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, 2000
------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ----------------------
Commission file number: 1-13654
---------
LIBERTY FINANCIAL COMPANIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3260640
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
600 Atlantic Avenue, Boston, Massachusetts 02210-2214
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(617) 722-6000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(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 47,836,851 shares of the registrant's Common Stock, $.01 par
value, and 323,912 shares of the registrant's Series A Convertible Preferred
Stock, $.01 par value, outstanding as of April 30, 2000.
Exhibit Index - Page 22 Page 1 of 24
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
QUARTERLY REPORT ON FORM 10-Q FOR PERIOD ENDED MARCH 31, 2000
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
- ------- ----
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999
Consolidated Income Statements for the Three Months
Ended March 31, 2000 and 1999
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2000 and 1999
Consolidated Statement of Stockholders' Equity for the
Three Months Ended March 31, 2000
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)
March 31 December 31
2000 1999
------------ ------------
Unaudited
ASSETS
Assets:
Investments $12,168.2 $12,195.1
Cash and cash equivalents 1,603.5 1,232.6
Accrued investment income 164.1 162.0
Deferred policy acquisition costs 709.2 739.2
Deferred distribution costs 157.0 153.7
Intangible assets 277.8 282.0
Other assets 483.2 244.8
Separate account assets 3,626.6 3,363.1
------------ ------------
$19,189.6 $18,372.5
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policyholder balances $12,071.4 $12,109.6
Notes payable 562.0 552.0
Payable for investments purchased and loaned 1,279.9 754.9
Other liabilities 460.9 453.1
Separate account liabilities 3,588.5 3,301.0
------------ ------------
Total liabilities 17,962.7 17,170.6
------------ ------------
Series A redeemable convertible preferred
stock, par value $.01; authorized,
issued and outstanding 324,759 shares in
2000 and 1999 16.2 16.0
------------ ------------
Stockholders' Equity:
Common stock, par value $.01; authorized
100,000,000 shares, issued and outstanding
47,824,052 shares in 2000 and 47,462,995
shares in 1999 0.5 0.5
Additional paid-in capital 926.6 923.0
Retained earnings 449.7 425.2
Accumulated other comprehensive loss (162.6) (158.1)
Unearned compensation (3.5) (4.7)
------------ ------------
Total stockholders' equity 1,210.7 1,185.9
------------ ------------
$19,189.6 $18,372.5
============ ============
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
March 31
-----------------------------
2000 1999
------------ ------------
Investment income $205.9 $206.2
Interest credited to policyholders (127.3) (134.8)
------------ ------------
Investment spread 78.6 71.4
------------ ------------
Net realized investment losses (3.9) (3.1)
------------ ------------
Fee income:
Investment advisory and
administrative fees 71.9 66.2
Distribution and service fees 15.4 14.7
Transfer agency fees 12.7 12.9
Surrender charges and net commissions 10.7 8.4
Separate account fees 10.7 6.6
------------ ------------
Total fee income 121.4 108.8
------------ ------------
Expenses:
Operating expenses (102.3) (88.7)
Amortization of deferred policy
acquisition costs (27.1) (24.2)
Amortization of deferred
distribution costs (10.2) (9.5)
Amortization of intangible assets (5.1) (5.0)
Interest expense, net (4.0) (5.7)
------------ ------------
Total expenses (148.7) (133.1)
------------ ------------
Pre-tax income 47.4 44.0
Income tax expense (17.7) (16.6)
------------ ------------
Net income $29.7 $27.4
============ ============
Net income per share - basic $0.62 $0.59
============ ============
Net income per share - assuming dilution $0.62 $0.58
============ ============
See accompanying notes to consolidated financial statements.
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Unaudited
Three Months Ended
March 31
---------------------------
2000 1999
---------- ----------
Cash flows from operating activities:
Net income $29.7 $27.4
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 20.3 20.4
Interest credited to policyholders 127.3 134.8
Net realized investment losses 3.9 3.1
Net amortization on investments 22.6 21.3
Change in deferred policy acquisition costs (9.0) (2.1)
Net change in other assets and liabilities 7.9 (22.9)
---------- ----------
Net cash provided by operating activities 202.7 182.0
---------- ----------
Cash flows from investing activities:
Investments purchased available for sale (628.9) (1,519.4)
Investments sold available for sale 663.6 1,190.8
Investments matured available for sale 36.5 80.8
Change in policy loans, net (7.9) (4.2)
Change in mortgage loans, net 0.7 40.9
Other (2.9) (5.8)
---------- ----------
Net cash provided by (used in) investing
activities 61.1 (216.9)
---------- ----------
Cash flows from financing activities:
Withdrawals from policyholder accounts (516.4) (456.3)
Deposits to policyholder accounts 310.9 154.9
Securities lending 302.9 599.5
Change in notes payable 10.0 20.5
Exercise of stock options 1.3 1.5
Dividends paid (1.6) (1.6)
---------- ----------
Net cash provided by financing activities 107.1 318.5
---------- ----------
Increase in cash and cash equivalents 370.9 283.6
Cash and cash equivalents at beginning of period 1,232.6 984.1
---------- ----------
Cash and cash equivalents at end of period $1,603.5 $1,267.7
========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in millions)
Unaudited
Accumulated
Addit'l Other Total
Common Paid-In Retained Comprehen. Unearned Stockholders'
Stock Capital Earnings Loss Compen. Equity
------ ------- -------- ---------- -------- -------------
Balance,
December 31,
1999 $0.5 $923.0 $425.2 $(158.1) $(4.7) $1,185.9
Effect of
stock-based
compensation
plans 0.2 1.2 1.4
Accretion to face
value of
preferred stock (0.2) (0.2)
Common stock
dividends 3.4 (4.8) (1.4)
Preferred stock
dividends (0.2) (0.2)
Net income 29.7 29.7
Other comprehensive
loss, net of tax (4.5) (4.5)
------ ------- -------- ---------- -------- -------------
Balance,
March 31, 2000 $0.5 $926.6 $449.7 $(162.6) $(3.5) $1,210.7
====== ======= ======== ========== ======== =============
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 Form
10-K for the year ended December 31, 1999. The results of operations for the
three months ended March 31, 2000 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., an
investment advisor to mutual funds and institutional accounts, Progress
Investment Management Company, 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
March 31
---------------------------
2000 1999
---------- ----------
Statement of Operations Data
Revenues (excluding net realized investment gains
and losses):
Annuity:
Unaffiliated $226.3 $219.8
Intersegment (3.8) (2.9)
---------- ----------
Total annuity 222.5 216.9
---------- ----------
Asset management:
Unaffiliated 101.0 95.2
Intersegment 3.8 2.9
---------- ----------
Total asset management 104.8 98.1
---------- ----------
Total revenues (excluding net realized
investment gains and losses) $327.3 $315.0
========== ==========
<PAGE>
Three Months Ended
March 31
---------------------------
2000 1999
---------- ----------
Income before income taxes:
Annuity:
Income before amortization of intangible assets $50.2 $42.2
Amortization of intangible assets (0.3) (0.3)
---------- ----------
Subtotal annuity 49.9 41.9
---------- ----------
Asset management:
Income before amortization of intangible assets 17.0 22.0
Amortization of intangible assets (4.8) (4.6)
---------- ----------
Subtotal asset management 12.2 17.4
---------- ----------
Other:
Loss before amortization of intangible assets (10.8) (12.1)
Amortization of intangible assets 0.0 (0.1)
---------- ----------
Subtotal other (10.8) (12.2)
---------- ----------
Income before net realized investment
losses and income taxes 51.3 47.1
Net realized investment losses (3.9) (3.1)
---------- ----------
Total income before income taxes $47.4 $44.0
========== ==========
3. Investments
Investments were comprised of the following (in millions):
March 31 December 31
2000 1999
---------- ----------
Fixed maturities $10,567.2 $10,516.1
Equity securities 35.5 37.9
Policy loans 607.4 599.5
Other invested assets 958.1 1,041.6
---------- ----------
Total $12,168.2 $12,195.1
========== ==========
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
March 31
-----------------------------
2000 1999
------------ ------------
Numerator (in millions)
Net income $29.7 $27.4
Less: preferred stock dividends (0.2) (0.2)
------------ ------------
Numerator for net income per share - basic
- income available to common stockholders 29.5 27.2
Plus: income impact of assumed conversions
Preferred stock dividends 0.2 0.2
------------ ------------
Numerator for net income per share - assuming
dilution - income available to common
stockholders after assumed conversions $29.7 $27.4
Denominator
Denominator for net income per share
- basic - weighted-average shares 47,363,267 46,335,719
Effect of dilutive securities:
Employee stock options 393,549 689,044
Convertible preferred stock 514,370 514,370
------------ ------------
Dilutive potential common shares 907,919 1,203,414
------------ ------------
Denominator for net income per share
- assuming dilution 48,271,186 47,539,133
============ ============
Net income per share - basic $0.62 $0.59
============ ============
Net income per share - assuming dilution $0.62 $0.58
============ ============
5. Comprehensive Income
Comprehensive income was comprised of the following (in millions):
Three Months Ended
March 31
-----------------------------
2000 1999
------------ ------------
Net income $29.7 $27.4
Other comprehensive loss, net of tax:
Net unrealized investment losses (4.5) (8.5)
------------ ------------
Comprehensive income $25.2 $18.9
============ ============
<PAGE>
6. Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities." 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, the FASB
issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS
No. 137 defers the effective date of SFAS No. 133 until 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 impact of this statement.
<PAGE>
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Net Income was $29.7 million or $0.62 per share for the quarter ended March
31, 2000 compared to $27.4 million or $0.58 per share for the quarter ended
March 31, 1999. The increase resulted largely from higher investment spread and
fee income. In addition, interest expense, net decreased. Partially offsetting
these items were higher operating expenses, amortization expense and income tax
expense.
Pre-tax Income was $47.4 million for the quarter ended March 31, 2000
compared to $44.0 million for the quarter ended March 31, 1999. The increase
resulted largely from higher investment spread and fee income. In addition,
interest expense, net decreased. Partially offsetting these items were higher
operating expenses and amortization expense.
Investment Spread is the amount by which investment income earned on the
Company's investments exceeds interest credited on policyholder balances.
Investment spread was $78.6 million for the quarter ended March 31, 2000
compared to $71.4 million for the quarter ended March 31, 1999. 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 March 31, 2000 was 2.26%
compared to 1.99% for the quarter ended March 31, 1999. The increase in the
investment spread percentage resulted from an increased yield on average
invested assets and from decreased crediting rates to policyholders.
Investment income was $205.9 million for the quarter ended March 31, 2000
compared to $206.2 million for the quarter ended March 31, 1999. The decrease of
$0.3 million in 2000 compared to 1999 includes a $6.1 million decrease resulting
from a lower level of average invested assets and a $5.8 million increase as a
result of a higher average investment yield. The 2000 investment income was net
of $21.1 million of S&P 500 Index call option amortization expense related to
the Company's equity-indexed annuities compared to $19.4 million in 1999. The
average investment yield was 6.49% for the quarter ended March 31, 2000 compared
to 6.31% for the quarter ended March 31, 1999.
Interest credited to policyholders totaled $127.3 million for the quarter
ended March 31, 2000 compared to $134.8 million for the quarter ended March 31,
1999. The decrease of $7.5 million in 2000 compared to 1999 primarily relates to
a $4.4 million decrease resulting from a lower level of average policyholder
balances, as well as a $3.1 million decrease as a result of a lower average
interest credited rate. Policyholder balances averaged $12.0 billion (including
$9.7 billion of fixed products, consisting of fixed annuities and a closed block
of single premium whole life insurance, and $2.3 billion of equity-indexed
annuities) for the quarter ended March 31, 2000 compared to $12.5 billion
(including $10.4 billion of fixed products and $2.1 billion of equity-indexed
annuities) for the quarter ended March 31, 1999. The average interest credited
rate was 4.23% (5.01% on fixed products and 0.85% on equity-indexed annuities)
for the quarter ended March 31, 2000 compared to 4.32% (5.02% on fixed products
and 0.85% on equity-indexed annuities) for the quarter ended March 31, 1999.
Keyport's equity-indexed annuities credit interest to the policyholder at a
"participation rate" equal to a portion (ranging for existing policies from 25%
to 100%) 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.
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 $12.7 billion for the
quarter ended March 31, 2000 compared to $13.1 billion for the quarter ended
March 31, 1999. This decrease was primarily due to net redemptions and transfers
to separate accounts, partially offset by the reinvestment of portfolio earnings
for the twelve months ended March 31, 2000.
Net Realized Investment Losses were $3.9 million for the quarter ended March
31, 2000 compared to $3.1 million for the quarter ended March 31, 1999. The net
realized investment losses in 2000 included losses of $3.3 million for certain
fixed maturity investments where the decline in value was determined to be other
than temporary. There were no such losses recorded during the quarter ended
March 31, 1999.
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 $71.9 million for
the quarter ended March 31, 2000 compared to $66.2 million for the quarter ended
March 31, 1999. The increase during 2000 compared to 1999 primarily reflects a
higher level of average fee-based assets under management.
Average fee-based assets under management were $51.7 billion for the quarter
ended March 31, 2000 compared to $47.4 billion for the quarter ended March 31,
1999. The increase during 2000 compared to 1999 resulted from market
appreciation and net sales for the twelve months ended March 31, 2000.
Investment advisory and administrative fees were 0.56% of average fee-based
assets under management for the quarters ended March 31, 2000 and 1999.
The amount of fee-based assets under management are affected by product sales
and redemptions and 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).
Fee-Based Assets Under Management
As of March 31
---------------------
2000 1999
--------- ---------
Mutual Funds:
Intermediary-distributed $18.0 $17.7
Direct-marketed 6.9 6.6
Closed-end 2.9 2.4
Variable annuity 2.1 1.6
--------- ---------
29.9 28.3
Private Capital Management 9.6 8.1
Institutional 13.6 11.0
--------- ---------
Total Fee-Based Assets Under Management* $53.1 $47.4
========= =========
- --------------
* As of March 31, 2000 and 1999, Keyport's insurance assets of $14.0 billion
and $13.4 billion, respectively, bring total assets under management to $67.1
billion and $60.8 billion, respectively.
Changes in Fee-Based Assets Under Management
Three Months Ended
March 31
---------------------
2000 1999
--------- ---------
Fee-based assets under management - beginning $51.4 $47.9
Sales and reinvestments:
Mutual funds 1.6 1.8
Private Capital Management 0.4 0.2
Institutional 0.9 0.6
--------- ---------
2.9 2.6
Redemptions and withdrawals:
Mutual funds (2.2) (1.9)
Private Capital Management (0.2) (0.1)
Institutional (0.4) (0.9)
--------- ---------
(2.8) (2.9)
Market appreciation (depreciation) 1.6 (0.2)
--------- ---------
Fee-based assets under management - ending $53.1 $47.4
========= =========
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 $15.4 million for
the quarter ended March 31, 2000 compared to $14.7 million for the quarter ended
March 31, 1999. As a percentage of intermediary-distributed average mutual fund
assets, distribution and service fees were approximately 0.35% and 0.34% for the
quarters ended March 31, 2000 and 1999, 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 $12.7 million on average assets of $26.8 billion for the
quarter ended March 31, 2000 and $12.9 million on average assets of $26.0
billion for the quarter ended March 31, 1999. As a percentage of total average
assets under management, transfer agency fees were approximately 0.19% and 0.20%
for the quarters ended March 31, 2000 and 1999, respectively.
Surrender Charges and Net Commissions are revenues earned on: a) the early
withdrawal of annuity policyholder balances and redemptions of the
intermediary-distributed mutual funds which were sold with 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 $10.7 million for the quarter ended
March 31, 2000 compared to $8.4 million for the quarter ended March 31, 1999.
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 $7.4 million for the quarter
ended March 31, 2000 and $5.5 million for the quarter ended March 31, 1999.
Total annuity withdrawals represented 14.9% and 12.8% of the total average
annuity policyholder and separate account balances for the quarters ended March
31, 2000 and 1999, respectively. Net commissions were $3.3 million for the
quarter ended March 31, 2000 and $2.9 million for the quarter ended March 31,
1999.
Separate Account Fees are primarily mortality and expense charges earned on
variable annuity and variable life policyholder balances. In addition, for
certain separate institutional accounts, the difference between investment
income and interest credited on these institutional accounts is included in
separate account fees. These fees, which are primarily based on the market
values of the assets in separate accounts supporting the contracts, were $10.7
million for the quarter ended March 31, 2000 compared to $6.6 million for the
quarter ended March 31, 1999. Such fees represented 1.27% and 1.28% of average
variable annuity, variable life and institutional separate account balances for
the quarters ended March 31, 2000 and 1999, respectively.
Operating Expenses primarily represent compensation, marketing, and other
general and administrative expenses. These expenses were $102.3 million for the
quarter ended March 31, 2000 compared to $88.7 million for the quarter ended
March 31, 1999. The increase during 2000 compared to 1999 was primarily related
to the expansion of investment management capabilities, mutual fund product
lines, distribution and electronic commerce activities. Operating expenses
expressed as a percent of average total assets under management were 0.63% for
the quarter ended March 31, 2000 compared to 0.59% for the quarter ended March
31, 1999.
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 $27.1
million for the quarter ended March 31, 2000 compared to $24.2 million for the
quarter ended March 31, 1999. The increase during 2000 compared to 1999 was
primarily related to the increase in investment spread from the growth of
business in force associated with fixed and indexed products and from increased
sales of variable annuity products for the twelve months ended March 31, 2000.
Amortization expense represented 30.3% and 31.0% of investment spread and
separate account fees for the quarters ended March 31, 2000 and 1999,
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 March 31,
2000 compared to $9.5 million for the quarter ended March 31, 1999.
Amortization of Intangible Assets relates to goodwill and certain
identifiable intangible assets arising from business combinations accounted for
as purchases. Amortization was $5.1 million for the quarter ended March 31, 2000
compared to $5.0 million for the quarter ended March 31, 1999. The Company has
experienced higher than anticipated redemptions of assets under management at an
acquired company, which at March 31, 2000 had goodwill and other intangible
assets of $83.3 million. Although the Company has determined that there is no
impairment of goodwill and other intangible assets at this time, if the higher
level of redemptions were to continue and sales were not to increase, the
Company's estimate of related future cash flows may change, resulting in the
need to record an impairment loss.
Interest Expense, Net was $4.0 million for the quarter ended March 31, 2000
compared to $5.7 million for the quarter ended March 31, 1999. Interest expense
primarily consists of interest on notes payable 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 $5.8 million and $3.1 million for
the quarters ended March 31, 2000 and 1999, respectively.
Income Tax Expense was $17.7 million or 37.3% of pre-tax income for the
quarter ended March 31, 2000 compared to $16.6 million, or 37.7% of pre-tax
income for the quarter ended March 31, 1999.
Financial Condition
Stockholders' Equity was $1.21 billion as of March 31, 2000 compared to $1.19
billion as of December 31, 1999. Net income for the first three months of 2000
was $29.7 million and cash dividends on the Company's preferred and common stock
totaled $1.6 million. Common stock totaling $1.3 million was issued in
connection with the exercise of stock options. An increase in accumulated other
comprehensive loss 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 $4.5 million.
Book Value Per Share amounted to $25.32 at March 31, 2000 compared to $24.99
at December 31, 1999. Excluding net unrealized losses on investments, book value
per share amounted to $28.72 at March 31, 2000 and $28.32 at December 31, 1999.
As of March 31, 2000, there were 47.8 million common shares outstanding compared
to 47.5 million shares as of December 31, 1999.
Investments not including cash and cash equivalents, totaled $12.2 billion at
March 31, 2000 and December 31, 1999.
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 March 31, 2000 and December 31,
1999 reflected net unrealized losses of $288.1 million and $318.6 million,
respectively.
Approximately $11.3 billion, or 81.0%, of the Company's general account
investments at March 31, 2000, 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
March 31, 2000, the carrying value of investments in below investment grade
securities represented $1.3 billion or 9.1% of general account investments,
including cash and cash equivalents in the Company's annuity operations, and
certain separate account investments of $14.0 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.
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 March 31, 2000 and December 31, 1999, the carrying value of fixed maturity
securities that were non-income producing was $29.6 million and $22.6 million,
respectively, which constituted 0.2% of investments in each period.
Derivatives
As a component of its investment strategy and to reduce its exposure to
interest rate risk, the Company utilizes interest rate and total return 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. A total return swap agreement is an agreement to
exchange payments based upon an underlying notional balance and changes in
variable rate and total return indices. The Company utilizes total return swap
agreements to hedge its obligations related to certain separate account
liabilities. The Company had 67 outstanding swap agreements with an aggregate
notional principal amount of $3.6 billion and $3.4 billion as of March 31, 2000
and December 31, 1999, 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. There were no outstanding interest rate cap
agreements as of March 31, 2000. The Company had interest rate cap agreements
with an aggregate notional amount of $50.0 million as December 31, 1999.
With respect to the Company's equity-indexed annuities and certain separate
account liabilities, the Company buys call options, futures and certain total
return swap agreements 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 $587.3 million and $701.1 million as of March 31, 2000 and December 31,
1999, respectively. The Company had total return swap agreements with a carrying
value of $49.7 million and $37.8 million as of March 31, 2000 and December 31,
1999, 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, futures and certain total return swap
agreements 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,
futures and certain total return swap agreements hedge the Company's obligations
to provide returns on equity-indexed annuities and certain separate liabilities
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,
futures and certain total return swap agreements would be substantially offset
by a reduction in policyholder and certain separate account 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, futures and certain total return swap agreements increase less
than (or decrease more than) the value of the guarantees made to equity-indexed
and certain separate account policyholders.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities." 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, the FASB issued SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." SFAS No. 137 defers the effective
date of SFAS No. 133 until 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, long-term borrowings
and offerings of preferred and common stock.
The Company has a $150.0 million revolving credit facility (the "Facility"),
established in April 1999 which is utilized to finance sales commissions paid in
connection with the distribution of mutual fund shares sold with 12b-1
distribution fees and contingent deferred sales charges. This 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 March 31, 2000, the interest paid
on borrowings under the Facility was at the rate of 6.03% 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 March 31, 2000, the amount of dividends that Keyport
could pay without such approval was $57.8 million. 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 its credit facility used to finance sales of mutual fund shares sold with
12b-1 distribution fees and contingent deferred sales charges.
Keyport uses cash for the payment of annuity and life insurance benefits,
operating expenses and policy acquisition costs, and the purchase of
investments. Keyport generates cash from annuity premiums and deposits, net
investment income, and from 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 March 31, 2000, $10.7 billion, or 76.8%, 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 75.0% of the Company's fixed annuity policyholder balances were
subject to surrender charges or restrictions as of March 31, 2000.
Year 2000
The Year 2000 issue relates to computer programs that use two digits to
identify a year in the date field and therefore may not be able to correctly
process dates after December 31, 1999. As the Company relies significantly on
computer systems and applications in its operations, it completed a remediation
plan that included repairing or replacing programs that were identified as not
being Year 2000 compliant. As a result, the Company did not experience any
significant Year 2000 problems with respect to computer systems, application
programs, and non-information technology systems. In addition, the Company did
not experience any significant disruptions related to interactions with third
parties. The Company is continuing to closely monitor critical systems and
applications to ensure that no unexpected Year 2000 issues develop. There can be
no assurance that there will be no such issues. In the opinion of management,
any additional costs of addressing the Year 2000 issue are 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 not based on historical fact, 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 made based on current
expectations and assumptions and 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 expressed or
implied 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 operations;
(13) changes in the Company's senior debt ratings; (14) changes in operating
expense levels; (15) acquisition risks; and (16) 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 three months of 2000 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 Form 10-K for the year ended
December 31, 1999.
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 March 31,
2000.
<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 12, 2000
<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
March 31
------------------------
2000 1999
---------- ----------
Earnings:
Pretax income $47.4 $44.0
Add fixed charges:
Interest on indebtedness 9.8 8.8
Portion of rent representing the interest factor 1.2 1.2
Accretion to face value of redeemable
convertible preferred stock 0.2 0.2
---------- ----------
Sub-total of income as adjusted 58.6 54.2
Interest on fixed annuities and financial products 127.3 134.8
---------- ----------
Total income as adjusted $185.9 $189.0
========== ==========
Fixed charges:
Interest on indebtedness $9.8 $8.8
Portion of rent representing the interest factor 1.2 1.2
Accretion to face value of redeemable
convertible preferred stock 0.2 0.2
---------- ----------
Sub-total of fixed charges 11.2 10.2
Interest on fixed annuities and financial products 127.3 134.8
---------- ----------
Combined fixed charges 138.5 145.0
Preferred stock dividends 0.3 0.3
---------- ----------
Fixed charges and preferred stock dividends $138.8 $145.3
========== ==========
Ratio of earnings to fixed charges:
Excluding interest on fixed annuities and
financial products 5.23 x 5.31 x
========== ==========
Including interest on fixed annuities and
financial products 1.34 x 1.30 x
========== ==========
Ratio of earnings to combined fixed charges and
preferred stock dividends:
Excluding interest on fixed annuities and
financial products 5.10 x 5.16 x
========== ==========
Including interest on fixed annuities and
financial products 1.34 x 1.30 x
========== ==========
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 10,567
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 36
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 12,168
<CASH> 1,604
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 709
<TOTAL-ASSETS> 19,190
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 12,071
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 562
0
16
<COMMON> 1
<OTHER-SE> 1,210
<TOTAL-LIABILITY-AND-EQUITY> 19,190
0
<INVESTMENT-INCOME> 206
<INVESTMENT-GAINS> (4)
<OTHER-INCOME> 121
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 27
<UNDERWRITING-OTHER> 102
<INCOME-PRETAX> 47
<INCOME-TAX> 17
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30
<EPS-BASIC> 0.62
<EPS-DILUTED> 0.62
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
