes and credit agreements may create additional limitations on the ability
of the Company's subsidiaries to pay dividends.
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 its intentions to pay dividends on the
common stock. The Company may 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, private capital management and institutional
accounts. The Company expects that, based upon their historical cash flow and
current prospects, these operating subsidiaries will be able to meet their
liquidity needs from internal sources and, in the case of Liberty Funds Group,
from the Facility described above.
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 the sales and 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, 1999, $9.8 billion, or 74.5%
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 and the sale of
short-term or floating-rate investments, thereby precluding the sale of fixed
maturity investments in a potentially unfavorable market. In addition, the
Company's fixed-rate products incorporate surrender charges to encourage
persistency and to make the cost of its policyholder balances more predictable.
Approximately 76.7% of the Company's fixed annuity policyholder balances were
subject to surrender charges or restrictions as of September 30, 1999.
Year 2000
Many companies and organizations have computer programs that use only two
digits to identify a year in the date field and may not be able to correctly
process dates after December 31,1999. The Company relies significantly on
computer systems and applications in its operations. To the extent that these
systems are not Year 2000 compliant (i.e. cannot correctly process dates after
December 31, 1999) and such non-compliance is not corrected, this could cause
system failures. Such failures could have an adverse effect on the Company
causing disruption of operations, including, among other things, an inability to
process transactions.
In addressing the Year 2000 issue, the Company has completed an inventory of
its information technology systems and assessed its Year 2000 readiness. The
Company's systems include internally developed programs, third-party purchased
programs and third-party custom developed programs. For programs which were
identified as not being Year 2000 compliant, the Company has implemented a
remediation plan which includes repairing or replacing the programs and testing
for Year 2000 compliance. The remediation is complete for all critical
applications and the Company believes that with modifications made to existing
software and conversions to new software, the Year 2000 issue will not pose
significant operational problems for its computer systems. In addition, all
non-compliant hardware components of the Company's information technology
systems have been upgraded or replaced. The Company also identified its
non-information technology systems affected by Year 2000 issues. The Company
initiated remediation efforts in this area and expects to complete this phase
during the fourth quarter of 1999.
The Company's Year 2000 efforts have included assessing the potential impact
on the Company of third parties' failure to remediate their own Year 2000
issues. These efforts have included: (1) identifying third parties which have
significant business relationships with the Company and inquiring of such third
parties regarding their Year 2000 readiness; (2) evaluating such third parties'
responses to the Company's inquiries; and (3) conducting additional inquiries
and evaluations with respect to third parties as determined to be necessary in
each case, based on the nature of third party responses or their failure to
respond and the significance of the business relationship. In addition, for
certain critical applications, the Company participated in both industry-wide
testing of interfaces with third parties and point-to-point testing of
interfaces with major business partners. The Company has substantially completed
initiatives (1) and (2). It is continuing to conduct the activities described in
(3) and anticipates that these activities will continue through the end of 1999.
However, because the Company does not have control over these third parties, the
Company cannot currently determine to what extent future operating results may
be adversely affected by the failure of these third parties to adequately
address their Year 2000 issues.
The Company has developed contingency plans to minimize the impact of
potential Year 2000 problems on critical systems. The contingency planning
process involved identifying reasonably likely business disruption scenarios
that, if they were to occur, could create significant problems in critical
functions of the Company. Alternative providers were then identified, year-end
staffing plans were finalized, manual work arounds were developed, and
prioritization processes for problem resolution were developed. Testing of the
contingency plans will continue through the end of 1999.
The complexity of the Year 2000 issue gives rise to numerous uncertainties
and extensive preparation efforts cannot guarantee a total absence of Year 2000
problems. If necessary modifications and conversions are not made, or are not
timely completed, or if the systems of the companies on which the Company's
systems rely are not timely converted, or if contingency plans do not adequately
correct disruptions that could occur, the Year 2000 issues could have a material
impact on the operations of the Company.
Prior to 1999, the external cost of the Year 2000 project was approximately
$2.5 million, which was primarily related to consultants and replacement
hardware and software. Such external costs for the first nine months of 1999
were approximately $1.3 million. The external costs to complete the project are
currently expected to be an additional $1.3 million which are primarily related
to testing of certain non-critical applications. The Company does not segregate
payroll or other internal costs specifically devoted to its efforts to address
Year 2000 issues. All of the costs of the Year 2000 project have been and will
be funded through operating cash flows and have been and will be expensed as
incurred. In the opinion of management, the cost of addressing the Year 2000
issue is not expected to have a material adverse effect on the Company's
financial condition or its results of operations.
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. Inflation may result in
increased operating expenses that may not be readily recoverable in the prices
of the services charged by the Company.
Forward-Looking Statements
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Investors
are cautioned that all statements, trend analyses and other information
contained in this report or in any of the Company's filings under Section 13 or
15 (d) of the Securities Exchange Act of 1934 (the "Exchange Act"), relative to
the markets for the Company's products and trends in the Company's operations or
financial results, as well as other statements including words such as
"anticipate", "believe", "plan", "estimate", "expect", "intend" and other
similar expressions, constitute forward-looking statements under the Reform Act.
These forward-looking statements are subject to known and unknown risks,
uncertainties and other factors, many of which are beyond the Company's control,
that may cause actual results to be materially different from those contemplated
by the forward-looking statements. Such factors include, among other things: (1)
general economic conditions and market factors, such as prevailing interest rate
levels, stock market performance and fluctuations in the market for
retirement-oriented savings products and investment management products, which
may adversely affect the ability of the Company to sell its products and
services and the market value of the Company's investments and assets under
management and, therefore, the portion of its revenues that are based on a
percentage of assets under management; (2) the Company's ability to manage
effectively its investment spread (i.e. the amount by which investment income
exceeds interest credited to annuity and life insurance policyholders) as a
result of changes in interest rates and crediting rates to policyholders, market
conditions and other factors (the Company's results of operations and financial
condition are significantly dependent on the Company's ability to manage
effectively its investment spread); (3) levels of surrenders, withdrawals and
net redemptions of the Company's retirement-oriented insurance products and
investment management products; (4) relationships with investment management
clients, including levels of assets under management; (5) the ability of the
Company to manage effectively certain risks with respect to its investment
portfolio, including risks relating to holding below investment grade securities
and the ability to dispose of illiquid and/or restricted securities at desired
times and prices, and the ability to manage and hedge against interest rate
changes through asset/liability management techniques; (6) competition in the
sale of the Company's products and services, including the Company's ability to
establish and maintain relationships with distributors of its products; (7)
changes in financial ratings of Keyport or those of its competitors; (8) the
Company's ability to attract and retain key employees, including senior
officers, portfolio managers and sales executives; (9) the impact of and
compliance by the Company with existing and future regulation, including
restrictions on the ability of certain subsidiaries to pay dividends and any
obligations of the Company under any guaranty fund assessment laws; (10) changes
in applicable tax laws which may affect the relative tax advantages and
attractiveness of some of the Company's products; (11) the result of any
litigation or legal proceedings involving the Company; (12) changes in generally
accepted accounting principles and the impact of accounting principles and
pronouncements on the Company's financial condition and results of operation;
(13) the impact of Year 2000 issues on the operations of the Company and its
subsidiaries; (14) changes in the Company's senior debt ratings; and (15) the
other risk factors or uncertainties contained from time to time in any document
incorporated by reference in this report or otherwise filed by the Company under
the Exchange Act. Given these uncertainties, prospective investors are cautioned
not to place undue reliance on such forward-looking statements and no assurances
can be given that the estimates and expectations reflected in such statements
will be achieved.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes during the first nine months of 1999 in
the Company's market risks or in the methods which the Company uses to manage
such risks, which are described in the Company's 1998 Form 10-K.
Part II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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, 1999.
<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 12, 1999
<PAGE>
Exhibit Index
Exhibit No. Description Page
- ----------- ----------- ----
12 Statement re Computation of Ratios
27 Financial Data Schedule
Liberty Financial Companies, Inc.
Exhibit 12 - Statement re Computation of Ratios
($ in millions)
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Earnings:
Pretax income $37.1 $ 49.4 $117.1 $138.3
Add fixed charges:
Interest on indebtedness 8.9 5.2 26.8 15.4
Portion of rent representing the
interest factor 1.2 1.1 3.6 3.2
Accretion to face value of redeemable
converible preferred stock 0.2 0.2 0.6 0.6
--------- --------- --------- ---------
Sub-total of income as adjusted 47.4 55.9 148.1 157.5
Interest on fixed annuities
and financial products 131.3 143.3 395.5 425.6
--------- --------- --------- ---------
Total income as adjusted $178.7 $199.2 $543.6 $583.1
========= ========= ========= =========
Fixed charges:
Interest on indebtedness $ 8.9 $ 5.2 $26.8 $15.4
Portion of rent representing the
interest factor 1.2 1.1 3.6 3.2
Accretion to face value of redeemable
convertible preferred stock 0.2 0.2 0.6 0.6
--------- --------- --------- ---------
Sub-total of fixed charges 10.3 6.5 31.0 19.2
Interest on fixed annuities and
financial products 131.3 143.3 395.5 425.6
--------- --------- --------- ---------
Combined fixed charges 141.6 149.8 426.5 444.8
Preferred stock dividends 0.4 0.4 1.1 1.1
--------- --------- --------- ---------
Fixed charges and preferred $142.0 $150.2 $427.6 $445.9
stock dividends ========= ========= ========= =========
Ratio of earnings to fixed charges:
Excluding interest on fixed
annuities and financial products 4.60 x 8.60 x 4.78 x 8.20 x
========= ========= ========= =========
Including interest on fixed
annuities and financial products 1.26 x 1.33 x 1.27 x 1.31 x
========= ========= ========= =========
Ratio of earnings to combined fixed
charges and preferred stock dividends:
Excluding interest on fixed
annuities and financial products 4.43 x 8.10 x 4.61 x 7.76 x
========= ========= ========= =========
Including interest on fixed
annuities and financial products 1.26 x 1.33 x 1.27 x 1.31 x
========= ========= ========= =========
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